ITEM 1A.
RISK FACTORS
Our
business
and
results
of
operations
are
subject
to
numerous
risks
and
uncertainties,
many
of
which
are
beyond
our
control. The following is a description of
the known factors that
may materially affect our
business, financial condition or
results
of operations. They should
be considered
carefully,
in addition to
the information set
forth elsewhere
in this Annual
Report on
Form 10-K, including under Item 7.
Management’s
Discussion and Analysis of Financial Condition
and Results of Operations,
in making any investment decisions with respect to our securities. Additional risks or uncertainties that are not currently
known
to us,
or that
we are
aware of
but currently
deem to
be immaterial
or that
could apply
to any
company could
also materially
adversely affect our business, financial condition or results of operations.
INDUSTRY RISK FACTORS
Market prices of
wholesale shell eggs
are volatile,
and decreases
in these prices
can adversely impact
our revenues
and
profits.
Our operating results are significantly affected by wholesale shell egg market prices, which fluctuate widely and are outside our
control. As a
result, our
prior performance
should not
be presumed
to be
an accurate
indication of
future performance.
Under
certain circumstances,
small increases
in production,
or small
decreases in demand,
within the industry
might have a
large adverse
effect on shell egg prices. Low shell egg prices adversely affect our revenues and profits.
Market prices for wholesale shell
eggs have been volatile and
cyclical. Shell egg prices have
risen in the past
during periods of
high demand such as the initial outbreak of the COVID-19 pandemic and periods when high protein diets are popular. Shell egg
prices have also
risen in the past
during periods of
constrained supply,
such as the
avian influenza outbreak in
2015, which we
believe, based on published industry
estimates, impacted approximately 12% of
the national flock of laying
hens. During times
when prices are
high, the egg
industry has typically
geared up to produce
more eggs primarily
by increasing the
number of layers,
ultimately resulting in an oversupply of eggs, which was subsequently followed by a period of lower prices.
As discussed
above under
the heading
“Seasonality” in
Part I.
Item 1.
Business, seasonal
fluctuations impact
shell egg
prices.
Therefore, comparisons of
our sales and
operating results between
different quarters within a
single fiscal year
are not necessarily
meaningful comparisons.
A decline in consumer demand for shell eggs can negatively impact our business.
We
believe the
increase in
meals prepared
at home
due to
COVID-19 pandemic,
high protein
diet trends,
industry advertising
campaigns, and the improved nutritional reputation of eggs (related to
better scientific understanding of the role of cholesterol in
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12
diets) have all contributed to shell egg demand. However,
it is possible that the demand for shell eggs will
decline in the future.
Adverse publicity
relating to
health concerns
and changes
in the
perception of
the nutritional
value of
shell eggs,
changes in
consumer views
regarding consumption
of animal-based
products, as
well as
movement away
from high
protein diets,
could
adversely
affect
demand
for
shell
eggs,
which
would
have
a
material
adverse
effect
on
our
future
results
of
operations
and
financial condition.
Feed costs are volatile and increases in these costs can adversely impact our results of operations.
Feed costs are the
largest element of our
shell egg (farm) production
cost, ranging from 55%
to 58% of total
farm production cost
in the last five fiscal years. Although feed ingredients, primarily corn and soybean
meal, are available from a number of sources,
we do not have
control over the prices
of the ingredients we
purchase, which are affected by
weather, various supply and demand
factors,
transportation
and
storage
costs,
speculators,
and
agricultural,
energy
and
trade
policies
in
the
U.S.
and
internationally. Increases in feed costs unaccompanied by increases
in the selling price of
eggs can have a material
adverse effect
on the
results of
our operations
and cash
flow. Alternatively,
low feed
costs can
encourage industry
overproduction, possibly
resulting in lower egg prices and lower revenue.
Shell
eggs
and
shell
egg
products
are
susceptible to
microbial
contamination, and
we
may
be
required
to,
or
we
may
voluntarily, recall contaminated products.
Shell eggs
and shell
egg products
are vulnerable
to contamination
by pathogens
such as
Salmonella. The Company
maintains
policies and procedures designed to comply with the complex rules and regulations
governing egg production, such as The Final
Egg Rule
issued by
the FDA
"Prevention of
Salmonella Enteritidis
in Shell
Eggs During
Production, Storage,
and Transportation,”
and the
FDA’s Food Safety Modernization Act.
Shipment of
contaminated products,
even if
inadvertent, could
result in
a violation
of law
and lead
to increased
risk of
exposure to
product liability
claims, product
recalls and
scrutiny by
federal and
state regulatory
agencies. In
addition,
products
purchased
from
other
producers
could
contain
contaminants
that
might
be
inadvertently
redistributed by
us. As such,
we might
decide or be
required to recall
a product
if we
or regulators
believe it poses
a potential
health risk. Any product recall could
result in a loss of consumer
confidence in our products, adversely
affect our reputation with
existing and potential customers and
have a material adverse effect on
our business, results of operations
and financial condition.
Agricultural risks, including outbreaks of avian disease, could harm our business.
