VITAL FARMS, INC.
The following discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including
those set forth in Part I, Item 1A, "Risk Factors," and "Special Note Regarding
Forward-Looking Statements" included elsewhere in this Annual Report. The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited financial statements
and related notes included elsewhere in this Annual Report.
Overview
Our mission is to bring ethical food to the table, and we are disrupting the
U.S. food system by developing a framework that challenges the norms of the
incumbent food model, allowing us to bring high-quality products from our
network of family farms to a national audience. This framework has enabled us to
become the leading U.S. brand of pasture-raised eggs and the second largest U.S.
egg brand by retail dollar sales. Our ethics are exemplified by our focus on
animal welfare and sustainable farming practices. We believe our standards
produce happy hens with varied diets, which produce better eggs. There is a
seismic shift in consumer demand for 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). We make decisions based on what's sustainable for all our
stakeholders. Our collective sustainable business practices will enable us to
fulfill our purpose of improving the lives of people, animals, and the planet
through food, now and long into the future. For us, it is not about short-term
outcomes or a trade-off between purpose and profit. We are fierce business
competitors who believe that prioritizing the long-term viability of all
stakeholders will produce stronger outcomes, for everyone, over time. These
principles guide our day-to-day operations and, we believe, help us deliver a
more sustainable and successful business. Our approach has been validated by our
financial performance and recertification as a Certified B Corporation in
January 2022 , 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.
We source our products from a network of over 300 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.
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 Kroger,
Sprouts, Target and Whole Foods , and we also sell our products at Albertsons,
Publix and Walmart. We offer 25 retail stock keeping units, or SKUs through a
multi-channel retail distribution network. We believe we have significant room
for growth within the retail and 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 153,000 square feet and utilizes highly automated
equipment to grade and package our shell egg products. Egg Central Station is
capable of packing approximately six million eggs per day and has achieved Safe
Quality Food, or SQF Good rating, the highest level of such certification from
the Global Food Safety Initiative. In addition, as of January 2020 , Egg Central
Station is the only egg facility to receive, and we are one of only six
companies globally to have received, the SQFI Select Site certification.
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Our products are distributed through a broker-distributor-retailer network
whereby brokers represent our products to distributors and retailers who will in
turn sell our products to consumers. We serve the majority of natural channel
customers through food distributors, such as UNFI, US Foods and KeHE, which
purchase, store, sell and deliver our products to Whole Foods (UNFI and US
Foods) and Sprouts (KeHE). 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. UNFI, US Foods and KeHE sales as a percentage of
the Company's net revenue is presented below:
Fiscal Year Ended
December 25, December 26,
2022 2021
UNFI 26% 18%
US Foods * 14%
KeHE * 10%
* less than 10%
The increase in the percentage of net revenue for UNFI for fiscal 2022 is due to
a net shift in the Company's distribution channels away from US Foods during
fiscal 2021. The decrease in percentage of net revenue for KeHE is due to
general shifts in the Company's distribution channels.
We have experienced consistent sales growth. We had net revenue of $362.1
million and $260.9 million , net income of $1.2 million and $2.4 million , and
Adjusted EBITDA of $16.2 million and $8.0 million in the fiscal years ended
December 25, 2022 and December 26, 2021 , respectively. Adjusted EBITDA is a
non-GAAP financial measure. See the section titled "-Non-GAAP Financial
Measures-Adjusted EBITDA" below for the definition of Adjusted EBITDA, as well
as a reconciliation of Adjusted EBITDA to net income, the most directly
comparable financial measure stated in accordance with GAAP.
Known Trends, Events and Uncertainties
Highly Pathogenic Avian Influenza
Since the initial outbreaks of HPAI in early 2022, we have been closely following the progression of the virus and working with our farmers, veterinarians, government health officials and animal welfare auditors to ensure that our flocks are kept as safe as possible. To date, we have experienced outbreaks at two of our farms, one located inMissouri and one inTennessee . While we have not experienced material disruptions to our egg supply due to HPAI outbreaks, if a substantial portion of our farms or production facilities were affected, this could materially and negatively affect our supply chain and operating results. Additionally, HPAI has resulted in supply shortages and price increases across the egg market. We are confident in the measures we have taken to reduce the risk of HPAI on our farms and production facilities, as well as our ability to mitigate impacts on supply. However, given continued uncertainty about future outbreaks and governmental responses to such outbreaks, we cannot predict the ultimate impact that HPAI will have on our business.
