Commission File Number 001-36729
FRESHPET, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-1884894 | |
(State ofIncorporation) | (I.R.S. EmployerIdentification No.) | |
400 Plaza Drive, 1st Floor Secaucus, | 07094 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(201) 520-4000
(201) 520-4000
Securities registered pursuant to Section12(b) of the Act:
Title of each class | Trading Symbol | Name of exchange on which registered |
Common Stock, | FRPT | NASDAQ Global Market |
Securities registered pursuant to Section12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-Accelerated filer | ☐ | Smaller reporting company | ☐ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1 (b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-votingregistrant’s common equitystock held by non-affiliates was approximately $2.4 billion.
As of the Registrant, based on the closing price of theFebruary 23, 2023, 48,048,343 shares of common stock on The NASDAQ Stock Market on June 30, 2020, was approximately $3.2 billion.
Documents Incorporated byBy Reference
The information required by Items 10 through 14 of Part III, of Form 10-K. This information was previously omitted from the 2020 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be incorporated in the Form 10-K by reference from the Company’s definitive proxy statement if such statement is filed no later than 120 days after the Company’s fiscal year-end. We are filing this Amendment to provide the information required in Part III of Form 10-K because a definitive proxy statement containing such information will not be filed by the Company within 120 days after the end of the fiscal year covered by the 2020 10-K.
Freshpet, Inc.
Annual Report on Form 10-K
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| Item 6 | [Reserved] | |
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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| Item 9C | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 71 |
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Item 12 | Security Ownership of Certain Beneficial Owners and Management and Relate Stockholder Matters | |
Item 13 | Certain Relationships and Related Transactions, and Director Independence | |
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| Item 16 | Form 10-K Summary | 73 |
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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,” "target," “outlook,” “potential,” “project,” “projection,” “plan,” “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 2020 10-Ktiming 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 exhibit index set forthindustry in Part IVwhich 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; | |
| ● | the impact of various worldwide or macroeconomic events, such as the ongoing conflict between Russia and Ukraine, on the U.S. and global economics, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations; | |
● | our ability to successfully implement our growth strategy, including related to implementing our marketing strategy and building capacity to meet demand, such as through the timely expansion of certain of our Freshpet Kitchens (as defined below); |
| ● | our ability to successfully implement new processes and systems as we continue to stabilize and improve our new ERP; | |
● | our ability to timely complete the construction at our Freshpet Kitchens South and Freshpet Kitchens Ennis (our Freshpet Kitchens Bethlehem, Freshpet Kitchens South and Freshpet Kitchens Ennis collectively, "Freshpet Kitchens") and achieve the anticipated benefits therefrom; |
● | the loss of key members of our senior management team; |
● | allegations that our products cause injury or illness or fail to comply with government regulations; |
● | the loss of a significant customer; |
● | the entrance of new competitors into our industry; |
● | the effectiveness of our marketing and trade spending programs; |
● | our ability to introduce new products and improve existing products; |
● | our ability to match our manufacturing capacity with demand; |
● | the impact of government regulation, scrutiny, warning and public perception; |
● | the effect of false marketing claims; |
● | adverse weather conditions, natural disasters, pestilences and other natural conditions affecting our operations; |
● | our ability to develop and maintain our brand; |
● | the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require, including those effects caused by inflation; |
● | our ability to manage our supply chain effectively; |
| ● | global or local pandemic, such as COVID-19; | |
| ● | actions of activist stockholders; | |
● | volatility in the price of our common stock; and |
● | other factors discussed under the headings “Risk Factors,” “Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. |
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. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. 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.
Overview
Freshpet, Inc. (“Freshpet,” the “Company,” "we" or "our") is disrupting the over $38.4 billion North American pet food industry by driving consumers to reassess conventional dog and cat food offerings that have remained essentially unchanged for decades. We position our brand to benefit from mainstream trends of growing pet humanization and consumer focus on health and wellness. We price our products to be accessible to the average consumer, providing us with broad demographic appeal and allowing us to penetrate multiple classes of retail, including grocery (including online), mass, club, pet specialty and natural. We have successfully expanded our network of Freshpet Fridges within leading blue-chip retail chains. The strength of our business model extends to our customers, who we believe find that Freshpet grows their pet category sales, drives higher traffic, increases shopper frequency and delivers category leading margins. As of December 31, 2022, our household penetration within North America was approximately 4.9 million, with a target of 11 million households by 2025. Additionally, we believe that there are opportunities to expand our network into international markets as demonstrated with our recent initiatives in the U.K. market.
Our Industry
We primarily compete in the North American dog and cat food market, which we estimate will grow at an average compounded annual growth rate of 5.7% from 2022 to 2027. We believe pet food spending in North America will continue to increase at a similar rate during this same time period. The pet food market has historically been resilient as consumers continue to spend on their pets even during economic downturns.
We believe the following trends are driving growth in our industry:
Pet ownership. There are currently approximately 90.5 million pet owning households in the United States, which represents approximately 70% of total households, and over 114.3 million dogs and cats in the United States, according to the American Pet Products Association.
Pet humanization. According to Packaged Facts, 92%-96% of U.S. pet owners view their pets as members of the 2020 10-Kfamily. As pets are increasingly viewed as companions, friends and includes certain exhibitsfamily members, pet owners are being transformed into “pet parents” who spare no expense for their loved ones, driving premiumization across pet categories. This trend is reflected in food purchasing decisions. According to an American Pet Products Association's Pulse Study, 72% of pet parents feel they are closer/more bonded with their pet due to the COVID-19 pandemic. We believe that pet owners' closer bond to their pets aligns with recent trends, which the COVID-19 pandemic has further accelerated.
Increasing consumer focus on health & wellness. Consumers are increasingly purchasing fresh, natural and organic food products. We believe consumers are seeking simple, fresh and easy to understand food products from brands they trust and made with ingredients that are transparently sourced.
The pet food purchasing decision is underpinned by higher brand loyalty than many other consumer packaged goods categories. A consumer selecting a pet food brand resists frequent switching in order to avoid disrupting the pet’s diet, resulting in high repeat purchasing behavior. As a result, we believe that as noted thereon. The cover pageconsumers try fresh, refrigerated pet food, they are likely to become repeat users of the 2020 10-K is also amendedproduct.
Our Opportunity
Even though long-term consumer trends of pet humanization and health and wellness are well documented, conventional pet food sold as dry kibble or wet food in cans has not changed substantially for decades. We believe that the pet food industry has not kept pace with how consumers think about food for their families, including their pets. As a result, consumers are searching for higher quality, less processed food for their dogs’ and cats’ meals that measure up to delete the referencetoday’s sensibilities of what actually constitutes “good food.” Freshpet was specifically designed to address this growing need with affordable offerings accessible to the incorporationaverage consumer.
Our Mission and Values
We started Freshpet with a single-minded mission—to bring the power of real, fresh food to our dogs and cats. And, we are committed to doing so in ways that are good for Pets, People and Planet.
Pets
Our pets are members of our family and deserve to eat the kind of fresh, healthy food that we do. Freshpet's carefully selected ingredients and gentle cooking process ensures best-in-class bioavailable nutrition. Hundreds of customer testimonials each year underscore Freshpet's support of a long and healthy life. Further, since founding Freshpet, we have donated over fourteen million fresh meals to pets via shelters, charitable organizations, and humane societies, including St Hubert's Animal Welfare Center, Pennsylvania SPCA and 4 Paws for Ability.
People
People include our team members, pet parents, and our partners. We treat our team members with respect and are committed to helping them develop professionally and personally. These efforts have contributed to an employee net promoter score of 80.0%. Additionally, we strive to be good partners with customers, distributors, and suppliers by referenceconducting business with honesty and transparency knowing that we cannot grow without their support.
Planet
We are committed to minimizing our environmental impact while providing the healthiest, tastiest pet food possible. Freshpet Kitchens Bethlehem is a landfill-free facility thanks to state-of-the-art recycling, digesting, and waste-to-energy processes. We support renewable energy by matching the electricity used in Freshpet Kitchens Bethlehem and our refrigerators in over 25,000 retail locations with Green-E Certified renewable energy certificates from North American based projects. Freshpet's chiller fleet efficiency continues to improve with our latest units being up to 8.5x more efficient than older units. In 2020, Nature's Fresh became Freshpet's first, and one of the industry's only, carbon neutral brand for Scope 1, 2, and 3 emissions. For 2021, we went even further and made Freshpet's entire business carbon neutral for Scope 1 and 2 emissions. We are committed to reducing as much of our carbon emissions as possible and use offsets to mitigate residual emissions. In 2022 we opened our state-of-the-art Kitchens in Ennis, TX. This facility will be our most sustainable yet with on-site solar power and battery micro-grid, wastewater recycling, and our most advanced heating / cooling technology. These efforts are intended to help achieve our environmental goals, building and preserving a healthy planet for generations to come.
Our commitment to our values helps us engage with consumers, motivate our team members and attract strong partners, which allows us to fulfill our mission of delivering the best nutritional product choices to improve the well-being of our pets, enrich pet parents’ lives and contribute to communities. Freshpet—Pets, People, Planet.
Our Products
Freshpet's business operates in a single segment: the manufacturing, marketing and distribution of pet food and pet treats for dogs and cats. Our products consist of dog food, cat food and dog treats. All Freshpet products are made according to our nutritional philosophy of fresh, meat-based nutrition and minimal processing. Our proprietary recipes include real, fresh meat and varying combinations of vitamin-rich vegetables, leafy greens and antioxidant rich fruits, without the use of preservatives, additives or artificial ingredients. Our unique product attributes appeal to diverse consumer needs across multiple classes of retail where Freshpet is sold. Consequently, our brand resonates across a broad cross-section of pet parent demographics.
Our products are sold under the Freshpet brand name, with ingredients, packaging and labeling customized by different classes of trade and are available in multiple forms.
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We also offer fresh treats across all classes of retail under the Dognation and Dog Joy labels.
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Our Product Innovation
As the first manufacturer of fresh, refrigerated pet food distributed across North America, product innovation is core to our strategy. We take a fresh approach to pet food and are not constrained by conventional pet food products, attributes and production capabilities. We employ a tightly-knit, creative team of marketing and research and development professionals, and we consult with outside experts through our Nutrition Council, which consist of PhDs in nutrition and veterinary nutritionists. Our team often identifies pet parents’ needs by evaluating emerging demand trends in both pet food and human food. New products are refined iteratively with the help of consumer panel data to arrive at products that we believe can be commercially successful.
The success of our approach is evidenced by our broad product portfolio today. We began Freshpet by producing fresh, refrigerated slice and serve rolls, and over time have steadily expanded into successful new product forms including bags and treats. We also introduced new fresh recipes and ingredients, such as proteins and grain-free options never before seen in pet food that cater to the specific dietary requirements of pets.
Our Innovation Center, which is part of our Freshpet Kitchens, helps us ensure that we remain capable of strong innovation including creating new product platforms to expand the breadth of our fresh pet food offerings. We expect that new product introductions and the introduction of new cooking techniques will continue to delight our consumers and drive growth going forward.
Our Supply Chain
Manufacturing: All of our products are manufactured in the United States. We own and operate what we believe to be the first fresh, refrigerated pet food manufacturing network in North America. Our original Freshpet Kitchens Bethlehem is a 240,000 square foot facility, built to United States Department of Agriculture standards and currently houses six production lines customized to produce fresh, refrigerated food.
In 2020 we began making investments at a manufacturing facility titled "Freshpet Kitchens South." Freshpet Kitchens South currently has three production lines with the space for additional production lines in the future.
The construction of Freshpet Kitchens Ennis, located in Ennis, Texas, began in 2020, with the first production line having been commissioned in Q4 of 2022, and two more lines to be commissioned over the next 18 months from the first phase of the project. The project is being developed in three phases with subsequent expansion planned for the next several years.
Due to the continued growth of the Company’s definitive proxy statement.fresh pet food sales, the Company has plans to continue expanding its manufacturing capacity via operational efficiency improvements at our current facilities and via future expansion of our physical features.
In 2022, approximately 98.8% of our product volume was manufactured with Freshpet owned equipment.
Ingredients and Packaging: Our products are made with natural and fresh ingredients including meat, vegetables, fruits, whole grains, vitamins and minerals. Over 50% of our raw ingredients are sourced from suppliers located within 300 miles of our Freshpet Kitchens, and 96% are from North America. We maintain rigorous standards for ingredient quality and safety. By volume, our single largest input is fresh chicken. In order to retain operating flexibility and negotiating leverage, we do not enter into exclusivity agreements or long-term commitments with any of our suppliers. All of our suppliers are well-established companies that have the scale to support our growth. For every ingredient, we either use multiple suppliers or have identified alternative sources of supply that meet our quality and safety standards.
Distribution: Outbound transportation from our facility is handled through a third-party refrigerated freight broker. During 2022 we began to leverage a second third-party distribution center in Texas with the expectation that the Texas facility will service the western section of the country and the Pennsylvania distribution center will service the eastern section of the country. As volume grows we expect to leverage our distribution network to continuously improve customer service levels and decrease certain distribution costs. For certain retailers, we use national and regional distributors.
Our Product Quality and Safety
We go to great lengths to ensure product quality, consistency and safety from ingredient sourcing to finished product. Our Freshpet-owned manufacturing lines allows us to exercise significant control over production. We have a highly skilled Quality Assurance team consisting of quality assurance supervisors, specialists, analysts and quality technicians with significant experience in pet and human food production.
Our production processes are designed to meet science-based quality standards with documented plans for Hazard Analysis Critical Control Points and Hazard Analysis Risk Based Preventive Control to monitor established production controls, calibrate instruments, record data and perform corrective actions. Our on-site laboratory has microbial and composition testing capabilities. Quality control approvals are based on a positive release strategy, wherein a batch can only be shipped when it passes control point record reviews and laboratory testing. Before commencing production, quality assurance professionals swab equipment to test for potential contaminants.
Freshpet’s food safety program is certified at Safe Quality Food Level III, which is the highest standard determined under the Global Food Safety Initiative Benchmarks. We believe our systems and standards for product quality and safety can support our growth and ensure continued success in the market.
Our Customers and Distributors
We sell our products throughout the United States, Canada, and Europe, generating the vast majority of our sales in the United States. The strength of our business model makes us an attractive partner for leading blue-chip retailers, who we believe find that Freshpet grows the sales of their pet category, drives higher traffic, increases shopper frequency and delivers category-leading margins. Our Freshpet Fridge locations have been madeconsistently increasing as we add new retail accounts and add stores in existing accounts. We are in approximately 25,281 stores and believe there is opportunity for us to install a Freshpet Fridge in at least 30,000 stores in North America. We sell our products through the 2020 10-K,following classes of retail: grocery (including online), mass, club, pet specialty and this Amendment does not modify, amendnatural.
Our customers determine whether they wish to purchase our products either directly from us or updatethrough a third-party distributor. In 2022, our largest distributor by net sales, Animal Supply Co., accounted for 8.0% of our net sales and our largest customer, Walmart, accounted for 21.4% of our net sales.
The Freshpet Fridge
We sell our products through a growing network of company-owned branded refrigerators, the Freshpet Fridges. Our Freshpet Fridges are typically four feet wide by seven feet high and replace standard shelving in any way anythe pet aisle or an end-cap of a retail store. Our Freshpet Fridge designs are constantly evolving with all new models featuring prominent edge-lit LED headers, LED interior lighting, crisp black interiors and frameless glass swing doors for aesthetics and easy access. We use state-of-the-art refrigeration technology and environmentally friendly refrigerants to minimize energy consumption and environmental impact.
We design and produce the Freshpet Fridge through a combination of in-house resources and world-class partners. We source our Freshpet Fridges from leading global commercial refrigerator manufacturers with whom we have a collaborative approach to refrigerator design and innovation. Once ordered by us, Freshpet Fridges are shipped to distribution centers for delivery and installation in retail stores.
Installation into retail locations and ongoing maintenance of the financial orFreshpet Fridge is coordinated by Freshpet and executed through leading third-party service providers. All of our Freshpet Fridges are protected by a manufacturer warranty of three years. Our refrigerators are designed to be highly reliable, and at any given time less than 0.5% of the network is out of service for maintenance. Moreover, to ensure quality, cleanliness and appropriate in-stock levels, we employ brokerage partners to conduct a physical audit of the Freshpet Fridge network on an ongoing basis, with photographic results of our Freshpet Fridges transmitted back to Freshpet for review by members of our sales team.
We currently estimate less than 12 month cash-on-cash payback for the average Freshpet Fridge installation, calculated by comparing our total current costs for a refrigerator (including installation) to our current margin on net revenues. We believe our attractive value proposition to retailers and pet parents will allow us to continue penetrating store locations of existing and new customers. The Freshpet Fridge provides a highly-visible merchandising platform, allowing us to control how our brand is presented to consumers at point-of-sale and represents a significant point of differentiation from other pet food competitors. Our total chiller fleet at retailers covers over one million cubic feet of space.
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Marketing and Advertising
Our marketing strategy is designed to educate consumers about the benefits of fresh refrigerated pet food and build awareness of the Freshpet brand. We deploy a broad set of marketing tools across television, digital and public relations to reach consumers through multiple touch points and increase product trials.
Our network of fridges at approximately 25,281 retail locations within blue-chip retailers helps to introduce consumers to our brand and instantly distinguish Freshpet from traditionally merchandised pet food. We have effectively used national TV advertising to drive incremental consumers to try Freshpet products. We expect to realize greater benefits from national TV advertising as we continue to grow the network of Freshpet store locations nationwide. We have also expanded our online presence to better target consumers seeking information containedon healthy pet food. We reach consumers across multiple digital and social media platforms including websites, blogs and online reviews, as well as with tailored messaging on popular digital hubs including Instagram, Facebook, Twitter, TikTok and YouTube.
Our marketing strategy has allowed us to drive new consumers to our brand and develop a highly engaged community of users who actively advocate for Freshpet.
Competition
Pet food is a highly competitive industry. We compete with manufacturers of conventional pet food such as Mars, Nestlé and Big Heart Pet Brands (part of The J.M. Smucker Company). We also compete with specialty and natural pet food manufacturers such as Colgate-Palmolive and General Mills. In addition, we compete with many regional niche brands in individual geographic markets, as well as the launch of new direct-to-consumer frozen brands.
Given a North American retail landscape dominated by large retailers, with limited shelf space and a significant number of competing products, competitors actively support their brands through marketing, advertising, promotional spending and discounting.
Competitive factors in the 2020 10-K. This Amendment does not reflect events occurring afterpet food industry include product quality, ingredients, brand awareness and loyalty, product variety, product packaging and design, reputation, price, advertising, promotion and nutritional claims. We believe that we compete effectively with respect to each of these factors.
Team Members & Human Capital Resources
At Freshpet we always want to build a fair, healthy and safe workplace, while creating work environment policies that promote diversity, equality and inclusion for our valued employees. We believe that when we create a workplace where our colleagues are engaged, committed and empowered for the date of the filinglong-term, we are better positioned to create value for our Company, as well as for our stockholders. We are proud of our 2020 10-K. Accordingly, this Amendment should be read in conjunction withfocus on promoting employee engagement across our 2020 10-Koperations - from our supply chain to our products - and withare committed to building our filings withbusiness on a foundation of strong ethics.
Attracting and retaining talent at all levels is vital to continuing our success. We promote the SEC subsequent to the filingwork-life balance of our 2020 10-K.employees, we invest in our employees through high-quality benefits and various health and wellness initiatives, and we have created a healthy work environment in our offices. In order to incentivize and engage our workforce, Freshpet provides:
| ● | Industry-leading compensation, including stock compensation for every employee | ● | Industry-leading healthcare offered equitably for every employee |
| ● | Multi-year equity grants to "One-of-a-Kind Talent" employees identified by the Board | ● | Competitive perquisites, including pet insurance, tuition reimbursement, paid parental leave, free healthy snack room and catered lunches |
| ● | 401(k) matching for every employee | ● | Rigorous focus on Diversity & Inclusion to create an inclusive culture to attract, engage and retain our diverse talent |
As of December 31, 2022, we had 1,011 employees located primarily in Bethlehem PA, Ennis TX, Secaucus NJ and Europe. None of our employees are represented by a labor union or by any collective bargaining arrangements with respect to his or her employment with us. We believe that our employee relations are good.
Our Corporate Information
We were incorporated in Delaware in November 2004 and currently exist as a Delaware corporation. Our principal executive offices are located at 400 Plaza Drive, 1st Floor, Secaucus, New Jersey 07094.
