S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 10, 2020.

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Vital Farms, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2000   27-0496985

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3601 South Congress Avenue

Suite C100

Austin, Texas 78704

(877) 455-3063

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Russell Diez-Canseco

President and Chief Executive Officer

Vital Farms, Inc.

3601 South Congress Avenue

Suite C100

Austin, Texas 78704

(877) 455-3063

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Nicole Brookshire

Darren DeStefano

Jaime L. Chase

Shauna Bracher

Cooley LLP

55 Hudson Yards

New York, NY 10001

(212) 479-6000

 

Jason Dale

Chief Operating Officer and

Chief Financial Officer

Vital Farms, Inc.

3601 South Congress Avenue

Suite C100

Austin, TX 78704

(877) 455-3063

 

Marc Jaffe

Cathy Birkeland

Alexa Berlin

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each Class of

Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share(2)

 

Proposed

Maximum
Aggregate

Offering Price(1)

 

Amount of

Registration Fee

Common stock, par value $0.0001 per share

  5,750,000   $34.95   $200,962,500   $21,925.01

 

 

(1)

Includes 750,000 additional shares that the Underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the average high and low sales price of the Registrant’s common stock as reported by The Nasdaq Stock Market on November 5, 2020.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

DATED NOVEMBER 10, 2020

5,000,000 Shares

 

 

LOGO

Common Stock

 

 

This is a public offering of shares of common stock of Vital Farms, Inc. The selling stockholders identified in this prospectus are offering 5,000,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

Our common stock is listed on The Nasdaq Stock Market under the symbol “VITL.” On November 9, 2020, the last reported sale price of our common stock on The Nasdaq Stock Market was $35.45 per share. The final public offering price will be determined through negotiation between the selling stockholders and the lead underwriters in the offering and the recent market price used throughout the prospectus may not be indicative of the actual offering price.

We are an “emerging growth company” as defined under the federal securities laws and, as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings.

We elected in October 2017 to be treated 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 certificate of incorporation. Accordingly, our duty to balance a variety of interests may result in actions that do not maximize stockholder value.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 17 to read about factors you should consider before buying our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to the selling stockholders

   $        $    

 

(1)

See the section titled “Underwriting” for additional information regarding compensation payable to the underwriters.

The selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to an additional 750,000 shares of common stock at the public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares of common stock to purchasers on or about                , 2020.

 

Goldman Sachs

& Co. LLC

 

Morgan

Stanley

 

Credit

Suisse

  Jefferies

 

 

Prospectus dated                , 2020.


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

GLOSSARY

     ii  

MARKET, INDUSTRY AND OTHER DATA

     iii  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     17  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     49  

USE OF PROCEEDS

     51  

DIVIDEND POLICY

     52  

CAPITALIZATION

     53  

SELECTED CONSOLIDATED FINANCIAL DATA

     54  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     56  

BUSINESS

     92  

MANAGEMENT

     108  

EXECUTIVE COMPENSATION

     116  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     129  

PRINCIPAL AND SELLING STOCKHOLDERS

     134  

DESCRIPTION OF CAPITAL STOCK

     137  

SHARES ELIGIBLE FOR FUTURE SALE

     142  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     145  

UNDERWRITING

     149  

LEGAL MATTERS

     160  

EXPERTS

     160  

CHANGES IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     160  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     160  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

Neither we, the selling stockholders nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders nor any of the underwriters take responsibility for, or can provide any assurance as to the reliability of, any other information that others may give you. We, the selling stockholders and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only under circumstances and in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

For investors outside the United States: Neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering and the possession and distribution of this prospectus outside of the United States.

“Vital Farms” and our other registered and common law trade names, trademarks and service marks are the property of Vital Farms, Inc. or our subsidiaries. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.

We refer to our Series B redeemable convertible preferred stock, Series C redeemable convertible preferred stock and Series D redeemable convertible preferred stock as our “convertible preferred stock” in this prospectus, each share of which was converted automatically into one share of our common stock immediately prior to the completion of our initial public offering on August 4, 2020.

 

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GLOSSARY

Unless we otherwise indicate, or unless the context requires otherwise, any references in this prospectus to the following key business terms have the respective meaning set forth below:

Branded eggs” are eggs other than private label.

Breaker plants” is a processor which converts shell eggs into further processed egg products.

Cage-free” refers to eggs that come from hens that are not housed in cages.

Clean label” refers to food products containing natural, familiar, simple ingredients that are easy to recognize, understand and pronounce, with no artificial ingredients or synthetic chemicals.

“Crew members” is a term we use to refer to our employees.

Egg Central Station” refers to our approximately 82,000 square foot shell egg grading and packing facility in Springfield, Missouri, which is centrally located within our network of small family farms.

Hatchery refers to a place where poultry eggs are hatched under controlled conditions for commercial purposes.

Organic” is a term regulated by the U.S. Department of Agriculture, or USDA, and refers to items the contents of which are 95% or more certified organic, meaning free of synthetic additives like pesticides, chemical fertilizers and dyes, and must not be processed using industrial solvents, irradiation or genetic engineering. The remaining 5% may only be foods or processed with additives on an approved list.

Pasture Belt” 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.

Pasture raised” refers to products produced from animals that were raised for at least some portion of their lives on pasture or with access to a pasture, not continually confined indoors.

Pullet” refers to a young hen, especially less than 24 weeks old.

“Refrigerated value-added dairy category” includes cream, half & half, yogurt, cheese (including cream cheese and cheese spreads), sour cream and cottage cheese, but excludes milk and butter.

Retail SKUs” refers to stock keeping units for discrete products (at universal product code level) that are sold through retail channels.

Traceable” is the ability to track food through production, processing and distribution, including importation and at retail.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains estimates, projections and other information concerning our industry, our business and the markets for our products. Some market data and statistical information contained in this prospectus are also based on management’s estimates and calculations, which are derived from our review and interpretation of the independent sources listed below, our internal research and knowledge of our market. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Among other items, certain of the market research included in this prospectus was published prior to the outbreak of the COVID-19 pandemic and did not anticipate the virus or the impact it has caused on the food industry. We have utilized this pre-pandemic market research in the absence of updated sources. These and other factors could cause results to differ materially from those expressed in the projections and estimates made by the independent third parties and us.

Unless otherwise expressly stated, we obtained industry, business, market and other data from the reports, publications and other materials and sources listed below. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

The sources of certain statistical data, estimates and forecasts contained in this prospectus include the following independent industry publications or reports:

 

   

Certified Humane, Humane Farm Animal Care, Animal Care Standards, February 1, 2018 Standards, Egg Laying Hens.

 

   

Numerator, Panel Data, Vital Farms and Total Egg Category, 52 Weeks Ending September 27, 2020.

 

   

SPINS, LLC, Refrigerated Eggs & Refrigerated Butter – MULO Channel and Natural Channel, 52 Weeks Ending December 31, 2017, December 30, 2018, December 29, 2019 and September 6, 2020.

 

   

SPINS, LLC, Refrigerated Eggs & Refrigerated Butter – Natural Channel, 52 Weeks Ending September 6, 2020.

 

   

SPINS, LLC, Refrigerated Eggs, Refrigerated Butter and Refrigerated Hard Boiled, MULO Channel and Natural Enhanced Channel, 52 Weeks Ending January 3, 2016, January 1, 2017, December 31, 2017, December 30, 2018, December 29, 2019 and September 6, 2020.

 

   

SPINS, LLC, Refrigerated Eggs, Refrigerated Butter and Refrigerated Hard Boiled, MULO Channel and Natural Enhanced Channel, 52 Weeks Ending September 6, 2020.

 

   

SPINS, LLC, Refrigerated Eggs, Refrigerated Butter and Refrigerated Hard Boiled – MULO Channel and Natural Channel, 12 Weeks Ending September 6, 2020.

 

   

SPINS, LLC, Refrigerated Eggs, Refrigerated Butter and Refrigerated Hard Boiled – MULO Channel and Natural Channel, 39 Weeks Ending September 29, 2019 and September 27, 2020.

 

   

SPINS, LLC, “State of the Natural Industry,” www.spins.com/spins-state-of-the-natural-industry-report, August 26, 2019.

 

   

USDA AMS, “Utilization of Eggs Produced in the U.S.,” 2019, https://unitedegg.com/facts-stats.

 

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Whole Foods Market, Inc., Refrigerated Eggs, Refrigerated Butter and Refrigerated Hard Boiled, 52 Weeks Ending January 3, 2016, January 1, 2017, December 31, 2017, December 30, 2018, December 29, 2019 and September 6, 2020.

 

   

Whole Foods Market, Inc., Refrigerated Eggs, Refrigerated Butter and Refrigerated Hard Boiled – MULO Channel and Natural Channel, 39 Weeks Ending September 29, 2019 and September 27, 2020.

 

   

Whole Foods Market, Inc., Refrigerated Eggs, Refrigerated Butter and Refrigerated Hard Boiled – MULO Channel and Natural Channel, 12 Weeks Ending September 6, 2020.

 

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PROSPECTUS SUMMARY

This summary highlights selected information included elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “Vital Farms,” the “company,” “we,” “our,” “us” or similar terms refer to Vital Farms, Inc. and its subsidiaries.

Overview

Vital Farms is an ethical food company that is disrupting the U.S. food system. We have developed a framework that challenges the norms of the incumbent 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 largest U.S. egg brand by retail dollar sales. Our ethics are exemplified by our focus on the humane treatment of farm animals and sustainable farming practices. We believe these 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, 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). 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, employees, communities and the environment. 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 designation as a Certified B Corporation, a certification 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

 

Stakeholders    Guiding Principles
Farmers and Suppliers   

•   Forming strong relationships with our network of approximately 200 small family farms, who are the foundation of our resilient and reliable supply chain

Customers and Consumers   

•   Delivering the transparency and quality around food products that today’s consumers demand

Crew Members   

•   Empowering our crew members by investing in their financial security, development and overall well-being

Community and Environment   

•   Investing in our community and being conscious stewards of the environment

Stockholders   

•   Building a sustainable company for the long term by delivering stockholder value



 

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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 approximately 200 family farms, we believe our pasture-raised products have set the national standard for ethically produced food. 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 beverage 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. Egg Central Station is capable of packing three million eggs per day and has achieved Safe Quality Food, or SQF, Level 3 certification, the highest level of such certification from 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 have 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 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), to our customers and consumers (food safety and maintenance investments far beyond regulatory requirements). 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.

Our loyal and growing consumer base has fueled the expansion of our brand from the natural channel to the mainstream channel and facilitated our entry into the foodservice channel. As of September 2020, we offer 23 retail SKUs through a multi-channel retail distribution network across more than 16,000 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 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 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 million in fiscal 2010 to $140.7 million in fiscal 2019, which represents a 61% compounded annual growth rate, or CAGR. From fiscal 2017 to fiscal 2019, we grew net revenue by 90% and the number of stores carrying our products increased by 50%. Going forward, we expect the consumer movement away from factory farming practices will continue to fuel demand for ethically produced food. According to a 2018 survey of nearly 30,000 international consumers, 62% want brands to have ethical values and demonstrate authenticity in all parts of their business. We believe these demands extend to the food industry and that consumers are recognizing the benefits of pasture-raised egg and dairy products. Management is committed to ensuring our values remain aligned with those of our consumers while delivering stockholder value.



 

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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 and 2019, which refer to the fiscal year ended December 30 and December 29, respectively.

 

Number of Stores

  

Net Revenue

  

Gross Profit

  

$MM

  

$MM

LOGO    LOGO    LOGO

Our History

Matthew O’Hayer and his wife Catherine Stewart founded Vital Farms in 2007 on a 27-acre plot of land in Austin, Texas. Armed with a small flock of hens, they 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. Matt and Catherine saw the opportunity to do something more than sell eggs to a few stores. They chose 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.

In 2014, our current president and 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 three million eggs per day and has achieved SQF Level 3 certification, the highest level of such certification from 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 September 2020, our ethically produced pasture-raised products are sold in more than 16,000 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 the business as our executive chairman, going so far as to personally read and ensure a written response to each email and letter we receive from our loyal consumers.

Our Mission

Our mission is to bring ethically produced food to the table. We do this by partnering with family farms that operate within our strictly defined set of ethical food production practices. We are motivated by the influence we



 

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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, this 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 that, according to SPINS, LLC, or SPINS, data, was projected to generate total retail sales of approximately $47.2 billion in 2019, accounting for approximately 10.5% of total projected food and beverage sales, and was projected to grow at a 6.4% CAGR between 2017 and 2019, outpacing total projected food and beverage growth of 1.9% over the same period. 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 data, the U.S. shell egg market accounted for approximately $6.3 billion in retail sales for the 52 weeks ended September 6, 2020 and grew at a CAGR of 8.1% between 2017 and September 2020. Our relatively low household penetration of 3.6% compared to the shell egg category penetration of approximately 98%, 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 $236.7 million in retail sales for the 52 weeks ended September 6, 2020 and grew at a CAGR of 40.4% between 2017 and September 2020, while the specialty egg (including pasture-raised, free-range and cage-free) market accounted for approximately $1.2 billion in retail sales for the 52 weeks ended September 6, 2020 and grew at a CAGR of 13.8% between 2017 and September 2020. Additionally, we estimate that the U.S. processed egg market as of September 2020 accounted for approximately $3.2 billion in retail sales. According to SPINS data, the U.S. butter market accounted for approximately $3.8 billion in retail sales for the 52 weeks ended September 6, 2020 and grew at a CAGR of 8.1% between 2017 and September 2020. 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



 

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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 and social media presence, we cultivate and support our relationship with consumers by communicating our values, building trust and promoting brand loyalty.

