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/

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 27, 2022

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-39411

 

 

Vital Farms, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

27-0496985

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

3601 South Congress Avenue

Suite C100

Austin, Texas

 

78704

(Address of principal executive offices)

(Zip Code)

(877) 455-3063

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

VITL

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes No  

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

 

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 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes No

As of May 2, 2022, the registrant had 40,607,865 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

Page

Special Note Regarding Forward-Looking Statements

ii

 

 

 

 

 

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive (Loss) Income

3

 

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders' Equity

4

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

PART II.

OTHER INFORMATION

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

 

Signatures

59

 

 

 

 

 

 

 

 

 

i


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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:

 

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, cream 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;

 

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

 

the effects of the ongoing 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;

 

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

 

anticipated changes in our product offerings and our ability to innovate to offer new products;

 

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 personnel;

 

our ability to effectively manage our growth;

 

the potential influence of our focus on a specific public benefit purpose and producing a positive effect for society;

 

our environmental, sustainability and governance goals, opportunities and initiatives, as well as the standards and expectations of third parties regarding these matters;

 

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

 

the impact of adverse economic conditions, including as a result of the conflict between Ukraine and Russia and inflation;

 

the sufficiency of our cash to meet our liquidity needs;

 

seasonality; and

 

the growth rates of the markets in which we compete.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. A summary of selected risks associated with our business is set forth at the beginning of the section titled “Risk Factors.” 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 Quarterly Report on Form 10-Q. The results, events and circumstances

ii


 

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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q 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.

 

 

 

 

 

iii


 

PART I – FINANCIAL INFORMATION

 

VITAL FARMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

 

 

 

March 27,

2022

 

 

December 26,

2021

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,774

 

 

$

30,966

 

Investment securities, available-for-sale

 

 

67,051

 

 

 

68,621

 

Accounts receivable, net

 

 

25,789

 

 

 

26,938

 

Inventories

 

 

13,336

 

 

 

10,945

 

Prepaid expenses and other current assets

 

 

3,112

 

 

 

3,817

 

Total current assets

 

 

134,062

 

 

 

141,287

 

Property, plant and equipment, net

 

 

47,294

 

 

 

44,608

 

Operating lease right-of-use assets

 

 

2,916

 

 

 

 

Goodwill

 

 

3,858

 

 

 

3,858

 

Other assets

 

 

3,131

 

 

 

189

 

Total assets

 

$

191,261

 

 

$

189,942

 

Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,567

 

 

$

22,520

 

Accrued liabilities

 

 

16,142

 

 

 

15,143

 

Operating lease liabilities

 

 

1,406

 

 

 

 

Finance lease liabilities

 

 

210

 

 

 

327

 

Total current liabilities

 

 

38,325

 

 

 

37,990

 

Operating lease liabilities, non-current

 

 

1,741

 

 

 

 

Other liabilities

 

 

206

 

 

 

192

 

Total liabilities

 

 

40,272

 

 

 

38,182

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

175

 

 

 

175

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share, 310,000,000 shares authorized as of March 27, 2022 and December 26, 2021; 40,596,297 and 40,493,969 shares issued and outstanding as of March 27, 2022 and December 26, 2021, respectively

 

 

5

 

 

 

5

 

Additional paid-in capital

 

 

150,550

 

 

 

149,000

 

Retained earnings

 

 

1,372

 

 

 

2,746

 

Accumulated other comprehensive loss

 

 

(1,064

)

 

 

(281

)

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

 

 

150,863

 

 

 

151,470

 

Noncontrolling interests

 

 

(49

)

 

 

115

 

Total stockholders’ equity

 

$

150,814

 

 

$

151,585

 

Total liabilities, redeemable noncontrolling interest, and stockholders’ equity

 

$

191,261

 

 

$

189,942

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

1


 

VITAL FARMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

(Unaudited)

 

 

 

13-Weeks Ended

 

 

 

March 27,

2022

 

 

March 28,

2021

 

Net revenue

 

$

77,058

 

 

$

58,545

 

Cost of goods sold

 

