Vital Farms, Inc. (VITL) FY 2021 MD&A

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

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors,” and “Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report.

Overview

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

Our purpose is rooted in a commitment to Conscious Capitalism, which prioritizes the long-term benefits of each of our stakeholders (farmers and suppliers, customers and consumers, communities and the environment, crew members and stockholders). We make decisions based on what’s sustainable for all our stakeholders. Simply put, we will not be a sustainable business if our stakeholders are not sustainable as well. Our collective sustainable business practices will enable us to fulfill our purpose of improving the lives of people, animals, and the planet through food, now and long into the future. For us, it is not about short-term outcomes or a trade-off between purpose and profit. We are fierce business competitors who believe that prioritizing the long-term viability of all stakeholders will produce stronger outcomes, for everyone, over time. These principles guide our day-to-day operations and, we believe, help us deliver a more sustainable and successful business. Our approach has been validated by our financial performance and our designation and January 2022 recertification as a Certified B Corporation, a certification reserved for businesses that balance profit and purpose to meet the highest verified standards of social and environmental performance, public transparency and legal accountability.

We source our products from a network of more than 275 family farms. We have strategically designed our supply chain to ensure high production standards and optimal year-round operation. We are motivated by the positive impact we have on rural communities and enjoy a strong relationship and reputation with our network of farmers.

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

We believe we are a strategic and valuable partner to retailers. We have continued to command premium prices for our products, including our shell eggs, which sell for as much as three times the price of commodity eggs. Our loyal and growing consumer base has fueled the expansion of our brand from the natural channel to the mainstream channel. We believe the success of our brand demonstrates that consumers are demanding premium products that meet a higher ethical standard of food production. We have a strong presence at Kroger, Sprouts Farmers Market, or Sprouts, Target and Whole Foods, and we also sell our products at Albertsons, Publix and Walmart. We offer 32 retail stock keeping units, or SKUs through a multi-channel retail distribution network. We believe we have significant room for growth within the retail and, in the medium- to long-term, foodservice channels through growing brand awareness, gaining additional points of distribution and new product innovation.

Our shell eggs are collected from farmers by a third-party freight carrier and placed in cold storage until we pack them for shipping to our customers at our state-of-the-art shell egg processing facility, Egg Central Station. Egg Central Station is approximately 82,000 square feet and utilizes highly automated equipment to grade and package our shell egg products. Egg Central Station is capable of packing three million eggs per day and has achieved Safe Quality Food, or SQF Good rating, the highest level of such certification from the Global Food Safety Initiative. In addition, as of January 2020, Egg Central Station is the only egg facility to receive, and we are one of only six companies globally to have received, the SQFI Select Site certification.

Our products are distributed through a broker-distributor-retailer network whereby brokers represent our products to distributors and retailers who will in turn sell our products to consumers. We serve the majority of natural channel customers through food distributors, such as UNFI and US Foods and KeHE, which purchase, store, sell and deliver our products to Whole Foods (UNFI and US Foods) and Sprouts (KeHE).  In the fiscal years ended December 26, 2021, December 27, 2020, and December 29, 2019, UNFI accounted for approximately 18%, 15%, and 35% of our net revenue, respectively, US Foods accounted for approximately 14%, 18%, and less than 10% of our net revenue, respectively, and KeHE accounted for approximately 10%, 12%, and 11% of our net revenue,

47

respectively. We serve mainstream retailers by arranging for delivery of our products directly through their distribution centers. We also leverage distributor relationships to fulfill orders for certain independent grocers and other customers.

We have experienced consistent sales growth. We had net revenue of $260.9 million and $214.3 million, net income of $2.4 million and $8.8 million, and Adjusted EBITDA of $8.0 million and $16.8 million in the fiscal years ended December 26, 2021 and December 27, 2020, respectively. See the section titled “—Non-GAAP Financial Measure—Adjusted EBITDA” below for the definition of Adjusted EBITDA, as well as a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure stated in accordance with GAAP.

