UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
FRESHPET, INC.
(Exact Name of Registrant as Specified in its Charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
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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.
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).
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.
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| Non-accelerated filer |
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| Smaller reporting company |
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| Emerging growth company |
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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
As of May 2, 2024 the registrant had
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Page No. |
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| Part I. Financial Information |
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| Item 1. |
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5 | |
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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) |
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Condensed Consolidated Statements of Changes in Stockholders’ Equity |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 4. |
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| Part II. Other Information |
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| Item 1. |
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| Item 1A. |
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| Item 5. | Other Information | 38 |
| Item 6. |
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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:
| • | our ability to meet our sustainability targets, goals, and commitments, including due to the impact of climate change; | |
| • | changes in global economic and financial market conditions generally, such as inflation and interest rate increases; | |
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the impact of various worldwide or macroeconomic events, such as the ongoing conflict between Russia and Ukraine and the current conflict in Israel and the Gaza Strip, 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; | |
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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 (collectively, our Freshpet Kitchens Bethlehem, Freshpet Kitchens South and Freshpet Kitchens Ennis); |
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| • | our ability to successfully implement new processes and systems as we continue to stabilize and improve our ERP; | |
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our ability to timely complete the construction at our Freshpet Kitchens Ennis and achieve the anticipated benefits therefrom; |
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the loss of key members of our senior management team; |
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allegations that our products cause injury or illness or fail to comply with government regulations; |
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the loss of a significant customer; |
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the entrance of new competitors into our industry; |
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the effectiveness of our marketing and trade spending programs; |
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our ability to introduce new products and improve existing products; |
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our ability to match our manufacturing capacity with demand; |
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the impact of government regulation, scrutiny, warning and public perception; |
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the effect of false marketing claims; |
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| • | adverse weather conditions, natural disasters, pestilences and other natural conditions affecting our operations; |
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our ability to develop and maintain our brand; |
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the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require, including those effects caused by inflation; |
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our ability to manage our supply chain effectively; |
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global or local pandemics, such as COVID-19; |
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| • | the failure of our information technology systems to perform adequately, including as a result of any interruptions, intrusions, cyber attacks or physical or electronic security breaches of such systems; | |
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actions of activist stockholders; |
| • | volatility in the price of our common stock; and | |
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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, 2023. |
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.
Item 1. Financial Statements
FRESHPET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Deposits on equipment | ||||||||
| Operating lease right of use assets | ||||||||
| Long term investment in equity securities | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current operating lease liabilities | ||||||||
| Current finance lease liabilities | ||||||||
| Total Current Liabilities | $ | $ | ||||||
| Convertible senior notes | ||||||||
| Long term operating lease liabilities | ||||||||
| Long term finance lease liabilities | ||||||||
| Total Liabilities | $ | $ | ||||||
| Commitments and contingencies | — | — | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Common stock — voting, $ par value, shares authorized, issued and outstanding on March 31, 2024, and issued and outstanding on December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost — shares on March 31, 2024 and on December 31, 2023 | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands, except per share data)
| For the Three Months Ended |
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| March 31, |
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| 2024 |
2023 |
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| NET SALES |
$ | $ | ||||||
| COST OF GOODS SOLD |
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| GROSS PROFIT |
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| SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES |
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| INCOME (LOSS) FROM OPERATIONS |
( |
) | ||||||
| OTHER INCOME (EXPENSES): |
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| Interest and Other Income, net |
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| Interest Expense |
( |
) | ( |
) | ||||
| Gain on Equity Investment |
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| ( |
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| INCOME (LOSS) BEFORE INCOME TAXES |
( |
) | ||||||
| INCOME TAX EXPENSE |
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| LOSS ON EQUITY METHOD INVESTMENT |
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| INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS |
$ | $ | ( |
) | ||||
| OTHER COMPREHENSIVE (LOSS) INCOME: |
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| Change in Foreign Currency Translation |
$ | ( |
) | $ | ||||
| TOTAL OTHER COMPREHENSIVE (LOSS) INCOME |
( |
) | ||||||
| TOTAL COMPREHENSIVE INCOME (LOSS) |
$ | $ | ( |
) | ||||
| NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS |
||||||||
| -BASIC |
$ | $ | ( |
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| -DILUTED |
$ | $ | ( |
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| WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING |
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| -BASIC |
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| -DILUTED |
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See accompanying notes to the unaudited condensed consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONDENSED 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 |
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| BALANCES, December 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||
| Exercise of options to purchase common stock |
— | |||||||||||||||||||||||||||||||
| Vesting of restricted stock units |
( |
) | ( |
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| Share-based compensation expense |
— | — | ||||||||||||||||||||||||||||||
| Foreign currency translation |
— | ( |
) | — | ( |
) | ||||||||||||||||||||||||||
| Net income |
— | — | ||||||||||||||||||||||||||||||
| BALANCES, March 31, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||
| Common Shares |
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive (Loss) Income |
Treasury Shares |
Treasury Stock |
Total Stockholders' Equity |
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| BALANCES, December 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||||||||||
| Exercise of options to purchase common stock |
— | |||||||||||||||||||||||||||||||
| Vesting of restricted stock units |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Share-based compensation expense |
— | — | ||||||||||||||||||||||||||||||
| Purchase of capped call options |
— | ( |
) | — | ( |
) | ||||||||||||||||||||||||||
| Foreign currency translation |
— | — | ||||||||||||||||||||||||||||||
| Net loss |
— | ( |
) | — | ( |
) | ||||||||||||||||||||||||||
| BALANCES, March 31, 2023 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| For the Three Months Ended |
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| March 31, |
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| 2024 |
2023 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net income (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: |
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| Provision for loss (gains) on accounts receivable |
( |
) | ||||||
| Loss on disposal of property, plant and equipment |
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| Share-based compensation |
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| Inventory obsolescence |
( |
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| Depreciation and amortization |
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| Write-off and amortization of deferred financing costs and loan discount |
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| Change in operating lease right of use asset |
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| Loss on equity method investment |
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| Gain on equity investment |
( |
) | ||||||
| Changes in operating assets and liabilities: |
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| Accounts receivable |
( |
) | ||||||
| Inventories |
( |
) | ( |
) | ||||
| Prepaid expenses and other current assets |
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| Other assets |
( |
) | ( |
) | ||||
| Accounts payable |
( |
) | ||||||
| Accrued expenses |
( |
) | ( |
) | ||||
| Operating lease liability |
( |
) | ( |
) | ||||
| Net cash flows provided by (used in) operating activities |
( |
) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Purchase of short-term investments |
( |
) | ||||||
| Acquisitions of property, plant and equipment, software and deposits on equipment |
( |
) | ( |
) | ||||
| Net cash flows used in investing activities |
( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Proceeds from exercise of options to purchase common stock |
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| Tax withholdings related to net shares settlements of restricted stock units |
( |
) | ( |
) | ||||
| Purchase of capped call options |
( |
) | ||||||
| Proceeds from issuance of convertible senior notes |
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| Debt issuance costs |
( |
) | ||||||
| Principal payments under finance lease obligations |
( |
) | ||||||
| Net cash flows provided by financing activities |
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| NET CHANGE IN CASH AND CASH EQUIVALENTS |
( |
) | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
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| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: |
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| Interest paid |
$ | $ | ||||||
| NON-CASH FINANCING AND INVESTING ACTIVITIES: |
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| Property, plant and equipment purchases in accounts payable and accrued expenses |
$ | $ | ||||||
| Receivable from exercise of options to purchase common stock |
$ | $ | ||||||
| Tax withholdings related to net shares settlements of restricted stock units in accrued expenses |
$ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 1 – 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, Mass, International, Digital, Pet Specialty, and Club.
Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The unaudited condensed 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 condensed 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 presentation of the Company’s financial position as of March 31, 2024, the results of its operations and changes to stockholders’ equity for the three months ended March 31, 2024 and 2023, and its cash flows for the three months ended March 31, 2024 and 2023. The results for the three months ended March 31, 2024, are not necessarily indicative of results to be expected for the year ending December 31, 2024, 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 condensed 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, 2023.
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.
Segments – The Company operates as a single operating segment reporting to its chief operating decision maker.
Investment in Unconsolidated Company – 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.
In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by its proportionate share of the net income or loss. 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.
Through 2022, we invested a total of $
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
On March 30, 2023, the Company no longer had representation on the investee's Board of Directors, and therefore determined that significant influence had been lost as of that date. As such, as of March 30, 2023, the Company stopped accounting for the investment as an equity method investment and began to account for the investment under ASC Topic 321 ("ASC 321"), Investments - Equity Securities. As of March 31, 2024, the Company's ability to exercise significant influence continues to be restricted as it no longer has, or the ability to obtain, board representation and it has no means of participation in any decision making processes as the privately held investee's Board of Directors is closely held.
Because the investee is a privately held company, there is not a means to obtain a readily determinable fair value of the entity. The Company follows ASC Topic 321 using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence. Under ASC 321, the initial carrying value of the investment is equal to the previous carrying amount of the investment under the equity method. The carrying amount of the investment is subsequently adjusted for any impairment or adjustments resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. Dividends and distributions, if any, from the investee would be recognized in the period in which they are received and recorded in other income on the consolidated statement of operations.
The Company performs a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company estimates the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures. If the fair value is less than the investment’s carrying value, the entity recognizes an impairment loss in earnings equal to the difference between the carrying value and fair value. On March 26, 2024, the investee completed an equity funding, which we concluded represented an orderly transaction for an identical equity security with no differences in rights and obligations. As a result, pursuant to the ASC 321 measurement alternative, we adjusted the carrying amount of our equity investment from $
March 2023 Issuance of $
The Company accounts for the Convertible Notes as a single liability measured at amortized cost. The Company uses the effective interest rate method to amortize the debt issuance costs to interest expense over the respective term of the Convertible Notes.
Leases – The Company is a lessee in noncancelable (1) operating leases, and (2) finance leases, which it accounts for in accordance with Accounting Standards Codification (ASC) Topic 842, Leases.
The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right of use asset and a lease liability at the lease commencement date. For both operating and finance leases, the right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received; and the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments for those leases. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms in a similar economic environment.
Right of use assets for the operating and finance leases are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment - Overall, to determine whether a right of use asset is impaired, and if so, the amount of the impairment loss to recognize. No such loss was recognized as of March 31, 2024.
The Company monitors for events or changes in circumstances that require a reassessment of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding right of use asset.
The Company has elected the practical expedient to combine lease and non-lease components when determining the right of use asset and lease liability. The Company has also elected not to recognize right of use assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term.
Cash Equivalents – The Company holds treasury bills with original maturities when purchased of less than three months, within cash and cash equivalents, carried at amortized cost on the Consolidated Balance Sheet. Treasury bills have been classified as held-to-maturity as we have the ability and intent to hold them to maturity. As of March 31, 2024, the Company had $
Short-Term Investments – The Company, from time to time, holds treasury bills with original maturities when purchased of greater than three months, within short-term investments, carried at amortized cost on the Consolidated Balance Sheet. Treasury bills have been classified as held-to-maturity as we have the ability and intent to hold them to maturity. As of March 31, 2024 and December 31, 2023, there were no short-term investments.
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 March 31, 2024 and December 31, 2023, 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 $
Fair Value of Financial Instruments – Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosure 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).
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
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. |
Our financial assets and liabilities include cash and cash equivalents, receivables, accounts payable and accrued liabilities, the fair values of which approximate their carrying values due to the short-term nature of these instruments. The Company holds certain financial assets within cash and cash equivalents in the form of held-to-maturity treasury bills as we have the ability and intent to hold them to maturity, as such, they are not fair valued each reporting period but instead measured at amortized cost. The fair value of these assets is based on quoted market prices for the same or similar securities within less active markets, which the Company determined to be Level 2 inputs. As of March 31, 2024, the fair value of these treasury bills approximates their carrying value due to the short-term nature of these instruments.
Certain financial and non-financial assets, including operating lease right-of-use assets and property, plant and equipment are reported at their carrying values and are not subject to recurring fair value measurements. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the investment in equity securities, we have elected the measurement alternative under which we measure this investment at cost minus impairment, if any, plus or minus changes resulting from observable price changes, if any, in orderly transactions for an identical or a similar investment of the same issuer, for which the change in fair value would be included in net income.
Refer to Note 6 for the fair value of our Convertible Senior Notes.
As of March 31, 2024, the Company maintained Level 1 and Level 2 assets and liabilities.
