UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, ~~2021~~2022

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

Commission File Number: 001-36729

FRESHPET, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

20-1884894

(State or other jurisdiction of

incorporation or organization)

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


400 Plaza Drive, 1^st Floor, Secaucus, New Jersey	07094

(Address of principal executive offices)

(Zip Code)

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

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	FRPT	NASDAQ Global Market

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

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

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of ~~July 30, 2021,~~August 4, 2022, the registrant had ~~43,360,020~~47,820,427 shares of common stock, $0.001 par value per share, outstanding.

TABLE OF CONTENTS

		Page No.
Part I. Financial Information		4
Item 1.	Financial Statements	4
	Consolidated Balance Sheets	5
	Consolidated Statements of Operations and Comprehensive ~~(Loss)~~Loss	5
	~~Changes to~~Consolidated Statements of Changes in Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial ~~Conditions~~Condition and Results of Operations	1615
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	3229
Item 4.	Controls and Procedures	3330
Part II. Other Information		3431
Item 1.	Legal Proceedings	3431
Item 1A.	Risk Factors	3431
Item 6.	Exhibits	3532

Forward-Looking Statements

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

	•	changes in global economic and financial market conditions generally, such as inflation and interest rate increases;
	•	the impact of various worldwide or macroeconomic events, such as the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine, on the U.S. and global economics, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations;
	•	our ability to successfully implement our growth ~~strategy;~~strategy, including related to implementing our marketing strategy and building capacity to meet demand, such as through the timely expansion of certain of our Freshpet Kitchens (as defined below);
	•	our ability to timely complete the construction at our Freshpet Kitchens South and Freshpet Kitchens Ennis (our Freshpet Kitchens Bethlehem, Freshpet Kitchens South and Freshpet Kitchens Ennis ~~together, our~~collectively, “Freshpet Kitchens") and achieve the anticipated benefits therefrom;

	•	~~the effect of the novel coronavirus (“COVID-19”)~~our ability to generate sufficient cash flow or raise capital on ~~our business, employees, suppliers, customers and end consumers;~~ acceptable terms;
	•	the loss of key members of our senior management team;

	•	allegations that our products cause injury or illness or fail to comply with government regulations;
	•	the loss of a significant customer;

	•	the entrance of new competitors into our industry;
	•	the effectiveness of our marketing and trade spending programs;

	•	our ability to introduce new products and improve existing products;
	•	our ability to match our manufacturing capacity with demand;

	•	the impact of government regulation, scrutiny, warnings and public perception;
	•	the effect of false marketing claims;

	•	adverse weather conditions, natural disasters, ~~pestilence~~pestilences and other natural conditions affecting our operations;
	•	our ability to meet our sustainability targets, goals, and commitments, including due to the impact of climate change;
	•	our ability to develop and maintain our brand;

	•	the effect of potential price increases and shortages on the inputs, commodities and ingredients that we ~~require;~~require, including those caused by inflation;
	•	our ability to manage our supply chain effectively;

	•	our ability to generate sufficient cash flow or raise capital on acceptable terms;
	•	volatility in the price of our common stock; and

•

other factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the headings "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FRESHPET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

	*June 30,*			*December 31,*			*June 30,*			*December 31,*
	*2021*			*2020*			*2022*			*2021*
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	280,323		$	67,247		$	307,345		$	72,788
Short-term investments								19,840			0
Accounts receivable, net of allowance for doubtful accounts		33,962			18,438			62,090			34,780
Inventories, net		24,597			19,119			60,679			35,574
Prepaid expenses		3,940			3,378			2,547			5,834
Other current assets		1,795			914			2,220			1,349
Total Current Assets		344,617			109,096			454,721			150,325
Property, plant and equipment, net		391,934			281,073			662,527			583,922
Deposits on equipment		3,747			3,710			1,084			4,100
Operating lease right of use assets		7,205			7,866			5,862			6,537
Equity method investment		27,276			27,894			27,123			25,856
Other assets		8,651			4,749			22,197			13,670
Total Assets	$	783,430		$	434,388		$	1,173,514		$	784,410
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	39,159		$	16,452		$	39,507		$	42,612
Accrued expenses		16,707			15,371			19,437			14,950
Current operating lease liabilities		1,336			1,298			1,446			1,384
Current portion of long-term debt								10,449			0
Total Current Liabilities	$	57,202		$	33,121		$	70,839		$	58,946
Long term debt								65,036			0
Long term operating lease liabilities		6,417			7,098			4,971			5,710
Total Liabilities	$	63,619		$	40,219		$	140,846		$	64,656
STOCKHOLDERS' EQUITY:
Common stock — voting, $0.001 par value, 200,000 shares authorized, 43,373 issued and 43,359 outstanding on June 30, 2021, and 40,732 issued and 40,718 outstanding on December 31, 2020		43			41
Common stock — voting, $0.001 par value, 200,000 shares authorized, 47,834 issued and 47,820 outstanding on June 30, 2022, and 43,449 issued and 43,435 outstanding on December 31, 2021								48			43
Additional paid-in capital		944,222			600,388			1,305,260			955,710
Accumulated deficit		(224,287	)		(205,924	)		(273,751	)		(235,623	)
Accumulated other comprehensive income (loss)		89			(80	)		1,367			(120	)
Treasury stock, at cost — 14 shares on June 30, 2021 and on December 31, 2020		(256	)		(256	)
Treasury stock, at cost — 14 shares on June 30, 2022 and on December 31, 2021								(256	)		(256	)
Total Stockholders' Equity		719,811			394,169			1,032,668			719,754
Total Liabilities and Stockholders' Equity	$	783,430		$	434,388		$	1,173,514		$	784,410

See accompanying notes to the unaudited consolidated financial statements.

FRESHPET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE ~~(LOSS)~~LOSS

(Unaudited, in thousands, except per share data)

	*For the Three Months Ended*						*For the Six Months Ended*						*For the Three Months Ended*						*For the Six Months Ended*
	*June 30,*						*June 30,*						*June 30,*						*June 30,*
	*2021*			*2020*			*2021*			*2020*			*2022*			*2021*			*2022*			*2021*
NET SALES	$	108,616		$	79,980		$	202,029		$	150,078		$	146,007		$	108,616		$	278,179		$	202,029
COST OF GOODS SOLD		65,525			46,047			122,624			84,355			94,927			65,525			182,346			122,624
GROSS PROFIT		43,091			33,933			79,405			65,723			51,080			43,091			95,833			79,405
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES		49,557			33,702			95,589			68,378			69,215			49,557			129,846			95,589
(LOSS) INCOME FROM OPERATIONS		(6,466	)		231			(16,184	)		(2,655	)
LOSS FROM OPERATIONS														(18,135	)		(6,466	)		(34,013	)		(16,184	)
OTHER (EXPENSES)/INCOME:
Other (Expenses)/Income, net		(2	)		24			(7	)		45			(21	)		(2	)		237			(7	)
Interest Expense		(654	)		(80	)		(1,556	)		(784	)		(1,672	)		(654	)		(2,243	)		(1,556	)
		(656	)		(56	)		(1,563	)		(739	)		(1,693	)		(656	)		(2,006	)		(1,563	)
(LOSS) INCOME BEFORE INCOME TAXES		(7,122	)		175			(17,747	)		(3,394	)
LOSS BEFORE INCOME TAXES														(19,828	)		(7,122	)		(36,019	)		(17,747	)
INCOME TAX EXPENSE		16			22			32			43			41			16			82			32
LOSS ON EQUITY METHOD INVESTMENT		337			0			585			0			717			337			2,027			585
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(7,475	)	$	153		$	(18,364	)	$	(3,437	)
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS													$	(20,586	)	$	(7,475	)	$	(38,128	)	$	(18,364	)
OTHER COMPREHENSIVE (LOSS) INCOME:
Change in foreign currency translation	$	(91	)	$	(387	)	$	169		$	(328	)	$	1,849			(91	)	$	1,487		$	169
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME		(91	)		(387	)		169			(328	)
TOTAL COMPREHENSIVE (LOSS)	$	(7,566	)	$	(233	)	$	(18,194	)	$	(3,765	)
NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)														1,849			(91	)		1,487			169
TOTAL COMPREHENSIVE LOSS													$	(18,737	)	$	(7,566	)	$	(36,641	)	$	(18,194	)
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
-BASIC	$	(0.17	)	$	0.00		$	(0.43	)	$	(0.09	)	$	(0.45	)	$	(0.17	)	$	(0.85	)	$	(0.43	)
-DILUTED	$	(0.17	)	$	0.00		$	(0.43	)	$	(0.09	)	$	(0.45	)	$	(0.17	)	$	(0.85	)	$	(0.43	)
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING USED IN COMPUTING NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
-BASIC		43,303			40,339			42,470			38,891			45,636			43,303			44,691			42,470
-DILUTED		43,303			41,510			42,470			38,891			45,636			43,303			44,691			42,470

See accompanying notes to the unaudited consolidated financial statements.