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

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

COVID-19 Business Update

As the COVID-19 pandemic continued in the fiscal year ended December 26, 2021, we continued to maintain a cross-functional task force and execute on business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our business and our stakeholders, comprised of farmers and suppliers, customers and consumers, communities and the environment, crew members and stockholders. While we are not experiencing material adverse impacts at this time, given the overall disruption of global supply chains and distribution systems and the other risks and uncertainties associated with the pandemic, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. We continue to closely monitor the COVID-19 situation as we evolve our business continuity plans and response strategy. In March 2020, the majority of our crew members at our headquarters transitioned to working remotely, and we have subsequently decided to permit such crew members to work remotely on a permanent basis. The efficacy of vaccinations, the timing of the development of herd immunity, the potential emergence of new variants of the SARS-CoV-2 variant and the prospect of additional shelter in place and similar movement restrictions are unknown, and further virus mutations and variants may have an adverse impact on our business.

Egg Central Station continues to be operational and we have implemented a number of measures to prevent and mitigate any outbreak of COVID-19 at that facility; however, we may need to modify or reduce operations due to the evolving effects of the COVID-19 pandemic. We continue to follow the COVID-19 protocol and preventative measures we have implemented at Egg Central Station to protect the health and safety of our crew members, customers and community.

Supply Chain

We are working closely with our farmers, suppliers and third-party manufacturers to manage our supply chain activities and mitigate potential disruptions to our product supplies as a result of the COVID-19 pandemic. We currently expect to have an adequate supply of eggs to meet anticipated demand in fiscal 2022, as well as adequate capacity for packing and processing our eggs.

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

Corporate Development

With cash and cash equivalents of $31.0 million as of December 26, 2021 and access to additional funds as a result of our IPO and under our credit facility agreement with PNC Bank, National Association, or the Credit Facility, we anticipate having sufficient liquidity to make investments in our business this fiscal year in support of our long-term growth strategy. Our IPO, which was completed on August 4, 2020, resulted in net proceeds to us of approximately $99.7 million, after deducting underwriting discounts,

48

commissions and offering costs associated with the offering. We expect that our cash and cash equivalents as of December 26, 2021, together with cash provided by our operating activities and availability of borrowings under our existing Credit Facility, will be sufficient to fund our operating expenses for at least the next 12 months and to make investments in our business in support of our long-term growth strategy.

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

Our Fiscal Year

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

Key Factors Affecting Our Business

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

Expand Household Penetration

We have positioned our brand to capitalize on growing consumer interest in natural, clean-label, traceable, ethical, great-tasting and nutritious foods. We believe there is substantial opportunity to grow our consumer base and increase the velocity at which households purchase our products. U.S. household penetration for the shell egg category is approximately 98%, while the household penetration for our shell eggs is approximately 5.0%. We intend to increase household penetration by continuing to invest significantly in sales and marketing to educate consumers about our brand, our values and the premium quality of our products. We believe these efforts will educate consumers on the attractive attributes of our products, generate further demand for our products and ultimately expand our consumer base. Our ability to attract new consumers will depend, among other things, on the perceived value and quality of our products, the offerings of our competitors and the effectiveness of our marketing efforts. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the U.S. natural food market in which we operate. Such factors include consumer preference, consumer confidence, consumer income, consumer perception of the safety and quality of our products and shifts in the perceived value for our products relative to alternatives.

Grow Within the Retail Channel

We believe that our ability to increase the number of customers that sell our products to consumers is an indicator of our market penetration and our future business opportunities. We define our customers as the entities that sell our products to consumers. With certain of our retail customers, like Whole Foods and Sprouts, we sell our products through distributors. We are not able to precisely attribute our net revenue to a specific retailer for products sold through such channels. We rely on third-party data to calculate the portion of retail sales attributable to such retailers, but this data is inherently imprecise because it is based on gross sales generated by our products sold at retailers, without accounting for price concessions, promotional activities or chargebacks, and because it measures retail sales for only the portion of our retailers serviced through distributors. Based on this third-party data and internal analysis, Whole Foods accounted for approximately 29% and 28% of our retail sales for the fiscal years ended December 26, 2021 and December 27, 2020, respectively, and Sprouts accounted for approximately 7% and 7% of our retail sales for the fiscal years ended December 26, 2021 and December 27, 2020, respectively.