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 reaching a broad set of consumers through a variety of retail partners, including Albertsons, Kroger, Publix, Target and Walmart. As of September 2020, we are 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. 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.

Vital Farms Natural Channel Velocity versus All Other Competitors (1)

 

Refrigerated Eggs (2)   Refrigerated Butter (3)

 

LOGO

  LOGO

Source: Refrigerated Eggs & Refrigerated Butter - SPINS, LLC, Natural Channel, 52 Weeks Ending September 6, 2020

 

(1)

Channel Velocity ($ / Store / Item / Week) is defined as weekly sales per store per item of products sold in retailers included in the Natural Channel.

(2)

Refrigerated egg competitors represent shell eggs in the Natural Channel.

(3)

Refrigerated butter competitors represent butter brands in the Natural Channel, excluding clotted cream and clarified butter.

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 partner with family farms in the Pasture Belt, the U.S. region where pasture-



 

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raised eggs can be produced year-round. 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. 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

 

 

LOGO

Experienced and Passionate Team

We have an experienced and passionate executive management team that we refer to as the “C-crew,” which has approximately 60 years of combined industry experience and includes our president and chief executive officer, Russell Diez-Canseco, a seasoned food industry expert with over 16 years of relevant experience, including at H-E-B, a privately held supermarket chain. Our C-crew works in partnership with Matthew O’Hayer, our founder and executive chairman, 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 are passionate about addressing the needs of our stakeholders. We have leveraged the experience and passion of our C-crew, our founder and executive chairman and our other crew members to grow net revenue over 390% since the beginning of 2014, to enter our second major food category, butter, and to build our first shell egg processing facility, Egg Central Station.

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.



 

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Expand Household Penetration through Greater Consumer Awareness

Critical to the success of our mission is our ability to share the Vital Farms story with a broader audience. By educating consumers about our brand, our values and the premium quality of our products, we intend to increase our household penetration. Our relatively low household penetration of 3.6% for our pasture-raised shell eggs, compared to the shell egg category penetration of approximately 98%, shows that expanding the national presence of our brand offers a significant runway for future growth.

We are well positioned to 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 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 Within the Retail Channel

By leveraging greater consumer awareness and demand for our brand, we believe there is significant opportunity to grow volume with existing retail customers. 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 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 stores 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, 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 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 more than 60 points of distribution, such as coffee shops and farmers market stands, across Texas. We believe branded foodservice offerings will further drive consumer awareness of our brand and purchase rates of our products in the retail channel.

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, such as our recent launch of pasture-raised egg bites in August 2020. As shown below, our current offerings span six product categories. In 2018, we launched the only pasture-raised 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.



 

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Demonstrated Track Record of Portfolio Expansion

 

 

LOGO

Note: Store count figures as of September 6, 2020.

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.

Risk Factors Summary

Investing in our common stock involves substantial risks. The risks described in the section titled “Risk Factors” immediately following this summary may cause us to not realize the full benefits of our strengths or to be unable to successfully execute all or part of our strategy. 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.



 

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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.

 

   

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.

 

   

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.

 

   

Demand for shell eggs is subject to seasonal fluctuations and can adversely impact our results of operations in certain quarters.

 

   

The COVID-19 pandemic could have a material adverse impact on our business, results of operations and financial condition.



 

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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.

Recent Developments

This recent developments section includes 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). All statements contained herein other than statements of historical facts, including, without limitation, statements regarding our financial and operating results for the 13-week period ended September 27, 2020, and our future financial and business performance, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “will” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, risks related to our growth and ability to sustain our revenue growth rate, competition in the markets in which we operate, market growth, our ability to innovate and manage our growth and the impact of the COVID-19 pandemic and associated global economic uncertainty. For additional information regarding the various risks and uncertainties inherent in estimates of this type, see “Special Note Regarding Forward-Looking Statements” and “Risk Factors” elsewhere in this prospectus.

Executive Team Update

As part of our long-term strategy to support our business and develop our infrastructure as a public company, we have made certain key hires into our executive team. In an effort to separate the Chief Operating Officer and Chief Financial Officer functions into separate roles, in July 2020, Bo Meissner joined Vital Farms as Executive Vice President, Finance. We anticipate that following a successful transition period, Mr. Meissner will be appointed as our Chief Financial Officer on January 1, 2021, and Jason Dale, our current Chief Operating Officer and Chief Financial Officer, will transition to the role of Chief Operating Officer. In addition, in October 2020, we hired Peter Pappas as our Chief Sales Officer.

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. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus or in deciding to purchase our common stock.

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



 

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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. See the sections titled “Business—Certified B Corporation” and “Description of Capital Stock—Anti-Takeover Provisions—Public Benefit Corporation” for additional information.

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 collection of family farms to operate with a well-defined set of organic agricultural practices that include 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. 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. Being a public benefit corporation underscores our commitment to our purpose and our stakeholders, including farmers and suppliers, consumers and customers, communities and the environment, crew members and stockholders. See the section titled “Business—Public Benefit Corporation” and “Description of Capital Stock—Anti-Takeover Provisions—Public Benefit Corporation Status” for additional information.

Our Fiscal Year

We report on a 52-53-week fiscal year, ending on the last Sunday in December, effective beginning with the first quarter of 2018. In a 52-53-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 be fiscal 2023, which we expect to begin on December 26, 2022 and end on December 31, 2023. See Note 1 to our consolidated financial statements and Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional details related to our fiscal calendar.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or 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 non-binding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until December 28, 2025 or until we are no longer an emerging growth company, whichever is earlier. In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until those standards 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.



 

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THE OFFERING

 

Common stock offered by the selling stockholders

5,000,000 shares (or 5,750,000 shares if the underwriters exercise their option to purchase additional shares of common stock in full)

 

Common stock to be outstanding after this offering

39,432,161 shares

 

Use of proceeds

The selling stockholders will receive all of the net proceeds from this offering and we will not receive any proceeds from the sale of shares in this offering. See the section titled “Use of Proceeds” for additional information.

 

Selling stockholders; concentration of ownership

The selling stockholders identified in this prospectus are selling an aggregate of 5,000,000 shares of common stock in this offering and have granted the underwriters an option to purchase an additional 750,000 shares of common stock. Based on the number of shares outstanding as of September 27, 2020, after the completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares), our executive officers, directors and stockholders holding more than 5% of our outstanding capital stock, together with their affiliates, will hold, in the aggregate, approximately 52.2 % of our outstanding capital stock. See the section titled “Principal and Selling Stockholders” for additional information.

 

Risk factors

You should carefully read the section titled “Risk Factors” beginning on page 17 and the other information included in this prospectus for a discussion of facts that you should consider before deciding to invest in shares of our common stock.

 

Nasdaq trading symbol

“VITL”

The number of shares of common stock that will be outstanding after this offering is based on 39,432,161 shares of common stock outstanding as of September 27, 2020, and excludes:

 

   

5,712,814 shares of common stock issuable on the exercise of outstanding stock options as of September 27, 2020 with a weighted-average exercise price of $6.32 per share;

 

   

45,000 shares of common stock issuable upon the vesting of restricted stock units as of September 27, 2020;

 

   

7,729,892 shares of common stock reserved for future issuance under our 2020 Equity Incentive Plan, or 2020 Plan, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans—2020 Equity Incentive Plan;” and

 

   

900,000 shares of common stock reserved for issuance under our 2020 Employee Stock Purchase Plan, or ESPP, as well as any future increases, including annual automatic evergreen increases, in the number of shares of common stock reserved for future issuance thereunder.



 

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In addition, unless we specifically state otherwise, the information in this prospectus assumes:

 

   

no exercise of the underwriters’ option to purchase additional shares of common stock; and

 

   

no exercise of the outstanding stock options and no settlement of outstanding restricted stock units described above.



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated statements of operations data for the fiscal years ended December 31, 2017, December 30, 2018 and December 29, 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary condensed consolidated statements of operations data for the 39-week periods ended September 29, 2019 and September 27, 2020 and the summary condensed consolidated balance sheet data as of September 27, 2020 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and related notes and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any period in the future.

 

    Fiscal Year Ended     39-Week Period Ended  
    December 31,
2017
    December 30,
2018
    December 29,
2019
    September 29,
2019
    September 27,
2020
 
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

         

Net revenue

  $ 74,000     $ 106,713     $ 140,733     $ 99,312     $ 160,287  

Cost of goods sold

    55,612       71,894       97,856       66,208       103,384  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,388       34,819       42,877       33,104       56,903  

Operating expenses:

         

Selling, general and administrative(1)

    14,261       19,437       29,526       16,991       31,832  

Shipping and distribution

    5,724       8,615       10,001       6,757       10,693  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,985       28,052       39,527       23,748       42,525  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (1,597     6,767       3,350       9,356       14,378  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

         

Interest expense, net

    (524     (424     (349     (250     (365

Other income (expense), net

    9       9       1,417       1,369       (182
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (515     (415     1,068       1,119       (547
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income before income taxes

    (2,112     6,352       4,418       10,475       13,831  

Provision for income taxes

    33       723       1,106       2,839       4,300  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (2,145     5,629       3,312       7,636       9,531  

Less: Net (loss) income attributable to noncontrolling interests

    (225     (168     927       950       (54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Vital Farms, Inc. common stockholders, basic and diluted

  $ (1,920   $ 5,797     $ 2,385     $ 6,686     $ 9,585  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to Vital Farms, Inc. common stockholders:(2)

         

Basic

  $ (0.07   $ 0.22     $ 0.09     $ 0.26     $ 0.33  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.07   $ 0.16     $ 0.07     $ 0.18     $ 0.29  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net (loss) income per share attributable to Vital Farms, Inc. common stockholders:(2)

         

Basic

    25,795,865       25,809,665       25,897,223       26,197,567       28,664,914  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    25,795,865       35,258,594       36,071,015       36,959,507       33,275,902  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation expense of $495, $600 and $1,029 for the fiscal years 2017, 2018 and 2019, respectively, and $576 and $1,481 for the 39-week periods ended September 29, 2019 and September 27, 2019, respectively.



 

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(2)

See Note 17 to our consolidated financial statements and Note 14 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net (loss) income per share attributable to Vital Farms, Inc. common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

     September 27,
2020
 
     Actual  

Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 112,619  

Working capital(1)

     119,845  

Total assets

     177,593  

Long-term debt, net of issuance costs, including current portion

     7,584  

Contingent consideration, including current portion

     170  

Total liabilities

     35,574  

Total stockholders’ equity

     141,844  

 

(1)

Working capital is defined as current assets less current liabilities.

Non-GAAP Financial Measure—Adjusted EBITDA

 

     Fiscal Year Ended      39-Week
Period Ended
 
     December 31,
2017
    December 30,
2018
     December 29,
2019
     September 29,
2019
     September 27,
2020
 
     (in thousands)  

Non-GAAP Financial Measure:

             

Adjusted EBITDA(1)(2)

   $ (163   $ 7,896      $ 6,406      $ 11,133      $ 16,859  

 

(1)

We calculate Adjusted EBITDA as net (loss) income, adjusted to exclude: (1) depreciation and amortization; (2) provision for income taxes; (3) stock-based compensation expense; (4) interest expense; (5) change in fair value of contingent consideration; (6) interest income; and (7) net litigation settlement gain.

Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with generally accepted accounting principles in the United States, or 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 (i) it does not properly reflect capital commitments to be paid in the future, (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures, (iii) it does not consider the impact of stock-based compensation expense, (iv) it does not reflect other non-operating expenses, including interest expense, (v) it does not consider the impact of any contingent consideration liability valuation adjustments and (vi) it does not reflect tax payments that may



 

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represent a reduction in cash available to us. 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.

(2)

The following table presents a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure stated in accordance with GAAP, for each of the periods presented:

 

     Fiscal Year Ended     39-Week
Period Ended
 
     December 31,
2017
    December 30,
2018
    December 29,
2019
    September 29,
2019
    September 27,
2020
 
     (in thousands)  

Net (loss) income

   $ (2,145   $ 5,629     $ 3,312     $ 7,636     $ 9,531  

Depreciation and amortization

     821       1,437       1,921       1,119       1,568  

Provision for income taxes

     33       723       1,106       2,839       4,300  

Stock-based compensation expense

     495       600       1,029       576       1,481  

Interest expense

     524       424       349       250       365  

Change in fair value of contingent consideration(a)

     118       92       70       53       (342

Interest income

     (9     (9     (181     (140     (24

Net litigation settlement gain(b)

     —         (1,000     (1,200     (1,200     (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (163   $ 7,896     $ 6,406     $ 11,133     $ 16,859  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)

Amount reflects the change in fair value of a contingent consideration liability in connection with our 2014 acquisition of certain assets of Heartland Eggs, LLC.

  (b)

For the fiscal year ended December 30, 2018, amount reflects an April 2018 gain in connection with the settlement of a lawsuit in which we were the plaintiff. For the fiscal year ended December 29, 2019 and the 39-week period ended September 29, 2019, amounts reflect a January 2019 gain in connection with the settlement of claims made pursuant to a lawsuit in which Ovabrite, Inc. was the defendant and a countersuit in which Ovabrite, Inc. was the plaintiff.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. 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 and you might lose part or all your investment.

