Vital Farms, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Financial Statements Report of Independent Registered Accounting Firm (KPMG LLP, Austin, TX, PCAOB ID: 185 ) 62 Consolidated Balance Sheets 63 Consolidated Statements of Operations 64 Consolidated Statements of Comprehensive Income 65 Consolidated Statements of Redeemable Convertible Preferred Stock, Redeemable Noncontrolling Interest and Stockholders’ Equity 66 Consolidated Statements of Cash Flows 67 Notes to the Consolidated Financial Statements 68 61 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Vital Farms, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Vital Farms, Inc. and subsidiaries (the Company) as of December 26, 2021 and December 27, 2020, 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 26, 2021, 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 26, 2021 and December 27, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 26, 2021, 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2019. Austin, Texas March 10, 2022 62 VITAL FARMS, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share amounts) December 26, 2021 December 27, 2020 Assets Current assets: Cash and cash equivalents $ 30,966 $ 29,544 Investment securities available-for-sale 68,621 68,357 Accounts receivable, net 26,938 20,934 Inventories 10,945 12,902 Income taxes receivable 199 1,554 Prepaid expenses and other current assets 3,539 3,965 Total current assets 141,208 137,256 Property, plant and equipment, net 44,608 30,118 Goodwill 3,858 3,858 Deferred tax asset, net 79 — Deposits and other assets 189 142 Total assets $ 189,942 $ 171,374 Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity Current liabilities: Accounts payable $ 22,520 $ 15,489 Accrued liabilities 15,124 9,845 Lease obligation, current 327 471 Contingent consideration, current 19 109 Total current liabilities 37,990 25,914 Lease obligation, net of current portion - 327 Contingent consideration, non-current — 18 Deferred tax liabilities, net — 2,537 Other liability, non-current 192 192 Total liabilities 38,182 28,988 Commitments and contingencies (Note 16) Redeemable noncontrolling interest 175 175 Stockholders’ equity: Common stock, $ 0.0001 par value per share, 310,000,000 shares authorized as of December 26, 2021 and December 27, 2020; 40,493,969 and 39,444,040 shares issued as of December 26, 2021 and December 27, 2020, respectively; 40,493,969 and 39,440,040 shares outstanding as of December 26, 2021 and December 27, 2020, respectively 5 5 Treasury stock, at cost, zero and 5,494,918 common shares as of December 26, 2021 and December 27, 2020, respectively — ( 16,276 ) Additional paid-in capital 149,000 144,311 Retained earnings 2,746 14,039 Accumulated other comprehensive loss ( 281 ) ( 31 ) Total stockholders’ equity attributable to Vital Farms, Inc. stockholders 151,470 142,048 Noncontrolling interests 115 163 Total stockholders’ equity $ 151,585 $ 142,211 Total liabilities, redeemable noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity $ 189,942 $ 171,374 See accompanying notes to the consolidated financial statements. 63 VITAL FARMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) Fiscal Year Ended December 26, 2021 December 27, 2020 December 29, 2019 Net revenue $ 260,901 $ 214,280 $ 140,733 Cost of goods sold 178,002 139,752 97,856 Gross profit 82,899 74,528 42,877 Operating expenses: Selling, general and administrative 57,868 47,396 29,526 Shipping and distribution 24,979 14,904 10,001 Total operating expenses 82,847 62,300 39,527 Income from operations 52 12,228 3,350 Other income (expense), net: Interest expense ( 52 ) ( 488 ) ( 349 ) Other income (expense), net 354 ( 86 ) 1,417 Total other income (expense), net 302 ( 574 ) 1,068 Net income before income taxes 354 11,654 4,418 (Benefit) provision for income taxes ( 2,028 ) 2,770 1,106 Net income 2,382 8,884 3,312 Less: Net (loss) income attributable to noncontrolling interests ( 47 ) 84 927 Net income attributable to Vital Farms, Inc. common stockholders $ 2,429 $ 8,800 $ 2,385 Net income per share attributable to Vital Farms, Inc. stockholders: Basic: $ 0.06 $ 0.31 $ 0.09 Diluted: $ 0.06 $ 0.27 $ 0.07 Weighted average common shares outstanding: Basic: 40,027,278 28,667,264 25,897,223 Diluted: 43,321,733 32,914,653 36,071,015 See accompanying notes to the consolidated financial statements 64 VITAL FARMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) Fiscal Year Ended December 26, 2021 December 27, 2020 December 29, 2019 Net income $ 2,382 $ 8,884 $ 3,312 Other comprehensive loss Unrealized holding loss on available-for-sale securities, net of deferred tax benefit of $ 80 and $ 10 for the years ended December 26, 2021 and December 27, 2020, respectively ( 250 ) ( 31 ) — Total comprehensive income $ 2,132 $ 8,853 $ 3,312 See accompanying notes to the consolidated financial statements. 