Net Sales - Information about the Company’s net sales by class of retailer is as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Grocery, Mass, International and Digital | $ | $ | ||||||
| Pet Specialty and Club | ||||||||
| Net Sales | $ | $ | ||||||
Pet specialty continues to grow at a slower rate than our overall business and will soon be less than 10% of our total net sales. As of March 31, 2024, the Company is providing a more meaningful breakout of its sales, which now combines pet specialty and club as both classes of retailers service a specific consumer through specialized offerings, which include value focused and or premium products. In contrast, grocery, mass, international and digital offer a wide variety of products.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This guidance will be effective for the Company for the annual report for the fiscal year ending December 31, 2024 and subsequent interim periods. Early adoption is permitted and retrospective adoption is required for all prior periods presented. The Company is currently evaluating the provisions of this guidance and its effect on its future consolidated financial statements and plans to adopt the standard on its effective date.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
In March 2024, the SEC adopted final rules to require disclosures about certain climate-related information in registration statements and annual reports. As adopted, the Final Climate Rules mandate disclosure of, among other things, material climate-related risks, how the board of directors and management oversee and manage such risks, and the actual and potential material impacts of such risks on us. The rules also require disclosure about material climate-related targets and goals, Scope 1 and Scope 2 GHG emissions, and the financial impacts of severe weather events and other natural conditions. In April 2024, the SEC voluntarily stayed the Final Climate Rules pending resolution of legal challenges. If the rules are ultimately implemented, their adoption will be phased and, accordingly, we are required to begin certain disclosures for our annual period ending December 31, 2025. These rules will be applied prospectively.
Note 2 – Inventories, net:
| March 31, |
December 31, |
|||||||
| 2024 |
2023 |
|||||||
| Raw Materials and Work in Process |
$ | $ | ||||||
| Packaging Components Material |
||||||||
| Finished Goods |
||||||||
| Inventories, net |
$ | $ | ||||||
Note 3 – Property, Plant and Equipment, net:
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Refrigeration Equipment | $ | $ | ||||||
| Machinery and Equipment | ||||||||
| Building, Land, and Improvements | ||||||||
| Furniture and Office Equipment | ||||||||
| Leasehold Improvements | ||||||||
| Construction in Progress | ||||||||
| Finance Lease Right of Use Asset | ||||||||
| Less: Accumulated Depreciation and Amortization | ( | ) | ( | ) | ||||
| Property, Plant and Equipment, net | $ | $ | ||||||
Depreciation and amortization expense related to property, plant and equipment for the three months ended March 31, 2024 totaled $
Depreciation expense related to property, plant and equipment for the three months ended March 31, 2023 totaled $
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 4 – Accrued Expenses:
| March 31, |
December 31, |
|||||||
| 2024 |
2023 |
|||||||
| Accrued Compensation and Employee Related Costs |
$ | $ | ||||||
| Accrued Construction Costs |
||||||||
| Accrued Chiller Cost |
||||||||
| Accrued Customer Consideration |
||||||||
| Accrued Freight |
||||||||
| Accrued Production Expenses |
||||||||
| Accrued Corporate and Marketing Expenses |
||||||||
| Accrued Interest |
||||||||
| Other Accrued Expenses |
||||||||
| Accrued Expenses |
$ | $ | ||||||
Note 5 – Debt:
On February 19, 2021, the Company entered into the Sixth Amended and Restated Loan and Security Agreement ("Credit Agreement"), which provided for a $
On March 15, 2023, the Company terminated the Credit Agreement in connection with the offering of the Convertible Notes (as defined below) and it had
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 6 – Convertible Senior Notes:
In March 2023, we issued $
The Convertible Notes are our senior, unsecured obligations and accrue interest at a rate of
As of March 31, 2024, noteholders have the right to early convert under the
We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion rate for the Convertible Notes is
We may not redeem the Convertible Notes prior to April 3, 2026. We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after April 3, 2026 and on or before the 40th scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least
Upon the occurrence of a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid additional interest, if any, to, but excluding, the fundamental change repurchase date.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
The effective interest rate for the Convertible Notes is
The Company measures the fair value of its Convertible Notes for disclosure purposes. The fair value is based on observable market prices for this debt, which is traded in less active markets and is therefore classified as a Level 2 fair value measurement. The following table discloses the carrying value and fair value of the Company's Convertible Notes as of March 31, 2024:
| As of March 31, 2024 | ||||||||
| Carrying Value (1) | Fair Value | |||||||
| Convertible Senior Notes Maturing | 707,926 | |||||||
| Total | ||||||||
(1) The carrying amounts presented are net of unamortized debt issuance costs of $
Lender fees that were paid upfront to the lenders and debt issuance fees paid to third parties are recorded as a discount to the carrying amount of debt and are being amortized to interest expense over the life of the debt. The total interest expense for the three months ended March 31, 2024, recognized related to the Convertible Notes consists of the following:
| Three Months Ended | ||||
| March 31, 2024 | ||||
| Contractual interest expense | ||||
| Amortization of issuance costs | ||||
| Total | ||||
As of March 31, 2024, the interest expense incurred to date was paid in full, with $
Note 7 – Purchase of Capped Call Options:
In connection with the pricing of the Convertible Notes issued in March 2023, we used $
The Capped Call Transactions are generally expected to reduce potential dilution to holders of our common stock upon any conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Convertible Notes upon conversion of the Convertible Notes in the event that the market price per share of our common stock is greater than the strike price of the Capped Call Transactions, with such reduction and/or offset subject to a cap.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
The Capped Call Transactions have an initial cap price of approximately $
The Capped Call Transactions are accounted for as freestanding derivatives and recorded at the initial fair value in additional paid-in-capital in the Consolidated Balance Sheet with
Note 8 – Leases:
We have various noncancelable operating lease agreements for office and warehouse space with original remaining lease terms of years to years, some of which include an option to extend the lease term for up to years. Because the Company is not reasonably certain to exercise the renewal options on these lease arrangements, 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.
During the third quarter of 2023, we also entered into a finance lease agreement for manufacturing equipment with an initial term of years, which includes an option to extend the lease term for up to years, which the Company is not reasonably certain to exercise. The agreement did not include termination options for either party to the lease or restrictive financial or other covenants. In connection with the manufacturing equipment lease, which is a new asset class, we elected the practical expedient to combine lease and non-lease components to determine the right of use asset and lease liability.
