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Item 7. Management’s Discussion and Analysis

2022-03-10 compared with 2021-03-24 · 177 added, 220 removed, 223 unchanged (64% of the section changed)

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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.

Our mission is to bring ethical food to the table, and we are 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 family farms to a national audience.

This framework has enabled us to become the leading U.S.

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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.

Our ethics are exemplified by our focus on animal welfare and sustainable farming practices.

We believe our standards produce happy hens with varied diets, which produce better eggs.

There is a seismic shift in consumer demand for 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.

We make decisions based on what’s sustainable for all our stakeholders.

Simply put, we will not be a sustainable business if our stakeholders are not sustainable as well.

Our collective sustainable business practices will enable us to fulfill our purpose of improving the lives of people, animals, and the planet through food, now and long into the future.

For us, it is not about short-term outcomes or a trade-off between purpose and profit.

We are fierce business competitors who believe that prioritizing the long-term viability of all stakeholders will produce stronger outcomes, for everyone, over time.

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.

Our approach has been validated by our financial performance and our designation and January 2022 recertification 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.

We source our products from a network of more than 275 family farms.

We have strategically designed our supply chain to ensure high production standards and optimal year-round operation.

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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 growin g consumer base has fueled the expansion of our brand from the natural channel to the mainstream channel.

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 Sp r outs, 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 offe r 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 a dditional points of distribution and new product innovation.

We have a strong presence at Kroger, Sprouts Farmers Market, or Sprouts, Target and Whole Foods, and we also sell our products at Albertsons, Publix and Walmart.

We offer 32 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.

Egg Central Station is capable of packing three million eggs per day and has achieved Safe Quality Food, or SQF Good rating, the highest level of such certification from the Global Food Safety Initiative.

In addition, as of January 2020, Egg Central Station is the only egg facility to receive, and we are one of only six companies globally to have received, the 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 the majority of natural channel customers through food distributors, such as UNFI and US Foods and KeHE, which purchase, store, sell and deliver our products to Whole Foods (UNFI and US Foods) and Sprouts (KeHE).

In the fiscal years ended December 26, 2021, December 27, 2020, and December 29, 2019, UNFI accounted for approximately 18%, 15%, and 35% of our net revenue, respectively, US Foods accounted for approximately 14%, 18%, and less than 10% of our net revenue, respectively, and KeHE accounted for approximately 10%, 12%, and 11% of our net revenue,

respectively.

We serve mainstream retailers by arranging for delivery of our products directly through their distribution centers.

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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.

Following the closing of the IPO, there were no shares of redeemable convertible preferred stock outstanding.

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.

As the COVID-19 pandemic continued in the fiscal year ended December 26, 2021, we continued to maintain a cross-functional task force and execute on 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 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.

In March 2020, the majority of our crew members at our headquarters transitioned to working remotely, and we have subsequently decided to permit such crew members to work remotely on a permanent basis.

The efficacy of vaccinations, the timing of the development of herd immunity, the potential emergence of new variants of the SARS-CoV-2 variant and the prospect of additional shelter in place and similar movement restrictions are unknown, and further virus mutations and variants may have an adverse impact on our business.

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.

however, we may need to modify or reduce operations due to the evolving effects of the COVID-19 pandemic.

We continue to follow the COVID-19 protocol and preventative measures we have implemented at Egg Central Station to protect the health and safety of our crew members, customers and community.

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.

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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.

cream supply, including significant volatility of prices and demand, hauling challenges due to labor shortages and ongoing financial pressures in milk cooperatives.

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 butter or ghee products, although 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 continues to persist for an extended period of time and further impacts egg or cream 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 $31.0 million as of December 26, 2021 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.

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 26, 2021 , 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.

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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.

However, a significant disruption of global financial markets (including a disruption due to the ongoing COVID-19 pandemic) may result in our 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.

