BEYOND MEAT, 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," of our 2019 Form 10-K and Part II, Item 1A, "Risk Factors" and "Note Regarding Forward-Looking Statements" included in this report and those discussed in other documents we file from time to time with theSEC . The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this quarterly report and our audited financial statements and notes thereto included in our 2019 10-K. Our historical results are not necessarily indicative of the results to be expected for any future periods and our operating results for the three months endedMarch 28, 2020 are not necessarily indicative of the results to be expected for the fiscal year endingDecember 31, 2020 or for any other interim period or for any other future year or period. 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. As ofMarch 28, 2020 , our products were available in approximately 94,000 points of distribution in 75 countries, across mainstream grocery, mass merchandiser, club, 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 initial public offering ("IPO") of common stock, in which we sold 11,068,750 shares. 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 public offering ("Secondary Offering") of common stock, 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. We did not receive any proceeds from the sale of common stock by the selling stockholders in the Secondary Offering. OnJanuary 14, 2020 , we registered our new subsidiary,Beyond Meat EU B.V. , inthe Netherlands . OnApril 28, 2020 , we registered our new subsidiary,Beyond Meat (Jiaxing) Food Co., Ltd. , in theZhejiang Province inChina . 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 onDecember 31 . As a result, our first and fourth fiscal quarters may have more or fewer days included than a traditional 91-day fiscal quarter. 25 -------------------------------------------------------------------------------- Impact of COVID-19 on Our Business The recent COVID-19 pandemic has impacted our business operations. While our manufacturing facilities remain operational, beginning inMarch 2020 employees at our corporate headquarters began working remotely. For any essential activities at our Manhattan Beach Project Innovation Center, we are strictly limiting the number of employees allowed in the building and have implemented physical distancing protocols and comprehensive preventative hygienic measures. We expect our corporate employees to remain working remotely pending further notice and guidelines from our local, state and federal agencies. At our manufacturing facilities, we have implemented a series of physical distancing and hygienic practices to further support the health and safety of our manufacturing employees. The employees are operating at extremely low density; all are being monitored for COVID-19 symptoms, including temperature screening of all personnel entering the site; and are following strict COVID-19 suggested Personal Protective Equipment guidelines perUnited States Centers for Disease Control andWorld Health Organization , including mandatory face coverings, increased hand washing and significantly increased sanitation of hard surfaces. All company-sponsored travel has been suspended and field marketing activities have been curbed due to the COVID-19-related restrictions. As government authorities institute restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for essential operations in our facilities. We source ingredients from multiple suppliers from around the world with our plant-based proteins coming from suppliers inthe United States , the EU,China andIndia . We also maintain inventory positions near our manufacturing operations, as well as floor stock agreements with many of our vendors. We have established a cross-functional task force that meets regularly and continually monitors and tracks relevant data including guidance from local, national, and international health agencies. This task force works closely with our senior leadership and is instrumental in making critical, timely decisions and is committed to continuing to communicate to our employees as more information is available to share. We began the first quarter of 2020 with strong momentum, however we experienced a meaningful slowdown in our foodservice business in the latter half of March due to the ongoing COVID-19 health crisis as various regions around the world implemented stay-at-home orders, resulting in the closure or limited operations of many of our foodservice customers. At the same time, we experienced an increase in demand by our retail customers as consumers shifted towards more at-home consumption, which partially offset the decline in sales to foodservice customers. We expect that the COVID-19 pandemic will have a greater negative impact on demand in the foodservice channel in the second quarter of 2020 relative to what the Company experienced in the first quarter of 2020. It is challenging to estimate the extent of the adverse impact of the COVID-19 pandemic on our results of operations, due to continued uncertainty regarding the duration, magnitude and effects of the COVID-19 pandemic, further spread of the disease, potential supply chain or manufacturing disruptions, and the magnitude of reduced customer traffic at our foodservice customers, or the extent to which they may be offset by increasing awareness of the benefits of plant-based meat products, or potential disruptions in the supply of conventional animal proteins. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net revenues, earnings and cash flows, will be adversely impacted for at least the balance of 2020, including as a result of: • potential disruption to the supply chain caused by distribution and other
logistical issues;
• the level of demand shift from foodservice to retail business;
• potential disruption or closure of our facilities or those of our
suppliers or co-manufacturers due to employee contraction of COVID-19;
• decreased foot traffic in foodservice establishments;
• resumption of any expansion plans for our product lines for those quick
service restaurant ("QSR") customers who are in trial or test phase;
26--------------------------------------------------------------------------------
• reduced consumer confidence and consumer spending, including spending to
purchase our products; and negative trends in consumer purchasing patterns
due to consumers' disposable income, credit availability and debt levels;
• increased likelihood of retail and foodservice customers closures or
further reduced operations;
• uncertain economic outlook in the
• uncertainty in the length of recovery time for theU.S. and world economies; and
• disruptions in our ability to expand to new international locations.