 

55,358

 

 

 

37,215

 

Gross profit

 

 

21,700

 

 

 

21,330

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

17,624

 

 

 

13,183

 

Shipping and distribution

 

 

8,162

 

 

 

5,063

 

Total operating expenses

 

 

25,786

 

 

 

18,246

 

(Loss) income from operations

 

 

(4,086

)

 

 

3,084

 

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(8

)

 

 

(18

)

Other income (expense), net

 

 

179

 

 

 

110

 

Total other income (expense), net

 

 

171

 

 

 

92

 

Net (loss) income before income taxes

 

 

(3,915

)

 

 

3,176

 

Income tax benefit

 

 

(2,377

)

 

 

(304

)

Net (loss) income

 

 

(1,538

)

 

 

3,480

 

Less: Net loss attributable to

   noncontrolling interests

 

 

(2

)

 

 

(11

)

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

   stockholders

 

$

(1,536

)

 

$

3,491

 

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

   stockholders:

 

 

 

 

 

 

 

 

Basic:

 

$

(0.04

)

 

$

0.09

 

Diluted:

 

$

(0.04

)

 

$

0.08

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic:

 

 

40,532,779

 

 

 

39,536,928

 

Diluted:

 

 

40,532,779

 

 

 

43,509,371

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

 

 

 

 

2


 

VITAL FARMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

13-Weeks Ended

 

 

 

March 27,

2022

 

 

March 28,

2021

 

Net (loss) income

 

$

(1,538

)

 

$

3,480

 

Other comprehensive loss

 

 

 

 

 

 

 

 

Unrealized holding loss on available-for-sale securities, net of deferred tax benefit of $242 and $7 for the 13-weeks ended March 27, 2022 and March 28, 2021, respectively

 

 

(783

)

 

 

(22

)

Total comprehensive (loss) income

 

$

(2,321

)

 

$

3,458

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

 

 

3


 

VITAL FARMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share amounts)

(Unaudited)

 

Redeemable

Noncontrolling

Interest

 

 

Common

Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

Stockholders’

Equity

Attributable

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings (Deficit)

 

 

Accumulated

Other

Comprehensive

Loss

 

 

to Vital

Farms, Inc.

Stockholders’

 

 

Noncontrolling

Interests

 

 

Total

Stockholders’

Equity

 

Balances as of December 26, 2021

$

175

 

 

 

40,493,969

 

 

$

5

 

 

$

149,000

 

 

$

2,746

 

 

$

(281

)

 

$

151,470

 

 

$

115

 

 

$

151,585

 

Exercise of stock options

 

 

 

 

102,328

 

 

 

 

 

 

254

 

 

 

 

 

 

 

 

 

254

 

 

 

 

 

 

254

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

1,296

 

 

 

 

 

 

 

 

 

1,296

 

 

 

 

 

 

1,296

 

Net loss attributable to non-

   controlling interests - stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

162

 

 

 

 

 

 

 

162

 

 

 

(164

)

 

 

(2

)

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(783

)

 

 

(783

)

 

 

 

 

 

(783

)

Net loss attributable to

   Vital Farms, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,536

)

 

 

 

 

 

(1,536

)

 

 

 

 

 

(1,536

)

Balances as of March 27, 2022

$

175

 

 

 

40,596,297

 

 

$

5

 

 

$

150,550

 

 

$

1,372

 

 

$

(1,064

)

 

$

150,863

 

 

$

(49

)

 

$

150,814

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4


 

VITAL FARMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share amounts)

(Unaudited)

 

 

 

Redeemable

Noncontrolling

Interest

 

 

Common

Stock

 

Treasury

Stock

 

 

 

 

 

 

 

 

 

 

Total

Stockholders’

Equity

Attributable

 

 

 

 

 

 

 

 

 

Amount

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Additional

Paid-In

Capital

 

Retained

Earnings

 

Accumulated

Other

Comprehensive

Loss

 

to Vital

Farms, Inc.