49

As of December 2021, there were more than 20,900 stores selling our products. We expect the retail channel to be our largest source of net revenue for the foreseeable future. By capturing greater shelf space, driving higher product velocities and increasing our SKU count, we believe there is meaningful runway for further growth with existing retail customers. Additionally, we believe there is significant opportunity to gain incremental stores from existing customers as well as by adding new retail customers. We also believe there is significant further long-term opportunity in additional distribution channels, including the convenience, drugstore, club, military and international markets. Our ability to execute on this strategy will increase our opportunities for incremental sales to consumers, and we also believe this growth will allow for margin expansion. To accomplish these objectives, we intend to continue leveraging consumer awareness of and demand for our brand, offering targeted sales incentives to our customers and utilizing customer-specific marketing tactics. Our ability to grow within the retail channel will depend on a number of factors, such as our customers’ satisfaction with the sales, product velocities and profitability of our products.

Expand Footprint Across Foodservice

We believe there is significant demand for our products in the foodservice channel since we offer versatile ingredients with high menu penetrations across all commercial and non-commercial operator segments. We see considerable opportunity for medium- to long-term growth in this channel by increasing our category market share through sales to values-aligned foodservice operators and their distributors. We are working with Waypoint, a foodservice sales and marketing agency in the consumer-packaged goods industry, to increase our broadline distribution and presence in national and regional restaurant chains. We believe that most U.S. consumers' food preferences are driven primarily by what they encounter on restaurant menus, so we are also leveraging foodservice as a critical consumer touchpoint to drive brand awareness and purchase rates of our products in the retail channel. We are investing in co-marketing to reach new households. We believe that joint marketing tactics are mutually beneficial for our operator partners and enhance their perceived customer value and that our products and on-menu branding can help operators differentiate themselves, increase check sizes and drive loyalty in an industry still recovering from the pandemic and its macro-economic impacts. An example of our recent foodservice growth initiative is our relationship with HomeState, a Texas kitchen in Southern California which sells breakfast tacos made exclusively with our liquid whole eggs across 4 restaurant locations. We have launched similar regional partnerships in all 4 of our U.S. sales regions, including Blue Plate Restaurant Company, a casual dining group comprised of 7 concepts in the Minneapolis/St. Paul area; Cafe Patachou, a breakfast and lunch restaurant based in the Indianapolis, Indiana area with 5 locations; King David Tacos, which sells breakfast tacos made exclusively with our medium shell eggs at their 3 locations and more than 20 retail outlets around New York City; Pura Vida, a fresh all-day concept in the Miami, Florida area with 9 locations; Hat Creek Burger Company, a fast-casual restaurant with over 26 locations across Texas; Tacodeli, which sells breakfast tacos made exclusively with our shell eggs across 11 restaurant locations and approximately 90 points of distribution, such as coffee shops and farmers' market stands, across Texas; and Moe's Broadway Bagel, an East Coast-style family-run bagel chain with 7 locations in the Denver/Boulder, Colorado area.

Expand Our Product Offerings

We intend to continue to strengthen our product offerings by investing in innovation in new and existing categories. We have a history of product introductions and intend to continue to innovate by introducing new products from time to time. Eggs generated $240.0 million, or approximately 92%, of net revenue in fiscal 2021. We expect eggs will be our largest source of net revenue for the foreseeable future. We believe that investments in innovation will contribute to our long-term growth, including by reinforcing our efforts to increase household penetration. Our ability to successfully develop, market and sell new products will depend on a variety of factors, including the availability of capital to invest in innovation, as well as changing consumer preferences and demand for food products.

Key Components of Results of Operations

Net Revenue

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

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

50

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

Selling, General and Administrative

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

Shipping and Distribution

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

Results of Operations

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

51

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

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

Net Revenue

The increase in net revenue of $46.6 million, or 22%, was primarily driven by an increase in egg-related product sales of $43.8 million and an increase in butter-related product sales of $3.4 million. The increases in egg and butter-related sales were primarily due to volume increases to our distributors as well as new distributions to new and existing customers. Net revenue from sales through our retail channel was $256.5 million and $208.5 million for fiscal 2021 and 2020, respectively.

Gross Profit and Gross Margin

The increase in gross profit of $8.4 million, or 11%, was driven by an increase in net revenue generated during the fiscal year ended December 26, 2021. The decrease in gross margin during the fiscal year ended December 26, 2021 as compared to the fiscal year ended December 27, 2020 was primarily driven by an increase in input costs across our shell business and higher cream prices impacting our butter business. Elevated transportation rates also increased our internal transfer expense. Promotional activity and slotting continued to normalize, further compressing margins.