FRESHPET, INC. AND SUBSIDIARIES

~~CHANGES TO~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)

Common Shares

Common Stock

Additional Paid-in Capital

Accumulated Deficit

Accumulated Other Comprehensive Income

Treasury Shares

Treasury Stock

Total Stockholders' Equity

BALANCES, March 31, 2021
43,242 $ 43 $ 938,242 $ (216,812 ) $ 179 14 $ (256 ) $ 721,396
Exercise of options to purchase common stock
102 0 1,026 0 0 0 0 1,026
Vesting of restricted stock units
29 0 (1,388 ) 0 0 0 0 (1,388 )
Share-based compensation expense
— 0 6,690 0 0 — 0 6,690
Shares issued in primary offering
— 0 (347 ) 0 0 — 0 (347 )
Foreign Currency Translation
— 0 0 0 (90 ) — 0 (90 )
Net income (loss)
— 0 0 (7,475 ) 0 — 0 (7,475 )
BALANCES, June 30, 2021
43,373 $ 43 $ 944,222 $ (224,287 ) $ 89 14 $ (256 ) $ 719,811

	Common Shares		Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Treasury Shares		Treasury Stock			Total Stockholders' Equity
BALANCES, March 31, 2022		43,485	$	43	$	961,914		$	(253,165	)	$	(482	)		14	$	(256	)	$	708,054
Exercise of options to purchase common stock		10		0		97			—			—			—		—			97
Vesting of restricted stock units		18		1		(890	)		0			0			0		0			(889	)
Share-based compensation expense		—		—		6,294			—			—			—		—			6,294
Shares issued in primary offering, net of issuance costs		4,320		4		337,845			0			0			0		0			337,849
Foreign currency translation		—		—		—			—			1,849			—		—			1,849
Net loss		—		—		—			(20,586	)		—			—		—			(20,586	)
BALANCES, June 30, 2022		47,834	$	48	$	1,305,260		$	(273,751	)	$	1,367			14	$	(256	)	$	1,032,668

Common Shares

Common Stock

Additional Paid-in Capital

Accumulated Deficit

Accumulated Other Comprehensive Income

Treasury Shares

Treasury Stock

Total Stockholders' Equity

BALANCES, March 31, 2020
40,271 $ 40 $ 588,357 $ (206,326 ) $ (20 ) 14 $ (256 ) $ 381,795
Exercise of options to purchase common stock
200 0 1,688 0 0 0 0 1,688
Vesting of restricted stock units
9 0 (992 ) 0 0 0 0 (992 )
Share-based compensation expense
— 0 2,333 0 0 — 0 2,333
Shares issued in primary offering
0 0 0 0 0 0 0 0
Foreign Currency Translation
— 0 0 0 (387 ) — 0 (387 )
Net income (loss)
— 0 0 153 0 — 0 153
BALANCES, June 30, 2020
40,480 $ 40 $ 591,386 $ (206,173 ) $ (407 ) 14 $ (256 ) $ 384,591

	Common Shares		Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Treasury Shares		Treasury Stock			Total Stockholders' Equity
BALANCES, March 31, 2021		43,242	$	43	$	938,242		$	(216,812	)	$	179			14	$	(256	)	$	721,396
Exercise of options to purchase common stock		102		0		1,026			—			—			—		—			1,026
Vesting of restricted stock units		29		0		(1,388	)		0			0			0		0			(1,388	)
Share-based compensation expense		—		—		6,690			—			—			—		—			6,690
Shares issued in primary offering, net of issuance costs		—		0		(347	)		0			0			—		0			(347	)
Foreign currency translation		—		—		—			—			(90	)		—		—			(90	)
Net loss		—		—		—			(7,475	)		—			—		—			(7,475	)
BALANCES, June 30, 2021		43,373	$	43	$	944,222		$	(224,287	)	$	89			14	$	(256	)	$	719,811

Common Shares

Common Stock

Additional Paid-in Capital

Accumulated Deficit

Accumulated Other Comprehensive Income

Treasury Shares

Treasury Stock

Total Stockholders' Equity

BALANCES, December 31, 2020
40,732 $ 41 $ 600,388 $ (205,924 ) $ (80 ) 14 $ (256 ) $ 394,169
Exercise of options to purchase common stock
174 0 1,740 0 0 0 0 1,740
Vesting of restricted stock units
52 0 (2,917 ) 0 0 0 0 (2,917 )
Share-based compensation expense
— 0 12,841 0 0 — 0 12,841
Shares issued in primary offering
2,415 2 332,170 0 0 0 0 332,172
Foreign Currency Translation
— 0 0 0 169 — 0 169
Net (loss)
— 0 0 (18,364 ) 0 — 0 (18,364 )
BALANCES, June 30, 2021
43,373 $ 43 $ 944,222 $ (224,287 ) $ 89 14 $ (256 ) $ 719,811

	Common Shares		Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Treasury Shares		Treasury Stock			Total Stockholders' Equity
BALANCES, December 31, 2021		43,449	$	43	$	955,710		$	(235,623	)	$	(120	)		14	$	(256	)	$	719,754
Exercise of options to purchase common stock		32		0		329			—			—			—		—			329
Vesting of restricted stock units		32		1		(1,213	)		0			0			0		0			(1,212	)
Share-based compensation expense		—		—		12,589			—			—			—		—			12,589
Shares issued in primary offering, net of issuance costs		4,320		4		337,845			0			0			0		0			337,849
Foreign currency translation		—		—		—			—			1,487			—		—			1,487
Net loss		—		—		—			(38,128	)		—			—		—			(38,128	)
BALANCES, June 30, 2022		47,834	$	48	$	1,305,260		$	(273,751	)	$	1,367			14	$	(256	)	$	1,032,668

Common Shares

Common Stock

Additional Paid-in Capital

Accumulated Deficit

Accumulated Other Comprehensive Income

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
244 0 2,091 0 0 0 0 2,091
Vesting of restricted stock units
74 0 (1,637 ) 0 0 0 0 (1,637 )
Share-based compensation expense
— 0 4,575 0 0 — 0 4,575
Shares issued in primary offering
4,000 4 252,058 0 0 0 0 252,062
Foreign Currency Translation
— 0 0 0 (328 ) — 0 (328 )
Net (loss)
— 0 0 (3,437 ) 0 — 0 (3,437 )
BALANCES, June 30, 2020
40,480 $ 40 $ 591,386 $ (206,173 ) $ (407 ) 14 $ (256 ) $ 384,591

	Common Shares		Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Treasury Shares		Treasury Stock			Total Stockholders' Equity
BALANCES, December 31, 2020		40,732	$	41	$	600,388		$	(205,924	)	$	(80	)		14	$	(256	)	$	394,169
Exercise of options to purchase common stock		174		0		1,740			—			—			—		—			1,740
Vesting of restricted stock units		52		0		(2,917	)		0			0			0		0			(2,917	)
Share-based compensation expense		—		—		12,841			—			—			—		—			12,841
Shares issued in primary offering, net of issuance costs		2,415		2		332,170			0			0			0		0			332,172
Foreign currency translation		—		—		—			—			169			—		—			169
Net loss		—		—		—			(18,364	)		—			—		—			(18,364	)
BALANCES, June 30, 2021		43,373	$	43	$	944,222		$	(224,287	)	$	89			14	$	(256	)	$	719,811

See accompanying notes to the unaudited consolidated financial statements.