65 VITAL FARMS, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY (Amounts in thousands, except share amounts) Redeemable Convertible Preferred Stock Redeemable Noncontrolling Interest Common Stock Treasury Stock Additional Paid-In Retained Earnings Accumulated Other Comprehensive Total Stockholders’ Equity Attributable to Vital Farms, Inc. Noncontrolling Total Stockholders’ Shares Amount Amount Shares Amount Shares Amount Capital (Deficit) Loss Stockholders’ Interests Equity Balances at December 30, 2018 8,192,876 $ 23,036 $ 175 28,461,978 $ 3 ( 2,642,148 ) $ ( 1,987 ) $ 4,245 $ 2,854 $ — $ 5,115 $ ( 848 ) $ 4,267 Issuance of common stock, net of issuance costs of $ 903 — — — 2,815,012 — — — 14,097 — — 14,097 — 14,097 Exercise of stock options — — — 152,908 — — — 222 — — 222 — 222 Repurchase of common stock — — — — — ( 2,852,770 ) ( 14,289 ) — — — ( 14,289 ) — ( 14,289 ) Stock-based compensation expense — — — — — — — 1,029 — — 1,029 — 1,029 Net income attributable to non- controlling interests - stockholders — — — — — — — — — — — 927 927 Net income attributable to Vital Farms, Inc. — — — — — — — — 2,385 — 2,385 — 2,385 Balances at December 29, 2019 8,192,876 $ 23,036 $ 175 31,429,898 $ 3 ( 5,494,918 ) $ ( 16,276 ) $ 19,593 $ 5,239 $ — $ 8,559 $ 79 $ 8,638 Issuance of common stock pursuant to initial public offering, net of issuance costs of 12,215 — — — 5,040,323 1 — — 98,670 — — 98,671 — 98,671 Issuance of common stock upon conversion of preferred stock ( 8,192,876 ) ( 23,036 ) — 8,192,876 1 — — 23,035 — — 23,036 — 23,036 Exercise of stock options — — — 75,964 — — — 221 — — 221 — 221 Exercise of warrant — — — 196,800 — — — 283 — — 283 — 283 Vested restricted stock — — — 3,097 — — — — — — — — — Stock-based compensation expense — — — — — — — 2,509 — — 2,509 — 2,509 Net income attributable to non- controlling interests - stockholders — — — — — — — — — — 83 83 Other comprehensive loss, net — — — — — — — — — ( 31 ) ( 31 ) — ( 31 ) Net income attributable to Vital Farms, Inc. — — — — — — — — 8,800 — 8,800 — 8,800 Balances at December 27, 2020 — $ — $ 175 44,938,958 $ 5 ( 5,494,918 ) $ ( 16,276 ) $ 144,311 $ 14,039 $ ( 31 ) $ 142,048 $ 162 $ 142,210 Exercise of stock options — — — 1,034,929 — — — 2,803 — — 2,803 — 2,803 Vesting of restricted stock — — — 15,000 — — — — — — 0 — 0 Stock-based compensation expense — — — — — — — 4,440 — — 4,440 — 4,440 Net loss attributable to non-controlling interests - stockholders — — — — — — — — — — 0 ( 47 ) ( 47 ) Retirement of treasury stock — — — ( 5,494,918 ) — 5,494,918 16,276 ( 2,554 ) ( 13,722 ) — — — — Other comprehensive loss, net — — — — — — — — — ( 250 ) ( 250 ) — ( 250 ) Net income attributable to Vital Farms, Inc. — — — — — — — — 2,429 — 2,429 — 2,429 Balances at December 26, 2021 — $ — $ 175 40,493,969 $ 5 — $ — $ 149,000 $ 2,746 $ ( 281 ) $ 151,470 $ 115 $ 151,585 See accompanying notes to the consolidated financial statements. 66 VITAL FARMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Fiscal Year Ended December 26, 2021 December 27, 2020 December 29, 2019 Cash flows provided by operating activities: Net income $ 2,382 $ 8,884 $ 3,312 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,540 2,550 1,921 Amortization of debt issuance costs — 68 9 Bad debt expense (recovery) 73 ( 108 ) 304 Inventory provisions 224 16 189 Change in fair value of contingent consideration 44 ( 333 ) 70 Stock-based compensation expense 4,440 2,509 1,029 Loss on write-off of construction in progress 173 259 — Deferred taxes ( 2,536 ) 1,782 52 Non-cash interest income ( 229 ) ( 33 ) — Changes in operating assets and liabilities: Accounts receivable ( 6,078 ) ( 4,718 ) ( 6,182 ) Inventories 1,733 29 ( 9,270 ) Income taxes receivable 1,354 61 ( 1,563 ) Prepaid expenses and other current assets 426 ( 2,255 ) ( 582 ) Deposits and other assets ( 46 ) 11 93 Accounts payable 6,796 1,807 3,192 Accrued liabilities and other liabilities 4,029 1,173 2,074 Net cash provided by (used in) operating activities $ 16,325 $ 11,702 $ ( 5,352 ) Cash flows used in investing activities: Purchases of property, plant and equipment ( 16,711 ) ( 10,300 ) ( 4,799 ) Purchases of available-for-sale debt securities ( 52,017 ) ( 68,388 ) — Sales, maturities, and call redemptions of available-for-sale debt securities 51,645 — — Proceeds from the sale of property, plant and equipment — — 7 Notes receivable provided to related parties — — ( 4,031 ) Repayment of notes receivable provided to related parties — 846 3,200 Net cash used in investing activities $ ( 17,083 ) $ ( 77,842 ) $ ( 5,623 ) Cash flows provided by (used in) financing activities: Proceeds from issuance of common stock pursuant to the initial public offering, net of issuance costs — 99,671 — Proceeds from borrowings under term loan — 5,000 — Proceeds from borrowings under equipment loan — 1,461 587 Proceeds from Paycheck Protection Program loan — 2,593 — Proceeds from issuance of redeemable noncontrolling interest — — 14,097 Proceeds from borrowing under revolving line of credit — — 1,325 Repayment of revolving line of credit — ( 1,325 ) — Repayment of equipment loan — ( 2,015 ) — Repayment of term loan — ( 8,245 ) ( 671 ) Repayment of Paycheck Protection Program loan — ( 2,593 ) — Repurchase of common stock — — ( 14,289 ) Payment of contingent consideration ( 152 ) ( 192 ) ( 409 ) Principal payments under finance lease obligation ( 471 ) ( 449 ) ( 428 ) Proceeds from exercise of stock options 2,803 221 222 Proceeds from exercise of warrant — 283 — Net cash provided by (used in) financing activities $ 2,180 $ 94,410 $ 434 Net increase in cash and cash equivalents $ 1,422 $ 28,270 $ ( 10,541 ) Cash and cash equivalents at beginning of the period 29,544 1,274 11,815 Cash and cash equivalents at end of the period $ 30,966 $ 29,544 $ 1,274 Supplemental disclosure of cash flow information: Cash paid for interest $ 43 $ 414 $ 340 Cash paid for income taxes $ 102 $ 2,214 $ 2,256 Supplemental disclosure of non-cash investing and financing activities: Purchases of property, plant and equipment included in accounts payable and accrued liabilities $ 1,493 $ 167 $ 928 Deferred offering costs in accounts payable and accrued liabilities $ - $ - $ 1,001 See accompanying notes to the consolidated financial statements. 