If U.S. media reports are to be believed, a preliminary inquiry into Hampton Creek has been opened by the Securities and Exchange Commission of the U.S.

An organized effort by Hampton Creek to buy large quantities of its Just Mayo product by sending undercover contractors into stores — a mayonnaise that uses a plant-based ingredient instead of eggs,  was described by a recent report from Bloomberg News and the S.E.C. inquiry is a response to that news report.

While declining to give any details, Hampton Creek’s chief executive, Joshua Tetrick, said he had heard from the S.E.C. about the informal inquiry Kevin J. Callahan, a spokesman for the S.E.C., declined to comment.

Not long before Hampton Creek raised $90 million from venture capitalists and other private investors, the product buyback effort took place in 2014 which made Just Mayo seem more popular than it was, Bloomberg’s report said. A former Hampton Creek employee, who asked for anonymity because of confidentiality restrictions with his onetime employer confirmed the basic details of the program.

The mayonnaise shopping spree was part of a quality control program that had minimal impact on overall sales, Mr. Tetrick write in a blog post after the report.

Hampton Creek has described itself as the fastest-growing food company in the world and the investigation puts a cloud over it. Using some of the same big data tools, it has promised to tackle the food industry with the gusto of a technology start-up.

Identification of healthy, plant-based ingredients that can substitute for common foods like eggs, with less of a negative impact on the environment is one of its goals.

The San Francisco based Hampton Creek has, received financial backing from prominent Silicon Valley entrepreneurs and investors like Marc Benioff and Vinod Khosla and has been praised by the likes of Bill Gates.

However tougher questions face Hampton Creek once a full-fledged investigation starts, analysts say. It is believed that significant amounts of money are being lost by the company. According to a Delaware filing provided by Equidate, which tracks private company shares, it is raising up to $220 million from investors.

Bleeding red ink in their early days for startups is not uncommon. But some basic challenges with the manufacturing costs for its products is faced by the 2011 founded Hampton Creek.

The raw cost to the company for every $1 it got in sales was about $1.20 in 2014, one former employee said, which means that the company had negative gross margins of about 20 percent on Just Mayo.

Without charging shoppers the often eye-popping prices attached to such food products, Hampton Creek’s use of premium ingredients in its products is the root of the issue. According to the former employee, for example, significant costs are added as the vegetable oil used in Just Mayo does not come from genetically modified organism sources.

However, priced at 32 cents less than a jar of Hellmann’s mayonnaise of the same size, a 30-ounce jar of Just Mayo was selling for $3.66 on Walmart.com on Friday.

The company planned to break even by the end of next year, Mr. Tetrick said.

“We are fortunate to be well capitalized,” he said. he however declined to disclose how much the company had in the bank. For some of the dressing’s of Hampton Creek generated more revenue than they cost to make and thus were gross-margin-positive, he added. Such products include mayonnaise and food service cookie products.

“We’re not trying to optimize at every turn, thinking, ‘What’s the margin? It’s about solving the bigger food problem. You know what we do about it? We attack it,” he said.

(Adapted from CNBC)

Categories: Economy & Finance