The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, "Risk Factors," and "Note Regarding Forward-Looking Statements" included elsewhere in this 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 report, as well as the information presented under "Selected Financial Data." OverviewBeyond Meat is one of the fastest growing food companies inthe United States , offering a portfolio of revolutionary plant-based meats. We build meat directly from plants, an innovation that enables consumers to experience the taste, texture and other sensory attributes of popular animal-based meat products while enjoying the nutritional and environmental benefits of eating our plant-based meat products. Our brand commitment, "Eat What You Love," represents a strong belief that by eating our plant-based meats, consumers can enjoy more, not less, of their favorite meals, and by doing so help address concerns related to human health, climate change, resource conservation, and animal welfare. The success of our breakthrough innovation model and products has allowed us to appeal to a broad range of consumers, including those who typically eat animal-based meats, positioning us to compete directly in the$1.4 trillion global meat industry. We sell a range of plant-based products across the three main meat platforms of beef, pork and poultry. They are offered in ready-to-cook formats (generally merchandised at retail in the meat case), which we refer to as our "fresh" platform, and ready-to-heat formats (merchandised at retail in the freezer), which we refer to as our "frozen" platform. As ofDecember 31, 2019 , our products were available in approximately 77,000 retail and restaurant and foodservice outlets in more than 65 countries, across mainstream grocery, mass merchandiser, club and convenience store, and natural retailer channels, direct to consumer, and various food-away-from-home channels, including restaurants, foodservice outlets and schools. OnMay 6, 2019 , we completed our IPO, in which we sold 11,068,750 shares of our common stock. The shares began trading on the Nasdaq Global Select Market onMay 2, 2019 . The shares were sold at a public offering price of$25.00 per share for net proceeds of approximately$252.4 million , after deducting underwriting discounts and commissions of$19.4 million and issuance costs of approximately$4.9 million payable by us. Upon the closing of the IPO, all outstanding shares of our convertible preferred stock automatically converted into 41,562,111 shares of common stock on a one-for-one basis, and warrants exercisable for convertible preferred stock were automatically converted into warrants exercisable for 160,767 shares of common stock. OnAugust 5, 2019 , we completed our Secondary Offering, in which we sold 250,000 shares. The shares were sold at a public offering price of$160.00 per share for net proceeds to the Company of approximately$37.4 million , after deducting underwriting discounts and commissions of$1.5 million and issuance costs of approximately$1.1 million payable by us. Total Secondary Offering costs paid in 2019 were approximately$2.2 million , of which approximately$1.1 million was capitalized to reflect the costs associated with the issuance of new shares and offset against proceeds from the Secondary Offering. We did not receive any proceeds from the sale of common stock by the selling stockholders in the Secondary Offering. We continue to experience strong sales growth over prior periods. Net revenues increased to$297.9 million in 2019 from$87.9 million in 2018 and$32.6 million in 2017, representing a 202% compound annual growth rate. The Beyond Burger accounted for approximately 64%, 70% and 48% of our gross revenues in 2019, 2018 and 2017, respectively. We believe that sales of the Beyond Burger will continue to constitute a significant portion of our revenues, income and cash flow for the foreseeable future. We have generated losses from inception. Net loss in 2019, 2018, and 2017 was$12.4 million ,$29.9 million , and$30.4 million , respectively, as we invested in innovation and growth of our business. We operate on a fiscal calendar year, and each interim quarter is comprised of one 5-week period and two 4-week periods, with each week ending on a Saturday. Our fiscal year always begins onJanuary 1 and ends on 51
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December 31 . As a result, our first and fourth fiscal quarters may have more or fewer days included than a traditional 91-day fiscal quarter. Components of Our Results of Operations and Trends and Other Factors Affecting Our Business Net Revenues We generate net revenues primarily from sales of our products to our customers across mainstream grocery, mass merchandiser, club and convenience store, and natural retailer channels, direct to consumer, and various food-away-from-home channels, including restaurants, foodservice outlets and schools, mainly inthe United States . We continue to experience strong sales growth over prior periods. The following factors and trends in our business have driven net revenue growth over prior periods and are expected to be key drivers of our net revenue growth for the foreseeable future: • increased penetration across our restaurant and foodservice channel, including increased desire by restaurant and foodservice establishments, including large FSR and/or global QSR customers, to add plant-based products to their menus and to highlight these offerings, and our retail channel, including mainstream grocery, mass merchandiser, club and convenience store, and natural retailer customers; • distribution expansion and increased velocity of our fresh product sales across our channels, by which we mean that the volume of our products sold per outlet has generally increased period-over-period due to greater adoption of and demand for our products; • increased international sales of our products across geographies, markets and channels as we continue to grow our numbers of international customers; • our continued innovation, including enhancing existing products and introducing new products across our plant-based beef, pork and poultry platforms that appeal to a broad range of consumers, including those who typically eat animal-based meat; • enhanced marketing efforts as we continue to build our brand and drive consumer adoption of our products, including scaling our GO BEYOND marketing campaign launched inFebruary 2019 , which seeks to mobilize our ambassadors to help raise brand awareness, define the category and remain its leader; • overall market trends, including growing consumer awareness and demand for nutritious, convenient and high protein plant-based foods; and • increased production levels as we scale production to meet demand for our products across our distribution channels both domestically and internationally. In addition to the factors and trends above, we expect the following to positively impact net revenues going forward: • expansion of our own internal production facilities domestically and abroad to produce our woven proteins, blends of flavor systems and binding systems, and potentially convert our woven proteins into packaged products, while forming additional strategic relationships with co-manufacturers; and • localized production to increase the availability and speed with which we can get our products to customers internationally.
