Vital Farms Inc

NOTES TO CONDENSED CONSOLID ATED FINANCIAL STATEMENTS

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

Note 1. Nature of the Business and Basis of Presentation

Vital Farms, Inc. (the “Company”) was incorporated in Delaware on June 6, 2013 and is headquartered in Austin, Texas. The Company packages, markets and distributes shell eggs, butter and other products. These products are principally sold under the name Vital Farms in addition to other trade names, primarily to retail and foodservice channels in the United States.

The accompanying unaudited condensed consolidated financial statements as of June 30, 2024 and for the 13-week and 26-week periods ended June 30, 2024 and June 25, 2023 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Annual Report”).

In the opinion of management, the included disclosures are adequate, and the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of the Company’s consolidated financial position as of June 30, 2024, consolidated results of operations for the 13-week and 26-week periods ended June 30, 2024 and June 25, 2023, and consolidated cash flows for the 26-week periods ended June 30, 2024 and June 25, 2023. Such adjustments are of a normal and recurring nature and certain reclassifications of previously reported amounts have been made to conform to the current year presentation. The condensed consolidated balance sheet as of December 31, 2023 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the audited annual financial statements. The condensed consolidated results of operations for the 13-week and 26-week periods ended June 30, 2024 are not necessarily indicative of the consolidated results of operations that may be expected for the fiscal year ending December 29, 2024.

Fiscal Year: The Company’s fiscal year ends on the last Sunday in December and contains either 52 or 53 weeks. In a 52-week fiscal year, each of the Company’s fiscal quarters consist 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. Therefore, the financial results of certain 53-week fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. The fiscal quarters ended June 30, 2024 and June 25, 2023 both contain operating results for 13 weeks. The fiscal year ended December 31, 2023 consisted of 53 weeks.

Note 2. Summary of Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2023, and the notes thereto, which are included in the Company’s Annual Report. Other than the adoption of the new accounting pronouncements and standards as further described below, there have been no material changes to the Company’s significant accounting policies during the 26-week period ended June 30, 2024.

Recently Adopted Accounting Pronouncements

The new accounting pronouncements recently adopted by the Company are described in the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2023, and the notes thereto, which are included in the Annual Report. There have been no new accounting pronouncements adopted by the Company during the 26-week period ended June 30, 2024.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued ASU 2023-07, Segment Reporting (Topic 280) — Improvements to Reportable Segment Disclosures (“ASU 2023-07”) in order to improve stockholders’ understanding of an entity’s business activities through enhanced disclosures around reportable segments. ASU 2023-07 will require incremental and more detailed disclosure regarding segment expenses on both an annual and interim basis. For public companies ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company plans to adopt the standard for the year ended December 29, 2024 and will thus include any additional disclosures, if necessary, in its Annual Report on Form 10-K for the current fiscal year.

In December 2023, the FASB issued ASU No 2023-09, Income Taxes (Topic 740) — Improvements to Income Tax Disclosures (“ASU 2023-09”) in order to enhance the transparency and usefulness of income tax disclosures. The guidance is applicable to all entities subject to income tax and it will require disclosure of certain categories within the rate reconciliation to improve consistency as well as disclosure of reconciling items which meet a certain quantitative threshold which will improve transparency. Additionally, entities must disclose the amount of taxes paid to federal, state and foreign municipalities. For public business entities ASU 2023-09 is effective for annual periods beginning after December 15, 2024. The Company expects to adopt the standard for the fiscal year beginning December 30, 2024. The Company is currently evaluating the impact of its pending adoption of ASU 2023-09 on its consolidated financial statements.

Note 3. Investment Securities

The following table summarizes the Company’s available-for-sale investment securities as of June 30, 2024:

The following table summarizes the Company’s available-for-sale investment securities as of December 31, 2023:

Proceeds from the sale of available-for-sale securities were$0 for the 13-week and 26-week periods ended June 30, 2024 and$1,907 for the 13-week and 26-week periods ended June 25, 2023.