67 VITAL FARMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share amounts) 1. Nature of the Business and Basis of Presentation Vital Farms, Inc. (“Vital Farms” or “the Company”) was incorporated in Delaware on June 6, 2013 and is headquartered in Austin, Texas. Vital Farms packages, markets and distributes shell eggs, butter and other products. These products are sold under the trade names Vital Farms, Alfresco Farms, Lucky Ladies and RedHill Farms, primarily to retail and foodservice channels in the United States. Vital Farms of Missouri, LLC, Backyard Eggs, LLC, Barn Door Farms, LLC, Sagebrush Foodservice, LLC and Vital Farms, LLC re all wholly owned subsidiaries of Vital Farms. All significant intercompany transactions and balances have been eliminated in the audited consolidated financial statements. Fiscal Year: The Company’s fiscal year ends on the last Sunday in December and contains either 52 or 53 weeks. Therefore, the financial results of certain 53-week years will not be exactly comparable to the prior and subsequent 52-week years. The years ended December 26, 2021, December 27, 2020, and December 29, 2019 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 26, 2021, 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. 68 2. Summary of Significant Accounting Policies Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates principally include revenue recognition, determination of useful lives for property and equipment, trade spend accruals, goodwill, allowance for doubtful accounts, inventory obsolescence, valuation of common stock prior to IPO, stock option valuations, accrual liabilities and income taxes. Actual results could differ from those estimates. 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, investments 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 26, 2021 and December 27, 2020, the Company had customers that individually represented 10% or more of the Company’s accounts receivable, net. During fiscal years 2021, 2020, and 2019 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 26, 2021 Net Revenue Year Ended December 27, 2020 Net Revenue Year Ended December 29, 2019 Accounts Receivable, Net As Of December 26, 2021 Accounts Receivable, Net As Of December 27, 2020 Customer A 18 % 15 % 35 % 19 % * Customer B 14 % 18 % * * 20 % Customer C 10 % 12 % 11 % * * Customer D 12 % 13 % 14 % 13 % 15 % * Revenue and/or accounts receivable was less than 10%. The increase in net revenue for Customer A for fiscal 2021 is due a net shift in the Company’s distribution channels from Customer B to Customer A during the year ended December 26, 2021. Net revenue for Customers C and D increased from 2020 to 2021; however, growth from other existing customers and new customers resulted in net revenue from Customers C and D comprising a lower percentage of total net revenue . 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 26, 2021, 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. The amortized cost of debt securities is adjusted for premiums and accretion of discounts to maturity. Such amortization is recorded in interest income. The cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of debt securities and declines in value due to credit-related factors are recorded in other income. Interest and dividends on securities classified as available-for-sale are recorded in interest income. 69 Variable Interest Entity: The Company consolidates all entities where a controlling financial interest exists. The Company has considered its relationships with a certain entity to determine whether the Company has a variable interest in that entity, and if so, whether the Company is the primary beneficiary of the relationship. GAAP requires variable interest entities (“VIEs”) to be consolidated if an entity’s interest in the VIE is a controlling financial interest. Under the variable model, a controlling financial interest is determined based on which entity, if any, has (i) the power to direct the activities of the VIE that most significantly impacts the VIE’s economic performance and (ii) the obligations to absorb losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. The consolidation status of a VIE may change as a result of such reassessments. Changes in consolidation status are applied prospectively in accordance with GAAP. Segment Information: The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of evaluating financial performance and allocating resources. All of the Company’s long-lived assets and customers are located in the United States. Fair Value of Financial Instruments: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of inputs that may be used to measure fair value are defined below: • Level 1 - Quoted prices in active markets for identical assets or liabilities. • 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 values of cash and cash equivalents, 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 26, 2021 and December 27, 2020, the Company recorded an allowance for doubtful accounts of $ 269 and $ 196 in the accompanying consolidated balance sheets. Inventories: Inventories are stated at the lower of cost (determined under the first-in, first-out method) or net realizable value. Inventory includes eggs and egg related products, butter and butter related products, 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 written down to its net realizable value. Property, Plant and Equipment, Net: Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives. The general range of useful lives of other property, plant and equipment is as follows: Estimated Useful Life Land N/A Building and improvements 39 years Vehicles 5 years Machinery and equipment 2 to 7 years Furniture and fixtures 5 years Leasehold improvements Lesser of lease term or 5 years 70 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 other income (expense), net in the consolidated statements of operations. Costs of repairs and maintenance are expensed as incurred. Goodwill: Goodwill represents the excess of cost over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually on the first day of the fourth fiscal quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company’s goodwill impairment test is performed at the enterprise level given the single 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 no t recognize an impairment loss during the years ended December 26, 2021, December 27, 2020, and December 29, 2019. 