Website Information
The address of our corporate website is www.freshpet.com. Our annual reports, annual proxy statements and related proxy cards are made available on our website at the same time they are mailed to Rule 12b-15 understockholders, as required by applicable law. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K and amendments to those reports that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), this Form 10-K/Aare available through our website, free of charge, as soon as reasonably practicable after they have been electronically filed or furnished to the Securities and Exchange Commission (the “SEC”). Our website also contains certificationsprovides access to reports filed by our directors, executive officers and certain significant shareholders pursuant to Section 30216 of the Sarbanes-Oxley Act of 2002, which are attached hereto. Because no financial statements have been included in this Amendment and this Amendment does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4 and 5 of the certifications have been omitted. Terms used but not defined herein are as defined in our 2020 10-K.
Trademarks and Other Intellectual Property
We will provide any person, without charge, upon request,believe that our rights in our trademarks and service marks are important to our marketing efforts to develop brand recognition and differentiate our brand from our competitors and are a copyvaluable part of our General Codebusiness. We own a number of trademarks and service marks that have been registered, or Codefor which applications are pending, with the United States Patent and Trademark Office including, among others, Freshpet, Vital, Nature’s Fresh, Roasted Meals, Fresh From The Kitchen, Freshpet Dog Joy, Dognation, Homestyle Creations and Pets People Planet.
We believe that our intellectual property has substantial value and has significantly contributed to our success to date. We are continually developing new technology and enhancing proprietary technology related to our pet food, Freshpet Fridges and manufacturing operations.
We also rely on unpatented proprietary expertise, recipes and formulations, continuing innovation and other trade secrets to develop and maintain our competitive position.
Government Regulation
Along with our brokers, distributors, and ingredients and packaging suppliers, we are subject to extensive laws and regulations in the United States by federal, state and local government authorities. In the United States, the federal agencies governing the manufacture, distribution and advertising of Ethics. Such requestsour products include, among others, the Federal Trade Commission, the U.S. Food and Drug Administration (“FDA”), the U.S. Department of Agriculture, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. Under various statutes, these agencies, among other things, prescribe the requirements and establish the standards for quality and safety and regulate our marketing and advertising to consumers. Certain of these agencies, in certain circumstances, must not only approve our products, but also review the manufacturing processes and facilities used to produce these products before they can be marketed in the United States. In addition to agency regulation, we are required to comply with state feed control requirements in the United States. We are also subject to the laws of Canada, including the Canadian Food Inspection Agency, and the United Kingdom, including the Food Standards Agency, as well as provincial and local regulations.
We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers or govern the promotion and sale of merchandise. Our operations, and those of our distributors and suppliers, are subject to various laws and regulations relating to environmental protection and worker health and safety matters. We monitor changes in these laws and believe that we are in material compliance with applicable laws.
Information Systems
We transitioned to a new ERP system during the three months ended March 31, 2022. Implementation, integration and transition efforts continued thereafter and remain ongoing. Accordingly, we have modified certain existing internal control processes relating to the implementation of the new ERP system. Other than the implementation of the new ERP system, there were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act during the three months ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This system governs order entry, customer service, accounts payable, accounts receivable, purchasing, asset management, manufacturing and warehouse management. Our order management process is automated via Electronic Data Interchange with virtually all our customers, which feeds information directly to our ERP platform.
Investing in our common stock involves a high degree of risk. The following is a discussion of the risks, uncertainties and assumptions that we believe are material to our business, which should be madeconsidered in writingconjunction with the other information contained in this report, including our consolidated financial statements and accompanying notes. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. While the risks are organized by headers, and each risk is discussed separately, many are interrelated. In any such case, the trading price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Risks Related to our Growth Strategy and Need for Capital
We may not be able to successfully implement our growth strategy on a timely basis or at all.
Our future success depends, in large part, on our ability to implement our growth strategy by attracting new consumers to our brand, expanding distribution through the timely expansion of certain of our Freshpet Kitchens, the installation of new Freshpet Fridges and launching new products. Our ability to increase awareness, consumer trial and adoption of our products, and to implement this growth strategy depends, among other things, on our ability to:
● | implement our marketing strategy; |
● | expand and maintain brand loyalty; |
● | partner with customers to secure space for our Freshpet Fridges; |
● | develop new product lines and extensions; |
● | partner with distributors to deliver our products to customers; |
● | continue to compete effectively in multiple classes of retail, including grocery (including online), mass, club, pet specialty and natural; and |
● | build capacity to meet demands, including the timely expansion of certain of our Freshpet Kitchens. |
We may not be able to successfully implement our growth strategy or to grow consistently from period to period. Our business, financial condition and results of operations will be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.
We expect to need capital in the future for business development, and we may not be able to generate sufficient cash flow or raise capital on acceptable terms to meet our needs.
Developing our business has in the past required and will continue in the future to require significant capital. To meet our capital needs, we expect to continue to rely on our cash flow from operations, our credit facilities, and other third-party financing. Third-party financing in the future may not, however, be available on terms favorable to us, or at all. 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 our contractual restrictions.
Additionally, our ability to make payments on and to refinance any indebtedness and to fund planned expenditures for our growth and operational efficiency plans 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. From time to time, we may seek to raise additional capital by accessing the debt and/or equity markets to fund capital expenditures or otherwise. 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. Further, our capital 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. For additional possible effects of such offerings, see "Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities, which may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock."
Our ability to utilize our credit facilities may be restricted or eliminated if we cannot comply with our debt covenants, which could adversely affect our business, financial condition and results of operations.
We are party to a Sixth Amended and Restated Loan and Security Agreement, which provides for a $350,000,000 senior secured credit facility (as amended the "Sixth Amendment"), encompassing a $300,000,000 delayed draw term loan facility (the "Delayed Draw Facility") and a $50,000,000 revolving loan facility (the "Revolving Loan Facility").
The Credit Facility contains customary representations, warranties, and covenants, including financial covenants. We cannot provide assurance that we will remain in compliance with the financial covenants during 2023. Should we fail to be in compliance, and if the lenders under the Credit Facility decline to provide a waiver of such non-compliance should we seek one, then lenders could accelerate any amounts then due, or could terminate our ability to access the Credit Facility. If this occurs, we could be unable to access the capital needed to fund our liquidity requirements for our operations, capital expenditures and other needs, which would adversely affect our business, financial condition and results of operations.
Loss of our key executive officers or personnel, or an inability to attract and retain such management and other personnel, could negatively affect our business.
Our future success depends to a significant degree on the skills, experience and efforts of our key executive officers. The sudden loss of any of these executives' services or our failure to appropriately plan for any expected key executive succession could materially and adversely affect our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. Additionally, we also depend on our ability to attract and retain qualified personnel to efficiently operate and expand our business. If we fail to attract or retain talented new employees, our business and results of operations could be negatively affected.
Risks Related to Competition in Our Industry
The pet food product category in which we participate is highly competitive. If we are unable to compete effectively, our results of operations could be adversely affected.
The pet food product category in which we participate is highly competitive. There are numerous brands and products that compete for shelf space and sales, with competition based primarily upon brand recognition and loyalty, product packaging, quality and innovation, taste, nutrition, breadth of product line, price and convenience. We compete with a significant number of companies of varying sizes, including divisions or subsidiaries of larger companies. We face strong competition from competitors’ products that are sometimes sold at lower prices. Price gaps between our products and our competitors’ products may result in market share erosion and harm our business. A number of our competitors have broader product lines, substantially greater financial and other resources and/or lower fixed costs than we have. Our competitors may succeed in developing new or enhanced products, including additional fresh, refrigerated pet food, that are more attractive to customers or consumers than our products. These competitors may also prove to be more successful in marketing and selling their products or may be better able to increase prices to reflect cost pressures. We may not be able to compete successfully with these other companies or maintain or grow the distribution of our products. We cannot predict the pricing or promotional activities of our competitors or whether their strategies will negatively affect us. Many of our competitors engage in aggressive pricing and promotional activities. There are competitive pressures and other factors which could cause our products to lose market share or decline in sales or result in significant price or margin erosion, which would have a material adverse effect on our business, financial condition and results of operations.
Our operating results depend, in part, on the sufficiency and effectiveness of our marketing and trade spending programs.
In general, due to the attentionhighly competitive nature of the businesses in which we compete, we must execute effective and efficient marketing investments and trade spending programs with respect to our businesses overall to sustain our competitive position in our markets. Marketing investments may be costly. Additionally, we may, from time to time, change our marketing and trade spending strategies, including the timing, amount or nature of television advertising and related promotional programs. The sufficiency and effectiveness of our Corporate Secretary at the following address: Freshpet, Inc., 400 Plaza Drive, 1st Floor, Secaucus, New Jersey 07094.
Risks Related to our Products and corruption. The Board established a robust Whistleblower PolicyCustomers
Our business depends on our ability to set optimal procedures with regard to reportsintroduce new products and improve existing products in anticipation of concerns made by employees and other parties, and to protect whistleblowers against harassment or retaliation.
Our business is focused on the development, manufacture, marketing and distribution of pet food products. If consumer demand for our products decreased, our business would suffer. Sales of pet food products are subject to evolving consumer preferences, changing demographics and economic pressures. A significant shift in consumer demand away from our products or a decline in pet ownership could reduce our sales or the prestige of our brand, which would harm our business, financial condition and results of operations.
A key element of our growth strategy depends on our ability to develop and market new products and improvements to our existing products that meet our standards for quality and appeal to consumer preferences. The success of our innovation and product development efforts is affected by our ability to anticipate changes in consumer preferences and demographics, the Company’s common stock. Based solelytechnical capability of our product development staff in developing and testing product prototypes, including complying with governmental regulations, and the success of our management and sales team in introducing and marketing new products. Additionally, the development and introduction of new products requires substantial research, development and marketing expenditures, which we may be unable to recoup if the new products do not gain widespread market acceptance. Efforts to accelerate our innovation may exacerbate risks associated with innovation. Failure to develop and market new products that appeal to consumers and meet our objectives could negatively impact our business, financial condition and results of operations.
If we fail to develop and maintain our brand, or the quality of our products that customers have come to expect, our business could suffer.
We believe that developing and maintaining our brand and the quality of our products is critical to our success. The importance of our brand recognition and the quality of our products may become even greater as competitors offer more products similar to ours. Our financial success is directly dependent on consumer perception of our brand and our products. Our brand-building activities involve providing high-quality products, increasing awareness of our brand, creating and maintaining brand loyalty and increasing the availability of our products.
The success of our brand may suffer if our marketing plans or product initiatives do not have the desired impact on our brand’s image or its review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended December 31, 2020 all filing requirements applicableability to the Reporting Persons were timely met except (i) Mr. Macchiaverna did not timely file a Form 4 in connection with a grant of RSU on April 1, 2020; (ii) Mr. Walsh did not timely file a Form 4 in connection with a grant of options on June 8, 2020; and (iii) Mr. Brewster did not timely file a Form 4 in connection with a purchase of 500 shares of the Company’s common stock on November 27, 2015, in Mr. Brewster’s caseattract customers. Further, our brand value could diminish significantly due to administrative oversight and in Mr. Walsh’s and Mr. Macchiaverna’s case due to administrative delays.
The loss of a highsignificant customer, certain actions by a significant customer or financial difficulties of a significant customer could adversely affect our results of operations.
A relatively limited number of production and sanitation employees intocustomers account for a large percentage of our kitchens. Labor shortages compounded by high absenteeism duenet sales. During 2022, ten customers, who purchase either directly from us or through third-party distributors, collectively accounted for approximately 64% of our net sales. This percentage may increase if there is consolidation among retailers or if mass merchandisers grow disproportionately to testing, quarantine and childcare issues led totheir competition. We expect that a seriessignificant portion of systemic changes to our recruitment, training and retention strategies. These revised practicesrevenues will continue to form partbe derived from a small number of customers; however, these customers may not continue to purchase our products in the same quantities as they have in the past. Our customers are not contractually obligated to purchase from us. Changes in our customers’ strategies, including a reduction in the number of brands they carry, shipping strategies, a shift of shelf space to or increased emphasis on private label products (including “store brands”), a reduction in shelf space for pet food items or a reduction in the space allocated for our Freshpet Fridges may adversely affect our sales. Requirements that may be imposed on us by our customers, such as sustainability, inventory management or product specification requirements, may have an adverse effect on our results of operations. Additionally, especially during economic downturns (including those that may be related to the COVID-19 pandemic), our customers may face financial difficulties, bankruptcy or other business disruptions that may impact their operations and their purchases from us and may affect their ability to pay us for products purchased from us. To the extent customers seek to reduce their usual or customary inventory levels or change their practices regarding purchases in excess of consumer consumption, our sales and results of operations could be adversely impacted in that period. If our sales of products to one or more of our ongoing efforts to ensuresignificant customers are reduced, this reduction could have a strong, skilled employee base.
HealthIf we are unable to maintain or increase prices for our products, our results of operations may be adversely affected.
We rely in part on price increases to neutralize cost increases and Safety
If our products are alleged to cause injury or illness, be mislabeled or misbranded, or fail to comply with a defining momentgovernmental regulations, we may suffer adverse public relations, need to supportrecall our products and further developexperience product liability claims.
We have in the past and entrenchmay in the future be exposed to product recalls, including voluntary recalls or withdrawals, and adverse public relations if our employee-centric culture. This showed upproducts are alleged to cause injury or illness or if we are alleged to have mislabeled or misbranded our products or otherwise violated governmental regulations. For example, we have had legal claims brought against us in California for our prioritizationuse of the health, safety and welfareword “natural” in describing certain of our employees. Our comprehensive responseproducts. We may also voluntarily recall or withdraw products that we consider below our standards, whether for taste, appearance or otherwise, in order to protect our brand reputation. Consumer or customer concerns (whether justified or not) regarding the quality or safety of our products could adversely affect our business. Product recalls or withdrawals can result in substantial and unexpected expenditures, destruction of product inventory, and lost sales due to the COVID-19 pandemic has included:
We also may be subject to product liability claims and adverse public relations if consumption or use of our products is alleged to cause injury or illness. While we carry product liability insurance, our insurance may not be adequate to cover all liabilities we may incur in connection with product liability claims. For example, punitive damages are reflectedgenerally not covered by insurance. In addition, we may not be able to continue to maintain our existing insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage (which may result in future product liability claims being uninsured). A product liability judgment against us or our diverse workforce,agreement to settle a product liability claim could also result in substantial and unexpected expenditures, which would reduce profitability and cash flow. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims could harm our brand image, be costly and time-consuming and may require management to spend time defending the claims rather than operating our business.
From time to time we believemay be subject to claims from competitors or consumers, including consumer class actions, alleging that our competitive advantage lies inproduct claims are deceptive, such as products being mislabeled or misbranded. Regardless of their merit, these claims can require significant time and expense to investigate and defend. Whether or not a false marketing claim is successful, such assertions could have an adverse effect on our diversitybusiness, financial condition and results of thought, creativity in solving systemic problems and strengthening our partnerships with pet-caring organizationsoperations, and the communities in which we live.
Risks Related to our Manufacturing and Supply Chain
We also allow each employeemay not be able to take home one packagesuccessfully implement initiatives to improve productivity and streamline operations to control or reduce costs. Failure to implement such initiatives could adversely affect our results of Freshpet each dayoperations.
Because our ability to feed their peteffectively implement price increases for our products can be affected by factors outside of our control, our profitability and growth depend significantly on our efforts to control our operating costs. Because many of our costs, such as energy and logistics costs, packaging costs and ingredient, commodity and raw product costs, are affected by factors outside or substantially outside our control, we generally must seek to control or reduce costs through operating efficiency or other initiatives. If we are not able to identify and complete initiatives designed to control or reduce costs and increase operating efficiency on time or within budget, our results of operations could be adversely impacted. In addition, if the petcost savings initiatives we have implemented to date, or any future cost-savings initiatives, do not generate expected cost savings, our business, financial condition and results of someone closeoperations could be adversely affected.
Our manufacturing capacity and expansion plans could have a material adverse effect on our business, financial condition and results of operations.
Due to them.
The inputs, commodities and ingredients that we require are subject to fillprice increases and shortages that could adversely affect our rapidly growing manufacturingresults of operations. We have three full-time recruiters on staff who screen potential new hires
The primary inputs, commodities and conduct on-boarding training for them. We advertise on social media, billboards and radio and uses a variety of job referral services to attract the skilled labor we require.
If we do not manage our supply chain effectively, including inventory levels, our business, financial condition and results of operation may be adversely affected.
The inability of any supplier, co-packer, third-party distributor or transportation provider to deliver or perform for us in a focustimely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease. We must continuously monitor our inventory and product mix against forecasted demand or risk having inadequate supplies to meet consumer demand, as well as having too much inventory on increasinghand that may reach its expiration date and become unsaleable. Changes in the diversityavailability and cost of freight may affect our supply chain and ultimately the pricing and availability of our managerial ranks.
ITEMAdverse weather conditions, natural disasters, pestilences, global or local pandemics, such as COVID-19 and other natural conditions can disrupt our operations, which can adversely affect our business, financial condition and results of operations.11. EXECUTIVE COMPENSATION
The ingredients that we use in the material elements of compensation awarded to, earned by, or paid to eachproduction of our named executive officers (or NEOs). This CD&A also describes Freshpet’s philosophy behindproducts (including, among others, meat, vegetables, fruits, carrageenans, whole grains, vitamins and objectives for executive compensation,minerals) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, fires, earthquakes, tornadoes and pestilences. Adverse weather conditions may be impacted by climate change and other factors. Adverse weather conditions and natural disasters can reduce crop size and crop quality, which in turn could reduce our supply of ingredients, lower recoveries of usable ingredients, increase the prices of our ingredients, increase our transportation costs or increase our cost of storing ingredients if harvests are accelerated and processing capacity is unavailable. Additionally, the growth of crops, as well as the manufacture and processing of our products, requires significant amounts of water. Drought or other causes of a reduction of water in aquifers may affect availability of water, which in turn may adversely affect our results of operations. Competing manufacturers may be affected differently by weather conditions and natural disasters depending on the location of their supplies or operations. If our supply of ingredients is reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply product to our customers and adversely affect our business, financial condition and results of operations. Increased costs for ingredients or other inputs could also adversely affect our business, financial condition and results of operations as described in “—The inputs, commodities and ingredients that we require are subject to price increases and shortages that could adversely affect our results of operations.”
Additionally, adverse weather conditions, natural disasters or other natural conditions, including global or local pandemics, such as COVID-19, affecting our operating activities or major facilities could cause an interruption or delay in our production or delivery schedules and loss of inventory and/or data or render us unable to accept and fulfill customer orders in a timely manner, or at all. If our operations are damaged by a fire, flood or other disaster, for example, we may be subject to supply or delivery interruptions, destruction of our facilities and products or other business disruptions, which could adversely affect our business, financial condition and results of operations. For example, during Q4 2020, we experienced a delay in our distribution chain due to winter storms in the Northeastern United States, which negatively impacted our results of operations for Q4 2020.
If the Company awards,operating capacity or reputation of our Freshpet Fridges is harmed, our business, financial condition and results of operations may suffer.
Our success depends on our network of company-owned branded refrigerators, known as Freshpet Fridges. If the operating capacity of our Freshpet Fridges is harmed by external factors, such as adverse weather or energy supply, or internal factors, such as faulty manufacturing or insufficient maintenance, our products contained in those fridges may be damaged and need to be discarded. In addition, if our Freshpet Fridges fail to operate as intended, for any reason, the reputation of our Freshpet Fridges with customers and the reputation of our brand with consumers may decline. In such event, customers may choose to discontinue, or not to expand, their use of Freshpet Fridges and our NEOs earn,products and consumers may choose to forgo purchasing our products. Any such compensation. Finally, this CD&A is intendedharm to supplement the data presented in the Summary Compensation Table and other compensation tables that follow the CD&A.
If the ingredients we use in our products are contaminated, alleged to be contaminated or are otherwise rumored to have adverse effects, our results of operations could be adversely affected.
We buy our ingredients from third-party suppliers. If these materials are alleged or prove to include contaminants that our Board of Directors (or Board) believes have a significant impact on long-term stockholder value. An important goalaffect the safety or quality of our executive compensation program is to help ensure that we hire and retain talented and experienced executives whoproducts or are motivated to achieve or exceed our short-term and long-term corporate goals. Our executive compensation program is designed to reinforce a strong pay-for-performance orientation and to serve the following purposes:
Compensation StrategyRestrictions imposed in reaction to outbreaks of animal diseases could have a material adverse effect on our business, financial condition and results of operations.