FRESHPET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	*For the Six Months Ended*						*For the Six Months Ended*
	*June 30,*						*June 30,*
	*2021*			*2020*			*2022*			*2021*
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)	$	(18,364	)	$	(3,437	)
Adjustments to reconcile net (loss) to net cash flows provided by operating activities:
Provision for loss on accounts receivable		5			7
Net loss							$	(38,128	)	$	(18,364	)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Provision for loss (gains) on accounts receivable								(14	)		5
Loss on disposal of equipment		106			36			89			106
Share-based compensation		12,770			4,464			12,589			12,770
Inventory obsolescence		253			151			3,455			253
Depreciation and amortization		14,743			9,894			15,888			14,743
Amortization of deferred financing costs and loan discount		815			691			398			815
Change in operating lease right of use asset		661			464			675			661
Investments in equity method investment		585			0
Loss on equity method investment								2,027			585
Changes in operating assets and liabilities:
Accounts receivable		(15,529	)		(4,077	)		(36,268	)		(15,529	)
Inventories		(5,731	)		(6,302	)		(28,560	)		(5,731	)
Prepaid expenses and other current assets		(1,443	)		10,181			2,416			(1,443	)
Other assets		(2,156	)		(212	)		(358	)		(2,156	)
Accounts payable		15,494			(3,430	)		(421	)		15,494
Accrued expenses		1,369			(13,147	)		4,487			1,369
Other lease liabilities		(643	)		(401	)		(677	)		(643	)
Net cash flows from (used in) operating activities		2,935			(5,118	)
Net cash flows used in operating activities								(62,402	)		2,935
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments		0			(20,001	)		(19,840	)		0
Investments in equity method investment								(3,294	)		0
Acquisitions of property, plant and equipment, software and deposits on equipment		(117,592	)		(73,251	)		(94,872	)		(117,592	)
Net cash flows used in investing activities		(117,592	)		(93,252	)		(118,006	)		(117,592	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common shares issued in primary offering, net of issuance cost		332,172			252,062			337,849			332,172
Proceeds from exercise of options to purchase common stock		1,740			2,091			329			1,740
Tax withholdings related to net shares settlements of restricted stock units		(2,917	)		(1,636	)		(1,213	)		(2,917	)
Proceeds from borrowings under Credit Facilities		0			20,933
Repayment of borrowings under Credit Facilities		0			(76,000	)
Proceeds from borrowings under Credit Facility								78,000			0
Fees paid in connection with financing agreements		(3,262	)		(824	)		0			(3,262	)
Net cash flows provided by financing activities		327,733			196,626			414,965			327,733
NET CHANGE IN CASH AND CASH EQUIVALENTS		213,076			98,256			234,557			213,076
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		67,247			9,472			72,788			67,247
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	280,323		$	107,728		$	307,345		$	280,323
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	839		$	789		$	1,265		$	839
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Property, plant and equipment purchases in accounts payable	$	18,493		$	1,427		$	19,799		$	18,493

See accompanying notes to the unaudited consolidated financial statements.

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

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

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

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The unaudited consolidated financial statements include the accounts of the Company as well as the Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The interim unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of management, the interim unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, ~~2021~~2022, the results of its operations and changes to stockholders’ equity for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021, and its cash flows for the six months ended June 30, ~~2021~~2022 and ~~2020~~2021. The results for the three and six months ended June 30, ~~2021~~2022, are not necessarily indicative of results to be expected for the year ending December 31, ~~2021~~2022, or any other interim periods, or any future year or period. ~~Certain~~All amounts ~~that appear in~~included herein have been rounded except where otherwise stated. As figures are rounded, numbers presented throughout this ~~report~~document may not add up ~~because of differences due~~precisely to ~~rounding.~~the totals we provide and percentages may not precisely reflect the absolute figures.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021.

Equity method investment – The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company ~~applies~~has the ~~equity method~~ability to ~~investments in common stock~~exercise significant influence based on our representation on and ~~to other investments when such other investments possess substantially identical subordinated interests to common stock.~~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 ~~("VIEs")~~ – In accordance with the applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which it has a variable interest is a variable interest entity. The Company's analysis includes both quantitative and qualitative reviews to determine if we must consolidate a variable interest entity as its primary beneficiary.

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

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, 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, ~~short-term investments,~~ 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 June 30, ~~2021~~2022, the Company ~~only~~ maintained Level 1 and Level 2assets and liabilities.

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

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

~~Restricted Stock Tax Withholdings~~Implementation Costs of Cloud Computing Arrangement –~~– To meet payroll tax withholdings obligations arising from the vesting~~ As of ~~restricted share units, the Company withheld 9 shares totaling $1,388 and 19 shares totaling $2,917 for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June~~ ~~30,~~~~2021,~~ ~~respectively, and withheld 88 shares totaling $992 and 98 shares totaling $1,636 for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ June 30, ~~2020.~~2022 and December 31, 2021, the Company incurred $8,659 and $7,380, respectively, in costs related to the implementation costs of our new ERP system associated with our cloud computing arrangement within other assets. The cost will be recognized over the term of the agreement, which began in the first quarter of 2022.

Debt Issuance Cost – During the first quarter of 2021, as part of the Sixth Amended and Restated Loan and Security Agreement, ~~(as~~dated February 19, 2021, (as amended, the "New Loan Agreement"), the Company incurred an additional ~~$3,166~~$3,263 of fees associated with the debt modification, of which ~~$2,713~~$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.~~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. ~~As of~~ ~~June 30, 2021~~~~, there was $2,875 of debt issuance cost that was recorded to other assets and $793 was recorded to other current 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

(Unaudited, in thousands, except per share data)

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

	*Three Months Ended*				*Six Months Ended*				*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*				*June 30,*				*June 30*
	*2021*		*2020*		*2021*		*2020*		*2022*		*2021*		*2022*		*2021*
Grocery, Mass and Club	$	89,553	$	68,284	$	168,625	$	129,103	$	127,572	$	89,553	$	243,090	$	168,625
Pet Specialty and Natural		19,062		11,696		33,405		20,975		18,435		19,062		35,089		33,405
Net Sales (a)	$	108,616	$	79,980	$	202,029	$	150,078	$	146,007	$	108,616	$	278,179	$	202,029

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

Recently Adopted Accounting Standards

In ~~January 2020,~~ ~~the FASB issued Accounting Standards Update ("ASU")~~ ~~2020~~-~~01,~~ ~~Investments - Equity Services (Topic~~ ~~321~~~~), Investments - Equity Method and Joint Ventures (Topic~~ ~~323~~~~), and Derivatives and Hedging (Topic~~ ~~815~~~~): Clarifying the Interactions between Topic~~ ~~321,~~ ~~Topic~~ ~~323,~~ ~~and Topic~~ ~~815.~~The standard addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. We adopted the requirements of ASU ~~2020~~-01 ~~prospectively as of~~ ~~January 1, 2021.~~ ~~The adoption of ASU~~ ~~2020~~-01Company did not ~~have a significant impact on our consolidated financial statements.~~ adopt any new Accounting Standard Updates during the quarter ended June 30, 2022.