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. 71 The Company’s policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 26, 2021 and December 27, 2020 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 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 $ 24,979 , $ 14,904 , and $ 10,001 during the years ended December 26,2021, December 27, 2020 and December 29, 2019, respectively. Freight-in costs are included within Cost of Goods Sold and were $ 7,623 , $ 5,126 , and $ 3,012 during the years ended December 26, 2021, December 27, 2020 and December 29, 2019, 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. 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. 72 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 26, 2021, December 27, 2020, and December 29, 2019, the Company incurred advertising and promotion expenses of approximately $ 11,469 , $ 9,815 , and $ 10,320 , 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 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 related lease liability of approximately $ 4.0 million 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. 73 In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which intends to simplify the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance. ASU 2019-12 is effective for years beginning after December 15, 2021, and interim periods within years beginning after December 15, 2022. The Company expects to adopt ASU 2019-12 on December 26, 2022. Although the Company is currently evaluating the impact of the adoption of ASU 2019-12, the Company does not expect it to have a material impact on its consolidated financial statements. 3. Fair Value The following table presents information about the Company’s financial assets measured at fair value on a recurring basis: Fair Value Measurements as of December 26, 2021, Using: Level 1 Level 2 Level 3 Total Assets: US Corporate Bonds and US Denominated Foreign Bonds $ — $ 64,452 $ — $ 64,452 Commercial Paper — 2,999 — 2,999 Money Market 20,101 — — 20,101 US Treasury — 1,170 — 1,170 Total assets measured at fair value $ 20,101 $ 68,621 $ — $ 88,722 Fair Value Measurements as of December 27, 2020, Using: Level 1 Level 2 Level 3 Total Assets: US Corporate Bonds and US Denominated Foreign Bonds $ — $ 58,630 $ — $ 58,630 Commercial Paper — 6,697 — 6,697 Money Market 25,469 — — 25,469 US Treasury — 3,030 — 3,030 Total assets measured at fair value $ 25,469 $ 68,357 $ — $ 93,826 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 26, 2021, Using: Liabilities: Level 1 Level 2 Level 3 Total Contingent consideration, current $ — $ — $ 19 $ 19 Contingent consideration, non-current — — - - Total liabilities measured at fair value $ — $ — $ 19 $ 19 Fair Value Measurements as of December 27, 2020, Using: Level 1 Level 2 Level 3 Total Liabilities: Contingent consideration, current $ — $ — $ 109 $ 109 Contingent consideration, non-current — — 18 18 Total liabilities measured at fair value $ — $ — $ 127 $ 127 During the years ended December 26, 2021 and December 27, 2020, there were no transfers between fair value measurement levels. During the years ended December 26, 2021 and December 27, 2020, the Company recognized unrealized losses and (gains) associated with the fair value of contingent consideration of $ 44 and $( 333 ), respectively. 74 The following table presents the unobservable inputs incorporated into the valuation of contingent consideration: Unobservable Input December 26, 2021 December 27, 2020 Estimated dozens of eggs to be supplied 275,250 1,885,660 Royalty rate per dozen eggs $ 0.07 $ 0.07 Estimated future royalty expense $ 19 $ 132 Discount interval (in years) 0.5 1.4 4. Investment Securities The following table summarizes the Company’s investment securities as of December 26, 2021: Amortized Cost Unrealized Losses Fair Value US Corporate Bonds and US Dollar Denominated Foreign Bonds $ 64,816 $ ( 364 ) $ 64,452 Commercial Paper 2,999 — 2,999 US Treasury 1,177 ( 7 ) 1,170 Total $ 68,992 $ ( 371 ) $ 68,621 The following table summarizes the Company’s investment securities as of December 27, 2020: Amortized Cost Unrealized Losses Fair Value US Corporate Bonds and US Dollar Denominated Foreign Bonds $ 58,671 $ ( 41 ) $ 58,630 Commercial Paper 6,697 — 6,697 US Treasury 3,030 — 3,030 Total $ 68,398 $ ( 41 ) $ 68,357 Available-for-sale securities In October 2020, the Company purchased available-for-sale debt securities of approximately $ 68,336 . During the year ended December 26, 2021 there were purchases of $ 51,688 , sales and maturities of $ 40,874 with realized losses of $ 1 , and call redemptions of $ 10,752 with realized losses of $ 54 . The securities incurred unrealized losses of $ 330 and related tax benefit of $ 80 for the year ended December 26, 2021. 