The Compensation Committeecost of the protein-based ingredients we use in our products has numerous tools at its disposalbeen adversely impacted in the past by the publicity surrounding animal diseases, such as bovine spongiform encephalopathy, or “mad cow disease.” As a result of extensive global publicity and trade restrictions imposed to help Freshpet accomplish its short-provide safeguards against mad cow disease, the cost of alternative sources of the protein-based ingredients we use in our products has from time to time increased significantly and long-term performance goals. The Committee generally choosesmay increase again in the future if additional cases of mad cow disease are found.
If mad cow disease or other animal diseases, such as foot-and-mouth disease or highly pathogenic avian influenza, also known as “bird flu,” impacts the availability of the protein-based ingredients we use in our products, we may be required to utilize those tools as follows in its administrationlocate alternative sources for protein-based ingredients. Those sources may not be available to sustain our sales volumes, may be more costly and oversightmay affect the quality and nutritional value of our executive compensation program.
We rely on co-packers to provide our supply of certain products. Any failure by co-packers to fulfill their obligations or any termination or renegotiation of our co-packing agreements could adversely affect our results of operations.
We have supply agreements with co-packers that require them to provide us with specific finished products. We rely on co-packers as our sole source for certain products. We also anticipate that we will rely on sole suppliers for future products. The Compensation Committee selectsfailure for any reason of a peer group for compensation comparison purposesco-packer to fulfill its obligations under the applicable agreements with us or the termination or renegotiation of any such co-packing agreement could result in disruptions to our supply of finished goods and have an adverse effect on our results of operations. Additionally, from time to time, a co-packer may experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of finished goods or require that includes a blend of comparably-sized companies in similar industries, including pet-related companies—our most likely sources of talent to support our growth. But the Committee also deliberately adds companies experiencing significant growth to help ensure that our compensation practices are competitive with—and relevant to—the circumstances found in growth-oriented companies so that they contributewe incur additional expense by providing financial accommodations to the growth potentialco-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new co-packing arrangement with another provider. During economic downturns (including those that may be related to the COVID-19 pandemic), our co-packers may be more susceptible to experiencing such financial difficulties, bankruptcies or other business disruptions. A new co-packing arrangement may not be available on terms as favorable to us as the existing co-packing arrangement, if at all.
Failure by our transportation providers to deliver our products on time or at all could result in lost sales.
We use third-party transportation providers for our product shipments. We rely on two primary providers for almost all of Freshpet. The Company considers peer group dataour shipments. Transportation services include scheduling and coordinating transportation of finished products to our customers, shipment tracking and freight dispatch services. Our use of transportation services for overall compensationshipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact the ability of providers to provide delivery services that adequately meet our shipping needs, including keeping our products adequately refrigerated during shipment. Any such change could cause us to incur costs and expend resources. Moreover, in the future we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers that we currently use, which in turn would increase our costs and thereby adversely affect our business, financial condition and results of operations.
Disruptions in the worldwide economy may adversely affect our business, results of operations and financial condition.
Adverse and uncertain economic conditions may impact distributor, customer and consumer demand for specific elements of compensation.
Incenting Sales GrowthOur ability to meet our workforce needs, particularly for staffing our Freshpet Kitchens, is crucial
We set whatrely on the existence of an available, qualified workforce to efficiently execute our operations and manufacture our products. Competition for qualified employees or inflationary pressures on employee compensation could require us to pay higher wages to attract and retain a sufficient number of qualified employees. We cannot be certain that we believewill be able to attract and retain qualified employees to meet current or future operational needs at a reasonable cost, or at all.
Although none of our employees are currently covered under collective bargaining agreements, any disruption in our employee relationships, including hiring and retaining our employees, could adversely affect our ability to attract and retain qualified employees to meet current or future manufacturing needs at a reasonable cost, or at all.
Risks Related to Government Regulation and Legal Proceedings
Government regulation, scrutiny, warnings and public perception could increase our costs of production and increase legal and regulatory expenses.
Manufacturing, processing, labeling, packaging, storing and distributing pet products are activities subject to extensive federal, state and local regulation, as well as foreign regulation. In the United States, these aspects of our operations are regulated by the FDA, and various state and local public health and agricultural agencies. The FDA Food Safety Modernization Act of 2011 provides direct recall authority to the FDA and includes a number of other provisions designed to enhance food safety, including increased inspections by the FDA of domestic and foreign food facilities and increased review of food products imported into the United States. In addition, many states have adopted the Association of American Feed Control Officials’ model pet food regulations or variations thereof, which generally regulate the information manufacturers provide about pet food. Complying with government regulation can be costly or may otherwise adversely affect our business. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, financial condition and results of operations.
Our business is also affected by import and export controls and similar laws and regulations, both in the United States and elsewhere. Issues such as national security or health and safety, which slow or otherwise restrict imports or exports, could adversely affect our business. In addition, the modification of existing laws or regulations or the introduction of new laws or regulations could require us to make material expenditures or otherwise adversely affect the way that we have historically operated our business.
From time to time, we may be subject to litigation, government investigations or governmental proceedings, which may adversely impact our results of operations and financial condition.
From time to time, we have been and may continue to be aggressive net sales growth targets for management each year and our annual incentive plan formula places equal value—both weighting (50%) and economic value ($ at risk)—oninvolved in various legal, regulatory or administrative investigations, negotiations or proceedings arising in the achievementnormal course of those net sales growth targets versus profitability goals. This helps to ensure that our management seeks to drive sales growth in concert with profit growth.
Risks Related to Intellectual Property
If we are not successful in protecting our intellectual property rights, our business, financial conditions and results of operations may be harmed.
We rely on trademark, copyright, trade secret, patent and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our intellectual property rights as well as the foregoing considerations, the Compensation Committee determined that our compensation peer group for 2020 would consistintellectual property of the following entities:
Our brand names and trademarks are important to our business, and we have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the 2020 Say-on-Pay vote. The Compensation Committee intendstrademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in the loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.
We rely on unpatented proprietary know-how in the areas of recipes, ingredients sourcing, cooking techniques, packaging, transportation and delivery. It is possible that others will independently develop the same or similar know-how or otherwise obtain access to our proprietary know-how. To protect our trade secrets and other proprietary know-how, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection in the event of any unauthorized use, misappropriation or disclosure of our trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our recipes, methods and other know-how, we could be materially adversely affected.
Further, to the extent we develop, introduce and acquire products, the risk of such claims may be exacerbated. Any such claims, even those without merit, could (i) require us to expend significant resources, (ii) cause us to cease making or using products that incorporate the challenged intellectual property, (iii) require us to redesign, reengineer or rebrand our products or packaging, including our Freshpet Fridges, (iv) divert management's attention and resources or (v) require us to enter into royalty or licensing agreements in order to obtain the right to use a third-party's intellectual property, which may not be available to us on acceptable terms or at all. Any of such events may adversely impact our business, financial condition and results of operations.
Risks Related to our International Operations
We may face difficulties as we expand into countries in which we have no prior operating experience.
In recent years, we have expanded our global footprint by entering into new markets and may expand into additional markets in the future. For example, we currently do business with four retailers in the United Kingdom, where our products are selling in approximately 407 stores. As we continue to considerexpand our business into new countries, we may encounter regulatory, personnel, technological and other difficulties that increase our expenses or delay our ability to become profitable in such countries. This may have an adverse effect on our business.
In addition, our expansion into new countries may require significant resources and the results of future Say-on-Pay votes when making compensation decisions.
Risks Related to Environmental Regulation and Environmental Risks
We are subject to environmental regulation and environmental risks, which may adversely affect our business. Climate change or concerns regarding climate change may increase environmental regulation and environmental risks.
As a result of our agricultural and food processing operations, we are subject to numerous environmental laws and regulations at the federal, state and local levels. As these laws and regulations become increasingly complex, our compliance costs become increasingly expensive. Changes in environmental conditions may result in existing legislation having a greater impact on us. Additionally, we may be subject to new legislation and regulation in the future.
For example, the long-term effects of global climate change present both physical risks (such as extreme weather conditions or rising sea levels) and transition risks (such as regulatory or technology changes), which are expected to be widespread and unpredictable. These changes could over time affect, for 2020:
Additionally, compliance with evolving environmental legislation and regulations, particularly if they are more aggressive than our current annual incentive plan—sustainability measures used to monitor our emissions and improve our energy efficiency, may increase our costs and adversely affect our results of operations. We cannot predict the extent to which any environmental law or regulation that may be enacted or enforced in whichthe future may affect our NEOs participate—in 2016. Awards underoperations. The effect of these actions and future actions on the plan,availability and use of pesticides could adversely impact our financial position or results of operations. If the cost of compliance with applicable environmental laws or regulations increases, our business, financial condition and results of operations could be negatively impacted.
Risks Related to Information Technology and Cyber Security
Our business operations could be disrupted if our information technology systems fail to perform adequately.
The efficient operation of our business depends on our information technology systems, some of which are calculatedmanaged by third-party service providers. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, impacts to working capital, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, physical theft or vandalism, cyber-attacks and viruses. Any such damage or interruption could have a material adverse effect on our business, financial condition and results of operations.
We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees, suppliers and others, including personal identification information. Security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber-attacks. Attacks may be targeted at us, our customers and suppliers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. In addition, data and security breaches can also occur as a percentageresult of base salary, are designed to motivatenon-technical issues, including breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our employees to achievesecurity could result in a violation of applicable privacy and other laws, including federal and state law, as well as the General Data Protection Regulation ("GDPR"), which could result in significant legal and financial exposure, and a loss of confidence in our annual goals basedsecurity measures, which could have an adverse effect on our strategic,business, financial condition and operating performance objectives. For 2020, Messrs. Cyr, Morris, Kassar, Weise and Walsh and Ms. Pomerantz had the opportunity to earn annual target awards equal to 90%, 60%, 50%, 40%, 35% and 50%, respectively,results of their base salaries.
Weighting | Target ($ millions) | Minimum Threshold | Result ($ millions) | |
| Net Sales | 50% | $315.0 | $300.0 | $320.4 |
| Adj. EBITDA before bonus accrual | 50% | $54.2 | $48.7 | $51.6 |
Risks Related to our NOLs
We may be unable to use some or all of our net operating loss carryforwards, which could adversely affect our financial results.
As of December 31, 2022, we had federal net operating loss (“NOLs”) carryforwards of approximately $340.3 million and state NOLs of approximately $259.4 million that we may use to offset against taxable income for U.S. federal and state income tax purposes, respectively. In general, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its “pre-ownership change” NOLs to offset future taxable income. In general, under the potential impactU.S. Internal Revenue Code of 1986, as amended (the “Code”), an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through and aggregation rules) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). We have completed several analyses under Section 382 of the COVID pandemicCode in the past which concluded that certain annual limitations exist. Purchases or sales of our common stock in amounts greater than specified levels, which are generally beyond our control, could create additional limitations on our ability to utilize our NOLs for tax purposes in the Company’s performancefuture. Limitations imposed on our ability to utilize NOLs could cause an increase in determining the awards. The Company choseamount of our aggregate payments of U.S. federal and state income taxes in future years. In addition, (i) the amount of NOLs generated in taxable years beginning after December 31, 2017 that we are permitted to adddeduct in any taxable year beginning after December 31, 2020 is limited to 80% of our taxable income in such year, and (ii) NOLs generated in taxable years beginning after December 31, 2020 cannot be carried back to its publicly reported Adj. EBITDA those costs that were directly relatedprior taxable years. Furthermore, we may not be able to keepinggenerate sufficient taxable income to utilize our team safe and ensuringNOLs before they expire. If any of these events occur, we may not derive some or all of the continuity ofexpected benefits from our operationsNOLs. In addition, NOLs incurred in one state may not be available to offset income earned in a different state. Furthermore, there may be periods during the pandemic. These costs, totaling approximately $4.0 million, included supplemental pay to hourly workers, pay to workers who were out for testing and quarantine, incremental costs for deep cleanings of our facilities, and health screenings for our employees.
Name | Amount of Award | % of Target Awarded |
| William B. Cyr | $545,940 | 101.1% |
| Scott Morris | $288,135 | 101.1% |
| Heather Pomerantz | $196,106 | 101.1% |
| Stephen L. Weise | $112,254 | 101.1% |
| Cathal Walsh | $103,767 | 101.1% |
| Richard Kassar | $80,880* | 101.1% |
Risks Related to Interest Rates
Changes in interest rates may adversely affect our earnings and cash flows.
Certain of our NEOsvariable rate indebtedness uses the Secured Overnight Financing Rate ("SOFR") as a benchmark for establishing the rate of interest and may be hedged with LIBOR-based or SOFR-based interest rate derivatives. SOFR is eligiblecalculated based on short-term repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with the London Inter-Bank Offered Rate ("LIBOR") under the previous methodology, which is an estimated forward-looking rate and relies, to participatesome degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it is a rate that does not take into account bank credit risk, as was the case with LIBOR. SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Because of these and other differences, there is no assurance that SOFR will perform in the same way as LIBOR would have performed at any time, and there is no guarantee that it is a comparable substitute for LIBOR. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question.
At this time, it is not possible to predict the effect of any establishment of alternative reference rates or any other reforms that may be enacted in the United Kingdom or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates, including SOFR, or other reforms may adversely affect the trading market for LIBOR- or SOFR-based securities, including ours. As a result, our interest expense may increase, our ability to refinance some or all of our existing indebtedness may be affected, and our available cash flow may be adversely affected.
Risks Related to Ownership of Our Common Stock
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to various factors that are beyond our control, resulting in a decline in our 2014 Plan. stock price.
Our 2014 Plan allows for awards of tax-qualified incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, other stock-based awards, and other cash-based awards to our directors, officers, employees, consultants, and advisors.
The price of our common stock has been and may continue to be volatile and you may lose all or part of your investment.
The trading price of our common stock has been, and may continue to be, volatile, and you may not be able to resell your shares at or above the purchase price. Such volatility could be based on various factors relating to our Company and industry, including those described in this “Risks Factors" section.
In 2020,addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our business, financial condition and results of operations, and those fluctuations could materially reduce our common stock price.
As we granted Messrs. Morris, Kassar,operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price and Weisewe have defended against such lawsuits in the past.
Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.
As of December 31, 2022, we had 48,037,016 shares of common stock outstanding, and Ms. Pomerantzour Certificate of Incorporation authorizes us to issue up to 200 million shares of common stock.
In the future, we may issue additional shares of common stock optionsor other securities if we need to purchaseraise additional capital. The number of new shares of our common stock under our 2014 Planissued in amounts of 15,618, 8,220, 4,932, and 9,864, respectively, 50% of which are scheduled to vest and become exercisable in equal installments on eachconnection with raising additional capital could constitute a material portion of the first three anniversaries of the grant date and 50% of which are scheduled to vest and become exercisable annually on a sliding scale according to the achievement of adjusted EBITDA performance-based conditions (and in each case subject to the NEO’s continued employment with us). In 2020, we also granted Mr. Walsh 59,932 stock options to purchasethen outstanding shares of our common stock. Any future sales of our common stock, underor the perception that such sales may occur, could negatively impact the price of our 2014 Plan, 39,932common stock.
Actions of activist stockholders could cause us to incur substantial costs, divert management's attention and resources, and have an adverse effect on our business.
We have been and may continue to be subject to proposals by stockholders urging us to take certain corporate actions. If activist stockholder activities continue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees. For example, we have been and may continue to be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial, and communications advisers, the costs of which vestmay negatively impact our future financial results. This may be exploited by our competitors, cause concern to our current or potential customers, and become exercisablemake it more difficult to attract and retain qualified personnel. In addition, actions of activist shareholders may cause significant fluctuations in equal installmentsour stock price based on eachtemporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of the first three anniversariesour business.
Future offerings of the grant datedebt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and 20,000future offerings of equity securities, which are scheduledmay be senior to vest and become exercisable following the achievement of certain annual net sales goals in the 2023 calendar year (and in each case subject to Mr. Walsh’s continued employment with us). Mr. Cyr did not receive an annual incentive equity grant in April 2020 as he had previously been granted a multi-year grant designed to replace all subsequent grants until the completion of that program at the end of 2020.
In the future, we may attempt to Messrs. Cyr, Morris, Kassarincrease our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and Weise. The Committee choseshares of preferred stock and lenders with respect to vest 100%other borrowings will receive a distribution of the options issued pursuantour available assets prior to the 2016 grants based onholders of our common stock. Additional equity offerings may dilute the Company’s performance in 2020, the performance year for the grants. Vesting conditions for the 2016 grants were determined based on the Company’s achievementholdings of specific financial metrics established in 2016 and amended prior to 2020 to account for the Board’s directive to focus on driving top line sales as a significant value creation metric in addition to profitability. The results were calculated using the same metrics and methods used in determining the annual bonus for all employees.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our corporate headquarters, located in Secaucus, New Jersey and consisting of approximately 24,000 square feet of office space, is subject to a lease agreement that expires on June 30, 2024.
We own the 401(k) Plan,Freshpet Kitchens Bethlehem ("Kitchens 1.0" and "Kitchens 2.0"). Kitchens 1.0 is approximately a 100,000 square-foot manufacturing facility, and Kitchens 2.0 is approximately a 140,000 square-foot manufacturing facility, each located in Bethlehem, Pennsylvania (together, the "Freshpet Kitchens Bethlehem").
Additionally we own a second location in Ennis, Texas ("Freshpet Kitchens Ennis"). Initial production on one manufacturing line began during the fourth quarter of 2022 with plans to fully commission the remaining two lines of phase 1 over the next 18 months. At the completion of phase 1 the Freshpet Kitchens Ennis facility will be approximately 400,000 square-foot.
We believe that our properties have been adequately maintained, are in good condition generally and are suitable and adequate for our business as presently conducted.
We are party to litigation proceedings. While the results of such litigation proceedings cannot be predicted with certainty, management believes that the final outcome will not have a material adverse effect on our financial condition, results of operations or cash flows. See also “Item 1A. Risk Factors” and Note 7 to our Consolidated Financial Statements for a discussion of certain legal proceedings involving the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. Market for registrant’s common equity, related stockholder matters and issueR purchases of equity secuRIties
Market Information
Shares of our common stock are publicly traded on the Nasdaq Global Market under the symbol "FRPT".
The number of stockholders of record of our common stock as of February 23, 2023 was approximately 420. This number excludes stockholders whose stock is held in nominee or street name by brokers.
Dividend Policy
Since we became a publicly traded company in 2014, we have not declared or paid, and do not maintainanticipate declaring or paying in the foreseeable future, any pension plans or non-qualified deferred compensation plans forcash dividends on our capital stock. Any future determination to declare and pay cash dividends will be at the benefitdiscretion of our employees or other service providers.
Issuer Purchases of Mr. Cyr’s employment due to “permanent disability” (as defined in his employment agreement), he is generally eligible to receive, subject to his timely execution and non-revocation of a general release of claims against the Company, Company payment of premiums (at active employee rates) for continuation of group health coverage for him and his eligible dependents for 18 months.
None.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the employment agreements with Messrs. Morris, Kassar, Weise and Walsh contains a cutback provision for “parachute payments” under Code Section 280G, under which the NEO may receive a cutback of certain change-in-control payments in order to avoid any excise taxExchange Act or loss of deduction under Code Section 280G, if the cutback would result (after factoring any potential excise taxes under Section 280G) in a larger after-tax paymentotherwise subject to the NEO.liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Freshpet, Inc. under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act.
The following graph compares our total common stock return with the total return for (i) the NASDAQ Composite Index (the “NASDAQ Composite”) and (ii) the Russell 3000 Index (the “Russell 3000”) for the five-year period ended December 31, 2022. The graph assumes that $100 was invested on December 31, 2018, in each of our common stock, the NASDAQ Composite and the Russell 3000. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.
Date | Freshpet, Inc. | NASDAQ Composite | Russell 3000 | |||||||||
31-Dec-18 | $ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||
31-Dec-19 | $ | 183.74 | $ | 135.23 | $ | 128.54 | ||||||
31-Dec-20 | $ | 441.51 | $ | 194.24 | $ | 152.73 | ||||||
31-Dec-21 | $ | 296.24 | $ | 235.78 | $ | 189.39 | ||||||
31-Dec-22 | $ | 164.09 | $ | 157.74 | $ | 150.61 | ||||||
Unregistered sales of equity securities
On September 29, 2022, the Company issued to operators of Freshpet Kitchens South warrants to purchase up to an aggregate of 194 thousand shares of our voting common stock, on a cashless exercise basis, at a price of $0.01 per share. The warrants were issued as partial consideration to this operator under our supply agreement with them for a value of approximately $9.8 million under that agreement.