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 future 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 $74.0 million in fiscal 2017 to $106.7 million in fiscal 2018 to $140.7 million in fiscal 2019. Our net revenue also increased from $99.3 million in the 39-week period ended September 29, 2019 to $160.3 million in the 39-week period ended September 27, 2020. This growth has placed significant demands on our management, financial, operational, technological and other resources. The anticipated 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;

 

   

price our products effectively so that we are able to attract new customers and consumers and expand sales to our existing customers and consumers;

 

   

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

 

   

maintain quality control over our product offerings.

Such growth and expansion of our business will place significant demands on our management and operations teams and 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:

 

   

our current and future processing 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; and

 

   

general administration, including increased finance, legal and accounting expenses associated with being a public company.

These investments may not result in the 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 and fiscal 2019, we generated net income of $5.6 million and $3.3 million, respectively. For the 39-week periods ended September 29, 2019 and September 27, 2020, we generated net income of

 

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$6.7 million and $9.6 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 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 expansion efforts may prove more expensive than we anticipate (including as a result of increases in equipment prices, which may be due to actual or threatened disruptions in our equipment supply chain relating to public health pandemics, such as COVID-19, trade wars 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, 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. In addition, many of our expenses, including the costs associated with our existing and any future processing and manufacturing facilities, are fixed. We also expect to incur significant additional legal, accounting and other expenses as a public company that we did not incur as a private 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.

We have only recently expanded our product offerings beyond pasture-raised eggs, which makes it difficult to forecast our future 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.

Failure to introduce new products may adversely affect our ability to continue to grow.

A key element of our growth strategy depends on our ability to develop and market 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 staff 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. 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 bites 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, 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 to new or improved products, our business could be harmed.

 

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We may require additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit, reduce 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 we 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.

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 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.

The estimates of market opportunity and forecasts of market growth included in this prospectus 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.

Market opportunity estimates and growth forecasts included in this prospectus, including those we have generated ourselves, 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. 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 product and those of our competitors. Even if the market in which we compete meets the size estimates and growth forecast in this prospectus, 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, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

Risks Related to Our Business, Our Brand, Our Products and Our Industry

We are dependent on the market for shell eggs.

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.

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, price-sensitive consumers may choose to purchase commodity shell eggs offered by our competitors at a greater velocity than, or instead of, our pasture-raised eggs. As a result, low commodity shell egg prices 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.

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 94% of our net revenue in fiscal 2017, 92% of our net revenue in fiscal 2018 and 90% of our net revenue in fiscal 2019. Pasture-raised shell eggs accounted for approximately 90% and 89% of our net revenue in the 39-week periods ended September 29, 2019 and September 27, 2020, respectively. 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 99% of the laying hens in our network of family farms as of September 27, 2020, the price we pay is also indexed 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 1% 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, transportation and storage costs, and agricultural and energy policies in the U.S. and internationally. For example, the severe drought in the summer of 2012 and resulting damage to corn and soybean crops resulted in high and volatile feed costs. 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, unable to offset operating cost increases with continuous improvement savings or unsuccessful in any commodity-hedging 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 in the future need to expand these capabilities as we continue to grow and scale our business. For example, we are in the process of expanding Egg Central Station, our shell egg processing facility, to increase our capacity for the distribution of pasture-raised shell eggs. However, there is risk in our ability to effectively 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 available processing and manufacturing capacity that we are appropriately allocating product supply across SKUs. Our forecasts are based

 

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on multiple assumptions which may cause our estimates to be inaccurate and affect our ability to obtain adequate processing and manufacturing capacities (whether our own 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 buy other brands or our retailers allocate shelf space to other brands, our business, financial condition and results of operations could be adversely affected.

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.

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.

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 or expand our 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. If we are unable to maintain and expand this supply chain because of actions taken by farmers or other events outside of our control, 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 these 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 would impair their ability to partner with us. If our relationship with these farmers is disrupted, we may not be able to fully recover our investments in birds and feed, which would negatively impact our operating results. There are a number of factors that could impair our relationship with farmers, many of which are outside of our control. For example, while we strive to operate our business in a manner that drives long-term and sustainable benefits for our stakeholders, including farmers, we may make strategic decisions that the farmers do not believe align with their interests or values, which could cause the farmers to terminate their relationships with us. Additionally, our network of small family farms 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 occurrence of a natural disaster in this region could have a significant negative impact on us, the farmers and our supply chain. Any failure to maintain or expand our network of small family farms would adversely affect our business, financial condition and results of operations.

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.

Our ability to ensure a continuing supply of pasture-raised eggs and milk and other raw materials for our products at competitive prices depends on many factors beyond our control. In particular, we rely on the farms

 

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that supply us with pasture-raised eggs and milk 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. Additionally, the animals from which our products are sourced, and the pastures on which they 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.

We also compete with other food companies in the procurement of pasture-raised eggs and milk, 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 milk 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, 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 these standards, we require them 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 or any U.S. government shutdown (including in connection with COVID-19) could significantly decrease loans available to farmers. Many of these farmers also have alternative income opportunities and the relative financial performance of raising chickens and cows on pasture 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.

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.

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 butter, one co-manufacturer for ghee, one co-manufacturer for liquid eggs and one co-manufacturer for egg bites. While we currently have written manufacturing contracts with our co-manufacturers for butter and egg bites, we do not have written manufacturing contracts with our other co-manufacturers. Due to the absence of written contracts with all of our co-manufacturers, certain of our co-manufacturers can generally seek to alter or terminate their relationships with us at any time, leaving us with periods during which we have limited or no ability to manufacture our products.

In addition, due to the limited number of co-manufacturers, an 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 natural disasters, could delay, postpone or reduce production of some of our products, which

 

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could have an adverse effect on our business, financial condition and results of operations until such time as such 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.

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.

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 change 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. 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 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.

Our products are distributed to 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 Foods and Sprouts. In fiscal years 2017, 2018 and 2019, UNFI accounted for approximately

 

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36%, 36% and 35% of our net revenue, respectively, and KeHE accounted for approximately 9%, 10% and 11% of our net revenue, respectively. In the 39-week periods ended September 29, 2019 and September 27, 2020, KeHE accounted for 11% and 11% of our net revenue, respectively, UNFI (which was Whole Foods’ distributor through March 2020) accounted for 35% and 16% of our net revenue, respectively, and US Foods (which became Whole Foods’ distributor in April 2020) accounted for 0% and 15% 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, 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 (or at all) could adversely affect our business, financial condition and 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.

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 directly with pullet farms 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 contract with this third party, and if this supplier were to cease doing business with us for any reason, we may have a difficult time finding and contracting with alternate pullet farms in sufficient scale to meet our needs, if at all. Additionally, any disruption in these supply services for any reason, including bird disease, 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.

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 label products, all of which could negatively impact our business. In fiscal years 2017, 2018 and 2019, Kroger accounted for approximately 15%, 14% and 14% of our net revenue, respectively. In the 39-week periods ended September 29, 2019 and September 27, 2020, Kroger accounted for approximately 14% and 12% 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 37%, 33% and 31% of our retail sales in fiscal years 2017, 2018 and 2019, respectively, and Sprouts accounted for approximately 7%, 9% and 8% of our retail sales in

 

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fiscal years 2017, 2018 and 2019, respectively. Further, for the 39-week periods ended September 29, 2019 and September 27, 2020, Whole Foods accounted for approximately 30% and 28% of our retail sales, respectively and Sprouts accounted for approximately 8% and 7% of our retail sales, respectively. The loss of Kroger, Whole Foods, Sprouts or any other large retail customer, the reduction of purchasing levels or the cancellation of any business from Kroger, Whole Foods, Sprouts or any other large retail 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 retailers 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.

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.

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-source supplier. Any disruption in the supply of our shell egg cartons 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, 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 number 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. Any of these events could result in lost sales, reduced gross margins or damage to our customer 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

 

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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, which 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.

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

 

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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.

We may not be able to implement our growth strategy successfully. Our sales and operating results will be adversely affected if we fail to 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 good manufacturing practices 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

 

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facility and move all production to a different facility, and 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.

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 the 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.

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 alterative 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

 

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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, 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 may need 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. Substantial 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 increase 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. 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.

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, 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, depends 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 depend 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

 

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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 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.

Demand for shell eggs is subject to seasonal fluctuations and can adversely impact our results of operations in certain quarters.

Demand for shell eggs fluctuates in response to seasonal factors. Shell egg demand 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 and may rise significantly, 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. Volatility in the prices of supplies we and our co-manufacturers purchase could increase our cost of sales and reduce our profitability. Moreover, we may not be able to implement price increases for our products to cover any increased costs, and any price increases we do implement may result in 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), 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, 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 number 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.

 

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Our net revenue and earnings may fluctuate as a result of price concessions, promotional activities and chargebacks.

Retailers may require price concessions that would negatively impact our margins and our profitability. If we are not able to lower our cost structure adequately in response to customer pricing demands, 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.

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 to our customers, which include credits or discounts to customers in the event that products do not conform to customer specifications or expire at a customer’s site. The cost associated with promotions and chargebacks is estimated and recorded as a reduction in net revenue. We anticipate that these price concessions and promotional activities 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 and retain additional qualified crew members to support our operations, our business and future growth prospects would 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 been 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 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.

In addition, our success depends in part upon our ability to attract, train 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 hire and retain crew members 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 in 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. 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 grow and develop the infrastructure of a public company, we may find it difficult to maintain these important values. If we fail to maintain our company culture or focus on our purpose our business and competitive position may be harmed.

 

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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 are concentrated in the Midwestern portion of the Pasture Belt. The pasture-raised milk for our butter is sourced from, and the butter is manufactured near, a geographically concentrated network of more than 50 farms, the majority of which are in the Midwest. The impact of natural disasters such as tornadoes, drought or flood within these areas is difficult to predict, 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.

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 SQFI 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 an international trade association, The Consumer Goods Forum. GFSI operates a benchmarking scheme whereby certification bodies, such as the SQF Program, are “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.

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

 

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appearing elsewhere in this prospectus. 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.

Risks Related to Socioeconomic, Political and Environmental Factors

The COVID-19 pandemic could have a material adverse impact on our business, results of operations and financial condition.

In connection with the COVID-19 pandemic, governments have implemented significant measures, including closures, quarantines, travel restrictions and other social distancing directives, intended to control the spread of the virus. Companies have also taken precautions, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses. 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 demand 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 also 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 continue for an extended period of time, our ability to meet the demands of our customers 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 expect our business, financial condition and results of operations would be materially and adversely affected.

Further, COVID-19 may impact customer and consumer demand. Retail and grocery stores may be impacted if governments continue to implement regional business closures, quarantines, travel restrictions and other social distancing directives to slow the spread of the virus. Further, to the extent our customers’ operations are negatively impacted, our customers may reduce demand for or spending on our products, or customers 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, governmental restrictions on the movement of people, public gatherings and businesses are likely to result in fewer people eating out and greater numbers of restaurant closures, both of which would negatively affect our foodservice business.

 

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In addition, any health 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 on our business, financial condition results of operations and cash flows, and may also have the effect of heightening many of the other risks described in this “Risk Factors” section.

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.

Climate change may negatively affect our business and operations.

Our network of small family farms are all geographically located in a region that provides an environment conducive to year round pasture 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. 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 such climate change has a negative effect on the year-round habitability of the 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 regional weather conditions not being conducive to pasture raising. We may also incur increased transportation, storage and processing costs if we are unable to source pasture-raised eggs and milk within a certain distance from Egg Central Station and co-manufacturing facilities.

Disruptions in the worldwide economy may adversely affect our business, results of operations and financial condition.

Adverse and uncertain economic conditions may impact distributor, retailer, foodservice and consumer demand for our products. In addition, our ability 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

 

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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.

Risks Related 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 suppliers, could result in the disruption or discontinuance of sales of these products or our relationships with such 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.

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 policies or not subject to insurance would have to be paid from our cash reserves, which would reduce our capital resources.

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 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.

 

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Our operations are subject to FDA and USDA federal regulation and state regulation, and there is no assurance that we will be in compliance with all 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, hard-boiled eggs, ghee and egg bite products are subject to the requirements of the Federal Food, Drug, and Cosmetic Act, as amended, or the FDCA, 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 hazard analysis and preventative 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. 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 foreign regulatory authority determines that we or these co-manufacturers have not complied with the applicable regulatory requirements, our business may be adversely impacted.

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 egg and egg bite products that is conducted by our co-manufacturers. If we or our co-manufacturers cannot successfully manufacture liquid whole eggs or egg bites 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

 

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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.

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-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,

 

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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 “Business—Government Regulation.”

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 suppliers and 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.

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.

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. 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 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

 

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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 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 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.

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, 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.

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. Actual outcomes or losses may differ materially from our assessments and estimates. We are not currently party to any material litigation.

Even when not merited, the defense of these lawsuits may divert our management’s attention, and we may incur significant expenses in defending these lawsuits. The results of litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements in some 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.

 

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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 as 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.

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.

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 certificate of incorporation. In addition, there is no assurance that the expected positive impact from being a public benefit corporation will be realized. Accordingly, being a public benefit corporation and complying 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 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 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 and may change over time. Currently, we are required to recertify as a Certified B Corporation once every three years, with our next certification required by February 22, 2021. 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, 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 harmed 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 board of directors 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. While we believe our public benefit designation and obligation will benefit our stockholders, in balancing these interests our board of directors 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 our stakeholders, 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;

 

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we may be influenced to pursue programs and services to demonstrate our commitment to the communities to which we serve and bringing ethically produced food to the table even though there is no immediate return to our stockholders; or

 

   

in responding to a possible proposal to acquire the company, our board of directors may be influenced by the interests of our stakeholders, including farmers, suppliers, crew members and local communities, whose interests may be different from the interests of our stockholders.