Net revenues from sales in our retail channel increased by 185.2% in 2019 to
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We distribute our products internationally, using distributors in more than 65 countries worldwide as ofDecember 31, 2019 . In 2019, we commenced co-manufacturing inCanada and also expanded our partnership with one of our distributors to co-manufacture our innovative plant-based meats at a new co-manufacturing facility built by our distributor inthe Netherlands , construction of which was completed in the first quarter of 2020. Our international net revenues (which exclude revenues fromCanada ) are included in our retail and restaurant and foodservice channels and were approximately 16%, 8% and 1%, respectively, of our net revenues in 2019, 2018 and 2017. Substantially all of our long-lived assets are inthe United States . Net revenues from sales to the Canadian market are included with net revenues from sales tothe United States market. As the Company accelerates international expansion initiatives, net revenues from international sales are expected to continue to grow. Over the next few years, the main driver of growth in our net revenues is expected to be sales of our fresh products, primarily the Beyond Burger, in both our retail channel and our restaurant and foodservice channel, including strategic and global customers both inthe United States andCanada , and in other international locations. As we seek to continue to rapidly grow our net revenues, we face several challenges. In 2017, continuing into 2018, demand for our products exceeded our expectations and production capacity, significantly constraining our net revenue growth relative to our total demand opportunity. While we have significantly expanded our production capacity to address production shortfall, we may experience a lag in production relative to customer demand if our growth rate exceeds our expectations. We routinely offer sales discounts and promotions through various programs to customers and consumers. These programs include rebates, temporary on-shelf price reductions, off-invoice discounts, retailer advertisements, product coupons and other trade activities. We anticipate needing to offer more trade and promotion discounting, primarily within the retail channel, to match competition pricing and promotions. The expense associated with these discounts and promotions is estimated and recorded as a reduction in total gross revenues in order to arrive at reported net revenues. We anticipate that these promotional activities could impact our net revenues and that changes in such activities could impact period-over-period results. In addition, because we do not have any purchase commitments from our distributors or customers, the amount of net revenues we recognize will vary from period to period depending on the volume and the channels through which our products are sold, causing variability in our results. We expect to face increasing competition across all channels, especially as additional plant-based protein product brands continue to enter the marketplace. InDecember 2019 , a novel strain of coronavirus ("COVID-19") was reported inWuhan, China . The COVID-19 pandemic has continued to spread and has already caused severe global disruptions. 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. For example, 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 ingredients and/or packaging materials and impact our supply chain. Additionally, if we are forced to scale back hours of production or close our production facilities or ourManhattan Beach Project Innovation Center in response to the pandemic, we expect our business, financial condition and results of operations would be materially adversely affected. In addition, our growth strategy to expand our operations internationally may be impeded. We may also be impacted by decreased customer and consumer demand as a result of event cancellations and social distancing, government-imposed restrictions on public gatherings and businesses, shelter-in place orders and temporary restaurant, retail and grocery store closures. If the pandemic continues to evolve into a severe worldwide health crisis, the disease could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock. 53
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Gross Profit (Loss) Gross profit (loss) consists of our net revenues less cost of goods sold. Our cost of goods sold primarily consists of the cost of raw materials and ingredients for our products, direct labor and certain supply costs, co-manufacturing fees, in-bound and internal shipping and handling costs incurred in manufacturing our products, plant and equipment overhead, depreciation and amortization expense, as well as the cost of packaging our products. In order to keep pace with demand, we have had to very quickly scale production and we have not always been able to meet all demand for our products. As a result, we have had to quickly expand our sources of supply for our core protein inputs such as pea protein. Our growth has also significantly increased facility and warehouse utilization rates. We intend to continue to increase our production capabilities at our two in-house manufacturing facilities inColumbia, Missouri , while expanding our co-manufacturing capacity and exploring additional production facilities domestically and abroad. As a result, we expect our cost of goods sold in absolute dollars to increase to support our growth. However, we expect such expenses to decrease as a percentage of net revenues over time as we continue to scale our business. Over the next several years, we continue to expect that gross profit improvements will be delivered primarily through improved volume leverage and throughput, greater internalization and geographic localization of our manufacturing footprint, materials and packaging input cost reductions, tolling fee efficiencies, and improved supply chain logistics and distribution costs. We intend to pass some of these cost savings on to the consumer as we pursue our goal to achieve price parity with animal protein in at least one of our product categories by 2024. Gross margin improved by 1,350 basis points to 33.5% in 2019 from 20.0% in 2018 and by 26.7 basis points in 2018 from (6.7)% in 2017. Gross margin benefited from an increase in the amount of products sold, improved production efficiencies and from a greater proportion of revenues from products in our fresh platform which have a higher net selling price per pound. We are also working to improve gross margin through ingredient cost savings achieved through scale of purchasing and through expanding our co-manufacturing network and negotiating lower tolling fees. However, in the near term, margin improvements may be impacted by our focus on growing our customer base, expanding into new geographies and markets, enhancing our production infrastructure, improving our innovation capabilities, enhancing our product offerings and increasing consumer engagement. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses, and share-based compensation, scale-up expenses, and depreciation and amortization expense on research and development assets. Our research and development efforts are focused on enhancements to our product formulations and production processes in addition to the development of new products. We expect to continue to invest substantial amounts in research and development, as evidenced in the build-out of our state-of-the-artManhattan Beach Project Innovation Center in 2018. Research and development and innovation are core elements of our business strategy, as we believe they represent a critical competitive advantage for us. We believe that we need to continue to rapidly innovate in order to be able to continue to capture a larger market share of consumers who typically eat animal-based meats. We expect these expenses to increase in absolute dollars, but to decrease as a percentage of net revenues as we continue to scale production. Selling, General and Administrative ("SG&A") Expenses SG&A expenses consist primarily of selling, marketing and administrative expenses, including personnel and related expenses, share-based compensation, outbound shipping and handling costs, non-manufacturing rent expense, depreciation and amortization expense on non-manufacturing assets and other non-production operating expenses. Marketing and selling expenses include share-based compensation awards to brand ambassadors, advertising costs, costs associated with consumer promotions, product samples and sales aids incurred to acquire new customers, retain existing customers and build our brand awareness. Administrative expenses include the expenses related to management, accounting, legal, IT, and other office functions. We 54
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expect SG&A expenses in absolute dollars to increase as we increase our domestic and international expansion efforts to meet our product demand and incur costs related to our status as a public company. Our selling and marketing expenses are expected to significantly increase, both through a greater focus on marketing and through additions to our sales and marketing organizations domestically and abroad. We expect to continue to significantly expand our marketing efforts to achieve greater brand awareness, accelerate our international expansion initiatives, attract new customers, drive consumer adoption of our products, and increase market penetration, including through the expansion of our GO BEYOND ambassador program, as well as the creation of an advisory board of leading experts in health and medicine to ensure that we have access to the latest thinking on peer-reviewed research on health, nutrition and ingredients. We have historically had a very small sales force, with only nine full-time sales employees as ofDecember 31, 2017 growing to 33 full-time sales employees as ofDecember 31, 2019 . As we continue to grow, including internationally, we expect to expand our sales force to address additional opportunities, which would substantially increase our selling expense. Our administrative expenses are expected to increase as a public company with increased personnel cost in accounting, legal, IT and compliance-related functions. Restructuring Expenses InMay 2017 , management approved a plan to terminate an exclusive supply agreement with one of our co-manufacturers. For a discussion of these expenses, see Note 3 , Restructuring, to the Notes to Financial Statements, and Part I, Item 3 , Legal Proceedings, included elsewhere in this report. Seasonality Generally, we expect to experience greater demand for certain of our products during the summer grilling season. In each of 2019, 2018 and 2017, we experienced strong net revenue growth compared to the previous year, which masked this seasonal impact. As our business continues to grow, we expect to see additional seasonality effects, especially within our retail channel, with revenue contribution from this channel tending to be greater in the second and third quarters of the year. Results of Operations The following table sets forth selected items in our statements of operations for the periods presented: Year Ended December 31, (in thousands) 2019 2018 2017 Net revenues$ 297,897 $ 87,934 $ 32,581 Cost of goods sold 198,141 70,360 34,772 Gross profit (loss) 99,756 17,574 (2,191 ) Research and development expenses 20,650 9,587 5,722 Selling, general and administrative expenses 74,726 34,461 17,143 Restructuring expenses 4,869 1,515 3,509 Total operating expenses 100,245 45,563 26,374 Loss from operations$ (489 ) $ (27,989 ) $ (28,565 ) 55
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The following table presents selected items in our statements of operations as a percentage of net revenues for the respective periods presented:
Year Ended December 31, 2019 2018 2017 Net revenues 100.0 % 100.0 % 100.0 % Cost of goods sold 66.5 80.0 106.7 Gross profit (loss) 33.5 20.0 (6.7 ) Research and development expenses 6.9 10.9 17.6 Selling, general and administrative expenses 25.1 39.2 52.6 Restructuring expenses 1.6 1.7 10.8 Total operating expenses 33.6 51.8 81.0 Loss from operations (0.2 )% (31.8 )% (87.7 )% Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net Revenues Year Ended December 31, Change (in thousands) 2019 2018 Amount % Net revenues: Gross Fresh Platform$ 306,585 $ 81,686 $ 224,899 275.3 % Gross Frozen Platform 17,772 15,896 1,876 11.8 % Less: Discounts (26,460 ) (9,648 ) (16,812 ) 174.3 % Net revenues$ 297,897 $ 87,934 $ 209,963 238.8 % Year Ended December 31, Change (in thousands) 2019 2018 Amount % Net revenues: Retail$ 144,809 $ 50,779 $ 94,030 185.2 % Restaurant and Foodservice 153,088 37,155 115,933 312.0 % Net revenues$ 297,897 $ 87,934 $ 209,963 238.8 %
Net revenues increased by
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Net revenues from sales through our retail channel in 2019 increased
Year Ended December 31, Change (in thousands) 2019 2018 Amount % Retail: Fresh Platform 22,350 6,025 16,325 271.0 % Frozen Platform 1,813 2,687 (874 ) (32.5 ) Total 24,163 8,712 15,451 177.4 % Year Ended December 31, Change (in thousands) 2019 2018 Amount % Restaurant and Foodservice: Fresh Platform 25,475 5,801 19,674 339.1 % Frozen Platform 1,734 729 1,005 137.9 % Total 27,209 6,530 20,679 316.7 % Cost of Goods Sold Year Ended December 31, Change (in thousands) 2019 2018 Amount % Cost of goods sold$ 198,141 $ 70,360 $ 127,781 181.6 %
Cost of goods sold increased by
Year Ended December 31, Change (in thousands) 2019 2018 Amount % Gross profit$ 99,756 $ 17,574 $ 82,182 467.6 % Gross margin 33.5 % 20.0 % N/A N/A
Gross profit in 2019 was
Note 2 , Summary of Significant Accounting Policies-Shipping and Handling Costs, in the Notes to Financial Statements included elsewhere in this report, we include outbound shipping and handling costs within SG&A expenses. As a result, our gross profit and gross margin may not be comparable to other entities that present all shipping and handling costs as a component of cost of goods sold.