Note 2 – Inventories:

June 30,

December 31,

2021

2020

Raw Materials and Work in Process
$ 10,303 $ 9,347
Packaging Components Material
2,650 1,872
Finished Goods
11,941 8,365
24,894 19,584
Reserve for Obsolete Inventory
(297 ) (465 )
Inventories, net
$ 24,597 $ 19,119

	*June 30,*			*December 31,*
	*2022*			*2021*
Raw Materials and Work in Process	$	16,125		$	13,339
Packaging Components Material		5,543			2,823
Finished Goods		39,154			19,704
		60,822			35,866
Reserve for Obsolete Inventory		(143	)		(292	)
Inventories, net	$	60,679		$	35,574

~~FRESHPET, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, in thousands, except per share data)~~

Note 3 – Property, Plant and Equipment:

	*June 30,*			*December 31,*			*June 30,*			*December 31,*
	*2021*			*2020*			*2022*			*2021*
Refrigeration Equipment	$	117,676		$	107,703		$	128,177		$	122,063
Machinery and Equipment		118,327			106,336			143,834			140,471
Building, Land, and Improvements		104,544			101,786			158,974			150,927
Furniture and Office Equipment		6,042			5,687			9,128			8,844
Leasehold Improvements		1,314			1,301			1,319			1,319
Construction in Progress		143,683			44,497			349,461			273,880
		491,586			367,310			790,892			697,504
Less: Accumulated Depreciation		(99,652	)		(86,237	)		(128,365	)		(113,582	)
Property, plant and equipment, net	$	391,934		$	281,073		$	662,527		$	583,922

Depreciation expense related to property, plant and equipment totaled $7,832 and $15,779 for the three and six months ended June 30, 2022, respectively, of which $4,295 and $8,996 was recorded to cost of goods sold for the three and six months ended June 30, 2022, respectively, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.

Depreciation expense related to property, plant and equipment totaled $7,281 and $13,866 for the three and six months ended June 30, 2021, respectively, of which $4,021 and $7,821 was recorded to cost of goods sold for the three and six months ended June 30, 2021, respectively, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.

~~Depreciation expense related to property, plant and equipment totaled $5,366 and $9,739 for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2020~~~~, respectively, of which $2,550 and $4,294 was recorded to cost of goods sold for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2020~~~~, respectively, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.~~

~~Note~~ 4 ~~– Accrued Expenses:~~

June 30,

December 31,

2021

2020

Accrued Compensation and Employee Related Costs
$ 7,752 $ 8,185
Accrued Chiller Cost
2,204 2,049
Accrued Customer Consideration
829 502
Accrued Freight
1,626 1,002
Accrued Production Expenses
681 705
Accrued Marketing
630 684
Accrued Corporate Expenses
1,608 1,629
Other Accrued Expenses
1,377 615
Accrued expenses
$ 16,707 $ 15,371

1110

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

Note 4 – Accrued Expenses:

	*June 30,*		*December 31,*
	*2022*		*2021*
Accrued Compensation and Employee Related Costs	$	5,544	$	6,934
Accrued Chiller Cost		1,885		2,050
Accrued Customer Consideration		690		828
Accrued Freight		1,429		1,547
Accrued Production Expenses		3,820		1,862
Accrued Corporate and Marketing Expenses		5,731		1,081
Other Accrued Expenses		338		648
Accrued Expenses	$	19,437	$	14,950

Note 5 – Debt:

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

~~The New 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 LIBOR (or a comparable successor rate if LIBOR~~ no longer exists), in each case, plus an applicable margin. Subject to the Company's leverage ratio, the applicable margin varies between 0.75% and 2.25% for base rate loans and 1.75% and 3.25% for LIBOR 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. Commencing on~~ ~~August 19, 2022,~~ ~~the amount of any outstanding Delayed Draw Term Loans shall be repayable in equal consecutive quarterly installments equal to~~ ~~1/28th~~ ~~of the total single term loan ("the Initial Combined Delayed Draw Term Loan"). Commencing on~~ ~~August 19, 2023,~~ ~~the amount of any outstanding Delayed Draw Term Loans, combined with the Initial Combined Delayed Draw Term Loan, shall be repayable in equal consecutive quarterly installments equal to~~ ~~1/28th~~ ~~of the outstanding Delayed Draw Term Loans and the remainder shall be due and payable on~~ ~~February~~ ~~19,~~~~2026.~~

Borrowings under the New Credit Facility are secured by substantially all of the Company's and certain of its subsidiaries' assets. The New Loan Agreement 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 transactions with affiliates. The New Loan Agreement also includes events of default customary for agreements of this type.

As of June 30, ~~2021~~2022, the Company had ~~0 debt~~$78,000 outstanding under the ~~Credit~~Delayed Draw Facility. ~~The Credit~~Any prepayments of the Delayed Draw Facility ~~includes a quarterly commitment fee on any unused amounts at a per annum rate between 0.30% to 0.50% depending on~~under the ~~aggregate principal outstanding.~~agreement may not be reborrowed.

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

As of June 30, ~~2021~~2022, there was ~~$3,668~~$1,821 of debt issuance cost ~~from~~recorded against Long-Term Debt, and $694 of debt issuance cost recorded against the Current Portion of Long-Term Debt related to the issuance costs of the Delayed Draw Facility. In addition, $260 of debt issuance costs recorded to other assets, and $99 was recorded in other current assets related to the issuance costs of the Revolving Loan Facility.

On April 29, 2022, the Company entered into the First Amendment to the New ~~Credit Facility as well as fees incurred from~~Loan Agreement, which amendment, among other things, (i) made amendments to allow for the ~~prior credit facilities.~~

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").

1211

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

Note 6 – Leases:

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

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

Weighted-average remaining lease term			~~4.97~~4.05
Weighted-average discount rate			6.15	%

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

Maturities of lease liabilities under noncancelable operating leases as of June 30, ~~2021~~2022 were as follows:

Operating Lease Obligations	*June 30, 2021*			*As of June 30, 2022*
2021 (a)	$	880
2022		1,764
2022 (a)				$	886
2023		1,802			1,802
2024		1,511			1,511
2025 and beyond		2,786
2025					1,210
2026 and beyond					1,576
Total lease payments	$	8,743		$	6,985
Less: Imputed interest		(990	)		(568	)
Present value of lease liabilities	$	7,752		$	6,417

(a)

Excluding the six months ended June 30, ~~2021~~2022.

A summary of rent expense for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021 was as follows:

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,

2021 2020 2021 2020
Operating lease cost
$ 444 $ 459 $ 891 $ 911

	*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*
	*2022*		*2021*		*2022*		*2021*
Operating lease cost	$	438	$	444	$	876	$	891

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

	*For the Three Months Ended*				*For the Six Months Ended*				*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*				*June 30,*				*June 30,*
Operating cash flow information:		*2021*		*2020*		*2021*		*2020*	*2022*		*2021*		*2022*		*2021*
Cash paid for amounts included in the measurement of lease liabilities	$	439	$	445	$	874	$	849	$	442	$	439	$	878	$	874

1312

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

Note 7 – Equity Incentive Plans:

Total compensation cost for share-based payments recognized for the three and six months ended June 30, ~~2021~~2022 ~~is $6,690~~was $6,294 and ~~$12,841,~~$12,589, respectively and for the three and six months ended June 30, ~~2020~~2021 ~~is $2,333~~was $6,690 and ~~$4,575,~~$12,841, respectively. During the six months ended June 30, ~~2021,~~ ~~78 and 96 service period~~2022, 32 stock options ~~and performance stock options, respectively,~~ were exercised. During the six months ended June 30, ~~2021,~~2022, 3180 service period restricted stock units were granted at a weighted average grant-date fair market value of ~~$155.49.~~$85.15. During the six months ended June 30, ~~2021,~~2022, ~~72 service period~~44 restricted stock units vested.