We may be unable or slow to 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.

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

We previously identified two material weaknesses in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, the accuracy and timing 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 two material weaknesses in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We determined that we had two material weaknesses because (i) we did not maintain a sufficient complement of personnel with an appropriate degree of technical knowledge commensurate with our accounting 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 were required that were material to the financial statements. These material weaknesses could result in a misstatement of account balances 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 additional material weaknesses in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements, cause us to fail to meet our reporting obligations.

 

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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 to report our financial results accurately on a timely basis 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. 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 we 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 purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our future reporting obligations.

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.

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 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 exceeded $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 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

 

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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 on 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 various information technology systems, including, but not limited to, networks, applications 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.

A cybersecurity incident or other technology disruptions could negatively impact our business and our relationships with customers.

We use computers in substantially all aspects of our business operations. We also use mobile devices, social networking and other online activities to connect with our crew members, suppliers, co-manufacturers, distributors, customers and consumers. Such uses give rise to cybersecurity risks, including security breaches, espionage, system disruption, theft 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. 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. If we fail to assess and identify cybersecurity risks associated with new initiatives, we may become increasingly vulnerable to such risks. Additionally, while we have implemented measures to prevent

 

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security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective. 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.

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 you 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

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 fluctuations in our financial condition or results of operations;

 

   

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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adoption of new regulations applicable to the food industry or the expectations concerning future regulatory developments;

 

   

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 pandemic and the 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 be able to influence corporate matters.

Based on the number of shares outstanding as of September 27, 2020, after the completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares), our directors, officers and stockholders holding more than 5% of our outstanding stock, together with their affiliates, will hold, in the aggregate, approximately    % 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 of delaying or preventing a third party from acquiring control over us.

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 equityholders 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.

All of our directors and officers and the holders of substantially all of our capital stock and securities convertible into our capital stock outstanding prior to our IPO are subject to lock-up agreements entered into in connection with our IPO that restrict their ability to transfer shares of our capital stock through January 26, 2021, subject to certain exceptions, including an exception granted by Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC to permit the selling stockholders named in this prospectus to offer an aggregate of 5,000,000 shares of common stock, plus an additional 750,000 shares of common stock if the underwriters exercise their option in full. Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC may, in their sole discretion, permit our stockholders who are subject to these lock-up agreements to sell other shares prior to the expiration of the

 

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lock-up agreements, subject to applicable notice requirements. If not earlier released, all of the shares of common stock subject to such IPO lock-up agreements will become eligible for sale on January 27, 2021, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

In addition, as of September 27, 2020, there were 5,757,814 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. 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 September 27, 2020, after the completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares), holders of approximately 23,230,569 shares, or 58.9% of our capital stock, as well as holders of 965,675 shares issuable upon the exercise of outstanding vested and unvested stock options, 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 issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders.

We expect to issue additional capital stock in the future that will result in dilution 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 acquire 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.

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.

 

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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 board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board 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 board of directors, the chairperson of our board of 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 board of directors;

 

   

establish that our board of directors 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 board of directors may be filled only by a majority of directors then in office, even though less than a quorum.

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 board of 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, 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 board of directors is required by the Delaware General Corporation Law 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 foregoing provisions could limit the price that 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 you 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, to the extent enforceable, 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 of actions or proceedings under Delaware statutory or common law: 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, our amended and restated certificate of incorporation or our amended and restated bylaws; any action as to which the Delaware General Corporation Law 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 to vigorously assert the validity and enforceability of the exclusive forum 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.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus 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 prospectus, 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 sustain or increase our profitability;

 

   

our ability to procure sufficient high quality eggs, butter and other raw materials;

 

   

real or perceived quality 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 suppliers, co-manufacturers, distributors, retailers and foodservice customers, as well as the health of the foodservice industry generally;

 

   

real or perceived quality or health issues with our products or other issues that adversely affect our brand and reputation;

 

   

the ability of our suppliers and co-manufacturers to comply with food safety, environmental or other laws or regulations;

 

   

future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;

 

   

the costs and success of our marketing efforts, and our ability to promote our brand;

 

   

our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;

 

   

our ability to effectively manage our growth;

 

   

our focus on a specific public benefit purpose and producing a positive effect for society may negatively influence our financial performance;

 

   

our ability to compete effectively with existing competitors and new market entrants;

 

   

the impact of adverse economic conditions;

 

   

the sufficiency of our cash to meet our liquidity needs and service our indebtedness;

 

   

seasonality; and

 

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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 prospectus 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” and elsewhere in this prospectus. 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 prospectus. 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.

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 prospectus. 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 prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus 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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USE OF PROCEEDS

The selling stockholders will receive all of the net proceeds from this offering. We will not receive any of the proceeds from the sale of the shares being offered by the selling stockholders. We will, however, bear the costs associated with the sale of shares by the selling stockholders, other than underwriting discounts and commissions. See the sections titled “Certain Relationships and Related Party Transactions—Registration Rights” and “Description of Capital Stock—Stockholder Registration Rights” for more information.

 

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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 is subject to limitations under the terms of our credit facility agreement with PNC Bank, National Association, or Credit Facility. See Note 11 to our consolidated financial statements and Note 9 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus 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 board of directors 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 board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 27, 2020.

You should read this table together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     September 27, 2020  
     Actual  
    

(in thousands except share

and per share amounts)

 

Cash and cash equivalents

   $ 112,619  
  

 

 

 

Long-term debt, net of issuance costs, including current portion

     7,584  

Stockholders’ equity:

  

Common stock, $0.0001 par value per share, 310,000,000 shares authorized as of September 27, 2020 (unaudited); 39,432,161 shares issued and outstanding as of September 27, 2020 (unaudited)

     5  

Treasury stock, 5,494,918 shares, at cost

     (16,276

Additional paid-in capital

     143,265  

Retained earnings

     14,825  
  

 

 

 

Total stockholders’ equity attributable to Vital Farms, Inc. common stockholders

     141,819  
  

 

 

 

Total capitalization

   $ 149,403  
  

 

 

 

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the fiscal years ended December 31, 2017, December 30, 2018 and December 29, 2019 and the selected consolidated balance sheet data as of December 30, 2018 and December 29, 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected condensed consolidated statements of operations data for the 39-week periods ended September 29, 2019 and September 27, 2020 and the selected condensed consolidated balance sheet data as of September 27, 2020 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and related notes and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any period in the future.

 

    Fiscal Year Ended     39-Week Period Ended  
    December 31,
2017
    December 30,
2018
    December 29,
2019
    September 29,
2019
    September 27,
2020
 
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

         

Net revenue

  $ 74,000     $ 106,713     $ 140,733     $ 99,312     $ 160,287  

Cost of goods sold

    55,612       71,894       97,856       66,208       103,384  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,388       34,819       42,877       33,104       56,903  

Operating expenses:

         

Selling, general and administrative(1)

    14,261       19,437       29,526       16,991       31,832  

Shipping and distribution

    5,724       8,615       10,001       6,757       10,693  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,985       28,052       39,527       23,748       42,525  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (1,597     6,767       3,350       9,356       14,378  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

         

Interest expense, net

    (524     (424     (349     (250     (365

Other income (expense), net

    9       9       1,417       1,369       (182
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (515     (415     1,068       1,119       (547
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income before income taxes

    (2,112     6,352       4,418       10,475       13,831  

Provision for income taxes

    33       723       1,106       2,839       4,300  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (2,145     5,629       3,312       7,636       9,531  

Less: Net (loss) income attributable to noncontrolling interests

    (225     (168     927       950       (54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Vital Farms, Inc. common stockholders, basic and diluted

  $ (1,920   $ 5,797     $ 2,385     $ 6,686     $ 9,585  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to Vital Farms, Inc. common stockholders:(2)

         

Basic

  $ (0.07   $ 0.22     $ 0.09     $ 0.26     $ 0.33  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.07   $ 0.16     $ 0.07     $ 0.18     $ 0.29  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net (loss) income per share attributable to Vital Farms, Inc. common stockholders:(2)

         

Basic

    25,795,865       25,809,665       25,897,223       26,197,567       28,664,914  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    25,795,865       35,258,594       36,071,015       36,959,507       33,275,902  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation expense of $495, $600 and $1,029 for the fiscal years 2017, 2018 and 2019, respectively, and $576 and $1,481 for the 39-week periods ended September 29, 2019 and September 27, 2020, respectively.

 

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(2)

See Note 17 to our consolidated financial statements and Note 14 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net (loss) income per share attributable to Vital Farms, Inc. common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

     As of  
     December 30,
2018
     December 29,
2019
     September 27,
2020
 
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 11,815      $ 1,274      $ 112,619  

Working capital(1)

     10,289        9,653        119,845  

Total assets

     49,855        61,948        177,593  

Long-term debt, net of issuance costs, including current portion

     3,807        5,056        7,584  

Contingent consideration, including current portion

     991        652        170  

Total liabilities

     22,377        30,099        35,574  

Convertible preferred stock

     23,036        23,036        —    

Total stockholders’ equity

     4,267        8,638        141,844  

 

(1)

Working capital is defined as current assets less current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and in the section titled “Risk Factors.”

Overview

Vital Farms is an ethical food company that is disrupting the U.S. food system. We have developed a framework that challenges the norms of the incumbent 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 largest U.S. egg brand by retail dollar sales. Our ethics are exemplified by our focus on the humane treatment of farm animals and sustainable farming practices. We believe these 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, 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). 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. Our approach has been validated by our financial performance and our designation as a Certified B Corporation, a certification 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 2008, and our pasture-raised shell eggs were launched at Whole Foods Market, Inc., or Whole Foods, in the same year. Since then, we have expanded our operations and our portfolio of pasture-raised food products as illustrated below:

 

LOGO

 

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We source our pasture-raised products from a network of approximately 200 small family farms. We have strategically designed our supply chain to ensure high-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. We are contractually obligated to purchase all of the eggs produced by the farmer during the term of the contract at an agreed upon price that depends upon pallet weight and is indexed quarterly in arrears for changes in feed cost.

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 Spouts, Target Corporation and 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 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 82,000 square feet and utilizes highly automated equipment to grade and package our shell egg products. Egg Central Station is capable of packing three million eggs per day and has achieved Safe Quality Food, or SQF, Level 3 certification, the highest level of such certification from the Global Food Safety Initiative. In addition, Egg Central Station is the only egg facility, and we are one of only six companies globally to have received the SQF Institute, or SQFI, Select Site certification. 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 fiscal years 2017, 2018 and 2019, UNFI accounted for approximately 36%, 36% and 35% of our net revenue, respectively, and KeHE accounted for approximately 9%, 10% and 11% of our net revenue, respectively. In the 39-week periods ended September 29, 2019 and September 27, 2020, KeHE accounted for 11% and 11% of our net revenue, respectively, UNFI (which was Whole Foods’ distributor through March 2020) accounted for 35% and 16% of our net revenue, respectively, and US Foods (which became Whole Foods’ distributor in April 2020) accounted for 0% and 15% of our net revenue, respectively. 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 $74.0 million, $106.7 million and $140.7 million, net (loss) income of $(2.1) million, $5.6 million and $3.3 million, and Adjusted EBITDA of $(0.2) million, $7.9 million and $6.4 million in the fiscal years ended December 31, 2017, December 30, 2018 and December 29, 2019, respectively. We had net revenue of $99.3 million and $160.3 million, net income of $7.6 million and $9.5 million, and Adjusted EBITDA of $11.1 million and $16.9 million in the 39-week periods ended September 29, 2019 and September 27, 2020, respectively. See the section titled “—Non-GAAP Financial Measure—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, 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 and the selling

 

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stockholders identified in the IPO prospectus 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 closing of the IPO in August 2020, all of our then-outstanding shares of convertible 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 convertible preferred stock outstanding. The condensed consolidated financial statements as of September 27, 2020, including share and per share amounts, do not include the effects of the IPO.

COVID-19 Business Update

With the global spread of the ongoing COVID-19 pandemic, we have established a cross-functional task force and implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our business and our stakeholders, comprised of farmers and suppliers, customers and consumers, communities and the environment, crew members and stockholders. While we are not experiencing material adverse impacts at this time, given the global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the pandemic, our business, financial condition, results of operations 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.

Supply Chain

Egg Central Station currently continues to be operational and we have implemented a number of measures to prevent 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 operations due to the evolving effects of the COVID-19 pandemic.

We are working 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. We currently expect to have an adequate supply of eggs to meet anticipated demand in fiscal 2020, as well as adequate capacity for packing and processing our eggs.

Additionally, 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 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, we could experience disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our products, which would adversely impact our ability to generate sales of and revenues from our products.

Corporate Development

With cash and cash equivalents of $112.6 million as of September 27, 2020 and access to additional funds as a result of our IPO and under our credit facility agreement with PNC Bank, National Association, or Credit Facility, we anticipate having sufficient liquidity to make investments in our business this fiscal year in 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 as of September 27, 2020, together with cash provided by our operating activities, proceeds from our IPO and proceeds from borrowings under our

 

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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. 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 partnerships and unexplored channels and the costs associated with our expansion of Egg Central Station. 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 the disruption persists and deepens, we could experience an 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.