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Research and Development Expenses
Year Ended December 31, Change (in thousands) 2019 2018 Amount % Research and development expenses$ 20,650 $ 9,587 $ 11,063 115.4 %
Research and development expenses increased
Year Ended December 31, Change (in thousands) 2019 2018 Amount % Selling, general and administrative expenses$ 74,726 $ 34,461 $ 40,265 116.8 % SG&A expenses increased by$40.3 million , or 116.8%, in 2019, as compared to the prior year. The increase was primarily due to$12.4 million in higher salaries, bonuses and related expenses due to higher headcount,$10.4 million in higher share-based compensation expense, including$3.2 million relating to equity awards made to brand ambassadors,$4.8 million in higher outbound shipping and handling expenses,$3.1 million in higher broker and distributor commissions,$2.4 million in higher legal expenses primarily due to the Secondary Offering and costs associated with being a public company,$1.9 million in higher insurance costs, and continued investment in marketing capabilities. Restructuring Expenses As a result of the termination inMay 2017 of an exclusive supply agreement with one of our co- manufacturers due to non-performance under the agreement, we recorded restructuring expenses of$4.9 million and$1.5 million in 2019 and 2018, respectively, primarily related to legal and other expenses associated with the dispute. As ofDecember 31, 2019 and 2018, there were$1.1 million and$0 , respectively, in accrued unpaid liabilities associated with this contract termination representing legal fees. We continue to incur legal fees in connection with our ongoing efforts to resolve this dispute. See Note 3 , Restructuring, to the Notes to Financial Statements, and Part I, Item 3 , Legal Proceedings, included elsewhere in this report. Total Other Expense, Net Total other expense, net primarily includes interest expense on the Company's debt balances and expense associated with the remeasurement of our preferred stock warrant liability and common stock warrant liability, partially offset by interest income. OnMay 6, 2019 , in connection with the IPO, our then outstanding warrants exercisable for convertible preferred stock were automatically converted into warrants exercisable for common stock. We remeasured and reclassified the common stock warrant liability to additional-paid-in-capital in connection with the IPO and recorded$12.5 million in expense associated with the remeasurement of warrant liability in 2019. Interest income in 2019 increased due to interest income from invested proceeds from the IPO and Secondary Offering. Subsequent to the closing of the IPO, all outstanding warrants to purchase shares of common stock were cashless exercised. No warrants were outstanding as ofDecember 31, 2019 . Other, net was$3.6 million in 2019 as compared to$0.4 million in 2018 primarily due to increased interest income resulting from investment of proceeds from the IPO and Secondary Offering. Loss from Operations Loss from operations in 2019 was$0.5 million compared to loss from operations of$28.0 million in the prior year. This improvement was driven entirely by the year-over-year increase in gross profit, partially offset by higher operating expenses to support our expanded manufacturing and supply chain operations, higher share-based compensation expense, higher administrative costs associated with being a public company, higher restructuring expenses, and continued investment in innovation and marketing capabilities. 58
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Income Tax Expense For 2019 and 2018, we recorded income tax expense of$9,000 and$1,000 , respectively. These amounts primarily consist of income taxes for state jurisdictions which have minimum tax requirements. No tax benefit was provided for losses incurred because those losses were offset by a full valuation allowance. Net Loss Net loss was$12.4 million in 2019 compared to a net loss of$29.9 million in the prior year. The decrease in net loss was primarily the result of the higher gross profit in 2019 and interest income, partially offset by higher operating expenses, higher share-based compensation expense, expenses associated with the remeasurement of our preferred stock warrant liability and common stock warrant liability in connection with the IPO, and higher interest expense. Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 Net Revenues Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Net revenues: Gross Fresh Platform$ 81,686 $ 18,109 $ 63,577 351.1 % Gross Frozen Platform 15,896 19,588 (3,692 ) (18.8 )% Less: Discounts (9,648 ) (5,116 ) (4,532 ) 88.6 % Net revenues$ 87,934 $ 32,581 $ 55,353 169.9 % Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Net revenues: Retail$ 50,779 $ 25,490 $ 25,289 99.2 % Restaurant and Foodservice 37,155 7,091 30,064 424.0 % Net revenues$ 87,934 $ 32,581 $ 55,353 169.9 %
Net revenues increased by
Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Retail: Fresh Platform 6,025 1,837 4,188 228.0 % Frozen Platform 2,687 3,123 (436 ) (14.0 )% Total 8,712 4,960 3,752 75.6 % 59
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Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Restaurant and Foodservice: Fresh Platform 5,801 637 5,164 810.7 % Frozen Platform 729 754 (25 ) (3.3 )% Total 6,530 1,391 5,139 369.4 % Cost of Goods Sold Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Cost of goods sold$ 70,360 $ 34,772 $ 35,588 102.3 %
Cost of goods sold increased by
Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Gross profit (loss)$ 17,574 $ (2,191 ) $ 19,765 N/A Gross margin 20.0 % (6.7 )% N/A N/A
Gross profit in 2018 was
Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Research and development expenses$ 9,587 $ 5,722 $ 3,865 67.5 %
Research and development expenses increased