Our shell egg production activities
are subject to a variety
of agricultural risks. Unusual or
extreme weather conditions, disease
and pests
can materially
and adversely
affect the
quality and
quantity of
shell eggs
we produce
and distribute. The
Company
maintains controls and procedures
to reduce the risk of
exposing our flocks to harmful
diseases; however, despite
these efforts,
outbreaks of avian disease can
and do still occur and
may adversely impact the health
of our flocks. An outbreak of avian
disease
could have a material
adverse impact on our
financial results by increasing
government restrictions on the
sale and distribution
of our products
and requiring us
to euthanize the
affected layers.
Negative publicity from
an outbreak within
our industry can
negatively impact customer perception,
even if the
outbreak does not
directly impact our flocks.
If a substantial
portion of our
layers or production facilities are affected by any of these factors
in any given quarter or year, our business, financial condition,
and results of operations could be materially and adversely affected.
BUSINESS AND OPERATIONAL RISK FACTORS
The COVID-19 pandemic has had an adverse impact on our business and operations
Since early
2020, the
coronavirus ("COVID-19") outbreak,
characterized as
a pandemic
by the
World
Health Organization
on
March 11, 2020, has
caused significant disruptions in international
and U.S. economies and markets.
The effects of COVID-19
have had, and may continue to
have if a resurgence occurs,
a negative impact on our business
through disruptions in the supply
chain such as increased costs
and decreased availability of packaging
supplies; the pandemic has also
increased labor costs and
medical costs.
During the initial outbreak
of COVID-19, we saw
an increase in
demand for eggs
as consumers prepared more
meals at home.
Egg prices initially rose during the fourth quarter of fiscal 2020, but prices quickly decreased as the demand shock subsided and
eggs that normally
would go to foodservice
businesses (e.g. restaurants)
entered the retail
market (e.g. grocery stores).
As a result
of the pandemic,
the foodservice market
for shell eggs
was depressed for
most of fiscal
2021. As vaccination
rates continue to
rise and governmental
restrictions are lifted,
foodservice demand may
increase and demand
in retail channels,
where we sell
most
of our eggs, could decrease.
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13
Our acquisition growth strategy subjects us to various risks.
As discussed in
Part I. ItemI. Business –Growth Strategy
, we plan
to pursue a
growth strategy that
includes selective acquisitions
of other
companies engaged
in the
production and
sale of
shell eggs,
with a
priority on
those that
will facilitate
our ability
to
expand our
cage-free shell
egg production
capabilities in
key locations
and markets.
The number
of existing
companies with
cage-free capacity that
we may be able
to purchase is limited,
as most production
of shell eggs by
other companies in our
markets
currently does not meet customer or legal requirements to be designated as cage-free.
Acquisitions require capital resources and
can divert management’s attention from our existing
business. Acquisitions also entail
an inherent risk that
we could become
subject to contingent
or other liabilities,
including liabilities arising
from events or
conduct
prior to
our acquisition
of a
business that
were unknown
to us
at the
time of
acquisition. We
could incur
significantly greater
expenditures in integrating an acquired business than we anticipated at the time of its purchase. We may over-estimate or under-
estimate the demand for cage-free eggs, which could cause our acquisition strategy to be less-than-optimal
for our future growth
and profitability.
We cannot assure you that we:
●
will identify suitable acquisition candidates;
●
can consummate acquisitions on acceptable terms;
●
can successfully integrate an acquired business into our operations; or
●
can successfully manage the operations of an acquired business.
No
assurance can
be
given
that
companies
we
acquire
in
the
future
will
contribute
positively
to
our
results
of
operations or
financial condition.
In addition,
federal antitrust
laws require
regulatory approval
of acquisitions
that exceed
certain threshold
levels of significance, and we cannot guarantee that such approvals would be obtained.
The consideration we pay
in connection with any
acquisition affects our financial
results. If we pay
cash, we could be
required
to use a
portion of our
available cash to
consummate the acquisition.
To the extent we
issue shares
of our Common
Stock, existing
stockholders may be diluted. In addition, acquisitions may result in additional debt.
Our largest customers have accounted
for a significant portion of
our net sales volume. Accordingly, our business
may be
adversely affected by the loss of, or reduced purchases by, one or more of our large customers.
Our top three
customers accounted for
an aggregate of
48.6%, 51.1% and
52.2% of net
sales dollars for
fiscal 2021, 2020,
and
2019, respectively.
Our largest
customer, Walmart
Inc. (including Sam's
Club), accounted for
29.8%, 32.1% and
33.7% of net
sales dollars
for fiscal
2021, 2020,
and 2019, respectively.
Although we
have established
long-term relationships with
most of
our customers who
continue to purchase
from us based
on our ability
to service their
needs, they are
free to acquire
shell eggs
from other sources. If, for any reason, one or more of our large customers were to purchase significantly less of our shell eggs in
the future or terminate
their purchases from
us, and we were
not able to
sell our shell
eggs to new customers
at comparable levels,
it would have a material adverse effect on our business, financial condition, and results of operations.
Our business is highly competitive.
The
production
and
sale
of
fresh
shell
eggs,
which
accounted
for
virtually
all
of
our
net
sales
in
recent
years,
is
intensely
competitive. We compete with a large number of competitors that may
prove to be more successful than