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 whereby customers increase their purchases of staples such as eggs and butter. During the 8-week period ended April 19, 2020, a period we refer to as the “stock-up” period, approximately 440,000 households purchased Vital Farms eggs that had not previously purchased them during the year prior to this period. In the following 20-week period ended September 6, 2020, 30% of these new households made a repeat purchase. Of these new households making a repeat purchase, 72% purchased Vital Farms eggs multiple times. Approximately 680,000 households that had purchased Vital Farms eggs during the prior year also purchased Vital Farms eggs during the stock-up period. In the following 20-week period ended September 6, 2020, 70% of these retained households made a repeat purchase. Of these retained households making a purchase, 69% purchased Vital Farms eggs multiple times. 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 342% during the 24 weeks ended September 5, 2020 compared to the same time period a year ago and as compared to an increase of 67% for retail sales overall for that same period; our “click & collect” sales at one national brick and mortar retailer have increased 246% over the 26 weeks ended August 28, 2020 compared to the same time period a year ago and as compared to an increase of 69% for retail sales overall for that same period; and our last mile delivery sales at a key partner have increased 206% year to date through the week ended September 11, 2020 compared to the same time period a year ago and as compared to an increase of 59% for retail sales overall for that same period. 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-week fiscal year, ending on the last Sunday in December, effective beginning with the first quarter of fiscal 2018. In a 52-53-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

 

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53-week fiscal year will be fiscal 2023, which we expect to begin on December 26, 2022 and end on December 31, 2023. See Note 1 to our consolidated financial statements and Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus 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%, while the household penetration for our pasture-raised shell eggs is approximately 3.6%. 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, 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 37%, 33% and 31% of our retail sales in fiscal years 2017, 2018 and 2019, respectively, and Sprouts accounted for approximately 7%, 9% and 8% of our retail sales in fiscal years 2017, 2018 and 2019, respectively. Further, for the 39-week periods ended September 29, 2019 and September 27, 2020, Whole Foods accounted for approximately 30% and 28% of our retail sales, respectively, and Sprouts accounted for approximately 8% and 7% of our retail sales, respectively.

As of September 2020, there are more than 16,000 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

 

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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 of our products in the foodservice channel in the medium- to long-term. In fiscal 2019, the foodservice channel accounted for approximately 2% of our net revenue, and in the 39-week period ended September 27, 2020, the foodservice channel accounted for approximately 1% of our net revenue. Our brand has a differentiated value proposition with consumers, who we believe are increasingly demanding ethically produced ingredients when they eat outside of the home. 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. 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. One example of our successful foodservice programs is with Tacodeli LLC, a popular chain based in Austin, Texas, which sells breakfast tacos made exclusively with our pasture-raised shell eggs across 11 restaurant locations and more than 60 points of distribution, such as coffee shops and farmers market stands, across Texas. 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.

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 ghee and liquid whole eggs in 2019 and egg bites in August 2020, and we believe there is opportunity to expand in the future into the refrigerated value-added dairy category, among others. Eggs generated $128.6 million, or 91%, of net revenue in fiscal 2019, and $147.7 million, or approximately 92%, of net revenue in the 39-week period ended September 27, 2020. We expect eggs will 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.

Components of Results of Operations

Net Revenue

We generate net revenue primarily from sales of our products, including pasture-raised eggs, pasture-raised butter and other ethically produced food, to our customers, which include natural retailers, mainstream retailers and foodservice partners. 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 sales incentives to our customers, including rebates, temporary price reductions, off-invoice discounts, retailer advertisements, product coupons and other trade activities. We periodically

 

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provide chargebacks to our customers, which include credits or discounts to customers in the event that products do not conform to customer expectations upon delivery or expire at a customer’s site. 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 treat chargebacks and discount offers, when accepted by customers, as a reduction of the sales price of the related transaction. We anticipate that these promotional activities, chargebacks and discount offers could impact our net revenue and that changes in such activities could impact period-over-period results.

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, 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. 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.

Gross Profit and Gross Margin

Gross profit consists of our net revenue less costs of goods sold. Gross profit was $42.9 million and gross margin was 30% in fiscal 2019, and gross profit was $56.9 million and gross margin was 35% in the 39-week period ended September 27, 2020. Gross profit and gross margin have been benefited by in-sourcing egg processing through Egg Central Station, which was completed in September 2017.

Gross profit and gross margin can be negatively affected by feed costs and commodity shell egg prices. As we continue to expand production, increase processing efficiency, leverage the cost of our fixed production and staff costs, and introduce new egg products to better utilize our existing egg supply, we expect to have the opportunity to increase our gross margins over time.

Operating Expenses

Operating expenses consist of selling, general and administrative and shipping and distribution expenses.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of broker and contractor fees for sales and marketing, and personnel costs for sales and marketing, finance, human resources and other administrative functions, consisting of 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. We expect selling, general and administrative expenses to increase in absolute dollars as we continue to scale our operations to meet our product demand, continue to build brand equity across our product portfolio, add personnel to our sales and marketing organization, and operate as a public company with increased personnel costs in the finance, legal and accounting functions.

Shipping and Distribution

Shipping and distribution expenses consist primarily of costs related to third-party freight for our products. We expect shipping and distribution expenses to increase in absolute dollars in the medium to long term as we continue to scale our business.

 

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Other (Expense) Income, Net

Other (expense) income, net consists primarily of interest paid on our term loan under our revolving credit, term loan and security agreement, or the Credit Facility. Other (expense) income, net also includes income earned on our money market funds included in cash and cash equivalents, interest income associated with our notes receivable from related parties and income earned related to a litigation settlement involving Ovabrite, Inc., or Ovabrite.

Provision for Income Taxes

Provision for income taxes consists of United States federal and state income taxes.

Net (Loss) Income Attributable to Noncontrolling Interests

In December 2016, we entered into an assignment and assumption agreement with Ovabrite, a technology company focused on developing technologies to detect egg fertility and chick gender. The initial stockholders of Ovabrite are also our stockholders, and the largest stockholder of Ovabrite is Matthew O’Hayer, our founder and executive chairman. In addition, we provide substantially all of the funding for the operations of Ovabrite.

Based upon this and other aspects of Ovabrite’s design and operation, we determined that Ovabrite is a variable interest entity, or VIE, and we are the primary beneficiary as we have (i) the power to direct the activities of Ovabrite that most significantly impact Ovabrite’s economic performance and (ii) the obligation to absorb losses that could potentially be significant to Ovabrite, or the right to receive benefits from Ovabrite that could potentially be significant to Ovabrite. Accordingly, we consolidate the results of Ovabrite and recognize the noncontrolling interests related to the VIE as equity in our consolidated financial statements separate from the parent entity’s equity. Ovabrite’s other stockholders’ share of its earnings or loss is recorded in the consolidated statement of operations as net loss attributable to noncontrolling interests.

 

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The results of operations data for the fiscal years ended December 31, 2017, December 30, 2018 and December 29, 2019 have been derived from the audited consolidated financial statements included elsewhere in this prospectus. The results of operations data for the 13-week periods ended and 39-week periods ended September 29, 2019 and September 27, 2020 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. The following table sets forth our results of operations for the periods presented:

 

    Fiscal Year Ended     13-Week Period
Ended
    39-Week Period
Ended
 
    December 31,
2017
    December 30,
2018
    December 29,
2019
    September 29,
2019
    September 27,
2020
    September 29,
2019
    September 27,
2020
 
    (in thousands)  

Net revenue

  $ 74,000     $ 106,713     $ 140,733     $ 34,082     $ 53,367     $ 99,312     $ 160,287  

Cost of goods sold

    55,612       71,894       97,856       23,484       35,017       66,208       103,384  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,388       34,819       42,877       10,598       18,350       33,104       56,903  

Operating expenses:

             

Selling, general and administrative(1)

    14,261       19,437       29,526       7,069       12,185       16,991       31,832  

Shipping and distribution

    5,724       8,615       10,001       2,345       3,752       6,757       10,693  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,985       28,052       39,527       9,414       15,937       23,748       42,525  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (1,597     6,767       3,350       1,184       2,413       9,356       14,378  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net:

             

Interest expense, net

    (524     (424     (349     (85     (110     (250     (365

Other income (loss), net

    9       9       1,417       47       (21     1,369       (182
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (515     (415     1,068       (38     (131     1,119       (547
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income before income taxes

    (2,112     6,352       4,418       1,146       2,282       10,475       13,831  

Provision for income taxes

    33       723       1,106       323       620       2,839       4,300  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (2,145     5,629       3,312       823       1,662       7,636       9,531  

Less: Net (loss) income attributable to noncontrolling interests

    (225     (168     927       (6     (15     950       (54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Vital Farms, Inc. common stockholders

  $ (1,920   $ 5,797     $ 2,385     $ 829     $ 1,677     $ 6,686     $ 9,585  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation expense of $495, $600 and $1,029 for fiscal years 2017, 2018 and 2019, respectively, $290 and $737 for the 13-week periods ended September 29, 2019 and September 27, 2020, respectively, and $576 and $1,481 for the 39-week periods ended September 29, 2019 and September 27, 2020, respectively.

 

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Comparison of the 13-Week Periods Ended September 29, 2019 and September 27, 2020

 

     13-Week Period Ended  
     September 29, 2019     September 27, 2020  
     Amount      % of
Revenue
    Amount      % of
Revenue
 
     (dollars in thousands)  

Net revenue

   $ 34,082        100   $ 53,367        100

Cost of goods sold

     23,484        69     35,017        66
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     10,598        31     18,350        34

Operating expenses:

          

Selling, general and administrative

     7,069        21     12,185        23

Shipping and distribution

     2,345        7     3,752        7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     9,414        28     15,937        30
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

     1,184        3     2,413        5
  

 

 

    

 

 

   

 

 

    

 

 

 

Other (expense) income, net:

          

Interest expense

     (85      —         (110      —    

Other (expense) income, net

     47        —         (21      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other (expense) income, net

     (38      —         (131      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income before income taxes

     1,146        3     2,282        4

Provision for income taxes

     323        1     620        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     823        2     1,662        3

Less: Net (loss) income attributable to noncontrolling interests

     (6      —         (15      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to Vital Farms, Inc. common stockholders

   $ 829        2   $ 1,677        3
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Revenue

 

     13-Week Period Ended                
     September 29,
2019
     September 27,
2020
     $ Change      % Change  
     (in thousands)         

Net revenue

   $ 34,082      $ 53,367      $ 19,285        57

Net revenue was $34.1 million for the 13-week period ended September 29, 2019 as compared to $53.4 million for the 13-week period ended September 27, 2020. The increase of $19.3 million, or 57%, was primarily driven by an increase in gross egg sales of $21.7 million, an increase in gross butter sales of $0.8 million, and an increase in gross ghee sales of $0.1 million. The increases were partially offset by an increase of $3.3 million of sales incentives offered to customers in connection with our egg and butter sales. The increases in egg sales and butter sales were primarily due to volume increases to our distributors, including as a result of trends associated with COVID-19 whereby customers increase their purchases of staples of eggs and butter, and a higher turnover rate of sales to our retail customers; nevertheless we do not have certainty that these trends will continue. Net revenue from sales through our retail channel was $33.2 million and $52.3 million and for the 13-week periods ended September 29, 2019 and September 27, 2020, respectively, net revenue from sales through our foodservice channel was $0.8 million and $0.6 million for the 13-week periods ended September 29, 2019 and September 27, 2020, respectively, and net revenue from sales to wholesalers and egg breaking plants was $0.1 million and $0.4 million for the 13-week periods ended September 29, 2019 and September 27, 2020, respectively.

 

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Gross Profit and Gross Margin

 

     13-Week Period Ended               
     September 29,
2019
    September 27,
2020
    $ Change      % Change  
     (in thousands)         

Gross profit

   $ 10,598     $ 18,350     $ 7,752        73

Gross margin

     31     34     

Gross profit was $10.6 million and gross margin was 31% for the 13-week period ended September 29, 2019 as compared to gross profit of $18.4 million and gross margin of 34% for the 13-week period ended September 27, 2020. The increase in gross profit of $7.8 million, or 73%, was primarily driven by higher net revenue.

Gross margin increased 330 basis points to 31% for the 13-week period ended September 29, 2019 as compared to 34% for the 13-week period ended September 27, 2020. The increase in gross margin was primarily driven by:

 

   

lower material costs for eggs and butter; and

 

   

volume leverage over direct labor and overhead costs.

These factors, which contributed to an increase in gross margin, were partially offset by an increase in promotional spending and other material costs.

Operating Expenses

Selling, General and Administrative

 

     13-Week Period Ended               
     September 29,
2019
    September 27,
2020
    $ Change      % Change  
     (in thousands)         

Selling, general and administrative

   $ 7,069     $ 12,185     $ 5,166        72

Percentage of net revenue

     21     23     

Selling, general and administrative expenses were $7.1 million for the 13-week period ended September 29, 2019 as compared to $12.2 million for the 13-week period ended September 27, 2020. Selling, general and administrative expenses as a percent of net sales increased to 21% for the 13-week period ended September 29, 2019, compared to 23% for the 13-week period ended September 27, 2020. The increase in selling, general and administrative expenses was primarily driven by:

 

   

an increase of $2.7 million in employee-related costs driven by an overall increase in employee headcount to support our operations;

 

   

an increase of $1.5 million in professional fees and commercial insurance costs due in part to our status as a newly public company; and

 

   

an increase of $0.3 million in marketing programs and associated expenses, and commission payments made to third parties that sell our products to customers, related to our continued investment in brand marketing and direct advertising.