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. The amortized cost and fair value of the Company’s investments in available-for-sale securities as of June 30, 2024 by contractual maturity are as follows:

The following tables present the Company’s unrealized loss aging for available-for-sale securities by type and length of time the security was in a continuous unrealized loss position as of the periods presented:

As of June 30, 2024, there were 31 diversified issuances in the Company's securities portfolio in an unrealized loss position, with credit ratings ranging from BBB- to AA-. As of June 30, 2024, there are no individual bonds with unrealized losses exceeding$25, and 30 issuances have been in a loss position greater than 12 months.

The decline in fair value has resulted primarily from rising interest rates over the last 12 months, and the Company does not believe there has been any significant decline in the creditworthiness of the issuers. The Company also does not believe it is likely that a significant number of bonds will be called early, and it does not have current liquidity needs that would necessitate a sale of any material investments prior to maturity. Therefore, the Company hasnot recorded an allowance for credit losses on the investment securities as of June 30, 2024.

The fair value and location of all investment securities are included in “Fair Value Measurements” in Note 5 below.

Note 4. Derivative Financial Instruments

The Company enters into derivative instruments to mitigate the impact of commodity price volatility. Such instruments may include call options on commodity price contracts. Realized and unrealized gains and losses on the Company’s commodity derivatives not designated as hedging instruments are recorded in other expense, net. The Company recognizes all derivative instruments as either assets or liabilities.

The following table presents the aggregated outstanding notional amounts related to the Company’s derivative financial instruments for the periods presented:

For the 13-week periods ended June 30, 2024 and June 25, 2023, the pre-tax amount of commodity contract derivative losses recognized in other expense, net was$87 and$402, respectively. For the 26-week periods ended June 30, 2024 and June 25, 2023, the pre-tax amount of commodity contract derivative losses recognized in other expense, net in the unaudited condensed consolidated statements of operations was$387 and$1,817, respectively.

The fair value and location of all outstanding derivative financial instruments are included in “Fair Value Measurements” in Note 5 below.

Note 5. Fair Value Measurements

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:

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

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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.

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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.

Assets Measured at Fair Value on a Recurring Basis

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis for the periods presented:

During the 26-week period ended June 30, 2024, there wereno transfers between fair value measurement levels. For additional information on concentrations of credit risk for the Company’s financial instruments, refer to “Investment Securities” in Note 3.

Fair Value of Other Financial Instruments

The carrying values of the Company’s short-term financial instruments not included above, including cash, trade receivables, other receivables and accounts payable, approximate their fair value due to their short-term nature.

Note 6. Revenue Recognition

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

Net revenue is primarily generated from the sale of eggs and butter. The Company’s product offerings include shell eggs, hard-boiled eggs, liquid whole eggs and stick butter. The Company’s previous convenient breakfast product line (including egg bites and egg-based breakfast bars) was discontinued in 2022, and the Company’s ghee and spreadable tub butter product offerings were discontinued during the fiscal year ended December 31, 2023. The revenues related to the discontinued product lines were immaterial for the 13-week and 26-week periods ended June 30, 2024 and June 25, 2023.

During the 13-week periods ended June 30, 2024 and June 25, 2023 and 26-week periods ended June 30, 2024 and June 25, 2023, the Company had a customer that individually exceeded 10% or more of the Company’s net revenue. The percentage of net revenue from significant customers during the 13-week and 26-week periods ended June 30, 2024 and June 25, 2023 is as follows:

As of June 30, 2024 and December 31, 2023, the Company had customers that individually exceeded 10% or more of the Company’s accounts receivable. The percentage of accounts receivable, net due from significant customers as of June 30, 2024 and December 31, 2023 is as follows:

Note 7. Allowance for Credit Losses

As of June 30, 2024 and December 31, 2023, the Company had an allowance for credit losses of$631 and$777, respectively.

