VITL US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 Annual Report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report, as well as the information presented under “Selected Financial Data.”

Vital Farms is an ethical food company that is disrupting the U.S. food system by developing a framework that challenges the norms of the incumbent food model, allowing us to bring high-quality products from our network of small family farms to a national audience. This framework has enabled us to become the leading U.S. brand of pasture-raised eggs and butter and the second largest U.S. egg brand by retail dollar sales. Our ethics are exemplified by our focus on the humane treatment of farm animals and sustainable farming practices. We believe these standards produce happy hens with varied diets, which produce better eggs. There is a seismic shift in consumer demand for ethically produced, natural, traceable, clean label, great-tasting and nutritious foods. Supported by a steadfast adherence to the values on which we were founded, we have designed our brand and products to appeal to this consumer movement.

Our purpose is rooted in a commitment to Conscious Capitalism, which prioritizes the long-term benefits of each of our stakeholders (farmers and suppliers, customers and consumers, communities and the environment, crew members and stockholders). Our business decisions consider the impact on all of our stakeholders, in contrast with the factory farming model, which principally emphasizes cost reduction at the expense of animals, farmers, consumers, crew members, communities and the environment. These principles guide our day-to-day operations and, we believe, help us deliver a more sustainable and successful business. Our approach has been validated by our financial performance and our designation as a Certified B Corporation, a certification reserved for businesses that balance profit and purpose to meet the highest verified standards of social and environmental performance, public transparency and legal accountability. Vital Farms was founded in 2007, and our pasture-raised shell eggs were launched at Whole Foods Market, Inc., or Whole Foods, in 2008. Since then, we have expanded our operations and our portfolio of pasture-raised food products as illustrated below:

We source our pasture-raised products from a network of more than 200 small family farms. We have strategically designed our supply chain to ensure high-production standards and optimal year-round operation. We are motivated by the positive impact we have on rural communities and enjoy a strong relationship and reputation with our network of farmers.

We primarily work with our farms pursuant to buy-sell contracts. Under these arrangements, the farmer is responsible for all of the working capital and investments required to produce the eggs and manage the farm, including purchasing the birds and feed supply. We are contractually obligated to purchase all of the eggs produced by the farmer during the term of the contract at an agreed upon price that depends upon pallet weight and is indexed quarterly in arrears for changes in feed cost.

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We believe we are a strategic and valuable partner to retailers. We have continued to command premium prices for our products, including our shell eggs, which sell for as much as three times the price of commodity eggs. Our loyal and growing consumer base has fueled the expansion of our brand from the natural channel to the mainstream channel. We believe the success of our brand demonstrates that consumers are demanding premium products that meet a higher ethical standard of food production. We have a strong presence at The Kroger Co., or Kroger, Sprouts Farmers Market, or Sprouts, Target Corporation and Whole Foods, and we also sell our pasture-raised products at Albertsons Companies, Inc., Publix Super Markets, Inc. and Walmart Inc. We offer 23 retail stock keeping units, or SKUs through a multi-channel retail distribution network. We believe we have significant room for growth within the retail and, in the medium- to long-term, foodservice channels through growing brand awareness, gaining additional points of distribution and new product innovation.

Our shell eggs are collected from farmers by a third-party freight carrier and placed in cold storage until we pack them for shipping to our customers at our state-of-the-art shell egg processing facility, Egg Central Station. Egg Central Station is approximately 82,000 square feet and utilizes highly automated equipment to grade and package our shell egg products. Egg Central Station is capable of packing three million eggs per day and has achieved Safe Quality Food, or SQF Excellent rating, the highest level of such certification from the Global Food Safety Initiative. In addition, Egg Central Station is the only egg facility, and globally we are one of only six companies to have received the SQF Institute, or SQFI, Select Site certification.

Our products are distributed through a broker-distributor-retailer network whereby brokers represent our products to distributors and retailers who will in turn sell our products to consumers. We serve the majority of natural channel customers through food distributors, such as US Foods, Inc., or US Foods, and KeHE Distributors, LLC, or KeHE, which purchase, store, sell and deliver our products to Whole Foods and Sprouts, respectively. In the fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018, UNFI (which was Whole Foods’ distributor through March 2020) accounted for approximately 15%, 35%, and 36% of our net revenue, respectively, US Foods accounted for approximately 18%, 0%, and 0% of our net revenue, respectively, and KeHE accounted for approximately 12%, 11%, and 10% of our net revenue, respectively. We serve mainstream retailers by arranging for delivery of our products directly through their distribution centers. We also leverage distributor relationships to fulfill orders for certain independent grocers and other customers.

We have experienced consistent sales growth. We had net revenue of $214.3 million and $140.7 million, net income of $8.8 million and $2.4 million, and Adjusted EBITDA of $16.8 million and $6.4 million in the fiscal years ended December 27, 2020 and December 29, 2019, respectively. See the section titled “—Non-GAAP Financial Measure—Adjusted EBITDA” below for the definition of Adjusted EBITDA, as well as a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure stated in accordance with GAAP.

On August 4, 2020, we completed our initial public offering, or IPO, of 10,699,573 shares of common stock at an offering price of $22.00 per share. We issued and sold 5,040,323 shares of common stock and the selling stockholders sold 5,659,250 shares of common stock, including 1,395,596 shares of common stock sold by the selling stockholders pursuant to the underwriters’ exercise in full of their option to purchase additional shares. We received gross proceeds of approximately $110.9 million before deducting underwriting discounts, commissions and offering related transaction costs; we did not receive any proceeds from the sale of shares by the selling stockholders. Upon the closing of the IPO in August 2020, all of our then-outstanding shares of redeemable convertible preferred stock automatically converted into 8,192,876 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there were no shares of redeemable convertible preferred stock outstanding.The consolidated financial statements as of December 27, 2020, including share and per share amounts, include the effects of the IPO.

In November 2020, we completed a secondary public offering of 5,000,000 shares of common stock sold by selling stockholders, from which no proceeds were received and expenses incurred totaled $0.5 million.

COVID-19 Business Update

With the global spread of the ongoing COVID-19 pandemic in the fiscal year ended December 27, 2020, we established a cross-functional task force and have implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our business and our stakeholders, comprised of farmers and suppliers, customers and consumers, communities and the environment, crew members and stockholders. While we are not experiencing material adverse impacts at this time, given the global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the pandemic, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. We continue to closely monitor the COVID-19 situation as we evolve our business continuity plans and response strategy. In March 2020, the majority of our crew members at our headquarters transitioned to working remotely, and such remote work continues as of the date of this Annual Report. While the rollout of vaccines has begun, the timing of vaccinations, herd immunity, and the lifting of shelter in place and similar restrictions and movement restrictions is unknown, and virus mutations and variants may continue to restrict our ability to return to full onsite operations.

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Supply Chain

Egg Central Station continues to be operational and we have implemented a number of measures to prevent and mitigate any outbreak of COVID-19 at that facility; however, we are managing operations through “essential” on-site staff and flexible work arrangements, and may need to further modify or reduce operations due to the evolving effects of the COVID-19 pandemic.

We are working closely with our farmers, suppliers and third-party manufacturers to manage our supply chain activities and mitigate potential disruptions to our product supplies as a result of the COVID-19 pandemic. We currently expect to have an adequate supply of eggs to meet anticipated demand in fiscal 2021, as well as adequate capacity for packing and processing our eggs.

Additionally, as a result of the COVID-19 pandemic, there have been recent disruptions in the U.S. pasture-raised milk supply, including significant drops in prices and demand, which have resulted in the loss of suppliers. While we have worked with our co-manufacturers to mitigate these supply disruptions, and as a result there has been no impact on our ability to fill customer orders for pasture-raised butter or ghee products, we expect that these supply disruptions will continue for the foreseeable future and that they may be further exacerbated by the ongoing effects of the COVID-19 pandemic. If the COVID-19 pandemic persists for an extended period of time and further impacts egg or milk supply, or disrupts our essential distribution systems, we could experience disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our products, which would adversely impact our ability to generate sales of and revenues from our products.

Corporate Development

With cash and cash equivalents of $29.5 million as of December 27, 2020 and access to additional funds as a result of our IPO and under our credit facility agreement with PNC Bank, National Association, or the Credit Facility, we anticipate having sufficient liquidity to make investments in our business this fiscal year in support of our long-term growth strategy. Our IPO, which was completed on August 4, 2020, resulted in net proceeds to us of approximately $99.7 million, after deducting underwriting discounts, commissions and offering costs associated with the offering. We expect that our cash and cash equivalents as of December 27, 2020, together with cash provided by our operating activities, and availability of borrowings under our existing Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months and to make investments in our business in support of our long-term growth strategy.

Our future capital requirements will depend on many factors, including our pace of new and existing customer growth, our investments in innovation, our investments in partnerships and unexplored channels and the costs associated with our expansion of Egg Central Station. We may be required to seek additional equity or debt financing. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation and product expansion, we may not be able to compete successfully, which would harm our business, operations and results of operations.

Other Financial and Corporate Impacts

We believe recent increases in our net revenue have been driven in part by the impact of stay at home trends associated with COVID-19, as a result of which consumers have increased their purchases of staples such as eggs and butter. The $6.7 billion retail egg category grew 18.7% in 2020 as compared to the prior year, outpaced by the specialty egg segment growth of 25.5% versus the prior year and total Vital Farms pasture-raised eggs growth of 53.1% as compared to the prior year. We believe this growth is yet another indication that consumers are shifting their preferences to premium products, even in a highly commoditized category. The total egg category benefited from the increased eat-at-home trends during the onset of the COVID-19 pandemic, growing 40.6% in the second quarter as compared to the prior year period. Despite the pandemic persisting throughout the year, the total egg category growth has decelerated to 10.0% in the fourth quarter as compared to the prior year period. The specialty egg segment grew 37.3% in the second quarter as compared to the prior year period, compared to 21.5% in the fourth quarter as compared to the prior year period. Vital Farms pasture-raised eggs grew 74.3% in the second quarter as compared to the prior year period and 37.9% in the fourth quarter as compared to the prior year period. We believe this is indicative of a shift in consumer preferences resulting from the COVID-19 pandemic.

For the 52 weeks ended December 27, 2020, five million households purchased Vital Farms shell eggs, a 50% increase over the prior year. New purchasers, defined as households who purchased Vital Farms in 2020 and not in 2019, increased 55% over the prior year. Retained households, defined as households who purchased Vital Farms in 2020 and 2019, increased 38% over the prior year. Throughout 2020, Vital Farms retained more households each quarter, with 588 thousand buyers repeating egg purchases in both the third and fourth quarters.

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Additionally, we believe that COVID-19 has accelerated the demand for e-commerce options in the retail channel. For example, our online fresh grocery sales at a key retailer have increased 266% during the 52 weeks ended December 27, 2020 compared to the prior fiscal year; our “click & collect” sales at two national brick and mortar retailers have increased 542% and 174%, respectively, over the 52 weeks ended December 27, 2020 compared to the prior fiscal year; and our last mile delivery sales at a key partner have increased 249% year to date through the week ended December 27, 2020 compared to the same time period a year ago. This growth in e-commerce demand is compared to an increase of 52% for retail dollar sales overall for that same period for the 52 weeks ended December 27, 2020. We anticipate that our performance will be affected by the duration of COVID-19’s impact on stay at home trends, and we do not have certainty that these trends will continue. Our net revenue may be more variable as a result.