We are focused on navigating these recent challenges presented by COVID-19 through offensive measures, such as switching foodservice production lines over to retail products, developing retail value packs and offering aggressive pricing with a strategic opportunity to encourage consumer trials, as well as defensive measures focused on reducing discretionary spending and activities in areas where effectiveness has been impeded by the pandemic, for example, certain marketing programs, or delaying until later in the year or until 2021 under the circumstances. We expect these actions will negatively impact our gross margins and profitability in the second quarter of 2020 as compared to the quarter endedMarch 28, 2020 . 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, 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 . EffectiveJanuary 1, 2020 , we began presenting net revenues by geography and distribution channel as follows: Distribution Channel DescriptionU.S. Retail Net revenues from retail sales to the U.S. marketU.S. Foodservice Net revenues from restaurant and foodservice sales to the U.S. market International Retail Net revenues from retail sales to international markets, includingCanada
International Foodservice Net revenues from restaurant and foodservice sales to
international markets, including Canada
Net revenues from sales to the Canadian market, previously included with net
revenues from sales to the U.S. market, have been reclassified to International
net revenues. Prior period amounts have been recast to conform to the current
period presentation. The foregoing change in presentation had no impact on our
net revenues, results of operations or cash flows.
Effective January 1, 2020 , we also eliminated the presentation of net revenues
by platform as it is no longer material to an understanding of our financial
results. Previously, we presented net revenues by platform for our
"ready-to-cook" or fresh platform, and "ready-to-heat" or frozen platform. Gross
revenues from sales of products in our frozen platform were 5.5% of gross
revenues in the year ended December 31, 2019 , as compared to 16.3% of gross
revenues in the year ended December 31, 2018 .
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The following table presents the Company's 2019 quarterly net revenues by
channel (unaudited):
Three Months Ended
March 30, June 29, September 28, December 31,
(in thousands) 2019 2019 2019 2019
U.S.:
Retail $ 19,461 $ 30,531 $ 44,170 $ 35,221
Foodservice 8,834 16,504 18,359 26,675
U.S. net revenues 28,295 47,035 62,529 61,896
International:
Retail 118 3,589 6,295 5,424
Foodservice 11,793 16,627 23,137 31,159
International net revenues 11,911 20,216 29,432 36,583
Net revenues $ 40,206 $ 67,251 $ 91,961 $ 98,479
In the first quarter of 2020, we continued 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, subject to the duration, magnitude and effects of the
COVID-19 pandemic:
• increased penetration across our foodservice channel, including increased
desire by foodservice establishments, including large full service
restaurants and/or global QSR customers, to add plant-based products to
their menus and to highlight these offerings, and across our retail
channel, including mainstream grocery, mass merchandiser, club,
convenience store, and natural retailer customers;
• distribution expansion and increased sales velocity across our channels;
• 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 andintroducing 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 in
ambassadors to welcome consumers to the brand, 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, subject to the duration, magnitude and effects of the COVID-19 pandemic: • 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.