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 26, 2021 are as follows: Amortized Cost Fair Value Due within one year $ 25,656 $ 25,638 Due in 1-5 years 43,336 42,983 Total available-for-sale $ 68,992 $ 68,621 75 5. Revenue Recognition The following table summarizes the Company’s net revenue by primary product for the periods presented: Fiscal Year Ended December 26, 2021 December 27, 2020 December 29, 2019 Net Revenue: Eggs and egg related products $ 239,967 $ 196,695 $ 128,579 Butter and butter related products 20,934 17,585 12,154 Net Revenue $ 260,901 $ 214,280 $ 140,733 Net revenue is primarily generated from the sale of eggs and butter. Historically, the Company’s product offering was comprised of shell eggs, hard-boiled eggs, liquid whole eggs and butter. In August 2021, the Company added spreadable tub butter and egg-based breakfast bars to its product offering. The fiscal year ended December 27, 2020 includes revenue totaling $ 624 resulting from the reduction of a sales promotion incentive settled in Q2 2020 that related to a prior year’s gross sales. 6. Accounts Receivable Accounts receivable, net was $ 26,938 and $ 20,934 as of December 26, 2021 and December 27, 2020, respectively. As of December 26, 2021 and December 27, 2020, the Company recorded an allowance for doubtful accounts of $ 269 and $ 196 , respectively. Changes in the allowance for doubtful accounts were as follows: Allowance for doubtful accounts As of December 29, 2019 $ ( 304 ) Provisions Charged to Operating Results ( 217 ) Account Write-off and Recoveries 325 As of December 27, 2020 $ ( 196 ) Provisions Charged to Operating Results ( 184 ) Account Write-off and Recoveries 111 As of December 26, 2021 $ ( 269 ) 7. Inventories Inventory consisted of the following as of the periods presented: December 26, 2021 December 27, 2020 Eggs and egg related products $ 5,422 $ 6,407 Butter and butter related products 2,359 3,347 Packaging 2,166 1,997 Other 998 1,151 $ 10,945 $ 12,902 During the years ended December 26, 2021, December 27, 2020, and December 29, 2019, laying-hen costs amortized to cost of goods sold were approximately $ 232 , $ 375 , and $ 484 , respectively. On a periodic basis, the Company compares the amount of inventory on hand with its latest forecasted requirement to determine whether charges for excess or obsolete inventory reserves are required. 76 8. Property, Plant and Equipment Property, plant and equipment consisted of the following as of the periods presented: December 26, 2021 December 27, 2020 Land $ 525 $ 525 Buildings and improvements 14,214 14,297 Vehicles 695 551 Machinery and equipment 15,523 12,473 Leasehold improvements 830 973 Furniture and fixtures 503 447 Construction in progress 21,164 6,654 53,454 35,920 Less: Accumulated depreciation and amortization ( 8,846 ) ( 5,802 ) Property, plant and equipment, net $ 44,608 $ 30,118 During the years ended December 26, 2021, December 27, 2020, and December 29, 2019, depreciation and amortization of property, plant and equipment was approximately $ 3,540 , $ 2,550 , and $ 1,921 , respectively. As of December 26, 2021 and December 27, 2020, machinery and equipment that was leased under capital leases and included in property, plant and equipment, net in the consolidated balance sheets was approximately $ 876 and $ 1,193 , respectively. 9. Accrued Liabilities Accrued liabilities consisted of the following as of the periods presented: December 26, 2021 December 27, 2020 Accrued promotions and expired product credits $ 3,599 $ 2,724 Accrued employee related costs 3,039 3,718 Accrued offering costs — 123 Accrued distribution fees and freight 3,875 436 Accrued accounting and legal fees 344 238 Accrued marketing and commissions 769 739 Accrued purchases of inventory 1,197 1,088 Property, plant and equipment 1,258 502 Other 1,043 277 Accrued liabilities $ 15,124 $ 9,845 10. Long-Term Debt In October 2017, the Company entered into a credit facility agreement with PNC Bank, National Association (the “Credit Facility”) that provided for an initial term loan of $ 4,700 (the “Term Loan”) and a revolving line of credit of up to $ 10,000 (the “Revolving Line of Credit”). The Credit Facility also originally provided for a $ 1,500 equipment loan (the “Equipment Loan”) for the purpose of funding permitted capital expenditures, subject to certain restrictions. Subsequently, the 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 $ 20,000 . 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 2.00 % or (ii) 1.00 % plus the alternate base rate. As of December 26, 2021, there were no outstanding amounts under the Revolving Line of Credit. 77 The Credit Facility is secured by all of the Company’s assets (other than real property and certain other property excluded pursuant to the terms of the Credit Facility) and requires the Company to comply with 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 and the sale of properties and liens. As a result of the limitations contained in the Credit Facility, certain of the net assets on the Company’s consolidated balance sheet as of December 26, 2021 are restricted in use. Vital Farms’ wholly owned subsidiaries are non-operating and do not hold any assets or liabilities; therefore, these subsidiaries have no restricted net assets within the meaning of Rule 4-08(e)(3) or Rule 12-04 of Regulation S-X. The Credit Facility also contains other customary covenants, representations and events of default. As of December 26, 2021, the Company was in compliance with all covenants under the Credit Facility. Debt issuance costs associated with the Credit Facility are reflected as a reduction of the carrying value of long-term debt on the Company’s consolidated balance sheets and are being amortized to interest expense over the term of the Credit Facility using the effective interest method. During the years ended December 26, 2021, December 27, 2020, and December 29, 2019, the Company recognized interest expense of $ 52 , $ 488 , and $ 349 respectively, which includes amortization of debt issuance costs of $ 0 , $ 68 , and $ 9 , respectively. As of December 26, 2021, future principal payments for capital lease payments are $ 327 for the fiscal year ending December 25, 2022, due to the August 2022 expiration of the capital lease. Amounts outstanding under the Company’s Revolving Line of Credit as of December 27, 2020 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. 