52

Operating Expenses

Selling, General and Administrative

Selling, general, and administrative expenses increased by $10.5 million in fiscal 2021, with such expenses accounting for 22% of net revenue. The dollar growth in selling, general and administrative expenses was primarily driven by:

Shipping and Distribution

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

Other Income (Expense), Net

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

(Benefit) Provision for Income Taxes

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

53

Net (Loss) Income Attributable to Noncontrolling Interests

The decrease of $131,000 in net income attributable to noncontrolling interests, or (156)%, was primarily driven by the release of a bonus reserve in 2020 that was ultimately not paid out. This activity did not reoccur in 2021.

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

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

Non-GAAP Financial Measures

Adjusted EBITDA

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

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

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

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

54

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

Liquidity and Capital Resources

Since inception, we have funded our operations with proceeds from sales of our capital stock, proceeds from borrowings and cash flows from the sale of our products. We had net income of $2.4 million for the year ended December 26, 2021 and retained earnings of $2.7 million as of December 26, 2021. We completed our IPO on August 4, 2020 resulting in net proceeds to us of approximately $99.7 million, after deducting underwriting discounts, commissions and offering costs associated with the offering.

Funding Requirements

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

Our future capital requirements will depend on many factors, including our pace of new and existing customer growth, our investments in innovation, our investments in partnerships and unexplored channels and the costs associated with our expansion of Egg Central Station. As of December 26, 2021, we expect to spend $25.8 million, including approximately $6.3 million yet to be spent, and we anticipate the expansion to be complete in mid-2022.

Credit Facility

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

Subsequently, terms of the Credit Facility were modified at various times throughout fiscal 2018-2021 which (i) amended various definitions, (ii) waived a technical default in May 2020 which was triggered by exceeding the capital expenditure limit, and (iii) increased borrowing capacity and (iv) extended the maturity date. The Ninth Amendment to the Credit Facility in April 2021 eliminated the term loan and equipment loan. The revolving line of credit matures in April 2024.

The maximum borrowing capacity under the revolving line of credit is $20.0 million. Interest on borrowings under the revolving line of credit, as well as loan advances thereunder, accrues at a rate, at our election at the time of borrowing, equal to (i) LIBOR plus 2.00% or (ii) 1.00% plus the alternate base rate. In April 2020, all then-outstanding amounts under the Revolving Line of Credit were repaid and the interest rate applicable to borrowings under the revolving line of credit was 4.5%.

The Credit Facility is secured by all of our assets (other than real property and certain other property excluded pursuant to the terms of the Credit Facility) and requires us to maintain three financial covenants: a fixed charge coverage ratio, a leverage ratio and a minimum tangible net worth requirement. The Credit Facility also contains various covenants relating to limitations on indebtedness, acquisitions, mergers, consolidations, the sale of properties and liens. As a result of the limitations contained in the Credit Facility,

55

certain of the net assets on our consolidated balance sheet as of December 26, 2021 are restricted in use. The Credit Facility contains other customary covenants, representations and events of default.

As of December 26, 2021, there was no outstanding balance under the Credit Facility. As of December 26, 2021, we were in compliance with all covenants under the Credit Facility. See “Long-Term Debt” in Note 10 to our consolidated financial statements included elsewhere in this Annual Report for additional details related to our Credit Facility.

Cash Flows

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

Operating Activities

In fiscal 2021, net cash provided by operating activities was $16.3 million and was primarily driven by net income of $2.4 million, total non-cash items of $5.7 million, and an increase in net working capital items of $8.2 million.  Non-cash items primarily consisted of depreciation and amortization of $3.5 million, non-cash stock-based compensation expense of $4.4 million and deferred income taxes of $(2.5) million.  The change in net working capital items was primarily due to a $6.8 million increase in accounts payable and a $1.4 million decrease in income taxes receivable, partially offset by a $0.4 million decrease in prepaid taxes and other current assets, a $6.1 million increase in accounts receivable and a $4.0 million increase in accrued liabilities. The reduction in prepaid expenses and other current assets were primarily due to a reduction in prepaid marketing campaign assets year over year. The increases in accounts payable were primarily due to an increase in amounts due to our partner farms combined with an increase in vendor payables in the normal course of business. The increases in accrued liabilities were primarily due to accrued capital expenditure costs and accrued promotions offset by decreases in accrued payroll.