28-------------------------------------------------------------------------------- We distribute our products internationally, using distributors in 75 countries worldwide as ofMarch 28, 2020 . In addition to our own production facilities, we use co-manufacturers in various locations inthe United States , and, in 2019, we commenced co-manufacturing inCanada and also expanded our partnership with one of our distributors to co-manufacture our products at a new manufacturing facility built by our distributor inthe Netherlands , construction of which was completed in the first quarter of 2020. International net revenues increased approximately 106% in the three months endedMarch 28, 2020 as compared to the prior-year period. As we seek to continue to rapidly grow our net revenues, we face several challenges. 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 our Manhattan 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 and retail store closures. Due to its global spread and unprecedented impact, the pandemic 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. 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 that we will need to offer more trade and promotion discounts, primarily to our retail customers, to drive increased consumer trial and in response to the COVID-19 pandemic. 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 as well as negatively impact our gross margins 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. Gross Profit Gross profit 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. 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 29 -------------------------------------------------------------------------------- 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. We are also working to improve gross margin through ingredient cost savings achieved through scale of purchasing and through expanding our comanufacturing network and negotiating lower tolling fees. However, in the near term, margin improvements may be impacted by our focus on growing our customer base, volume deleveraging and repackaging costs as the Company repurposes a certain portion of its existing foodservice inventory into retail SKUs in response to COVID-19 demand shifts, aggressive pricing strategies and increased discounting, 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 research and development and innovation are core elements of our business strategy, and we believe they represent a critical competitive advantage for us. We believe that we need to continue to rapidly innovate in order 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. 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 lease 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 expect SG&A expenses in absolute dollars to increase as we increase our domestic and international expansion efforts, expand our marketing efforts, and incur costs related to our status as a public company. In response to the COVID-19 pandemic, we expect to undertake measures focused on reducing discretionary spending and activities in areas where effectiveness has been impeded by the pandemic, for example, certain marketing programs, or delaying until later in the year or until 2021 under the circumstances. Restructuring Expenses InMay 2017 , management approved a plan to terminate an exclusive supply agreement with one of our co-manufacturers. See " Results of Operations -Three Months EndedMarch 28, 2020 Compared to Three Months endedMarch 30 , 2019-Restructuring Expenses" for a discussion of these expenses. Seasonality Generally, we expect to experience greater demand for certain of our products during the summer grilling season. 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. In an environment of uncertainty from the impact of COVID-19, we are unable to anticipate the extent of demand for our products during the upcoming 2020 summer grilling season. 30 --------------------------------------------------------------------------------
Results of Operations The following table sets forth selected items in our condensed consolidated statements of operations for the periods presented:
Three Months Ended
March 28, March 30,
(in thousands) 2020 2019
Net revenues $ 97,074 $ 40,206
Cost of goods sold 59,383 29,435
Gross profit 37,691 10,771
Research and development expenses 6,194 4,498
Selling, general and administrative expenses 27,315 11,177
Restructuring expenses 2,373 394
Total operating expenses 35,882 16,069
Income (loss) from operations $ 1,809 $ (5,298 )
The following table presents selected items in our condensed consolidated
statements of operations as a percentage of net revenues for the respective
periods presented:
Three Months Ended
March 28, March 30,
2020 2019
Net revenues 100.0 % 100.0 %
Cost of goods sold 61.2 73.2
Gross profit 38.8 26.8
Research and development expenses 6.4 11.2
Selling, general and administrative expenses 28.1 27.8
Restructuring expenses 2.4 1.0
Total operating expenses 37.0 40.0
Income (loss) from operations 1.9 % (13.2 )%
Three Months Ended March 28, 2020 Compared to Three Months Ended March 30, 2019
Net Revenues
Net revenues increased by $56.9 million , or 141.4%, in the three months ended
March 28, 2020 , as compared to the prior-year period primarily due to an
increase in volume sold, primarily driven by expansion in the number of
distribution points both domestically and abroad, higher sales velocities at
existing retail customers, and contribution from new products introduced
subsequent to the three months ended March 30, 2019 , partially offset by lower
net price per pound. During the quarter, specifically in the latter half of
March, we experienced a reduction in sales to foodservice customers as a result
of the ongoing COVID-19 health crisis as domestic and international stay-at-home
orders became more widespread. The deceleration in foodservice sales was
partially offset by the increase in retail demand in the latter half of March as
consumers shifted towards more at-home consumption.
Net revenues across all channels increased in the three months ended March 28,
2020 compared to the prior-year period, with net revenues from U.S. retail, U.S.
foodservice, International foodservice and International retail increasing $30.5
million , $13.8 million , $6.8 million and $5.8 million , respectively. As a
percentage of net revenues, U.S. retail revenues increased the most among the
four channels in the three
31
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months ended March 28, 2020 . U.S. net revenues and International net revenues
increased 156.4% and 105.9%, respectively, compared to the same period in the
prior year. Retail net revenues increased 185.4%, while foodservice net revenues
increased 99.7% versus the first quarter of 2019.