The extent to which COVID-19 impacts our ability to expand our household penetration, grow within the retail channel and execute on our corporate development objectives will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, and the effectiveness of actions taken globally to contain and treat the disease. For example, if remote work policies for certain portions of our business, or for our business partners, are extended longer than we currently expect, we may need to reassess our priorities and our corporate objectives for the fiscal year. Additionally, while the transition of the majority of our headquarters crew members to remote working in March 2020 has not materially disrupted our business operations, our financial close or reporting processes or the functioning of our internal controls, we are continuing to monitor these processes and may need to adjust them in the future as a result of the fluid nature of the COVID-19 pandemic and its impact on our operations.

Our Fiscal Year

We report on a 52-53-week fiscal year, ending on the last Sunday in December, effective beginning with the first quarter of fiscal 2018. In a 52-53-week fiscal year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. Our first 53-week fiscal year will be fiscal 2023, which we expect to begin on December 26, 2022 and end on December 31, 2023. See “Nature of the Business and Basis of Presentation” in Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report for additional details related to our fiscal calendar.

Key Factors Affecting Our Business

We believe that the growth of our business and our future success are dependent upon many factors. While each of these factors presents significant opportunities for us, they also pose important challenges that we must successfully address to enable us to sustain the growth of our business and improve our results of operations.

Expand Household Penetration

We have positioned our brand to capitalize on growing consumer interest in natural, clean-label, traceable, ethical, great-tasting and nutritious foods. We believe there is substantial opportunity to grow our consumer base and increase the velocity at which households purchase our products. U.S. household penetration for the shell egg category is approximately 98%, while the household penetration for our pasture-raised shell eggs is approximately 3.9%. We intend to increase household penetration by continuing to invest significantly in sales and marketing to educate consumers about our brand, our values and the premium quality of our products. We believe these efforts will educate consumers on the ethical value and the attractive attributes of pasture-raised food, generate further demand for our products and ultimately expand our consumer base. Our ability to attract new consumers will depend, among other things, on the perceived value and quality of our products, the offerings of our competitors and the effectiveness of our marketing efforts. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the U.S. natural food market in which we operate. Such factors include consumer preference, consumer confidence, consumer income, consumer perception of the safety and quality of our products and shifts in the perceived value for our products relative to alternatives.

Grow Within the Retail Channel

We believe that our ability to increase the number of customers that sell our products to consumers is an indicator of our market penetration and our future business opportunities. We define our customers as the entities that sell our products to consumers. With certain of our retail customers, like Whole Foods and Sprouts, we sell our products through distributors. We are not able to precisely attribute our net revenue to a specific retailer for products sold through such channels. We rely on third-party data to calculate the portion of retail sales attributable to such retailers, but this data is inherently imprecise because it is based on gross sales generated by our products sold at retailers, without accounting for price concessions, promotional activities or chargebacks, and because it measures retail sales for only the portion of our retailers serviced through distributors. Based on this third-party data and internal analysis, Whole Foods accounted for approximately 28% and 30% of our retail sales for the fiscal years ended December 27, 2020 and December 29, 2019, respectively, and Sprouts accounted for approximately 7% and 8% of our retail sales for the fiscal years ended December 27, 2020 and December 29, 2019, respectively.

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As of December 2020, there are more than 16,000 stores selling our products. We expect the retail channel to be our largest source of net revenue for the foreseeable future. By capturing greater shelf space, driving higher product velocities and increasing our SKU count, we believe there is meaningful runway for further growth with existing retail customers. Additionally, we believe there is significant opportunity to gain incremental stores from existing customers as well as by adding new retail customers. We also believe there is significant further long-term opportunity in additional distribution channels, including the convenience, drugstore, club, military and international markets. Our ability to execute on this strategy will increase our opportunities for incremental sales to consumers, and we also believe this growth will allow for margin expansion. To accomplish these objectives, we intend to continue leveraging consumer awareness of and demand for our brand, offering targeted sales incentives to our customers and utilizing customer-specific marketing tactics. Our ability to grow within the retail channel will depend on a number of factors, such as our customers’ satisfaction with the sales, product velocities and profitability of our products.

Expand Footprint Across Foodservice

We believe there is a significant opportunity to expand sales of our products in the foodservice channel in the medium- to long-term. In fiscal year ended December 27, 2020, the foodservice channel accounted for approximately 1% of our net revenue. Our brand has a differentiated value proposition with consumers, who we believe are increasingly demanding ethically produced ingredients when they eat outside of the home. Additionally, in January 2021, we began a partnership with Acosta Foodservice, U.S. foodservice sales and marketing agency in the consumer-packaged goods industry to increase our broadline distribution and presence in national and regional restaurant chains. We believe that more consumers will look for our products on menus, particularly with foodservice partners whose values are aligned with our own, and that on-menu branding of our products as ingredients in popular meals and menu items will drive traffic and purchases in the foodservice channel. We also believe that branded foodservice offerings will further help drive consumer awareness of our brand and purchase rates of our products in the retail channel. One example of our successful foodservice programs is with Tacodeli LLC, a popular chain based in Austin, Texas, which sells breakfast tacos made exclusively with our pasture-raised shell eggs across 11 restaurant locations and approximately 90 points of distribution, such as coffee shops and farmers market stands, across Texas. We have launched similar regional concepts with Moe’s Broadway Bagel, an East Coast-style family-run bagel chain in the Denver/Boulder, Colorado area; Cafe Patachou, a breakfast and lunch restaurant based in the Indianapolis, Indiana area with 5 locations; Roam Artisan Burgers, a fast-casual burger restaurant dedicated to high-quality sourcing in the San Francisco, California area with 6 locations; Homegrown, a sustainability-focused brand in the Seattle, Washington area with 11 locations; and Pura Vida, a fresh all-day concept in the Miami, Florida area with 7 locations. We also believe there is significant additional opportunity in micro-markets, corporate offices, the hospitality industry, and colleges and universities in the medium- to long-term. We intend to continue to invest in relationships with foodservice operators, including to support joint marketing and advertising of our products. Expansion in this channel will depend on the health of the foodservice industry generally and on our ability to successfully partner with foodservice operators in a manner that leverages and reinforces our value proposition with consumers.

Expand Our Product Offerings

We intend to continue to strengthen our product offerings by investing in innovation in new and existing categories. We launched pasture-raised hard-boiled eggs in 2018, pasture-raised ghee and liquid whole eggs in 2019 and egg bites in August 2020. We believe there is opportunity to expand in the future into the refrigerated value-added dairy category, among others. Eggs generated $196.7 million, or approximately 92%, of net revenue in fiscal 2020. We expect eggs will be our largest source of net revenue for the foreseeable future. We believe that investments in innovation will contribute to our long-term growth, including by reinforcing our efforts to increase household penetration. Our ability to successfully develop, market and sell new products will depend on a variety of factors, including the availability of capital to invest in innovation, as well as changing consumer preferences and demand for food products.

Components of Results of Operations

Net Revenue

We generate net revenue primarily from sales of our products, including pasture-raised eggs, pasture-raised butter and other ethically produced food, to our customers, which include natural retailers, mainstream retailers and foodservice partners. We sell our products to customers on a purchase-order basis. We serve the majority of our natural channel customers and certain independent grocers and other customers through food distributors, which purchase, store, sell and deliver our products to these customers.

We periodically offer sales incentives to our customers, including rebates, temporary price reductions, off-invoice discounts, retailer advertisements, product coupons and other trade activities. We record a provision for sales incentives at the later of the date at which the related revenue is recognized or when the sales incentive is offered. At the end of each accounting period, we recognize a liability for an estimated promotional allowance reserve. We periodically provide credits or discounts to our customers in the event that products do not conform to customer expectations upon delivery or expire at a customer’s site. We treat these credits and discounts, when accepted by customers, as a reduction of the sales price of the related transaction. We anticipate that these promotional activities, credits and discounts could impact our net revenue and that changes in such activities could impact period-over-period results.

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Our pasture-raised shell eggs are sold to consumers at a premium price point, and when prices for commodity shell eggs fall relative to the price of our pasture-raised shell eggs, price-sensitive consumers may choose to purchase commodity shell eggs offered by our competitors instead of our pasture-raised eggs. As a result, low commodity shell egg prices may adversely affect our net revenue. Net revenue may also vary from period to period depending on the purchase orders we receive, the volume and mix of our products sold, and the channels through which our products are sold.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of broker and contractor fees for sales and marketing, and personnel costs for sales and marketing, finance, human resources and other administrative functions, consisting of salaries, benefits, bonuses, stock-based compensation expense and sales commissions. Selling, general and administrative expenses also include advertising and digital media costs, agency fees, travel and entertainment costs, and costs associated with consumer promotions, product samples, sales aids incurred to acquire new customers, retain existing customers and build our brand awareness, overhead costs for facilities, including associated depreciation and amortization expenses, and information technology-related expenses.

Shipping and Distribution

Shipping and distribution expenses consist primarily of costs related to third-party freight for our products. We expect shipping and distribution expenses to increase in absolute dollars in the medium to long term, as we continue to scale our business.

The following table sets forth our results of operations for the periods presented (in thousands):

Fiscal Year Ended

Operating expenses:

Other (expense) income, net:

Other (expense) income, net (86 ) 1,417 9

Total other (expense) income, net (574 ) 1,068 (415 )

Less: Net income (loss) attributable to noncontrolling interests 84 927 (168 )

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The following table sets forth our consolidated statements of operations data expressed as a percentage of net revenue for the periods presented:

Fiscal Year Ended

Amount % of Revenue Amount % of Revenue Amount % of Revenue

(dollars in thousands)

Operating expenses:

Other (expense) income, net:

Other (expense) income, net (86 ) — 1,417 1 % 9 —

Total other (expense) income, net (574 ) — 1,068 1 % (415 ) —

Fiscal Year Ended December 27, 2020 Compared to Fiscal Year Ended December 29, 2019

Net Revenue

Fiscal Year Ended

(in thousands)

The increase of $73.5 million, or 52%, was primarily driven by an increase in egg gross sales of $77.9 million and an increase in gross butter sales of $4.9 million. The increases were partially offset by an increase of $7.6 million of sales incentives offered to our customers as our volume has grown. The $7.6 million of sales incentives includes a reduction of $0.6 million of incentive settled in 2020 that related to a prior year’s gross sales. The increases in egg sales and butter sales were primarily due to volume increases to our distributors, including as a result of continued trends associated with COVID-19 whereby consumers increased their purchases of staples of eggs and butter, a higher turnover rate of sales to our retail customers, and new distribution at new and existing customers. We do not have certainty that any COVID-19 trends will continue. Net revenue from sales through our retail channel was $208.5 million and $136.5 million for fiscal 2020 and 2019, respectively, net revenue of sales through our foodservice channel was $3.1 million and $3.4 million for fiscal 2020 and 2019, and net revenue from sales to wholesalers and egg breaking plants was $2.6 million and $0.8 million for fiscal 2020 and 2019.

Gross Profit and Gross Margin

Fiscal Year Ended

(in thousands)

Gross margin 35 % 30 % 4 %

The increase in gross profit of $31.7 million, or 74%, was primarily driven by an increase in net revenue. Gross margin increased 431 basis points in fiscal 2020 as compared to fiscal 2019. The increase in gross margin was primarily driven by the following:

• 419 basis points lower material costs for eggs and butter; and

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• 12 basis points volume leverage over direct labor and overhead costs.

These factors, which contributed to an increase in gross margin, were partially offset by an increase in other material costs.

Operating Expenses

Selling, General and Administrative

Fiscal Year Ended

(in thousands)

Percentage of net revenue 22 % 21 %

Selling, general, and administrative expenses as a percent of net sales increased by $17.9 million, or 61% in fiscal 2020. Selling, general, and administrative expenses as a percentage of net sales increased to 22% in fiscal 2020. The increase in selling, general, and administrative expenses was primarily driven by:

Shipping and Distribution

Fiscal Year Ended

(in thousands)

Percentage of net revenue 7 % 7 %

The increase of $4.9 million, or 49%, was primarily driven by an increase in sales volume that resulted in increased costs related to third-party freight for our products.