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SG&A Expenses Year Ended December 31, Change (in thousands) 2018 2017 Amount Percentage Selling, general and administrative expenses$ 34,461 $ 17,143 $ 17,318 101.0 % SG&A expenses increased by$17.3 million , or 101.0%, in 2018 as compared to the prior year. The increase was primarily due to$6.8 million in higher salaries and related expenses due to a 224% increase in headcount,$2.7 million in higher outbound freight expenses,$1.9 million in higher supply chain expenses,$1.8 million in higher consulting and professional fees,$1.3 million in higher marketing services,$0.9 million in higher travel expenses, and$0.7 million in higher broker commissions in 2018 as compared to the prior year. SG&A expenses in 2017 include$1.2 million primarily related to disputed fees resulting from the co-manufacturer's failure to meet agreed upon minimum production and expedited outbound freight expenses we incurred for alternative arrangements after we terminated the exclusive supply agreement with this co-manufacturer. Restructuring Expenses As a result of the termination inMay 2017 of an exclusive supply agreement with one of our co- manufacturers due to non-performance under the agreement, we recorded restructuring expenses of$3.5 million in 2017, of which$2.3 million were related to the impairment write-off of long-lived assets, comprised of certain unrecoverable equipment located at the co-manufacturer's site and company-paid leasehold improvements to the co-manufacturer's facility pursuant to the agreement, and$1.2 million primarily related to legal and other expenses associated with the dispute. See Note 9 , Commitments and Contingencies-Litigation, to the Notes to Financial Statements included elsewhere in this report. In addition, we recorded$2.4 million in write-off of unrecoverable inventory held at the co-manufacturer's site, which is included in cost of goods sold, and$1.2 million primarily related to disputed fees for not meeting the agreed upon minimum production and expedited outbound freight expenses, which are included in selling, general and administrative expenses in our statement of operations for 2017. In 2018, we recorded$1.5 million in restructuring expenses related to this dispute, which consisted primarily of legal and other expenses. See Note 3 , Restructuring, to the Notes to Financial Statements included elsewhere in this report. As ofDecember 31, 2018 and 2017, there were no accrued unpaid liabilities associated with this contract termination, although we continue to incur legal fees in connection with our ongoing efforts to resolve this dispute. See Part I, Item 3 , Legal Proceedings, included elsewhere in this report. Income Tax Expense For 2018 and 2017, we recorded income tax expense of$1,000 and$5,000 , respectively. These amounts primarily consist of income taxes for state jurisdictions which have minimum tax requirements. No tax benefit was provided for losses incurred because those losses are offset by a full valuation allowance. Non-GAAP Financial Measures We use the following non-GAAP financial measures in assessing our operating performance and in our financial communications: "Adjusted EBITDA" is defined as net income (loss) adjusted to exclude, when applicable, income tax expense, interest expense, depreciation and amortization expense, restructuring expenses, share-based compensation expense, inventory losses from termination of an exclusive supply agreement with a co-manufacturer, costs of termination of an exclusive supply agreement with the same co-manufacturer, and expenses primarily associated with the conversion of our convertible notes and remeasurement of our preferred stock warrant liability and common stock warrant liability. "Adjusted EBITDA as a % of net revenues" is defined as Adjusted EBITDA divided by net revenues. We use Adjusted EBITDA and Adjusted EBITDA as a % of net revenues because they are important measures upon which our management assesses our operating performance. We use Adjusted EBITDA and Adjusted EBITDA as a % of net revenues as key performance measures because we believe these measures facilitate operating performance comparison from period-to-period by excluding potential differences primarily caused by the 61
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impact of restructuring, asset depreciation and amortization, non-cash
share-based compensation and non-operational charges including the impact to
cost of goods sold and SG&A expenses related to the termination of an exclusive
co-manufacturing agreement, early extinguishment of convertible notes and
remeasurement of warrant liability. Because Adjusted EBITDA and Adjusted EBITDA
as a % of net revenues facilitate internal comparisons of our historical
operating performance on a more consistent basis, we also use these measures for
our business planning purposes. In addition, we believe Adjusted EBITDA and
Adjusted EBITDA as a % of net revenues are widely used by investors, securities
analysts, ratings agencies and other parties in evaluating companies in our
industry as a measure of our operational performance.
There are a number of limitations related to the use of Adjusted EBITDA rather
than net income (loss), which is the most directly comparable measure prepared
in conformity with accounting principles generally accepted in
these are non-cash expenses, the assets being depreciated may have to be
replaced in the future increasing our cash requirements;
• Adjusted EBITDA does not reflect interest expense, or the cash required to
service our debt, which reduces cash available to us;
• Adjusted EBITDA does not reflect income tax payments that reduce cash
available to us;
• Adjusted EBITDA does not reflect restructuring expenses that reduce cash
available to us;
• Adjusted EBITDA does not reflect share-based compensation expense and
therefore does not include all of our compensation costs;
• Adjusted EBITDA does not reflect other income (expense) that may increase or
decrease cash available to us; and
• other companies, including companies in our industry, may calculate Adjusted
EBITDA differently, which reduces its usefulness as a comparative measure.
These non-GAAP financial measures should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies.
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The following table presents the reconciliation of Adjusted EBITDA to its most comparable GAAP measure, net loss, as reported (unaudited):
Year Ended December 31, (in thousands) 2019 2018 2017 Net loss, as reported$ (12,443 ) $ (29,886 ) $ (30,384 ) Income tax expense 9 1 5 Interest expense 3,071 1,128 1,002 Depreciation and amortization expense 8,106 4,921 3,181 Restructuring expenses(1) 4,869 1,515 3,509 Inventory losses from termination of exclusive supply agreement(2) - - 2,440 Costs of termination of exclusive supply agreement(3) - - 1,213 Share-based compensation expense 12,807 2,241 665 Remeasurement of warrant liability 12,503 1,120 385 Other, net(4) (3,629 ) (352 ) 427 Adjusted EBITDA$ 25,293 $ (19,312 ) $ (17,557 ) Net loss as a % of net revenues (4.2 )% (33.9 )% (92.9 )% Adjusted EBITDA as a % of net revenues 8.5 % (22.0 )% (53.9 )%
_____________
(1) In connection with the termination of an exclusive supply agreement with a
co-manufacturer in
result of termination of an exclusive supply agreement with a co-manufacturer
and is recorded in cost of goods sold.
(3) Consists of additional charges incurred as a result of termination of an
exclusive supply agreement with a co-manufacturer and is recorded in selling,
general and administrative expenses.
(4) In 2017, includes expenses associated with the conversion of our convertible
notes.
