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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-10 compared with 2021-03-24 · 4 added, 848 removed, 34 unchanged (96% of the section changed)

10 unchanged sentences

Ingredient Risk

We source our pasture-raised eggs and milk for our products from our network of small family farms.

We source our eggs and cream for our products from our network of 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 26, 2021, 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.

1 unchanged sentence

Either type of contract subjects us to risk of price fluctuations in feed ingredients, primarily consisting of corn and soy.

The price we pay for cream is subject to butter commodity fluctuations.

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.

A hypothetical 10% increase or decrease in the weighted-average cost of these ingredients across our product lines as of December 26, 2021 would have resulted in an increase or decrease to cost of sales for the year ended December 26, 2021 of approximately $4.9 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.

2 unchanged sentences

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.

See the section titled “—Liquidity and Capital Resources—Credit Facility” above for additional details related to our Credit Facility.

Based on the average interest rate on the instruments under the Credit Facility during the fiscal year ended December 26, 2021, 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 26, 2021.

11 unchanged sentences

dollar to other currencies would not have had a material effect on our results of operations for the fiscal year ended December 26, 2021.

Financial Statemen ts and Supplementary Data

Index to Financial Statements

Report of Independent Registered Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Redeemable Convertible Preferred Stock, Redeemable Noncontrolling Interest and Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

Report of Independent Regis tered 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.

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

Austin, Texas

March 24, 2021

VITAL FARMS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

Current assets:

Cash and cash equivalents

Investment securities available-for-sale

Accounts receivable, net

Income taxes receivable

Prepaid expenses and other current assets

Total current assets

Property, plant and equipment, net

Notes receivable from related party

Deposits and other assets

Liabilities, Redeemable Noncontrolling Interest, Redeemable

Convertible Preferred Stock and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued liabilities

Current portion of long-term debt

Lease obligation, current

Contingent consideration, current

Total current liabilities

Long-term debt, net of current portion

Lease obligation, net of current portion

Contingent consideration, non-current

Deferred tax liabilities, net

Other liability, non-current

Total liabilities

Commitments and contingencies (Note 16)

Redeemable noncontrolling interest

Redeemable convertible preferred stock (Series B, Series C and Series D), $0.0001 par

value per share;

0 and 8,192,876 shares authorized, issued, and outstanding as of December 27,

2020 and December 29, 2019;

aggregate liquidation preference of $0 and $40,436

as of December 27, 2020 and December 29, 2019

Stockholders’ equity:

Common stock, $0.0001 par value per share, 310,000,000 and 40,348,565 shares authorized as of

December 27, 2020 and December 29, 2019;

39,444,040 and 31,429,898 shares issued as of

December 27, 2020 and December 29, 2019, respectively;

39,444,040 and 25,934,980 shares

outstanding as of December 27, 2020 and December 29, 2019, respectively

Treasury stock, at cost, 5,494,918 common shares as of December 27, 2020

and December 29, 2019

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss

Total stockholders’ equity attributable to Vital Farms, Inc.

Noncontrolling interests

Total stockholders’ equity

Total liabilities, redeemable noncontrolling interest, redeemable

convertible preferred stock and stockholders’ equity

See accompanying notes to the consolidated financial statements.

VITAL FARMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Fiscal Year Ended

Cost of goods sold

Operating expenses:

Selling, general and administrative

Shipping and distribution

Total operating expenses

Income from operations

Other (expense) income, net:

Interest expense

Other (expense) income, net

Total other (expense) income, net

Net income before income taxes

Provision for income taxes

Net income (loss) attributable to

noncontrolling interests

Net income attributable to Vital Farms, Inc.

Net income per share attributable to Vital Farms, Inc.

stockholders:

Weighted average common shares outstanding:

See accompanying notes to the consolidated financial statements

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

Total comprehensive income

See accompanying notes to the consolidated financial statements.

VITAL FARMS, INC.