Other (Expense) Income, Net

Fiscal Year Ended

(in thousands)

Percentage of net revenue — 1 %

The increase of $1.5 million in other expense, net, or 106%, was primarily due to a one-time January 2019 gain of $1.2 million in connection with the settlement of claims made pursuant to a lawsuit in which Ovabrite was the defendant and a countersuit in which Ovabrite was the plaintiff. The remaining $0.3 million increase was primarily due to a write off of implementation costs for software no longer in use.

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Provision for Income Taxes

Fiscal Year Ended

(in thousands)

The increase of $1.7 million, or 150%, was primarily driven by an increase in net income before taxes due to higher net revenue and improved gross margin.

Net (Loss) Income Attributable to Noncontrolling Interests

Fiscal Year Ended

(in thousands)

Net income attributable to noncontrolling interests $ 84 $ 927 $ (843 ) (91 )%

The decrease of $0.8 million in net income attributable to noncontrolling interests, or 91%, was primarily driven by the non-recurring settlement of the Ovabrite lawsuit in January 2019.

Fiscal Year Ended December 29, 2019 Compared to Fiscal Year Ended December 30, 2018

For the discussion of the financial condition and results of operations for the year ended December 29, 2019 compared to the year ended December 30, 2018, refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of the Fiscal Years Ended December 30, 2018 and December 29, 2019” in our final prospectus filed with the Securities and Exchange Commission on November 12, 2020 pursuant to Rule 424(b) under the Securities Act of 1933.

Non-GAAP Financial Measures

Adjusted EBITDA

We report our financial results in accordance with GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance.

We calculate Adjusted EBITDA as net income (loss), adjusted to exclude: (1) depreciation and amortization; (2) provision for income taxes; (3) stock-based compensation expense; (4) interest expense; (5) interest income; (6) change in fair value of contingent consideration; and (7) net litigation settlement gain.

Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance with GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business, determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.

Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Some of the limitations of Adjusted EBITDA include that (1) it does not properly reflect capital commitments to be paid in the future, (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures, (3) it does not consider the impact of stock-based compensation expense, (4) it does not reflect other non-operating expenses, including interest expense, (5) it does not consider the impact of any contingent consideration liability valuation adjustments and (6) it does not reflect tax payments that may represent a reduction in cash available to us. In addition, our use of Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net income and other results stated in accordance with GAAP.

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The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure stated in accordance with GAAP, for the periods presented:

Fiscal Year Ended

Change in fair value of contingent consideration (1) (333 ) 70 92

Interest income (97 ) (181 ) (9 )

Net litigation settlement gain (2) (20 ) (1,200 ) (1,000 )

Contractual Obligations and Commitments

Payments Due by Period

Total Less than 1 Year 1 to 3 Years 4 to 5 Years More than 5 Years

(in thousands)

Capital lease obligations $ 798 $ 471 $ 327 $ — $ —

We purchase our egg inventories under long-term supply contracts with farms. Purchase commitments contained in these arrangements are variable dependent upon the quantity of eggs produced by the farms. As a result, these commitments have been excluded from the contractual obligations disclosed above. In addition, substantially all of the long-term supply contracts with farms contain components that meet the definition of embedded leases under ASC Topic 840, Leases. As total purchase commitments contained under these arrangements are variable, the amount attributable to the lease component are contingent rentals, and there are no minimum lease payments associated with these long-term supply contracts. See Note 16 to our consolidated financial statements included elsewhere for additional details related to our long-term supply contracts with farms.

Liquidity and Capital Resources

Since inception, we have funded our operations with proceeds from sales of our capital stock, proceeds from borrowings and cash flows from the sale of our products. We had net income of $8.8 million for the year ended December 27, 2020, and retained earnings of $14.0 million as of December 27, 2020. We completed our IPO on August 4, 2020 resulting in net proceeds to us of approximately $99.7 million, after deducting underwriting discounts, commissions and offering costs associated with the offering. We expect that our cash and cash equivalents, together with cash provided by our operating activities, and available borrowings under our existing Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months. Our future capital requirements will depend on many factors, including our pace of new and existing customer growth, our investments in innovation, our investments in partnerships and unexplored channels and the costs associated with our expansion of Egg Central Station. As of December 27, 2020, we expect to spend $25 million on our expansion of Egg Central Station. If we are required to seek additional equity or debt financing, we may not be able to raise such funding on terms acceptable to us or at all. Further, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation and product expansion, we may not be able to compete successfully, which would harm our business, operations and financial condition.

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Credit Facility

We originally entered into our Credit Facility with PNC Bank, National Association, or PNC Bank in October 2017. The Credit Facility initially included a $7.9 million term loan, a $15.0 million revolving line of credit and an equipment loan with a maximum borrowing capacity of $3.0 million and matures in October 2022.

In April 2018, we entered into amended loan agreements with PNC Bank, which we refer to as the First Amendment Loan and the Second Amendment Loan, respectively. The First Amendment Loan amended the Credit Facility to decrease the maximum borrowings under the equipment loan from $1.5 million to $750,000, and to waive existing events of default. The Second Amendment Loan amended the Credit Facility to modify various definitions and terms that were not significant.

In February 2019, we entered into the Third Amendment to our Credit Facility, which we refer to as the Third Amendment Loan. The Third Amendment Loan amended the Credit Facility to waive existing events of default.

In February 2020, we entered into the Fourth Amendment to our Credit Facility, which we refer to as the Fourth Amendment Loan. The Fourth Amendment Loan amended certain terms and conditions under our Credit Facility and increased the maximum borrowing capacity of the Credit Facility to $17.7 million. In addition, the Fourth Amendment Loan increased our maximum borrowing capacity under the equipment loan to $3.0 million and extended the borrowing period for the equipment loan from October 2019 to October 2021.

In May 2020, we entered into the Fifth Amendment to our Credit Facility, which we refer to as the Fifth Amendment Loan. The Fifth Amendment Loan amended or waived certain terms and conditions under the Credit Facility and increased the maximum borrowing capacity of the Credit Facility to $22.7 million. In addition, the Fifth Amendment Loan increased the maximum borrowing capacity under the revolving line of credit to $15.0 million.

In June 2020, we entered into the Sixth Amendment to our Credit Facility, which we refer to as the Sixth Amendment Loan. The Sixth Amendment Loan amended certain terms and conditions under our Credit Facility and increased the maximum borrowing capacity of the Credit Facility to $25.9 million. In addition, the Sixth Amendment Loan refinanced our term loan and provided for the borrowing of an additional $5.0 million, resulting in the issuance of an amended and restated secured term loan note in the amount of $7.9 million.

Borrowings under the amended and restated term loan are repayable in monthly installments of principal and interest, followed by a balloon payment of all unpaid principal and accrued and unpaid interest due July 2027. Interest on borrowings under the amended and restated term loan accrues at a rate, at our election at the time of borrowing, equal to (i) LIBOR plus 3.25% or (ii) 2.25% plus the sum of the Federal Funds Open Rate plus 50 basis points and the Daily LIBOR Rate plus 100 basis points. As of December 27, 2020, there was $0 outstanding under the amended and restated term loan which was fully paid off in December 2020.

The maximum borrowing capacity under the revolving line of credit is $15.0 million. Interest on borrowings under the revolving line of credit, as well as loan advances thereunder, accrues at a rate, at our election at the time of borrowing, equal to (i) LIBOR plus 2.25% or (ii) 1.25% plus the alternate base rate. In April 2020, all outstanding amounts under the Revolving Line of Credit were repaid and the interest rate applicable to borrowings under the revolving line of credit was 4.5%.

The maximum borrowing capacity under the equipment loan is $3.0 million, subject to certain restrictions. Any borrowings under the equipment loan from October 2018 through October 2021 will be due and payable beginning the following month with 36 monthly installments of principal due through October 2022, and all accrued and unpaid interest due October 2022. Interest on borrowings under the equipment loan accrues at a rate, at our election at the time of borrowing, equal to (i) LIBOR plus 3.00% or (ii) 2.00% plus the alternate base rate. In September 2020, all outstanding amounts under the Equipment Loan were repaid using cash provided by operations.

In July 2020, we entered into the Seventh Amendment to our Credit Facility, which we refer to as the Seventh Amendment Loan. The Seventh Amendment Loan amended the Credit Facility to modify various definitions and terms in anticipation of our IPO.

In October 2020, we entered into the Eighth Amendment to our Credit Facility, which we refer to as the Eighth Amendment Loan. The Eighth Amendment Loan amended the Credit Facility to modify various definitions.

The Credit Facility is secured by all of our assets and requires us to maintain two financial covenants: a fixed charge coverage ratio and a leverage ratio. The Credit Facility also contains various covenants relating to limitations on indebtedness, investments and acquisitions, mergers, consolidations, the sale of properties and liens and capital expenditures. In addition, the Credit Facility imposes limitations on our ability to pay dividends or distributions on any equity interests, declare any stock splits or reclassifications of our stock, apply any of our funds, property or assets to purchase, redeem or retire any of our equity interests, or to purchase, redeem or retire any of our options to purchase any of our equity interests. As a result of the limitations contained in the Credit Facility, all of the net assets on our consolidated balance sheet as of December 27, 2020 are restricted in use. The Credit Facility contains other customary covenants, representations and events of default.

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In December 2020, the outstanding balance of the Credit Facility was fully paid off. As of the loan pay off date, we were in compliance with all covenants under the Credit Facility. See “Long-Term Debt” in Note 10 to our consolidated financial statements included elsewhere in this Annual Report for additional details related to our Credit Facility.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Fiscal Year Ended

(in thousands)

Net cash provided by (used in) operating activities $ 11,702 $ (5,352 ) $ 11,424

Net cash provided by (used in) financing activities 94,410 434 (1,509 )

Operating Activities

In fiscal 2020, net cash provided by operating activities was $11.7 million and was primarily driven by net income of $8.8 million, total non-cash items of $6.7 million, and a decrease in net working capital items of $3.9 million. Non-cash items primarily consisted of depreciation and amortization of $2.6 million, non-cash stock-based compensation expense of $2.5 million and deferred income taxes of $1.8 million. The change in net working capital items was primarily due to a $1.8 million increase in accounts payable, a $0.2 million decrease in income taxes receivable, partially offset by a $2.3 million increase in prepaids and other current assets, a $4.7 million increase in accounts receivable, and a $1.2 million increase in accrued liabilities. The increases in prepaid expenses and other current assets were primarily due to prepaid insurance offset by a reduction in prepaid transaction costs associated with our IPO. The increases in accounts payable were primarily due to an increase in amounts due to our partner farms. The increases in accrued liabilities were primarily due to increases in accrued payroll and accrued promotions, offset by lower accruals related to the timing of vendor invoices.

In fiscal 2019, net cash used in operating activities was $5.4 million resulting primarily from net cash used in changes in our operating assets and liabilities of $12.2 million, partially offset by noncash charges of $3.5 million and net income of $3.3 million. Net cash used in changes in our operating assets and liabilities for fiscal 2019 consisted primarily of increases in inventories, accounts receivable, income taxes receivable and prepaid expenses and other current assets of $9.2 million, $6.2 million, $1.5 million and $0.6 million, respectively, partially offset by increases in accounts payable of $3.2 million and increases in accrued and other liabilities of $2.1 million. The increases in accounts receivable were primarily due to new customers and distribution centers, in addition to increased orders from our existing customers, while the increases in inventories were primarily due to a significant increase in egg inventory and packaging inventory to support anticipated demand. The increases in prepaid expenses and other current assets were primarily due to transaction costs associated with our IPO. The increases in accounts payable were primarily due to increase in amounts due to our partner farms for lost income as a result of removing birds from current flocks ahead of schedule and additional increases in shipping and packaging costs. The increases in accrued liabilities were primarily due to timing of vendor invoices.