Liquidity and Capital Resources Our primary cash needs are for operating expenses, working capital and capital expenditures to support the growth in our business. Prior to our IPO, we financed our operations through private sales of equity securities and through sales of our products. Since our inception and through our IPO, we raised a total of$199.5 million from the sale of convertible preferred stock, including through sales of convertible notes which were converted into preferred stock, net of costs associated with such financings. In connection with our IPO, we sold an aggregate of 11,068,750 shares of our common stock at a public offering price of$25.00 per share and received approximately$252.4 million in net proceeds. In connection with the Secondary Offering we sold 250,000 shares of our common stock. The shares were sold at a public offering price of$160.00 per share and we received net proceeds of approximately$37.4 million . We did not receive any proceeds from the sale of common stock by the selling stockholders in the Secondary Offering. We have also entered into the credit facilities described below withSilicon Valley Bank ("SVB"). As ofDecember 31, 2019 , we had$276.0 million in cash and cash equivalents. We believe that our cash and cash equivalents, cash flow from operating activities and available borrowings under our credit facilities will be sufficient to fund our working capital and meet our anticipated capital requirements for the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including the number and characteristics of any additional products or manufacturing processes we 63
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develop or acquire to serve new or existing markets; the expenses associated with our marketing initiatives; our investment in manufacturing to expand our manufacturing and production capacity; the costs required to fund domestic and international growth; the scope, progress, results and costs of researching and developing future products or improvements to existing products or manufacturing processes; any lawsuits related to our products or commenced against us, including the costs associated with our current litigation with a former co-manufacturer and the securities case recently brought against us; the expenses needed to attract and retain skilled personnel; the costs associated with being a public company; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing intellectual property claims, including litigation costs and the outcome of such litigation; the impact of the COVID-19 pandemic; and the timing, receipt and amount of sales of, or royalties on, any future approved products, if any. Amended and Restated Loan and Security Agreement InJune 2018 , we refinanced our then existing revolving credit facility and term loan facility under a loan and security agreement with SVB (the "Amended LSA"). The Amended LSA includes a$6.0 million revolving credit facility (the "2018 Revolving Credit Facility") and a term loan facility (the "2018 Term Loan Facility") comprised of (i) a$10.0 million term loan advance at closing, (ii) a conditional$5.0 million term loan advance, if no event of default has occurred and is continuing through the borrowing date, and (iii) an additional conditional term loan advance of$5.0 million if no event of default has occurred and is continuing based upon a minimum level of gross profit for the trailing 12-month period. The 2018 Term Loan Facility has a floating interest rate that is equal to 4.0% above the prime rate, with interest payable monthly and principal amortizing commencing onJuly 1, 2020 , and will mature inJune 2022 . Borrowings under the 2018 Revolving Credit Facility carry a variable annual interest rate of prime rate plus 0.75% to 1.25% with an additional 5% on the outstanding balances in the event of a default. The 2018 Revolving Credit Facility matures inJune 2020 . The 2018 Term Loan Facility and the 2018 Revolving Credit Facility (collectively, the "SVB Credit Facilities") contain customary negative financial covenants that limit our ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate. The SVB Credit Facilities also contain customary affirmative financial covenants, including delivery of audited financial statements. We were in compliance with the financial covenants in the SVB Credit Facilities as ofDecember 31, 2019 . The SVB Credit Facilities are secured by an interest in our assets including manufacturing equipment, inventory, contract rights or rights to payment of money, leases, license agreements, general intangibles, and cash. In conjunction with the execution of the Amended LSA, we issued two common stock warrants one each to SVB and its affiliate to provide the ability to purchase an aggregate of 60,002 shares of our common stock at an exercise price of$3.00 per share. The common stock warrants were fully exercisable on the date of the grant and had a term of 10 years. We also paid a commitment fee of$30,000 to SVB in connection with the execution of the Amended LSA. Subsequent to the closing of the IPO, all outstanding warrants to purchase shares of common stock were cashless exercised and no warrants were outstanding as ofDecember 31, 2019 . As ofDecember 31, 2019 and 2018, we had$6.0 million and$20.0 million in borrowings on the 2018 Revolving Credit Facility and 2018 Term Loan Facility, respectively, and had no availability to borrow under either of these loan facilities. In 2019 and 2018, we incurred$2.2 million and$0.9 million , respectively, in interest expense related to the SVB Credit Facilities. The interest rates on the 2018 Revolving Credit Facility and the 2018 Term Loan Facility atDecember 31, 2019 were 5.5% and 8.75%, respectively. Equipment Loan Facility InSeptember 2018 , we entered into an Equipment Loan and Security Agreement withStructural Capital Investments II, LP ("Structural Capital ") andOcean II PLO, LLC , as administrative and collateral agent, pursuant to whichStructural Capital agreed to provide an equipment loan facility to us in the amount of$5.0 million for the purpose of purchasing equipment. 64
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Subject to