The Company recognizes current estimated credit losses (“CECL”) for accounts receivable and other receivables. The CECL for trade receivables are estimated based on the trade receivable aging category, credit risk of specific customers, past collection history, and management’s evaluation of accounts receivable. The Company also has other receivables which are classified within prepaid expenses and other current assets. The CECL for other receivables are estimated based on the other receivables aging category and the probability of default. Provisions for CECL are classified within selling, general and administrative costs

Changes in the allowance for credit losses for the 26-week period ended June 30, 2024 were as follows:

Note 8. Inventories

Inventory consisted of the following as of the periods presented:

On a periodic basis, the Company compares the amount of inventory on hand with its latest forecasted requirements to determine whether provisions for excess or obsolete inventory reserves are required.

Note 9. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of the periods presented:

Note 10. Property, Plant and Equipment

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

During the 13-week periods ended June 30, 2024 and June 25, 2023, depreciation of property, plant and equipment was approximately$2,350 and$1,850, respectively. During the 26-week periods ended June 30, 2024 and June 25, 2023, depreciation of property, plant and equipment was approximately$4,647 and$3,543, respectively. During the 13-week periods ended June 30, 2024 and June 25, 2023, amortization of property, plant and equipment was approximately$938 and$447, respectively. During the 26-week periods ended June 30, 2024 and June 25, 2023, amortization of property, plant and equipment was approximately$1,852 and$894, respectively. Refer to Note 11 “Leases” below for further information.

Note 11. Leases

Operating lease cost is recognized on a straight-line basis over the lease term and finance lease cost is recognized as amortization expense for the right-of-use (“ROU”) assets and interest expense associated with the finance lease liabilities.

The components of lease cost, classified within cost of goods sold, selling, general and administrative and interest expense for the 13-week and 26-week periods ended June 30, 2024 and June 25, 2023 are below:

Future undiscounted cash flows are as follows:

During the 26-week periods ended June 30, 2024 and June 25, 2023, ROU assets obtained in exchange for new finance lease obligations were$1,173 and$4, respectively. During the 26-week periods ended June 30, 2024 and June 25, 2023, ROU assets obtained in exchange for new operating lease obligations were$5,228 and$0, respectively.

Note 12. Goodwill and Other Assets

Goodwill and other assets consisted of the following as of the periods presented:

As of June 30, 2024, the Company has capitalized costs of $1,544 relating to development of internal-use software. This software has been developed by third-party and internal labor and has passed the preliminary project stage prior to capitalization. Amortization of the internal-use software development costs will begin once the software is placed in service.

Note 13. Accrued Liabilities

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

Note 14. Long-Term Debt

PNC Credit Facility

In October 2017, the Company entered into a credit facility agreement with PNC Bank, National Association (the “PNC Credit Facility”), which was modified at various times between fiscal 2018 and fiscal 2023. Such amendments included (i) amendments to various definitions and covenants, (ii) waiver of a technical default in May 2020, (iii) increased borrowing capacity, (iv) elimination of a term loan and equipment loan, and (v) extension of the maturity date.

The maximum borrowing capacity under the revolving line of credit was $20.0 million, prior to its termination in April 2024 when the Company entered into a syndicated credit agreement with JPMorgan Chase Bank, N.A. and the other lenders party thereto (the “JPMorgan Credit Facility”). Interest on borrowings under the PNC Credit Facility's revolving line of credit, as well as loan advances thereunder, accrued at a rate, at the Company’s election at the time of borrowing, equal to (i) the secured overnight financing rate as administered by the Federal Reserve Bank of New York plus 2.00% or (ii)1.00% plus the alternate base rate, as defined in the PNC Credit Facility.

The PNC Credit Facility was secured by all of the Company’s assets (other than real property and certain other property excluded pursuant to the terms of the PNC Credit Facility) and required the Company to maintain three financial covenants: a fixed charge coverage ratio, a leverage ratio and a minimum tangible net worth requirement. The PNC Credit Facility also contained various covenants relating to limitations on indebtedness, acquisitions, mergers, consolidations and the sale of properties and liens. The PNC Credit Facility also contained other customary covenants, representations and events of default.