The following table presents our net revenues by channel:
Three Months Ended Change
March 28, March 30,
(in thousands) 2020 2019 Amount %
U.S.:
Retail $ 49,923 $ 19,461 $ 30,462 156.5 %
Foodservice 22,631 8,834 $ 13,797 156.2 %
U.S. net revenues 72,554 28,295 44,259 156.4 %
International:
Retail 5,952 118 5,834 4,944.1 %
Foodservice 18,568 11,793 6,775 57.4 %
International net revenues 24,520 11,911 12,609 105.9 %
Net revenues $ 97,074 $ 40,206 $ 56,868 141.4 %
Net revenues from U.S. retail sales in the three months ended March 28, 2020
increased $30.5 million , or 156.5%, primarily due to increases in sales of the
Beyond Burger, Beyond Sausage and Beyond Beef Crumble. Net revenues from U.S.
retail sales of the Beyond Burger in the three months ended March 28, 2020
increased approximately 168.3% as compared to the prior-year period. In
addition, Beyond Beef, introduced at retail in June 2019 , also contributed to
the increase in U.S. retail net revenues. Net revenues from U.S. foodservice
sales increased $13.8 million , or 156.2%, primarily due to increases in sales of
the Beyond Burger, Beyond Sausage, and Beyond Beef Crumble. Our products were
available at approximately 25,000 U.S. retail outlets and 34,000 U.S.
foodservice outlets as of March 28, 2020 .
Net revenues from International retail sales in the three months ended March 28,
2020 increased $5.8 million , or 4,944.1%, primarily due to increases in sales of
the Beyond Burger, Beyond Beef and Beyond Sausage which in the aggregate
accounted for approximately 96% of international gross revenues. Net revenues
from International foodservice sales increased $6.8 million , or 57.4%, primarily
due to an increase in the number of foodservice outlets offering the Beyond
Burger. Our products were available at approximately 35,000 International retail
and foodservice outlets as of March 28, 2020 .
The following table presents consolidated volume of our products sold in pounds:
Three Months Ended Change
March 28, March 30,
(in thousands) 2020 2019 Amount %
Volume of products sold:
U.S.:
Retail 8,446 3,210 5,236 163.1 %
Foodservice 4,066 1,447 2,619 181.0 %
International:
Retail 828 16 812 5,075.0 %
Foodservice 3,312 2,165 1,147 53.0 %
Volume of products sold 16,652 6,838 9,814 143.5 %
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Cost of Goods Sold
Three Months Ended Change
March 28, March 30,
(in thousands) 2020 2019 Amount %
Cost of goods sold $ 59,383 $ 29,435 $ 29,948 101.7 %
Cost of goods sold increased by $29.9 million , or 101.7%, to $59.4 million , in
the three months ended March 28, 2020 as compared to the prior-year period,
primarily due to the increase in the sales volume of our products. Cost of goods
sold in the three months ended March 28, 2020 decreased to 61.2% of net revenues
from 73.2% of net revenues in the prior-year period.
Gross Profit and Gross Margin
Three Months Ended Change
March 28, March 30,
(in thousands) 2020 2019 Amount %
Gross profit $ 37,691 $ 10,771 $ 26,920 249.9 %
Gross margin 38.8 % 26.8 % 1200 bps N/A
Gross profit in the three months ended March 28, 2020 was $37.7 million as
compared to gross profit of $10.8 million in the prior-year period, an
improvement of $26.9 million . Gross margin in the three months ended March 28,
2020 improved to 38.8% from 26.8% in the prior-year period. The improvement in
gross profit and gross margin was primarily due to an increase in the volume of
products sold, production efficiency improvements, direct materials and
packaging input cost savings, and direct labor and variable cost efficiencies in
the first quarter of 2020 compared to the prior-year period. 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 shipping
and handling costs as a component of cost of goods sold.