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

Investing Activities

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

In fiscal 2020, net cash used in investing activities was $77.8 million, resulting primarily from $68.4 million of purchases of available-for-sale securities and $18.3 million of purchases of property, plant and equipment used in ongoing operations, offset by $0.8 million received from repayment of notes receivable from related parties.

Financing Activities

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

56

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

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 26, 2021:

Capital Lease Commitments

As of December 26, 2021, the Company has one capital lease obligation. The monthly lease payments, which include base rent charges of approximately $41, will extend through the termination of the lease, which expires August 2022.

Operating Lease Commitments

As of December 26, 2021, the Company was leasing approximately 92,000 square feet of warehouse space in Springfield, Missouri for 10,000 rentable pallet spaces. The monthly lease payments, which include base rent charges of $79, are subject to periodic rent increases through September 2023.

As of December 26,2021, the Company was leasing approximately 9,100 square feet of office space and parking spaces in Austin, Texas. The lease expires in April 2026. The Company has the option to extend the lease agreement for successive periods up to five years. The monthly lease payments, which include base rent charges of $19, are subject to periodic rent increases through April 2026.

Facility Expansion

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

Long-Term Supply Agreements

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

57

Seasonality

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

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in the financial statements and related notes thereto. Critical accounting estimates are those estimates that, in accordance with GAAP, involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements. Management has determined that our most critical accounting estimates are those relating to revenue recognition and trade promotions, income taxes, and contingencies. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ materially from those estimates. The following is a summary of certain accounting estimates we consider critical. For further discussion about our accounting policies, see Note 2 to our consolidated financial statements appearing elsewhere in the Annual Report on Form 10-K.

Revenue Recognition and Trade Promotions

We recognize revenue for the sale of our product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon delivery to the customer based on terms of the sale. Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which include trade promotions as well as allowances such as coupons, discounts, rebates, spoils, and other programs. Variable consideration related to these programs is recorded as a reduction to revenue, at the time of sale, based on the amount we expect to incur.

The transaction price contains estimates of known or expected variable consideration. We base these estimates on current performance and historical utilization or experience. We review and update these estimates regularly until the incentives or product returns are realized and the impact of any adjustments are recognized in the period the adjustments are identified.

We do not believe it is reasonably likely that there will be a material change in the estimates or assumptions used to recognize revenue. As noted above, estimates are made based on historical experience and other factors. Typically, programs that are offered have a short duration and historical differences between actual experience compared to estimated volumes, performance and redemptions have not been significant to the quarterly or annual financial statements. However, if the level of redemption rates, volumes or performance were to vary significantly from our estimates, we may be exposed to gains or losses that could be material. We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years.

Income Taxes

We determine our effective tax rate by estimating its permanent differences resulting from differing treatment of items for financial and income tax purposes. We are periodically audited by taxing authorities and considers any adjustments made as a result of the audits in computing our income tax expense. Any audit adjustments affecting permanent differences could have an impact on our effective tax rate.

Deferred income taxes relate primarily to depreciation expense and share-based compensation programs accounted for differently for financial and income tax purposes. Changes in tax laws and rates could materially affect recorded deferred tax assets and liabilities in the future. Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized for a deferred tax asset. Changes in projected future earnings could affect our recorded valuation allowances, if any, in the future.

We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due.  However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. To the extent we prevail in matters for which unrecognized tax benefit liabilities have been established or are required to pay amounts in excess of our recorded liability, our effective tax rate in a given financial statement period could be materially affected.

58

Contingencies

We recognize the costs of legal defense for the legal proceedings to which we are a party during the periods in which the costs are incurred. After considerable analysis of the facts and circumstances of each case, we determine the amount of reserves required, if any.

At this time, we have not accrued any reserves for any legal proceedings. Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in our assumptions, the effectiveness of legal strategies, or other factors beyond our control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.

Recent Accounting Pronouncements

See the sections titled “Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” and    “—Recently Issued Accounting Pronouncements Not Yet Adopted” in Note 2 to our consolidated financial statements included elsewhere in this Annual Report for a discussion of recent accounting pronouncements.

Emerging Growth Company Status

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