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

(Amounts in thousands, except share amounts)

Preferred Stock

Noncontrolling

Treasury Stock

Comprehensive

Stockholders’

Noncontrolling

Stockholders’

Balances at December 31, 2017

Issuance of redeemable noncontrolling

Exercise of stock options

Stock-based compensation expense

Net loss attributable to non-

controlling interests - stockholders

Net income attributable to Vital

Balances at December 30, 2018

Issuance of common stock, net of

issuance costs of $903

Exercise of stock options

Repurchase of common stock

Stock-based compensation expense

Net income attributable to non-

controlling interests - stockholders

Net income attributable to Vital

Balances at December 29, 2019

Issuance of common stock pursuant to

initial public offering, net of

issuance costs of 12,215

Issuance of common stock upon

conversion of preferred stock

Exercise of stock options

Exercise of warrant

Vested restricted stock

Stock-based compensation expense

Net income attributable to non-

controlling interests - stockholders

Other comprehensive loss, net

Net income attributable to

Vital Farms, Inc.

Balances at December 27, 2020

See accompanying notes to the consolidated financial statements.

VITAL FARMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

Fiscal Year Ended

Cash flows provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Amortization of debt issuance costs

Bad debt (recovery) expense

Inventory provisions

Change in fair value of contingent consideration

Stock-based compensation expense

Loss on write-off of construction in progress

Deferred taxes

Non-cash interest income

Changes in operating assets and liabilities:

Accounts receivable

Income taxes receivable

Prepaid expenses and other current assets

Deposits and other assets

Accounts payable

Accrued liabilities and other liabilities

Net cash provided by (used in) operating activities

Cash flows used in investing activities:

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

Proceeds from the sale of property, plant and equipment

Notes receivable provided to related parties

Repayment of notes receivable provided to related parties

Net cash used in investing activities

Cash flows provided by (used in) financing activities:

Proceeds from issuance of common stock pursuant to the initial public offering, net of

issuance costs

Proceeds from borrowings under term loan

Proceeds from borrowings under equipment loan

Proceeds from Paycheck Protection Program loan

Proceeds from issuance of redeemable noncontrolling interest

Proceeds from issuance of common stock, net of issuance costs

Proceeds from borrowings under revolving line of credit

Repayment of revolving line of credit

Repayment of equipment loan

Repayment of term loan

Repayment of Paycheck Protection Program loan

Repurchase of common stock

Payment of contingent consideration

Principal payments under finance lease obligation

Proceeds from exercise of stock options

Proceeds from exercise of warrant

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of the period

Cash and cash equivalents at end of the period

Supplemental disclosure of cash flow information:

Cash paid for interest

Cash paid for income taxes

Supplemental disclosure of non-cash investing and financing

Purchases of property, plant and equipment included in accounts payable and accrued liabilities

Deferred offering costs in accounts payable and accrued liabilities

See accompanying notes to the consolidated financial statements.

VITAL FARMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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.

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:

Net Revenue Year Ended December 27, 2020

Net Revenue Year Ended December 29, 2019

Net Revenue Year Ended December 30, 2018

Accounts Receivable, Net As Of December 27, 2020

Accounts Receivable, Net As Of December 29, 2019

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

The decrease in net revenue for Customer A for fiscal 2020 is due a shift in our distribution channels to Customer B.

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.

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 deter mined 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 righ t 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.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

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 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

Building and improvements

Machinery and equipment

Furniture and fixtures

Leasehold improvements

Lesser of lease term or 5 years

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 statement s of operations.

Costs of repairs and maintenance are expensed as incurred.

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.

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, 2019 the 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.

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 d uring 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 th e 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.

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 year s 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.

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:

Contingent consideration, current

Contingent consideration, non-current

Total liabilities measured at fair value

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

Contingent consideration, current

Contingent consideration, non-current

Total liabilities measured at fair value

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:

Balance as of December 30, 2018

Payment of contingent consideration

Change in fair value

Balance as of December 29, 2019

Payment of contingent consideration

Change in fair value

Balance as of December 27, 2020

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

Unobservable Input

December 27, 2020

December 29, 2019

Dozens of eggs supplied

Royalty rate per dozen eggs

Estimated royalty income

Discount interval (in years)

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:

US Corporate Bonds and US Denominated Foreign Bonds

Commercial Paper

Total assets measured at fair value

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

US Corporate Bonds and US Dollar

Denominated Foreign Bonds

Commercial Paper

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

Due within one year

Due in 1-5 years

Total available-for-sale

Revenue Recognition

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

Fiscal Year Ended

Egg and egg related products

Butter and butter related products

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.