Weighted-average remaining lease term (in years) and discount rate related to operating and finance leases were as follows:
| Operating Leases | Finance Lease | |||||||
| Weighted-average remaining lease term | ||||||||
| Weighted-average discount rate | % | % | ||||||
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 and finance lease as of March 31, 2024 were as follows:
| As of March 31, 2024 | ||||||||
| Operating Leases | Finance Lease | |||||||
| 2024 (a) | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 and beyond | ||||||||
| Total lease payments | $ | $ | ||||||
| Less: Imputed interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
|
| (a) | Excluding the three months ended March 31, 2024. |
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
A summary of lease costs for the three months ended March 31, 2024 and 2023 was as follows:
| Three Months Ended | |||||||||
| March 31, | |||||||||
|
| 2024 | 2023 | |||||||
| Operating Lease: | |||||||||
| Lease cost | Cost of goods sold and selling, general and administrative | $ | $ | ||||||
| Finance Lease: | |||||||||
| Amortization of right of use asset | Cost of goods sold | $ | $ | ||||||
| Interest on lease liabilities | Interest Expense | $ | $ | ||||||
| Variable lease cost (a) | Inventory/Cost of goods sold (a) | $ | $ | ||||||
|
| (a) | Variable lease cost primarily consists of the procurement and manufacturing costs capitalized to inventory. During the period, $ |
Supplemental balance sheet information as of March 31, 2024 and December 31, 2023 related to leases are as follows:
|
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| Assets: | |||||||||
| Operating leases | Operating lease right of use assets | $ | $ | ||||||
| Finance lease, net | Property, plant and equipment, net | ||||||||
| Total lease assets | $ | $ | |||||||
| Liabilities: | |||||||||
| Current: | |||||||||
| Operating lease liabilities | Current operating lease liabilities | $ | $ | ||||||
| Finance lease liabilities | Current finance lease liabilities | ||||||||
| Long-term: | |||||||||
| Operating lease liabilities | Long term operating lease liabilities | ||||||||
| Finance lease liabilities | Long term finance lease liabilities | ||||||||
| Total lease liabilities | $ | $ | |||||||
Supplemental cash flow information and non-cash activity relating to operating and finance leases are as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| Operating cash flow information: | 2024 | 2023 | ||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | ||||||
| Cash paid for amounts included in the measurement of finance lease liabilities (i.e. interest) | $ | $ | ||||||
| Finance cash flow information: | ||||||||
| Cash paid for amounts included in the measurement of finance lease liabilities (i.e. principal payment) | $ | $ | ||||||
Note 9 – Warrants (in thousands, except share data):
In connection with an agreement we entered into with operators of Freshpet Kitchens South during the third quarter of 2022 in exchange for services, we issued our partner warrants to purchase up to an aggregate of
During 2022,
Total amortization associated with partner warrants for the three months ended March 31, 2024 and 2023 was $
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 10 – Equity Incentive Plans:
Total compensation cost for share-based payments recognized for the three months ended March 31, 2024 totaled $
Total compensation cost for share-based payments recognized for the three months ended March 31, 2023 totaled $
During the three months ended March 31, 2024,
During the three months ended March 31, 2024,
Note 11 – Net Income (Loss) Per Share Attributable to Common Stockholders:
Basic net income (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 income (loss) per share of common stock is computed by giving effect to all potentially dilutive securities. For purpose of determining diluted earnings per common share, the treasury stock method is used for stock options, warrants, and RSUs, and the if-converted method is used for convertible instruments such as convertible debt as prescribed in FASB ASC Topic 260. In conjunction with the issuance of the $
For the three months ended March 31, 2024, diluted net income per share attributable to common stockholders is calculated as follows:
| Three Months Ended | ||||
| March 31, | ||||
| 2024 | ||||
| Net Income Attributable to Common Stockholders | $ | |||
| Weighted Average Common Shares Outstanding, Basic | ||||
| Service Period Stock Options | ||||
| Restricted Stock Units | ||||
| Performance Stock Options | ||||
| Convertible Notes | ||||
| Weighted Average Common Shares Outstanding, Diluted | ||||
| Basic Net Income per Share | $ | |||
| Diluted Net Income per Share | $ | |||
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
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 | ||||
| March 31, | ||||
| 2023 | ||||
| Service Period Stock Options | ||||
| Restricted Stock Units | ||||
| Performance Stock Options | ||||
| Convertible Notes | ||||
| Total | ||||
Note 12 – 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 $
Note 13 – Commitments and Contingencies:
Commitments - In August 2023, we entered into a lease arrangement for a to-be constructed office space, which will contribute right of use assets and lease liabilities upon lease commencement, which is anticipated to occur by the first quarter of 2025. As of March 31, 2024, the future commitments related to this arrangement are not determinable as they are variable in nature. Our current headquarters lease in Secaucus, NJ expires in June 2024.
Legal Obligations - We are currently involved in various claims and legal actions that arise in the ordinary course of our business. 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 $
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 December 31, 2022, due to the claims and counterclaims between the parties, the Company reclassified the amounts due from Phillips of $
The fact discovery period in this action closed on December 31, 2023.
The expert discovery phase, closed on March 31, 2024. Phillips filed a Motion for Partial Summary Judgment on April 1, 2024, and on April 29,2024, the court ordered all further proceedings and deadlines as reflected in its November 15, 2023, Case Management Order to be extended for 60 days. The case is scheduled for a non-jury trial on September 16, 2024.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Based on information currently available and advice of counsel, we do not believe that the outcome 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 14 – Subsequent Events:
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued for recognition or disclosures.
The Company did not identify any recognized or unrecognized subsequent events that require adjustment or disclosure in the financial statements.
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 condensed 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, 2023 (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.
Components of our Results of Operations
Net Sales
Our net sales are derived from the sale of pet food 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 27,097 retail stores as of March 31, 2024. 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, Mass, International, Digital, Pet Specialty, and Club. 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. |
|
| • | At times we increase our sales price to offset any adverse movement in input costs. |
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.