In fiscal 2018, net cash provided by operating activities was $11.4 million resulting primarily from net income of $5.6 million, an increase in accounts payable of $4.9 million, an increase in accrued liabilities of $2.9 million and non-cash charges of $3.1 million, partially offset by an increase in accounts receivable of $3.6 million, an increase in inventory of $1.0 million, and an increase in prepaid expenses and other current assets of $0.5 million. The increases in accounts payable and accrued expenses were primarily due to increases in a payment associated with an over recovery of promotions related to a customer and overall increase to inventory purchases and payroll related costs associated with our continued growth. The increases in accounts receivable were primarily due to new customers and distribution centers, in addition to increased orders from our existing customers. The increases in prepaid expenses and other current assets were primarily due to our gain contingency in connection with our lawsuit settlement in which we were the plaintiff.

Investing Activities

In fiscal 2020, net cash used in investing activities was $77.8 million resulting primarily from $68.4 million of purchases of available-for-sale securities, $10.3 million of purchases of property, plant and equipment used in ongoing operations, offset by $0.8 million received from repayment of notes receivable from related parties.

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In fiscal 2019, net cash used in investing activities was $5.6 million, resulting primarily from purchases of property, plant and equipment used in ongoing operations of $4.8 million and the issuance of notes receivable of $0.8 million to related parties.

In fiscal 2018, net cash used in investing activities was $1.9 million, resulting primarily from purchases of property, plant and equipment used in ongoing operations.

Financing Activities

In fiscal 2020, net cash provided by financing activities was $94.4 million which primarily consisted of net proceeds of $99.7 million from the issuance of common stock from our IPO, $6.5 million from borrowings under the Credit Facility, $0.3 million from the exercise of warrants and proceeds of $0.2 million from the exercise of stock options, partially offset by $11.6 million of repayments under our Credit Facility, and $0.5 million of repayments of our capital lease obligations.

In fiscal 2019, net cash provided by financing activities was $0.4 million, which primarily consisted of $15.0 million of gross proceeds from our issuance of common stock to Manna Tree Partners, less issuance costs of $0.9 million, proceeds of $1.3 million and $0.6 million under our revolving line of credit and equipment loan, respectively, and proceeds of $0.2 million from the exercise of stock options, partially offset by our repurchase of common stock of $14.3 million, $0.7 million of principal repayments in association with our Credit Facility, $0.4 million of deferred royalty payments related to our 2014 acquisition of certain assets of Heartland Eggs and $0.4 million of principal payments under our capital lease obligations.

In fiscal 2018, net cash used in financing activities was $1.5 million, primarily consisting of $0.4 million of deferred royalty payments related to our 2014 acquisition of certain assets of Heartland Eggs, $0.7 million of principal payments under our Credit Facility and $0.4 million of principal payments under our capital lease obligations.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 27, 2020:

Payments Due by Period

Total Less than 1 Year 1 to 3 Years 4 to 5 Years More than 5 Years

(in thousands)

Capital lease obligations $ 798 $ 471 $ 327 $ — $ —

We purchase our egg inventories under long-term supply contracts with farms. Purchase commitments contained in these arrangements are variable dependent upon the quantity of eggs produced by the farms. As a result, these commitments have been excluded from the contractual obligations disclosed above. In addition, substantially all of the long-term supply contracts with farms contain components that meet the definition of embedded leases under ASC Topic 840, Leases. As total purchase commitments contained under these arrangements are variable, the amount attributable to the lease component are contingent rentals, and there are no minimum lease payments associated with these long-term supply contracts. See Note 18 to our consolidated financial statements included elsewhere in this Annual Report for additional details related to our long-term supply contracts with farms.

Long-Term Debt Obligations

In June 2020, we entered into the Sixth Amendment Loan, which amended certain terms and conditions under the Credit Facility and increased the maximum borrowing capacity of the Credit Facility to $25.9 million. In addition, the Sixth Amendment Loan refinanced our term loan, providing for the borrowing of an additional $5.0 million, resulting in the issuance of an amended and restated secured term loan note in the amount of $7.9 million.

In December 2020, the outstanding balance of the Credit Facility was fully paid off.

Operating Lease Commitments

In May 2020, we entered into a lease agreement for warehouse space in Springfield, Missouri for 13,000 rentable pallet spaces. We have the option to exceed the 3,750 pallet spaces through September 30, 2023, the lease expiration date. The monthly lease payments, which include base rent charges of approximately $0.1 million, are subject to periodic rent increases through September 2023.

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Seasonality

Demand for our products fluctuates in response to seasonal factors. Demand tends to increase with the start of the school year and is highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter and the lowest during the summer months. As a result of these seasonal and quarterly fluctuations, comparisons of our sales and results of operations between different quarters within a single fiscal year are not necessarily meaningful comparisons.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and related notes thereto. The future effects of the COVID-19 pandemic on our results of operations, cash flows and financial position are unclear. However, we believe we have used reasonable estimates and assumptions in preparing the consolidated financial statements. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. Such estimates principally include revenue recognition, determination of useful lives for property and equipment, goodwill, contingent consideration, allowance for doubtful accounts, inventory obsolescence, valuation of common stock, stock option valuations, redeemable noncontrolling interest, accrual liabilities and income taxes.

The significant accounting policies and estimates used in preparation of the consolidated financial statements are described in our audited consolidated financial statements as of and for the fiscal year ended December 29, 2019, and the notes thereto. Except as detailed in Note 2 to our consolidated financial statements included in this Annual Report, there have been no material changes to our significant accounting policies during the fiscal year ended December 27, 2020.

Recent Accounting Pronouncements

See the sections titled “Summary of Significant Accounting Policies—Recently adopted accounting pronouncements” and “—Recently issued accounting pronouncements not yet adopted” in Note 2 to our consolidated financial statements included elsewhere in this Annual Report for a discussion of recent accounting pronouncements.

Emerging Growth Company Status

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in raw materials, ingredients, inflation and interest rates.

Raw Materials Pricing Risk

The packaging materials used for our products include cardboard, glass, corrugated fiberboard, kraft paper, flexible plastic, flexible film and paperboard. These raw materials are subject to price fluctuations that may create price risk. A hypothetical 10% increase or decrease in the weighted-average cost of these raw materials as of December 27, 2020 would have resulted in an increase or decrease to cost of sales for the year ended December 27, 2020 of approximately $1.6 million. We seek to mitigate the impact of raw materials cost increases by negotiating pricing agreements. We strive to offset the impact of raw materials cost increases with a combination of cost savings initiatives and efficiencies and price increases to our customers.

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Ingredient Risk

We source our pasture-raised eggs and milk for our products from our network of small family farms. The price we pay to purchase shell eggs from farmers fluctuates based on pallet weight, and under our buy-sell contracts, which account for 98% of the laying hens in our network of family farms as of December 27, 2020, the price we pay is also indexed quarterly in arrears for changes in feed cost, which may cause our agreed-upon pricing under these contracts to fluctuate on a quarterly basis. Under the remainder of our contracts, we are directly responsible for purchasing feed. Either type of contract subjects us to risk of price fluctuations in feed ingredients, primarily consisting of corn and soy. We do not attempt to hedge against fluctuations in the prices of these ingredients by using future, forward, option or other derivative instruments. A hypothetical 10% increase or decrease in the weighted-average cost of these ingredients as of December 27, 2020 would have resulted in an increase or decrease to cost of sales for the year ended December 27, 2020 of approximately $3.4 million. We strive to offset the impact of ingredient cost increases with a combination of cost savings initiatives and efficiencies and price increases to our customers.

Inflation Risk

We do not believe that inflation has had a material effect on our business, results of operations or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations and financial condition.

Interest Rate Risk

We are subject to interest rate risk in connection with our credit facility agreement with PNC Bank, National Association, or the Credit Facility. See the section titled “—Liquidity and Capital Resources—Credit Facility” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Annual Report. Based on the average interest rate on the instruments under the Credit Facility during the fiscal year ended December 27, 2020, and to the extent that borrowings were outstanding, we do not believe that a hypothetical 10% change in the interest rate would have a material effect on our results of operations or financial condition for the fiscal year ended December 27, 2020.

Our interest-earning instruments also carry a degree of interest rate risk. As of December 27, 2020, we had cash and cash equivalents of 29.5 million and investments in available for sale securities of $68.4 million

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

Foreign Currency Exchange Risk

All of our sales are denominated in U.S. dollars, and therefore our net revenue is not currently subject to significant foreign currency risk. We purchase certain equipment from foreign countries, and the cost related to this equipment is denominated in the currency of the applicable country. Additionally, to the extent our sourcing strategy changes or we commence generating revenue outside of the United States that is denominated in currencies other than the U.S. dollar, our results of operations could be impacted by changes in exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. A hypothetical 10% change in the relative value of the U.S. dollar to other currencies would not have had a material effect on our results of operations for the fiscal year ended December 27, 2020.

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Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Report of Independent Registered Accounting Firm 61

Consolidated Balance Sheets 62

Consolidated Statements of Operations 63

Consolidated Statements of Comprehensive Income 64

Consolidated Statements of Cash Flows 66

Notes to the Consolidated Financial Statements 67

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Vital Farms, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Vital Farms, Inc. and subsidiaries (the Company) as of December 27, 2020 and December 29, 2019, the related consolidated statements of operations, comprehensive income, redeemable convertible preferred stock, redeemable noncontrolling interest and stockholders’ equity, and cash flows for each of the years in the three‐year period ended December 27, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 2020 and December 29, 2019, and the results of its operations and its cash flows for each of the years in the three‐year period ended December 27, 2020, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2019.

Austin, Texas

March 24, 2021

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VITAL FARMS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

Assets

Current assets:

Investment securities available-for-sale 68,357 —

Prepaid expenses and other current assets 3,965 2,706

Notes receivable from related party — 831

Deposits and other assets 142 151

Current liabilities:

Current portion of long-term debt — 2,160

Lease obligation, current 471 449

Contingent consideration, current 109 270

Long-term debt, net of current portion — 2,896

Lease obligation, net of current portion 327 797

Contingent consideration, non-current 18 382

Deferred tax liabilities, net 2,537 755

Other liability, non-current 192 272

Commitments and contingencies (Note 16)

Redeemable noncontrolling interest 175 175

Stockholders’ equity:

Accumulated other comprehensive loss (31 ) —

Noncontrolling interests 163 79

See accompanying notes to the consolidated financial statements.

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VITAL FARMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

Fiscal Year Ended

Operating expenses:

Other (expense) income, net:

Other (expense) income, net (86 ) 1,417 9

Total other (expense) income, net (574 ) 1,068 (415 )

Less: Net income (loss) attributable to noncontrolling interests 84 927 (168 )

Net income per share attributable to Vital Farms, Inc. stockholders:

Weighted average common shares outstanding:

See accompanying notes to the consolidated financial statements

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VITAL FARMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

Fiscal Year Ended

Other comprehensive loss

Unrealized holding loss on available-for-sale securities, net of tax (31 ) — —

See accompanying notes to the consolidated financial statements.

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VITAL FARMS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share amounts)

Issuance of redeemable noncontrolling interest — — 25 — — — — — — — — — 0

Exercise of stock options — — — 12,546 — — — 40 — — 40 — 40

Stock-based compensation expense — — — — — — — 600 — — 600 — 600

Stock-based compensation expense — — — — — — — 1,029 — — 1,029 — 1,029

Vested restricted stock — — — 3,097 — — — — — — — — —

Stock-based compensation expense — — — — — — — 2,509 — — 2,509 — 2,509

Other comprehensive loss, net — — — — — — — — (31 ) (31 ) — (31 )

See accompanying notes to the consolidated financial statements.