11. Redeemable Convertible Preferred Stock Upon the closing of the IPO in August 2020, all of the then-outstanding shares of Preferred Stock automatically converted into 8,192,876 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there were no shares of Preferred Stock outstanding. As of December 26, 2021, the Company’s amended and restated certificate of incorporation authorized the Company to issue 10,000,000 shares, par value $ 0.0001 per share, of preferred stock, in one or more series and with such designation, rights and preferences as may be determined from time to time by the Company’s board of directors (collectively, the “Preferred Stock”). As of December 26, 2021, there were no shares of Preferred Stock issued or outstanding. 12. Common Stock and Common Stock Warrant Common Stock: As of December 26, 2021, Vital Farms’ amended and restated certificate of incorporation authorized the Company to issue 310,000,000 shares of common stock, par value $ 0.0001 per share, of which 40,493,969 shares were issued and outstanding. 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 Preferred Stock, if any. 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, if any. No cash dividends had been declared or paid during the periods presented. 78 As of each balance sheet date, the Company had reserved shares of common stock for issuance in connection with the following: December 26, 2021 December 27, 2020 Options to purchase common stock 4,927,033 5,815,684 Restricted stock units 107,867 45,000 Shares available for grant under the 2020 Equity Incentive Plan and 2020 Employee Stock Purchase Plan 9,993,187 7,615,143 Total 15,028,087 13,475,827 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 Vital Farms’ common stock resulting in net proceeds of approximately $ 282 . Treasury Stock : In August 2021, the Company retired an aggregate of 5,494,918 shares of its common stock held in treasury. Upon retirement, the shares were redesignated as authorized but unissued shares of the Company’s common stock. 13. Stock-Based Compensation As of December 26, 2021, 9,993,187 shares were available for future grants of the Company’s common stock pursuant to the Vital Farms, Inc. 2020 Equity Incentive Plan (“2020 Incentive Plan”) and the 2020 Employee Share Purchase Plan (“2020 ESPP”). 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, 2022, 1,619,758 shares of common stock were added to the available reserve pursuant to this provision. We estimate the fair value of stock options on the date of grant using a Black-Scholes option-pricing valuation model, which uses the expected option term, stock price volatility, and the risk-free interest rate. The expected option term assumption reflects the period for which we believe the option will remain outstanding. We elected to use the simplified method to determine the expected option term, for all periods presented, which is the average of the option’s vesting and contractual term. Our computation of expected volatility is based on the historical volatility of selected comparable publicly traded companies over a period equal to the expected term of the option. The risk-free interest rate reflects the U.S. Treasury yield curve for a similar instrument with the same expected term in effect at the time of the grant. The following assumptions were utilized to calculate the fair value of stock options granted during the fiscal periods indicated: December 26, 2021 December 27, 2020 December 29, 2019 Expected term (in years) 6.0 - 6.5 5.2 - 6.5 5.4 - 6.5 Expected stock price volatility 28.5% - 29.4% 29.1% - 42.9% 39.5% - 47.0% Risk-free interest rate 0.57% - 1.36% 0.34% - 0.49% 1.4% - 2.38% Expected dividend yield 0 % 0 % 0 % Weighted average fair value at grant date $ 7.31 $ 6.83 $ 2.31 79 The following table summarizes the Company’s stock option activity since December 27, 2020: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding as of December 27, 2020 5,815,684 $ 6.87 6.7 $ 112,762 Granted 565,593 $ 24.05 Exercised ( 1,034,929 ) $ 2.68 $ 20,343 Cancelled ( 419,315 ) $ 12.17 Outstanding as of December 26, 2021 4,927,033 $ 9.25 6.5 $ 48,222 Options exercisable as of December 26, 2021 2,572,316 $ 4.70 5.1 $ 33,605 Options vested and expected to vest as of December 26, 2021 4,918,003 $ 9.26 6.5 $ 48,099 The following table summarizes the Company’s stock option activity since December 29, 2019: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding as of December 29, 2019 5,413,064 $ 3.73 7.3 $ 60,059 Granted 985,519 $ 22.98 Exercised ( 66,062 ) $ 2.85 $ 1,022 Cancelled ( 516,837 ) $ 3.76 Outstanding as of December 27, 2020 5,815,684 $ 6.87 6.7 $ 112,762 Options exercisable as of December 27, 2020 2,751,727 $ 2.59 4.7 $ 63,061 Options vested and expected to vest as of December 27, 2020 5,815,684 $ 6.87 6.7 $ 112,762 The fair value of shares vested during the fiscal year ended December 26, 2021 and December 27, 2020 was $ 2,694 and $ 3,320 , respectively. 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: Number of RSUs Weighted- Average Fair Price Unvested as of December 29, 2019 — $ — Granted 48,097 $ 37.63 Vested ( 3,097 ) $ 37.97 Forfeited — $ — Unvested as of December 27, 2020 45,000 $ 37.61 Granted 80,324 $ 23.71 Vested ( 15,000 ) $ 37.61 Forfeited ( 2,457 ) $ 25.78 Unvested as of December 26, 2021 107,867 $ 27.53 80 During the years ended December 26, 2021, December 27, 2020, and December 29, 2019, the Company recognized total stock-based compensation expense of $ 4,440 , $ 2,509 , and $ 1,029 , respectively. 