 

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Shipping and Distribution

 

     13-Week Period Ended               
     September 29,
2019
    September 27,
2020
    $ Change      % Change  
     (in thousands)         

Shipping and distribution

   $ 2,345     $ 3,752     $ 1,407        60

Percentage of net revenue

     7     7     

Shipping and distribution expenses were $2.3 million for the 13-week period ended September 29, 2019 as compared to $3.8 million for the 13-week period ended September 27, 2020. The increase of $1.4 million, or 60%, was primarily driven by an increase in sales volume that resulted in increased costs related to third-party freight for our products.

Other Expense, Net

 

     13-Week Period Ended                
     September 29,
2019
     September 27,
2020
     $ Change      % Change  
     (in thousands)         

Other expense, net

   $ 47      $ (21    $ (68      (145 %) 

Percentage of net revenue

     —          —          

Other income was $47,000 or the 13-week period ended September 29, 2019 as compared to other expense of $21,000 for the 13-week period ended September 27, 2020. The decrease of $68,000, or 145%, was primarily driven by a write off of implementation costs for software no longer in use.

Provision for Income Taxes

 

     13-Week Period Ended                
     September 29,
2019
     September 27,
2020
     $ Change      % Change  
     (in thousands)         

Provision for income taxes

   $ 323      $ 620      $ 297        92

Provision for income taxes was $0.3 million for the 13-week period ended September 29, 2019 as compared to $0.6 million for the 13-week period ended September 27, 2020. The increase of $0.3 million, or 92%, was primarily driven by an increase in net income before taxes.

Net Loss Attributable to Noncontrolling Interests

 

     13-Week Period Ended                
     September 29,
2019
     September 27,
2020
     $ Change      % Change  
     (in thousands)         

Net loss attributable to noncontrolling interests

   $ (6    $ (15    $ (9      (150 %) 

Net loss attributable to noncontrolling interests was $6,000 for the 13-week period ended September 29, 2019 as compared to $15,000 for the 13-week period ended September 27, 2020. The increase of $9,000, or 150%, was primarily driven by an increase in research costs and accounting expenses associated with Ovabrite during the current year.

 

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Comparison of the 39-Week Periods Ended September 29, 2019 and September 27, 2020

 

     39-Week Period Ended  
     September 29, 2019     September 27, 2020  
     Amount      % of
Revenue
    Amount      % of
Revenue
 
     (in thousands)  

Net revenue

   $ 99,312        100   $ 160,287        100

Cost of goods sold

     66,208        67     103,384        64
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     33,104        33     56,903        36

Operating expenses:

          

Selling, general and administrative

     16,991        17     31,832        20

Shipping and distribution

     6,757        7     10,693        7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     23,748        24     42,525        27
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

     9,356        9     14,378        9
  

 

 

    

 

 

   

 

 

    

 

 

 

Other (expense) income, net:

          

Interest expense

     (250      —         (365      —    

Other (expense) income, net

     1,369        1     (182      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other (expense) income, net

     1,119        1     (547      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income before income taxes

     10,475        11     13,831        9

Provision for income taxes

     2,839        3     4,300        3
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     7,636        8     9,531        6

Less: Net (loss) income attributable to noncontrolling interests

     950        1     (54      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to Vital Farms, Inc. common stockholders

   $ 6,686        7   $ 9,585        6
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Revenue

 

     39-Week Period Ended                
     September 29,
2019
     September 27,
2020
     $ Change      % Change  
     (in thousands)         

Net revenue

   $ 99,312      $ 160,287      $ 60,975        61

Net revenue was $99.3 million for the 39-week period ended September 29, 2019 as compared to $160.3 million for the 39-week period ended September 27, 2020. The increase of $61.0 million, or 61%, was primarily driven by an increase in gross egg sales of $63.0 million. The increases were partially offset by an increase of $6.0 million of sales incentives offered to our customers as our sales have grown. The $6.0 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 the stay-at-home trends associated with COVID-19, whereby customers increased their purchases of eggs and butter, and a higher turnover rate of sales to our retail customers, and new distribution at new and existing customers. Net revenue from sales through our retail channel was $97.1 million and $157.9 million for the 39-week period ended September 29, 2019 and September 27, 2020, respectively, and net revenue of sales through our foodservice channel was $2.2 million and $2.3 million for the 39-week period ended September 29, 2019 and September 27, 2020, respectively.

 

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Gross Profit and Gross Margin

 

     39-Week Period Ended               
     September 29,
2019
    September 27,
2020
    $ Change      % Change  
     (in thousands)         

Gross profit

   $ 33,104     $ 56,903     $ 23,799        72

Gross margin

     33     36        2

Gross profit was $33.1 million and gross margin was 33% for the 39-week period ended September 29, 2019 as compared to gross profit of $56.9 million and gross margin of 36% for the 39-week period ended September 27, 2020. The increase in gross profit of $23.8 million, or 72%, was primarily driven by an increase in net revenue.

Gross margin increased 220 basis points from the 39-week period ended September 29, 2019 as compared to the 39-week period ended September 27, 2020. The increase in gross margin was primarily driven by the following:

 

   

lower material costs for eggs and butter; and

 

   

volume leverage over direct labor and overhead costs.

These factors, which contributed to an increase in gross margin, were partially offset by an increase in other material costs.

Operating Expenses

Selling, General and Administrative

 

     39-Week Period Ended               
     September 29,
2019
    September 27,
2020
    $ Change      % Change  
     (in thousands)         

Selling, general and administrative

   $ 16,991     $ 31,832     $ 14,841        87

Percentage of net revenue

     17     20     

Selling, general and administrative expenses were $17.0 million for the 39-week period ended September 29, 2019 as compared to $31.8 million for the 39-week period ended September 27, 2020. Selling, general and administrative expenses as a percent of net sales increased to 17% for the 39-week period ended September 29, 2019, compared to 20% for the 39-week period ended September 27, 2020. The increase in selling, general, and administrative expenses was primarily driven by:

 

   

an increase of $6.6 million in employee-related costs driven by an overall increase in employee headcount to support our operations and structure as a newly public company;

 

   

an increase of $3.0 million in marketing programs and associated expenses, and commission payments made to third parties that sell our products to customers, related to our continued investment in brand marketing and direct advertising;

 

   

an increase of $2.1 million in professional fees and commercial insurance costs due in part to our status as a newly public company; and

 

   

increased corporate development costs and one-time expenses of $1.4 million associated with our accounting and legal functions in connection with our IPO.

 

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Shipping and Distribution

 

     39-Week Period Ended               
     September 29,
2019
    September 27,
2020
    $ Change      % Change  
     (in thousands)         

Shipping and distribution

   $ 6,757     $ 10,693     $ 3,936        58

Percentage of net revenue

     7     7     

Shipping and distribution expenses were $6.8 million for the 39-week period ended September 29, 2019 as compared to $10.7 million for the 39-week period ended September 27, 2020. The increase of $3.9 million, or 58%, was primarily driven by an increase in sales volume that resulted in increased costs related to third-party freight for our products.

Other (Expense) Income, Net

 

     39-week Period Ended               
     September 29,
2019
    September 27,
2020
    $ Change      % Change  
     (in thousands)         

Other (expense) income, net

   $ 1,369     $ (182   $ (1,551      (113 %) 

Percentage of net revenue

     1     —       

Other income, net was $1.4 million for the 39-week period ended September 29, 2019 as compared to other expense, net of $0.2 million for the 39-week period ended September 27, 2020. The increase of $1.6 million in other expense, net, or 113%, 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 $0.4 million increase in other expense, net was primarily due to a write off of implementation costs for software no longer in use.

Provision for Income Taxes

 

     39-week Period Ended                
     September 29,
2019
     September 27,
2020
     $ Change      % Change  
     (in thousands)         

Provision for income taxes

   $ 2,839      $ 4,300      $ 1,461        51

Provision for income taxes was $2.8 million for the 39-week period ended September 29, 2019 as compared to $4.3 million for the 39-week period ended September 27, 2020. The increase of $1.5 million, or 51%, was primarily driven by an increase in net income before taxes.

Net (Loss) Income Attributable to Noncontrolling Interests

 

     39-week Period Ended                
     September 29,
2019
     September 27,
2020
     $ Change      % Change  
     (in thousands)         

Net (loss) income attributable to noncontrolling interests

   $ 950      $ (54    $ (1,004      (106 %) 

Net income attributable to noncontrolling interests was $1.0 million for the 39-week period ended September 29, 2019 as compared to net loss attributable to noncontrolling interests of $54,000 for the 39-week period ended September 27, 2020. The increase of $1.0 million in net loss attributable to noncontrolling interests, or 106%, was primarily driven by the settlement of the Ovabrite lawsuit in January 2019.

 

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Comparison of the Fiscal Years Ended December 30, 2018 and December 29, 2019

 

     Fiscal Year Ended  
     December 30,
2018
    December 29,
2019
 
     Amount      % of
Revenue
    Amount      % of
Revenue
 
     (dollars in thousands)         

Net revenue

   $ 106,713        100   $ 140,733        100

Cost of goods sold

     71,894        67     97,856        70
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     34,819        33     42,877        30

Operating expenses:

          

Selling, general and administrative

     19,437        18     29,526        21

Shipping and distribution

     8,615        8     10,001        7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     28,052        26     39,527        28
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

     6,767        6     3,350        2
  

 

 

    

 

 

   

 

 

    

 

 

 

Other (expense) income, net:

          

Interest expense

     (424      —         (349      —    

Other income

     9        —         1,417        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other (expense) income, net

     (415      —         1,068        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income before income taxes

     6,352        6     4,418        3

Provision for income taxes

     723        1     1,106        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 5,629        5   $ 3,312        2
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Revenue

 

     Fiscal Year Ended                
     December 30,
2018
     December 29,
2019
     $ Change      % Change  
     (dollars in thousands)         

Net revenue

   $ 106,713      $ 140,733      $ 34,020        32

Net revenue was $106.7 million for the fiscal year ended December 30, 2018 as compared to $140.7 million for the fiscal year ended December 29, 2019. The increase of $34.0 million, or 32%, was primarily driven by an increase in gross egg sales of $31.8 million, an increase in gross butter sales of $4.1 million and an increase in gross ghee sales, a product that launched in the second half of fiscal 2019, of $0.8 million. The increases were partially offset by an increase of $2.2 million of sales incentives offered to customers in connection with our egg sales, $0.4 million of sales incentives offered to customers in connection with our butter sales and $0.1 million of sales incentives offered to customers in connection with our ghee sales. The increases in egg sales and butter sales were primarily due to new customers, additional points of distribution for existing customers, a higher turnover rate of sales to our retail customers and an increase in the number of SKUs on the shelves of existing customers. Net revenue from sales through our retail channel was $104.6 million and $137.3 million for fiscal 2018 and fiscal 2019, respectively, and net revenue from sales through our foodservice channel was $2.1 million and $3.4 million for fiscal 2018 and fiscal 2019, respectively.

 

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Cost of Goods Sold

 

     Fiscal Year Ended               
     December 30,
2018
    December 29,
2019
    $ Change      % Change  
     (dollars in thousands)         

Cost of goods sold

   $ 71,894     $ 97,856     $ 25,962        36

Percentage of net revenue

     67     70     

Cost of goods sold was $71.9 million for the fiscal year ended December 30, 2018 as compared to $97.9 million for the fiscal year ended December 29, 2019. The increase of $26.0 million, or 36%, was primarily driven by increases associated with the cost of eggs of $17.6 million, cost of butter of $3.8 million, costs of ghee of $0.6 million, costs associated with warehousing and transportation of inventory of $1.1 million, increases of $1.3 million associated with direct labor and overhead costs and increases of $1.6 million associated with payments made to our partner farms for lost income. The increase in costs associated with egg and butter sales were primarily due to our increased sales volume and the increase in costs associated with our warehousing and transportation of inventory was a result of increased inventory levels due to increased sales volume. The increase in costs associated with payments made to our partner farms for lost income were a result of removing birds from current flocks ahead of schedule due to changes in our projected product demand outlook. We do not anticipate incurring additional costs of this nature in connection with our long-term supply contracts with our partner farms; however, if our projected inventory levels exceed our projected product demand outlook, we may be required to further amend our long-term supply contracts to align with our product demand projections. Cost of goods sold associated with direct labor and overhead costs increased as a result of our increased sales volume.

Gross Profit and Gross Margin

 

     Fiscal Year Ended               
     December 30,
2018
    December 29,
2019
    $ Change      % Change  
     (dollars in thousands)         

Gross profit

   $ 34,819     $ 42,877     $ 8,058        23

Gross margin

     33     30        (3 %) 

Gross profit was $34.8 million and gross margin was 33% for the fiscal year ended December 30, 2018 as compared to gross profit of $42.9 million and gross margin of 30% for the fiscal year ended December 29, 2019. Gross profit and gross margin in fiscal 2019 were reduced by an increase in product donations of $2.6 million and costs of $1.6 million incurred in association with commitments made by us to reimburse partner farms for lost income in connection with removing birds from current flocks ahead of schedule. In addition, beginning in the fourth quarter of 2019, there was an increase in the market prices of raw materials used in the production of butter.