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VITAL FARMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

Fiscal Year Ended

Cash flows provided by (used in) operating activities:

Amortization of debt issuance costs 68 9 71

Bad debt (recovery) expense (108 ) 304 —

Change in fair value of contingent consideration (333 ) 70 92

Loss on write-off of construction in progress 259 — —

Non-cash interest income (33 ) — —

Changes in operating assets and liabilities:

Income taxes receivable 61 (1,563 ) —

Prepaid expenses and other current assets (2,255 ) (582 ) (520 )

Deposits and other assets 11 93 (63 )

Net cash provided by (used in) operating activities $ 11,702 $ (5,352 ) $ 11,424

Cash flows used in investing activities:

Purchases of property, plant and equipment (10,300 ) (4,799 ) (1,940 )

Purchases of available-for-sale debt securities (68,388 ) — —

Proceeds from the sale of property, plant and equipment — 7 29

Notes receivable provided to related parties — (4,031 ) —

Repayment of notes receivable provided to related parties 846 3,200 —

Net cash used in investing activities $ (77,842 ) $ (5,623 ) $ (1,911 )

Cash flows provided by (used in) financing activities:

Proceeds from borrowings under term loan 5,000 — —

Proceeds from borrowings under equipment loan 1,461 587 —

Proceeds from Paycheck Protection Program loan 2,593 — —

Proceeds from issuance of redeemable noncontrolling interest — — 25

Proceeds from issuance of common stock, net of issuance costs — 14,097 —

Proceeds from borrowings under revolving line of credit — 1,325 —

Repayment of revolving line of credit (1,325 ) — —

Repayment of equipment loan (2,015 ) — —

Repayment of Paycheck Protection Program loan (2,593 ) — —

Repurchase of common stock — (14,289 ) —

Payment of contingent consideration (192 ) (409 ) (494 )

Principal payments under finance lease obligation (449 ) (428 ) (409 )

Proceeds from exercise of stock options 221 222 40

Proceeds from exercise of warrant 283 — —

Net cash provided by (used in) financing activities $ 94,410 $ 434 $ (1,509 )

Cash and cash equivalents at beginning of the period 1,274 11,815 3,811

Cash and cash equivalents at end of the period $ 29,544 $ 1,274 $ 11,815

Supplemental disclosure of cash flow information:

Supplemental disclosure of non-cash investing and financing activities:

See accompanying notes to the consolidated financial statements.

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VITAL FARMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

1. Nature of the Business and Basis of Presentation

Vital Farms, Inc. (“Vital Farms” or “the Company”) was incorporated in Delaware on June 6, 2013 and is headquartered in Austin, Texas. Vital Farms packages, markets and distributes pasture-raised shell eggs, pasture-raised butter and other products. These products are sold under the trade names Vital Farms, Alfresco Farms, Lucky Ladies and RedHill Farms, primarily to retail foodservice channels in the United States.

Vital Farms Missouri, LLC, Backyard Eggs, LLC, Barn Door Farms, LLC and Sagebrush Foodservice, LLC are all wholly owned subsidiaries of Vital Farms. All significant intercompany transactions and balances have been eliminated in the audited consolidated financial statements.

Fiscal Year: The Company’s fiscal year ends on the last Sunday in December and contains either 52 or 53 weeks. Therefore, the financial results of certain 53-week years will not be exactly comparable to the prior and subsequent 52-week years. The years ended December 27, 2020, December 29, 2019, and December 30, 2018 all contain operating results for 52 weeks.

Impact of COVID-19 Pandemic: Due to the ongoing COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on the Company’s business. The Company does not currently anticipate that the COVID-19 pandemic will have a material impact on the timelines for the Company’s product development and expansion efforts. However, the extent to which the COVID-19 pandemic impacts the Company’s business, product development and expansion efforts, corporate development objectives and the value of and market for the Company’s common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, and the effectiveness of actions taken globally to contain and treat the disease, including the roll-out of vaccines. The global economic slowdown, the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Forward Stock Split: In July 2020, the board of directors and the stockholders of the Company approved a 2.46-for-1 forward stock split of the Company’s outstanding common stock and preferred stock, which was effected on July 22, 2020. Stockholders entitled to fractional shares as a result of the forward stock split received a cash payment in lieu of receiving fractional shares. All common stock, preferred stock, and per share information has been retroactively adjusted to give effect to this forward stock split for all periods presented. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately increased and the respective per share value and exercise prices, if applicable, were proportionately decreased in accordance with the terms of the agreements governing such securities. There were no changes in the par values of the Company’s common stock and preferred stock as a result of the forward stock split.

Initial Public Offering: In August 2020, the Company completed its initial public offering (“IPO”) of 10,699,573 shares of common stock at an offering price of $22.00 per share. The Company offered 5,040,323 shares of common stock and the selling stockholders offered an additional 5,659,250 shares of common stock, including the underwriter’s option to purchase up to an additional 1,395,596 shares of common stock from the selling stockholders. The Company received gross proceeds of approximately $110,887 before deducting underwriting discounts, commissions and offering related transaction costs; the Company did not receive any proceeds from the sale of shares by the selling stockholders. Upon the closing of the IPO in August 2020, all of the then-outstanding shares of preferred stock automatically converted into 8,192,876 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. The consolidated financial statements as of December 27, 2020, including share and per share amounts, include the effects of the IPO.

Secondary Public Offering: In November 2020, the Company completed a secondary public offering of 5,000,000 shares of common stock from selling stockholders in which no proceeds from the sale of shares were received by the Company and the Company incurred $0.5 million of expenses.

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2. Summary of Significant Accounting Policies

Use of Estimates:The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates principally include revenue recognition, determination of useful lives for property and equipment, trade spend accruals, goodwill, allowance for doubtful accounts, inventory obsolescence, valuation of common stock prior to IPO, stock option valuations, accrual liabilities and income taxes. Actual results could differ from those estimates.

The Company does not currently anticipate that the COVID-19 pandemic will have a material impact on the timelines for the Company’s product development and expansion efforts and the Company’s corporate development objectives. However, future COVID-19 developments are highly uncertain and unpredictable at this time; therefore, our estimates and assumptions about future events cannot be determined with certainty and require the use of management’s judgment.As of the date of issuance of these consolidated financial statements, the Company is not aware of any specific event or circumstance related to the ongoing COVID-19 pandemic that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s consolidated financial statements.

Deferred Offering Costs: The Company capitalized certain legal, accounting and other third-party fees that are directly related to the Company’s in-process equity financings until such financings were completed. Upon closing the IPO in August 2020, all deferred offering costs were reclassified from prepaid and other current assets and recorded against the IPO proceeds reducing additional paid-in capital.

Concentrations of Credit Risk and Significant Customers: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains deposits with large financial institutions that the Company believes are of high credit quality. At times the Company’s cash and cash equivalents balances with individual banking institutions are in excess of federally insured limits. The Company has not experienced any losses related to its cash and cash equivalents balances.

As of December 27, 2020 and December 29, 2019, the Company had customers that individually represented 10% or more of the Company’s accounts receivable, net. During fiscal years 2020, 2019, and 2018 the Company also had customers that individually exceeded 10% or more of the Company’s net revenue. Significant customer information is presented below as follows:

Customer B 18% * * 20% *

*Revenue and/or accounts receivable was less than 10%.

Cash and Cash Equivalents: The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. As of December 27, 2020, cash and cash equivalents consisted of cash on deposit with balances denominated in U.S. dollars and investments in money market funds.

Investment Securities: The Company accounts for its investment securities in accordance with ASC Topic 320, Investments-Debt and Equity Securities. The Company considers all of its debt securities for which there is a determinable fair market value, and there are no restrictions on the Company's ability to sell within the next 12 months as available-for-sale. We have classified these securities as current, because the amounts invested are available for current operations. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity.

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Variable Interest Entity: The Company consolidates all entities where a controlling financial interest exists. The Company has considered its relationships with a certain entity to determine whether the Company has a variable interest in that entity, and if so, whether the Company is the primary beneficiary of the relationship. GAAP requires variable interest entities (“VIEs”) to be consolidated if an entity’s interest in the VIE is a controlling financial interest. Under the variable model, a controlling financial interest is determined based on which entity, if any, has (i) the power to direct the activities of the VIE that most significantly impacts the VIE’s economic performance and (ii) the obligations to absorb losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. The consolidation status of a VIE may change as a result of such reassessments. Changes in consolidation status are applied prospectively in accordance with GAAP.

Segment Information: The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of evaluating financial performance and allocating resources. All of the Company’s long-lived assets and customers are located in the United States.

Fair Value of Financial Instruments: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of inputs that may be used to measure fair value are defined below:

• Level 1 - Quoted prices in active markets for identical assets or liabilities.

The carrying amounts of the Company’s long-term debt approximate the fair value based on consideration of current borrowing rates available to the Company (Level 2 input). The carrying values of accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities.

Accounts Receivable: Accounts receivable are stated at invoice value less estimated allowances for doubtful accounts. The Company establishes an allowance for doubtful accounts as losses are estimated to have occurred through a provision for bad debts charged to earnings. Losses are charged against the allowance when management believes the receivable is no longer collectible. These losses have been immaterial to date. Subsequent recoveries, if any, are credited to the allowance. The allowance for doubtful accounts is evaluated on a regular basis by management and is based on the credit risk of specific customers, past collection history, and management’s evaluation of accounts receivable. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As of December 27, 2020 and December 29, 2019 the Company recorded an allowance for doubtful accounts of $196 and $304 in the accompanying consolidated balance sheets.

Inventories: Inventories are stated at the lower of cost (determined under the first-in, first-out method) or net realizable value. Inventory includes eggs, butter, packaging, feed, laying hens, pullets, merchandise and equipment parts. A reduction in the carrying value of an inventory item from cost to net realizable value is recorded in cost of goods sold with the offset to inventory. Any inventory that does not meet the quality control standards of the Company is separated and a reserve is recorded for the cost.

Property, Plant and Equipment, Net: Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives. The general range of useful lives of other property, plant and equipment is as follows:

Estimated Useful Life

Land N/A

Building and improvements 39 years

Vehicles 5 years

Machinery and equipment 2 to 7 years

Furniture and fixtures 5 years

Leasehold improvements Lesser of lease term or 5 years

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When assets are sold or retired, the cost and related accumulated depreciation or amortization of assets disposed of are removed from the accounts, with any resulting gain or loss recorded in income from operations in the consolidated statements of operations. Costs of repairs and maintenance are expensed as incurred.

Goodwill: Goodwill represents the excess of cost over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually on the first day of the fourth fiscal quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company’s goodwill impairment test is performed at the enterprise level given the sole reporting unit.

The Company first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude that it is more likely than not that the fair value of the reporting unit is below its carrying amount. If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value and a charge is reported as impairment of goodwill in the consolidated statements of operations. To date, the Company has not recorded any impairment charges associated with its goodwill.

Impairment of Long-Lived Assets: The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects and the effects of obsolescence, demand, competition and other economic factors. The Company did not recognize an impairment loss during the years ended December 27, 2020, December 29, 2019, and December 30, 2018.