Stockholders’

 

Noncontrolling

Interests

 

Total

Stockholders’

Equity

 

Balances as of December 27, 2020

 

$

175

 

 

 

44,938,958

 

$

5

 

 

(5,494,918

)

$

(16,276

)

$

144,311

 

$

14,039

 

 

(31

)

$

142,048

 

$

163

 

$

142,211

 

Exercise of stock options

 

 

 

 

 

300,266

 

 

 

 

 

 

 

 

525

 

 

 

 

 

 

 

525

 

 

 

 

525

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

853

 

 

 

 

 

 

 

853

 

 

 

 

853

 

Net loss attributable to non-

   controlling interests - stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

(11

)

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

(22

)

 

 

 

 

(22

)

Net income attributable to Vital

   Farms, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,491

 

 

 

 

 

3,491

 

 

 

 

3,491

 

Balances as of March 28, 2021

 

$

175

 

 

 

45,239,224

 

$

5

 

 

(5,494,918

)

$

(16,276

)

$

145,689

 

$

17,530

 

$

(53

)

$

146,895

 

$

152

 

$

147,047

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

5


 

VITAL FARMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

13-Weeks Ended

 

 

 

March 27,

2022

 

 

March 28,

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,538

)

 

$

3,480

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

948

 

 

 

785

 

Amortization of right-of-use assets

 

 

413

 

 

 

 

Amortization of available-for-sale debt securities

 

 

321

 

 

 

405

 

Stock-based compensation expense

 

 

1,296

 

 

 

853

 

Deferred Taxes

 

 

(2,572

)

 

 

142

 

Other

 

 

199

 

 

 

(508

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,080

 

 

 

2,717

 

Inventories

 

 

(2,363

)

 

 

1,636

 

Prepaid expenses and other current assets

 

 

538

 

 

 

1,492

 

Deposits and other assets

 

 

(49

)

 

 

 

Income taxes payable

 

 

(112

)

 

 

(449

)

Accounts payable

 

 

(2,973

)

 

 

(1,402

)

Accrued liabilities

 

 

240

 

 

 

(1,111

)

Operating lease liabilities

 

 

(367

)

 

 

 

Net cash (used in) provided by operating activities

 

$

(4,939

)

 

$

8,040

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,686

)

 

 

(3,451

)

Purchases of available-for-sale debt securities

 

 

(13,973

)

 

 

(14,409

)

Sales of available-for sale debt securities

 

 

 

 

 

1,441

 

Maturities and call redemptions of available-for-sale debt securities

 

 

14,254

 

 

 

13,569

 

Proceeds from the sale of property, plant and equipment

 

 

50

 

 

 

 

     Net cash used in investing activities

 

$

(1,355

)

 

$

(2,850

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of contingent consideration

 

 

(26

)

 

 

(42

)

Principal payments under finance lease obligations

 

 

(126

)

 

 

(116

)

Proceeds from exercise of stock options

 

 

254

 

 

 

525

 

Net cash provided by financing activities

 

$

102

 

 

$

367

 

Net (decrease) increase in cash and cash equivalents

 

 

(6,192

)

 

 

5,557

 

Cash and cash equivalents at beginning of the period

 

 

30,966

 

 

 

29,544

 

Cash and cash equivalents at end of the period

 

$

24,774

 

 

$

35,101

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

8

 

 

$

20

 

Cash paid for income taxes

 

 

7

 

 

 

 

Supplemental disclosure of non-cash investing and financing

   activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable and accrued liabilities

 

 

2,147

 

 

 

140

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

6


 

VITAL FARMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

Note 1. Nature of the Business and Basis of Presentation

Vital Farms, Inc. (the “Company”, “we”, “us” or “our”) was incorporated in Delaware on June 6, 2013 and is headquartered in Austin, Texas. Vital Farms packages, markets and distributes shell eggs, butter and other products. These products are sold under the trade names Vital Farms, Alfresco Farms, Lucky Ladies and RedHill Farms, primarily to retail and foodservice channels in the United States.