Note 8 – Earnings Per Share Attributable to Common Stockholders:

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

The ~~following table shows how we computed basic and~~potentially dilutive securities excluded from the determination of diluted ~~earnings~~loss per ~~common share:~~share, as their effect is antidilutive, are as follows:

Three months ended

Six Months Ended

June 30,

June 30,

2021

2020

2021

2020

Net Income (Loss) Attributable to Common Stockholders
$ (7,475 ) $ 153 $ (18,364 ) $ (3,437 )

Weighted Average Common Shares Outstanding, Basic
43,303 40,339 42,470 38,891
Dilutive Effect of Share-Based Awards:

Service Period Stock Options
0 1,032 0 0
Restricted Stock Units
0 114 0 0
Performance
0 25 0 0
Weighted Average Common Shares Outstanding, Diluted
43,303 41,510 42,470 38,891

Basic Earnings per Share
$ (0.17 ) $ 0.00 $ (0.43 ) $ (0.09 )
Diluted Earnings per Share
$ (0.17 ) $ 0.00 $ (0.43 ) $ (0.09 )

~~Shares excluded from EPS calculation:~~

	*Three months ended*				*Six Months Ended*				*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*				*June 30,*				*June 30,*
	*2021*		*2020*		*2021*		*2020*		*2022*		*2021*		*2022*		*2021*
Service Period Stock Options		1,301		0		1,309		1,326		1,272		1,301		1,261		1,309
Restricted Stock Units		162		0		180		220		169		162		150		180
Performance Stock Options		906		0		906		31		944		906		944		906
Total shares issuable as assumed exercise would be antidilutive		2,368		0		2,395		1,577
Total										2,385		2,368		2,355		2,395

For the three and six months ended June 30, ~~2021~~2022 and ~~for the~~ ~~six~~2021, ~~months ended~~ ~~June 30, 2020,~~ diluted net loss per share of common stock iswas the same as basic net loss per share of common stock, due to the fact that potentially dilutive securities would have an antidilutive effect as the Company incurred a net loss during such period.

1413

FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

Note 9 – Concentrations:

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

Note 10 – Commitments and Contingencies:

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

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

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

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

Note 11 – Subsequent Events:

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued for ~~recognitions~~recognition or disclosures.

The Company did not identify any recognized or unrecognized subsequent events that have required adjustment or disclosure in the financial statements.

1514

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

The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (our "Annual Report").

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

For information regarding our consolidated operating results, financial condition, liquidity and cash flows for the six months ended June 30, 2020 as compared to the same period in 2019, refer to "Part I—Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2020, filed with the SEC on May 5, 2020, 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 ~~our Company’s~~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

~~Continued Observations~~During late 2021 and early in 2022, we announced three price increases designed to address the margin impact of inflation on our input costs, logistics and labor. The first price increase occurred during Q4 2021, and the second price increase occurred during Q1 2022 and the third will go into effect in Q3 of 2022. We believe the price increases caused our Q4 2021 and Q1 2022 household penetration growth to be below our historical rate, but we believe we are still progressing towards our long-term household penetration goals as the more recent trend shows acceleration more in-line with our historical rate. We believe the household penetration impact as a reaction to our price increases, to be a short-term setback when the higher pricing first appears on the ~~Effects of COVID-19~~

Due to COVID-19, our retail customers experienced a surge in consumption in the second half of Q1 2020 as consumers stocked up on food and necessities. The unexpected surge in consumption caused a spike in Freshpet orders, which at times were greater than our production capacity.

~~At the end of Q1 2020,~~shelf, but we announced our post-surge pivot. That strategic pivot was built on a foundation that said, if we could keep our employees safe, then we could rebuild our supply and that would enable us to replenish our product supply in retail stores, which would allow usexpect it to turn positive through product distribution and media. We believe our buying rate will likely benefit from the higher pricing. Further, depending on ~~our advertising~~the broader macroeconomic environment, including inflationary costs due to ~~drive consumption~~energy costs and ~~household penetration gains. As a result,~~raw ingredients, further pricing increases could be considered later in 2022 or 2023. In addition, we ~~invested in each of those areas, including safety enhancements~~are introducing an enhanced long-term capacity expansion plan to ~~protect our team, incremental capacity at Kitchens South, incremental retail coverage, new e-commerce purchase~~provide greater capital efficiency and ~~delivery options~~support long-term targeted net sales growth. See "—Liquidity and ~~additional media advertising.~~

The Company made and continues to make investments designed to protect its team members. These efforts include taking the temperature of every team member and administering a brief health screening before entering our Freshpet Kitchens, installing increased space for social distancing, instituting staggered shifts, enhancing daily sanitation efforts and weekly deep cleaning of all common areas, requiring use of face coverings by all employees, and limiting visitors, who must also submit to a health check before entering the facilities. Capital Resources."

1615

Despite the COVID-19 related disruptions, our ability to bring the power of fresh to pet parents has continued, in part due to our post-surge pivot. Consumers' increased interest in their pets, the strong appeal of the Freshpet idea and products, our ability to continuously run our manufacturing facilities and successfully add capacity, the increased impact of our advertising, and our customers' realization of the value that Freshpet brings to their pet food category offerings and stores has resulted in some of our strongest growth. As noted above, the unexpected surge in consumption towards the second half of Q1 2020, as well as the subsequent strong growth, has caused us to draw down on trade inventory and have higher out-of-stocks than usual. With the additional capacity brought on during Q2 and Q3 of 2020, as well as Kitchens South startup in Q1 2020 and Kitchens 2.0 startup in Q4 2020 and Q1 2021, we believe we will be able to rebuild our trade inventory and decrease our out-of-stocks.

We are unsure how long the COVID-19 pandemic, including current and evolving health and safety guidance and local health and safety responses as well as emergence of new variants, will require us to absorb higher costs to protect and reward our employees while simultaneously ensuring we can support our pet parents with a continual supply of Freshpet products. We are also monitoring our supply of raw materials, ingredients and packaging materials. Although we have not experienced any extended supply interruptions to date and our chicken prices for the year are fixed contractually, subject to limited exceptions, we have used our secondary suppliers from time to time, and have also experienced higher beef prices as a result of reduced supplies.

We will continue to monitor the retail environment and pet parent demand, and intend to adapt to changing conditions to continue to drive growth and meet our goal of “changing the way people feed their pets forever” during the evolving COVID-19 pandemic.

~~Supporting Freshpet’s Growth –~~

At the Company's February 2020 Investor Day, Freshpet presented its "Feed the Growth - 5 by 2025" strategic plan. The plan looked to add 5 million more households by 2025, for a total 8 million households. During 2020, the Company continued to see increased sales growth and household penetration despite capacity limits and less than planned advertising spend. As a result, the Company raised its 2025 household penetration target from 8 million to 11 million households. To support the strategic plan Freshpet is committed to invest in production capacity as well as upgrades to our systems and processes. The Company is continuously evaluating its ability to feed as many pets as possible and minimize its impact on the environment, and will continue to make investments that provide the necessary returns on its investments to deliver on "Pets, People, Planet."