Additionally, we beli eve 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

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We believe there is substantial opportunity to grow our consumer base and increase the velocity at which households purchase our products.

household penetration for the shell egg category is approximately 98%, while the household penetration for our pasture-raised shell eggs is approximately 3.9%.

household penetration for the shell egg category is approximately 98%, while the household penetration for our shell eggs is approximately 5.0%.

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.

We believe these efforts will educate consumers on the attractive attributes of our products, 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.

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Based on this third-party data and internal analysis, Whole Foods accounted for approximately 29% and 28% of our retail sales for the fiscal years ended December 26, 2021 and December 27, 2020, respectively, and Sprouts accounted for approximately 7% and 7% of our retail sales for the fiscal years ended December 26, 2021 and December 27, 2020, respectively.

As of December 2020, there are more than 16,000 stores selling our products.

As of December 202 1, there were more than 20,900 stores selling our products.

We expect the retail channel to be our largest source of net revenue for the foreseeable future.

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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 c ustomer-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;

We believe there is significant demand for our products in the foodservice channel since we offer versatile ingredients with high menu penetrations across all commercial and non-commercial operator segments.

We see considerable opportunity for medium- to long-term growth in this channel by increasing our category market share through sales to values-aligned foodservice operators and their distributors.

We are working with Waypoint, a 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 most U.S.

consumers' food preferences are driven primarily by what they encounter on restaurant menus, so we are also leveraging foodservice as a critical consumer touchpoint to drive brand awareness and purchase rates of our products in the retail channel.

We are investing in co-marketing to reach new households.

We believe that joint marketing tactics are mutually beneficial for our operator partners and enhance their perceived customer value and that our products and on-menu branding can help operators differentiate themselves, increase check sizes and drive loyalty in an industry still recovering from the pandemic and its macro-economic impacts.

An example of our recent foodservice growth initiative is our relationship with HomeState, a Texas kitchen in Southern California which sells breakfast tacos made exclusively with our liquid whole eggs across 4 restaurant locations.

We have launched similar regional partnerships in all 4 of our U.S.

sales regions, including Blue Plate Restaurant Company, a casual dining group comprised of 7 concepts in the Minneapolis/St.

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.

King David Tacos, which sells breakfast tacos made exclusively with our medium shell eggs at their 3 locations and more than 20 retail outlets around New York City;

Pura Vida, a fresh all-day concept in the Miami, Florida area with 9 locations;

Hat Creek Burger Company, a fast-casual restaurant with over 26 locations across Texas;

Tacodeli, which sells breakfast tacos made exclusively with our shell eggs across 11 restaurant locations and approximately 90 points of distribution, such as coffee shops and farmers' market stands, across Texas;

and Moe's Broadway Bagel, an East Coast-style family-run bagel chain with 7 locations in the Denver/Boulder, Colorado area.

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.

We have a history of product introductions and intend to continue to innovate by introducing new products from time to time.

Eggs generated $240.0 million, or approximately 92%, of net revenue in fiscal 2021.

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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

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.

Key Components of Results of Operations

We generate net revenue primarily from sales of our products, including eggs and butter to our customers, which include natural retailers, mainstream retailers and foodservice partners.

We sell our products to customers on a purchase-order basis.

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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 treat these credits and discounts as a reduction of the sales price of the related transaction at the time of sale.

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.

Our pasture-raised shel l 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 in stead of our pasture-raised eggs.

Our 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 shell eggs, price-sensitive consumers may choose to purchase commodity shell eggs offered by our competitors instead of our 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 th e channels through which our products are sold.

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

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We expect shipping and distribution expenses to increase in absolute dollars in the medium-to-long term, as we continue to scale our business.

Results of Operations

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

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Income from operations

Other (expense) income, net:

Other income (expense), net:

Interest expense

Other (expense) income, net

Total other (expense) income, net

Other income (expense), net

Total other income (expense), net

Net income before income taxes

Provision for income taxes

Net income (loss) attributable to noncontrolling

(Benefit) provision for income taxes

Net (loss) income attributable to noncontrolling

Net income attributable to Vital Farms, Inc.