The accompanying unaudited condensed consolidated financial statements as of March 27, 2022 and for the 13-week periods ended March 27, 2022 and March 28, 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto on our Annual Report on Form 10-K for the fiscal year ended December 26, 2021 (“Annual Report on Form 10-K”).

In the opinion of management, the included disclosures are adequate and the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair presentation of our consolidated financial position as of March 27, 2022, consolidated results of operations for the 13-week periods ended March 27, 2022 and March 28, 2021, and consolidated cash flows for the 13-week periods ended March 27, 2022 and March 28, 2021. Such adjustments are of a normal and recurring nature and certain reclassifications of previously reported amounts have been made to conform to the current year presentation. The condensed consolidated results of operations for the 13-week period ended March 27, 2022 are not necessarily indicative of the consolidated results of operations that may be expected for the fiscal year ending December 25, 2022.

 

Fiscal Year: The Company’s fiscal year ends on the last Sunday in December and contains either 52 or 53 weeks. In a 52-week fiscal year, each of the Company’s fiscal quarters consist 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. Therefore, the financial results of certain 53-week fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. The quarters ended March 27, 2022 and March 28, 2021 both contain operating results for 13 weeks.

 

Impact of COVID-19 Pandemic: Due to the ongoing COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on the Company’s business. The Company does not currently anticipate that the COVID-19 pandemic will have a material impact on the timelines for the Company’s product development and expansion efforts. However, the extent to which the COVID-19 pandemic impacts the Company’s business, product development and expansion efforts, corporate development objectives and the value of and market for the Company’s common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, and the effectiveness of actions taken globally to contain and treat the disease, including the roll-out of vaccines. The global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.  

Note 2. Summary of Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the fiscal year ended December 26, 2021, and the notes thereto, which are included in our Annual Report on Form 10-K. Other than the adoption of the new accounting pronouncements as further described below, there have been no material changes to the Company’s significant accounting policies during the 13-week period ended March 27, 2022.  

Recently Adopted Accounting Pronouncements: The new accounting pronouncements recently adopted by the Company are described in the Company’s audited consolidated financial statements as of and for the fiscal year ended December 26, 2021, and the notes thereto, which are included in our Annual Report on Form 10-K. Except as described below, there have been no new accounting pronouncements adopted by the Company during the 13-week period ended March 27, 2022.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) and also issued subsequent amendments to the initial guidance, ASU 2017-13, ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20, ASU 2019-01, ASU

7


 

2019-10, ASU 2020-02, and ASU 2020-05 (collectively, “Topic 842”). The guidance in Topic 842 supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than twelve months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the unaudited condensed consolidated statement of operations. An entity may adopt the guidance either (1) retrospectively to each prior reporting period presented in the financial statements with a cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The Company adopted Topic 842 as of the beginning of the period of adoption, December 27, 2021, and has not applied the new standard to comparative periods presented.

To reduce the burden of adoption and ongoing compliance with Topic 842, a number of practical expedients and policy elections are available under the new guidance. The Company elected the "package of practical expedients" permitted under the transition guidance, which among other things, did not require reassessment of whether contracts entered into prior to adoption are or contain leases, and allowed carryforward of the historical lease classification for existing leases. The Company has not elected to adopt the “hindsight” practical expedient, and therefore will measure the right-of-use (“ROU”) assets and lease liabilities using the remaining portion of the lease term at adoption on December 27, 2021.  

The Company made an accounting policy election under Topic 842 not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less.  For all other leases, the Company recognizes ROU assets and lease liabilities based on the present value of lease payments over the lease term at the commencement date of the lease (or December 27, 2021 for existing leases upon the adoption of Topic 842). The Company’s recognized ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date, which are reduced by any lease incentives.

Future lease payments may include fixed rent escalation clauses or payments that depend on an index (such as the Consumer Price Index measured by the U.S. Bureau of Labor Statistics). Subsequent index changes and other periodic market-rate adjustments to base rent are recorded as variable lease expense during the period in which they are incurred. Residual value guarantees or payments for terminating the lease are included in the lease payments only when it is probable they will be incurred.