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

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

As of December 30, 2018

Provisions Charged to Operating Results

Account Write-off and Recoveries

As of December 29, 2019

Provisions Charged to Operating Results

Account Write-off and Recoveries

As of December 27, 2020

Inventory consisted of the following as of the periods presented:

December 27, 2020

December 29, 2019

Eggs and egg related products

Butter and butter related products

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.

Property, Plant and Equipment

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

December 27, 2020

December 29, 2019

Buildings and improvements

Machinery and equipment

Leasehold improvements

Furniture and fixtures

Construction in progress

Accumulated depreciation and amortization

Property, plant and equipment, net

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.

Accrued Liabilities

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

December 27, 2020

December 29, 2019

Accrued promotions and expired product credits

Accrued grower payments

Accrued employee related costs

Accrued offering costs

Accrued distribution fees and freight

Accrued accounting and legal fees

Accrued marketing and commissions

Property, plant and equipment

Accrued liabilities

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 was 5.75%.

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 was 4.44%.

The Credit Facility is secured by all of the Company’s assets and requires the Company to maintai n 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 proper ties 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 ne t assets on the Company’s consolidated balance sheet as of December 27, 2020 are restricted in use.

Vital Farm s ’ wholly owned subsidiaries are non-operating and do not hold any assets or liabilities;

therefore, these subsidiaries have no restricted net ass ets 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 c ovenants 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:

December 27, 2020

December 29, 2019

Revolving Line of Credit

Equipment Loan

current portion of long-term debt

unamortized debt issuance costs

Long-term debt, net of current portion

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.

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”).

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:

December 27, 2020

December 29, 2019

Conversion of outstanding shares of redeemable

convertible preferred stock

Warrants to purchase common stock

Options to purchase common stock

Restricted stock units

Shares available for grant under the 2013

Incentive Plan

Shares available for grant under the 2020

Incentive Plan

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.

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:

Outstanding as of December 29, 2019

Outstanding as of December 27, 2020

Options exercisable as of December 27, 2020

Options vested and expected to vest as of December 27, 2020

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.

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

Outstanding as of December 29, 2019

Outstanding as of December 27, 2020

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.

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

Provision for income taxes

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%

State income taxes

Non-deductible costs

Charitable deduction

Change in deferred tax asset valuation allowance

Provision for income taxes

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:

Accrued expenses

Inventory reserve

Net operating loss carryforwards

Charitable contributions

Total deferred tax assets

Valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Prepaid expenses

Property and equipment

Total deferred tax liabilities

Net deferred tax liabilities

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

Increases recorded to income tax provision

Decreases recorded as benefit to income tax

Valuation allowance as of end of year

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

Increase in gross tax contingencies

Decrease in gross tax contingencies

Gross tax contingencies as of end of year

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.

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

Net income (loss) attributable to noncontrolling interests

Net income attributable to Vital Farms, Inc.

stockholders’ — basic

Weighted average common shares outstanding — basic

Weighted average effect of potentially dilutive securities:

Effect of potentially dilutive stock options

Effect of potentially dilutive common stock warrants

Effect of potentially dilutive restricted stock units

Effect of potentially dilutive redeemable convertible preferred stock

Weighted average common shares outstanding — diluted

Net income per share attributable to Vital Farms, Inc.

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.

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:

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.

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.

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 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.

Note s Receivable from Related Parties:

In February 2019, the Company issued promissory notes in the aggregate amount of $4,000 to i ts 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 accr ued 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.

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.

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

September 27,

September 29,

Consolidated Statements of Operations Data:

Cost of goods sold

Operating expenses:

Selling, general

and administrative

Total operating expenses

Income from operations

Other (expense) income, net:

Interest expense

(expense), net

(expense) income, net

Net income (loss) before income taxes

Provision for income taxes

Net income (loss)

Net (loss) income attributable to

noncontrolling interests

Net income (loss) attributable to Vital Farms, Inc.

Common stockholders, basic and diluted

Net income (loss) per share attributable to Vital Farms, Inc.

common stockholders:

Weighted average shares used to compute net income (loss) per share attributable to Vital Farms, Inc.

common stockholders:

Changes in and Disagreements w ith Acco untants 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.

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 7A. Quantitative and Qualitative Disclosures About Market Risk