Includes stock-based compensation expense of $4,440 , $2,509, and $1,029 for the fiscal years 2021, 2020, and 2019, respectively.

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

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

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Income from operations

Other (expense) income, net:

Other income (expense), net:

Interest expense

Other (expense) income, net

Total other (expense) income, net

Other income (expense), net

Total other income (expense), net

Net income before income taxes

Provision for income taxes

(Benefit) provision for income taxes

Fiscal Year Ended December 26, 2021 Compared to Fiscal Year Ended December 27, 2020

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(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.

The increase in net revenue of $46.6 million, or 22%, was primarily driven by an increase in egg-related product sales of $43.8 million and an increase in butter-related product sales of $3.4 million.

The increases in egg and butter-related sales were primarily due to volume increases to our distributors as well as new distributions to new and existing customers.

Net revenue from sales through our retail channel was $256.5 million and $208.5 million for fiscal 2021 and 2020, respectively.

Gross Profit and Gross Margin

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(in thousands)

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;

1 2 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.

The increase in gross profit of $8.4 million, or 11%, was driven by an increase in net revenue generated during the fiscal year ended December 26, 2021.

The decrease in gross margin during the fiscal year ended December 26, 2021 as compared to the fiscal year ended December 27, 2020 was primarily driven by an increase in input costs across our shell business and higher cream prices impacting our butter business.

Elevated transportation rates also increased our internal transfer expense.

Promotional activity and slotting continued to normalize, further compressing margins.

Operating Expenses

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Percentage of net revenue

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:

an increase of $9.7 million in employee-related costs driven by an overall increase in employee headcount to support our operations and structure as a newly public company;

an increase of $1.8 million in volume-driven commission payments made to third parties that sell our products to customers, and other selling related expenses;

an increase of $2.2 million in professional fees and commercial insurance costs due in part to our status as a newly public company;

increased corporate development costs and one-time expenses of $1.7 million associated with our accounting and legal functions in connection with our IPO and the secondary offering in November 2020.

Selling, general, and administrative expenses increased by $10.5 million in fiscal 2021, with such expenses accounting for 22% of net revenue.

The dollar growth in selling, general and administrative expenses was primarily driven by:

an increase of $1.8 million in professional fees and commercial insurance costs due in part to our status as a public company;

an increase of $6.5 million in employee-related costs, including stock-based compensation, driven by an overall increase in employee headcount to support our operations and public company status;

an increase of $1.7 million in marketing programs and associated expenses and commission payments made to third parties that sell our products to customers, related to our continued investment in brand marketing and direct advertising

Shipping and Distribution

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Percentage of net revenue

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

The increase in shipping and distribution expenses of $10.1 million, or 68%, was primarily driven by higher outbound freight rates that resulted in increased costs for our products and, to a lesser extent, higher sales volumes in 2021.

Other Income (Expense), Net

Fiscal Year Ended

(in thousands)

Other (expense) income, net

Other income (expense), net

Percentage of net revenue

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.

Provision for Income Taxes

The increase of $440,000 in other expense, net, or 512%, was primarily driven by losses on asset write-offs in the prior year that did not recur during the current fiscal year and interest income from available-for-sale debt securities that we originally purchased in October 2020.

(Benefit) Provision for Income Taxes

Fiscal Year Ended

(in thousands)

Provision for income taxes

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.

(Benefit) provision for income taxes

The decrease of $(4.8) million, or (173)%, was primarily driven by the favorable tax impact of non-qualified stock option exercises and disqualifying dispositions of incentive stock options during 2021.

Net (Loss) Income Attributable to Noncontrolling Interests

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(in thousands)

Net income attributable to noncontrolling interests

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.

Net (loss) income attributable to noncontrolling interests

The decrease of $131,000 in net income attributable to noncontrolling interests, or (156)%, was primarily driven by the release of a bonus reserve in 2020 that was ultimately not paid out.

This activity did not reoccur in 2021.

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

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.