JPMorgan Credit Facility

On April 9, 2024, the Company entered into the JPMorgan Credit Facility, which provides for a five-year, $60.0 million revolving credit facility.

The JPMorgan Credit Facility includes a $5.0 million letter of credit sub-limit and an accordion option that would allow the Company to increase the aggregate revolving commitments or add incremental term loans in an aggregate amount not to exceed the greater of (i) $35.0 million and (ii) an amount equal to 100% of consolidated adjusted EBITDA.

Any borrowings under the JPMorgan Credit Facility bear interest, at the Company’s election, at either (i) an adjusted term Secured Overnight Financing Rate or adjusted daily Secured Overnight Financing Rate plus 0.10% plus a margin of either 0.75%, 1.00% or 1.25% depending on the Company’s net leverage ratio or (ii) an alternative base rate plus a margin or either 1.75%, 2.00% or 2.25%, depending on the Company’s net leverage ratio. The Company is required to pay a commitment fee on the undrawn portion of the aggregate commitments that accrues at either 0.20% or 0.375% per annum depending on the Company’s revolving exposure. Additionally, the Company is required to pay a participation fee on the account of each lender for each outstanding letter of credit at a rate equal to the applicable rate used to determine the interest rate applicable to term benchmark revolving loans.

The JPMorgan Credit Facility is secured by liens on substantially all of the Company’s assets, including certain intellectual property assets and investment securities. It requires the Company to maintain (i) a net leverage ratio of no greater than 3.25 to 1.00, subject to two increases up to 4.00 to 1.00 for a certain period following material acquisitions, and (ii) a fixed charge coverage ratio of no less than 1.35 to 1.00. As a result of the limitations contained in the JPMorgan Credit Facility, certain of the net assets on the Company’s consolidated balance sheet as of June 30, 2024 are restricted in use. The Company’s wholly owned subsidiaries are non-operating and have no restricted net assets within the meaning of Rule 4-08(e)(3) or Rule 12-04 of Regulation S-X. As of June 30, 2024, the Company was in compliance with all covenants under the JPMorgan Credit Facility.

As of June 30, 2024, there wereno outstanding amounts under the JPMorgan Credit Facility. During the 13-week periods ended June 30, 2024 and June 25, 2023, the Company recognizedno interest expense related to draws on our revolving lines of credit. During the 26-week periods ended June 30, 2024 and June 25, 2023, the Company recognized interest expense related to draws on our revolving lines of credit of$0 and$7, respectively.

Note 15. Common Stock

As of June 30, 2024, the Company’s 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 42,971,988 shares were issued and outstanding.

The voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders of the preferred stock, 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 were declared or paid during the periods presented.

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

Note 16. Stock-Based Compensation

The Company measures compensation expense for all stock-based awards based on the estimated fair values on the date of the grant. Stock options generally vest ratably over three years from the date of grant, subject to the recipient’s continued service over such period, and expire 10 years from the date of grant. RSUs generally vest ratably over three years from the date of grant, subject to the recipient’s continued service over such period, and contain no other service or performance conditions. PSUs vest at the end of athree-year period based on the achievement of certain Company performance metrics and the recipient’s continued service over such period. The Company’s policy is to recognize stock-based compensation expense on a straight-line basis over the requisite service or vesting period. For awards that are contingent upon performance metrics, the probability of achievement is taken into account in the calculation of the expense to be recognized and modified as needed. Forfeitures for stock options and restricted stock awards, including RSUs and PSUs, are recognized as they occur.

The Company recognized stock-based compensation expense in the condensed consolidated statements of operations for the periods presented:

Stock Option Activity

The following table summarizes the Company’s stock option activity since December 31, 2023:

The fair value of stock options vested during the 13-week periods ended June 30, 2024 and June 25, 2023 was$240 and$257, respectively. The fair value of stock options vested during the 26-week periods ended June 30, 2024 and June 25, 2023 was$1,900 and$1,272, respectively. As of June 30, 2024, total unrecognized stock-based compensation expense related to unvested stock options was$1,796, which is expected to be recognized over a weighted-average period of 1.46 years.

Restricted Stock Unit Activity

The following table summarizes the Company’s RSU activity since December 31, 2023:

1 Includes 64,213 shares of common stock withheld to cover taxes on the release of vested RSUs, which became available for future grants pursuant

to the 2020 Equity Incentive Plan.

The fair value of RSU shares vested during the 13-week periods ended June 30, 2024 and June 25, 2023 was$677 and$1,258, respectively. The fair value of RSU shares vested during the 26-week periods ended June 30, 2024 and June 25, 2023 was$3,580 and$2,913, respectively. As of June 30, 2024, total unrecognized stock-based compensation expense related to the RSUs was$10,156, which is expected to be recognized over a weighted-average period of 2.28 years.

Performance Stock Unit Activity

In fiscal year 2024, the Company granted PSUs to certain of its officers and other employees. These PSUs vest at the end of a three-year period dependent upon the level of achievement of certain Company performance metrics and the recipient’s continued service over such period. The number of shares that can be earned will range from 0% to 200% of the granted PSUs, based upon the Company’s level of achievement of the stated performance metrics. The number of PSUs expected to vest and for which compensation cost has been recognized is based on the number of awards that the Company believes are probable to vest as of June 30, 2024.

The following table summarizes the Company’s PSU activity since December 31, 2023:

The fair value of PSU shares vested during the 13-week and 26-week periods ended June 30, 2024 and June 25, 2023 was$- asno shares have vested as of such periods. As of June 30, 2024, total unrecognized stock-based compensation expense related to the PSUs was$8,861, which is expected to be recognized over a weighted-average period of 2.49 years.

2020 Equity Incentive Plan: In July 2020, the Company’s Board of Directors adopted the 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 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. As of June 30, 2024,12,367,778 shares were available for future grants of the Company’s common stock, which includes 1,667,385 shares of stock that were automatically added to the available reserve on January 1, 2024. Awards issued under the 2020 Incentive Plan generally have a three-year ratable vesting period beginning on the date of grant.

Employee Stock Purchase Plan: In July 2020, the Company’s Board of Directors adopted the 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 eligible employees of the Company or, as designated by the Company’s 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 Company’s Board of Directors. As of June 30, 2024,2,546,083 shares of the Company’s common stock were available for future issuance under the 2020 ESPP, which includes 416,846 shares of common stock that were automatically added to the available reserve on January 1, 2024. The Company’s Board of Directors authorizes six-month offering periods, with the most recent beginning on November 16, 2023.

Note 17. Income Taxes

The Company’s effective tax rate for the 13-week periods ended June 30, 2024 and June 25, 2023 was approximately 10% and 16%, respectively. The Company's effective tax rate for the 26-week periods ended June 30, 2024 and June 25, 2023 was approximately 17% and 21%, respectively. The Company’s effective tax rate for the 13-week and 26-week periods ended June 30, 2024 differs from the statutory rate due primarily to discrete tax benefits related to the exercise of non-qualified stock options and the vesting of restricted stock units.

For interim periods, the Company's income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions, and other items. The Company’s estimated annual effective tax rate differs from the federal statutory rate of 21% due to state taxes, permanent differences related to incentive stock options and the impact of compensation deduction limitations under Internal Revenue Code Section 162(m).