The foregoing transaction did not involve any underwriters, any underwriting discounts or commissions, or any public offering. We believe the issuance described above was exempt from registration under the Securities Act by virtue of Section 4(a)(2) of the employment agreements with Messrs. Morris, Kassar, Weise and Walsh containsSecurities Act, because the following restrictive covenants: (i) a non-compete covenant that prohibits the NEO from competing against the Company for 12 months after employment; (ii) non-solicit covenants that prohibit the NEO from actively soliciting the Company’s employees, customers, or suppliers during employment and for 12 months after employment; and (iii) a perpetual confidentiality covenant that protects the Company’s proprietary information, developments, and other intellectual property.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in these forward-looking statements as a result of various factors, including those set forth in “Risk Factors.” The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements included elsewhere in this report.
For more information regarding our consolidated results and liquidity and capital resources for the year ended December 31, 2021 as compared to the year ended December 31, 2020, refer to "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K, which information is incorporated herein by reference.
Overview
We started Freshpet with a single-minded mission to bring the power of real, fresh food to our dogs and cats. We were inspired by the rapidly growing view among pet owners that their dogs and cats are a part of their family, leading them to demand healthier pet food choices. Since Freshpet's inception in 2006, we have created a comprehensive business model to deliver wholesome pet food that pet parents can trust, and in the process, we believe we have become one of the fastest growing pet food companies in North America. Our business model is difficult for others to replicate, and we see significant opportunity for future growth by leveraging the unique elements of our business, including our brand, our product know-how, our Freshpet Kitchens, our refrigerated distribution, our Freshpet Fridge and our culture.
Recent Developments
As part of the Company's increased focus on cash, we recently changed how we report Adjusted Gross Profit, Adjusted SG&A, and Adjusted EBITDA. Beginning for the period ended September 30, 2022, we no longer add back launch expenses and plant start-up expense in our calculation of our non-GAAP metrics. This change is reflective of our increased focus on cash, and we believe that this revised presentation will provide greater clarity on our path toward generating positive net income as the business scales further following the Company's planned capacity additions.
The presentation for Adjusted Gross Profit, Adjusted SG&A, and Adjusted EBITDA for the prior year period and prior quarter period has been recast as shown below to reflect these changes to enhance comparability between periods.
The impact of the change on an annual basis is as follows:
FY 2022 | FY 2021 | FY 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
Gross profit | $ | 186,033 | $ | 162,146 | $ | 132,910 | ||||||
Depreciation expense | 20,774 | 16,545 | 9,576 | |||||||||
Non-cash share-based compensation | 7,293 | 4,152 | 2,132 | |||||||||
COVID-19 expense (a) | — | 1,753 | 3,497 | |||||||||
Adjusted Gross Profit | $ | 214,100 | $ | 184,596 | $ | 148,115 | ||||||
Adjusted Gross Profit as a % of Net Sales | 36.0 | % | 43.4 | % | 46.5 | % | ||||||
(a) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in cost of goods sold. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance. |
FY 2022 | FY 2021 | FY 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
SG&A expenses | $ | 238,016 | $ | 186,809 | $ | 134,908 | ||||||
Depreciation and amortization expense | 13,781 | 13,923 | 11,549 | |||||||||
Non-cash share-based compensation | 18,799 | 20,846 | 8,793 | |||||||||
Loss on disposal of equipment | 396 | 1,000 | 1,805 | |||||||||
Equity offering expenses (a) | — | — | 58 | |||||||||
Enterprise Resource Planning (b) | 8,558 | 1,379 | 1,682 | |||||||||
COVID-19 expense (c) | — | 5 | 357 | |||||||||
Organization changes (d) | 734 | — | — | |||||||||
Adjusted SG&A Expenses | $ | 195,748 | $ | 149,656 | $ | 110,664 | ||||||
Adjusted SG&A Expenses as a % of Net Sales | 32.9 | % | 35.2 | % | 34.7 | % | ||||||
(a) | Represents fees associated with public offerings of our common stock. |
(b) | Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system. |
(c) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in SG&A. |
(d) | Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. |
FY 2022 | FY 2021 | FY 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
Net loss | $ | (59,494 | ) | $ | (29,699 | ) | $ | (3,188 | ) | |||
Depreciation and amortization | 34,555 | 30,468 | 21,125 | |||||||||
Interest expense | 5,208 | 2,882 | 1,211 | |||||||||
Income tax expense | 282 | 162 | 65 | |||||||||
EBITDA | $ | (19,449 | ) | $ | 3,813 | $ | 19,213 | |||||
Loss on equity method investment | 3,731 | 2,005 | — | |||||||||
Loss on disposal of equipment | 396 | 1,000 | 1,805 | |||||||||
Non-cash share-based compensation | 26,092 | 24,998 | 10,925 | |||||||||
Equity offering expenses (a) | — | — | 58 | |||||||||
Enterprise Resource Planning (b) | 8,558 | 1,379 | 1,682 | |||||||||
COVID-19 expense (c) | — | 1,758 | 3,854 | |||||||||
Organization changes (d) | 734 | — | — | |||||||||
Adjusted EBITDA | $ | 20,062 | $ | 34,953 | $ | 37,537 | ||||||
Adjusted EBITDA as a % of Net Sales | 3.4 | % | 8.2 | % | 11.8 | % | ||||||
(a) | Represents fees associated with public offerings of our common stock. |
(b) | Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system. |
(c) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs to mitigate potential supply chain disruptions during the pandemic included in SG&A. |
(d) | Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. |
Prior to September 30, 2022, the Company presented the following items as adjustments to its non-GAAP metrics. Those details are provided again here for your convenience and for consideration in making comparisons to prior periods:
FY 2022 | FY 2021 | FY 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
Plant start-up expense | $ | 26,089 | $ | 4,868 | $ | 5,962 | ||||||
Launch expense | 4,116 | 3,130 | 3,421 | |||||||||
The impact of the change on a quarterly basis is as follows:
Three Months Ended | ||||||||||||||||||||||||||||||||
12/31/2022 | 9/30/2022 | 6/30/2022 | 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Gross profit | $ | 45,709 | $ | 44,491 | $ | 51,080 | $ | 44,753 | $ | 41,216 | $ | 41,525 | $ | 43,090 | $ | 36,315 | ||||||||||||||||
Depreciation expense | 6,566 | 5,212 | 4,295 | 4,701 | 4,649 | 4,075 | 4,021 | 3,800 | ||||||||||||||||||||||||
Non-cash share-based compensation | 2,505 | 2,450 | 1,170 | 1,168 | 1,182 | 1,057 | 1,203 | 710 | ||||||||||||||||||||||||
COVID-19 expense (a) | — | — | — | — | — | 119 | 681 | 953 | ||||||||||||||||||||||||
Adjusted Gross Profit | $ | 54,780 | $ | 52,153 | $ | 56,545 | $ | 50,622 | $ | 47,047 | $ | 46,776 | $ | 48,995 | $ | 41,778 | ||||||||||||||||
Adjusted Gross Profit as a % of Net Sales | 33.0 | % | 34.5 | % | 38.7 | % | 38.3 | % | 40.6 | % | 43.5 | % | 45.1 | % | 44.7 | % | ||||||||||||||||
(a) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in cost of goods sold. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance. |
Three Months Ended | ||||||||||||||||||||||||||||||||
12/31/2022 | 9/30/2022 | 6/30/2022 | 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
SG&A expenses | $ | 47,775 | $ | 60,395 | $ | 69,215 | $ | 60,631 | $ | 48,854 | $ | 42,365 | $ | 49,557 | $ | 46,033 | ||||||||||||||||
Depreciation and amortization expense | 3,565 | 3,345 | 3,586 | 3,285 | 3,330 | 3,671 | 3,633 | 3,289 | ||||||||||||||||||||||||
Non-cash share-based compensation | 3,178 | 5,371 | 5,123 | 5,127 | 5,300 | 4,689 | 5,487 | 5,370 | ||||||||||||||||||||||||
Loss on disposal of equipment | 193 | 112 | 48 | 43 | 482 | 412 | 46 | 60 | ||||||||||||||||||||||||
Equity offering expenses (a) | — | — | — | — | — | — | (125 | ) | 125 | |||||||||||||||||||||||
Enterprise Resource Planning (b) | 3,613 | 1,937 | 1,990 | 1,018 | 256 | 273 | 247 | 603 | ||||||||||||||||||||||||
COVID-19 expense (c) | — | — | — | — | — | — | — | 5 | ||||||||||||||||||||||||
Organization changes (d) | — | 734 | — | — | — | — | — | — | ||||||||||||||||||||||||
Adjusted SG&A Expenses | $ | 37,227 | $ | 48,896 | $ | 58,467 | $ | 51,158 | $ | 39,486 | $ | 33,320 | $ | 40,269 | $ | 36,581 | ||||||||||||||||
Adjusted SG&A Expenses as a % of Net Sales | 22.4 | % | 32.3 | % | 40.0 | % | 38.7 | % | 34.1 | % | 31.0 | % | 37.1 | % | 39.2 | % | ||||||||||||||||
(a) | Represents fees associated with public offerings of our common stock. |
(b) | Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system. |
(c) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in SG&A. |
(d) | Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. |
Three Months Ended | ||||||||||||||||||||||||||||||||
12/31/2022 | 9/30/2022 | 6/30/2022 | 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/21/2021 | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Net loss | $ | (2,918 | ) | $ | (18,448 | ) | $ | (20,586 | ) | $ | (17,542 | ) | $ | (9,265 | ) | $ | (2,070 | ) | $ | (7,476 | ) | $ | (10,888 | ) | ||||||||
Depreciation and amortization | 10,131 | 8,558 | 7,880 | 7,986 | 7,979 | 7,746 | 7,654 | 7,089 | ||||||||||||||||||||||||
Interest expense | 1,148 | 1,817 | �� | 1,672 | 571 | 650 | 677 | 654 | 901 | |||||||||||||||||||||||
Income tax expense | 159 | 41 | 41 | 41 | 114 | 16 | 16 | 16 | ||||||||||||||||||||||||
EBITDA | $ | 8,520 | $ | (8,032 | ) | $ | (10,993 | ) | $ | (8,944 | ) | $ | (523 | ) | $ | 6,369 | $ | 849 | $ | (2,882 | ) | |||||||||||
Loss on equity method investment | 762 | 942 | $ | 717 | 1,310 | 881 | $ | 539 | 337 | 248 | ||||||||||||||||||||||
Loss on disposal of equipment | 193 | 112 | 48 | 43 | 482 | 412 | 46 | 60 | ||||||||||||||||||||||||
Non-cash share-based compensation | 5,683 | 7,820 | 6,294 | 6,295 | 6,482 | 5,746 | 6,690 | 6,080 | ||||||||||||||||||||||||
Equity offering expenses (a) | — | — | — | — | — | — | (125 | ) | 125 | |||||||||||||||||||||||
Enterprise Resource Planning (b) | 3,613 | 1,937 | 1,990 | 1,018 | 256 | 273 | 247 | 603 | ||||||||||||||||||||||||
COVID-19 expense (c) | — | — | — | — | — | 119 | 681 | 958 | ||||||||||||||||||||||||
Organization changes (d) | — | 734 | — | — | — | — | — | — | ||||||||||||||||||||||||
Adjusted EBITDA | $ | 18,771 | $ | 3,513 | $ | (1,944 | ) | $ | (278 | ) | $ | 7,578 | $ | 13,458 | $ | 8,725 | $ | 5,192 | ||||||||||||||
Adjusted EBITDA as a % of Net Sales | 11.3 | % | 2.3 | % | -1.3 | % | -0.2 | % | 6.5 | % | 12.5 | % | 8.0 | % | 5.6 | % | ||||||||||||||||
(a) | Represents fees associated with public offerings of our common stock. |
(b) | Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system. |
(c) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in SG&A. |
(d) | Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. |
Prior to September 30, 2022, the Company presented for the following items as adjustments to its non-GAAP metrics. Those details are provided again here for your convenience and for consideration in making comparisons to prior periods:
Three Months Ended | ||||||||||||||||||||||||||||||||
12/31/2022 | 9/30/2022 | 6/30/2022 | 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Plant start-up expense | $ | 8,033 | $ | 8,015 | $ | 5,293 | $ | 4,748 | $ | 1,306 | $ | 588 | $ | 1,130 | $ | 1,843 | ||||||||||||||||
Launch expense | 1,438 | 1,542 | 504 | 632 | 819 | 562 | 1,018 | 731 | ||||||||||||||||||||||||
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 25,281 retail stores as of December 31, 2022. Our products are sold under the Freshpet brand name with ingredients, packaging and labeling customized by class of retail. Sales are recorded net of discounts, returns and promotional allowances.
Our net sales growth is driven by the following key factors:
● | Increasing sales velocity from the average Freshpet Fridge due to increasing awareness, trial and adoption of Freshpet products and innovation. Our investments in marketing and advertising help to drive awareness and trial at each point of sale. |
● | Increasing penetration of Freshpet Fridge locations in major classes of retail, including Grocery (including online), Mass, Club, Pet Specialty and Natural. The impact of new Freshpet Fridge installations on our net sales varies by retail class and depends on numerous factors including store traffic, refrigerator size, placement within the store, and proximity to other stores that carry our products. |
● | Consumer trends including growing pet ownership, pet humanization and a focus on health and wellness. |
We believe that as a result of the above key factors, we will continue to penetrate the pet food marketplace and increase our share of the pet food category.
Gross Profit
Our gross profit is net of costs of goods sold, which include the costs of product manufacturing, product ingredients, packaging materials and inbound freight, as well as depreciation and amortization and non-cash share-based compensation.
We expect to continue to mitigate any adverse movement in input costs through a combination of cost management and price increases.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of the following:
Outbound freight. We use a third-party logistics provider for outbound freight that ships directly to retailers as well as third-party distributors.
Marketing & advertising. Our marketing and advertising expenses primarily consist of national television media, digital marketing, social media and grass roots marketing to drive brand awareness. These expenses may vary from quarter to quarter depending on the timing of our marketing and advertising campaigns. Our Feed the Growth initiative focuses on growing the business through increased marketing investments.
Freshpet Fridge operating costs. Freshpet Fridge operating costs consist of repair costs and depreciation. The purchase and installation costs for new Freshpet Fridges are capitalized and depreciated over the estimated useful life. All new refrigerators are covered by a manufacturer warranty for three years. We subsequently incur maintenance and freight costs for repairs and refurbishments handled by third-party service providers.
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 $340.3 million as of December 31, 2022, of which, approximately $175.4 million, generated in 2017 and prior, will expire between 2025 and 2037. The NOL generated from 2018 through 2022, of approximately $164.9 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, 2022, we had approximately $259.4 million of state NOLs, which expire between 2023 and 2041, and had $14.3 million of foreign NOLs which do not expire. At December 31, 2022, we had a full valuation allowance against our net deferred tax assets as the realization of such assets was not considered more likely than not.
Consolidated Statements of Operations and Comprehensive Loss
Twelve Months Ended December 31, | ||||||||||||||||||||||||
2022 | 2021 | 2020 | ||||||||||||||||||||||
Amount | % of Net Sales | Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Net sales | $ | 595,344 | 100 | % | $ | 425,489 | 100 | % | $ | 318,790 | 100 | % | ||||||||||||
Cost of goods sold | 409,311 | 69 | 263,343 | 62 | 185,880 | 58 | ||||||||||||||||||
Gross profit | 186,033 | 31 | 162,146 | 38 | 132,910 | 42 | ||||||||||||||||||
Selling, general and administrative expenses | 238,016 | 40 | 186,809 | 44 | 134,908 | 42 | ||||||||||||||||||
Loss from operations | (51,983 | ) | (9 | ) | (24,663 | ) | (6 | ) | (1,998 | ) | (1 | ) | ||||||||||||
Other income/(expenses), net | 1,710 | 0 | 13 | 0 | 87 | 0 | ||||||||||||||||||
Interest expense | (5,208 | ) | (1 | ) | (2,882 | ) | (1 | ) | (1,212 | ) | (0 | ) | ||||||||||||
Loss before income taxes | (55,481 | ) | (10 | ) | (27,532 | ) | (6 | ) | (3,123 | ) | (1 | ) | ||||||||||||
Income tax expense | 282 | 0 | 162 | 0 | 65 | 0 | ||||||||||||||||||
Loss on equity method investment | 3,731 | 1 | 2,005 | 0 | - | 0 | ||||||||||||||||||
Net loss | $ | (59,494 | ) | (10 | )% | $ | (29,699 | ) | (7 | )% | $ | (3,188 | ) | (1 | )% | |||||||||
Twelve Months Ended December 31, 2022 Compared To Twelve Months Ended December 31, 2021
Net Sales
The following table sets forth net sales by class of retail:
Year Ended December 31, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
Amount | % of Net Sales | Store Count | Amount | % of Net Sales | Store Count | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Grocery (including Online), Mass and Club (1) | $ | 524,971 | 88 | % | 19,670 | $ | 356,965 | 84 | % | 18,139 | ||||||||||||||
Pet Specialty and Natural (2) | 70,373 | 12 | % | 5,611 | 68,524 | 16 | % | 5,492 | ||||||||||||||||
Net Sales (3) | $ | 595,344 | 100 | % | 25,281 | $ | 425,489 | 100 | % | 23,631 | ||||||||||||||
(1) | Stores at December 31, 2022 and December 31, 2021 consisted of 13,847 and 12,723 grocery (including online) and 5,823 and 5,416 mass and club, respectively. |
(2) | Stores at December 31, 2022 and December 31, 2021 consisted of 5,135 and 5,017 pet specialty and 476 and 475 natural, respectively. |
(3) | Online sales associated with each class of retailer are included within their respective total. |
Net sales increased $169.9 million, or 39.9%, to $595.3 million for the twelve months ended December 31, 2022 as compared to the prior year. The $169.9 million increase in net sales was driven by growth in the Grocery (including Online), Mass, and Club refrigerated channel of $168.0 million, with the remaining growth in Pet Specialty and Natural. The net sales increase was driven by overall velocity gains, higher pricing and an increase of Freshpet Fridges store locations and fridges, which grew by 7.0% from 23,631 as of December 31, 2021 to 25,281 as of December 31, 2022.
Gross Profit
Gross profit was $186.0 million, or 31.2% as a percentage of net sales, for the twelve months ended December 31, 2022, compared to $162.1 million, or 38.1% as a percentage of net sales, in the prior year. For the twelve months ended December 31, 2022, Adjusted Gross Profit was $214.1 million, or 36.0% as a percentage of net sales, compared to $184.6 million, or 43.4% as a percentage of net sales, in the prior year. The decrease in gross profit as a percentage of net sales was primarily due to increased plant start-up cost, inflation of ingredient cost and labor, and quality issues, partially offset by increased pricing, leverage on depreciation cost and prior year COVID-19 expenses.
The decrease in adjusted gross profit as a percentage of net sales was primarily due to increased plant start-up cost, inflation of ingredient cost and labor, and quality issues, partially offset by increased pricing. 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 $238.0 million, for the twelve months ended December 31, 2022, compared to $186.8 million in the prior year. As a percentage of net sales, SG&A decreased to 40.0% for the twelve months ended December 31, 2022, compared to 43.9% in the prior year. The decrease of 390 basis points in SG&A as a percentage of net sales was mainly a result of increased selling, general and administrative expense leverage as the business scales.
Adjusted SG&A for the twelve months ended December 31, 2022, was $195.7 million, or 32.9% as a percentage of net sales, compared to $149.7 million, or 35.2% as a percentage of net sales, in the prior year. The decrease in Adjusted SG&A as a percentage of net sales was mainly a result of increased selling, general and administrative expense leverage as the business scales. 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.
Loss from Operations
Loss from operations increased by $27.3 million to a loss from operations of $52.0 million for the twelve months ended December 31, 2022 as compared to a loss from operations of $24.7 million in the prior year as a result of the factors discussed above.