~~Manufacturing Site~~	~~Manufacturing Capability~~	~~Investments to be Made~~
~~Freshpet Kitchens Bethlehem~~	~~Kitchens 1.0~~ Kitchens 1.0 is an approximately 100,000 square-foot manufacturing facility in Bethlehem, PA. It has four manufacturing lines, each of which has the ability to produce our Freshpet Recipes seven days a week/24 hours a day. ~~Kitchens 2.0~~ Kitchens 2.0 is an approximately 140,000 square-foot addition to our Bethlehem, PA campus. It has two manufacturing lines. Freshpet Kitchens 2.0 makes greater use of automation to improve quality, safety and reduce costs. In addition, Kitchens 2.0 delivers on our commitment to continue to minimize our manufacturing impact. Production of saleable product began in October 2020.	~~Kitchens 2.0 cost approximately $116.0 million.~~
~~Freshpet Kitchens South~~	During 2020, the Company officially opened a manufacturing facility called "Freshpet Kitchens South," which cooked its first meal in February 2020. In order to ensure we are able to deliver on projected growth, the Company is also looking to add additional manufacturing lines. The capacity build out is expected to occur in two phases. By the end of 2021, we expect the first phase of Freshpet Kitchens South to be completed. By the start of 2023, we expect the second phase to be completed, which will include a second building that will house additional manufacturing lines.	To date, we have invested approximately $31.3 million in Freshpet Kitchens South. From the second quarter of 2021 to 2023, we expect to make an additional investment of approximately $165.0 million to complete phase 1 and phase 2.
~~Freshpet Kitchens Ennis~~	During the end of 2019, the Company started its initial design and engineering phase of Freshpet Kitchens Ennis, which sits on 74 acres in Ennis, Texas. We expect initial production to begin by the second quarter of 2022.	~~Projected spend on the project is $530.0 million to $600.0 million. We have invested approximately $114.2 million in the project to date.~~

~~Additionally, the Company is upgrading its enterprise resource planning (“ERP”) system. The project commenced in Q1 2020 and is expected to run through Q4 of 2021.~~

In order to fund the strategic capital investments as well as provide the Company with capital flexibility, in February 2021, the Company completed a public offering of its common stock, which provided net proceeds of $332.2 million.

In addition, on February 19, 2021, the Company entered into a Sixth Amended and Restated Loan and Security Agreement with City National Bank, as the arranger and administrative agent, and the other lenders party thereto (the “New Loan Agreement”). The New Loan Agreement provides for a $350.0 million senior secured credit facility (the “New Credit Facility”), encompassing a $300.0 million delayed draw term loan facility (the “New Delayed Draw Facility”) and a $50.0 million revolving loan facility (the “New Revolving Loan Facility”), which replaced the Company’s prior $130.0 million delayed draw term loan facility and $35.0 million revolving loan facility.

~~The Company intends to use the net proceeds from the equity offering, borrowings from the New Credit Facility and cash from operations to continue to fund the Freshpet Kitchens expansion projects.~~

Components of our ~~Operating~~ Results of Operations

Net Sales

Our net sales are derived from the sale of ~~pet food~~products that are sold to ~~our customers, who purchase either directly from us or~~retailers through ~~third-party distributors.~~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 ~~23,155~~24,277 retail stores as of June 30, ~~2021.~~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.

•

~~Increased~~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.~~freight, as well as depreciation and amortization and non-cash share based compensation.

~~Our gross profit margins are also impacted by the cost of ingredients, packaging materials, and labor and overhead and share-based compensation related to direct labor and overhead.~~ We expect 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 will focus 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.

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

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

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

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

Income Taxes

We had federal net operating loss (“NOL”) carry forwards of approximately ~~$239.8~~$291.8 million as of December 31, ~~2020,~~2021, of which approximately ~~$175.0~~$175.4 million, generated in 2017 and prior, will expire between 2025 and 2037. The ~~Company~~NOL generated from 2018 through 2021, of approximately $116.4 million, will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. We may be subject to ~~the net operating loss~~certain limitations in our annual utilization ~~provisions~~ of NOL carry forwards to off-set future taxable income pursuant to Section 382 of the Internal Revenue Code, (the “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.which could result in NOLs expiring unused. At December 31, ~~2020,~~2021, we had approximately ~~$189.8~~$229.5 million of state NOLs, which expire between ~~2021~~2022 and ~~2039.~~2041, and had $14.3 million of foreign NOLs which do not expire. At December 31, ~~2020,~~2021, we had a full valuation allowance against our net deferred tax assets as the realization of such assets was not considered more likely than not.

Consolidated Statements of Operations and Comprehensive Loss

	Three Months Ended June 30,												Six Months Ended June 30,												Three Months Ended June 30,												Six Months Ended June 30,
	2021						2020						2021						2020						2022						2021						2022						2021
	Amount			% of Net Sales			Amount			% of Net Sales			Amount			% of Net Sales			Amount			% of Net Sales			Amount			% of Net Sales			Amount			% of Net Sales			Amount			% of Net Sales			Amount			% of Net Sales
	(Dollars in thousands)												(Dollars in thousands)												(Dollars in thousands)												(Dollars in thousands)
Net sales	$	108,616			100	%	$	79,980			100	%	$	202,029			100	%	$	150,078			100	%	$	146,007			100	%	$	108,616			100	%	$	278,179			100	%	$	202,029			100	%
Cost of goods sold		65,525			60			46,047			58			122,624			61			84,355			56			94,927			65			65,525			60			182,346			66			122,624			61
Gross profit		43,091			40			33,933			42			79,405			39			65,723			44			51,080			35			43,091			40			95,833			34			79,405			39
Selling, general and administrative expenses		49,557			46			33,702			42			95,589			47			68,378			46			69,215			47			49,557			46			129,846			47			95,589			47
(Loss) income from operations		(6,466	)		(6	)		231			0			(16,184	)		(8	)		(2,655	)		(2	)
Loss from operations																										(18,135	)		(12	)		(6,466	)		(6	)		(34,013	)		(12	)		(16,184	)		(8	)
Other (expenses)/income, net		(2	)		(0	)		24			0			(7	)		(0	)		45			0			(21	)		(0	)		(2	)		(0	)		237			0			(7	)		(0	)
Interest expense		(654	)		(0	)		(80	)		(0	)		(1,556	)		(1	)		(784	)		(0	)		(1,672	)		(0	)		(654	)		(0	)		(2,243	)		(0	)		(1,556	)		(1	)
(Loss) income before income taxes		(7,122	)		(7	)		175			0			(17,747	)		(9	)		(3,394	)		(2	)
Loss before income taxes																										(19,828	)		(14	)		(7,122	)		(7	)		(36,019	)		(13	)		(17,747	)		(9	)
Income tax expense		16			0			22			0			32			0			43			0			41			0			16			0			82			0			32			0
Loss on equity method investment		337			0			-			-			585			0			-			-			717			0			337			0			2,027			1			585			0
Net (loss) income	$	(7,475	)		(7	)%	$	153			0	%	$	(18,364	)		(9	)%	$	(3,437	)		(2	)%
Net loss																									$	(20,586	)		(14	)%	$	(7,475	)		(7	)%	$	(38,128	)		(14	)%	$	(18,364	)		(9	)%

2017

Three Months Ended June 30, ~~2021~~2022 Compared to Three Months Ended June 30, ~~2020~~2021

Net Sales

The following table sets forth net sales by class of retailer:

Three Months Ended June 30,

2021

2020

% of

% of

Amount

Net Sales

Store Count

Amount

Net Sales

Store Count

(Dollars in thousands)

Grocery, Mass and Club (1)
$ 89,553 82 % 17,780 $ 68,284 85 % 16,929
Pet Specialty and Natural (2)
19,062 18 % 5,375 11,696 15 % 5,191
Net Sales (3)
$ 108,616 100 % 23,155 $ 79,980 100 % 22,120

	Three Months Ended June 30,
	2022							2021
			% of							% of
	Amount		Net Sales			Store Count		Amount		Net Sales			Store Count
	(Dollars in thousands)
Grocery, Mass and Club (1)	$	127,572		87	%		18,717	$	89,553		82	%		17,780
Pet Specialty and Natural (2)		18,435		13	%		5,560		19,062		18	%		5,375
Net Sales (3)	$	146,007		100	%		24,277	$	108,616		100	%		23,155

(1)	Stores at June 30, ~~2021~~2022 and ~~2020~~2021 consisted of ~~12,476~~13,214 and ~~11,841~~12,476 Grocery and ~~5,304~~5,503 and ~~5,088~~5,304 Mass and Club, respectively.