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 using the Black-Scholes Merton option-pricing model. 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 $420.3 million as of December 31, 2023, of which approximately $175.4 million, generated in 2017 and prior, will expire between 2025 and 2037. The NOLs generated from 2018 through 2023, of approximately $244.9 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, 2023, we had approximately $312.8 million of state NOLs, which expire between 2024 and 2043, and had $20.7 million of foreign NOLs in the United Kingdom which do not expire. At December 31, 2023, 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.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
| Three Months Ended March 31, |
||||||||||||||||
| 2024 |
2023 |
|||||||||||||||
| Amount |
% of Net Sales |
Amount |
% of Net Sales |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Net sales |
$ | 223,849 | 100 | % | $ | 167,522 | 100 | % | ||||||||
| Cost of goods sold |
135,691 | 61 | 116,762 | 70 | ||||||||||||
| Gross profit |
88,158 | 39 | 50,760 | 30 | ||||||||||||
| Selling, general and administrative expenses |
79,695 | 36 | 72,271 | 43 | ||||||||||||
| Income (loss) from operations |
8,463 | 4 | (21,511 | ) | (13 | ) | ||||||||||
| Interest and other income, net |
3,335 | 1 | 946 | 1 | ||||||||||||
| Interest expense |
(3,060 | ) | (1 | ) | (3,171 | ) | (0 | ) | ||||||||
| Gain on equity investment |
9,918 | 4 | - | 0 | ||||||||||||
| Income (loss) before income taxes |
18,656 | 8 | (23,736 | ) | (14 | ) | ||||||||||
| Income tax expense |
54 | 0 | 70 | 0 | ||||||||||||
| Loss on equity method investment |
- | - | 980 | 1 | ||||||||||||
| Net income (loss) |
$ | 18,602 | 8 | % | $ | (24,786 | ) | (15 | )% | |||||||
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Net Sales
The following table sets forth net sales by class of retailer:
| Three Months Ended March 31, |
||||||||||||||||
| 2024 |
2023 |
|||||||||||||||
| % of |
% of |
|||||||||||||||
| Amount |
Net Sales |
Amount |
Net Sales |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Grocery, Mass, International and Digital |
$ | 184,429 | 82 | % | $ | 140,179 | 84 | % | ||||||||
| Pet Specialty and Club |
39,420 | 18 | % | 27,343 | 16 | % | ||||||||||
| Net Sales |
$ | 223,849 | 100 | % | $ | 167,522 | 100 | % | ||||||||
Net sales increased $56.3 million, or 33.6%, to $223.8 million for the three months ended March 31, 2024 as compared to $167.5 million in the same period in the prior year. The $56.3 million increase in net sales was driven by growth in the Grocery, Mass, International and Digital channel of $44.3 million, with the remaining growth in the Pet Specialty and Club channel. The net sales increase was primarily driven by volume gains of 30.6%.
Gross Profit
Gross profit was $88.2 million, or 39.4% as a percentage of net sales, for the three months ended March 31, 2024, compared to $50.8 million, or 30.3% as a percentage of net sales, in the prior year period. The increase in gross profit as a percentage of net sales was primarily due to improved leverage on plant expenses, reduced quality costs, and lower input cost as a percentage of sales. For the three months ended March 31, 2024, Adjusted Gross Profit was $101.5 million, or 45.3% as a percentage of net sales, compared to $64.4 million, or 38.5% as a percentage of net sales, in the prior year period.
See “—Non-GAAP Financial Measures” for how we define Adjusted Gross Profit, a reconciliation of Adjusted Gross Profit to gross profit, the closest comparable U.S. GAAP measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were $79.7 million for the three months ended March 31, 2024, compared to $72.3 million in the prior year period. As a percentage of net sales, SG&A decreased to 35.6% for the three months ended March 31, 2024, compared to 43.1% in the prior year period. The decrease of 750 basis points in SG&A as a percentage of net sales was mainly a result of reduced logistics costs and media as a percentage of net sales, in addition to lower share-based compensation.
Adjusted SG&A for the three months ended March 31, 2024, was $70.9 million, or 31.7% as a percentage of net sales, compared to $61.5 million, or 36.7% as a percentage of net sales, in the prior year period.
See “—Non-GAAP Financial Measures” for how we define Adjusted SG&A, a reconciliation of Adjusted SG&A to SG&A, the closest comparable U.S. GAAP measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.
Income (Loss) from Operations
As a result of the factors discussed above, income from operations increased by $30.0 million to an income from operations of $8.5 million for the three months ended March 31, 2024 as compared to a loss from operations of $21.5 million for the same period in the prior year.
Interest and Other Income, net
The Company recorded interest and other income, net of $3.3 million for the three months ended March 31, 2024 as a result of interest income generated from cash and cash equivalents as compared to $0.9 million for the three months ended March 31, 2023.
Interest Expense
Interest expense decreased $0.1 million to interest expense of $3.1 million for the three months ended March 31, 2024 as compared to interest expense of $3.2 million for the same period in the prior year. The decrease was primarily driven by the termination of our Credit Agreement in the prior year period resulting in the write-off of unamortized fees of $2.5 million, which were recorded to interest expense, partially offset by a $1.8 million increase (net of the $1.0 million of capitalized interest) as a result of interest incurred on our Convertible Notes as compared to interest incurred on the Credit Agreement that existed in the prior year period, as well as a $0.6 million increase related to the interest on our finance lease liability.
Gain on Equity Investment
The $9.9 million gain on equity investment for the three months ended March 31, 2024, resulted from the change in fair value of the Company's equity interest in a privately held company, as discussed in Note 1 of our (unaudited) condensed consolidated financial statements.
Net Income (Loss)
Net income increased $43.4 million to a net income of $18.6 million for the three months ended March 31, 2024, as compared to a net loss of $24.8 million for the same period in the prior year due to contribution from higher sales, improved gross margin, reduced logistics costs as a percentage of net sales, and gain on equity investment, partially offset by increased SG&A expenses including increased media spend of $6.1 million.
Adjusted EBITDA
Adjusted EBITDA was $30.6 million for the three months ended March 31, 2024, compared to $3.0 million in the prior year period. The increase in Adjusted EBITDA was a result of increased Adjusted Gross Profit partially offset by higher Adjusted SG&A expenses.
See "—Non-GAAP Financial Measures" for how we define Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net income (loss) the closest comparable U.S. GAAP measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures; see the section entitled "Forward-Looking Statements" in this report and the section entitled "Risk Factors" in our Annual Report for factors that could cause our results to differ, in some cases materially.
Non-GAAP Financial Measures
Freshpet uses the following non-GAAP financial measures in its financial communications. These non-GAAP financial measures should be considered as supplements to the U.S. GAAP reported measures, should not be considered replacements for, or superior to, the U.S. GAAP measures and may not be comparable to similarly named measures used by other companies.
| • |
Adjusted Gross Profit |
| • |
Adjusted Gross Profit as a percentage of net sales (Adjusted Gross Margin) |
| • |
Adjusted SG&A expenses |
| • |
Adjusted SG&A expenses as a percentage of net sales |
| • |
EBITDA |
| • |
Adjusted EBITDA |
| • |
Adjusted EBITDA as a percentage of net sales (Adjusted EBITDA Margin) |
Such financial measures are not financial measures prepared in accordance with U.S. GAAP. We define Adjusted Gross Profit as Gross Profit before depreciation expense, non-cash share-based compensation, and loss on disposal of manufacturing equipment. We define Adjusted SG&A as SG&A expenses before depreciation and amortization expense, non-cash share-based compensation, implementation and other costs associated with the implementation of an ERP system, fees related to the Capped Call Transactions, loss on disposal of equipment, and advisory fees related to activism engagement. EBITDA represents net income (loss) plus interest expense net of interest income, income tax expense and depreciation and amortization. Adjusted EBITDA represents EBITDA plus loss on equity method investment, gain on equity investment, non-cash share-based compensation, implementation and other costs associated with the implementation of an ERP system, loss on disposal of property, plant and equipment, fees related to the Capped Call Transactions, and advisory fees related to activism engagement.