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. As of December 26, 2021, total unrecognized stock-based compensation expense related to unvested stock options and unreleased restricted stock units was $ 11,006 , which is expected to be recognized over a weighted-average period of 2.6 years. 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, 2022, 404,939 shares of common stock were added to the available reserve pursuant to this provision. The Company’s board of directors may periodically grant or provide for the grant to eligible employees the ability to purchase common stock under the 2020 ESPP during a specific offering period. In November 2021, the Compensation Committee of the Board of Directors approved an initial offering of common stock under the 2020 ESPP to eligible employees, which commenced March 1, 2022. 14. Income Taxes For the years ended December 26, 2021, December 27, 2020, and December 29, 2019 the provision for income taxes consisted of the following: December 26, 2021 December 27, 2020 December 29, 2019 Current: Federal $ 225 $ 587 $ 867 State 282 412 187 Deferred: Federal ( 2,164 ) 1,677 ( 88 ) State ( 371 ) 94 140 (Benefit) provision for income taxes $ ( 2,028 ) $ 2,770 $ 1,106 The Company’s income before income taxes is entirely derived from domestic sources for all periods presented. The reconciliation of the federal statutory income tax provision to the Company’s effective income tax provision is as follows: December 26, 2021 December 27, 2020 December 29, 2019 Provision at statutory rate of 21 % $ 74 $ 2,446 $ 929 State income taxes ( 416 ) 300 258 Stock-based compensation ( 2,846 ) 373 - Non-deductible costs 12 211 604 Charitable deduction ( 88 ) ( 206 ) ( 629 ) Change in deferred tax asset valuation allowance 774 ( 138 ) 23 Other, net 462 ( 216 ) ( 79 ) (Benefit) provision for income taxes $ ( 2,028 ) $ 2,770 $ 1,106 81 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 26, 2021 and December 27, 2020 were comprised of the following: December 26, 2021 December 27, 2020 Deferred tax assets: Accrued expenses $ 1,383 $ 1,144 Allowances and other reserves 212 80 Inventory 387 368 Net operating loss carryforwards 2,220 27 Charitable contributions 774 322 Stock-based compensation 460 205 Other 90 11 Total deferred tax assets 5,526 2,157 Less: Valuation allowance ( 774 ) - Net deferred tax assets $ 4,752 $ 2,157 Deferred tax liabilities: Prepaid expenses $ 784 $ 906 Property and equipment 3,610 3,497 Intangibles 279 291 Total deferred tax liabilities 4,673 4,694 Net deferred tax assets or liabilities $ 79 $ 2,537 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 26, 2021 was an increase of approximately $ 774 . The activity in the Company’s deferred tax asset valuation allowance for the years ended December 26, 2021 and December 27, 2020 was as follows: December 26, 2021 December 27, 2020 Valuation allowance as of beginning of year $ - $ 138 Increases recorded to income tax provision 774 — Decreases recorded as benefit to income tax provision - ( 138 ) Valuation allowance as of end of year $ 774 $ - As of December 26, 2021, 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 26, 2021, 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 and we do not anticipate the balance of the unrecognized tax benefits to change in the next twelve months. The following table reflects changes in gross unrecognized tax benefits: December 26, 2021 December 27, 2020 Gross tax contingencies as of beginning of year $ 219 $ 272 Increase in gross tax contingencies - 219 Decrease in gross tax contingencies - ( 272 ) Gross tax contingencies as of end of year $ 219 $ 219 As of December 26, 2021, the Company had federal net operating loss carryforwards of $ 9.1 million which can be carried forward indefinitely. The Company also had state net operating loss carryforwards of $ 3.9 million which begin to expire in 2022 . 82 The Company files a U.S. federal income tax return, as well as income tax returns in various states. Tax years 2018 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 2017. 15. Net Income Per Share Basic and diluted net income per share attributable to the Company’s common stockholders were calculated as follows: Fiscal Year Ended December 26, 2021 December 27, 2020 December 29, 2019 Numerator: Net income $ 2,382 $ 8,884 $ 3,312 Less: Net (loss) income attributable to noncontrolling interests ( 47 ) 84 927 Net income attributable to Vital Farms, Inc. stockholders’ — basic and diluted $ 2,429 $ 8,800 $ 2,385 Denominator: Weighted average common shares outstanding — basic 40,027,278 28,667,264 25,897,223 Weighted average effect of potentially dilutive securities: Effect of potentially dilutive stock options 3,290,615 4,142,947 1,826,084 Effect of potentially dilutive common stock warrants — 82,993 154,832 Effect of potentially dilutive restricted stock units 3,840 21,449 — Effect of potentially dilutive redeemable convertible preferred stock — — 8,192,876 Weighted average common shares outstanding — diluted 43,321,733 32,914,653 36,071,015 Net income per share attributable to Vital Farms, Inc. stockholders Basic $ 0.06 $ 0.31 $ 0.09 Diluted $ 0.06 $ 0.27 $ 0.07 For the years ended December 26, 2021 and December 27, 2020, options to purchase 23,744 shares of common stock and 826,883 shares of common stock, respectively, were excluded from the computation of diluted net income per share attributable to the Company’s common stockholders because including them would have been antidilutive. 16. Commitments and Contingencies Operating Leases: As of December 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 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 December 31, 2020 . 