Interest Expense
Interest expense relating to our Credit Facility increased $2.3 million to interest expense of $5.2 million for the twelve months ended December 31, 2022 as compared to an interest expense of $2.9 million for the prior year as a result of the Sixth Amendment and additional borrowings discussed in Note 6.
Loss on Equity Method Investment
Our loss on equity method investment for the twelve months ended December 31, 2022 was $3.7 million as compared to a loss on equity method investment of $2.0 million in the prior year from the Company's 19% interest in a privately held company, as discussed in Note 1.
Net Loss
Net loss increased $29.8 million to a net loss of $59.5 million for the twelve months ended December 31, 2022 as compared to a net loss of $29.7 million for the prior year due to increased SG&A, which includes increased media spend of $16.6 million and increased plant start-up cost of $21.2 million, partially offset by higher net sales and increased gross profit.
Adjusted EBITDA
Adjusted EBITDA was $20.1 million, or 3.4% as a percentage of net sales (also called Adjusted EBITDA Margin), for the twelve months ended December 31, 2022, compared to $35.0 million, or 8.2% as a percentage of net sales, in the prior year. The decrease in Adjusted EBITDA was a result of increased Adjusted SG&A expense (including $4.1 million of launch expense) partially offset by higher net sales and Adjusted Gross Profit (including $26.1 million of plant start-up expense). See "—Non-GAAP Financial Measures" for how we define Adjusted EBITDA, a reconciliation of Adjusted EBITDA to EBITDA, the closest comparable U.S. GAAP measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures, as well as for a discussion of certain changes we made to our methodology for calculating Adjusted EBITDA beginning with the period ending September 30, 2022; see the section entitled "Forward-Looking Statements" in this report and the section entitled "Risk Factors" in this 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 COVID-19 expenses. We define Adjusted SG&A as SG&A expenses before depreciation and amortization expense, non-cash share-based compensation, fees related to equity offerings of our common stock, implementation and other costs associated with the implementation of an ERP system, loss on disposal of equipment, COVID-19 expenses, and organization changes designed to support long-term growth objectives. As of the fourth quarter of 2021, all remaining COVID-19 expenses are part of our operating performance. EBITDA represents net income (loss) plus interest expense, income tax expense and depreciation and amortization. Adjusted EBITDA represents EBITDA plus loss on equity method investment, non-cash share-based compensation, fees related to equity offerings of our common stock, implementation and other costs associated with the implementation of an ERP system, loss on disposal of equipment, COVID-19 expenses, and organization changes designed to support long-term growth objectives. As part of the Company's focus on cash, we have recently changed how we report our non-GAAP financial measures. Beginning with the period ended September 30, 2022, the Company is no longer adding back launch expenses and plant start-up expense in its calculation of non-GAAP financial measures. This change is reflective of a renewed focus on cash, that will provide greater clarity on our path toward generating positive net income as the business scales further following the Company's planned capacity additions. The presentations of our non-GAAP financial measures for the prior year period has been recast to reflect these changes to enhance comparability between periods, as set forth above under "—Recent Developments".
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 cash requirements for our working capital needs. |
Additionally, Adjusted EBITDA excludes non-cash share-based compensation expense, which is and will remain a key element of our overall long-term incentive compensation package. 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 loss, the most directly comparable financial measure presented in accordance with U.S. GAAP:
Twelve Months Ended | ||||||||||||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
Net loss | $ | (59,494 | ) | $ | (29,699 | ) | $ | (3,188 | ) | |||
Depreciation and amortization | 34,555 | 30,468 | 21,125 | |||||||||
Interest expense | 5,208 | 2,882 | 1,211 | |||||||||
Income tax expense | 282 | 162 | 65 | |||||||||
EBITDA | $ | (19,449 | ) | $ | 3,813 | $ | 19,213 | |||||
Loss on equity method investment | $ | 3,731 | $ | 2,005 | $ | - | ||||||
Loss on disposal of equipment | 396 | 1,000 | 1,805 | |||||||||
Non-cash share-based compensation | 26,092 | 24,998 | 10,925 | |||||||||
Equity offering expenses (a) | — | — | 58 | |||||||||
Enterprise Resource Planning (b) | 8,558 | 1,379 | 1,682 | |||||||||
COVID-19 expense (c) | — | 1,758 | 3,854 | |||||||||
Organization changes (d) | 734 | — | — | |||||||||
Adjusted EBITDA | $ | 20,062 | $ | 34,953 | $ | 37,537 | ||||||
Adjusted EBITDA as a % of Net Sales | 3.4 | % | 8.2 | % | 11.8 | % | ||||||
(a) | Represents fees associated with public offerings of our common stock. |
(b) | Represents implementation, amortization of deferred implementation costs and other costs associated with the implementation of an ERP system |
(c) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic. |
| (d) | Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. |
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:
Twelve Months Ended | ||||||||||||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
Gross Profit | $ | 186,033 | $ | 162,146 | $ | 132,910 | ||||||
Depreciation expense | 20,774 | 16,545 | 9,576 | |||||||||
Non-cash share-based compensation | 7,293 | 4,152 | 2,132 | |||||||||
COVID-19 expense (a) | — | 1,753 | 3,497 | |||||||||
Adjusted Gross Profit | $ | 214,100 | $ | 184,596 | $ | 148,115 | ||||||
Adjusted Gross Profit as a % of Net Sales | 36.0 | % | 43.4 | % | 46.5 | % | ||||||
(a) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in cost of goods sold. |
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:
Twelve Months Ended | ||||||||||||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
SG&A expenses | $ | 238,016 | $ | 186,809 | $ | 134,908 | ||||||
Depreciation and amortization expense | 13,781 | 13,923 | 11,549 | |||||||||
Non-cash share-based compensation | 18,799 | 20,846 | 8,793 | |||||||||
Loss on disposal of equipment | 396 | 1,000 | 1,805 | |||||||||
Equity offering expenses (a) | — | — | 58 | |||||||||
Enterprise Resource Planning (b) | 8,558 | 1,379 | 1,682 | |||||||||
COVID-19 expense (c) | — | 5 | 357 | |||||||||
Organization changes (d) | 734 | — | — | |||||||||
Adjusted SG&A Expenses | $ | 195,748 | $ | 149,656 | $ | 110,664 | ||||||
Adjusted SG&A Expenses as a % of Net Sales | 32.9 | % | 35.2 | % | 34.7 | % | ||||||
(a) | Represents fees associated with public offerings of our common stock. |
(b) | Represents implementation and other costs associated with the implementation of an ERP system. |
(c) | Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs related to mitigating potential supply chain disruptions during the pandemic included in SG&A. |
(d) | Represents transition costs related to the organization changes designed to support growth, including several changes in organizational structure designed to enhance capabilities and support long-term growth objectives. |
Liquidity and Capital Resources
We expect to make future capital expenditures in connection with the completion of our planned development and of Freshpet Kitchens Ennis Phase 1, Ennis Phase 2, Ennis Chicken Processing and Freshpet Kitchens South. During fiscal year 2022, we spent approximately $230.1 million of capital to meet our capacity needs as well as recurring capital expenditures. In fiscal year 2023, we expect to spend approximately $240.0 million. To meet our capital needs, we expect to rely on our current and future cash flow from operations, our available borrowing capacity, and access to the capital markets, if appropriate. There is a possibility that the Company will not be in compliance with the debt covenants during certain quarters in 2023, in which it would either have to obtain a waiver from the borrower or renegotiate the debt. If not in compliance all outstanding debt within the Credit Facility would be due and the borrower has the option to provide a waiver or terminate the Credit Facility. Our ability to obtain additional funding will be subject to various factors, including general 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, such as financial covenants under our debt agreements, which we cannot provide assurance we will be able to do.
Additionally, our ability to make payments on, and to refinance, any indebtedness under our credit facilities 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, planned borrowing capacity and our ability to access the capital markets, if appropriate, are adequate to fund our debt service requirements, operating 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 inflation and interest rates, 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 convertible debt securities, 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 financings 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.
On April 29, 2022, the Company entered into the First Amendment to the Sixth Amendment, which amendment, among other things, (i) made amendments to allow for the Company's projected Capital Expenditures (as defined in the Amended Credit Agreement) without either triggering mandatory prepayment obligations or violating the Capital Expenditure covenant and (ii) replaced the LIBOR interest rate for U.S. dollar loans with a term Secured Overnight Financing Rate (or "Term SOFR", as defined in the Amended Credit Agreement). See Note 6 for additional details.
The following table sets forth, for the periods indicated, our working capital:
December 31, | December 31, | |||||||
2022 | 2021 | |||||||
(Dollars in thousands) | ||||||||
Cash and cash equivalents | $ | 132,735 | $ | 72,788 | ||||
Accounts receivable, net of allowance for doubtful accounts | 57,572 | 34,780 | ||||||
Inventories, net | 58,290 | 35,574 | ||||||
Prepaid expenses | 9,778 | 5,834 | ||||||
Other current assets | 3,590 | 1,349 | ||||||
Accounts payable | (55,088 | ) | (42,612 | ) | ||||
Accrued expenses | (33,016 | ) | (14,950 | ) | ||||
Current operating lease liabilities | (1,510 | ) | (1,384 | ) | ||||
Total Working Capital | $ | 172,351 | $ | 91,379 | ||||
Working capital consists of current assets net of current liabilities. Working capital increased $81.0 million to $172.4 million at December 31, 2022 compared with working capital of $91.4 million at December 31, 2021. The increase was primarily a result of an increase of $59.9 million in cash and cash equivalents as a result of our April 2022 primary offering as we fund our capital expansion plan, an increase in accounts receivable of $22.8 million due to increased sales, an increase in inventory of $22.7 million, and an increase in prepaid expenses of $3.9 million. The increase was partially offset by an increase in accounts payable of $12.5 million as a result of timing and capital expenditures of approximately $38.0 million related to our capital expansion plan, and an increase in accrued expenses of $18.1 million as a result of timing and capital expenditures of approximately $6.2 million related to our capital expansion plan.
We normally carry three to four weeks of finished goods inventory. As of December 31, 2022, the average duration of our accounts receivable is approximately 32 days.
For the year ended December 31, 2022 our capital resources consisted primarily of $132.7 million of cash and cash equivalents on hand, $270.0 million available under our $350.0 million credit facilities, subject to debt covenants. Our credit facilities reflect $2.0 million reserved for two letters of credit and the remaining availability after 2022 borrowing activity of $78.0 million under the Delayed Draw Facility.
For the year ended December 31, 2021, our capital resources consisted primarily of $72.8 million cash on hand, $348.0 million available under our $350.0 million credit facilities, subject to debt covenants. Our credit facilities reflect $2.0 million reserved for two letters of credit.
We expect to fund our ongoing operations and obligations with cash and cash equivalents, cash flow from operations and available funds under our Credit Facility.
The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by operating, investing and financing activities and our ending balance of cash.
Year Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
(Dollars in thousands) | ||||||||
Cash at the beginning of period | $ | 72,788 | $ | 67,247 | ||||
Net cash (used in) provided by operating activities | (43,227 | ) | 647 | |||||
Net cash used in investing activities | (233,364 | ) | (322,099 | ) | ||||
Net cash provided by financing activities | 336,538 | 326,993 | ||||||
Cash at the end of period | $ | 132,735 | $ | 72,788 | ||||
Net Cash (Used In) Provided by Operating Activities
Cash (used in) provided by operating activities consists primarily of net loss adjusted for certain non-cash items (i.e., provision for loss on receivables, loss/(gain) on disposal of equipment, change in reserve for inventory obsolescence, depreciation and amortization, amortization of deferred financing costs and loan discount, change in operating lease right of use asset, loss on equity method investment, and share-based compensation).
2022
Net cash used in operating activities of $43.2 million in 2022 was primarily attributed to:
● | $10.9 million of net income adjusted for reconciling non-cash items, which excludes $70.4 million of non-cash items primarily related to $34.6 million in depreciation and amortization, $26.1 million in share-based compensation, $3.7 million of investments in equity method investment, $3.5 million in inventory obsolescence, $1.4 million of change in operating lease right of use asset, $0.8 million of amortization of deferred financing costs and $0.4 million in loss on disposal of equipment. |
This was offset by:
● | $54.1 million decrease due to changes in operating assets and liabilities. The decrease was primarily due to the change in accounts receivable, inventory, accounts payable, other assets, other lease liabilities and prepaid expenses, offset by change in accrued expenses. |
2021
Net cash provided by operating activities of $0.6 million in 2021 was primarily attributed to:
● | $31.2 million of net income adjusted for reconciling non-cash items, which excludes $60.9 million of non-cash items primarily related to $30.5 million in depreciation and amortization, $25.0 million in share-based compensation, $2.0 million of investments in equity method investment, $1.3 million of change in operating lease right of use asset, $1.2 million of amortization of deferred financing costs, $0.5 million in loss on disposal of equipment, and $0.3 million in inventory obsolescence. |
This was offset by:
● | $30.6 million decrease due to changes in operating assets and liabilities. The decrease was primarily due to the change in accounts receivable, inventory, other assets, prepaid expenses, other lease liabilities and accrued expenses, offset by change in accounts payable. |
Net Cash Used in Investing Activities
2022
Net cash used in investing activities of $233.4 million in 2022 was primarily attributed to:
● | $28.4 million in capital expenditures related to Freshpet Kitchens South expansion. | |
| ● | $165.1 million in capital expenditures related to Freshpet Kitchens Ennis expansion. | |
| ● | $27.4 million in in capital expenditures related to investment in fridges and other capital spend. | |
| ● | $9.2 million in plant recurring capital expenditures. | |
| ● | $19.8 million purchase of short-term investments. | |
| ● | $3.3 million investment in equity method investment. |
This was offset by:
● | $19.8 million of proceeds from maturities of short-term investments. |
2021
Net cash used in investing activities of $322.1 million in 2021 was primarily attributed to:
● | $3.0 million in capital expenditures related to Freshpet Kitchens Bethlehem expansion. |
| ● | $73.8 million in capital expenditures related to Freshpet Kitchens South expansion. | |
| ● | $208.2 million in capital expenditures related to Freshpet Kitchens Ennis expansion. | |
| ● | $16.8 million in plant recurring capital expenditures. | |
| ● | $20.3 million in capital expenditures relating to investment in fridges and other capital spend. |
Net Cash Provided by Financing Activities
2022
Net cash provided by financing activities of $336.5 million in 2022 was primarily attributed to:
| ● | $337.5 million of proceeds from common shares issued in a primary offering, net of issuance cost. |
| ● | $78.0 million of proceeds from borrowings under Credit Facility. | |
● | $0.5 million of proceeds from the exercise of stock options. |
This was partially offset by:
● | $78.0 million for repayment of borrowings under Credit Facility |
● | $1.4 million for tax withholdings related to net share settlements of restricted stock units. |
2021
Net cash provided by financing activities of $327.0 million in 2021 was primarily attributed to:
● | $332.2 million of proceeds from common shares issued in a primary offering, net of issuance cost. |
● | $2.3 million of proceeds from the exercise of stock options. |
This was partially offset by:
● | $4.2 million for tax withholdings related to net share settlements of restricted stock units. | |
| ● | $3.3 million for debt issuance cost related to the new credit facilities. |
Indebtedness
For a discussion of our material indebtedness, see Note 6 to our Consolidated Financial Statements included in this report.
Critical Accounting Estimates and Policies
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 and policies 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.
While our significant accounting estimates and policies are described in the notes to our financial statements appearing in this report, we believe that the following critical accounting estimates and policies are most important to understanding and evaluating our reported financial results.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of net sales and expenses during the reporting period.
We believe that the accounting estimates policies discussed below are critical to understanding our historical and future performance, as these policies related to the more significant areas involving management’s judgments and estimates. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results, as determined at a later date, could differ from those estimates. To the extent that there are differences between our estimate and the actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
The following critical accounting policies reflect significant judgments and estimates used in preparation of our consolidated financial statements:
Revenue Recognition and Incentives—Revenue is reported net of applicable trade incentives and allowances. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis. The Company applies judgment in the determination of the amount of consideration the Company receives from its customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Revenue the Company recognizes varies with changes in trade incentives the Company offers to its customers and their consumers. Trade incentives consist primarily of customer pricing allowances and merchandising funds, and consumer coupons are offered through various programs to customers and consumers. Estimates of trade promotion expense and coupon redemption costs are based upon programs offered, timing of those offers, estimated redemption/usage rates from historical performance, management’s experience and current economic trends.
Share-based Compensation—We account for all share-based compensation payments issued to employees, directors and nonemployees using a fair value method. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the date of grant. 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.
We have outstanding share-based awards that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial criteria as a condition to the vesting. For certain performance-based awards, the quantity of awards received can range based on the level of performance achieved. The performance-based awards with financial criteria either have a Net Sales and/or Adjusted EBITDA target from FY 2023 through FY 2025. We recognize the estimated fair value of performance-based awards as share-based compensation expense over the performance period based upon our determination of whether it is probable that the performance targets will be achieved. At each reporting period, we reassess the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the probability assessment is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled shares, and, to the extent share-based compensation expense was previously recognized for those cancelled shares, such share-based compensation expense is reversed.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 (Summary of Significant Accounting Policies) to our audited consolidated financial statements included in this report.
Segment
We have determined we operate in one segment: the manufacturing, marketing and distribution of pet food and pet treats for dogs and cats.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
We are sometimes exposed to market risks from changes in interest rates on debt and changes in commodity prices. Our exposure to interest rate fluctuations is limited to our outstanding indebtedness under our credit facilities, which bears interest at variable rates. As of December 31, 2022, we did not have any outstanding borrowings under our credit facilities.
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.
Inflation
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our customers. The impact of inflation on food, labor and energy costs can significantly affect the profitability of our Company as it has in 2022.
While generally we have been able to offset inflation and other changes in the costs of key operating resources through price increases, productivity improvements and greater economies of scale, our price increases are not always done immediately causing us to temporarily absorb increased cost. Further, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our pricing flexibility. In addition, macroeconomic conditions could make additional price increases imprudent. There can be no assurance that all future cost increases can be offset by increased prices or that increased prices will be fully absorbed without any resulting changes in their purchasing patterns.
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 twelve months ended December 31, 2022 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 (Loss) in Other expenses, 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 December 31, 2022, there were no forward contracts outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRESHPET, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Consolidated Balance Sheets as of December 31, 2022 and 2021 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020 | |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Compensation; Tax CutsDirectors
Freshpet, Inc.:
Opinions on the Consolidated Financial Statements and Jobs Act
We have audited the accompanying consolidated balance sheets of Freshpet, Inc. and subsidiaries (the Company) as attractingof December 31, 2022 and retaining executives2021, the related consolidated statements of operations and providing appropriate performance incentives.comprehensive loss, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). We also considerhave audited the after-tax costCompany's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in establishing executive compensation programs, both individuallyaccordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed 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.
A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the probability of achieving the vesting performance criteria of share-based awards
As discussed in Notes 1 and 9 to the consolidated financial statements, the Company recognizes share-based compensation based on the value of the number of share-based payment awards that are ultimately expected to vest during the period. Share-based awards with performance-based vesting conditions require the achievement of certain financial criteria as a condition to the vesting. For certain performance-based awards, the quantity of awards received can range based on the level of performance achieved. The performance-based awards with financial criteria either have 1) an annual revenue target or 2) an adjusted earnings before interest, taxes, depreciation and amortization target within fiscal years 2023 through 2025. At each reporting period, the Company reassesses the probability of achieving the performance criteria required to meet those vesting targets. When achievement of the vesting criteria is considered probable, compensation cost is recognized. As of December 31, 2022, there were 311,000 unvested performance-based options outstanding that were deemed not probable, with an aggregate fair value of $22.8 million.