The Company has made an accounting policy election to account for lease and non-lease components in its contracts as a single lease component for all asset classes. The non-lease components typically represent additional services transferred to the Company, such as common area maintenance for real estate, which are variable in nature and recorded in variable lease expense in the period incurred.  

As an emerging growth company, we use our lease-specific collateralized incremental borrowing rate to determine the present value of lease payments at lease commencement or upon the adoption of Topic 842. The adoption of the new lease standard had an immaterial impact on our consolidated net earnings and consolidated cash flows and did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of Topic 842 as of December 27, 2021, resulted in the recording of right-of-use assets and lease liabilities of $4.1 million and $3.8 million, respectively.

Recently Issued Accounting Pronouncements Not Yet Adopted: In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) and also issued subsequent amendments to the initial guidance, ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02, and ASU 2020-03 (collectively, “Topic 326”), to introduce a new impairment model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Topic 326 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. 

The Company expects to adopt Topic 326 on December 26, 2022. Although the Company is currently evaluating the impact of its pending adoption of Topic 326, the Company does not expect it to have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which intends to simplify the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company expects to adopt ASU 2019-12 on December 26, 2022. Although the Company is currently evaluating the impact of the adoption of ASU 2019-12, the Company does not expect it to have a material impact on its consolidated financial statements.

8


 

Note 3. Investment Securities

The following table summarizes the Company’s available-for-sale investment securities as of March 27, 2022:

 

 

 

Amortized Cost

 

 

Unrealized Losses

 

 

Fair Value

 

   U.S. Corporate Bonds and U.S. Dollar

   Denominated Foreign Bonds

 

$

66,270

 

 

$

(1,371

)

 

$

64,899

 

   Commercial Paper

 

 

1,000

 

 

 

 

 

 

1,000

 

   U.S. Treasury

 

 

1,177

 

 

 

(25

)

 

 

1,152

 

Total

 

$

68,447

 

 

$

(1,396

)

 

$

67,051

 

The following table summarizes the Company’s available-for-sale investment securities as of December 26, 2021:

 

 

 

Amortized Cost

 

 

Unrealized Losses

 

 

Fair Value

 

   U.S. Corporate Bonds and U.S. Dollar

   Denominated Foreign Bonds

 

$

64,816

 

 

$

(364

)

 

$

64,452

 

   Commercial Paper

 

 

2,999

 

 

 

 

 

 

2,999

 

   U.S. Treasury

 

 

1,177

 

 

 

(7

)

 

 

1,170

 

Total

 

$

68,992

 

 

$

(371

)

 

$

68,621

 

 

The securities incurred unrealized losses of $1,026 and related tax benefit of $242 for the 13-weeks ended March 27, 2022. The unrealized losses in our U.S. corporate bond portfolio consist of losses on 89 diversified issuances with credit ratings ranging from BBB to AAA.  There are no individual bonds with unrealized losses exceeding $65 and only three issuances have been in a loss position greater than 12 months with aggregate unrealized losses of $124.  

The decline in fair value has resulted primarily from rising interest rates over the last 12 months and we do not believe there has been any significant decline in the creditworthiness of the issuers. We also do not believe it is likely that the bonds will be called early given the current interest rate environment and we do not have current liquidity needs that would necessitate a sale of the investments prior to maturity.  Therefore, we have not recorded an allowance for credit losses on the investment securities as of March 27, 2022.

Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities of investment securities as of March 27, 2022 are as follows:

 

 

 

Amortized Cost

 

 

Fair Value

 

Due within one year

 

$

20,640

 

 

$

20,541

 

Due in 1-5 years

 

 

47,807

 

 

 

46,510

 

Total available-for-sale

 

$

68,447

 

 

$

67,051

 

 

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis for the periods presented:

 

 

Fair Value Measurements as of March 27, 2022, Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   U.S. Corporate Bonds and U.S. Dollar

   Denominated Foreign Bonds

 

$

 

 

$

64,899

 

 

$

 

 

$

64,899

 

   Commercial Paper

 

 

 

 

 

1,000

 

 

 

 

 

 

1,000

 

   Money Market

 

 

19,431