For the discussion of the financial condition and results of operations for the year ended December 27, 2020 compared to the year ended December 29, 2019, refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020, filed with the Securities and Exchange Commission on March 24, 2021.

Non-GAAP Financial Measures

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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.

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

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

December 27, 2020

December 29, 2019

December 30, 2018

Depreciation and amortization

Provision for income tax

(Benefit) provision for income tax

Stock-based compensation expense

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For the year ended December 29, 2019, amount reflects a gain in connection with the settlement of the Ovabrite lawsuit.

Contractual Obligations and Commitments

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

Payments Due by Period

Less than 1 Year

More than 5 Years

(in thousands)

Capital lease obligations

Operating lease commitments

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

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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.

Funding Requirements

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 expansio n 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.

We further believe that we will be able to fund potential operating expenses and cash obligations beyond the next 12 months, through a combination of existing cash and cash equivalents, cash provided by our operating activities and available borrowing under our Credit Facility.

As of December 26, 2021, we expect to spend $25.8 million, including approximately $6.3 million yet to be spent, and we anticipate the expansion to be complete in mid-2022.

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 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.

Subsequently, terms of the Credit Facility were modified at various times throughout fiscal 2018-2021 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 and (iv) extended the maturity date.

The Ninth Amendment to the Credit Facility in April 2021 eliminated the term loan and equipment loan.

The revolving line of credit matures in April 2024.

The maximum borrowing capacity under the revolving line of credit is $20.0 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 2.00% or (ii) 1.00% 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.

In December 20 20, 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 elsewh ere in this Annual Report for additional details related to our Credit Facility.

In April 2020, all then-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 Credit Facility is secured by all of our assets (other than real property and certain other property excluded pursuant to the terms of the Credit Facility) and requires us to maintain three financial covenants:

a fixed charge coverage ratio, a leverage ratio and a minimum tangible net worth requirement.

The Credit Facility also contains various covenants relating to limitations on indebtedness, acquisitions, mergers, consolidations, the sale of properties and liens.

As a result of the limitations contained in the Credit Facility,

certain of the net assets on our consolidated balance sheet as of December 26, 2021 are restricted in use.

The Credit Facility contains other customary covenants, representations and events of defaul t.

As of December 26, 2021, there was no outstanding balance under the Credit Facility.

As of December 26, 2021, 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.

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

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December 29, 2019

December 30, 2018

(in thousands)

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Operating Activities

In fiscal 2021, net cash provided by operating activities was $16.3 million and was primarily driven by net income of $2.4 million, total non-cash items of $5.7 million, and an increase in net working capital items of $8.2 million.

Non-cash items primarily consisted of depreciation and amortization of $3.5 million, non-cash stock-based compensation expense of $4.4 million and deferred income taxes of $(2.5) million.

The change in net working capital items was primarily due to a $6.8 million increase in accounts payable and a $1.4 million decrease in income taxes receivable, partially offset by a $0.4 million decrease in prepaid taxes and other current assets, a $6.1 million increase in accounts receivable and a $4.0 million increase in accrued liabilities.

The reduction in prepaid expenses and other current assets were primarily due to a reduction in prepaid marketing campaign assets year over year.

The increases in accounts payable were primarily due to an increase in amounts due to our partner farms combined with an increase in vendor payables in the normal course of business.

The increases in accrued liabilities were primarily due to accrued capital expenditure costs and accrued promotions offset by decreases in accrued payroll.

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.

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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.

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 .

In fiscal 2021, net cash used in investing activities was $17.1 million resulting primarily from $52.0 million of purchases of available-for-sale securities and $16.7 million of purchases of property, plant and equipment used in ongoing operations, offset by $51.6 million of sales, maturities and redemptions of available-for-sale securities

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 and $18.3 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.

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.

In fiscal 2021, net cash provided by financing activities was $2.2 million which primarily consisted of net proceeds of $2.8 million from the exercise of stock options, partially offset by $0.5 million of repayments of our capital lease obligations.