Inflation and Economic Uncertainties
The recent trends towards rising inflation may also materially affect our business and corresponding financial position and cash flows. Inflationary factors, such as increases in the cost of materials and supplies, interest rates and overhead costs, may adversely affect our operating results. Rising interest rates also present a recent challenge impacting theU.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Additionally, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which, together with the foregoing, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations. Furthermore, such economic conditions have produced downward pressure on share prices. We have experienced and may continue to experience increases in our operating costs, including our labor costs and research and development costs, due to supply chain constraints, consequences associated with COVID-19 and the ongoing war betweenRussia andUkraine , and employee availability and wage increases, which may result in additional stress on the Company's working capital resources. We work 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 supply chain disruptions associated with such uncertainties. We currently expect to have an adequate supply of eggs, butter, packaging, and freight to meet anticipated demand through mid-2023, as well as adequate capacity for packaging and processing our eggs. 48 --------------------------------------------------------------------------------
Liquidity and Capital Resources Overview
With cash and cash equivalents of$12.9 million as ofDecember 25, 2022 and access to additional funds held as investment securities and available borrowing under our credit facility agreement withPNC Bank, National Association , or the Credit Facility, we anticipate having sufficient liquidity to make investments in our business to support our long-term growth strategy. We expect that our cash and cash equivalents as ofDecember 25, 2022 , together with cash provided by our operating activities and availability of borrowings under our existing Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months and to make investments in our business in support of our long-term growth strategy. Our future capital requirements will depend on many factors, including our pace of new and existing customer growth, our investments in innovation, our investments in acquisitions or other growth opportunities, our investments in partnerships and unexplored channels and ongoing costs associated with expansions of our production capacity. We may be required to seek additional equity or debt financing. However, a significant disruption of global financial markets (including a disruption due to public health pandemics, geopolitical tensions and wars, inflation or other factors) may result in our inability to access additional capital, which could in the future negatively affect our operations. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation and product expansion, we may not be able to compete successfully, which would harm our business, operations and results of operations. For additional information, see the section titled "Liquidity and Capital Resources" below.
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 53-week fiscal year will be this year, fiscal 2023, which we expect to begin onDecember 26, 2022 and end onDecember 31, 2023 . See "Nature of the Business and Basis of Presentation" in Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report for additional details related to our fiscal calendar. Key Factors Affecting Our Business
We believe that the growth of our business and our future success are dependent upon many factors. While each of these factors presents significant opportunities for us, they also pose important challenges that we must successfully address to enable us to sustain the growth of our business and improve our results of operations.
Expand Household Penetration
We have positioned our brand to capitalize on growing consumer interest in natural, clean-label, traceable, ethical, great-tasting and nutritious foods. We believe there is substantial opportunity to grow our consumer base and increase the velocity at which households purchase our products.U.S. household penetration for the shell egg category is approximately 98%, while the household penetration for our shell eggs is approximately 7.0%. 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 attractive attributes of our products, generate further demand for our products and ultimately expand our consumer base. Our ability to attract new consumers will depend, among other things, on the perceived value and quality of our products, the offerings of our competitors and the effectiveness of our marketing efforts. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in theU.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. 49 --------------------------------------------------------------------------------
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, likeWhole Foods , 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 23% and 29% of our retail sales for the fiscal years endedDecember 25, 2022 andDecember 26, 2021 , respectively. While the amount of our retail sales toWhole Foods increased in real terms in the fiscal year endedDecember 25, 2022 , the percentage of our net revenue attributable toWhole Foods declined in these periods as we added new customers and expanded distribution to existing customers. As ofDecember 2022 , there were more than 22,000 stores selling our products. We expect the retail channel to be our largest source of net revenue for the foreseeable future. By capturing greater shelf space, driving higher product velocities and increasing our SKU count, we believe there is meaningful runway for further growth with existing retail customers. Additionally, we believe there is significant opportunity to gain incremental stores from existing customers as well as by adding new retail customers. We also believe there is significant further long-term opportunity in additional distribution channels, including the convenience, drugstore, club, military and international markets. Our ability to execute on this strategy will increase our opportunities for incremental sales to consumers, and we also believe this growth will allow for margin expansion. To accomplish these objectives, we intend to continue leveraging consumer awareness of and demand for our brand, offering targeted sales incentives to our customers and utilizing customer-specific marketing tactics. Our ability to grow within the retail channel will depend on a number of factors, such as our customers' satisfaction with the sales, product velocities and profitability of our products.
Expand Footprint Across Foodservice
We believe there is significant demand for our products in the foodservice channel since we offer versatile ingredients with high menu penetrations across all commercial and non-commercial operator segments. We see considerable opportunity to continue to grow the channel in the medium- to long-term with our two-pronged sales approach to values-aligned foodservice operators and their distributors. We are working with Waypoint, a foodservice sales and marketing agency in the consumer-packaged goods industry, to increase our category share in broad-line distribution and to get on national and regional restaurant chain menus. We believe that mostU.S. consumers' food preferences are driven primarily by what they encounter on restaurant menus, so we are also leveraging foodservice as a critical consumer touchpoint to drive brand awareness and build trust. We are investing in co-marketing to reach new households. We believe co-branding is mutually beneficial to us and foodservice operators as we believe it helps to differentiate their brands, enhance their perceived customer value and drive repeat traffic. A multi-unit example from our successful foodservice program isTrue Food Kitchen , an award-winning restaurant brand and a pioneer of wellness-driven dining with 43 locations acrossthe United States , that shares our values for improving the lives of people, animals, and the planet through ethically produced food. We have launched similar relationships with national chains, including Hopdoddy Burger Bar and Original ChopShop. Additionally, we have regional chain collaborations in all four or ourU.S. sales territories. Several examples include:
•
Tacodeli, which sells breakfast tacos made exclusively with our shell eggs
across restaurant locations and points of distribution, such as coffee shops and
farmers' market stands, across
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Black Seed Bagels, a bagel brand with locations across the
•
King David Tacos, which sells breakfast tacos made exclusively with our eggs at a brick-and-mortar location, multiple cart locations and over 70 retail partners in theNew York City area;
•
•
•
•
Moe's Broadway Bagel, an
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--------------------------------------------------------------------------------Expand Our Product Offerings
We intend to continue to strengthen our product offerings by investing in innovation in new and existing categories. We have a history of product introductions and intend to continue to innovate by introducing new products from time to time. Eggs and egg-related products generated$339.2 million , or approximately 94%, of net revenue in fiscal 2022. We expect eggs and egg-related products 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. Key Components of Results of OperationsNet Revenue We generate net revenue primarily from sales of our products, including eggs and butter, to our customers, which include natural retailers, mainstream retailers and foodservice customers. We sell our products to customers on a purchase-order basis. We serve the majority of our natural channel customers and certain independent grocers and other customers through food distributors, which purchase, store, sell and deliver our products to these customers. We periodically offer sales incentives to our customers, including rebates, temporary price reductions, off-invoice discounts, retailer advertisements, product coupons and other trade activities. We record a provision for sales incentives at the later of the date at which the related revenue is recognized or when the sales incentive is offered. At the end of each accounting period, we recognize a liability for an estimated promotional allowance reserve. We periodically provide credits or discounts to our customers in the event that products do not conform to customer expectations upon delivery or expire at a customer's site. We treat these credits and discounts as a reduction of the sales price of the related transaction at the time of sale. We anticipate that these promotional activities, credits and discounts could impact our net revenue and that changes in such activities could impact period-over-period results. Our 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 shell eggs (including due to any price increases we may implement), price-sensitive consumers may choose to purchase commodity shell eggs offered by our competitors instead of our eggs. As a result, low commodity shell egg prices may adversely affect our net revenue. For example, we increased prices on certain of our products inJanuary 2022 ,May 2022 andJanuary 2023 . While we have not seen significant decreases in sales volume due to previous price increases, if we further increase prices to offset higher commodity prices or other costs, we could experience lower demand for our products, decreased ability to attract new customers and lower sales volumes. Net revenue may also vary from period to period depending on the purchase orders we receive, the volume and mix of our products sold, and the channels through which our products are sold.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of broker and contractor fees for sales and marketing, as well as personnel costs for sales and marketing, finance, human resources and other administrative functions, including salaries, benefits, bonuses, stock-based compensation expense and sales commissions. Selling, general and administrative expenses also include advertising and digital media costs, agency fees, travel and entertainment costs, and costs associated with consumer promotions, product samples, sales aids incurred to acquire new customers, retain existing customers and build our brand awareness, overhead costs for facilities, including associated depreciation and amortization expenses, and information technology-related expenses.
Shipping and Distribution
Shipping and distribution expenses consist primarily of costs related to third-party freight for our products. 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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Results of Operations
The following table sets forth our results of operations for the periods
presented (in thousands):
Fiscal Year Ended
December 25, December 26,
2022 2021
(in thousands)
Net revenue $ 362,050 $ 260,901
Cost of goods sold(1) 252,606 178,002
Gross profit 109,444 82,899
Operating expenses:
Selling, general and administrative(1) 77,236 57,868
Shipping and distribution 30,104 24,979
Total operating expenses 107,340 82,847
Income from operations 2,104 52
Other income (expense), net:
Interest expense (114 ) (52 )
Interest income 992 381
Other income (expense), net (151 ) (27 )
Total other income (expense), net 727 302
Net income before income taxes 2,831 354
Income tax provision (benefit) 1,601 (2,028 )
Net income 1,230 2,382
Less: Net (loss) income attributable to noncontrolling
interests (21 ) (47 )
Net income attributable to
stockholders$ 1,251 $ 2,429 (1)
Includes stock-based compensation expense of
52
--------------------------------------------------------------------------------The following table sets forth our consolidated statements of operations data expressed as a percentage of net revenue for the periods presented:
Fiscal Year Ended
December 25, December 26,
2022 2021
% of % of
Amount Revenue Amount Revenue
(dollars in thousands)
Net revenue $ 362,050 100 % $ 260,901 100 %
Cost of goods sold(1) 252,606 70 % 178,002 68 %
Gross profit 109,444 30 % 82,899 32 %
Operating expenses:
Selling, general and administrative(1) 77,236 21 % 57,868 22 %
Shipping and distribution 30,104 8 % 24,979 10 %
Total operating expenses 107,340 30 % 82,847 32 %
Income from operations 2,104 1 % 52 -
Other income (expense), net:
Interest expense (114 ) - (52 ) -
Interest income 992 - 381 -
Other income (expense), net (151 ) - (27 ) -
Total other income (expense), net 727 - 302 -
Net income before income taxes 2,831 1 % 354 -
Income tax provision (benefit) 1,601 - (2,028 ) (1 )%
Net income 1,230 - 2,382 1 %
Less: Net (loss) income attributable to
noncontrolling
interests (21 ) - (47 ) -
Net income attributable to Vital Farms,
Inc.
stockholders $ 1,251 - $ 2,429 1 %
Fiscal Year Ended
Net Revenue
Fiscal Year Ended
December 25, December 26,
2022 2021 $ Change % Change
(in thousands)
Net revenue $ 362,050 $ 260,901 $ 101,149 39 %
The increase in net revenue of $101.1 million , or 39%, was primarily driven by
volume-related increases of $74.4 million and price increases of $26.8 million .
Additionally, there was an increase in egg-related product sales of $99.2
million and an increase in butter-related product sales of $1.9 million . The
increases in egg and butter-related sales were primarily due to volume increases
to our distributors as well as new distributions to new and existing customers.
Net revenue from sales through our retail channel was $348.9 million and $256.5
million for fiscal 2022 and 2021, respectively.
Gross Profit and Gross Margin
Fiscal Year Ended
December 25, December 26,
2022 2021 $ Change % Change
(in thousands)
Gross profit $ 109,444 $ 82,899 $ 26,545 32 %
Gross margin 30 % 32 %
53-------------------------------------------------------------------------------- The increase in gross profit of$26.5 million , or 32%, was driven by higher net revenue generated during the fiscal year endedDecember 25, 2022 . The decrease in gross margin during the fiscal year endedDecember 25, 2022 as compared to the fiscal year endedDecember 26, 2021 was primarily driven by an increase in input costs (including costs of organic feed and increased farmer pay) across our shell egg and butter businesses, increases in packaging costs and increases in transportation costs. Increased pricing on our organic shell egg and butter businesses at the end ofJanuary 2022 , along with additional pricing increases across the entire portfolio inMay 2022 , partially offset the input cost headwinds. Operating Expenses
Selling, General and Administrative
Fiscal Year Ended
December 25, December 26,
2022 2021 $ Change % Change
(in thousands)
Selling, general and administrative
$ 19,368 33 % Percentage of net revenue 21 % 22 %
Selling, general, and administrative expenses increased by
•
an increase of$13.0 million in employee-related costs, including stock-based compensation, driven by an overall increase in employee headcount to support our operations and public company status; • an increase of$3.5 million in brokerage-related and selling-related expenses due to expansion of the business; • an increase of$1.8 million in marketing-related expenses related to continued investment in brand and product marketing; and • an increase of$1.0 million in technology and software related expenses to support increased operations and employee headcount. Shipping and Distribution Fiscal Year Ended December 25, December 26, 2022 2021 $ Change % Change (in thousands) Shipping and distribution$ 30,104 $ 24,979 $ 5,125 21 % Percentage of net revenue 8 % 10 % The increase in shipping and distribution expenses of$5.1 million , or 21%, was driven by higher sales volumes and freight rates. We are beginning to see freight rates stabilize due to a combination of steadying line haul rates and internal operational efficiency. Interest Income Fiscal Year Ended December 25, December 26, 2022 2021 $ Change % Change (in thousands) Interest income $ 992 $ 381$ 611 160 %
The increase of
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--------------------------------------------------------------------------------Provision (Benefit) for Income Taxes
Fiscal Year Ended
December 25, December 26,
2022 2021 $ Change % Change
(in thousands)
Income tax provision (benefit) $ 1,601 $ (2,028 ) $ 3,629 179 %
Percentage of net revenue 0 % (1 )%
The change in income tax provision (benefit) of $3.6 million , or 179%, was
primarily driven by higher pre-tax income in 2022 and favorable tax benefits
from stock option exercises in the prior year which have not recurred at the
same levels during the fiscal year ended December 25, 2022 .
Fiscal Year Ended
For the discussion of the financial condition and results of operations for the fiscal year endedDecember 26, 2021 compared to the fiscal year endedDecember 27, 2020 , refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Components of Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 26, 2021 , filed with theSecurities and Exchange Commission onMarch 10, 2022 . Non-GAAP Financial Measures
Adjusted EBITDA
We report our financial results in accordance with GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance.
We calculate Adjusted EBITDA as net income (loss), adjusted to exclude:
•
Depreciation and amortization;
•
Stock-based compensation expense;
•
Costs related to the discontinuation of our convenient breakfast product line;
•
Costs related to the dissolution of the
•
Benefit or provision for income taxes, as applicable;
•
Interest expense;
•
Change in fair value of contingent consideration; and
•
Interest income.
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 the following:
•
It does not properly reflect capital commitments to be paid in the future;
•
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;
•
It does not consider the impact of stock-based compensation expense, as such
expenses in any specific period may not directly correlate to the underlying
performance of our business operations and can vary significantly between
periods as a result of the timing of grants of new stock-based awards;
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It does not include the costs related to the discontinuation of our convenient breakfast product line as these costs are infrequent, unusual and we do not anticipate that we will incur similar significant costs for product exits in the foreseeable future;
•
It does not reflect the dissolution of the
•
It does not reflect other non-operating expenses, including interest expense;
•
It does not consider the impact of any contingent consideration liability valuation adjustments; and
•
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 income,
the most directly comparable financial measure stated in accordance with GAAP,
for the periods presented:
Fiscal Year Ended
December 25, December 26,
2022 2021
(in thousands)
Net income $ 1,230 $ 2,382
Depreciation and amortization(1) 5,761 3,540
Stock-based compensation expense 6,040
4,440
Costs related to our exit of the convenient breakfast product line
2,341 -
Dissolution of Ovabrite, Inc. 122 -
Income tax provision (benefit) 1,601 (2,028 )
Interest expense 114 52
Change in fair value of contingent consideration(2) 19 44
Interest income (992 ) (381 )
Adjusted EBITDA $ 16,236 $ 8,049
(1)Amount also includes finance lease amortization.
(2)
Amount reflects the change in fair value of a contingent consideration liability in connection with our 2014 acquisition of certain assets of Heartland Eggs.
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 $1.2 million for the fiscal year ended December
25, 2022 and retained earnings of $4.2 million as of December 25, 2022 . We
completed our IPO on August 4, 2020 , resulting in net proceeds to us of
approximately $99.7 million , after deducting underwriting discounts, commissions
and offering costs associated with the offering.
Funding Requirements
We expect that our cash and cash equivalents, together with cash provided by our operating activities and available borrowings under our existing Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months. We further believe that we will be able to fund potential operating expenses and cash obligations beyond the next 12 months, through a combination of existing cash and cash equivalents, cash provided by our operating activities and access to additional funds held as investment securities as well as available borrowing under our Credit Facility. Our future capital requirements will depend on many factors, including our pace of new and existing customer growth, our investments in innovation, our investments in acquisitions, partnerships and unexplored channels and the potential costs associated with further expansion of our processing capacity. As ofDecember 25, 2022 , future minimum lease payments under non-cancelable operating leases totaled$2.2 million and future minimum lease payments under non-cancelable finance leases totaled$9.9 million . 56 --------------------------------------------------------------------------------
Credit Facility
We originally entered into our Credit Facility with
Subsequently, terms of the Credit Facility were modified at various times between fiscal 2018 and fiscal 2022. Such amendments (i) amended various definitions, (ii) waived a technical default inMay 2020 which was triggered by exceeding the capital expenditure limit, (iii) increased borrowing capacity and (iv) extended the maturity date. The Ninth Amendment to the Credit Facility inApril 2021 eliminated the term loan and equipment loan. The Tenth Amendment to the Credit Agreement inDecember 2022 modified certain covenants related to commodity hedging, consented to the dissolution of immaterial subsidiaries and implemented changes related to the discontinuation of LIBOR. The revolving line of credit matures inApril 2024 . The maximum borrowing capacity under the revolving line of credit is$20.0 million . Interest on borrowings under the revolving line of credit, as well as loan advances thereunder, accrues at a rate, at our election at the time of borrowing, equal to (i) the secured overnight financing rate as administered by theFederal Reserve Bank of New York plus 2.00% or (ii) 1.00% plus the alternate base rate, as defined in the Credit Facility. InApril 2020 , all then-outstanding amounts under the revolving line of credit were repaid and the interest rate applicable to borrowings under the revolving line of credit was 4.5%. The Credit Facility is secured by all of our assets (other than real property and certain other property excluded pursuant to the terms of the Credit Facility) and requires us to maintain three financial covenants: a fixed charge coverage ratio, a leverage ratio and a minimum tangible net worth requirement. The Credit Facility also contains various covenants relating to limitations on indebtedness, acquisitions, mergers, consolidations, the sale of properties and liens. As a result of the limitations contained in the Credit Facility, certain of the net assets on our consolidated balance sheet as ofDecember 25, 2022 are restricted in use. The Credit Facility contains other customary covenants, representations and events of default. As ofDecember 25, 2022 , there was no outstanding balance under the Credit Facility. As ofDecember 25, 2022 , we were in compliance with all covenants under the Credit Facility. See "Long-Term Debt" in Note 11 to our consolidated financial statements included elsewhere in this Annual Report for additional details related to our Credit Facility.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Fiscal Year Ended
December 25, December 26,
2022 2021
(in thousands)
Net cash (used in) provided by operating
activities $ (8,098 ) $ 17,682
Net cash used in investing activities (10,037 ) (18,440 ) Net cash provided by financing activities 83
2,180
Net (decrease) increase in cash and cash equivalents $ (18,052 ) $ 1,422 Operating Activities Cash flows related to operating activities are dependent on net income, non-cash adjustments to net income, and changes in working capital. Net cash used in operating activities during the fiscal year endedDecember 25, 2022 is primarily due to an increase in cash used for working capital. The increase in cash used for working capital was primarily due to (i) an increase in accounts receivable as a result of significantly higher sales in the current fiscal year, (ii) a significant increase in inventory to support the ongoing growth of our business and improve our ability to meet increasing demand, and (iii) an increase in accrued liabilities for promotional spending to drive continued sales growth, employee related accruals, and marketing and broker commission accruals.
Investing Activities
Net cash used in investing activities during the fiscal year endedDecember 25, 2022 is primarily due to a reduction in capital spending related to our expansion ofEgg Central Station that was completed in fiscal 2022. The net cash used in investing activities for purchases, sales and maturities of our available-for-sale debt securities during the fiscal year endedDecember 25, 2022 compared to the prior fiscal year is immaterial. 57 --------------------------------------------------------------------------------
Financing Activities
Net cash provided by financing activities during the fiscal year endedDecember 25, 2022 is primarily comprised of proceeds from the exercise of stock options in the current fiscal year, partially offset by principal payments on finance lease obligations. Seasonality Demand for our products fluctuates in response to seasonal factors. Demand tends to increase with the start of the school year and is highest prior to holiday periods, particularlyThanksgiving , Christmas and Easter and the lowest during the summer months. As a result of these seasonal and quarterly fluctuations, comparisons of our sales and results of operations between different quarters within a single fiscal year are not necessarily meaningful comparisons. Critical Accounting Estimates The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in the financial statements and related notes thereto. Critical accounting estimates are those estimates that, in accordance with GAAP, involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements. Management has determined that our most critical accounting estimates are those relating to revenue recognition and trade promotions, income taxes, and contingencies. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ materially from those estimates. The following is a summary of certain accounting estimates we consider critical. For further discussion about our accounting policies, see Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report.