Year Ended December 31, (in thousands) 2019 2018 2017 Cash (used in) provided by: Operating activities$ (46,995 ) $ (37,721 ) $ (25,273 ) Investing activities$ (26,164 ) $ (23,242 ) $ (8,115 ) Financing activities$ 294,876 $ 76,199 $ 55,425 Net Cash Used in Operating Activities For the year endedDecember 31, 2019 , we incurred a net loss of$12.4 million . The primary reason for net cash used in operating activities of$47.0 million was the$68.2 million in net cash outflows from changes in our operating assets and liabilities, primarily due to increases in inventory to meet growth in anticipated sales and to accommodate longer lead times for international shipments and increases in accounts receivable, partially offset by an increase in accounts payable. Net loss for the year endedDecember 31, 2019 , included$33.7 million in non-cash expenses primarily comprised of share-based compensation expense, change in warrant liability, and depreciation and amortization expense. For the year endedDecember 31, 2018 , we incurred a net loss of$29.9 million , which was the primary reason for net cash used in operating activities of$37.7 million . Net cash used in operating activities also included$16.3 million in net cash outflows from changes in our operating assets and liabilities, partially offset by$8.5 million in non-cash expenses primarily comprised of depreciation and amortization expense, share-based compensation expense and change in warrant liability. For the year endedDecember 31, 2017 , we incurred a net loss of$30.4 million , which was the primary reason for net cash used in operating activities of$25.3 million . Net cash used in operating activities also included$2.6 million in net cash outflows from changes in our operating assets and liabilities, fully offset by$5.4 million in non-cash expenses primarily comprised of depreciation and amortization expense, share-based compensation expense, convertible note-related expense and change in warrant liability. For the year endedDecember 31, 2017 , net loss included a non-cash restructuring loss of$2.3 million on the write-off of fixed assets related to our termination of an exclusive supply agreement with a co-manufacturer. Depreciation and amortization expense was$8.1 million ,$4.9 million and$3.2 million , in 2019, 2018 and 2017, respectively. We anticipate our depreciation and amortization expense will increase in 2020 based on our 65
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existing fixed assets and anticipated capital expenditures as we further invest in R&D infrastructure and expand our production capabilities to meet increased demand for our products.Net Cash Used in Investing Activities Net cash used in investing activities primarily relates to capital expenditures to support our growth and investment in property, plant and equipment. For the year endedDecember 31, 2019 , net cash used in investing activities was$26.2 million and consisted of$23.8 million in cash outflows for purchases of property, plant and equipment, primarily for manufacturing facility improvements and manufacturing equipment,$2.1 million in cash outflows related to property, plant and equipment purchased for sale to co-manufacturers which we expect will be sold by the end of 2020, and security deposits, partially offset by proceeds from sale of assets held for sale. For the year endedDecember 31, 2018 , net cash used in investing activities was$23.2 million and consisted of$22.2 million in cash outflows for purchases of property, plant and equipment, primarily for manufacturing facility improvements and manufacturing equipment,$1.0 million in cash outflows related to property, plant and equipment purchased for sale to co-manufacturers, and security deposits, partially offset by proceeds from sale of fixed assets. For the year endedDecember 31, 2017 , net cash used in investing activities was$8.1 million and primarily consisted of cash outflows for the purchases of property, plant and equipment, principally for the build-out and equipping of our Manhattan Beach Project Innovation Center. Net Cash Provided by Financing Activities For the year endedDecember 31, 2019 , net cash provided by financing activities was$294.9 million primarily as a result of$254.9 million in net proceeds from our IPO, net of issuance costs,$37.4 million in net proceeds to us from the Secondary Offering, net of issuance costs, and$2.7 million in proceeds from stock option exercises, partially offset by$55,000 in payments of capital lease obligations. For the year endedDecember 31, 2018 , net cash provided by financing activities was$76.2 million primarily as a result of$51.3 million in proceeds from the issuance of our Series G and Series H preferred stock, net of issuance costs,$20.0 million in borrowings under our 2018 Term Loan Facility,$6.0 million in borrowings under our 2018 Revolving Credit Facility,$5.0 million in borrowings under an equipment loan facility, and$1.4 million in proceeds from stock option exercises, partially offset by cash outflows for repayment of a note with theMissouri Department of Economic Development , and borrowings under our 2016 Revolving Credit Facility and 2016 Term Loan Facility. The proceeds from the borrowings were used to finance our operations. For the year endedDecember 31, 2017 , financing activities provided$55.4 million in cash as a result of$43.3 million of proceeds from the issuance of our Series F and G preferred stock, net of issuance costs,$10.0 million in proceeds from the issuance of convertible notes that were eventually converted into Series G preferred stock,$2.5 million in revolving credit facility borrowings and$0.4 million in proceeds from stock option exercises, partially offset by payments towards our revolving credit facility borrowings and capital lease obligations. The proceeds from the borrowings were used to finance our operations. As ofDecember 31, 2019 , we had borrowed the entire availability of$20.0 million under the 2018 Term Loan Facility and$6.0 million under the 2018 Revolving Credit Facility. Contractual Obligations and Commitments EffectiveMarch 16, 2020 , we entered into an agreement to extend the lease for one of our facilities inColumbia, Missouri , for an additional term of two years ending inJune 2022 . The aggregate lease amount for the additional two-year term is$0.5 million , which is not included in the table below. See Note 12 , Subsequent Events, of the Notes to Financial Statements included elsewhere herein. 66
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The following table summarizes our significant contractual obligations as ofDecember 31, 2019 : Payments Due by Period Less Than More Than (in thousands) Total One Year 1-3 Years 3-5 Years Five Years Rent obligations(1)$ 13,868 $ 1,878 $ 3,630 $ 3,193 $ 5,167 Equipment lease 325 86 151 88 - obligations(2) 2018 Revolving Credit 6,164 6,164 - - - Facility(3) 2018 Term Loan 22,570 7,473 15,097 - - Facility(4) Equipment loan(5) 7,021 559 6,462 - - Purchase commitments(6) 44,102 22,684 21,418 - - Total$ 94,050 $ 38,844 $ 46,758 $ 3,281 $ 5,167 ___________________
(1) Includes lease payments for our Manhattan Beach Project Innovation Center and
corporate offices in
in
(2) Consists of payments under various capital leases for certain equipment.
(3) Includes principal and interest accrued at a floating rate under the 2018
Revolving Credit Facility.
(4) Includes principal and interest under the 2018 Term Loan Facility.
(5) Includes principal and interest on an equipment loan.
(6) Consists of commitments to purchase pea protein inventory. Excludes amounts
under the multi-year sales agreement withRoquette Frères entered into subsequent to the year endedDecember 31, 2019 . See Note 12 , Subsequent Events, to the Notes to Financial Statements included elsewhere herein.