Contingent Consideration: In connection with the Company’s acquisition of certain assets of Heartland Eggs, LLC in 2014, the Company was required to make royalty payments to prior owners of certain assets of Heartland Eggs. The royalty payments are contingent on the Company’s future purchase of eggs from supplier contracts that were acquired in the certain assets of Heartland Eggs acquisition. The royalty payments are deemed to be contingent because the future egg purchases are not guaranteed, and the timing and amount of any such purchases are unknown. The fair value of the contingent consideration was determined at the acquisition date using unobservable inputs (Level 3 inputs). These inputs included projected financial information, market volatility, risk-adjusted discount rates and timing of contractual payments. Subsequent to the acquisition date, at each reporting date, the contingent consideration liability is remeasured to fair value with changes in fair value recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.

Noncontrolling Interest: The Company recognizes noncontrolling interest related to VIEs, in which the Company is the primary beneficiary, as equity in the consolidated financial statements separate from the parent entity’s equity. The amount of net income or loss attributable to noncontrolling interests is included in consolidated net income on the face of the consolidated statements of operations. Changes in the parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary will be initially measured at fair value and the difference between the carrying value and fair value of the retained interest will be recorded as a gain or loss. Affiliate equity interests where the Company has certain rights to demand settlement are presented at their current redemption values, as redeemable noncontrolling interest in the consolidated balance sheet. Because these transactions take place between entities under common control, any gains or losses attributable to these transactions are required to be included within additional paid-in-capital on the consolidated balance sheets.

Income Taxes: Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements. In estimating future tax consequences, the Company considers all expected future events other than enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized.

The Company follows the provisions of the authoritative guidance from the Financial Accounting Standards Board (“FASB”) on accounting for uncertainty in income taxes. These provisions provide a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under these provisions, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Assessing an uncertain tax position begins with the initial determination of the sustainability of the position and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed. Additionally, the Company must accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

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The Company’s policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 27, 2020 and December 29, 2019the Company had no accrued interest or penalties related to uncertain tax positions.

Net Income (Loss) per Share Attributable to Vital Farms, Inc. Common Stockholders: The Company applies the two-class method to compute basic and diluted net (loss) income per share attributable to the Company’s common stockholders when shares meet the definition of participating securities. The two-class method determines net income per share for each class of the Company’s common stock and Preferred Stock according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between the Company’s common stock and Preferred Stock based upon their respective rights to share in the earnings as if all income for the period had been distributed. During periods of loss, there is no allocation required under the two-class method since the Preferred Stock does not have a contractual obligation to share in the Company’s losses.

Basic net income per share attributable to the Company’s stockholders is computed by dividing net income by the weighted-average number of shares outstanding during the period without consideration of potentially dilutive common stock. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares of the Company’s common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company unless inclusion of such shares would be anti-dilutive. For periods in which the Company reports net losses, diluted net loss per common share attributable to the Company’s common stockholders is the same as basic net loss, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Revenue Recognition: The Company generates revenue primarily through sales of products, including pasture-raised eggs and butter, to its customers, which include natural channel retailers, mainstream channel retailers and foodservice partners. The Company sells its products to customers on a purchase-order basis.

Revenue is recognized when control of the product is transferred to the customer and the related performance obligation is satisfied, which typically occurs upon delivery of the product to the customer, for an amount that reflects the net consideration the Company expects to receive in exchange for delivering the product. We offer sales incentives through various programs to customers and allow deductions from our customers, which may include credits or discounts to customers in the event that products do not conform to customer specifications or expire at a customer’s site. The cost associated with promotions and chargebacks is estimated and recorded as a reduction in revenue and is recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of this cost therefore requires management judgement regarding the volume of promotional offers that will be redeemed. Differences between estimated cost and actual redemptions are recognized as a change in management estimate in a subsequent period.

Treasury Stock: The Company records treasury stock activities under the cost method whereby the cost of the acquired stock is recorded as treasury stock. The Company’s accounting policy upon the formal retirement of treasury stock is to deduct the par value from the Company’s common stock and to reflect any excess of cost over par value as a reduction to additional paid-in capital (to the extent created by previous issuances of the shares).

Shipping and Distribution: The Company’s shipping and distribution costs include costs incurred with third-party carriers to transport products to customers and salaries and overhead costs related to activities to prepare the Company’s products for shipment. Shipping and distribution costs were $14,904, $10,001, and $8,615 during the years ended December 27, 2020, December 29, 2019 and December 30, 2018, respectively. Freight-in costs are included within Cost of Goods Sold and were $5,126, $3,012, and $2,976 during the years ended December 27, 2020, December 29, 2019 and December 30, 2018, respectively.

Stock-Based Compensation: The Company measures all stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense for those awards, over the requisite service period, which is generally the vesting period of the respective award. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the fair market value of the Company’s common stock, expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company’s expected dividend yield.

Effective December 31, 2018, the Company adopted ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment awards to nonemployees. As a result, stock-based awards granted to consultants and non-employees are accounted for in the same manner as awards granted to employees and directors as described above. The impact of adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

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Prior to the adoption of ASU 2018-07, the Company recognized compensation expense for stock-based awards granted to consultants and non-employees over the shorter of the vesting period or the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is re-measured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model.

The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

Advertising and Promotion Expenses: Advertising and promotion expenses consist primarily of production costs and the costs to communicate the advertisements to promote and market the Company’s products. Production costs such as idea development, artwork, audio and video crews and other up-front development costs are expensed the first time the associated advertising campaign is launched or aired. The costs to communicate the advertisements such as airtime and distribution costs are expensed as incurred. During the years ended December 27, 2020, December 29, 2019, and December 30, 2018, the Company incurred advertising and promotion expenses of approximately $9,815, $10,320, and $4,613, respectively.

Emerging Growth Company Status: The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised financial accounting standards until such time as those standards apply to private companies. The Company elected to use the extended transition period for complying with the adoption of new or revised accounting standards, and, as a result of this election, the Company’s financial statements may not be comparable to companies that comply with public company effective dates.

Recently Adopted Accounting Pronouncements: In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. The standard is effective for all entities for years and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company adopted ASU 2018-13 on December 30, 2019 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 on March 12, 2020 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) and also issued subsequent amendments to the initial guidance, ASU 2017-13, ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20, ASU 2019-01, ASU 2019-10, ASU 2020-02, and ASU 2020-05 (collectively, “Topic 842”). The guidance in Topic 842 supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. An entity may adopt the guidance either (1) retrospectively to each prior reporting period presented in the financial statements with a cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The Company expects to adopt Topic 842 retrospectively at the beginning of the period of adoption, December 27, 2021, through a cumulative-effect adjustment, and will not apply the new standard to comparative periods presented. The new standard provides a number of practical expedients. Upon adoption, the Company expects to elect all of the practical expedients available. The Company is currently evaluating the impact of its pending adoption of Topic 842 on its consolidated financial statements. It is anticipated that the primary impact of the adoption of Topic 842 will be the recording of a right-of-use asset and lease liability of similar amount on the Company’s consolidated balance sheet.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) and also issued subsequent amendments to the initial guidance, ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02, and ASU 2020-03 (collectively, “Topic 326”), to introduce a new impairment model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Topic 326 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. For non-public companies, Topic 326 is effective for years beginning after December 15, 2022, including interim periods within those years. The Company expects to adopt Topic 326 on December 26, 2022. The Company is currently evaluating the impact of its pending adoption of Topic 326 on its consolidated financial statements.

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In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740),Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which intends to simplify the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance. ASU 2019-12 is effective for years beginning after December 15, 2021, and interim periods within years beginning after December 15, 2022. The Company expects to adopt ASU 2019-12 on December 26, 2022. Although the Company is currently evaluating the impact of the adoption of ASU 2019-12, the Company does not expect it to have a material impact on its consolidated financial statements.

3. Fair Value

The following tables presents information about the Company’s financial liabilities measured at fair value on a recurring basis:

Fair Value Measurements as of December 27, 2020, Using:

Liabilities: Level 1 Level 2 Level 3 Total

Contingent consideration, current $ — $ — $ 109 $ 109

Contingent consideration, non-current — — 18 18

Total liabilities measured at fair value $ — $ — $ 127 $ 127

Fair Value Measurements as of December 29, 2019, Using:

Level 1 Level 2 Level 3 Total

Liabilities:

Contingent consideration, current $ — $ — $ 270 $ 270

Contingent consideration, non-current — — 382 382

Total liabilities measured at fair value $ — $ — $ 652 $ 652

During the years ended December 27, 2020 and December 29, 2019, there were no transfers between fair value measurement levels.

During the years ended December 27, 2020 and December 29, 2019, the Company recognized unrealized (gains) and losses associated with the fair value of contingent consideration of $(333) and $70, respectively.

The following table provides a rollforward of the aggregate fair value of the Company’s contingent consideration, for which fair value is determined using Level 3 inputs:

Payment of contingent consideration (409 )

Change in fair value 70

Payment of contingent consideration (192 )

Change in fair value (333 )

The following table presents the unobservable inputs incorporated into the valuation of contingent consideration:

Royalty rate per dozen eggs $ 0.07 $ 0.07

Estimated royalty income $ 132 $ 726

Discount interval (in years) 1.4 4.0

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The following table presents information about the Company’s financial assets measured at fair value on a recurring basis:

Fair Value Measurements as of December 27, 2020, Using:

Level 1 Level 2 Level 3 Total

Assets:

US Corporate Bonds and US Denominated Foreign Bonds $ — $ 58,630 $ — $ 58,630

4. Investment Securities

The following table summarizes the Company’s investment securities as of December 27, 2020, which were purchased in October 2020:

Amortized Cost Unrealized Losses Fair Value

Available-for-sale securities

In October 2020, the Company purchased available-for-sale debt securities of approximately $68,336. There were no proceeds from the sales or maturities of investments for the period from inception to year ended December 27, 2020. The securities incurred unrealized losses of $41 and related tax benefit of $10 for the year ended December 27, 2020.

Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities of investment securities as of December 27, 2020 are as follows:

Amortized Cost Fair Value

5. Revenue Recognition

The following table summarizes the Company’s net revenue by primary product for the periods presented:

Fiscal Year Ended

Net Revenue:

Net revenue is primarily generated from the sale of eggs and butter. Historically, the Company’s product offering was comprised of pasture-raised shell eggs, pasture-raised hard-boiled eggs and pasture-raised butter. In 2019, the Company added both liquid whole eggs and clarified butter (“ghee”) to its product offerings. In August 2020, the Company added egg bites to its product offering.

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The fiscal year ended December 27, 2020 includes revenue totaling $624 resulting from the reduction of a sales promotion incentive settled in Q2 2020 that related to a prior year’s gross sales.

6. Accounts Receivable

Accounts receivable, net was $20,934 and $16,108 as of December 27, 2020 and December 29, 2019, respectively.

As of December 27, 2020 and December 29, 2019, the Company recorded an allowance for doubtful accounts of $196 and $304, respectively. Changes in the allowance for doubtful accounts were as follows:

Allowance for doubtful accounts

Provisions Charged to Operating Results (304 )

Account Write-off and Recoveries —

Provisions Charged to Operating Results (217 )

Account Write-off and Recoveries 325

7. Inventories

Inventory consisted of the following as of the periods presented:

Eggs and egg related products $ 6,407 $ 8,811

Butter and butter related products 3,347 646

During the years ended December 27, 2020, December 29, 2019, and December 30, 2018, laying-hen costs amortized to cost of goods sold were approximately $375, $484, and $676, respectively. On a periodic basis, the Company compares the amount of inventory on hand with its latest forecasted requirement to determine whether write-offs for excess or obsolete inventory reserves are required.

8. Property, Plant and Equipment

Property, plant and equipment consisted of the following as of the periods presented:

Less: Accumulated depreciation and amortization (5,802 ) (3,360 )

Property, plant and equipment, net $ 30,118 $ 22,458

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During the years ended December 27, 2020, December 29, 2019, and December 30, 2018, depreciation and amortization of property, plant and equipment was approximately $2,550, $1,921, and $1,437, respectively.