Revenue Recognition and Trade Promotions
We recognize revenue for the sale of our product at the point in time when our
performance obligation has been satisfied and control of the product has
transferred to our customer, which generally occurs upon delivery to the
customer based on terms of the sale. Revenue is measured by the transaction
price, which is defined as the amount of consideration we expect to receive in
exchange for providing goods to customers. The transaction price is adjusted for
estimates of known or expected variable consideration, which include trade
promotions as well as chargebacks such as coupons, discounts, rebates, spoils,
and other programs. Variable consideration related to these programs is recorded
as a reduction to revenue, at the time of sale, based on the amount we expect to
incur.
The transaction price contains estimates of known or expected variable
consideration. We base these estimates on current performance and historical
utilization or experience. We review and update these estimates regularly until
the incentives or product returns are realized and the impact of any adjustments
are recognized in the period the adjustments are identified.
We do not believe it is reasonably likely that there will be a material change
in the estimates or assumptions used to recognize revenue. As noted above,
estimates are made based on historical experience and other factors. Typically,
programs that are offered have a short duration and historical differences
between actual experience compared to estimated volumes, performance and
redemptions have not been significant to the quarterly or annual financial
statements. However, if the level of redemption rates, volumes or performance
were to vary significantly from our estimates, we may be exposed to gains or
losses that could be material. We have not made any material changes in the
accounting methodology used to recognize revenue during the past three fiscal
years.
Income Taxes
We determine our effective tax rate by estimating our permanent differences
resulting from differing treatment of items for financial and income tax
purposes. We are periodically audited by taxing authorities and consider any
adjustments made as a result of the audits in computing our income tax expense.
Any audit adjustments affecting permanent differences could have an impact on
our effective tax rate.
Deferred income taxes relate primarily to depreciation expense and share-based
compensation programs accounted for differently for financial and income tax
purposes. Changes in tax laws and rates could materially affect recorded
deferred tax assets and liabilities in the future. Valuation allowances are
recorded when it is more likely than not that a tax benefit will not be realized
for a deferred tax asset. Changes in projected future earnings could affect our
recorded valuation allowances, if any, in the future.
We record unrecognized tax benefit liabilities for known or anticipated tax
issues based on our analysis of whether, and the extent to which, additional
taxes will be due. However, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is
materially different from the current estimate of the tax liabilities. To the
extent we prevail in matters for which unrecognized tax benefit liabilities have
been established or are required to pay amounts in excess of our recorded
liability, our effective tax rate in a given financial statement period could be
materially affected.
58
--------------------------------------------------------------------------------Contingencies
We recognize the costs of legal defense for the legal proceedings to which we are a party during the periods in which the costs are incurred. After considerable analysis of the facts and circumstances of each case, we determine the amount of reserves required, if any. We evaluate whether a loss contingency exists, and if the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the loss can be reasonably estimated, the estimated loss would be accrued. There were no loss contingency reserves for the past three fiscal years. Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in our assumptions, the effectiveness of legal strategies, or other factors beyond our control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.
Recent Accounting Pronouncements
See the sections titled "Summary of Significant Accounting Policies-Recently
Adopted Accounting Pronouncements" and "-Recently Issued Accounting
Pronouncements Not Yet Adopted" in Note 2 to our consolidated financial
statements included elsewhere in this Annual Report for a discussion of recent
accounting pronouncements.
Emerging Growth Company Status
In April 2012 , the JOBS Act was enacted. Section 107 of the JOBS Act provides
that an "emerging growth company" may take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards. Therefore, an emerging growth company can
delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have elected to use the extended
transition period under the JOBS Act. Accordingly, our financial statements may
not be comparable to the financial statements of public companies that comply
with such new or revised accounting standards.
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