Research and Development Expenses
Three Months Ended Change
March 28, March 30,
(in thousands) 2020 2019
Amount %
Research and development expenses
Research and development expenses increased$1.7 million , or 37.7%, in the three months endedMarch 28, 2020 , as compared to the prior-year period. Research and development expenses increased primarily due to higher headcount, higher scale-up expenses, higher consulting expenses and higher depreciation and amortization expense compared to the prior-year period. Research and development expenses decreased to 6.4% of net revenues in the three months endedMarch 28, 2020 , from 11.2% of net revenues in the prior-year period. SG&A Expenses Three Months Ended Change March 28, March 30, (in thousands) 2020 2019 Amount % Selling, general and administrative expenses$ 27,315 $ 11,177 $ 16,138 144.4 % 33
-------------------------------------------------------------------------------- SG&A expenses increased$16.1 million , or 144.4%, in the three months endedMarch 28, 2020 . SG&A expenses increased to 28.1% of net revenues in the three months endedMarch 28, 2020 , from 27.8% of net revenues in the prior-year period. The increase was primarily due to$4.7 million in higher share-based compensation expense,$3.0 million in higher salaries and related expenses resulting from higher headcount,$1.4 million in higher legal expenses,$1.2 million in higher public company-related expenses,$1.2 million in higher expense related to product donations,$1.1 million in higher broker and distributor commissions, and continued investment in marketing capabilities. The increase in share-based compensation expense in the three months endedMarch 28, 2020 was primarily due to appreciation in our stock price as well as substantially higher staffing levels versus the prior-year period. 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$2.4 million and$0.4 million in the three months endedMarch 28, 2020 andMarch 30, 2019 , respectively, primarily related to legal and other expenses associated with the dispute. The amount incurred in the three months endedMarch 28, 2020 includes transition costs associated with our substitution of legal counsel during the quarter. As ofMarch 28, 2020 andDecember 31, 2019 , there were$2.7 million and$1.1 million , respectively, in accrued and unpaid restructuring expenses 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 Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and Legal Proceedings in Part II, Item 1 of this report. Total Other Income (Expense), Net Total other income, net in the three months endedMarch 28, 2020 was$5,000 , compared to Total other expense, net of$1.4 million in the prior-year period. Total other income (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, offset by investment income. Total other income (expense), net, in the three months endedMarch 28, 2020 primarily included investment income resulting from investment of proceeds from the IPO and Secondary Offering, partially offset by interest expense on our debt balances. Total other income (expense), net, in the three months endedMarch 20, 2019 primarily included expense associated with the remeasurement of our preferred stock warrant liability and common stock warrant liability and interest expense. Income (Loss) from Operations Income from operations in the first quarter of 2020 was$1.8 million compared to loss from operations of$5.3 million in the first quarter of the prior year. This improvement was driven by the year-over-year increase in gross profit, partially offset by higher operating expenses to support increased personnel levels and higher administrative costs associated with being a public company, higher share-based compensation expense, increases in our marketing initiatives, higher restructuring expenses, and continued investment in innovation. Net Income (Loss) Net income was$1.8 million in the three months endedMarch 28, 2020 compared to net loss of$6.6 million in the prior-year period. The improvement in net income was primarily the result of the increase in net revenues and gross profit, as well as operating expense leverage compared to the prior-year period. 34 -------------------------------------------------------------------------------- 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, expenses primarily associated with the conversion of our convertible notes and remeasurement of our preferred stock warrant liability and common stock warrant liability, and Other, net, including investment income. "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 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, and investment income. 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 those 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 GAAP measure. Some of these limitations are: • Adjusted EBITDA excludes depreciation and amortization expense and, although
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 expenses 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 income (loss), as reported (unaudited):
Three Months Ended
March 28, March 30,
(in thousands) 2020 2019
Net income (loss), as reported $ 1,815 $ (6,649 )
Income tax benefit (1 ) -
Interest expense 705 733
Depreciation and amortization expense 2,583 1,905 Restructuring expenses(1)
2,373 394
Share-based compensation expense 5,949 855
Remeasurement of warrant liability - 759
Other, net (710 ) (141 )
Adjusted EBITDA $ 12,714 $ (2,144 ) Net income (loss) as a % of net revenues 1.9 % (16.5 )% Adjusted EBITDA as a % of net revenues 13.1 % (5.3 )%
_____________
(1) Primarily comprised of legal and other expenses associated with the dispute
with a co-manufacturer with whom an exclusive supply agreement was
terminated in May 2017 .
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 also previously entered into the credit facilities with Silicon Valley Bank
("SVB") which were terminated on April 21, 2020 and replaced with a $150 million
five-year secured revolving credit agreement with an accordion feature for up to
an additional $200 million (the "2020 Credit Agreement"). See Note 13 ,
Subsequent Event, to the Notes to Unaudited Condensed Consolidated Financial
Statements included in Part I, Item 1 of this report.