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.

Contractual Obligations and Commitments

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Operating lease commitments

Facility Expansion

Capital Lease Commitments

As of December 26, 2021, the Company has one capital lease obligation.

The monthly lease payments, which include base rent charges of approximately $41, will extend through the termination of the lease, which expires August 2022.

Operating Lease Commitments

As of December 26, 2021, the Company was leasing approximately 92,000 square feet of warehouse space in Springfield, Missouri for 10,000 rentable pallet spaces.

The monthly lease payments, which include base rent charges of $79, are subject to periodic rent increases through September 2023.

As of December 26,2021, the Company was leasing approximately 9,100 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 up to five years.

The monthly lease payments, which include base rent charges of $19, are subject to periodic rent increases through April 2026.

Facility Expansion

As of December 26, 2021, in connection lwith our expansion of Egg Central Station, we expect to spend $25.8 million, including approximately $6.3 million yet to be spent, and we anticipate the expansion to be complete in mid-2022.

Long-Term Supply Agreements

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.

As a result, these commitments have been excluded from the contractual obligations and commitments 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 .

1 unchanged sentence

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.

Demand for our products fluctuates in response to seasonal factors.

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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.

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in the financial statements and related notes thereto.

Critical accounting estimates are those estimates that, in accordance with GAAP, involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements.

Management has determined that our most critical accounting estimates are those relating to revenue recognition and trade promotions, income taxes, and contingencies.

Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ materially from those estimates.

The following is a summary of certain accounting estimates we consider critical.

For further discussion about our accounting policies, see Note 2 to our consolidated financial statements appearing elsewhere in the Annual Report on Form 10-K.

Revenue Recognition and Trade Promotions

We recognize revenue for the sale of our product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon delivery to the customer based on terms of the sale.

Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for providing goods to customers.

The transaction price is adjusted for estimates of known or expected variable consideration, which include trade promotions as well as allowances such as coupons, discounts, rebates, spoils, and other programs.

Variable consideration related to these programs is recorded as a reduction to revenue, at the time of sale, based on the amount we expect to incur.

The transaction price contains estimates of known or expected variable consideration.

We base these estimates on current performance and historical utilization or experience.

We review and update these estimates regularly until the incentives or product returns are realized and the impact of any adjustments are recognized in the period the adjustments are identified.

We do not believe it is reasonably likely that there will be a material change in the estimates or assumptions used to recognize revenue.

As noted above, estimates are made based on historical experience and other factors.

Typically, programs that are offered have a short duration and historical differences between actual experience compared to estimated volumes, performance and redemptions have not been significant to the quarterly or annual financial statements.

However, if the level of redemption rates, volumes or performance were to vary significantly from our estimates, we may be exposed to gains or losses that could be material.

We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years.

We determine our effective tax rate by estimating its permanent differences resulting from differing treatment of items for financial and income tax purposes.

We are periodically audited by taxing authorities and considers any adjustments made as a result of the audits in computing our income tax expense.

Any audit adjustments affecting permanent differences could have an impact on our effective tax rate.

Deferred income taxes relate primarily to depreciation expense and share-based compensation programs accounted for differently for financial and income tax purposes.

Changes in tax laws and rates could materially affect recorded deferred tax assets and liabilities in the future.

Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized for a deferred tax asset.

Changes in projected future earnings could affect our recorded valuation allowances, if any, in the future.

We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due.

However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

To the extent we prevail in matters for which unrecognized tax benefit liabilities have been established or are required to pay amounts in excess of our recorded liability, our effective tax rate in a given financial statement period could be materially affected.

Contingencies

We recognize the costs of legal defense for the legal proceedings to which we are a party during the periods in which the costs are incurred.

After considerable analysis of the facts and circumstances of each case, we determine the amount of reserves required, if any.

At this time, we have not accrued any reserves for any legal proceedings.

Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in our assumptions, the effectiveness of legal strategies, or other factors beyond our control.

Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis