10-Q 1 frpt20220930_10q.htm FORM 10-Q frpt20220930_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-36729

 


 

frpt.jpg

 

FRESHPET, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware

20-1884894

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

  

400 Plaza Drive, 1st Floor, Secaucus, New Jersey

07094

(Address of principal executive offices)

(Zip Code)

 


Registrant’s telephone number, including area code: (201) 520-4000

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

FRPT

NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

 

As of October 31, 2022, the registrant had 48,020,070 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

TABLE OF CONTENTS

 

     

Page No.

Part I. Financial Information

4

    Item 1.

Financial Statements

4

 

Consolidated Balance Sheets

5

 

Consolidated Statements of Operations and Comprehensive Loss

5

 

Consolidated Statements of Changes in Stockholders’ Equity

6

 

Consolidated Statements of Cash Flows

7

   

Notes to Consolidated Financial Statements

8

    Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

    Item 3.

Quantitative and Qualitative Disclosures about Market Risks

35

    Item 4.

Controls and Procedures

36

Part II. Other Information

37

    Item 1.

Legal Proceedings

37

    Item 1A.

Risk Factors

37

 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 37

    Item 6.

Exhibits

38

 

 

2

 

Forward-Looking Statements

 

This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” "target," “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

  changes in global economic and financial market conditions generally, such as inflation and interest rate increases;
 

 

 

the impact of various worldwide or macroeconomic events, such as the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine, on the U.S. and global economics, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations;
 

our ability to successfully implement our growth strategy, including related to implementing our marketing strategy and building capacity to meet demand, such as through the timely expansion of certain of our Freshpet Kitchens (as defined below);

 

our ability to timely complete the construction at our Freshpet Kitchens South and Freshpet Kitchens Ennis (our Freshpet Kitchens Bethlehem, Freshpet Kitchens South and Freshpet Kitchens Ennis collectively, “Freshpet Kitchens") and achieve the anticipated benefits therefrom;

 

our ability to generate sufficient cash flow or raise capital on acceptable terms;
 

the loss of key members of our senior management team;

 

allegations that our products cause injury or illness or fail to comply with government regulations;

 

the loss of a significant customer;

 

the entrance of new competitors into our industry;

 

the effectiveness of our marketing and trade spending programs;

 

our ability to introduce new products and improve existing products;

 

our ability to match our manufacturing capacity with demand;

 

the impact of government regulation, scrutiny, warnings and public perception;

 

the effect of false marketing claims;

  the effect of shareholder activism;
 

adverse weather conditions, natural disasters, pestilences and other natural conditions affecting our operations;

  our ability to meet our sustainability targets, goals, and commitments, including due to the impact of climate change;
 

our ability to develop and maintain our brand;

 

the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require, including those caused by inflation;

 

our ability to manage our supply chain effectively;

 

our ability to generate sufficient cash flow or raise capital on acceptable terms;

 

volatility in the price of our common stock; and

 

other factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the headings "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

 

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

 

3

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

FRESHPET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

ASSETS

        

CURRENT ASSETS:

        

Cash and cash equivalents

 $240,310  $72,788 

Short-term investments

  19,891    

Accounts receivable, net of allowance for doubtful accounts

  48,235   34,780 

Inventories, net

  64,334   35,574 

Prepaid expenses

  8,395   5,834 

Other current assets

  2,314   1,349 

Total Current Assets

  383,479   150,325 

Property, plant and equipment, net

  719,444   583,922 

Deposits on equipment

  3,821   4,100 

Operating lease right of use assets

  5,516   6,537 

Equity method investment

  26,180   25,856 

Other assets

  27,057   13,670 

Total Assets

 $1,165,497  $784,410 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

CURRENT LIABILITIES:

        

Accounts payable

 $37,046  $42,612 

Accrued expenses

  19,576   14,950 

Current operating lease liabilities

  1,478   1,384 

Current portion of long-term debt

  72,872   - 

Total Current Liabilities

 $130,972  $58,946 

Long term operating lease liabilities

  4,588   5,710 

Total Liabilities

 $135,560  $64,656 

STOCKHOLDERS' EQUITY:

        

Common stock — voting, $0.001 par value, 200,000 shares authorized, 47,838 issued and 47,824 outstanding on September 30, 2022, and 43,449 issued and 43,435 outstanding on December 31, 2021

  48   43 

Additional paid-in capital

  1,321,299   955,710 

Accumulated deficit

  (292,200)  (235,623)

Accumulated other comprehensive income (loss)

  1,046   (120)

Treasury stock, at cost — 14 shares on September 30, 2022 and on December 31, 2021

  (256)  (256)

Total Stockholders' Equity

  1,029,937   719,754 

Total Liabilities and Stockholders' Equity

 $1,165,497  $784,410 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

4

 

 

FRESHPET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, in thousands, except per share data)

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 

NET SALES

  $ 151,333     $ 107,590     $ 429,511     $ 309,620  

COST OF GOODS SOLD

    106,788       66,065       289,187       188,689  

GROSS PROFIT

    44,545       41,525       140,324       120,931  

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

    60,449       42,365       190,241       137,955  

LOSS FROM OPERATIONS

    (15,904 )     (840 )     (49,917 )     (17,024 )

OTHER (EXPENSES)/INCOME:

                               

Other (Expenses)/Income, net

    256       2       492       (5 )

Interest Expense

    (1,817 )     (677 )     (4,060 )     (2,232 )
      (1,561 )     (675 )     (3,568 )     (2,237 )

LOSS BEFORE INCOME TAXES

    (17,465 )     (1,515 )     (53,485 )     (19,261 )

INCOME TAX EXPENSE

    41       16       123       48  

LOSS ON EQUITY METHOD INVESTMENT

    943       539       2,969       1,124  

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

  $ (18,449 )   $ (2,070 )   $ (56,577 )   $ (20,433 )

OTHER COMPREHENSIVE (LOSS) INCOME:

                               

Change in foreign currency translation

  $ (592 )     4     $ 895     $ 173  

Unrealized gain on available for sale investments

  $ 271           $ 271     $  

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

    (321 )     4       1,166       173  

TOTAL COMPREHENSIVE LOSS

  $ (18,770 )   $ (2,066 )   $ (55,411 )   $ (20,260 )

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

                               

-BASIC

  $ (0.39 )   $ (0.05 )   $ (1.24 )   $ (0.48 )

-DILUTED

  $ (0.39 )   $ (0.05 )   $ (1.24 )   $ (0.48 )

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING USED IN COMPUTING NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

                               

-BASIC

    47,856       43,373       45,545       42,774  

-DILUTED

    47,856       43,373       45,545       42,774  

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 

 

FRESHPET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 

(Unaudited, in thousands)

 

   

Common Shares

   

Common Stock

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive (Loss) Income

   

Treasury Shares

   

Treasury Stock

   

Total Stockholders' Equity

 

BALANCES, June 30, 2022

    47,834     $ 48     $ 1,305,260     $ (273,751 )   $ 1,367       14     $ (256 )   $ 1,032,668  

Exercise of options to purchase common stock

    2                                            

Vesting of restricted stock units

    2             (66 )                             (66 )

Share-based compensation expense

                6,671                               6,671  

Issuance of partner warrants

                9,775                               9,775  

Shares issued in primary offering, net of issuance costs

                (341 )                             (341 )

Unrealized gain on available for sale investments

                            271                   271  

Foreign currency translation

                            (592 )                 (592 )

Net loss

                      (18,449 )                       (18,449 )

BALANCES, September 30, 2022

    47,838     $ 48     $ 1,321,299     $ (292,200 )   $ 1,046       14     $ (256 )   $ 1,029,937  

 

   

Common Shares

   

Common Stock

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive Income

   

Treasury Shares

   

Treasury Stock

   

Total Stockholders' Equity

 

BALANCES, June 30, 2021

    43,373     $ 43     $ 944,222     $ (224,287 )   $ 89       14     $ (256 )   $ 719,811  

Exercise of options to purchase common stock

    29             308                               308  

Vesting of restricted stock units

    2             (281 )                             (281 )

Share-based compensation expense

                5,746                               5,746  

Shares issued in primary offering, net of issuance costs

                                               

Foreign currency translation

                            4                   4  

Net loss

                      (2,070 )                       (2,070 )

BALANCES, September 30, 2021

    43,404     $ 43     $ 949,995     $ (226,357 )   $ 93       14     $ (256 )   $ 723,518  

 

   

Common Shares

   

Common Stock

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive (Loss) Income

   

Treasury Shares

   

Treasury Stock

   

Total Stockholders' Equity

 

BALANCES, December 31, 2021

    43,449     $ 43     $ 955,710     $ (235,623 )   $ (120 )     14     $ (256 )   $ 719,754  

Exercise of options to purchase common stock

    34             329                               329  

Vesting of restricted stock units

    35       1       (1,279 )                             (1,278 )

Share-based compensation expense

                19,260                               19,260  

Issuance of partner warrants

                9,775                               9,775  

Shares issued in primary offering, net of issuance costs

    4,320       4       337,504                               337,508  

Unrealized gain on available for sale investments

                            271                   271  

Foreign currency translation

                            895                   895  

Net loss

                      (56,577 )                       (56,577 )

BALANCES, September 30, 2022

    47,838     $ 48     $ 1,321,299     $ (292,200 )   $ 1,046       14     $ (256 )   $ 1,029,937  

 

   

Common Shares

   

Common Stock

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive (Loss) Income

   

Treasury Shares

   

Treasury Stock

   

Total Stockholders' Equity

 

BALANCES, December 31, 2020

    40,732     $ 41     $ 600,388     $ (205,924 )   $ (80 )     14     $ (256 )   $ 394,169  

Exercise of options to purchase common stock

    203             2,048                               2,048  

Vesting of restricted stock units

    54             (3,198 )                             (3,198 )

Share-based compensation expense

                18,587                               18,587  

Shares issued in primary offering, net of issuance costs

    2,415       2       332,170                               332,172  

Foreign currency translation

                            173                   173  

Net loss

                      (20,433 )                       (20,433 )

BALANCES, September 30, 2021

    43,404     $ 43     $ 949,995     $ (226,357 )   $ 93       14     $ (256 )   $ 723,518  

 

See accompanying notes to the unaudited consolidated financial statements.

 

6

 

 

FRESHPET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

   

For the Nine Months Ended

 
   

September 30,

 
   

2022

   

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (56,577 )   $ (20,433 )

Adjustments to reconcile net loss to net cash flows used in operating activities:

               

Provision for loss (gains) on accounts receivable

    (23 )     15  

Loss on disposal of equipment

    203       284  

Share-based compensation

    20,409       18,516  

Inventory obsolescence

    3,455       249  

Depreciation and amortization

    24,422       22,489  

Amortization of deferred financing costs and loan discount

    596       1,013  

Change in operating lease right of use asset

    1,021       992  

Loss on equity method investment

    2,969       1,124  

Changes in operating assets and liabilities:

               

Accounts receivable

    (22,403 )     (13,794 )

Inventories

    (32,215 )     (10,435 )

Prepaid expenses and other current assets

    1,074       (1,140 )

Other assets

    (1,639 )     (5,520 )

Accounts payable

    1,430       5,057  

Accrued expenses

    4,626       (781 )

Other lease liabilities

    (1,028 )     (971 )

Net cash flows used in operating activities

    (53,680 )     (3,335 )

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchase of short-term investments

    (19,840 )      

Investments in equity method investment

    (3,293 )      

Acquisitions of property, plant and equipment, software and deposits on equipment

    (167,437 )     (220,835 )

Net cash flows used in investing activities

    (190,570 )     (220,835 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from common shares issued in primary offering, net of issuance cost

    337,508       332,172  

Proceeds from exercise of options to purchase common stock

    329       2,048  

Tax withholdings related to net shares settlements of restricted stock units

    (1,279 )     (3,198 )

Proceeds from borrowings under Credit Facility

    78,000        

Repayment of borrowings under Credit Facility

    (2,786 )      

Fees paid in connection with financing agreements

          (3,263 )

Net cash flows provided by financing activities

    411,772       327,759  

NET CHANGE IN CASH AND CASH EQUIVALENTS

    167,522       103,589  

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

    72,788       67,247  

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 240,310     $ 170,836  

SUPPLEMENTAL CASH FLOW INFORMATION:

               

Interest paid

  $ 3,152     $ 1,288  

NON-CASH FINANCING AND INVESTING ACTIVITIES:

               

Property, plant and equipment purchases in accounts payable

  $ 15,486     $ 2,599  

Issuance of partner warrants

  $ 9,775     $  

 

See accompanying notes to the unaudited consolidated financial statements.

 

7

 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

Note 1 – Nature of the Business and Summary of Significant Accounting Policies:

 

Nature of the Business – Freshpet, Inc. (hereafter referred to as “Freshpet”, the “Company”, “we,” "us" or “our”), a Delaware corporation, manufactures and markets natural fresh meals and treats for dogs and cats. The Company’s products are distributed throughout the United States, Canada and other international markets, into major retail classes including Grocery (including online), Mass and Club, Pet Specialty, and Natural retail.

 

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The unaudited consolidated financial statements include the accounts of the Company as well as the Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The interim unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of management, the interim unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2022, the results of its operations and changes to stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and its cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022, are not necessarily indicative of results to be expected for the year ending December 31, 2022, or any other interim periods, or any future year or period. All amounts included herein have been rounded except where otherwise stated. As figures are rounded, numbers presented throughout this document may not add up precisely to the totals we provide and percentages may not precisely reflect the absolute figures. 

 

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K for the year ended December 31, 2021.

 

Equity method investment – The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company has the ability to exercise significant influence based on our representation on and the makeup of the investee's Board of Directors. The Company has elected to record its share of equity in income (losses) of equity method investment on a one-quarter lag based on the most recently available financial statements. 

 

In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by our proportionate share of the net income or loss. 

 

On March 10, 2022, the Company invested $3,300 to maintain our 19% interest in a privately held company that operates in our industry, with our investments to date totaling $31,200. The Company concluded that it is not the primary beneficiary, which is primarily the result of the Company's conclusion that it does not have the power to direct activities that most significantly impact the economic performance. The Company accounts for the investment under the equity method of accounting based on our ability to exercise significant influence even though the Company's percentage of ownership is below 20%. The basis difference between the Company's carrying value of its investment and the amount of underlying equity in net assets of the privately held company is not material to the Company's consolidated financial statements.

 

Variable interest entities – In accordance with the applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which it has a variable interest is a variable interest entity. The Company's analysis includes both quantitative and qualitative reviews to determine if we must consolidate a variable interest entity as its primary beneficiary.

 

Estimates and Uncertainties – The preparation of our consolidated financial statements in conformity with U.S. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used in determining, among other items, trade incentives, share-based compensation and useful lives for long-lived assets. Actual results, as determined at a later date, could differ from those estimates.

 

8

 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

Fair Value of Financial Instruments – Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

 Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
 Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies.
 Level 3 - Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

 

The carrying amounts reported in the balance sheets for cash and cash equivalents, other receivables, accounts payable and accrued expenses approximate their fair value based on the short-term maturity of these instruments. Certain assets, including the equity method investment, right-of-use assets and property and equipment are also subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review.

 

As of September 30, 2022, the Company maintained Level 1 and Level 2 assets and liabilities.  

 

Cash Equivalents  The Company holds treasury bills with original maturities when purchased of less than three months, measured as a level 2 asset. Treasury bills have been classified as available-for-sale which may be sold before maturity or are not classified as held-to-maturity or trading. Cash equivalents classified as available-for-sale are carried at fair value with unrealized gains or losses reported in other comprehensive income (loss).  

 

Short-Term Investments  The Company holds treasury bills with original maturities when purchased of greater than three months, measured as a Level 2 asset. Treasury bills have been classified as available-for-sale which may be sold before maturity or are not classified as held to maturity or trading. Short-term investments classified as available-for-sale are carried at fair value with unrealized gains or losses reported in other comprehensive income (loss).

 

Trade accounts receivable – The allowance for doubtful accounts is based on the Company's assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer's ability to pay. 

 

Implementation Costs of Cloud Computing Arrangement – As of  September 30, 2022 and December 31, 2021, the Company's deferred implementation costs of our new ERP system associated with our cloud computing arrangement, which were reflected within prepaid and other assets, were $9,138 and $7,380, respectively. The cost will be recognized over the term of the agreement, which began in the first quarter of 2022.  

 

Debt Issuance Cost – During the first quarter of 2021, as part of the Sixth Amended and Restated Loan and Security Agreement, dated February 19, 2021, (as amended, the "New Loan Agreement"), the Company incurred an additional $3,263 of fees associated with the debt modification, of which $2,797 of the fees were related to the Delayed Draw Term Loan ("DDTL") (as defined below) with the remaining balance relating to the Revolving Loan Facility (as defined below). The Company also wrote down $485 of fees incurred from the prior credit facilities. The Company’s policy is to record the debt issuance cost related to the Delayed Draw Term Loan, net of debt, for the portion of the Delayed Draw Term Loan that is outstanding, with the remaining amount recorded within assets.   

 

The Company amortizes debt issuance costs categorized as assets on a straight-line basis over the term of the loan and amortizes the debt issuance costs that are categorized net of debt using the effective interest method, over the term of the loan.

 

9

 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

 

Net Sales - Information about the Company’s net sales by class of retailer is as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  2022  2021  2022  2021 

Grocery, Mass and Club

 $132,757  $91,148  $375,847  $259,227 

Pet Specialty and Natural

  18,576   16,442   53,664   50,393 

Net Sales (a)

 $151,333  $107,590  $429,511  $309,620 

 

(a) Online sales associated with each class of retailer are included within their respective total.

 

Recently Adopted Accounting Standards

The Company did not adopt any new Accounting Standard Updates during the quarter ended September 30, 2022.

   

 

 

Note 2 – Inventories:

 

   

September 30,

   

December 31,

 
   

2022

   

2021

 

Raw Materials and Work in Process

  $ 17,593     $ 13,339  

Packaging Components Material

    6,562       2,823  

Finished Goods

    40,322       19,704  
      64,477       35,866  

Reserve for Obsolete Inventory

    (143 )     (292 )

Inventories, net

  $ 64,334     $ 35,574  

 

 

Note 3 – Property, Plant and Equipment:

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Refrigeration Equipment

 $132,233  $122,063 

Machinery and Equipment

  162,863   140,471 

Building, Land, and Improvements

  167,463   150,927 

Furniture and Office Equipment

  9,340   8,844 

Leasehold Improvements

  1,319   1,319 

Construction in Progress

  382,043   273,880 
   855,260   697,504 

Less: Accumulated Depreciation

  (135,816)  (113,582)

Property, plant and equipment, net

 $719,444  $583,922 

 

Depreciation expense related to property, plant and equipment totaled $8,485 and $24,264 for the three and nine months ended September 30, 2022, respectively, of which $5,159 and $14,208 was recorded to cost of goods sold for the three and nine months ended September 30, 2022, respectively, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.

 

Depreciation expense related to property, plant and equipment totaled $7,389 and $21,571 for the three and nine months ended September 30, 2021, respectively, of which $4,075 and $11,896 was recorded to cost of goods sold for the three and nine months ended September 30, 2021, respectively, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.

 

10


 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

 

Note 4 – Accrued Expenses:

 

   

September 30,

   

December 31,

 
   

2022

   

2021

 

Accrued Compensation and Employee Related Costs

  $ 5,822     $ 6,934  

Accrued Chiller Cost

    2,889       2,050  

Accrued Customer Consideration

    1,278       828  

Accrued Freight

    2,225       1,547  

Accrued Production Expenses

    4,529       1,862  

Accrued Corporate and Marketing Expenses

    1,631       1,081  

Other Accrued Expenses

    1,202       648  

Accrued Expenses

  $ 19,576     $ 14,950  

 

 

Note 5 – Debt:

 

On February 19, 2021, the Company entered into the Sixth Amended and Restated Loan and Security Agreement ("Sixth Amendment"), which amended and restated in full the Company's Fifth Amended and Restated Loan and Security Agreement, dated as of April 17, 2020. The Sixth Amendment provides for a $350,000 senior secured credit facility (as amended the "Credit Facility"), encompassing a $300,000 delayed draw term loan facility (the "Delayed Draw Facility") and a $50,000 revolving loan facility (the "Revolving Loan Facility"), which replaced the Company's prior $130,000 delayed draw term loan facility and $35,000 revolving loan facility.

 

The Credit Facility matures on February 19, 2026 and borrowings thereunder bear interest at variable rates depending on the Company's election, either at a base rate or at the adjusted term SOFR (which rate shall be calculated based upon a one-month tenor in effect on such date and shall be determined on a daily basis), in each case, plus an applicable margin. Subject to the Company's leverage ratio, the applicable margin varies between 0.75% and 2.25% for base rate loans and 1.75% and 3.25% for SOFR loans. The Company has the option to borrow term loans under the Delayed Draw Facility ("Delayed Draw Term Loans") until August 19, 2023, subject to certain conditions. As of August 19, 2022, the amount of any outstanding Delayed Draw Term Loans shall be repayable in equal consecutive quarterly installments equal to 1/28th of the total single term loan ("the Initial Combined Delayed Draw Term Loan"). Commencing on August 19, 2023, the amount of any outstanding Delayed Draw Term Loans, combined with the Initial Combined Delayed Draw Term Loan, shall be repayable in equal consecutive quarterly installments equal to 1/28th of the outstanding Delayed Draw Term Loans and the remainder shall be due and payable on February 19, 2026. 

 

As of  September 30, 2022, the Company had $75,214 outstanding under the Delayed Draw Facility. Any prepayments of the Delayed Draw Facility under the agreement may not be reborrowed. The Credit Facility includes a quarterly commitment fee on any unused amounts at a per annum rate between 0.30% to 0.50% depending on the aggregate principal outstanding. As of September 30, 2022, the Company was not in compliance with the total funded debt ratio and the fixed charge coverage ratio financial covenants associated with the Credit Facility. Prior to the issuance of these financial statements, the lenders under the Credit Facility consented to such covenants not being tested as of such date. At the time such consent was granted, the Company repaid in full the $75,214 outstanding amount under the Delayed Draw Facility.

 

In connection with entering into the Sixth Amendment, the Company incurred $3,166 of debt issuance cost, which is capitalized on the balance sheet and amortized over the life of the facility, and wrote off $485 of fees incurred from the prior credit facilities. 

 

As of September 30, 2022, there was $2,342 of debt issuance cost recorded against the Current Portion of Long-Term Debt related to the issuance costs of the Delayed Draw Facility. In addition, $235 of debt issuance costs recorded to other assets, and $99 was recorded in other current assets related to the issuance costs of the Revolving Loan Facility. 

 

On April 29, 2022, the Company entered into the First Amendment to the New Loan Agreement, which amendment, among other things, (i) made amendments to allow for the Company's projected capital expenditures without either triggering mandatory prepayment obligations or violating the covenant and (ii) replaced the LIBOR interest rate for U.S. dollar loans to a term Secured Overnight Financing Rate ("Term SOFR").

 

11

 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

 

Note 6 – Leases:

 

We have various noncancelable lease agreements for office and warehouse space, as well as office equipment, with original remaining lease terms of two years to five years, some of which include an option to extend the lease term for up to five years. Because the Company is not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments. The Company’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants.

 

Weighted-average remaining lease term (in years) and discount rate related to operating leases were as follows:

 

Weighted-average remaining lease term

  3.82 

Weighted-average discount rate

  6.15%

 

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments.

 

Maturities of lease liabilities under noncancelable operating leases as of September 30, 2022 were as follows:

 

Operating Lease Obligations

 As of September 30, 2022 

2022 (a)

 $443 

2023

  1,802 

2024

  1,511 

2025

  1,210 

2026 and beyond

  1,576 

Total lease payments

 $6,542 

Less: Imputed interest

  (476)

Present value of lease liabilities

 $6,066 

 

 

(a)

Excluding the nine months ended September 30, 2022.

 

A summary of rent expense for the three and nine months ended September 30, 2022 and 2021 was as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Operating lease cost

 $438  $444  $1,314  $1,335 

 

Supplemental cash flow information and non-cash activity relating to operating leases are as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Operating cash flow information:

 

2022

  

2021

  

2022

  

2021

 

Cash paid for amounts included in the measurement of lease liabilities

 $443  $440  $1,321  $1,313 

 

12

 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

 

Note 7 – Warrants:

 

In connection with an agreement with one of our suppliers during the third quarter of 2022 in exchange for services, we issued our partner warrants to purchase up to an aggregate of 194 thousand shares of voting common stock of the Company at a purchase price of $0.01 per share. The Company determined these warrants are accounted for under FASB ASC 718 Stock Compensation. The warrants were recorded as a prepaid expense as the warrants were exercisable at the grant date. The prepaid expense will be amortized within Cost of Goods Sold as services are provided by the supplier. As of September 30, 2022, there were $4,600 of warrants in prepaid expense and $4,026 of warrants in other assets.  

 

During the three and nine months ended September 30, 2022, 194 thousand warrants were issued and exercised, respectively. The grant date fair value of warrants granted during the three and nine months ended September 30, 2022 was $50.32 per share.

 

Warrants Assumptions

 

Fair value of the warrants at September 30, 2022, was based on the Black Scholes Option Pricing Model, which is based, in part, upon level 3 unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. 

 

The Company used the following assumptions for its warrants:

 

Expected Volatility - Expected volatility was based on the historical volatility of the Company's common stock.

 

Exercise Price of Warrants Granted - The Company determined the exercise price pursuant to the terms of the warrant agreement of $0.01 per share. 

 

Risk-Free Interest Rate - The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term in effect at the time of the warrant issuance.

 

Expected Dividend Yield - The Company has not historically declared dividends, and no future dividends are expected to be available to benefit warrant holders at the time of warrant issuance. Accordingly, the Company used an expected dividend yield of zero in the valuation model.

 

A summary of warrants assumptions as of September 30, 2022 were as follows:

 

  

As of September 30,

  

2022

Exercise price of warrants granted

 

$ 0.01

Expected volatility

 

52.5%

Expected terms in years

 

0.0

Risk-free interest rate

 

3.9%

Expected dividend yield

 

0.0%

 

 

Total amortization associated with partner warrants for the three and nine months ended September 30, 2022 was $1,150.

 

 

13

 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

 

 

Note 8 – Equity Incentive Plans:

 

Total compensation cost for share-based payments recognized for the three and nine months ended September 30, 2022 was $6,671 and $19,260, respectively, and for the three and nine months ended September 30, 2021 was $5,746 and $18,587, respectively. During the nine months ended September 30, 2022, 35 thousand stock options were exercised. During the nine months ended September 30, 2022, 81 thousand service period restricted stock units were granted at a weighted average grant-date fair market value of $85.01. During the nine months ended September 30, 2022, 57 thousand restricted stock units vested.

 

Note 9 – Earnings Per Share Attributable to Common Stockholders:

 

Basic net earnings (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net earnings (loss) per share of common stock is computed by giving effect to all potentially dilutive securities.

 

The potentially dilutive securities excluded from the determination of diluted loss per share, as their effect is antidilutive, are as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 

Service Period Stock Options

    1,269       1,275       1,259       1,298  

Restricted Stock Units

    149       160       147       173  

Performance Stock Options

    944       886       944       886  

Total

    2,362       2,321       2,350       2,357  

 

For the three and nine months ended September 30, 2022 and 2021, diluted net loss per share of common stock was the same as basic net loss per share of common stock, due to the fact that potentially dilutive securities would have an antidilutive effect as the Company incurred a net loss during such periods.

 

Note 10 – Concentrations:

 

Concentration of Credit Risk—The Company maintains its cash balances in financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 each. At times, such balances may be in excess of the FDIC insurance limit.

 

 

14

 

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

 

Note 11 – Commitments and Contingencies:

 

We are currently involved in various claims and legal actions that arise in the ordinary course of our business, including claims resulting from employment related matters. None of these claims or proceedings, most of which are covered by insurance, are expected to have a material adverse effect on our business, financial condition, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operations or cash flows. 

 

On April 8, 2022, Phillips Feed Service, Inc., d/b/a Phillips Feed And Pet Supply ("Phillips") filed a complaint against the Company in U.S. District Court for the Eastern District of Pennsylvania (Allentown Division) for damages allegedly sustained as a result of the termination of the Company's distribution arrangement with Phillips, a former distributor of Freshpet products. Phillips asserts a claim for breach of contract, and seeks monetary damages in excess of $8,300 based on a claimed "termination payment" under a 2018 "Letter Of Intent" and additional damages based on a claim for improper notice of termination. Phillips also claims a right of setoff with respect to monies owed by Phillips to the Company.

 

On July 5, 2022, the Company answered the complaint disputing the claimed damages, assertions of breach of contract, and the right of offset. In addition, the Company counterclaimed breach of contract for amounts owed to Freshpet earned while Phillips served as an authorized distributor of Freshpet product. As of September 30, 2022, due to the claims and counterclaims between the parties, the Company reclassified the amounts due from Phillips of $8,971 to other noncurrent assets.  

 

Based on information currently available and advice of counsel, we do not believe that the outcome of any of this matter is likely to have a material adverse effect on our business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of this matter, if unfavorable, may be materially adverse to our business, financial condition, results of operations or liquidity. Legal costs such as outside counsel fees and expenses are charged to selling, general and administrative expenses in the period incurred. 

 

 

Note 12 – Subsequent Events:

 

As of September 30, 2022, the Company was not in compliance with the total funded debt ratio and the fixed charge coverage ratio financial covenants associated with the credit facility referenced in Note 5. Prior to the issuance of these financial statements, the lenders under the Credit Facility consented to such covenants not being tested as of such date. At the time such consent was granted, the Company repaid in full the $75,214 outstanding amount under the Delayed Draw Facility.

 

15

 
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (our "Annual Report").

 

In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section entitled "Forward-Looking Statements" in this report and in the section entitled "Risk Factors" in our Annual Report.

 

Overview

 

We started Freshpet with a single-minded mission to bring the power of real, fresh food to our dogs and cats. We were inspired by the rapidly growing view among pet owners that their dogs and cats are a part of their family, leading them to demand healthier pet food choices. Since Freshpet's inception in 2006, we have created a comprehensive business model to deliver wholesome pet food that pet parents can trust, and in the process we believe we have become one of the fastest growing pet food companies in North America. Our business model is difficult for others to replicate and we see significant opportunity for future growth by leveraging the unique elements of our business, including our brand, our product know-how, our Freshpet Kitchens, our refrigerated distribution, our Freshpet Fridge and our culture.

 

Recent Developments

 

Throughout 2022 revenue growth remains strong and vibrant across dollars, units and consumer penetration. As Freshpet has grown and faced supply chain adversity, we have established that we need incremental resources across three areas. These include improvements in logistics and supply chain, quality (lowering HPP & disposals), and procurement/hedging of major ingredients. We have implemented improvement programs and action plans in each area and expect to begin to see positive impact in the latter months of 2022 and into 2023. 

 

In order to manage ingredient costs, our third price increase of 2.6% went into effect during September 2022. Thus far, it appears that most major retailers have reflected that in their shelf prices and to date, we have not seen an adverse effect on our growth rates.

 

 

16

 

Increased Focus on Cash

 

As part of the Company's increased focus on cash, we are changing how we report Adjusted Gross Profit, Adjusted SG&A, and Adjusted EBITDA. Beginning for the period ended September 30, 2022, we are no longer adding back launch expenses and plant start-up expense in our calculation of our non-GAAP metrics. This change is reflective of our increased focus on cash, and we believe that this revised presentation will provide greater clarity on our path toward generating positive net income as the business scales further following the Company's planned capacity additions.

 

The presentation for Adjusted Gross Profit, Adjusted SG&A, and Adjusted EBITDA for the prior year period and prior quarter period has been recast as shown below to reflect these changes to enhance comparability between periods. 

 

The impact of the change on an annual basis is as follows:

 

 

   

FY 2020

   

FY 2021

 
   

(Dollars in thousands)

 

Gross profit

  $ 132,910     $ 162,146  

Depreciation expense

    9,576       16,545  

Non-cash share-based compensation

    2,132       4,152  

COVID-19 expense (a)

    3,497       1,753  

Adjusted Gross Profit

  $ 148,115     $ 184,596  

Adjusted Gross Profit as a % of Net Sales

    46.5 %     43.4 %

 

 

(a)

Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in cost of goods sold. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance.

 

   

FY 2020

   

FY 2021

 
   

(Dollars in thousands)

 

SG&A expenses

  $ 134,908     $ 186,809  

Depreciation and amortization expense

    11,549       13,923  

Non-cash share-based compensation

    8,793       20,846  

Loss on disposal of equipment

    1,805       1,000  

Equity offering expenses (a)

    58        

Enterprise Resource Planning (b)

    1,682       1,379  

COVID-19 expense (c)

    357       5  

Organization changes (d)

           

Adjusted SG&A Expenses

  $ 110,664     $ 149,656  

Adjusted SG&A Expenses as a % of Net Sales

    34.7 %     35.2 %

 

 

(a)

Represents fees associated with public offerings of our common stock.

  (b) Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system.
 

(c)

Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance.

  (d) Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. 

 

 

17

 

   

FY 2020

   

FY 2021

 
   

(Dollars in thousands)

 

Net loss

  $ (3,188 )   $ (29,699 )

Depreciation and amortization

    21,125       30,468  

Interest expense

    1,211       2,882  

Income tax expense

    65       162  

EBITDA

  $ 19,213     $ 3,813  

Loss on equity method investment

          2,005  

Loss on disposal of equipment

    1,805       1,000  

Non-cash share-based compensation

    10,925       24,998  

Equity offering expenses (a)

    58        

Enterprise Resource Planning (b)

    1,682       1,379  

COVID-19 expense (c)

    3,854       1,758  

Organization changes (d)

           

Adjusted EBITDA

  $ 37,537     $ 34,953  

Adjusted EBITDA as a % of Net Sales

    11.8 %     8.2 %

 

 

(a)

Represents fees associated with public offerings of our common stock.

  (b) Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system.
 

(c)

Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance.

  (d) Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. 

 

Prior to September 30, 2022, the Company presented for the following items as adjustments to its non-GAAP metrics. Those details are provided again here for your convenience and for consideration in making comparisons to prior periods:

 

 

   

FY 2020

   

FY 2021

 
   

(Dollars in thousands)

 

Plant start-up expense

  $ 5,962     $ 4,868  

Launch expense

    3,421       3,130  

 

18

 

The impact of the change on a quarterly basis is as follows:

 

   

Three Months Ended

 
   

3/31/2021

   

6/30/2021

   

9/30/2021

   

12/31/2021

   

3/31/2022

   

6/30/2022

   

9/30/2022

 
   

(Dollars in thousands)

 

Gross profit

  $ 36,315     $ 43,091     $ 41,525     $ 41,216     $ 44,753     $ 51,080     $ 44,545  

Depreciation expense

    3,800       4,021       4,075       4,649       4,701       4,295       5,159  

Non-cash share-based compensation

    710       1,203       1,058       1,182       1,168       1,170       2,450  

COVID-19 expense (a)

    953       681       119                          

Adjusted Gross Profit

  $ 41,778     $ 48,996     $ 46,777     $ 47,047     $ 50,622     $ 56,545     $ 52,154  

Adjusted Gross Profit as a % of Net Sales

    44.7 %     45.1 %     43.5 %     40.6 %     38.3 %     38.7 %     34.5 %

 

 

(a)

Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in cost of goods sold. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance.

 

   

Three Months Ended

 
   

3/31/2021

   

6/30/2021

   

9/30/2021

   

12/31/2021

   

3/31/2022

   

6/30/2022

   

9/30/2022

 
   

(Dollars in thousands)

 

SG&A expenses

  $ 46,033     $ 49,557     $ 42,365     $ 48,854     $ 60,631     $ 69,215     $ 60,449  

Depreciation and amortization expense

    3,289       3,633       3,671       3,330       3,285       3,585       3,387  

Non-cash share-based compensation

    5,370       5,487       4,688       5,300       5,127       5,124       5,371  

Loss on disposal of equipment

    60       46       412       482       43       48       124  

Equity offering expenses (a)

    125       (125 )                                

Enterprise Resource Planning (b)

    603       247       273       256       1,018       1,991       1,937  

COVID-19 expense (c)

    4                                      

Organization changes (d)

                                        734  

Adjusted SG&A Expenses

  $ 36,582     $ 40,269     $ 33,321     $ 39,486     $ 51,158     $ 58,467     $ 48,896  

Adjusted SG&A Expenses as a % of Net Sales

    39.2 %     37.1 %     31.0 %     34.1 %     38.7 %     40.0 %     32.3 %

 

 

(a)

Represents fees associated with public offerings of our common stock.

  (b) Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system.
 

(c)

Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance.

  (d) Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. 

 

 

19

 

 

   

Three Months Ended

 
   

3/21/2021

   

6/30/2021

   

9/30/2021

   

12/31/2021

   

3/31/2022

   

6/30/2022

   

9/30/2022

 
   

(Dollars in thousands)

 

Net loss

  $ (10,888 )   $ (7,475 )   $ (2,070 )   $ (9,265 )   $ (17,542 )   $ (20,586 )   $ (18,448 )

Depreciation and amortization

    7,089       7,654       7,746       7,979       7,986       7,880       8,546  

Interest expense

    901       654       677       650       571       1,671       1,817  

Income tax expense

    16       16       16       114       41       41       41  

EBITDA

  $ (2,882 )   $ 849     $ 6,369     $ (523 )   $ (8,944 )   $ (10,994 )   $ (8,044 )

Loss on equity method investment

    248       337     $ 539       881       1,310     $ 717       943  

Loss on disposal of equipment

    60       46       412       482       43       48       124  

Non-cash share-based compensation

    6,080       6,690       5,746       6,482       6,295       6,294       7,821  

Equity offering expenses (a)

    125       (125 )                              

Enterprise Resource Planning (b)

    603       247       273       256       1,018       1,991       1,937  

COVID-19 expense (c)

    957       681       119                          

Organization changes (d)

                                        734  

Adjusted EBITDA

  $ 5,191     $ 8,725     $ 13,458     $ 7,578     $ (278 )   $ (1,944 )   $ 3,515  

Adjusted EBITDA as a % of Net Sales

    5.6 %     8.0 %     12.5 %     6.5 %     -0.2 %     -1.3 %     2.3 %

 

 

(a)

Represents fees associated with public offerings of our common stock.

  (b) Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system.
 

(c)

Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance.

  (d) Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. 

 

Prior to September 30, 2022, the Company presented for the following items as adjustments to its non-GAAP metrics. Those details are provided again here for your convenience and for consideration in making comparisons to prior periods:

 

 

   

Three Months Ended

 
   

3/31/2021

   

6/30/2021

   

9/30/2021

   

12/31/2021

   

3/31/2022

   

6/30/2022

   

9/30/2022

 
   

(Dollars in thousands)

 

Plant start-up expense

  $ 1,843     $ 1,130     $ 588     $ 1,306     $ 4,748     $ 5,293     $ 8,015  

Launch expense

    731       1,018       562       819       632       504       1,542  

 

 

20

 

Components of our Results of Operations 

 

Net Sales

 

Our net sales are derived from the sale of products that are sold to retailers through broker and distributor arrangements. Our products are sold to consumers through a fast-growing network of company-owned branded refrigerators, known as Freshpet Fridges, located in our customers’ stores. We continue to roll out Freshpet Fridges at leading retailers across North America and parts of Europe and have installed Freshpet Fridges in approximately 24,651 retail stores as of September 30, 2022. Our products are sold under the Freshpet brand name with ingredients, packaging and labeling customized by class of retail. Sales are recorded net of discounts, returns and promotional allowances.

 

Our net sales growth is driven by the following key factors:

 

Increasing sales velocity from the average Freshpet Fridge due to increasing awareness, trial and adoption of Freshpet products and innovation. Our investments in marketing and advertising help to drive awareness and trial at each point of sale.

 

Increasing penetration of Freshpet Fridge locations in major classes of retail, including Grocery (including online), Mass, Club, Pet Specialty, and Natural. The impact of new Freshpet Fridge installations on our net sales varies by retail class and depends on numerous factors including store traffic, refrigerator size, placement within the store, and proximity to other stores that carry our products.

 

Consumer trends including growing pet ownership, pet humanization and a focus on health and wellness.

 

We believe that as a result of the above key factors, we will continue to penetrate the pet food marketplace and increase our share of the pet food category.

 

Gross Profit

 

Our gross profit is net of costs of goods sold, which include the costs of product manufacturing, product ingredients, packaging materials and inbound freight, as well as depreciation and amortization and non-cash share based compensation.

 

We expect to continue to mitigate any adverse movement in input costs through a combination of cost management and price increases.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses consist of the following:

 

Outbound freight. We use a third-party logistics provider for outbound freight that ships directly to retailers as well as third-party distributors.

 

Marketing & advertising. Our marketing and advertising expenses primarily consist of national television media, digital marketing, social media and grass roots marketing to drive brand awareness. These expenses may vary from quarter to quarter depending on the timing of our marketing and advertising campaigns. Our Feed the Growth initiative focuses on growing the business through increased marketing investments.

 

Freshpet Fridge operating costs. Freshpet Fridge operating costs consist of repair costs and depreciation. The purchase and installation costs for new Freshpet Fridges are capitalized and depreciated over the estimated useful life. All new refrigerators are covered by a manufacturer warranty for three years. We subsequently incur maintenance and freight costs for repairs and refurbishments handled by third-party service providers.

 

21

 

Research & development. Research and development costs consist of expenses to develop and test new products. The costs are expensed as incurred.

 

Brokerage. We use third-party brokers to assist with monitoring our products at the point-of-sale as well as representing us at headquarters for various customers. These brokers visit our retail customers’ store locations to ensure items are appropriately stocked and maintained.

 

Share-based compensation. We account for all share-based compensation payments issued to employees, directors and non-employees using a fair value method. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the grant date. We recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to us using the straight-line single option method.

 

Other general & administrative costs. Other general and administrative costs include non-plant personnel salaries and benefits, as well as corporate general & administrative costs.

 

Income Taxes

 

We had federal net operating loss (“NOL”) carry forwards of approximately $291.8 million as of December 31, 2021, of which approximately $175.4 million, generated in 2017 and prior, will expire between 2025 and 2037. The NOL generated from 2018 through 2021, of approximately $116.4 million, will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. We may be subject to certain limitations in our annual utilization of NOL carry forwards to off-set future taxable income pursuant to Section 382 of the Internal Revenue Code, which could result in NOLs expiring unused. At December 31, 2021, we had approximately $229.5 million of state NOLs, which expire between 2022 and 2041, and had $14.3 million of foreign NOLs which do not expire. At December 31, 2021, we had a full valuation allowance against our net deferred tax assets as the realization of such assets was not considered more likely than not.

 

 

Consolidated Statements of Operations and Comprehensive Loss

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

Amount

   

% of Net Sales

   

Amount

   

% of Net Sales

   

Amount

   

% of Net Sales

   

Amount

   

% of Net Sales

 
   

(Dollars in thousands)

   

(Dollars in thousands)

 

Net sales

  $ 151,333       100 %   $ 107,590       100 %   $ 429,511       100 %   $ 309,620       100 %

Cost of goods sold

    106,788       71       66,065       61   &