We identified the assessment of the probability of achieving the vesting performance criteria of share-based awards as a critical audit matter. Evaluating the assumptions relating to the Company's determination of the probability that the performance criteria will be achieved for the share-based awards involved subjective auditor judgment. In particular, judgment was required to assess the probability of meeting the Company's future performance targets, including forecasted revenue.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company's share-based compensation process, including a control related to the Company's assessment of assumptions that were used in the determination that a performance criteria was probable of achievement. To assess the Company's ability to accurately forecast revenue, we compared the Company's historical revenue forecasts to actual results. We compared forecasted revenue to those in communications to the Board of Directors, press releases and analyst reports. We evaluated the timing of the Company's expansion projects by comparing the progress of the Company's plans to construction milestones achieved.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Short Hills, New Jersey
February 28, 2023
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, | December 31, | |||||||
2022 | 2021 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 132,735 | $ | 72,788 | ||||
Accounts receivable, net of allowance for doubtful accounts | 57,572 | 34,780 | ||||||
Inventories, net | 58,290 | 35,574 | ||||||
Prepaid expenses | 9,778 | 5,834 | ||||||
Other current assets | 3,590 | 1,349 | ||||||
Total Current Assets | 261,965 | 150,325 | ||||||
Property, plant and equipment, net | 800,586 | 583,922 | ||||||
Deposits on equipment | 3,823 | 4,100 | ||||||
Operating lease right of use assets | 5,165 | 6,537 | ||||||
Equity method investment | 25,418 | 25,856 | ||||||
Other assets | 28,426 | 13,670 | ||||||
Total Assets | $ | 1,125,383 | $ | 784,410 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 55,088 | $ | 42,612 | ||||
Accrued expenses | 33,016 | 14,950 | ||||||
Current operating lease liabilities | 1,510 | 1,384 | ||||||
Total Current Liabilities | $ | 89,614 | $ | 58,946 | ||||
Long term operating lease liabilities | 4,200 | 5,710 | ||||||
Total Liabilities | $ | 93,814 | $ | 64,656 | ||||
STOCKHOLDERS' EQUITY: | ||||||||
Common stock — voting, $0.001 par value, 200,000 shares authorized, 48,051 issued and 48,037 outstanding on December 31, 2022, and 43,449 issued and 43,435 outstanding on December 31, 2021 | 48 | 43 | ||||||
Additional paid-in capital | 1,325,524 | 955,710 | ||||||
Accumulated deficit | (295,117 | ) | (235,623 | ) | ||||
Accumulated other comprehensive income (loss) | 1,370 | (120 | ) | |||||
Treasury stock, at cost — 14 shares on December 31, 2022 and on December 31, 2021 | (256 | ) | (256 | ) | ||||
Total Stockholders' Equity | 1,031,569 | 719,754 | ||||||
Total Liabilities and Stockholders' Equity | $ | 1,125,383 | $ | 784,410 | ||||
See accompanying notes to the consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
For the Year Ended | ||||||||||||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
NET SALES | $ | 595,344 | $ | 425,489 | $ | 318,790 | ||||||
COST OF GOODS SOLD | 409,311 | 263,343 | 185,880 | |||||||||
GROSS PROFIT | 186,033 | 162,146 | 132,910 | |||||||||
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES | 238,016 | 186,809 | 134,908 | |||||||||
LOSS FROM OPERATIONS | (51,983 | ) | (24,663 | ) | (1,998 | ) | ||||||
OTHER INCOME/(EXPENSES): | ||||||||||||
Other Income/(Expenses), net | 1,710 | 13 | 87 | |||||||||
Interest Expense | (5,208 | ) | (2,882 | ) | (1,212 | ) | ||||||
| (3,498 | ) | (2,869 | ) | (1,125 | ) | |||||||
LOSS BEFORE INCOME TAXES | (55,481 | ) | (27,532 | ) | (3,123 | ) | ||||||
INCOME TAX EXPENSE | 282 | 162 | 65 | |||||||||
LOSS ON EQUITY METHOD INVESTMENT | 3,731 | 2,005 | — | |||||||||
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (59,494 | ) | $ | (29,699 | ) | $ | (3,188 | ) | |||
OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||
Change in foreign currency translation | $ | 1,490 | $ | (40 | ) | $ | (1 | ) | ||||
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | 1,490 | (40 | ) | (1 | ) | |||||||
TOTAL COMPREHENSIVE LOSS | $ | (58,004 | ) | $ | (29,740 | ) | $ | (3,189 | ) | |||
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS | ||||||||||||
-BASIC | $ | (1.29 | ) | $ | (0.69 | ) | $ | (0.08 | ) | |||
-DILUTED | $ | (1.29 | ) | $ | (0.69 | ) | $ | (0.08 | ) | |||
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING USED IN COMPUTING NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS | ||||||||||||
-BASIC | 46,191 | 42,931 | 39,758 | |||||||||
-DILUTED | 46,191 | 42,931 | 39,758 | |||||||||
See accompanying notes to the consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Common Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss) | Treasury Shares | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||
BALANCES, December 31, 2019 | 36,162 | $ | 36 | $ | 334,299 | $ | (202,735 | ) | $ | (79 | ) | 14 | $ | (256 | ) | $ | 131,265 | |||||||||||||||
Exercise of options to purchase common stock | 479 | — | 5,441 | — | — | — | — | 5,441 | ||||||||||||||||||||||||
Vesting of restricted stock units | 91 | — | (2,568 | ) | — | — | — | — | (2,568 | ) | ||||||||||||||||||||||
Share-based compensation expense | — | — | 11,157 | — | — | — | — | 11,157 | ||||||||||||||||||||||||
Shares issued in primary offering | 4,000 | 4 | 252,058 | — | — | — | — | 252,062 | ||||||||||||||||||||||||
Foreign Currency Translation | — | — | — | — | (1 | ) | — | — | (1 | ) | ||||||||||||||||||||||
Net loss | — | — | — | (3,188 | ) | — | — | — | (3,188 | ) | ||||||||||||||||||||||
BALANCES, December 31, 2020 | 40,732 | $ | 40 | $ | 600,388 | $ | (205,924 | ) | $ | (80 | ) | 14 | $ | (256 | ) | $ | 394,169 | |||||||||||||||
Exercise of options to purchase common stock | 224 | — | 2,271 | — | — | — | — | 2,271 | ||||||||||||||||||||||||
Vesting of restricted stock units | 78 | — | (4,187 | ) | — | — | — | — | (4,187 | ) | ||||||||||||||||||||||
Share-based compensation expense | — | — | 25,068 | — | — | — | — | 25,068 | ||||||||||||||||||||||||
Shares issued in primary offering, net of issuance costs | 2,415 | 2 | 332,170 | — | — | — | — | 332,172 | ||||||||||||||||||||||||
Foreign Currency Translation | — | — | — | — | (40 | ) | — | — | (40 | ) | ||||||||||||||||||||||
Net loss | — | — | — | (29,699 | ) | — | — | — | (29,699 | ) | ||||||||||||||||||||||
BALANCES, December 31, 2021 | 43,449 | $ | 43 | $ | 955,710 | $ | (235,623 | ) | $ | (120 | ) | 14 | $ | (256 | ) | $ | 719,754 | |||||||||||||||
Exercise of options to purchase common stock | 45 | — | 471 | — | — | — | — | 471 | ||||||||||||||||||||||||
Vesting of restricted stock units | 43 | 1 | (1,441 | ) | — | — | — | — | (1,440 | ) | ||||||||||||||||||||||
Share-based compensation expense | — | — | 23,505 | — | — | — | — | 23,505 | ||||||||||||||||||||||||
Issuance and exercise of partner warrants | 194 | — | 9,775 | — | — | — | — | 9,775 | ||||||||||||||||||||||||
Shares issued in primary offering, net of issuance costs | 4,320 | 4 | 337,504 | — | — | — | — | 337,508 | ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | 1,490 | — | — | 1,490 | ||||||||||||||||||||||||
Net loss | — | — | — | (59,494 | ) | — | — | — | (59,494 | ) | ||||||||||||||||||||||
BALANCES, December 31, 2022 | 48,051 | 48 | $ | 1,325,524 | $ | (295,117 | ) | $ | 1,370 | 14 | $ | (256 | ) | $ | 1,031,569 | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
For the Year Ended | ||||||||||||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (59,494 | ) | $ | (29,699 | ) | $ | (3,188 | ) | |||
Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities: | ||||||||||||
Provision for (gains) loss on accounts receivable | (20 | ) | 29 | (23 | ) | |||||||
Loss on disposal of equipment | 396 | 538 | 1,805 | |||||||||
Share-based compensation | 26,092 | 24,998 | 10,925 | |||||||||
Inventory obsolescence | 3,455 | 349 | 232 | |||||||||
Depreciation and amortization | 34,555 | 30,468 | 21,125 | |||||||||
Amortization of deferred financing costs and loan discount | 795 | 1,212 | 834 | |||||||||
Change in operating lease right of use asset | 1,372 | 1,329 | 1,289 | |||||||||
Loss on equity method investment | 3,731 | 2,005 | — | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (32,993 | ) | (16,371 | ) | 166 | |||||||
Inventories | (26,171 | ) | (16,804 | ) | (6,808 | ) | ||||||
Prepaid expenses and other current assets | (435 | ) | (2,891 | ) | 9,437 | |||||||
Other assets | (3,141 | ) | (7,899 | ) | (719 | ) | ||||||
Accounts payable | (3,063 | ) | 14,958 | (5,922 | ) | |||||||
Accrued expenses | 13,078 | (273 | ) | (6,762 | ) | |||||||
Other lease liabilities | (1,384 | ) | (1,302 | ) | (1,198 | ) | ||||||
Net cash flows (used in) provided by operating activities | (43,227 | ) | 647 | 21,193 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Purchase of short-term investments | (19,840 | ) | — | (20,000 | ) | |||||||
Proceeds from maturities of short-term investments | 19,840 | — | 20,000 | |||||||||
Investments in equity method investment | (3,293 | ) | — | (27,894 | ) | |||||||
Acquisitions of property, plant and equipment, software and deposits on equipment | (230,071 | ) | (322,099 | ) | (134,568 | ) | ||||||
Net cash flows used in investing activities | (233,364 | ) | (322,099 | ) | (162,462 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Proceeds from common shares issued in primary offering, net of issuance cost | 337,508 | 332,172 | 252,062 | |||||||||
Proceeds from exercise of options to purchase common stock | 471 | 2,271 | 5,441 | |||||||||
Tax withholdings related to net shares settlements of restricted stock units | (1,441 | ) | (4,187 | ) | (2,568 | ) | ||||||
Proceeds from borrowings under Credit Facility | 78,000 | — | 20,933 | |||||||||
Repayment of borrowings under Credit Facility | (78,000 | ) | — | (76,000 | ) | |||||||
Fees paid in connection with financing agreements | — | (3,263 | ) | (824 | ) | |||||||
Net cash flows provided by financing activities | 336,538 | 326,993 | 199,044 | |||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 59,947 | 5,541 | 57,775 | |||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 72,788 | 67,247 | 9,472 | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 132,735 | $ | 72,788 | $ | 67,247 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
Taxes paid | $ | 297 | $ | 182 | $ | 88 | ||||||
Interest paid | $ | 3,152 | $ | 1,730 | $ | 1,061 | ||||||
NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||||||
Property, plant and equipment purchases in accounts payable and accrued expenses | $ | 44,258 | $ | 22,482 | $ | 11,281 | ||||||
Issuance of partner warrants | $ | 9,775 | — | — | ||||||||
See accompanying notes to the consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 (including online), Mass and Club, Pet Specialty, and Natural retail.
Basis of Presentation –The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). All amounts included in the consolidated financial statements 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.
Principles of Consolidation – The 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.
Segments – The Company operates as a single operating segment reporting to its chief operating decision maker.
Equity method investment – The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company has the ability to exercise significant influence based on our representation on and the makeup of the investee's Board of Directors. The Company has elected to record its share of equity in income (losses) of equity method investment on a one-quarter lag based on the most recently available financial statements.
In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by our proportionate share of the net income or loss.
On March 10, 2022, the Company invested $3,300 to maintain our 19% interest in a privately held company that operates in our industry, with our investments to date totaling $31,200. The Company concluded that it is not the primary beneficiary, which is primarily the result of the Company's conclusion that it does not have the power to direct activities that most significantly impact the economic performance. The Company accounts for the investment under the equity method of accounting based on our ability to exercise significant influence even though the Company's percentage of ownership is below 20%. The basis difference between the Company's carrying value of its investment and the amount of underlying equity in net assets of the privately held company is not material to the Company's consolidated financial statements.
Variable interest entities – In accordance with the applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which it has a variable interest is a variable interest entity. The Company's analysis incudes both quantitative and qualitative reviews to determine if we must consolidate a variable interest entity as its primary beneficiary.
Estimates and Uncertainties – The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used in determining, among other items, trade incentives, share-based compensation and useful lives for long-lived assets. Actual results, as determined at a later date, could differ from those estimates.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Inventories – Inventories are stated at the lower of cost or market, using the first-in, first-out method. When necessary, the Company provides allowances to adjust the carrying value of its inventories to the lower of cost or net realizable value, including any costs to sell or dispose and consideration for obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value.
Property, Plant and Equipment – Property, plant and equipment are recorded at cost. The Company provides for depreciation on the straight-line method by charges to income at rates based upon estimated recovery periods of 7 years for furniture and office equipment, 5 years for automotive equipment, 9 years for refrigeration equipment, 5 to 10 years for machinery and equipment, 2 years for plates & dies and 15 to 39 years for building and improvements. Capitalized cost includes the costs incurred to bring the property, plant and equipment to the condition and location necessary for its intended use, which includes any necessary delivery, electrical and installation cost for equipment. Maintenance and repairs that do not extend the useful life of the assets over two years are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the term of the related lease or the estimated useful lives on the straight-line method.
Long-Lived Assets – The Company evaluates all long-lived assets for impairment. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Recoverability of assets held for sale is measured by a comparison of the carrying amount of an asset or asset group to their fair value less estimated costs to sell. Estimating future cash flows and calculating fair value of assets requires significant estimates and assumptions by management. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carry amount to fair value and is charged to expense in the period of impairment.
Income Taxes – The Company provides for deferred income taxes for temporary differences between financial and income tax deductibilityreporting, principally net operating loss carryforwards, depreciation, and share-based compensation. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those temporary differences are expected to be recovered or settled.
A valuation allowance is appropriate when management believes it is more likely than not, the deferred tax asset will not be realized. At December 31, 2022 and 2021, the Company determined that full valuation of its net deferred tax assets and liabilities is appropriate.
Share-based Compensation – The Company recognizes share-based compensation based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. The Company estimates grant date fair value of its options using the Black-Scholes Merton option-pricing model. Share awards are amortized under the straight-line method over the requisite service period of the entire award. The Company accounts for forfeitures as they occur.
Cash Equivalents – The Company at times considers money market funds and all other highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Trade Account 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 December 31, 2022 and 2021, the Company's deferred implementation costs of our sole consideration.new ERP system associated with our cloud computing arrangement, which were reflected within prepaid and other assets, were $9,444 and $7,380, respectively. The cost will be recognized over the term of the agreement, which began in the first quarter of 2022.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Fair Value of Financial Instruments – Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
● | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities. |
● | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies. |
● | Level 3 – Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. |
The carrying amounts reported in the balance sheets for cash and cash equivalents, other receivables, accounts payable and accrued expenses approximate their fair value based on the short-term maturity of these instruments. Certain assets, including the equity method investment, right-of-use assets and property and equipment are also subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review.
As of December 31, 2022, the Company only maintained Level 1 assets and liabilities.
Debt Issuance Cost – During the first quarter of 2021, as part of the Sixth Amended and Restated Loan and Security Agreement, dated February 19, 2021 (as amended, the Sixth Amendment), the Company incurred an additional $3,263 of fees associated with the debt modification, of which $2,797 of the fees were related to the Delayed Draw Term Loan (as defined below) with the remaining balance relating to the Revolving Loan Facility (as defined below). The Company also wrote down $485 of fees incurred from the prior credit facilities. The Company's policy is to record the debt issuance cost related to the Delayed Draw Term Loan, net of debt, for the portion of the Delayed Draw Term Loan that is outstanding, with the remaining amount recorded within assets.
The Company amortizes debt issuance costs categorized as assets on a straight-line basis over the term of the loan and amortizes the debt issuance costs that are categorized net of debt using the effective interest method, over the term of the loan.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Revenue Recognition and Incentives – Revenues primarily consist of the sale of pet food products that are sold to retailers through broker and distributor arrangements. These revenue contracts generally have single performance obligations. Revenue, which includes shipping and handling charges billed to the customer, is reported net of applicable trade incentives and allowances. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components.
Revenue from product sales is recognized when obligations under the terms of the contract with the customer are satisfied, which occurs once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods.
The amount of consideration the Company receives and revenue the Company recognizes varies with changes in trade incentives the Company offers to its customers and their consumers. Trade incentives consists primarily of customer pricing allowances and merchandising funds, and consumer coupons are offered through various programs to customers and consumers. Estimates of trade promotion expense and coupon redemption costs are based upon programs offered, timing of those offers, estimated redemption/usage rates from historical performance, management’s experience and current economic trends.
Sales taxes and other similar taxes are excluded from revenue.
There were no contract assets as of December 31, 2022 and 2021.
Net Sales – Information about the Company’s net sales by class of retailer is as follows:
Twelve Months Ended | ||||||||||||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Grocery (including Online), Mass and Club | $ | 524,971 | $ | 356,965 | $ | 272,008 | ||||||
Pet Specialty and Natural | 70,373 | 68,524 | 46,782 | |||||||||
Net Sales (a) | $ | 595,344 | $ | 425,489 | $ | 318,790 | ||||||
(a) Online sales associated with each class of retailer are included within their respective total.
Advertising – Advertising costs are expensed when incurred, with the exception of production costs which are expensed the first time advertising takes place. Advertising costs, consisting primarily of media ads, were $71,720, $53,687 and $38,483, in 2022, 2021 and 2020, respectively. As of December 31, 2022, 2021 and 2020 we had $553, $1,173 and $128, respectively of production cost in prepaid expense, representing advertising that had yet to take place.
Shipping and Handling Costs/Freight Out – Costs incurred for shipping and handling are included in selling, general, and administrative expenses within the statement of operations and comprehensive loss. Shipping and handling costs primarily consist of costs associated with moving finished products to customers, including costs associated with our distribution center and the cost of shipping products to customers through third-party carriers. Shipping and handling cost totaled $63,891, $47,713, and $27,167 in 2022,2021 and 2020, respectively.
Recently Adopted Standards
The Company did not adopt any new Accounting Standard Updates during 2022.
We consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB).
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 2 – Inventories:
Inventories are summarized as follows:
December 31, | December 31, | |||||||
2022 | 2021 | |||||||
Raw Materials and Work in Process | $ | 20,608 | $ | 13,339 | ||||
Packaging Components Material | 6,186 | 2,823 | ||||||
Finished Goods | 31,639 | 19,704 | ||||||
| 58,433 | 35,866 | |||||||
Reserve for Obsolete Inventory | (143 | ) | (292 | ) | ||||
Inventories, net | $ | 58,290 | $ | 35,574 | ||||
Note 3 – Property, Plant and Equipment:
Property, plant and equipment are summarized as follows:
December 31, | December 31, | |||||||
2022 | 2021 | |||||||
Refrigeration Equipment | $ | 137,875 | $ | 122,063 | ||||
Machinery and Equipment | 199,504 | 140,471 | ||||||
Building, Land, and Improvements | 458,800 | 150,927 | ||||||
Furniture and Office Equipment | 14,040 | 8,844 | ||||||
Leasehold Improvements | 1,319 | 1,319 | ||||||
Construction in Progress | 134,338 | 273,880 | ||||||
| 945,877 | 697,504 | |||||||
Less: Accumulated Depreciation | (145,291 | ) | (113,582 | ) | ||||
Property, Plant and Equipment, net | $ | 800,586 | $ | 583,922 | ||||
Depreciation expense related to property, plant and equipment totaled $34,332, $29,467, and $20,805 in 2022,2021 and 2020, respectively; of which $20,774, $16,545, and $9,576 was recorded in cost of goods sold for 2022, 2021 and 2020, respectively, with the remainder of depreciation expense being recorded to selling, general and administrative expense.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 4 – Income Taxes
A summary of income taxes as follows:
Year Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Federal | $ | — | $ | — | $ | — | ||||||
State | 282 | 162 | 65 | |||||||||
International | — | — | — | |||||||||
| $ | 282 | $ | 162 | $ | 65 | |||||||
The provisions for income taxes do not bear a normal relationship to loss before income taxes primarily as a result of the valuation allowance on deferred tax assets.