(2)	Stores at June 30, ~~2021~~2022 and ~~2020~~2021 consisted of ~~4,899~~5,086 and ~~4,728~~4,899 Pet Specialty and ~~476~~474 and ~~463~~476 Natural, respectively.
(3)	Online sales associated with each class of retailer are included within their respective total.

Net sales increased ~~$28.6~~$37.4 million, or ~~35.8%~~34.4%, to ~~$108.6~~$146.0 million for the three months ended June 30, ~~2021~~2022 as compared to ~~$80.0~~$108.6 million in the same period in the prior year. The ~~$28.6~~$37.4 million increase in net sales was driven by an$20.3 million related to price and mix and $17.1 million due to volume, including refilling our trade inventory. Of the sales increase $38.0 million of ~~$21.2 million~~growth was experienced in our Grocery (including Online), Mass, and Club refrigerated ~~channel~~channels, and ~~$7.4~~was offset by a reduction of $0.6 million in our Pet Specialty and Natural refrigerated ~~channel.~~channels. Our Freshpet Fridge store locations grew by ~~4.7%~~4.8% to 24,277 as of June 30, 2022 compared to 23,155 as of June 30, ~~2021 compared to 22,120 as of June 30, 2020.~~2021.

Gross Profit

Gross profit ~~increased $9.2~~was $51.1 million, or ~~27.0%, to $43.1 million~~35.0% as a percentage of net sales, for the three months ended June 30, ~~2021 as~~2022, compared to ~~$33.9~~$43.1 million, ~~in the same period~~or 39.7% as a percentage of net sales, in the prior ~~year. The increase in gross profit was primarily driven by higher net sales, offset by increased cost.~~

~~Gross profit margin of 39.7% for~~year period. For the three months ended June 30, ~~2021 decreased 280 basis points~~2022, Adjusted Gross Profit was $61.8 million, or 42.4% as a percentage of net sales, compared to ~~the same period~~$50.1 million, or 46.1% as a percentage of net sales, in the prior year ~~due to inflation~~period. The decreases in gross profit as a percentage of ~~ingredient cost of 140 basis points primarily from inflation in beef, Increased processing cost of 130 basis points as we grow into capacity at Kitchens Bethlehem~~net sales and ~~Kitchens South, increased depreciation and stock compensation cost of 100 basis points, plant start-up cost of 10 basis points, slightly offset by COVID-19 related cost of 130 basis points.~~

Adjusted Gross Profit was $50.1 million and $39.2 million in the three months ended June 30, 2021 and 2020, respectively. Adjusted Gross Profit Margin was 46.1% and 49.1% in the three months ended June 30, 2021 and 2020, respectively. The decrease in Adjusted Gross Profit as a percentage of net sales were primarily due to inflation of ingredient cost and labor, and quality issues, partially offset by increased pricing. The Gross profit as a percentage of net sales for the three months ended June 30, 2022, reflects a correction to the percentage previously reported in our earnings release for the second quarter of 2022 of 35.8%, which was ~~driven by the same factors as those decreasing our gross profit margin.~~furnished in a Current Report on Form 8-K on August 8, 2022. See “—Non-GAAP Financial Measures” for how we define Adjusted Gross Profit, ~~and~~ a reconciliation of Adjusted Gross Profit to ~~Gross Profit,~~gross profit, the closest comparable U.S. GAAP ~~measure.~~

measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses ~~increased $15.9 million, or 47.0%, to $49.6~~("SG&A") were $69.2 million for the three months ended June 30, ~~2021 as~~2022, compared to ~~the same period~~$49.6 million in the prior year. Key components of the increase include higher variable costs of $5.9 million due to increased volume and increased freight cost, increased options expense of $3.7 million, increased media expense of $3.6 million, higher incremental operating costs of $1.4 million, increased depreciation expense of $0.7 million and selling expense of $0.6 million. The increased operating expenses were primarily due to new hires, and increased employee incentive and benefit costs.year period. As a percentage of net sales, ~~selling, general and administrative expenses~~SG&A increased to ~~45.6%~~47.4% for the three months ended June 30, ~~2021 from 42.1%~~2022, compared to 45.6% in the prior year period. The increase in SG&A as a percentage of net sales was a result of increased media expenses as a percentage of net sales of 350 basis points, partially offset by increased selling, general and administrative expense leverage of 170 basis points due to higher net sales. Adjusted SG&A for the three months ended June 30, ~~2020.~~

~~Adjusted SG&A~~2022, was ~~$39.3~~$58.0 million, ~~and $28.1 million in the three months ended June 30, 2021 and 2020, respectively. Adjusted SG&A increased~~or 39.7% as a percentage of net sales, ~~to 36.1% in the three months ended June 30, 2021 as~~ compared to 35.1% of net sales in the three months ended June 30, 2020. The increase of 100 basis points in Adjusted SG&A is a result of increasing variable cost of 310 basis points due to freight, offset by leverage of 190 basis points and media$39.3 million, or 36.1% as a percentage of net sales, ~~decreasing by 20~~in the prior year period. The increase in Adjusted SG&A as a percentage of net sales was mainly a result of increased media expenses as a percentage of net sales of 350 basis points. See “—Non-GAAP Financial Measures” for how we define Adjusted SG&A, ~~and~~ a reconciliation of Adjusted SG&A to SG&A, the closest comparable U.S. GAAP ~~measure.~~measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.

~~(Loss)~~ ~~Income~~Loss from Operations

~~(Loss) Income~~Loss from operations ~~decreased~~increased by ~~$6.7~~$11.7 million to a loss from operations of ~~$6.5~~$18.1 million for the three months ended June 30, ~~2021~~2022 as compared to ~~an income~~a loss from operations of ~~$0.2~~$6.5 million for the same period in the prior year as a result of the factors discussed above.

Interest Expense

Interest expense relating to our ~~credit facilities~~Credit Facility increased ~~$0.6~~$1.0 million to interest expense of ~~$0.7~~$1.7 million for the three months ended June 30, ~~2021~~2022 as compared to an interest expense of ~~$0.1~~$0.7 million for the same period in the prior year as a result of the New Loan ~~Agreement.~~Agreement and additional borrowings discussed in Note 1.

Loss on Equity Method Investment

Our loss on equity method investment for the three months ended June 30, 2022, was $0.7 million from the Company's 19% interest in a privately held company.

Net ~~(Loss) Income~~Loss

Net ~~(loss) Income decreased $7.6~~loss increased $13.1 million to a net loss of ~~$7.5~~$20.6 million for the three months ended June 30, ~~2021~~2022, as compared to a net ~~income~~loss of ~~$0.2~~$7.5 million for the same period in the prior year as a result of the factors discussed above.

Adjusted EBITDA

Adjusted EBITDA was $3.9 million, or 2.6% as a percentage of net sales (also called Adjusted EBITDA Margin), for the three months ended June 30, 2022, compared to $10.9 million, or 10.0% as a percentage of net sales, in the prior year period. The decrease in Adjusted EBITDA was a result of increased Adjusted SG&A expense partially offset by higher net sales and Adjusted Gross Profit. As a long-term target as part of our capacity plan by 2025, we have targeted an Adjusted EBITDA Margin of approximately 25% measured on a yearly basis. 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 anticipate making 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 our Annual Report for factors that could cause our results to differ, in some cases materially.