As of March 28, 2020 , we had $246.4 million in cash and cash equivalents. We
believe that our cash and cash equivalents, cash flow from operating activities
and available borrowings under our 2020 Credit Agreement 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 impact of the
COVID-19 global pandemic; the number and characteristics of any additional
products or manufacturing processes we develop or acquire to serve new or
existing markets; the
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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, the putative class action
cases recently brought against us, and the shareholder derivative lawsuits
putatively brought on our behalf; 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; 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
As of March 28, 2020 and December 31, 2019 , we had $6.0 million and $20.0
million , in borrowings on the revolving credit facility and term loan facility,
respectively, with SVB (collectively, the "SVB Credit Facilities") and had no
availability to borrow under these facilities. In the three months ended
March 28, 2020 and March 30, 2019 , we incurred $0.4 million and $0.6 million ,
respectively, in interest expense related to the SVB credit facilities. The
interest rates on the revolving credit facility and the term loan facility at
March 28, 2020 were 4.00% and 7.25%, respectively. We were in compliance with
the financial covenants in the SVB Credit Facilities as of March 28, 2020 .
Concurrently with the effectiveness of the 2020 Credit Agreement, on April 21,
2020, we terminated the SVB Credit Facilities. See Note 13 , Subsequent
Event, to the Notes to Unaudited Condensed Consolidated Financial Statements
included in Part I, Item 1 of this report.
Equipment Loan Facility
We had $5.0 million in borrowings outstanding as of March 28, 2020 and
December 31, 2019 under the equipment loan facility with Structural Capital
Investments II, LP , as Lender, and Ocean II, PLC, LLC , as collateral agent and
administrative agent (the "Equipment Loan Facility"). The interest rate on the
Equipment Loan Facility at March 28, 2020 was 11.0%. In each of the three months
ended March 28, 2020 and March 30, 2019 , we recorded $0.1 million in interest
expense related to the Equipment Loan Facility. We were in compliance with the
financial covenants contained in the Equipment Loan Faciity as of March 28,
2020 .
Concurrently with the effectiveness of the 2020 Credit Agreement, on April 21,
2020, we terminated the Equipment Loan Facility. See Note 13 , Subsequent
Event, to the Notes to Unaudited Condensed Consolidated Financial Statements
included in Part I, Item 1 of this report.
Cash Flows
The following table presents the major components of net cash flows used in and
provided by operating, investing and financing activities for the periods
indicated.
Three Months Ended
March 28, March 30,
(in thousands) 2020 2019
Cash (used in) provided by:
Operating activities $ (17,202 ) $ (13,280 )
Investing activities $ (13,362 ) $ (4,993 )
Financing activities $ 986 $ (589 )
Net Cash Used in Operating Activities
In the three months ended March 28, 2020 , we recorded net income of $1.8
million . The primary reason for net cash used in operating activities of $17.2
million was $28.1 million in net cash outflows from changes in our operating
assets and liabilities, primarily due to the increase in inventory to meet
growth in anticipated sales and to accommodate longer lead times for
international shipments and prepayments to one of our pea protein
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suppliers, partially offset by the increase in accounts payable. Net income in
the three months ended March 28, 2020 , included $9.0 million in non-cash
expenses primarily comprised of depreciation and amortization expense and
share-based compensation expense.
In three months ended March 30, 2019 , we incurred a net loss of $6.6 million ,
which was the primary reason for net cash used in operating activities of $13.3
million . Net cash used in operating activities also included $10.2 million in
net cash outflows from changes in our operating assets and liabilities,
partially offset by $3.6 million in non-cash expenses comprised of depreciation
and amortization expense, share-based compensation expense and change in warrant
liability.
Depreciation and amortization expense was $2.6 million and $1.9 million in the
three months ended March 28, 2020 and March 30, 2019 , respectively.
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.
In the three months ended March 28, 2020 , net cash used in investing activities
was $13.4 million and consisted of $12.4 million in cash outflows for purchases
of property, plant and equipment, primarily driven by growth capital production
equipment purchases related to our capacity expansion initiatives and
$1.0 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.
In the three months ended March 30, 2019 , net cash used in investing activities
was $5.0 million and consisted of cash outflows for the purchases of property,
plant and equipment, primarily for manufacturing facility improvements and
manufacturing equipment, assets purchased for sale to co-manufacturers and
security deposits.