The reconciliation of the statutory federal income tax rate to the Company’s effective tax is presented below:
Year Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Tax at federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
State taxes, net of federal | 3.6 | % | 7.4 | % | 39.2 | % | ||||||
Permanent items | 3.7 | % | 30.6 | % | 284.4 | % | ||||||
Other | (0.7 | %) | (0.2 | %) | 5.6 | % | ||||||
State rate change | 0.5 | % | (0.5 | %) | 0.2 | % | ||||||
Valuation allowance | (28.6 | %) | (58.8 | %) | (352.5 | %) | ||||||
Effective tax rate | (0.5 | %) | (0.5 | %) | (2.1 | %) | ||||||
In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. The Company believes that it is more likely than not that the Company’s deferred income tax assets will not be realized. The Company has experienced taxable losses from inception. As such, there is a full valuation allowance against the net deferred tax assets as of December 31, 2022, 2021 and 2020.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
Year Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Net operating loss | $ | 85,214 | $ | 73,436 | $ | 60,268 | ||||||
Stock option expense | 18,709 | 12,169 | 6,454 | |||||||||
Property and equipment | (20,753 | ) | (14,957 | ) | (11,941 | ) | ||||||
Other | 5,920 | 2,845 | 1,194 | |||||||||
Less: Valuation allowance | (89,090 | ) | (73,493 | ) | (55,975 | ) | ||||||
Net deferred income tax assets | $ | - | $ | - | $ | - | ||||||
At December 31, 2022, the Company had federal net operating loss (“NOL”) carryforwards of $340.3 million, of which $175.4 million, generated in 2017 and prior, will expire between 2025 and 2037. The NOL generated from 2018 through 2022 of $164.9 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company may be subject to the net operating loss utilization provisions of Section 162(m)382 of the Internal Revenue Code. The effect of an ownership change would be the imposition of an annual limitation on the use of NOL carry forwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. We have completed several analyses under Section 382 of the Code generally disallows a federalin the past which concluded that certain annual limitations exist. At December 31, 2022, the Company had $259.4 million of State NOLs which expire between 2023 and 2041, and had $14.3 million of foreign NOLs which do not expire.
Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax deductionprovisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2021, there were no uncertain positions. The Company’s U.S. federal and state net operating losses have occurred since its inception in 2005 and as such, tax years subject to public companiespotential tax examination could apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing authorities. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. The Company did not have any unrecognized tax benefits and has not accrued any interest or penalties through 2022, 2021 and 2020.
The Company considered the impact of the disallowance of certain incentive based compensation tax deductibility under Internal Revenue Code Section 162(m); however, to the extent an adjustment to the deferred tax asset is required the impact will be offset by a corresponding adjustment to the valuation allowance.
Note 5 – Accrued Expenses:
Accrued expenses are summarized as follows:
2022 | 2021 | |||||||
Accrued Compensation and Employee Related Costs | $ | 8,559 | $ | 6,934 | ||||
Accrued Construction Costs | 4,235 | — | ||||||
Accrued Chiller Cost | 4,106 | 2,050 | ||||||
Accrued Customer Consideration | 656 | 828 | ||||||
Accrued Freight | 2,705 | 1,547 | ||||||
Accrued Production Expenses | 3,755 | 1,862 | ||||||
Accrued Corporate and Marketing Expenses | 3,794 | 1,081 | ||||||
Accrued Interest | 922 | — | ||||||
Other Accrued Expenses | 4,284 | 648 | ||||||
Accrued Expenses | $ | 33,016 | $ | 14,950 | ||||
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 6 – Debt:
On February 19, 2021, the Company entered into the Sixth Amended and Restated Loan and Security Agreement ("Sixth Amendment"), which amended and restated in full the Company's Fifth Amended and Restated Loan and Security Agreement, dated as of April 17, 2020. The Sixth Amendment provides for annual compensation over $1 million (per individual) paida $350,000 senior secured credit facility (as amended the "Credit Facility"), encompassing a $300,000 delayed draw term loan facility (the "Delayed Draw Facility") and a $50,000 revolving loan facility (the "Revolving Loan Facility"), which replaced the Company's prior $130,000 delayed draw term loan facility and $35,000 revolving loan facility.
The Credit Facility matures on February 19, 2026 and borrowings thereunder bear interest at variable rates depending on the Company's election, either at a base rate or at the adjusted term SOFR (which rate shall be calculated based upon a one-month tenor in effect on such date and shall be determined on a daily basis), in each case, plus an applicable margin. Subject to their chief executive officer, chief financial officer,the Company's leverage ratio, the applicable margin varies between 0.75% and 2.25% for base rate loans and 1.75% and 3.25% for SOFR loans. The Company has the option to borrow term loans under the Delayed Draw Facility ("Delayed Draw Term Loans") until August 19, 2023, subject to certain conditions. As of August 19, 2022, the amount of any outstanding Delayed Draw Term Loans shall be repayable in equal consecutive quarterly installments equal to 1/28th of the total single term loan ("the Initial Combined Delayed Draw Term Loan"). Commencing on August 19, 2023, the amount of any outstanding Delayed Draw Term Loans, combined with the Initial Combined Delayed Draw Term Loan, shall be repayable in equal consecutive quarterly installments equal to 1/28th of the outstanding Delayed Draw Term Loans and the next three most highly compensated executive officers (asremainder shall be due and payable on February 19, 2026.
Borrowings under the Credit Facility are secured by substantially all of the Company's and certain of its subsidiaries' assets. The Sixth Amendment requires compliance with various covenants customary for agreements of this type, including financial covenants and negative covenants that limit, among other things, the Company's ability to incur additional debt, create or incur liens, engage in mergers or consolidations, sell, transfer or otherwise dispose of assets, make voluntary prepayments to subordinated debt, permit a change of control, pay dividends or distributions, make investments, and enter into certain transaction with affiliates. The Sixth Amendment also includes events of default customary for agreements of this type.
During 2022, the Company borrowed and repaid $78,000 under the Delayed Draw Facility. Any prepayments of the Delayed Draw Facility under the agreement may not be reborrowed. As of September 30, 2022, the Company was not in compliance with the total funded debt ratio and the fixed charge coverage ratio financial covenants associated with the Credit Facility. The lenders under the Credit Facility consented to such covenants not being tested as of September 30, 2022. At the time such consent was granted, the Company repaid in full the $75,214 outstanding amount under the Delayed Draw Facility. As of December 31, 2022, the Company was in compliance with the total funded debt ratio and the fixed charge coverage ratio financial covenants associated with the Credit Facility, though the Company cannot provide assurance that it will remain in compliance with such covenants. If not in compliance all outstanding debt within the Credit Facility would be due and the borrower has the option to provide a waiver or terminate the Credit Facility.
As of December 31, 2022, the Company had no debt outstanding under the Credit Facility. The Credit Facility includes a quarterly commitment fee on any unused amounts at a per annum rate between 0.30% to 0.50% depending on the aggregate principal outstanding.
In connection with entering into the Sixth Amendment, the Company incurred $3,166 of debt issuance cost, which are capitalized on the balance sheet and amortized over the life of the facility, and wrote off $485 of fees incurred from the prior credit facilities.
As of December 31, 2022 and 2021, there was a total of $2,478 and $3,272 of debt issuance cost from the Credit Facility as well as fees incurred from the prior credit facilities applied to the Credit Facility under ASC 835-30 along with ASU 2015-03. As of December 31, 2022 and 2021 there was $1,685 and $2,478, respectively, of debt issuance costs recorded in other assets, and $793 and $793, respectively, recorded in other current assets.
On April 29, 2022, the Company entered into the First Amendment to the Sixth Amendment, which amendment, among other things, (i) made amendments to allow for the Company's projected capital expenditures without either triggering mandatory prepayment obligations or violating the covenant and (ii) replaced the LIBOR interest rate for U.S. dollar loans to a term Secured Overnight Financing Rate ("Term SOFR").
Interest expense and fees totaled $5,208, $2,882 and $1,212 in 2022,2021 and 2020, respectively. There was $904 of accrued interest on the credit facilities as of December 31, 2022, no accrued interest on the credit facilities as of December 31, 2021, and $135 of accrued interest on the credit facilities as of December 31, 2020.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 7 – Commitments and Contingencies
Commitments – The Company’s obligations include leases for office space under non-cancelable operating leases, manufacturing processing and utility servicing that expire at various dates through April 1, 2027.
Leases:
We have various noncancellable lease agreements for office and warehouse space, as well as office equipment, with original remaining lease terms of two years to five years, some of which include an option to extend the lease term for up to five years. Because the Company is not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments. The Company’s leases generally do not include termination options for either party to the lease or restrictive financial or other officers whocovenants.
Weighted-average remaining lease term (in years) and discount rate related to operating leases were covered employees in years after 2016). The 2017 Tax Act eliminatedas follows:
As of December 31, | ||||||||
2022 | 2021 | |||||||
Weighted-average remaining lease term | 3.61 | 4.51 | ||||||
Weighted-average discount rate | 6.2 | % | 6.2 | % | ||||
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the exceptionsinformation available at the commencement date to determine the present value of lease payments.
Costs related to lease obligations for 2022 and 2021 were as follows:
For the Twelve Months Ended December 31, | ||||||||
2022 | 2021 | |||||||
Operating lease cost | $ | 1,752 | $ | 1,779 | ||||
Supplemental cash flow information and non-cash activity relating to operating leases are as follows:
For the Twelve Months Ended December 31, | ||||||||
2022 | 2021 | |||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 1,764 | $ | 1,753 | ||||
As of December 31, 2022, future minimum payments due under lease obligations for five years were as follows:
Operating Lease Obligations | As of December 31, 2022 | |||
2023 | $ | 1,802 | ||
2024 | 1,511 | |||
2025 | 1,210 | |||
2026 | 1,239 | |||
2027 and beyond | 337 | |||
Total lease payments | $ | 6,099 | ||
Less: Imputed interest | (389 | ) | ||
Present value of lease liabilities | $ | 5,710 | ||
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
As of December 31, 2022, future minimum payments due under manufacturing and service obligations for five years were as follows:
Manufacturing and Servicing Obligations | December 31, 2022 | |||
2023 | $ | 3,288 | ||
2024 | 4,783 | |||
2025 and beyond | 712 | |||
Total Manufacturing and Servicing Obligations | $ | 8,783 | ||
Certain of the Company’s executives are covered by employment contracts requiring the Company to pay severance in the event of certain terminations.
Legal Obligations:
We are currently involved in various claims and legal actions that arise in the ordinary course of our business, including claims resulting from employment related matters. None of these claims or proceedings, most of which are covered by insurance, are expected to have a material adverse effect on our business, financial condition, results of operations or cash flows. However, a significant increase in the $1 million deduction limit, exceptnumber 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 certain arrangements in placethe Eastern District of Pennsylvania (Allentown Division) for damages allegedly sustained as of November 2, 2017. As a result most of the compensation payable to our NEOstermination 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 $1 million per person in$8,300 based on a year will not be fully deductible.
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.
On November 14, 2022, the discovery deadline was extended until March 31, 2023.
As a publicly traded company,of December 31, 2022, due to the claims and counterclaims between the parties, the Company reclassified the amounts due from Phillips of $8,971 to other noncurrent assets.
Based on information currently available and advice of counsel, we are subject to SEC rules regarding risk assessment. Those rules require a publicly traded company to determine whetherdo not believe that the outcome of any of its existing incentive compensation plans, programs, or arrangements create risks that are reasonablythis 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.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 8 – Warrants:
In connection with an agreement to 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 194 thousand shares of voting common stock of the Company at a purchase price of $0.01 per share. The Company determined these warrants are accounted for under FASB ASC 718 Stock Compensation. The warrants were recorded as a prepaid expense as the warrants were exercisable at the grant date. The prepaid expense will be amortized within Cost of Goods Sold as services are provided by the supplier. As of December 31, 2022 there were $5,750 of warrants in prepaid expense and $1,438 of warrants in other assets.
During 2022, 194 thousand warrants were both issued and exercised, respectively. The grant date fair value of warrants granted during 2022 was $50.32 per share.
Warrants Assumptions
Fair value of the warrants at September 30, 2022 was based on the Black Scholes Option Pricing Model, which is based, in part, upon level 3 unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions.
The Company used the following assumptions for its warrants:
Expected Volatility - Expected volatility was based on the historical volatility of the Company's common stock.
Exercise Price of Warrants Granted - The Company determined the exercise price pursuant to the terms of the warrant agreement of $0.01 per share.
Risk-Free Interest Rate - The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term in effect at the time of the warrant issuance.
Expected Dividend Yield - The Company has not historically declared dividends, and no future dividends are expected to be available to benefit warrant holders at the time of warrant issuance. Accordingly, the Company used an expected dividend yield of zero in the valuation model.
A summary of warrants assumptions as of December 31, 2022 was as follows:
As of September 30, | ||||
2022 | ||||
Exercise price of warrants granted | $ | 0.01 | ||
Expected volatility | 52.5 | % | ||
Expected terms in years | 0.0 | |||
Risk-free interest rate | 3.9 | % | ||
Expected dividend yield | 0.0 | % | ||
Total amortization associated with partner warrants during 2022 was $2,587.
Note 9 – Equity Incentive Plans and Equity:
Total compensation cost for share-based payments recognized in 2022,2021 and 2020 was approximately $23,505, $24,998 and $10,925, respectively. Cost of goods sold in 2022,2021 and 2020 included share-based compensation of approximately $4,706, $4,152 and $2,132, respectively. Selling, general, and administrative expense in 2022,2021 and 2020 included share-based compensation of approximately $18,799, $20,846 and $8,793, respectively. Capital expenditures recorded for the Freshpet Kitchens expansion project included no share-based compensation during 2022 and approximately $71 and $232 during 2021 and 2020, respectively.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The Company maintains the approved 2010 Stock Plan(the "2010 Plan") under which options to purchase shares of the Company’s common stock were granted to employees and affiliates of the Company. These options are either time-based (vest over four years), performance-based (vest when performance targets are met, as defined in the stock option grant agreement), or vest at the occurrence of an exit event which is defined as a Change of Control in the Company, as defined in the stock grant agreement.
The options granted have maximum contractual terms of 10 years. The Board of Directors froze the 2010 Stock Plan such that no further grants may be issued under the 2010 Stock Plan.
The Company maintains the approved 2014 Omnibus Incentive Planunder which shares of common stock may be issued or used for reference purposes as awards granted under the 2014 Plan. These awards may be in the form of stock options, stock appreciation rights, restricted stock, as well as other stock-based and cash-based awards. As of December 31, 2022, the awards granted were either time-based (cliff vest over three years), performance-based (vest when performance targets are met, as defined in the stock option grant agreement), or restricted stock units (employee RSUs cliff vest over three years and non-employee director RSUs cliff vest over one year).
NASDAQ Marketplace Rules Inducement Award—During 2016, 500,000 service period stock options and 500,000 performance-based stock options were granted to the Company’s CEO as an inducement under the NASDAQ Marketplace Rules.
During 2020, as an inducement under the NASDAQ Marketplace Rules, and therefore outside of any Plan, 15,000 service period stock options were granted to the Executive Vice President of Finance who later served as the Company's Chief Financial Officer until September 2022. Upon her departure 5,000 of the service period stock awards were forfeited.
During 2022, as an inducement under the NASDAQ Marketplace Rules, and therefore outside of any Plan, 40,120 service period stock options and 22,381 restricted stock units were granted to the Company's CFO.
Under the terms of the applicable agreement, each grant is governed as if issued under the 2014 Omnibus Plan. The awards granted are time-based (cliff vest over four years or three years) and performance-based (vest when performance targets are met, as defined in the stock option grant agreement).
Service Period Stock Options—A summary of service period stock options outstanding and changes under the plans during the year ended December 31, 2022 is presented below:
Options | Shares | Weighted Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
Outstanding at December 31, 2021 | 1,287 | $ | 50.37 | |||||||||||||
Granted | 40 | 67.02 | ||||||||||||||
Exercised | (9 | ) | 76.07 | |||||||||||||
Forfeited | (27 | ) | 62.08 | |||||||||||||
Outstanding at December 31, 2022 | 1,291 | $ | 51.63 | 5.41 | $ | 33,958 | ||||||||||
Exercisable at December 31, 2022 | 1,040 | $ | 32.61 | 4.69 | $ | 33,958 | ||||||||||
As of December 31, 2022, there was $14,411 of total unrecognized compensation costs related to non-vested service period options, of which $5,321 will be incurred in 2023, $8,470 will be incurred in 2024 and the remaining $620 will be incurred in 2025.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Performance Based Options—Performance based option vesting is contingent upon the Company achieving certain annual Net Sales or Adjusted EBITDA goals. A summary of performance-based stock options outstanding and changes under the plans in 2022 is presented below:
Options | Shares | Weighted Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
Outstanding at December 31, 2021 | 2,067 | $ | 74.71 | |||||||||||||
Granted | - | - | ||||||||||||||
Exercised | (35 | ) | 84.45 | |||||||||||||
Forfeited | (107 | ) | 73.80 | |||||||||||||
Outstanding at December 31, 2022 | 1,925 | $ | 75.50 | 6.00 | $ | 36,989 | ||||||||||
Exercisable at December 31, 2022 | 1,107 | $ | 19.53 | 4.69 | $ | 36,989 | ||||||||||
As of December 31, 2022, there was approximately $19,779 of total unrecognized compensation costs related to performance-based awards for which the achievement of the vesting criteria is considered probable, of which $9,926 will be incurred in 2023 and the remaining $9,853 will be incurred in 2024.
As of December 31, 2022, there were 311 unvested performance-based options outstanding that were deemed not probable, with an aggregate fair value of $22,775.
Service Period Restricted Stock Units—The following table includes activity related to outstanding restricted stock units in 2022.
Shares | Weighted-Average Grant-Date Fair Value Per Unit | |||||||
Outstanding at December 31, 2021 | 103 | $ | 96.18 | |||||
Granted | 230 | 67.99 | ||||||
Exercised/Vested | (47 | ) | 112.57 | |||||
Forfeited | (8 | ) | 105.62 | |||||
Outstanding at December 31, 2022 | 278 | $ | 74.52 | |||||
As of December 31, 2022, there was approximately $13,108 of total unrecognized compensation costs related to restricted stock units, of which $6,537 will be incurred in 2023, $4,276 will be incurred in 2024, $2,295 will be incurred in 2025, and $1,328 will be incurred in 2026.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Performance Based Restricted Stock Units—The following table includes activity related to outstanding restricted stock units in 2022.
Shares | Weighted-Average Grant-Date Fair Value Per Unit | |||||||
Outstanding at December 31, 2021 | 22 | $ | 111.65 | |||||
Granted | 158 | 57.52 | ||||||
Forfeited | (4 | ) | 113.33 | |||||
Outstanding at December 31, 2022 | 176 | $ | 63.01 | |||||
As of December 31, 2022, there was approximately $9,459 of total unrecognized compensation costs related to performance-based restricted stock units for which the achievement of the vesting criteria is considered probable, of which $3,456 will be incurred in 2023, $3,402 will be incurred in 2024 and the remaining $2,600 will be incurred in 2025.
Grant Date Fair Value of Options—The weighted average grant date fair value of options (service period options and performance based options) granted during in 2022,2021 and 2020 were $37.39, $74.90 and $68.93 per share, respectively.
Expected Volatility—Expected volatility was based on the historical volatility of the Company’s common stock.
Weighted Average Expected Term—The Company determined the expected term based on the “shortcut method” described in FASB ASC 718, Compensation—Stock Compensation (an expected term based on the midpoint between the vesting date and the end of the contractual term).
Risk-Free Interest Rate—The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Expected Dividend Yield—The Company has not historically declared dividends, and no future dividends are expected to be available to benefit option holders. Accordingly, the Company used an expected dividend yield of zero in the valuation model.
Year Ended December 31, | |||||||||
2022 | 2021 | 2020 | |||||||
Weighted average exercise price of options granted | $ 67.02 | $ 155.00 | $ 135.55 | ||||||
Expected volatility | 52.5% | 50.4% | 46.9% - 51.5% | ||||||
Average expected terms in years | 6.5 | 6.1 | 5.8 - 7 | ||||||
Risk-free interest rate | 3.8% | 1.1% | 0.3% - 1.69% | ||||||
Expected dividend yield | 0.0% | 0.0% | 0.0% | ||||||
Note 10 – Earnings Per Share Attributable to Common Stockholder:
Basic net earnings (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net earnings (loss) per share of common stock is computed by giving effect to all potentially dilutive securities. Diluted net loss per common share is the same as basic net loss per common share, due to the fact that potentially dilutive securities would have an antidilutive effect as the Company incurred a net loss in 2022,2021 and 2020.
In 2022,2021 and 2020, there were no reconciling items between Net Loss/Income and Net Loss attributable to common stockholders.