We believe that each of these non-GAAP financial measures provide additional metrics to evaluate our operations and, when considered with both our U.S. GAAP results and the reconciliation to the closest comparable U.S. GAAP measures, provides a more complete understanding of our business than could be obtained absent this disclosure. We use the non-GAAP financial measures, together with U.S. GAAP financial measures, such as net sales, gross profit margins and cash flow from operations, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our operating performance and to compare our performance to that of our peers and competitors.
Adjusted EBITDA is also an important component of internal budgeting and setting management compensation.
The non-GAAP financial measures are presented here because we believe they are useful to investors in assessing the operating performance of our business without the effect of non-cash items, and other items as detailed below. The non-GAAP financial measures should not be considered in isolation or as alternatives to net income (loss), income (loss) from operations or any other measure of financial performance calculated and prescribed in accordance with U.S. GAAP. Neither EBITDA nor Adjusted EBITDA should be considered a measure of discretionary cash available to us to invest in the growth of our business. Our non-GAAP financial measures may not be comparable to similarly titled measures in other organizations because other organizations may not calculate non-GAAP financial measures in the same manner as we do.
Our presentation of the non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. We recognize that the non-GAAP financial measures have limitations as analytical financial measures. For example, the non-GAAP financial measures do not reflect:
| • | our capital expenditures or future requirements for capital expenditures; | |
| • | the interest expense, or the cash requirements necessary to service interest expense or principal payments, associated with indebtedness; | |
| • | depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor any cash requirements for such replacements; and | |
| • | changes in our cash requirements for our working capital needs. |
Additionally, Adjusted EBITDA excludes (i) non-cash share-based compensation expense, which is and will remain a key element of our overall long-term incentive compensation package, and (ii) certain costs essential to our sales growth and strategy. Adjusted EBITDA also excludes certain cash charges resulting from matters we consider not to be indicative of our ongoing operations. Other companies in our industry may calculate the non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures.
The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure presented in accordance with U.S. GAAP:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| (Dollars in thousands) |
||||||||
| Net income (loss) |
$ | 18,602 | $ | (24,786 | ) | |||
| Depreciation and amortization |
15,745 | 14,492 | ||||||
| Interest income, net of interest expense |
(275 | ) | 2,225 | |||||
| Income tax expense |
54 | 70 | ||||||
| EBITDA |
$ | 34,126 | $ | (7,999 | ) | |||
| Loss on equity method investment |
— | 980 | ||||||
| Gain on equity investment |
(9,918 | ) | — | |||||
| Loss on disposal of property, plant and equipment |
150 | 268 | ||||||
| Non-cash share-based compensation (a) |
6,221 | 8,415 | ||||||
| Enterprise Resource Planning (b) |
— | 801 | ||||||
| Capped Call Transactions fees (c) |
— | 113 | ||||||
| Activism engagement (d) |
— | 389 | ||||||
| Adjusted EBITDA |
$ | 30,579 | $ | 2,967 | ||||
| Adjusted EBITDA as a % of Net Sales |
13.7 | % | 1.8 | % | ||||
| (a) |
Includes true-ups, if required, to share-based compensation expense compared to prior periods. We have certain outstanding share-based awards with performance-based vesting conditions that require the achievement of certain Adjusted EBITDA and/or Net Sales targets as a condition of vesting. At each reporting period, we reassess the probability of achieving the performance criteria and the performance period required to meet those targets. When such performance conditions are deemed to be improbable of achievement, the compensation cost previously recorded is reversed. |
| (b) | Represents costs associated with the implementation of an ERP system. | |
| (c) | Represents fees associated with the Capped Call Transactions. | |
| (d) | Represents advisory fees related to activism engagement. |
The following table provides a reconciliation of Adjusted Gross Profit to Gross profit, the most directly comparable financial measure presented in accordance with U.S. GAAP:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| (Dollars in thousands) |
||||||||
| Gross profit |
$ | 88,158 | $ | 50,760 | ||||
| Depreciation expense |
10,675 | 10,721 | ||||||
| Non-cash share-based compensation (a) |
2,622 | 2,956 | ||||||
| Loss on disposal of manufacturing equipment |
21 | — | ||||||
| Adjusted Gross Profit |
$ | 101,476 | $ | 64,437 | ||||
| Adjusted Gross Profit as a % of Net Sales |
45.3 | % | 38.5 | % | ||||
| (a) |
Includes true-ups, if required, to share-based compensation expense compared to prior periods. We have certain outstanding share-based awards with performance-based vesting conditions that require the achievement of certain Adjusted EBITDA and/or Net Sales targets as a condition of vesting. At each reporting period, we reassess the probability of achieving the performance criteria and the performance period required to meet those targets. When such performance conditions are deemed to be improbable of achievement, the compensation cost previously recorded is reversed. |
The following table provides a reconciliation of Adjusted SG&A Expenses to SG&A expenses, the most directly comparable financial measure presented in accordance with U.S. GAAP:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| (Dollars in thousands) |
||||||||
| SG&A expenses |
$ | 79,695 | $ | 72,271 | ||||
| Depreciation and amortization expense |
5,070 | 3,771 | ||||||
| Non-cash share-based compensation (a) |
3,600 | 5,459 | ||||||
| Loss on disposal of equipment |
129 | 268 | ||||||
| Enterprise Resource Planning (b) |
— | 801 | ||||||
| Capped Call Transactions fees (c) |
— | 113 | ||||||
| Activism engagement (d) |
— | 389 | ||||||
| Adjusted SG&A Expenses |
$ | 70,896 | $ | 61,470 | ||||
| Adjusted SG&A Expenses as a % of Net Sales |
31.7 | % | 36.7 | % | ||||
| (a) | Includes true-ups, if required, to share-based compensation expense compared to prior periods. We have certain outstanding share-based awards with performance-based vesting conditions that require the achievement of certain Adjusted EBITDA and/or Net Sales targets as a condition of vesting. At each reporting period, we reassess the probability of achieving the performance criteria and the performance period required to meet those targets. When such performance conditions are deemed to be improbable of achievement, the compensation cost previously recorded is reversed. | |
| (b) | Represents costs associated with the implementation of an ERP system. | |
| (c) | Represents fees associated with the Capped Call Transactions. | |
| (d) | Represents advisory fees related to activism engagement. |
Liquidity and Capital Resources
To meet our capital needs, we issued approximately $402.5 million in convertible notes in March 2023 (the “Convertible Notes”), used $66.2 million of the proceeds to enter into capped call transactions, and used $11.0 million of the proceeds on debt issuance related costs. Further, on March 13, 2023, in connection with the proposed offering of the Convertible Notes, the Company, notified City National Bank, of Freshpet's intent to terminate the Credit Agreement, and such termination became effective as of March 15, 2023 (the "Termination Date"). The Company had no borrowings outstanding under the Credit Agreement as of the date of the Termination Date.