Operating Expenses

Selling, General and Administrative

 

     Fiscal Year Ended               
     December 30,
2018
    December 29,
2019
    $ Change      % Change  
     (dollars in thousands)         

Selling, general and administrative

   $ 19,437     $ 29,526     $ 10,089        52

Percentage of net revenue

     18     21     

Selling, general and administrative expenses were $19.4 million for the fiscal year ended December 30, 2018 as compared to $29.5 million for the fiscal year ended December 29, 2019. The increase of $10.1 million,

 

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or 52%, was primarily driven by an increase of $5.3 million related to our marketing programs and associated expenses, an increase of $1.9 million in other general and administrative expenses, an increase of $1.2 million in personnel costs, a $1.0 million litigation gain in fiscal 2018 that did not have an effect in fiscal 2019 and an increase of $0.7 million of commission payments made to third parties that sell our products to our customers. The increases associated with our marketing programs and associated expenses and commission payments were primarily due to our continued investment in brand marketing and direct advertising, and the increase associated with our personnel costs was a direct result of increasing our headcount to support our marketing efforts and support our growth. The increase in other general and administrative expenses primarily consisted of increases in legal, accounting and tax fees, including one-time expenses of $1.4 million associated with our accounting and legal functions as we prepare to operate as a public company, travel and facility-related expenses. The litigation gain in fiscal 2018 resulted from the April 2018 settlement of a lawsuit in which we were the plaintiff.

Shipping and Distribution

 

     Fiscal Year Ended               
     December 30,
2018
    December 29,
2019
    $ Change      % Change  
     (dollars in thousands)         

Shipping and distribution

   $ 8,615     $ 10,001     $ 1,386        16

Percentage of net revenue

     8     7     

Shipping and distribution expenses were $8.6 million for the fiscal year ended December 30, 2018 as compared to $10.0 million for the fiscal year ended December 29, 2019. The increase of $1.4 million, or 16%, was primarily driven by an increase in sales volume that resulted in increased costs related to cold storage and third-party freight for our products.

Other (Expense) Income, Net

 

     Fiscal Year Ended               
     December 30,
2018
    December 29,
2019
    $ Change      % Change  
     (dollars in thousands)         

Other (expense) income, net

   $ (415   $ 1,068     $ 1,483        357

Percentage of net revenue

     —       1     

Other expense, net was $0.4 million for fiscal year ended December 30, 2018 as compared to other income, net of $1.1 million for the fiscal year ended December 29, 2019. The increase of $1.5 million, or 357%, was primarily driven by a 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 increase was primarily a result of interest income associated with our money market funds and notes receivable from related parties.

Provision for Income Taxes

 

     Fiscal Year Ended               
     December 30,
2018
    December 29,
2019
    $ Change      % Change  
     (dollars in thousands)         

Provision for income taxes

   $ 723     $ 1,106     $ 383        53

Percentage of net revenue

     1     1     

Provision for income taxes was $0.7 million for the fiscal year ended December 30, 2018 as compared to $1.1 million for the fiscal year ended December 29, 2019. The increase was primarily driven by the reduction in our 2018 current federal tax expense in association with the reduction of our valuation allowance in 2018.

 

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Net (Loss) Income Attributable to Noncontrolling Interests

 

     Fiscal Year Ended                
     December 30,
2018
     December 29,
2019
     $ Change      % Change  
     (dollars in thousands)         

Net (loss) income attributable to noncontrolling interest

   $ (168    $ 927      $ 1,095        652

Net loss attributable to noncontrolling interests was $0.2 million for the fiscal year ended December 30, 2018 as compared to net income attributable to noncontrolling interests of $0.9 million for the fiscal year ended December 29, 2019. The increase was primarily a result of a 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, partially offset by the share of Ovabrite’s net loss attributable to its other stockholders.

Comparison of the Fiscal Years Ended December 31, 2017 and December 30, 2018

 

     Fiscal Year Ended  
     December 31, 2017     December 30, 2018  
     Amount      % of
Revenue
    Amount      % of Net
Revenue
 
     (dollars in thousands)         

Net revenue

   $ 74,000        100   $ 106,713        100

Cost of goods sold

     55,612        75     71,894        67
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     18,388        25     34,819        33

Operating expenses:

          

Selling, general and administrative

     14,261        19     19,437        18

Shipping and distribution

     5,724        8     8,615        8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     19,985        27     28,052        26
  

 

 

    

 

 

   

 

 

    

 

 

 

(Loss) income from operations

     (1,597      (2 )%      6,767        6
  

 

 

    

 

 

   

 

 

    

 

 

 

Other expense, net:

          

Interest expense, net

     (524      (1 )%      (424      —    

Other Income

     9        —         9        —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other expense, net

     (515      (1 )%      (415      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net (loss) income before income taxes

     (2,112      (3 )%      6,352        6

Provision for income taxes

     33        —         723        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (2,145      (3 )%    $ 5,629        5
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Revenue

 

     Fiscal Year Ended                
     December 31,
2017
     December 30,
2018
     $ Change      % Change  
     (dollars in thousands)         

Net revenue

   $ 74,000      $ 106,713      $ 32,713        44

Net revenue was $74.0 million for the fiscal year ended December 31, 2017 as compared to $106.7 million for the fiscal year ended December 30, 2018. The increase of $32.7 million, or 44%, was primarily driven by an increase in gross egg sales of $34.9 million and an increase in gross butter sales of $3.9 million. The increases were partially offset by increases of $5.6 million of sales incentives offered to customers in connection with our

 

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egg sales and $0.5 million of sales incentives offered to customers in connection with our butter sales. The increases in egg and butter sales were primarily due to volume increases to our distributors and a higher turnover rate of sales to our retail customers. Net revenue from sales through our natural and mainstream channels was $71.3 million and $104.6 million for fiscal 2017 and fiscal 2018, respectively. Net revenue from sales through our foodservice channel was $2.7 million and $2.1 million for fiscal 2017 and fiscal 2018, respectively.

Cost of Goods Sold

 

     Fiscal Year Ended               
     December 31,
2017
    December 30,
2018
    $ Change      % Change  
     (dollars in thousands)         

Cost of goods sold

   $ 55,612     $ 71,894     $ 16,282        29

Percentage of net revenue

     75     67     

Cost of goods sold was $55.6 million for the fiscal year ended December 31, 2017 as compared to $71.9 million for the fiscal year ended December 30, 2018. The increase of $16.3 million, or 29%, was primarily driven by increases associated with the cost of eggs of $10.1 million, cost of butter of $2.6 million and costs associated with warehousing and transportation of inventory of $1.0 million, all of which were primarily due to increased sales volume, as well as $3.6 million of direct labor and overhead costs. The cost increases were partially offset by a decrease of $1.0 million associated with payments to our partner farms, which we made in fiscal 2017 but not in fiscal 2018, for lost income as a result of removing birds from current flocks ahead of schedule.

Gross Profit and Gross Margin

 

     Fiscal Year Ended               
     December 31,
2017
    December 30,
2018
    $ Change      % Change  
     (dollars in thousands)         

Gross profit

   $ 18,388     $ 34,819     $ 16,431        89

Gross margin

     25     33     

Gross profit was $18.4 million for the fiscal year ended December 31, 2017 as compared to $34.8 million for the fiscal year ended December 30, 2018. Gross margin was 25% for fiscal 2017 as compared to 33% for fiscal 2018. Gross profit and gross margin were benefited by in-sourcing egg processing through Egg Central Station, which was completed in September 2017.

Operating Expenses

Selling, General and Administrative

 

     Fiscal Year Ended               
     December 31,
2017
    December 30,
2018
    $ Change      % Change  
     (dollars in thousands)         

Selling, general and administrative

   $ 14,261     $ 19,437     $ 5,176        36

Percentage of net revenue

     19     18     

Selling, general and administrative expenses were $14.3 million for the fiscal year ended December 31, 2017 as compared to $19.4 million for the fiscal year ended December 30, 2018. The increase of $5.2 million, or 36%, was primarily driven by an increase of $3.5 million related to our marketing programs and associated expenses, an increase of $1.8 million in personnel costs, a $1.0 million litigation gain offset by an increase of

 

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$0.3 million in other general and administrative expenses and $0.6 million of commission payments made to third parties that sell our products to our customers. The increases associated with our marketing programs and associated expense and commission payments were primarily due to increases in brand marketing and direct advertising. The increase associated with our personnel costs was a direct result of increased headcount in our sales and marketing department in 2018, partially offset by rotating personnel out of general and administrative functions to our plant operations as a result of the completion of Egg Central Station in September 2017. The litigation gain resulted from the April 2018 settlement of a lawsuit in which we were the plaintiff. The increase in other general and administrative expenses primarily consisted of increases in travel and facility-related expenses.

Shipping and Distribution

 

     Fiscal Year Ended               
     December 31,
2017
    December 30,
2018
    $ Change      % Change  
     (dollars in thousands)         

Shipping and distribution

   $ 5,724     $ 8,615     $ 2,891        51

Percentage of net revenue

     8     8     

Shipping and distribution expenses were $5.7 million for the fiscal year ended December 31, 2017 as compared to $8.6 million for the fiscal year ended December 30, 2018. The increase of $2.9 million, or 51%, was primarily driven by an increase in sales volume that resulted in increased costs related to cold storage and third-party freight for our products.

Other Expense, Net

 

     Fiscal Year Ended               
     December 31,
2017
    December 30,
2018
    $ Change      % Change  
     (dollars in thousands)         

Other expense, net

   $ (515   $ (415   $ 100        (19 )% 

Percentage of net revenue

     (1 )%      —       

Other expense, net was $0.5 million for the fiscal year ended December 31, 2017 as compared to $0.4 million for the fiscal year ended December 30, 2018. The decrease was primarily due to the declining principal balance on our debt.

Provision for Income Taxes

 

     Fiscal Year Ended               
     December 31,
2017
    December 30,
2018
    $ Change      % Change  
     (dollars in thousands)         

Provision for income taxes

   $ 33     $ 723     $ 690        2,091

Percentage of net revenue

     —       1     

Provision for income taxes was $33,000 for the fiscal year ended December 31, 2017 as compared to $0.7 million for the fiscal year ended December 30, 2018.

 

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Net Loss Attributable to Noncontrolling Interests

 

     Fiscal Year Ended                
     December 31,
2017
     December 30,
2018
     $ Change      % Change  
     (dollars in thousands)         

Net loss attributable to noncontrolling interests

   $ (225    $ (168    $ 57        (25 )% 

Net loss attributable to noncontrolling interests was $0.2 million for the fiscal years ended December 31, 2017 and December 30, 2018, representing the share of Ovabrite’s net loss that is attributable to its other stockholders.

 

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Quarterly Results of Operations

The following table sets forth our unaudited condensed consolidated statement of operations data for each of the last nine fiscal quarters in the period ended September 27, 2020. The unaudited quarterly consolidated statements of operations data set forth below have been prepared on a basis consistent with our audited annual consolidated financial statements included elsewhere in this prospectus and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the results of operations for the periods presented. Our historical quarterly results are not necessarily indicative of the results that may be expected in any future period. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements and the related notes and our unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Fiscal Quarter Ended  
    April 1,
2018
    July 1,
2018
    September 30,
2018
    December 30,
2018
    March 31,
2019
    June 30,
2019
    September 29,
2019
    December 29,
2019
    March 29,
2020
    June 28,
2020
    September 27,
2020
 
                (dollars in thousands)        

Net revenue

  $ 24,240     $ 23,638     $ 27,042     $ 31,793     $ 32,945     $ 32,285     $ 34,082     $ 41,421     $ 47,579     $ 59,341     $ 53,367  

Cost of goods sold

    16,158       16,197       18,193       21,346       21,439       21,285       23,484       31,648       31,724       36,643       35,017  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,082       7,441       8,849       10,447       11,506       11,000       10,598       9,773       15,855       22,698       18,350  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    33     31     33     33     35     34     31     24     33     38     34

Operating expenses:

                     

Selling, general and administrative

    5,028       2,983       4,927       6,499       5,164       4,758       7,069       12,535       9,678       9,970       12,185  

Shipping and distribution

    1,723       1,977       2,104       2,811       2,079       2,333       2,345       3,244       3,274       3,666       3,752  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    6,751       4,960       7,031       9,310       7,243       7,091       9,414       15,779       12,952       13,636       15,937  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    1,331       2,481       1,818       1,137       4,263       3,909       1,184       (6,006     2,903       9,062       2,413  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net:

                     

Interest expense

    (96     (95     (100     (133     (86     (79     (85     (99     (158     (97     (110

Other income

    4       —         —         5       1,269       53       47       48       20       (181     (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (92     (95     (100     (128     1,183       (26     (38     (51     (138     (278     (131
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

    1,239       2,286       1,718       1,009       5,446       3,883       1,146       (6,057     2,765       8,784       2,282  

Provision (benefit) for income taxes

    —         248       429       46       1,421       1,095       323       (1,733     831       2,848       620  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    1,239       2,138       1,289       963       4,025       2,788       823       (4,324     1,934       5,936       1,662  

Less: Net (loss) income attributable to noncontrolling interests

    (63     (36     (24     (45     967       (11     (6     (23     (11     (28     (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Vital Farms, Inc. stockholders

  $ 1,302     $ 2,174     $ 1,313     $ 1,008     $ 3,058     $ 2,799     $ 829     $ (4,301   $ 1,945     $ 5,964     $ 1,677  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to Vital Farms, Inc. common stockholders:

                     

Basic

  $ 0.05     $ 0.08     $ 0.05     $ 0.04     $ 0.12     $ 0.11     $ 0.03     $ (0.17   $ 0.07     $ 0.23     $ 0.05  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.04     $ 0.06     $ 0.04     $ 0.03     $ 0.09     $ 0.08     $ 0.02     $ (0.17   $ 0.05     $ 0.16     $ 0.04  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net (loss) income per share attributable to Vital Farms, Inc. common stockholders:

                     

Basic

    25,807,292       25,807,292       25,807,292       25,816,815       26,221,974       26,440,796       25,929,923       25,932,394       25,942,277       26,007,459       34,044,994  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    35,454,929       35,632,761       35,400,949       35,417,733       35,766,018       36,241,488       37,472,406       25,932,394       37,118,484       37,896,742       39,111,018  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenue Trends

Our net revenues have generally increased sequentially in each fiscal quarter presented due to increased sales volume, except for the decline in net revenue from the fiscal quarter ended March 31, 2019 to the fiscal quarter ended June 30, 2019. Historically, our net revenues have generally declined from the first fiscal quarter to the second fiscal quarter of each fiscal

 

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year due to seasonal factors. Specifically, shell egg demand tends to increase with the start of the school year and is highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter, and lowest during the summer months. This pattern was disrupted by the stay-at-home environment due to COVID-19 in the fiscal quarter ended September 27, 2020 where we experienced unseasonably high demand for our products.