Net Cash Provided by (Used in) Financing Activities
In the three months ended March 28, 2020 , net cash provided by financing
activities was $1.0 million primarily from proceeds from stock option exercises.
In the three months ended March 30, 2019 , net cash used in financing activities
was $0.6 million primarily as a result of $0.9 million in payments of deferred
offering costs associated with the IPO, partially offset by $0.4 million in
proceeds from stock option exercises.
As of March 28, 2020 , we had borrowed the entire availability of $20.0 million
under the term loan facility and $6.0 million under the revolving credit
facility with SVB.
Concurrently with the effectiveness of the 2020 Credit Agreement, on April 21,
2020 , we terminated the SVB Credit Facilities and the Equipment Loan Facility.
See Note 13, Subsequent Event, to the Notes to Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 of this report.
Contractual Obligations and Commitments
There have been no significant changes during the three months ended March 28,
2020 to the contractual obligations disclosed in Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth in the 2019
10-K, other than the following:
Leases
On January 1, 2020 , we adopted ASU 2016-02 using the modified retrospective
approach, which permits application of this new guidance at the beginning of the
period of adoption, with comparative periods continuing to be reported under ASC
840. Upon adoption of ASU 2016-02, we recognized operating lease right-of-use
assets of $11.9 million adjusted for $0.3 million previously recorded as
deferred rent and $0.2 million previously recorded as prepaid rent on our
condensed consolidated balance sheets. We also recorded $1.4 million in current
operating lease liabilities and $10.6 million in operating lease liabilities,
net of current portion.
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As part of this adoption, we elected to not record operating lease right-of-use
assets or operating lease liabilities for leases with an initial term of 12
months or less. We also elected to combine lease and non-lease components on all
new or modified operating leases into a single lease component for all classes
of assets. Short-term lease payments for the three months ended Mach 28, 2020
totaled $64,000 . See Note 4 , Leases, to the Notes to Unaudited Condensed
Consolidated Financial Statements included in Part I, Item 1 of this report.
Purchase Commitments
On January 10, 2020 , we and Roquette Frères ("Roquette") entered into a
multi-year sales agreement pursuant to which Roquette will provide us with
plant-based protein. The agreement expires on December 31, 2022 ; however it can
be terminated after 18 months under certain circumstances. This agreement
increases the amount of plant-based protein to be supplied by Roquette in each
of 2020, 2021 and 2022 compared to the amount supplied 2019. The plant-based
protein sourced under the supply agreement is secured on a purchase order basis
regularly, per specified minimum monthly and semi-annual quantities, throughout
the term. The Company is not required to purchase plant-based protein in amounts
in excess of such specified minimum quantities; however, we have the option to
increase such minimum quantities for delivery in each of 2021 and 2022. The
total annual amount purchased each year by us must be at least the minimum
amount specified in the agreement, which totals in the aggregate $154.1 million
over the term of the agreement. We also have the right to be indemnified by
Roquette in certain circumstances.
As of March 28, 2020 , we had committed to purchase pea protein inventory
totaling $198.1 million , approximately $64.7 million in the remainder of 2019,
$74.9 million in 2020, and $58.5 million in 2021. In addition, as of March 28,
2020 , we had approximately $27.3 million in purchase order commitments for
capital expenditures primarily to purchase machinery and equipment. Payments for
these purchases will be due within twelve months. We intend to use cash from
operations to fund these purchase commitments.
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.
There have been no material changes in our critical accounting policies during
the three months ended March 28, 2020 , as compared to those disclosed in
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies" in the 2019 10-K other than as
described in Note 2 , Summary of Significant Accounting Policies, to the
Notes to Unaudited Condensed Consolidated Financial Statements included in Part
I, Item 1 of this report.
Emerging Growth Company Status
We are an "emerging growth company" ("EGC") as defined in the Jumpstart Our
Business Startups Act (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
ending December 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 Securities Exchange Act of 1934, as amended (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 EGC, we intend to take advantage of certain other exemptions from various
reporting requirements that are applicable to other public companies that are
not
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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.
Recent Accounting Pronouncements
Please refer to Note 2 , Summary of Significant Accounting Policies, to the
Notes to Unaudited Condensed Consolidated Financial Statements included in Part
I, Item 1 of this report for a discussion of recently adopted accounting
pronouncements and new accounting pronouncements that may impact us.
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