As of December 27, 2020 and December 29, 2019, machinery and equipment that was leased under capital leases and included in property, plant and equipment, net in the consolidated balance sheets was approximately $1,193 and $1,505, respectively.

9. Accrued Liabilities

Accrued liabilities consisted of the following as of the periods presented:

Accrued promotions and expired product credits $ 2,724 $ 2,038

Accrued grower payments 34 1,649

Accrued employee related costs 3,718 1,132

Accrued distribution fees and freight 436 624

Accrued accounting and legal fees 238 86

Accrued marketing and commissions 739 887

Property, plant and equipment 502 964

10. Long-Term Debt

In October 2017, the Company entered into a credit facility agreement with PNC Bank, National Association (the “Credit Facility”) that provided for an initial term loan of $4,700 (the “Term Loan”) and a revolving line of credit of up to $10,000 (the “Revolving Line of Credit”). The Credit Facility also originally provided for a $1,500 equipment loan (the “Equipment Loan”) for the purpose of funding permitted capital expenditures, subject to certain restrictions. The Credit Facility matures in October 2022.

Subsequently, the terms of the Credit Facility were modified at various times throughout fiscal 2018-2020 which (i) amended various definitions, (ii) waived a technical default in May 2020 which was triggered by exceeding the capital expenditure limit, and (iii) increased borrowing capacity.

Borrowings under the amended and restated Term Loan are repayable in monthly installments of principal and interest, followed by a balloon payment of all unpaid principal and accrued and unpaid interest due in July 2027. Interest on borrowings under the amended and restated Term Loan accrues at a rate, at the Company’s election at the time of borrowing, equal to (i) LIBOR plus 3.25% or (ii) 2.25% plus the sum of the Federal Funds Open Rate plus 50 basis points and the Daily LIBOR Rate plus 100 basis points. In December 2020, all outstanding amounts under the Term Loan were fully paid off. As of December 29, 2019 the interest rate applicable to borrowings under the amended and restated Term Loan was 4.64%.

The maximum borrowing capacity under the Revolving Line of Credit is $15,000. Interest on borrowings under the Revolving Line of Credit, as well as loan advances thereunder, accrues at a rate, at the Company’s election at the time of borrowing, equal to (i) LIBOR plus 2.25% or (ii) 1.25% plus the alternate base rate. In April 2020, all outstanding amounts under the Revolving Line of Credit were repaid. As of December 29, 2019, the interest rate applicable to borrowings under the Revolving Line of Credit was5.75%.

The maximum borrowing capacity under the Equipment Loan is $3,000, subject to certain restrictions. Any borrowings under the Equipment Loan from October 2018 through October 2021 will be due and payable beginning the following month with 36 monthly installments of principal due through October 2022, and all accrued and unpaid interest due October 2022. Interest on borrowings under the Equipment Loan accrues at a rate, at the Company’s election at the time of borrowing, equal to (i) LIBOR plus 3.00% or (ii) 2.00% plus the alternate base rate. In September 2020 all outstanding amounts under the Equipment Loan were repaid. As of December 29, 2019, the interest rate applicable to borrowings under the Equipment Loan as was4.44%.

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The Credit Facility is secured by all of the Company’s assets and requires the Company to maintain two financial covenants: a fixed charge coverage ratio and a leverage ratio. The Credit Facility also contains various covenants relating to limitations on indebtedness, dividends, investments and acquisitions, mergers, consolidations, the sale of properties and liens and capital expenditures. In addition, the Credit Facility imposes limitations on the Company’s ability to pay dividends or distributions on any equity interest, declare any stock splits or reclassifications of its stock, or apply any of its funds, property or assets to purchase, redeem or retire any of its equity interests or to purchase, redeem or retire any of its options to purchase any of its equity interests. As a result of the limitations contained in the Credit Facility, all of the net assets on the Company’s consolidated balance sheet as of December 27, 2020are restricted in use. Vital Farms’ wholly owned subsidiaries are non-operating and do not hold any assets or liabilities; therefore, these subsidiaries have no restricted net assets within the meaning of Rule 4-08(e)(3) or Rule 12-04 of Regulation S-X. The Credit Facility also contains other customary covenants, representations and events of default. As of the pay-off date in December 2020, the Company was in compliance with all covenants under the Credit Facility.

Debt issuance costs associated with the Credit Facility are reflected as a reduction of the carrying value of long-term debt on the Company’s consolidated balance sheets and are being amortized to interest expense over the term of the Credit Facility using the effective interest method. During the years ended December 27, 2020, December 29, 2019, and December 30, 2018, the Company recognized interest expense of $488, $349, and $424 respectively, which includes amortization of debt issuance costs of $68, $9, and $71, respectively.

As of the periods presented, long-term debt, net of current portion, consisted of the following:

Term Loan $ — $ 3,245

Revolving Line of Credit — 1,325

Equipment Loan — 554

Less: current portion of long-term debt — (2,160 )

Less: unamortized debt issuance costs — (68 )

Long-term debt, net of current portion $ — $ 2,896

Future principal payments for capital lease payments as of December 27, 2020 are as follows:

For Fiscal Period

Amounts outstanding under the Company’s Revolving Line of Credit as of December 29, 2019 have been presented as current obligations under current portion of long-term debt in the Company’s consolidated balance sheets due to the Company’s ability and intent to repay the amounts within the next twelve months.

Paycheck Protection Program Loan: In April 2020, the Company received loan proceeds of approximately $2,593 under the Paycheck Protection Program (“PPP”) (the “PPP Loan”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualified businesses for amounts up to 2.5 times of the average monthly payroll expenses for the qualifying business. The Company elected to not use any of the PPP Loan proceeds of $2,593 and repaid the entire balance of the PPP Loan in April 2020.

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11. Redeemable Convertible Preferred Stock

Upon the closing of the IPO in August 2020, all of the then-outstanding shares of Preferred Stock automatically converted into 8,192,876 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there were no shares of Preferred Stock outstanding.

As of December 29, 2019, the Company’s amended and restated certificate of incorporation authorized the Company to issue 8,192,876 shares, par value $0.0001 per share, of preferred stock, of which 2,728,018 shares were designated Series B redeemable convertible preferred stock, 2,464,466 shares were designated Series C redeemable convertible preferred stock, and 3,000,392 shares were designated Series D redeemable convertible preferred stock (collectively, the “Preferred Stock”).

12. Common Stock and Common Stock Warrant

Common Stock: As of December 27, 2020, Vital Farms’ amended and restated certificate of incorporation authorized the Company to issue 39,444,040 shares of common stock, par value $0.0001 per share.

In March 2019 and April 2019, the Company issued and sold an aggregate of 2,815,012 shares of common stock at a purchase price of $5.3286 per share, for proceeds of $14,097, net of issuance costs of $903.

In March 2019 and April 2019, the Company executed a tender offer to repurchase 2,852,770 shares of its common stock and the vested equity of certain directors, employees and officers for a net purchase price of $5.0087 per shares for net proceeds of $14,289.

The voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock. Each share of the Company’s common stock is entitled to one vote on all matters submitted to a vote of the Company’s stockholders. Holders of the Company’s common stock are entitled to receive dividends as may be declared by the Company’s board of directors, if any, subject to the preferential dividend rights of Preferred Stock. No cash dividends had been declared or paid during the periods presented.

As of each balance sheet date, the Company had reserved shares of common stock for issuance in connection with the following:

Warrants to purchase common stock — 196,800

Restricted stock units 45,000 —

Shares available for grant under the 2013 Incentive Plan — 240,079

Shares available for grant under the 2020 Incentive Plan 7,615,143 —

Common Stock Warrant: In June 2015, the Company issued a warrant to the guarantor of a line of credit agreement that was entered into in 2015. During 2017 the line of credit matured and was repaid in full. The guarantor was also the Company’s Chief Executive Officer. The warrant provided for the purchase of a total of 196,800 shares of Vital Farms common stock at an exercise price of $1.43 per share. The warrant was scheduled to expire on the earlier of June 12, 2020 or the completion of the IPO. At the time of issuance, the Company classified the warrant as equity in its consolidated balance sheets. On June 9, 2020, the guarantor exercised the warrant to purchase 196,800 shares of the Company’s common stock resulting in net proceeds of approximately $282.

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13. Stock-Based Compensation

As of December 27, 2020, 7,615,143 shares were available for future grants of the Company’s common stock.

The following table summarizes the Company’s stock option activity since December 29, 2019:

The fair value of shares vested during the fiscal year ended December 27, 2020 was $3,320.

2020 Equity Incentive Plan:In July 2020, the Company’s board of directors adopted the Vital Farms, Inc. 2020 Equity Incentive Plan (“2020 Incentive Plan”), which was subsequently approved by the Company’s stockholders and became effective on July 30, 2020. Initially, the maximum number of shares of the Company’s common stock that may be issued under the 2020 Incentive Plan was 8,595,871 shares. The 2020 Incentive Plan provides that the number of shares reserved and available for issuance under the 2020 Incentive Plan will automatically increase each January 1, beginning on January 1, 2021 and ending on (and including) January 1, 2030, by an amount equal to 4% of the outstanding number of shares of common stock on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s board of directors. On January 1, 2021, 1,577,761 shares of common stock were added to the available reserve pursuant to this provision. During the fiscal year ended December 27, 2020, the Company granted stock options to purchase an aggregate of 985,519 shares of common stock to participants with a weighted average exercise price of $22.98 per share.

Employee Stock Purchase Plan:In July 2020, the board of directors adopted the Vital Farms Inc. 2020 Employee Stock Purchase Plan (“2020 ESPP”), which was subsequently approved by the Company’s stockholders and became effective on July 30, 2020. The 2020 ESPP authorizes the initial issuance of up to 900,000 shares of the Company’s common stock to certain eligible employees or, as designated by the board of directors, employees of a related company. The 2020 ESPP provides that the number of shares reserved and available for issuance under the 2020 ESPP will automatically increase each January 1, beginning on January 1, 2021 and ending on (and including) January 1, 2030, by an amount equal to the lesser of (i) 1% of the outstanding number of shares of common stock on the immediately preceding December 31 and (ii) 900,000, or such lesser number of shares as determined by the Vital Farms board of directors. On January 1, 2021, 394,440 shares of common stock were added to the available reserve pursuant to this provision.The Company’s board of directors may from time to time grant or provide for the grant to eligible employees of options to purchase common stock under the 2020 ESPP during a specific offering period. As of December 27, 2020, no offerings have been approved.

Restricted Stock Units: In August 2020, the Company granted a restricted stock unit (“RSU”) for 7,500 shares of the Company’s common stock to each person who was a non-employee director as of the IPO date, for a total of 45,000 RSUs (“IPO Initial Grant”). Each IPO Initial Grant will vest in three equal installments on the day before each of the first, second and third Annual Meeting of the Stockholders that occurs following the IPO Date, subject to the Non-Employee Director’s Continuous Service (as defined in the 2020 Incentive Plan) on each vesting date. Additionally, the Company granted a fully vested RSU for 3,097 shares to an employee in October 2020.

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The following table summarizes the Company’s restricted stock unit activity since December 29, 2019:

Number of RSUs Weighted- Average Exercise Price

Outstanding as of December 29, 2019 — $ —

Cancelled — $ —

During the years ended December 27, 2020, December 29, 2019, and December 30, 2018, the Company recognized stock-based compensation expense of $2,509, $1,029, and $600, respectively. The Company records stock-based compensation expense in selling, general and administrative expenses.

As of December 27, 2020, total unrecognized stock-based compensation expense related to unvested stock options was $11,494, which is expected to be recognized over a weighted-average period of 2.0 years.