We expect to make future capital expenditures in connection with the completion of our planned development of Freshpet Kitchens Ennis Phase 2 and 3. During the three months ended March 31, 2024, we spent approximately $46.5 million of capital to meet our capacity needs as well as recurring capital expenditures. We expect to spend an additional $163.5 million in the remainder of fiscal 2024.
We expect to rely on our current and future cash flow from operations, may issue additional debt, and/or raise capital through our access to capital markets, if appropriate. Our ability to obtain additional funding will be subject to various factors, including general economic and market conditions, our operating performance, the market’s perception of our growth potential, lender sentiment and our ability to incur additional debt in compliance with other contractual restrictions.
Our ability to make future minimum interest payments on the Convertible Notes, to refinance any indebtedness and to fund any necessary expenditures for our growth will depend on our ability to generate cash in the future. If our business does not achieve the levels of profitability or generate the amount of cash that we anticipate or if we expand faster than anticipated, we may need to seek additional debt or equity financing to operate and expand our business. Future third-party financing may not be available on favorable terms or at all.
Our primary cash needs, in addition to our plant expansions, are for purchasing ingredients, operating expenses, marketing expenses and capital expenditures to procure Freshpet Fridges. We believe that cash and cash equivalents, expected cash flow from operations, amounts previously raised through the issuance of the Convertible Notes and our ability to access the capital markets, if appropriate, are adequate to fund our debt requirements, operating and finance lease obligations, capital expenditures and working capital obligations for the foreseeable future. We believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to general economic factors, including but not limited to increasing interest rates and inflation, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. Expanding certain of our Freshpet Kitchens primarily comprises our material future cash requirement. However, our capital requirements, including our cash requirements, may vary materially from those currently planned if, for example, our revenues do not reach expected levels, or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may seek alternative financing, such as selling additional debt or equity securities, and we cannot assure you that we will be able to do so on favorable terms, if at all. Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity or if the Convertible Notes are converted to common shares, existing stockholders may experience dilution, and such new securities could have rights senior to those of our common stock. These factors may make the timing, amount, terms and conditions of additional financing unattractive. Our inability to raise capital could impede our growth or otherwise require us to forego growth opportunities and could materially adversely affect our business, financial condition and results of operations.
The following table sets forth, for the periods indicated, our working capital:
| March 31, |
December 31, |
|||||||
| 2024 |
2023 |
|||||||
| (Dollars in thousands) |
||||||||
| Cash and cash equivalents |
$ | 257,894 | $ | 296,871 | ||||
| Accounts receivable, net of allowance for doubtful accounts |
68,507 | 56,754 | ||||||
| Inventories, net |
71,865 | 63,238 | ||||||
| Prepaid expenses |
5,757 | 7,615 | ||||||
| Other current assets |
2,935 | 2,841 | ||||||
| Accounts payable |
(46,591 | ) | (36,096 | ) | ||||
| Accrued expenses |
(32,193 | ) | (49,816 | ) | ||||
| Current operating lease liabilities |
(1,174 | ) | (1,312 | ) | ||||
| Current finance lease liabilities |
(1,988 | ) | (1,998 | ) | ||||
| Total Working Capital |
$ | 325,012 | $ | 338,097 | ||||
Working capital consists of current assets net of current liabilities. Working capital decreased $13.1 million to $325.0 million as of March 31, 2024 compared with working capital of $338.1 million as of December 31, 2023. The decrease was primarily a result of a decrease of $39.0 million in cash and cash equivalents, a decrease in prepaid expenses of $1.9 million, and an increase in accounts payable of $10.5 million as a result of timing and capital expenditures of approximately $16.1 million related to our capital expansion plan. The decrease was partially offset by an increase in accounts receivable of $11.8 million, an increase in inventories, net of $8.6 million, and a decrease in accrued expenses of $17.6 million due to timing and capital expenditures of approximately $1.3 million related to our capital expansion plan.
We normally carry three to four weeks of finished goods inventory and less than 30 days of accounts receivable.
For the quarter ended March 31, 2024, our capital resources consisted primarily of $257.9 million of cash and cash equivalents on hand.
For the year ended December 31, 2023, our capital resources consisted primarily of $296.9 million of cash and cash equivalents on hand.
We expect to fund our ongoing operations and obligations with cash and cash equivalents, and cash flow from operations.
The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows used in operating, investing and provided by financing activities and our ending balance of cash:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| (Dollars in thousands) | ||||||||
| Cash at the beginning of period |
$ | 296,871 | $ | 132,735 | ||||
| Net cash provided by (used in) operating activities |
5,406 | (13,740 | ) | |||||
| Net cash used in investing activities |
(46,473 | ) | (107,365 | ) | ||||
| Net cash provided by financing activities |
2,090 | 325,513 | ||||||
| Cash at the end of period |
$ | 257,894 | $ | 337,143 | ||||
Net Cash Provided by (Used In) Operating Activities
Cash provided by (used in) operating activities consists primarily of net income (loss) adjusted for certain non-cash items (i.e., provision for loss (gains) on receivable, loss on disposal of property, plant and equipment, share-based compensation, change in reserve for inventory obsolescence, depreciation and amortization, write-off and amortization of deferred financing costs and loan discount, change in operating lease right of use asset, loss on equity method investment, and gain on equity investment).