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 under an operating lease expiring in September 2023 . The monthly lease payments, which include base rent charges of $ 79 , 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 26, 2021, December 27, 2020, and December 29, 2019, the Company recognized rent expense, including associated common area maintenance charges, of $ 583 , $ 444 , and $ 358 , respectively. 83 As of December 26, 2021, future minimum lease payments under noncancelable operating leases are as follows: 2022 $ 1,476 2023 1,254 2024 471 2025 338 Thereafter 115 Total $ 3,654 Supplier Contracts: The Company purchases its egg inventories under 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 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 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 26, 2021, December 27, 2020, and December 29, 2019, the Company recognized total costs associated with its supply contracts with farms of $ 108,707 , $ 84,537 , and $ 54,380 , 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 26, 2021, the Company has not incurred any material costs as a result of such indemnifications. Litigation: The Company is subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to its business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. When the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. The liability recorded includes probable and estimable legal costs incurred to date and future legal costs to the point in the legal matter where the Company believes a conclusion to the matter will be reached. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible. In January 2019, Ovabrite Inc. (“Ovabrite”) settled claims made pursuant to a lawsuit in which Ovabrite was the defendant and a countersuit in which Ovabrite was the plaintiff and recorded a related gain of $ 1,200 , which is included in other income in the consolidated statements of operations. 17. Related Party Transactions Guarantor Warrant: The Company’s executive chairman and former Chief Executive Officer (the “Guarantor”) guaranteed the Company’s obligations under a line of credit agreement that was entered into in 2015 and that matured and was repaid in full in 2017. The Company issued a warrant to purchase 196,800 shares of the Company’s common stock at an exercise price of $ 1.43 to the Guarantor in exchange for his guaranty. See Note 12, “Common Stock and Common Stock Warrant.” The warrant expired on the earlier of June 12, 2020 or the completion of the IPO. In June 2020, the Guarantor exercised the warrant to purchase 196,800 shares of the Company’s common stock resulting in net proceeds of approximately $ 282 . Ovabrite: Ovabrite is a related party because its founders are stockholders of the Company, with the majority stockholder in Ovabrite also serving as the Company’s executive chairman and member of the Company’s board of directors. Since Ovabrite’s incorporation in November 2016, the Company is deemed to have had a variable interest in Ovabrite, and Ovabrite is deemed to have been a VIE, of which the Company is the primary beneficiary. Accordingly, the Company has consolidated the results of Ovabrite 84 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 2 6 , 202 1 . Notes Receivable from Related Parties: In February 2019, the Company issued promissory notes in the aggregate amount of $ 4,000 to its founder and a former member of the board of directors that is currently a board observer, both of whom are also stockholders of the Company. The promissory notes bore monthly interest at LIBOR plus 2.0 % and were to mature on the earlier of August 7, 2022 or the date of closing of a liquidity transaction which is defined as a merger, consolidation or sale of the Company’s assets or such time as the notes would be prohibited by the Sarbanes-Oxley Act (“Promissory Note Maturity Date”). All unpaid principal and accrued and unpaid interest was due on the Promissory Note Maturity Date. The borrower has the ability to 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 26, 2021, December 27, 2020, the Company recorded interest income of $ 0 and $ 97 , 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 $ 1,037 , $ 842 , and $ 556 in 2021, 2020, and 2019, 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 was, until February 2022, an executive vice president and senior advisor at Whole Foods. The Company serves the majority of its natural channel retail customers through food distributors, such as US Foods Inc. and United Natural Foods, Inc., who purchase, store, sell and deliver products to Whole Foods Market, Inc. While the Company cannot precisely determine its specific revenue attributable to Whole Foods, it is a significant customer. 18. 401(K) Savings Plan The Company established a defined contribution savings plan in 2017 under Section 401(k) of the Internal Revenue Code of 1986, as amended. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Company’s board of directors. During the years ended December 26, 2021, December 27, 2020 and December 29, 2019, the Company made contributions totaling $ 651 , $ 401 , and $ 246 respectively, to the plan. 19. Subsequent Events In January 2022, management of the Company determined that the Company would cease production of its breakfast bars and egg bites products effective prior to the end of the first quarter ending March 27, 2022. The Company expects to incur charges of approximately $ 2.1 million related to these product discontinuations for inventory obsolescence and contract terminations during the quarter ending March 27, 2022. 85 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.