14. Income Taxes

For the years ended December 27, 2020, December 29, 2019, and December 30, 2018 the provision for income taxes consisted of the following:

Current:

Deferred:

The reconciliation of the federal statutory income tax provision to the Company’s effective income tax provision is as follows:

Provision (benefit) at statutory rate at 21% $ 2,446 $ 929 $ 1,334

Charitable deduction (206 ) (629 ) —

Change in deferred tax asset valuation allowance (138 ) 23 (655 )

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Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred income tax assets and liabilities at December 27, 2020, December 29, 2019 and December 30, 2018 were comprised of the following:

Deferred tax assets:

Net operating loss carryforwards 27 31 230

Charitable contributions 322 760 —

Less: Valuation allowance — (138 ) (115 )

Deferred tax liabilities:

Intangibles 291 — —

A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. A full review of all positive and negative evidence needs to be considered, including the Company’s current and past performance, the market environments in which the Company operates, the utilization of past tax credits, the length of carry back and carry forward periods and tax planning strategies that might be implemented. Management considered the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. The net change in the total valuation allowance for the year ended December 27, 2020 was a decrease of approximately $138.

The activity in the Company’s deferred tax asset valuation allowance for the years ended December 27, 2020, December 29, 2019 and December 30, 2018 was as follows:

Valuation allowance as of beginning of year $ 138 $ 115 $ 770

Increases recorded to income tax provision — 23 40

Decreases recorded as benefit to income tax provision (138 ) — (695 )

Valuation allowance as of end of year $ - $ 138 $ 115

As of December 27, 2020, the Company had unrecognized tax benefits, which represent the aggregate tax effect of the differences between tax return positions and the benefits recognized in the Company’s financial statements. At December 27, 2020, all of the unrecognized tax benefits, if recognized, would affect the Company’s annual effective tax rate. The unrecognized tax benefits are long-term in nature.

The following table reflects changes in gross unrecognized tax benefits:

Gross tax contingencies as of beginning of year $ 272 $ 314 $ 201

Increase in gross tax contingencies 219 — 113

Decrease in gross tax contingencies (272 ) (42 ) —

Gross tax contingencies as of end of year $ 219 $ 272 $ 314

The Company files a U.S. federal income tax return, as well as income tax returns in various states. Tax years 2017 through 2020 remain open to examination by the tax jurisdictions to which the Company is subject, with certain state taxing jurisdictions being open back to 2016.

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15. Net Income Per Share

Basic and diluted net income per share attributable to the Company’s common stockholders were calculated as follows:

Fiscal Year Ended

Numerator:

Less: Net income (loss) attributable to noncontrolling interests 84 927 (168 )

Denominator:

Weighted average effect of potentially dilutive securities:

Effect of potentially dilutive restricted stock units 21,449 — —

Net income per share attributable to Vital Farms, Inc. stockholders

For the years ended December 27, 2020 and December 29, 2019, options to purchase 826,883 shares of common stock and 0 shares of common stock, respectively, were excluded from the computation of diluted net income per share attributable to the Company’s common stockholders because including them would have been antidilutive.

16. Commitments and Contingencies

Operating Leases: As of December 27, 2020, the Company was leasing 9,082 square feet of office space and parking spaces in Austin, Texas. The lease expires in April 2026. The Company has the option to extend the lease agreement for successive periods of up to five years. The monthly lease payments, which include base rent charges of $19, are subject to periodic rent increases through April 2026.

As of December 27, 2020, the Company was leasing warehouse space in Webb City, Missouri for 5,000 rentable pallet spaces. The monthly lease payments include base rent charges of $55. In October 2020, the lease was amended to terminate the agreement effective on December 31, 2020.

As December 27, 2020, the Company was leasing warehouse space in Springfield, Missouri for 3,750 rentable pallet spaces. The Company has the option to exceed the 3,750 pallet spaces through September 30, 2023, the lease expiration date. The monthly lease payments, which include base rent charges of $85, are subject to periodic rent increases through September 2023.

The Company recognizes rent expense on a straight-line basis over the respective lease period and has recorded deferred rent for rent expense incurred but not yet paid. During the years ended December 27, 2020, December 29, 2019, and December 30, 2018, the Company recognized rent expense, including associated common area maintenance charges, of $444, $358, and $359, respectively.

As of December 27, 2020, future minimum lease payments under noncancelable operating leases are as follows:

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Supplier Contracts: The Company purchases its egg inventories under long-term supply contracts with farms. Purchase commitments contained in these arrangements are variable dependent upon the quantity of eggs produced by the farms. Accordingly, there are no estimable future purchase commitments associated with these supplier contracts. In addition, substantially all the Company’s long-term supply contracts with farms contain components that meet the definition of embedded leases within the scope of Topic 840, Leases. These arrangements convey to the Company the right to control implicitly identified property, plant and equipment as it takes substantially all the utility generated by these assets over the term of the arrangements at a variable price. As total purchase commitments contained in these arrangements are variable, the amounts attributable to the lease components are contingent rentals; there are no minimum lease payments associated with these long-term supply contracts. As the classification and timing of recognition of costs attributable to the eggs and embedded cost of the lease rentals are identical, the Company does not allocate the total purchase cost of eggs between the cost of the eggs and the embedded cost of the lease rentals or distinguish between them in its accounting records. The Company records the total purchase costs of eggs, which includes costs associated with the eggs and the corresponding costs of embedded lease rentals from the same arrangement, into inventory. These costs are expensed to cost of goods sold when the associated eggs are sold to customers. During the years ended December 27, 2020, December 29, 2019, and December 30, 2018, the Company recognized total costs associated with its long-term supply contracts with farms of $84,537, $54,380, and $41,728, respectively.

Indemnification Agreements: In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. As of December 27, 2020, the Company has not incurred any material costs as a result of such indemnifications.

Litigation: The Company is subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to its business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. When the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. The liability recorded includes probable and estimable legal costs incurred to date and future legal costs to the point in the legal matter where the Company believes a conclusion to the matter will be reached. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible.

In January 2019, Ovabrite Inc. (“Ovabrite”) settled claims made pursuant to a lawsuit in which Ovabrite was the defendant and a countersuit in which Ovabrite was the plaintiff and recorded a related gain of $1,200, which is included in other income in the consolidated statements of operations.

17. Related Party Transactions

Guarantor Warrant: The Company’s executive chairman and former Chief Executive Officer (the “Guarantor”) guaranteed the Company’s obligations under a line of credit agreement that was entered into in 2015 and that matured and was repaid in full in 2017. The Company issued a warrant to purchase 196,800 shares of the Company’s common stock at an exercise price of $1.43 to the Guarantor in exchange for his guaranty. See Note 12, “Common Stock and Common Stock Warrant.” The warrant expired on the earlier of June 12, 2020 or the completion of the IPO. In June 2020, the Guarantor exercised the warrant to purchase 196,800 shares of the Company’s common stock resulting in net proceeds of approximately $282.

Ovabrite: Ovabrite is a related party because its founders are stockholders of the Company, with the majority stockholder in Ovabrite also serving as the Company’s executive chairman and member of the Company’s board of directors. Since Ovabrite’s incorporation in November 2016, the Company is deemed to have had a variable interest in Ovabrite, and Ovabrite is deemed to have been a VIE, of which the Company is the primary beneficiary. Accordingly, the Company has consolidated the results of Ovabrite since November 2016. All significant intercompany transactions between the Company and Ovabrite have been eliminated in consolidation. The Ovabrite entity is immaterial as of the year ended December 27, 2020.

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Notes Receivable from Related Parties:In February 2019, the Company issued promissory notes in the aggregate amount of $4,000 to its founder and a former member of the board of directors that is currently a board observer, both of whom are also stockholders of the Company. The promissory notes bear monthly interest at LIBOR plus 2.0% and mature on the earlier of August 7, 2022 or the date of closing of a liquidity transaction which is defined as a merger, consolidation or sale of the Company’s assets or such time as the notes would be prohibited by the Sarbanes-Oxley Act (“Promissory Note Maturity Date”). All unpaid principal and accrued and unpaid interest are due on the Promissory Note Maturity Date. The borrower may prepay all or any portion of the promissory note at any time without premium or penalty. In November 2019, $3,200 of the promissory notes were repaid.

In August 2020, the remaining $800 of the promissory notes were repaid. During the years ended December 27, 2020, December 29, 2019, the Company recorded interest income of $97and $146, respectively, in connection with the promissory notes.

Manna Tree Partners: In March 2019 and April 2019, the Company issued and sold an aggregate of 2,815,012 shares of common stock at a purchase price of $5.3286 per share, for an aggregate purchase price of $15,000, to entities associated with Manna Tree Partners. The co-founder and chief operating officer of Manna Tree Partners is a member of the Company’s board of directors.

Sandpebble Builders Preconstruction, Inc.: The Company utilizes Sandpebble Builders Preconstruction, Inc. (“Sandpebble”) for project management and related services associated with the construction and expansion of Egg Central Station. The owner and principal of Sandpebble is the father of an executive of the Company. In connection with the services described above, the Company paid Sandpebble $842, $556, and $211 in 2020, 2019, and 2018, respectively. Amounts paid to Sandpebble are included in property, plant and equipment.

Whole Foods Market, Inc: A member of the Company’s board of directors is an executive vice president and senior advisor at Whole Foods. The Company serves the majority of its natural channel retail customers through food distributors, such as US Foods Inc. and United Natural Foods, Inc. who purchase, store, sell and deliver products to Whole Foods Market, Inc. While the Company cannot precisely determine its specific revenue attributable to Whole Foods, it is a significant customer.

18. 401(K) Savings Plan

The Company established a defined contribution savings plan in 2017 under Section 401(k) of the Internal Revenue Code of 1986, as amended. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Company’s board of directors. During the years ended December 27, 2020, December 29, 2019 and December 30, 2018, the Company made contributions totaling $401, $246, and $245 respectively, to the plan.

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19. Quarterly Results of Operations (Unaudited)

The following table presents selected unaudited quarterly financial data for each full quarterly period in fiscal 2020 and 2019:

Fiscal Quarter Ended

Consolidated Statements of Operations Data:

Operating expenses:

Other (expense) income, net:

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

In 2019, we engaged new auditors as our independent accountants to audit our financial statements. Our board of directors approved the change of accountants to KPMG LLP, and we dismissed RSM US LLP on August 19, 2019.

The independent auditor’s report on our consolidated financial statements prepared by RSM US LLP under auditing standards generally accepted in the United States of America for the 2018 fiscal year did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. There were (i) no disagreements with RSM US LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of RSM US LLP, would have caused RSM US LLP to make reference to the subject matter of the disagreements in connection with its report and (ii) no reportable events of the type listed in paragraphs (A) through (D) of Item 304(a)(1)(v) of Regulation S-K issued by the SEC, in connection with the audit of our financial statements for the 2018 fiscal year and the subsequent period through the replacement of RSM US LLP with KPMG LLP.

Neither we nor anyone acting on our behalf consulted with KPMG LLP at any time prior to their retention by us as our independent registered public accounting firm regarding any of the matters described in Item 304(a)(2)(i) or Item 304(a)(2)(ii) of Regulation S-K.

We have provided RSM US LLP with a copy of the disclosures set forth under the heading “Changes in Independent Registered Public Accounting Firm” included in this Annual Report and have requested that RSM US LLP furnish a letter addressed to the SEC stating whether or not RSM US LLP agrees with statements related to them made by us under the heading “Changes in and Disagreements with Accountants on Accounting and Financial Disclosure” in this Annual Report. A copy of that letter is filed as Exhibit 16.1 hereto.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.