Note 18. Net Income Per Share

Basic and dilutednet income per share attributable to Vital Farms, Inc. common stockholders were calculated as follows:

The Company excluded the following shares of common stock, outstanding at each period end, from the computation of dilutednet income per share attributable to Vital Farms, Inc. common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

Note 19. Accumulated Other Comprehensive Income

The amounts reclassified from accumulated other comprehensive income (“AOCI”) to the unaudited consolidated statements of operations were as follows (in thousands):

The gross amount and related tax (expense) benefit recorded in, and associated with, each component of other comprehensive income were as follows (in thousands):

Note 20. Commitments and Contingencies

Supplier Contracts: The Company purchases its egg inventories under long-term supply contracts with farms. Purchase commitments contained in these arrangements are variable and dependent on the quantity of eggs produced by the farms. Accordingly, there are no estimable future purchase commitments associated with these supplier contracts and there are no minimum payments associated with these long-term supply contracts. The Company records the total cost of eggs into inventory and they are expensed to cost of goods sold when the associated eggs are sold to customers and are also reported as part of the Company’s variable lease cost.

The Company has entered into agreements with certain qualifying suppliers to provide a one-time payment of up to $200,000, for the purpose of funding costs associated with farm start up. As of June 30, 2024, the Company has executed 31 such agreements, 2 of which were in fiscal year 2023. The payment of these incremental costs is contingent upon the achievement of certain milestones and is to be made no later than 90 days prior to the pullet placement date specified in each supplier agreement. Upon the achievement of such milestones, the Company recognizes an operating ROU asset and lease liability as a cost of obtaining the embedded lease within the supplier contract, which is included in “Leases” in Note 11. As of June 30, 2024,$4.3 million has been paid out and$1.3 million remains to be paid.

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 June 30, 2024, the Company has not incurred any material costs as a result of such indemnification agreements.

Litigation: The Company is subject to various claims and contingencies that 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. Based on these assessments and estimates, the Company may establish reserves, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from the Company’s assessments and estimates.

On May 20, 2021, the Company and certain of its current and former officers were named as defendants in a class action complaint captioned Nicholas A. Usler et al. v. Vital Farms, Inc. et al. in the United States District Court for the Western District of Texas (the “District Court”). The plaintiffs alleged false advertising claims on behalf of themselves and a putative class of alleged consumers of the Company’s eggs. The named officers of the Company were subsequently dismissed as defendants in this matter. On July 9, 2024, a U.S. Magistrate Judge issued both an order and report and recommendation, for review and adoption by the District Court. Collectively, the order and the report and recommendation (i) denied the plaintiffs’ motion for class certification, (ii) excluded the testimony and report of the plaintiffs’ damages expert and (iii) granted summary judgment for the Company with respect to two plaintiffs and three of the plaintiffs’ state claims. The plaintiffs have filed objections to the order and report and recommendation, and the matter is ongoing. The Company believes the claims are without merit and is vigorously defending itself in this matter. Given the uncertainty of the litigation, the stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company is unable to reasonably estimate the possible loss or range of loss, if any, that may result from the claim.

Although the Company maintains insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to various exclusions and caps on amounts recoverable. Even if the Company believes a claim is covered by insurance, insurers may dispute the Company's entitlement to recovery for a variety of potential reasons, which may affect the timing and, if the insurers prevail, the amount of the Company's recovery. 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. 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.

Note 21. Related Party Transactions

Sandpebble Builders Preconstruction, Inc.: The Company utilizes Sandpebble Builders Preconstruction, Inc. and Sandpebble South, Inc. (collectively “Sandpebble”) for project management and related services associated with the construction and expansion of the Company’s egg processing facilities, including site selection, project management and related services for the Company’s planned egg packing facility in Seymour, Indiana. The Company’s contract with Sandpebble for services related to the Company’s planned egg packing facility in Seymour, Indiana was awarded after a competitive bidding process. Victor Canseco, the owner and principal of Sandpebble, is the father of Russell Diez-Canseco, the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors. In connection with the services described above, the Company paid Sandpebble$292 and$139 during the 13-week periods ended June 30, 2024 and June 25, 2023, respectively, and$540 and$255 during the 26-week periods ended June 30, 2024 and June 25, 2023, respectively. Amounts paid to Sandpebble are included in property, plant and equipment, net and selling, general and administrative costs. As of June 30, 2024 and June 25, 2023, amounts owed to Sandpebble were$168 and$1,126, respectively, and are included in accrued liabilities.