Quarterly Cost of Goods Sold Trends

Our cost of goods sold is directly related to the amount of revenue that we generate and increases as our revenue increases. For the fiscal quarter ended September 29, 2019, our cost of goods sold also included an increase in market prices for the raw materials used in the production of butter. For the fiscal quarter ended December 29, 2019, our cost of goods sold included costs associated with commitments we made to reimburse farms for lost income in connection with the removal of birds from current flocks ahead of schedule due to changes in our projected product demand outlook. We included approximately $1.6 million in expected payments to farms under these commitments to cost of goods sold for the fiscal quarter ended December 29, 2019. We do not anticipate incurring additional costs of this nature in connection with our long-term supply contracts; however, if our projected inventory levels exceed our projected product demand outlook, we may be required to further amend our long-term supply contracts to align with our product demand projections.

Quarterly Gross Profit and Gross Margin Trends

With the exception of the fiscal quarters ended September 29, 2019, December 29, 2019 and March 29, 2020, gross profit and gross margin in the periods presented continued to grow in conjunction with the increase in net revenues. Gross profit and gross margin increased significantly as compared to prior periods in the fiscal quarters ended March 31, 2019 and June 30, 2019 due to improved leveraging of fixed costs facilitated by higher production volumes. Gross margin decreased in the fiscal quarter ended March 29, 2020 due to a higher volume of eggs sold into the wholesale market at cost. Gross profit and gross margin increased significantly as compared to prior periods in the fiscal quarter ended June 28, 2020 due to the additional volume of production we saw in connection with the stay-at-home environment related to COVID-19. We anticipate that gross profit and gross margin may fluctuate from quarter to quarter because of variability in our production volumes and product mix.

Quarterly Operating Expense Trends

Selling, general and administrative expenses varied quarter to quarter throughout fiscal 2018, primarily due to the timing of our brand marketing events, and a litigation gain of $1.0 million in connection with the settlement of a lawsuit in which we were the plaintiff in the fiscal quarter ended July 1, 2018. Selling, general and administrative expenses increased sequentially throughout fiscal 2019 as a result of our increasing headcount to support our business growth, most notably in the fiscal quarter ended December 29, 2019 due to costs incurred in preparation for becoming a public company. For fiscal 2018, shipping and distribution expenses fluctuated from quarter to quarter due to seasonal volume changes and inefficiencies in shipping and distribution that occurred in the fiscal quarter ended December 30, 2018. For fiscal 2019, quarterly shipping and distribution expenses fluctuated as a result of seasonal volume changes. For fiscal 2020, quarterly shipping and distribution expenses fluctuated as a result of volume changes. We anticipate our operating expenses will continue to increase in absolute dollars in future periods as we invest in the long-term growth of our business and prepare to operate as a public company. Historical patterns should not be considered a reliable indicator of our future sales activity or performance.

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 $9.6 million for the 39-week period ended September 27, 2020 and retained earnings of $14.8 million as of September 27, 2020. We completed our IPO

 

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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. We expect that our cash and cash equivalents, together with cash provided by our operating activities, proceeds from our IPO and proceeds from borrowings under our Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months. 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 partnerships and unexplored channels and the costs associated with our expansion of Egg Central Station. 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 the disruption persists and deepens, we could experience an 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 financial condition.

Credit Facility

Our Credit Facility with PNC Bank, National Association, or PNC Bank, includes a $7.9 million term loan, a $15.0 million revolving line of credit and an equipment loan with a maximum borrowing capacity of $3.0 million. The Credit Facility was originally entered into in October 2017 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 and 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, the Fourth Amendment Loan increased our maximum borrowing capacity under the equipment loan to $3.0 million and extended the borrowing period for the equipment loan from October 2019 to October 2021.

In April 2020, we paid all amounts outstanding under the revolving line of credit using cash provided by operations.

In May 2020, we entered into the Fifth 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 and increased the maximum borrowing capacity of the Credit Facility 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.

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.

 

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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 September 27, 2020, there was $7.6 million outstanding under the amended and restated term loan and the interest rate applicable to borrowings under the amended and restated term loan was 3.44%.

The maximum borrowing capacity under the revolving line of credit is $15.0 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) LIBOR plus 2.25% or (ii) 1.25% plus the alternate base rate. As of September 27, 2020, there were no outstanding borrowings under the revolving line of credit and the interest rate applicable to borrowings under the revolving line of credit was 4.50%.

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 amended the Credit Facility to modify various definitions and terms in anticipation of our IPO.

The Credit Facility is secured by all of our assets and requires us to maintain two financial covenants: a fixed charge coverage ratio and a leverage ratio. 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. As a result of the limitations contained in the Credit Facility, all of the net assets on our unaudited condensed consolidated balance sheet as of September 27, 2020 are restricted in use. The Credit Facility contains other customary covenants, representations and events of default. As of September 27, 2020, we were in compliance with all covenants under the Credit Facility. See Note 11 to our consolidated financial statements and Note 9 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional details related to our Credit Facility.

In September 2020, we repaid all amounts outstanding under the equipment loan using cash provided by operations.

 

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Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

     Fiscal Year Ended     39-Week Period Ended  
     December 31,
2017
    December 30,
2018
    December 29,
2019
    September 29,
2019
     September 27,
2020
 
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (4,490   $ 11,424     $ (5,352   $ 102      $ 15,043  

Net cash used in investing activities

     (11,695     (1,911     (5,623     (7,089      (5,882

Net cash provided by (used in) financing activities

     14,289       (1,509     434       (1,118      102,184  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (1,896   $ 8,004     $ (10,541   $ (8,105    $ 111,345  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating Activities

In fiscal 2017, net cash used in operating activities was $4.5 million, resulting primarily from net loss of $2.1 million and increases in accounts receivable, prepaid expenses and other current assets, inventories and deposits and other assets of $ 0.8 million, $0.4 million, $0.2 million, and $0.1 million, respectively, partially offset by a decrease in accrued liabilities and other liabilities of $2.6 million, non-cash charges of $2.0 million and a decrease in accounts payable of $0.3 million. The decreases in accounts payable and accrued and other liabilities were primarily due to the timing of vendor invoices and a decrease in payments made to our partner farms for lost income as a result of removing birds from current flocks ahead of schedule. The increases in accounts receivable were primarily due to increased sales as result of new distribution centers and a higher turnover rate. The increases in prepaid expenses and other current assets were primarily due to a partial prepayment of a gain contingency in connection with a lawsuit settlement in which we were the plaintiff.

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, partially offset by an increase in accounts receivable of $3.6 million, an 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 were primarily due to increases in a payment associated with an over recovery 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, and 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.

In fiscal 2019, net 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, and 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 payments made to our partner farms for lost income as a result of removing birds from current flocks ahead of

 

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schedule and additional increases in shipping and packaging costs, and the increases in accrued liabilities were primarily due to timing of vendor invoices.

Net cash provided by operating activities was $0.1 million in the 39-week period ended September 29, 2019 and was primarily driven by net income of $6.7 million, total non-cash items of $1.5 million, and an increase in net working capital items of $9.1 million. Non-cash items primarily consisted of depreciation and amortization of $1.1 million and non-cash stock-based compensation expense of $0.6 million. The change in net working capital items was primarily due to a $9.5 million increase in inventory driven by higher egg inventory levels, a $3.3 million increase in accounts receivable, partially offset by a $1.0 million increase in accrued liabilities, a $0.7 million increase in income taxes payable, and a $1.9 million increase in accounts payable.

Net cash provided by operating activities was $15.0 million in the 39-week period ended September 27, 2020 and was primarily driven by net income of $9.6 million, total non-cash items of $4.4 million, and a decrease in net working capital items of $1.1 million. Non-cash items primarily consisted of depreciation and amortization of $1.6 million, non-cash stock-based compensation expense of $1.5 million and deferred income taxes of $1.4 million. The change in net working capital items was primarily due to a $1.1 million decrease in inventory resulting from shipments outpacing farm egg production during the initial phase of the COVID-19 pandemic, a $2.2 million increase in accounts payable, a $1.3 million decrease in income taxes receivable, a $0.4 million increase in income taxes payable, partially offset by a $2.0 million increase in prepaids and other current assets, a $1.4 million decrease in accounts receivable, and a $0.5 million decrease in accrued liabilities.

Investing Activities

In fiscal 2017, net cash used in investing activities was $11.7 million, resulting primarily from purchases of property, plant and equipment used in ongoing operations.

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.

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 net borrowings of $0.8 million issued to related parties.

For the 39-week period ended September 29, 2019, net cash used in investing activities was $7.1 million resulting from notes receivable provided to related parties of $4.0 million and purchases of property, plant and equipment used in ongoing operations of $3.1 million.

For the 39-week period ended September 27, 2020, net cash used in investing activities was $5.9 million resulting primarily from $6.7 million of purchases of property, plant and equipment used in ongoing operations, offset by $0.8 million received from notes receivable from related parties.

Financing Activities

In fiscal 2017, net cash provided by financing activities was $14.3 million, which primarily consisted of $11.1 million of proceeds from our issuance of Series D preferred stock, less issuance costs of $0.1 million, proceeds of $8.7 million under our Credit Facility, less debt issuance costs of $0.2 million, and proceeds from the issuance of redeemable noncontrolling interest of $0.2 million, partially offset by $4.9 million of principal repayments in association with our existing loans, $0.4 million of deferred royalty payments related to our 2014 acquisition of certain assets of Heartland Eggs, LLC, or Heartland Eggs, and $0.1 million of principal payments under our capital lease obligations.

In fiscal 2018, net cash used in financing activities was $1.5 million, primarily consisting of $0.4 million of deferred royalty payments related to our 2014 acquisition of certain assets of Heartland Eggs, $0.7 million of principal payments under our Credit Facility and $0.4 million of principal payments under our capital lease obligations.

 

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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 repayments 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.

For the 39-week period ended September 29, 2019, net cash used in financing activities was $1.1 million, which primarily consisted of $14.1 million of net proceeds from our issuance of common stock to Manna Tree Partners, and proceeds of $0.2 million from the exercise of stock options, partially offset by our repurchase of common stock of $14.3 million, $0.5 million of principal repayments in association with our Credit Facility, $0.3 million of deferred royalty payments related to our 2014 acquisition of certain assets of Heartland Eggs, $0.5 million of repayments of our term loan, and $0.3 million of principal payments under our capital lease obligations.

For the 39-week period ended September 27, 2020, net cash provided by financing activities was $102.2 million which primarily consisted of proceeds of $99.7 million from net proceeds 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 $3.3 million of repayments under our Credit Facility, $0.6 million of repayments of our term loan, and $0.3 million of repayments of our capital lease obligations.

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 (loss) income, adjusted to exclude: (1) depreciation and amortization; (2) provision for income taxes; (3) stock-based compensation expense; (4) interest expense; (5) interest income; (6) change in fair value of contingent consideration; and (7) net litigation settlement gain.

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) it does not properly reflect capital commitments to be paid in the future, (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures, (3) it does not consider the impact of stock-based compensation expense, (4) it does not reflect other non-operating expenses, including interest expense, (5) it does not consider the impact of any contingent

 

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consideration liability valuation adjustments and (6) it does not reflect tax payments that may represent a reduction in cash available to us. 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.

The following table presents a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure stated in accordance with GAAP, for the periods presented:

 

     Fiscal Year Ended     39-Week Period Ended  
     December 31,
2017
    December 30,
2018
    December 29,
2019
    September 29,
2019
    September 27,
2020
 
     (in thousands)  

Net (loss) income

   $ (2,145   $ 5,629     $ 3,312     $ 7,636     $ 9,531  

Depreciation and amortization

     821       1,437       1,921       1,119       1,568  

Provision for income tax

     33       723       1,106       2,839       4,300  

Stock-based compensation expense

     495       600       1,029       576       1,481  

Interest expense

     524       424       349       250       365  

Change in fair value of contingent consideration(1)

     118       92       70       53       (342

Interest income

     (9     (9     (181     (140     (24

Net litigation settlement gain(2)

     —         (1,000     (1,200     (1,200     (20