Net cash provided by operating activities of $5.4 million for the three months ended March 31, 2024, was primarily attributed to:
| • |
$32.6 million of net income, adjusted for reconciling non-cash items, which excludes $14.0 million of non-cash items related to $15.9 million of depreciation and amortization, $6.2 million of share-based compensation including amortization of warrants, $0.7 million of reserve for inventory obsolescence, $0.5 million of write-off and amortization of deferred financing costs and loan discount, $0.4 million of change in operating lease right of use asset, and $0.2 million of loss on disposal of property, plant and equipment, partially offset by $9.9 million of gain on equity investment. |
This was partially offset by:
| • |
$27.2 million decrease due to changes in operating assets and liabilities. The decrease was primarily due to the change in accrued expenses, accounts receivable, inventories, other assets, and operating lease liability, primarily offset by the change in accounts payable and prepaid expenses and other current assets. |
Net cash used in operating activities of $13.7 million for the three months ended March 31, 2023, was primarily attributed to:
| • |
$2.2 million of net income, adjusted for reconciling non-cash items, which excludes $27.0 million non-cash items related to $14.5 million of depreciation and amortization, $8.4 million of share-based compensation including amortization of warrants, $2.5 million of write-off and amortization of deferred financing costs and loan discount, $1.0 million of loss on equity method investment, $0.4 million of change in operating lease right of use asset, and $0.3 million of loss on disposal of property, plant and equipment. |
This was offset by:
| • |
$15.9 million decrease due to changes in operating assets and liabilities. The decrease is primarily due to the change in inventories, accounts payable, other assets, and accrued expenses, primarily offset by the change in accounts receivable, and prepaid expenses and other current assets. |
Net Cash Used in Investing Activities
Net cash used in investing activities of $46.5 million for the three months ended March 31, 2024, was primarily attributed to:
| • |
$46.5 million of capital expenditures related to Freshpet Kitchens, plant recurring capital expenditures, expenditures relating to investment in fridges, and other capital spend. |
Net cash used in investing activities of $107.4 million for the three months ended March 31, 2023, was primarily attributed to:
| • |
$58.0 million of capital expenditures related to Freshpet Kitchens, plant recurring capital expenditures, expenditures relating to investment in fridges, and other capital spend. |
|
| • | $49.3 million purchase of short-term investments. |
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $2.1 million for the three months ended March 31, 2024, was primarily attributed to:
| • | $2.8 million cash proceeds from the exercise of stock options. |
This was partially offset by:
| • | $0.2 million for tax withholdings related to net share settlements of restricted stock units. | |
| • | $0.5 million for principal payments under finance lease obligations. |
Net cash provided by financing activities of $325.5 million for the three months ended March 31, 2023, was primarily attributed to:
| • | $393.5 million net proceeds from Convertible Notes. |
| • |
$0.8 million cash proceeds from the exercise of stock options. |
This was partially offset by:
| • | $66.2 million for the purchase of capped call options. | |
| • | $2.0 million for debt issuance costs. | |
| • | $0.6 million for tax withholdings related to net share settlements of restricted stock units. |
Indebtedness
For a discussion of our material indebtedness, see Notes 5 and 6 to our (unaudited) condensed consolidated financial statements included in this report.
Contractual Obligations
There were no material changes to our commitments under contractual obligations, as disclosed in our Annual Report, except as noted in Note 8 and 13 of our (unaudited) condensed consolidated financial statements.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States or ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting estimates as compared to the critical accounting policies and estimates described in our Annual Report.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements:
See Note 1 of our (unaudited) condensed consolidated financial statements for additional information.
Standards Effective in Future Years:
We consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed herein were assessed and determined to be either not applicable or are expected to have minimal impact to our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Interest Rate Risk
During period of rising interest rates, our cost of borrowing could increase, the fair value of our investments could be affected, and it could constrain the purchasing power of our customers.
Commodity Price and Inflation Risk
We purchase certain products and services that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions, and other factors which are not considered predictable or within our control. In many cases, we believe we will be able to address material commodity cost increases by either increasing prices or reducing operating expenses. However, increases in commodity prices, without adjustments to pricing or reduction to operating expenses, could increase our operating costs as a percentage of our net sales.
Foreign Exchange Rates
Fluctuations in the currencies of countries where the Company operates outside the U.S. may impact our financial results. The Company is exposed to movements in the British pound sterling and Euro. The Statements of Financial Position of non-U.S. business units are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. The percentage of our consolidated revenue for the three months ended March 31, 2024 recognized in Europe was approximately 1%.
The Company may, from time to time, enter into forward exchange contracts to reduce the Company’s exposure to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies. Historically, the foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Operations and Comprehensive Income (Loss) in Interest and Other Income, net, and carried at their fair value in the Consolidated Balance Sheet with gains reported in prepaid expenses and other current assets and losses reported in accrued expenses. As of March 31, 2024, there were no forward contracts outstanding.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date our disclosure controls and procedures were effective.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 1. Legal Proceedings
We are currently involved in various claims and legal actions that arise in the ordinary course of our business. While the results of such litigation proceedings cannot be predicted with certainty, management believes none of these claims or proceedings are expected to have a material adverse effect on our business, financial condition, results of operations or cash flows. See Note 13 — Commitments and Contingencies for additional discussion of pending litigation.
There have been no material changes to the risk factors previously reported under Part I, Item 1A. "Risk Factors" in our Annual Report. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, financial condition and/or operating results.
Insider Trading Arrangements
Our directors and executive officers may from time to time enter into plans or other arrangements for the purchase or sale of our shares that are intended to satisfy the affirmative defense conditions of Rule 10b5-1 trading arrangements under the Exchange Act.
During the fiscal quarter ended March 31, 2024, none of our directors or officers informed us of the adoption or termination of a "Rule - trading arrangement" or "non-Rule - trading arrangement," as those terms are defined in Regulation S-K, Item 408.
| Exhibits |
| Exhibit No. |
|
Description |
| 31.1* |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2* |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1** |
|
|
| EX-101.INS* |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document. |
| EX-101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
| EX-101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| EX-101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
| EX-101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| EX-101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
| EX-104 |
|
Inline XBRL Formatted Cover Page (formatted as Inline XBRL and contained in Exhibit 101). |
|
|
|
|
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 6, 2024 |
|
FRESHPET, INC. |
|
|
|
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|
|
|
/s/ William B. Cyr William B. Cyr Chief Executive Officer (Principal Executive Officer) |
|
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|
|
|
|
/s/ Todd Cunfer |
|
|
|
Todd Cunfer Chief Financial Officer |
|
|
|
(Principal Financial and Accounting Officer) |
Exhibit 31.1
CERTIFICATIONS
I, William B. Cyr, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Freshpet, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 6, 2024
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/s/ William B. Cyr William B. Cyr Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Todd Cunfer, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Freshpet, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 6, 2024
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/s/ Todd Cunfer Todd Cunfer Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO § 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of Freshpet, Inc., a Delaware corporation (the “Company”), for the quarter ended March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:
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1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. |
Date: May 6, 2024
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/s/ William B. Cyr William B. Cyr Chief Executive Officer |
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/s/ Todd Cunfer Todd Cunfer Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.