In addition to the amounts shown in the table above, as of
Segment Information We have one operating segment and one reportable segment, as our CODM, who is our Chief Executive Officer, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements or any holdings in variable interest entities. Critical Accounting Policies In preparing our financial statements in accordance with GAAP, we are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs and expenses, and disclosure of contingent assets and liabilities that are reported in the financial statements and accompanying disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates and assumptions. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain. Therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates and assumptions. See Note 2, Summary of Significant Accounting Policies, to the Notes to Financial Statements included elsewhere in this 67
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report for information about these critical accounting policies as well as a description of our other accounting policies. Revenue Recognition While our revenue recognition does not involve significant judgment, it represents an important accounting policy. Our revenues are generated through sales of our products to distributors or customers. Revenue is recognized at the point in which the performance obligation under the terms of a contract with the customer have been satisfied and control has transferred. The Company's performance obligation is typically defined as the accepted purchase order, or the contract, with the customer which requires the Company to deliver the requested products at agreed upon prices at the time and location of the customer's choice. The Company does not offer warranties or a right to return on the products it sells except in the instance of a product recall. Revenue is measured as the amount of consideration the Company expects to receive in exchange for fulfilling the performance obligation. Sales and other taxes the Company collects concurrent with the sale of products are excluded from revenue. The Company's normal payment terms vary by the type and location of its customers and the products offered. The time between invoicing and when payment is due is not significant. None of the Company's customer contracts as ofDecember 31, 2019 contains a significant financing component. The Company routinely offers sales discounts and promotions through various programs to its customers and consumers. These programs include rebates, temporary on shelf price reductions, off invoice discounts, retailer advertisements, product coupons and other trade activities. Provision for discounts and incentives are recorded in the same period in which the related revenues are recognized. At the end of each accounting period, the Company recognizes a liability for estimated sales discounts that have been incurred but not paid. The offsetting charge is recorded as a reduction of revenues in the same period when the expense is incurred. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. The incremental cost to obtain contracts was not material. Share-Based Compensation The 2018 Equity Incentive Plan (the "2018 Plan") provides for the grant of incentive stock options, within the meaning of Section 422 of the Code, to our employees and the employees of our subsidiaries, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and performance shares to our employees, directors, and consultants and the employees and consultants of any subsidiary. Stock options. The administrator may grant incentive and/or non-statutory stock options under our 2018 Plan, provided that incentive stock options may only be granted to employees. The exercise price of such options must generally be equal to at least the fair market value of our common stock on the date of grant. The term of an option may not exceed 10 years, subject to certain exceptions. Stock appreciation rights. Stock appreciation rights may be granted under our 2018 Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the date of grant and the exercise date. Restricted stock. Restricted stock may be granted under our 2018 Plan. Restricted stock awards are grants of shares of our common stock that are subject to various restrictions, including restrictions on transferability and forfeiture provisions. Shares of restricted stock will vest and the restrictions on such shares will lapse, in accordance with terms and conditions established by the administrator. Restricted stock units. Restricted stock units may be granted under our 2018 Plan, and may include the right to dividend equivalents, as determined in the discretion of the administrator. Each restricted stock unit granted is a bookkeeping entry representing an amount equal to the fair market value of one share of our common stock. Vesting criteria may include achievement of specified performance criteria and/or continued service, and the form and timing of payment. 68
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Performance units/performance shares. Performance units and performance shares may be granted under our 2018 Plan. Performance units and performance shares are awards that will result in a payment to a participant if performance goals established by the administrator are achieved and any other applicable vesting provisions are satisfied. We account for all shared-based compensation awards using a fair-value method. Options are recorded at their estimated fair value using the Black-Scholes option pricing model. We recognize the fair value of each award as an expense over the requisite service period, generally the vesting period of the equity grant. Determining the fair value of share-based awards at the grant date requires significant judgment. The determination of the grant date fair value of stock options using the Black-Scholes option-pricing model is affected by our estimated common stock fair value as well as other highly subjective assumptions including, the expected term of the awards, our expected volatility over the expected term of the awards, expected dividend yield, risk-free interest rates. The assumptions used in our option-pricing model represent management's best estimates. These assumptions and estimates are as follows: Fair Value of Common Stock: We estimate the fair value of stock options using the Black-Scholes option pricing model. We use the value of our common stock to determine the fair value of restricted shares. Expected Term: As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, our expected term is based on the simplified method, generally calculated as the mid-point between the vesting date and the end of the contractual term. Expected Volatility: As the Company has only been a public entity sinceMay 2, 2019 , there is not a substantive share price history to calculate volatility and, as such, we have elected to use an approximation based on the volatility of other comparable public companies, which compete directly with the Company, over the expected term of the options. Expected Dividend Yield: We have never declared or paid any cash dividends and do not presently intend to pay cash dividends in the foreseeable future. As a result, we used an expected dividend yield of zero. Risk-Free Interest Rates: We determine the average risk-free interest rate using the yield on actively tradedU.S. Treasury notes with the same maturity as the expected term of the underlying options. If any assumptions used in the Black-Scholes option-pricing model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously. The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our share-based compensation expense could be materially different. Emerging Growth Company Status We are an "emerging growth company" ("EGC") as defined in the JOBS Act. As an EGC, the JOBS Act, allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We expect to lose our EGC status upon the filing of the Form 10-K for the year endingDecember 31, 2020 , when we expect to qualify as a Large Accelerated Filer based upon the current market capitalization of the Company according to Rule 12b-2 of the Exchange Act. Therefore, we have elected to use the adoption dates applicable to public companies beginning in the first quarter of 2020. For as long as we continue to be an emerging growth company, we intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. 69
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Recently Adopted Accounting Pronouncements Please refer to Note 2 , Summary of Significant Accounting Policies, to the Notes to Financial Statements included elsewhere in this report for a discussion of recently adopted accounting pronouncements and new accounting pronouncements that may impact us.
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