The potentially dilutive securities excluded from the determination of diluted loss per share, as their effect is antidilutive, are as follows:
Twelve Months Ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Service Period Stock Options | 1,291 | 1,291 | 1,356 | |||||||||
Restricted Stock Units | 275 | 173 | 190 | |||||||||
Performance Stock Options | 1,107 | 972 | 1,009 | |||||||||
Total | 2,673 | 2,437 | 2,555 | |||||||||
Note 11 – Retirement Plan:
The Company sponsors a safe harbor 401(k) plan covering all employees. All employees are eligible to participate. Active participants in the plan may make contributions of up to 50% of their compensation, subject to certain limitations. Company contributions totaled approximately $2,297 in 2022, $1,829 in 2021 and $1,416 in 2020.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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 up to $250,000 each. At times, such balances may be in excess of the FDIC insurance limit.
Major Customers—In 2022, 2021 and 2020, net sales to one of our distributors accounted for 8%, 16% and 18% of our net sales, respectively. In 2022, one customer accounted for more than 10% of our net sales, while in 2021 and 2020, no customers accounted for 10% of our net sales. As of December 31, 2022, two distributors and two customers accounted for 15%, 6%, 26% and 11% respectively, of our accounts receivable. As of December 31, 2021, two distributors and two customers accounted for 20%, 10%, 14% and 13%, respectively, of our account receivable.
Major Suppliers—The Company purchased approximately 33% of its raw materials from one vendor during 2022, approximately 21% of its raw materials from one vendor during 2021, and approximately 23% of its raw materials from one vendor during 2020.
The Company purchased approximately 91% of its packaging material from five vendors during 2022, 84% of its packaging material from five vendors during 2021, and approximately 88% of its packaging material from five vendors during 2020.
Note 13 – 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 have required adjustment or disclosure in the financial statements.
ITEM 9. — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We do not believemaintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our incentive compensation plans, programs,Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its Internal Control-Integrated Framework (2013). This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this assessment, management concluded that as of December 31, 2022, the Company’s internal control over financial reporting was effective.
Our independent registered public accounting firm that audited the consolidated financial statements included in this annual report has issued an audit report on the effectiveness of our internal control over financial reporting, which is included within "Item 8. Financial Statements and Supplementary Data" under section "Report of Independent Registered Public Accounting Firm".
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act during the period covered by this Annual Report on Form 10-K that materially affected, or arrangements create risks that are reasonably likely to havematerially affect, our internal control over financial reporting.
We transitioned to a material adverse effect on Freshpet.
Inherent Limitations on Effectiveness of Controls
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 following table sets forthdesign of any system of controls also is based in part upon certain assumptions about the compensation for 2020 for each NEO. Compensation information for 2019likelihood of future events, and 2018 is presented for individuals who were also our NEOsthere can be no assurance that any design will succeed in those years.
Name and Principal Position | Year | Salary ($)(1) | Options ($)(2) | Non-Equity Incentive Plan Compensation ($)(3) | All Other Compensation ($)(4) | Total ($) | |
William B. Cyr(5) | 2020 | 600,000 | 14,701,112(6) | 545,940 | 11,400 | 15,858,452 | |
| Chief Executive Officer | 2019 | 600,000 | — | 555,750 | 11,200 | 1,166,950 | |
| 2018 | 600,000 | — | 562,500 | 53,486 | 1,215,986 | ||
Scott Morris | 2020 | 475,000 | 11,342,468(7) | 288,135 | 11,400 | 12,117,003 | |
| President and | 2019 | 415,000 | — | 311,220 | 11,200 | 737,420 | |
| Chief Operating Officer | 2018 | 400,000 | — | 300,000 | 11,000 | 711,000 | |
Heather Pomerantz Chief Financial Officer | 2020 | 400,000 | 7,972,163(8) | 196,106 | 9,846 | 8,578,115 | |
Stephen L. Weise | 2020 | 285,000 | 7,450,526(9) | 112,254 | 11,400 | 7,859,180 | |
| Executive Vice President, | 2019 | 279,375 | 140,568 | 139,555 | 11,200 | 570,698 | |
| Operations | 2018 | 270,000 | 305,099 | 135,000 | 11,000 | 721,099 | |
Cathal Walsh | 2020 | 285,000 | 3,204,674 | 103,767 | — | 3,593,441 | |
| Managing Director Europe | 2019 | 333,269 | 139,846 | 119,949 | — | 593,064 | |
| 2018 | 312,394 | 132,835 | 117,031 | — | 562,260 | ||
Richard Kassar | 2020 | 282,000(10) | 166,656 | 80,880 | 11,400 | 540,936 | |
| Vice Chairman, formerly | 2019 | 310,000 | 227,816 | 192,969 | 11,200 | 741,985 | |
| Chief Financial Officer | 2018 | 302,500 | 508,489 | 189,063 | 11,000 | 1,011,052 | |
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth certain information with respect to grants of plan-based awards to our NEOs during 2020. Please see “Annual Incentive Awards” in the CD&A above for additional information about the non-equity incentive plan awards reflected in the table below. Please see the “Outstanding Equity Awards at Fiscal Year-End” table below for additional information about the vesting parameters that are applicable to equity awards reflected in the table immediately below.
Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | ||||||||||
Name | Award Type | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) |
| William B. Cyr | Annual Incentive | — | — | 540,000 | — | — | — | — | — | — | — |
| Performance-Vesting Options | 12/24/2020 | — | — | — | 82,032 | 205,079 | 205,079 | — | 142.79 | 14,950,259 | |
| Time-Vesting Options | 12/24/2020 | — | — | — | — | — | — | 68,360 | 142.79 | 4,983,444 | |
| Scott Morris | Annual Incentive | — | — | 285,000 | — | — | — | — | — | — | — |
| Performance-Vesting Options | 12/24/2020 | — | — | — | 61,524 | 153,809 | 153,809 | — | 142.79 | 11,212,676 | |
| Time-Vesting Options | 12/24/2020 | — | — | — | — | — | — | 51,270 | 142.79 | 3,737,583 | |
| Performance-Vesting Options | 4/1/2020 | — | — | — | 1,302 | 7,809 | 7,809 | — | 63.87 | 79,161 | |
| Time-Vesting Options | 4/1/2020 | — | — | — | — | — | — | 7,809 | 63.87 | 237,484 | |
| Heather Pomerantz | Annual Incentive | — | — | 193,972 | — | — | — | — | — | — | — |
| Performance-Vesting Options | 12/24/2020 | — | — | — | 41,016 | 102,539 | 102,539 | — | 142.79 | 7,475,093 | |
| Time-Vesting Options | 12/24/2020 | — | — | — | — | — | — | 34,180 | 142.79 | 2,491,722 | |
| Performance-Vesting Options | 4/1/2020 | — | — | — | 822 | 4,932 | 4,932 | — | 63.87 | 149,990 | |
| Time-Vesting Options | 4/1/2020 | — | — | — | — | — | — | 4,932 | 63.87 | 49,997 | |
| Time-Vesting Options | 1/12/2020 | — | — | — | — | — | — | 15,000 | 60.70 | 421,644 | |
| Stephen L. Weise | Annual Incentive | — | — | 114,000 | — | — | — | — | — | — | — |
| Performance-Vesting Options | 12/24/2020 | — | — | — | 41,016 | 102,539 | 102,539 | — | 142.79 | 7,475,093 | |
| Time-Vesting Options | 12/24/2020 | — | — | — | — | — | — | 34,180 | 142.79 | 2,491,722 | |
| Performance-Vesting Options | 4/1/2020 | — | — | — | 411 | 2,466 | 2,466 | — | 63.87 | 24,998 | |
| Time-Vesting Options | 4/1/2020 | — | — | — | — | — | — | 2,466 | 63.87 | 74,995 | |
| Cathal Walsh | Annual Incentive | — | — | 99,750 | — | — | — | — | — | — | — |
| Performance-Vesting Options | 10/1/2020 | — | — | — | 20,000 | 20,000 | 20,000 | — | 111.65 | 1,110,794 | |
| Time-Vesting Options | 10/1/2020 | — | — | — | — | — | — | 35,000 | 111.65 | 1,943,890 | |
| Time-Vesting Options | 4/1/2020 | — | — | — | — | — | — | 4,932 | 63.87 | 149,990 | |
| Richard Kassar | Annual Incentive | — | 80,000 (1) | — | — | — | |||||
| Performance-Vesting Options | 4/1/2020 | — | — | — | 685 | 4,110 | 4,110 | — | 63.84 | 41,664 | |
| Time-Vesting Options | 4/1/2020 | — | — | — | — | — | — | 4,110 | 63.87 | 124,992 | |
Name | Grant Date | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Underlying Unexercised Options Unexercisable (#) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | |||||||||||||
| William B. Cyr | 9/6/2016 | 1,000,000 | — | — | 10.23 | 9/6/2026 | |||||||||||||
| 12/24/2020 | — | 68,360 | (1) | 205,079 | (2) | 142.79 | 12/24/2030 | ||||||||||||
| Scott Morris | 9/27/2016 | 133,000 | — | — | 9.05 | 9/27/2026 | |||||||||||||
| 4/3/2017 | 82,790 | — | — | 11.00 | 4/3/2027 | ||||||||||||||
| 4/1/2020 | 2,603 | 7,809 | (3) | 5,206 | (4) | 63.87 | 4/1/2030 | ||||||||||||
| 12/24/2020 | — | 51,270 | (1) | 153,809 | (2) | 142.79 | 12/24/2030 | ||||||||||||
| Heather Pomerantz | 1/12/2020 | — | 15,000 | (3) | — | 60.70 | 1/12/2030 | ||||||||||||
| 4/1/2020 | 1,644 | 4,932 | (3) | 3,288 | (4) | 63.87 | 4/1/2030 | ||||||||||||
| 12/24/2020 | — | 34,180 | (1) | 102,539 | (2) | 142.79 | 12/24/2030 | ||||||||||||
| Stephen L. Weise | 5/10/2016 | 26,945 | — | — | 9.05 | 5/10/2026 | |||||||||||||
| 9/27/2016 | 53,200 | — | — | 8.90 | 9/27/2026 | ||||||||||||||
| 4/3/2017 | 23,173 | — | — | 11.00 | 4/3/2027 | ||||||||||||||
| 3/30/2018 | 13,409 | 2,683 | (5) | — | 16.45 | 3/30/2028 | |||||||||||||
| 4/1/2019 | 3,531 | 2,357 | (6) | 1,178 | (4) | 42.29 | 4/1/2029 | ||||||||||||
| 4/1/2020 | 822 | 2,466 | (3) | 1,644 | (4) | 63.87 | 4/1/2030 | ||||||||||||
| 12/24/2020 | — | 34,180 | (1) | 102,539 | (2) | 142.79 | 12/24/2030 | ||||||||||||
| Cathal Walsh | 5/10/2016 | 20,463 | — | — | 9.05 | 5/10/2026 | |||||||||||||
| 4/3/2017 | 23,173 | — | — | 11.00 | 4/3/2027 | ||||||||||||||
| 3/30/2018 | 10,726 | 5,366 | (5) | — | 16.45 | 3/30/2028 | |||||||||||||
| 4/1/2019 | 2,273 | 4,547 | (6) | — | 42.29 | 4/1/2029 | |||||||||||||
| 4/1/2020 | — | 4,932 | (3) | — | 63.87 | 4/1/2030 | |||||||||||||
| 10/1/2020 | — | 35,000 | (7) | 111.65 | 10/1/2030 | ||||||||||||||
| 10/1/2020 | — | — | 20,000 | (8) | — | 10/1/2030 | |||||||||||||
| Richard Kassar | 9/27/2016 | 79,800 | — | — | 8.90 | 9/27/2026 | |||||||||||||
| 4/3/2017 | 18,940 | — | — | 11.00 | 4/3/2027 | ||||||||||||||
| 3/30/2018 | 9,723 | — | 4,471 | (4) | 16.45 | 3/30/2028 | |||||||||||||
| 4/1/2019 | 5,722 | 3,817 | (6) | 1,908 | (4) | 42.29 | 4/1/2029 | ||||||||||||
| 4/1/2020 | 1,370 | 4,110 | (3) | 2,740 | (4) | 63.87 | 4/1/2030 | ||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | ||||||
| William B. Cyr | — | — | ||||||
| Scott Morris | 24,163 | 2,091,135 | ||||||
| Heather Pomerantz | — | — | ||||||
| Stephen L. Weise | 10,000 | 810,677 | ||||||
| Cathal Walsh | 48,523 | 3,176,672 | ||||||
| Richard Kassar | 10,000 | 619,906 | ||||||
Name | Cash and COBRA ($)(1)(2) | Equity ($)(3) | Total ($) |
William B. Cyr | |||
| Termination due to permanent disability | 48,510 | — | 48,510 |
| Involuntary termination (4) | 2,565,000 | — | 2,565,000 |
| Change in control | — | — | — |
| Involuntary termination after change in control | 2,565,000 (5) | — | 2,565,000 |
Scott Morris | |||
| Termination due to permanent disability | 507,340 | — | 507,340 |
| Involuntary termination (4) | 792,340 | — | 792,340 |
| Change in control | — | — | — |
| Involuntary termination after change in control | 792,340 (5) | 610,039 | 1,402,379 |
Heather Pomerantz | |||
| Termination due to permanent disability | — | — | — |
| Involuntary termination (4) | — | — | — |
| Change in control | — | — | — |
| Involuntary termination after change in control | — | 406,450 | 406,450 |
Stephen L. Weise | |||
| Termination due to permanent disability | 308,144 | — | 308,144 |
| Involuntary termination (4) | 422,144 | — | 422,144 |
| Change in control | — | — | — |
| Involuntary termination after change in control | 422,144 (5) | 764,461 | 1,186,605 |
Cathal Walsh | |||
| Termination due to permanent disability | 317,340(6) | — | 317,340 |
| Involuntary termination (4) | 417,090(6) | — | 417,090 |
| Change in control | — | 1,668,700 (7) | 1,668,700 |
| Involuntary termination after change in control | 417,090 (5) | 2,574,171 (7) | 2,991,261 |
Richard Kassar | |||
| Termination due to permanent disability | 183,144 | — | 183,144 |
| Involuntary termination (4) | 263,144 | — | 263,144 |
| Change in control | — | — | — |
| Involuntary termination after change in control | 263,144 (5) | 701,628 | 964,772 |
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be realized in subsequent years, Mr. Cyr's realized compensation for 2020filed (and is $2,318,449, approximately 38:1 timeshereby incorporated by reference) by an amendment hereto or pursuant to a definitive proxy statement pursuant to Regulation 14A that of the median of the annual total compensation of all of our employees.
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | Total ($) |
| Charles A. Norris (2) | 80,000 | 90,000 | 170,000 |
| J. David Basto | 50,000 | 70,000 | 120,000 |
| Olu Beck | 50,000 | 70,000 | 120,000 |
| Daryl G. Brewster (3) | 57,500 | 70,000 | 127,500 |
| Lawrence S. Coben (4) | 55,625 | 70,000 | 125,625 |
| Walter N. George III (5) | 51,875 | 70,000 | 121,875 |
| Jacki S. Kelley | 50,000 | 70,000 | 120,000 |
| Robert C. King (6) | 37,500 | 70,000 | 107,500 |
| Leta D. Priest | 50,000 | 70,000 | 120,000 |
| Craig D. Steeneck (7) | 65,000 | 70,000 | 135,000 |
| William B. Cyr (8) | — | — | — |
Stock Ownership Guidelines for Non-Employee Directors
The following table shows information about the beneficial ownership of our common stock, as of April 19, 2021, by:
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
The numbers listed below are based on 43,258,748 shares of our common stock outstanding as of April 19, 2021. Unless otherwise indicated, the address of each individual listed ininformation required by this tableitem will be filed (and is c/o Freshpet, Inc., 400 Plaza Drive, 1st Floor, Secaucus, New Jersey 07094.
Name and Address of Beneficial Owner (1) | Amount and Nature of Beneficial Ownership | Percent of Common Stock Outstanding | ||
Principal Stockholders: | ||||
| Blackrock, Inc. (2) | 4,075,905 | 9.4% | ||
| The Vanguard Group, Inc. (3) | 3,673,108 | 8.5% | ||
Named Executive Officers and Directors: | ||||
| William B. Cyr (4) | 1,075,532 | 2.5% | ||
| Charles A. Norris (5) | 588,741 | 1.4% | ||
| J. David Basto | 28,612 | * | ||
| Olu Beck | 2,948 | * | ||
| Daryl G. Brewster | 51,226 | * | ||
| Lawrence S. Coben | 48,203 | * | ||
| Walter N. George III | 41,641 | * | ||
| Jacki S. Kelley | 5,031 | * | ||
| Craig D. Steeneck | 25,849 | * | ||
| Leta D. Priest | 6,105 | * | ||
| Scott Morris | 241,717 | * | ||
| Heather Pomerantz | 7,644 | * | ||
| Cathal Walsh | 56,635 | * | ||
| Richard Kassar (6) | 201,188 | * | ||
| Stephen L. Weise | 67,879 | * | ||
Executive Officers and Directors as a Group (17 persons) (7) | 2,559,643 | 5.9% | ||
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm is KPMG LLP, Short Hills, NJ, Auditor ID: 185.
The information required by this item will be filed (and is hereby incorporated by reference) by an amendment hereto or pursuant to a definitive proxy statement pursuant to Regulation 14A that will contain such information.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights (#) (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights ($) (b)(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (#) (c) |
| Equity Compensation Plans Approved by Security Holders | 2,631,697 (2) | 78.15 | 908,433 |
| Equity Compensation Plans Not Approved by Security Holders | 1,015,000 (3) | 10.98 | — |
| Total | 3,646,697 | $59.45 | 908,433 |
| 2020 | 2019 | |||||||
| Audit Fees (1) | $ | 858,500 | $ | 737,000 | ||||
| Audit-Related Fees (2) | 170,000 | 96,500 | ||||||
| Tax Fees | — | — | ||||||
| All Other Fees (3) | 1,897 | 1,780 | ||||||
| Total | $ | 1,030,397 | $ | 835,280 | ||||
The following documents are filed as a part of this report:
(1) Financial Statements – See Index to the Consolidated Financial Statements appearing on page 47.
(2) Financial Statement Schedules – None.
(3) Exhibits – The exhibits listed on the accompanying Exhibit Index are furnished, filed or incorporated by reference as part of this report.
None.
EXHIBIT INDEX
Exhibit No. | Description | |
3.1 | ||
3.2 | |
4.1* | |
10.1 | |
| 10.2+ | |
| 10.3+ | |
10.4+ | |
10.5+ | |
10.6+ | |
10.7+ | |
10.8+ | |
10.9+ | |
10.10+ | |
| 10.11*+ | |
| Exhibit No. | Description | |
| 10.20+ | ||
| 10.21+ | ||
| 10.22 | ||
21.1* | ||
23.1* | ||
31.1* | ||
31.2* | ||
32.1* | ||
101.INS* | ||
Inline XBRL Instance Document | ||
101.SCH* | ||
Inline XBRL Schema Documents | ||
101.CAL* | ||
Inline XBRL Calculation Linkbase Document | ||
101.LAB* | ||
Inline XBRL Labels Linkbase Document | ||
101.PRE* | Inline XBRL Presentation Linkbase Document | |
101.DEF* | Inline XBRL Definition Linkbase Document | |
EX-104 | Inline XBRL Formatted Cover Page (formatted as Inline XBRL and contained in Exhibit 101). | |
* Filed herewith. **Furnished herewith. + Indicates a management contract or compensatory plan or agreement. | ||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on April 30, 2021.
FRESHPET, INC.
By: /s/ Todd Cunfer
Name: Todd Cunfer
Title: Chief Financial Officer
* * * *
Power of Attorney
Each person whose signature appears below constitutes and appoints Todd Cunfer as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2023.
Signature | Title | |||
/s/ | Chief Executive Officer and Director | |||
/s/ Todd Cunfer | Chief Financial Officer | |||
/s/ Charles A. Norris | Director | |||
/s/ J. David Basto | Director | |||
/s/ Daryl G. Brewster | Director | |||
/s/ Lawrence S. Coben | Director | |||
/s/ Walter N. George III | Director |
Signature | Title | |
/s/ Craig D. Steeneck | Director | |
/s/ Leta D. Priest Leta D. Priest | Director | |
| Director | ||
/s/ Jacki S. Kelley Jacki S. Kelley | ||
/s/ Olu Beck Olu Beck | Director |