2219

Six Months Ended June 30, ~~2021~~2022 Compared to Six Months Ended June 30, ~~2020~~2021

Net Sales

The following table sets forth net sales by class of retailer:

Six Months Ended June 30,

2021

2020

% of

% of

Amount

Net Sales

Store Count

Amount

Net Sales

Store Count

(Dollars in thousands)
Grocery, Mass and Club (1)
$ 168,625 83 % 17,780 $ 129,103 86 % 16,929
Pet Specialty and Natural (2)
33,405 17 % 5,375 20,975 14 % 5,191
Net Sales (3)
$ 202,029 100 % 23,155 $ 150,078 100 % 22,120

	Six Months Ended June 30,
	2022							2021
			% of							% of
	Amount		Net Sales			Store Count		Amount		Net Sales			Store Count
	(Dollars in thousands)
Grocery, Mass and Club (1)	$	243,090		87	%		18,717	$	168,625		83	%		17,780
Pet Specialty and Natural (2)		35,089		13	%		5,560		33,405		17	%		5,375
Net Sales (3)	$	278,179		100	%		24,277	$	202,029		100	%		23,155

(1)	Stores at June 30, ~~2021~~2022 and ~~2020~~2021 consisted of ~~12,476~~13,214 and ~~11,841~~12,476 Grocery and ~~5,304~~5,503 and ~~5,088~~5,304 Mass and Club, respectively.

(2)	Stores at June 30, ~~2021~~2022 and ~~2020~~2021 consisted of ~~4,899~~5,086 and ~~4,728~~4,899 Pet Specialty and ~~476~~474 and ~~463~~476 Natural, respectively.
(3)	Online sales associated with each class of retailer are included within their respective total.

Net sales increased ~~$52.0~~$76.2 million, or ~~34.6%~~37.7%, to ~~$202.0~~$278.2 million for the six months ended June 30, ~~2021~~2022 as compared to ~~$150.1~~$202.0 million in the same period in the prior year. The ~~$52.0~~$76.2 million increase in net sales was driven by an$46.5 million due to volume, including refilling our trade inventory, and $29.7 million due to price and mix. Of the sales increase, $74.5 million of ~~$39.5 million~~growth was experienced in our Grocery (including Online), Mass, and Club refrigerated ~~channel~~channels and ~~$12.5~~$1.7 million of growth was experienced in our Pet Specialty and Natural refrigerated ~~channel.~~channels. Our Freshpet Fridge store locations grew by ~~4.7%~~4.8% to 24,277 as of June 30, 2022 compared to 23,155 as of June 30, ~~2021 compared to 22,120 as of June 30, 2020.~~2021.

Gross Profit

Gross profit ~~increased $13.7~~was $95.8 million, or ~~20.8%, to $79.4 million~~34.5% as a percentage of net sales, for the six months ended June 30, ~~2021 as~~2022, compared to ~~$65.7~~$79.4 million, ~~in the same period~~or 39.3% as a percentage of net sales, in the prior ~~year. The increase in gross profit was primarily driven by higher net sales, offset by increased cost.~~

~~Gross profit margin of 39.3% for~~year period. For the six months ended June 30, ~~2021 decreased 450 basis points~~2022, Adjusted Gross Profit was $117.2 million, or 42.1% as a percentage of net sales, compared to ~~the same period~~$93.7 million, or 46.4% as a percentage of net sales, in the prior year ~~due to increased processing cost~~period. The decreases in gross profit as a percentage of net sales and write-offs of 250 basis points as we grow into capacity at Kitchens Bethlehem and Kitchens South, increased depreciation and stock compensation cost of 130 basis points, inflation of ingredient cost of 130 basis points primarily from inflation in beef and plant start-up cost of 70 basis points, slightly offset by COVID-19 related cost of 130 basis points.

Adjusted Gross Profit was $93.7 million and $73.9 million in the six months ended June 30, 2021 and 2020, respectively. Adjusted Gross Profit Margin was 46.4% and 49.3% in the six months ended June 30, 2021 and 2020, respectively. The decrease in Adjusted Gross Profit as a percentage of net sales were primarily due to inflation of ingredient cost and labor, and quality issues, partially offset by increased pricing. The Gross profit as a percentage of net sales for the six months ended June 30, 2022, reflects a correction to the percentage previously reported in our earnings release for the six months ended June 30, 2022 of 34.9%, which was ~~driven by the same factors as those decreasing our gross profit margin.~~furnished in a Current Report on Form 8-K on August 8, 2022. See “—Non-GAAP Financial Measures” for how we define Adjusted Gross Profit, ~~and~~ a reconciliation of Adjusted Gross Profit to ~~Gross Profit,~~gross profit, the closest comparable U.S. GAAP ~~measure.~~

measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.

2320

Selling, General and Administrative Expenses

Selling, general and administrative expenses ~~increased $27.2 million, or 39.8%, to $95.6~~("SG&A") were $129.8 million for the six months ended June 30, ~~2021 as~~2022, compared to ~~the same period~~$95.6 million in the prior year. Key components of the increase include higher variable costs of $11.1 million due to increased volume and increased freight cost, increased options expense of $7.3 million, increased media expense of $3.2 million, higher incremental operating costs of $2.6 million, increased selling expense of $1.7 million and increased depreciation expense of $1.3 million. The increased operating expenses were primarily due to new hires, and increased employee incentive and benefit costs.year period. As a percentage of net sales, ~~selling, general and administrative expenses increased~~SG&A decreased to ~~47.3%~~46.7% for the six months ended June 30, ~~2021 from 45.6%~~2022, compared to 47.3% in the prior year period. The decrease in SG&A as a percentage of net sales was a result of increased selling, general and administrative expense leverage of 440 basis points due to higher net sales, partially offset by increased media expenses as a percentage of net sales of 380 basis points. Adjusted SG&A for the six months ended June 30, ~~2020.~~

~~Adjusted SG&A~~2022, was ~~$75.1~~$108.5 million, ~~and $57.0 million in the six months ended June 30, 2021 and 2020, respectively. Adjusted SG&A decreased~~or 39.0% as a percentage of net sales, ~~to 37.2% in the six months ended June 30, 2021 as~~ compared to ~~38.0% of net sales in the six months ended June 30, 2020. The decrease of 80 basis points in Adjusted SG&A is a result of media~~$75.1 million, or 37.2% as a percentage of net sales, ~~decreasing by 220 basis points and improved leverage~~in the prior year period. The increase in Adjusted SG&A as a percentage of ~~170~~net sales was a result of increased media expenses as a percentage of net sales of 380 basis points offset by ~~increasing variable cost~~increased selling, general and administrative expense leverage of ~~310~~200 basis points due to ~~freight.~~higher net sales. See “—Non-GAAP Financial Measures” for how we define Adjusted SG&A, ~~and~~ a reconciliation of Adjusted SG&A to SG&A, the closest comparable U.S. GAAP ~~measure.~~measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.

Loss from Operations

Loss from operations increased ~~$13.5~~by $17.8 million to a loss from operations of ~~$16.2~~$34.0 million for the six months ended June 30, ~~2021~~2022 as compared to a loss from operations of ~~$2.7~~$16.2 million for the same period in the prior year as a result of the factors discussed above.

Interest Expense

Interest expense relating to our ~~credit facilities increased $0.8~~Credit Facility decreased $0.7 million to ~~$1.6~~interest expense of $2.2 million for the six months ended June ~~30, 2021~~2022 as compared to an interest expense of ~~$ $0.8~~$1.6 million for the same period in the prior year as a result of the New Loan ~~Agreement.~~Agreement and increased borrowings discussed in Note 1.

Loss on Equity Method Investment

Our loss on equity method investment for the six months ended June 30, 2022, was $2.0 million from the Company's 19% interest in a privately held company.

Net Loss

Net loss increased ~~$14.9~~$19.8 million to a net loss of ~~$18.4~~$38.1 million for the six months ended June 30, ~~2021~~2022, as compared to a net loss of ~~$3.4~~$18.4 million for the same period in the prior year as a result of the factors discussed above.

Adjusted EBITDA

Adjusted EBITDA was $9.0 million, or 3.2% as a percentage of net sales (also called Adjusted EBITDA Margin), for the six months ended June 30, 2022, compared to $18.6 million, or 9.2% as a percentage of net sales, in the prior year period. The decrease in Adjusted EBITDA was a result of increased Adjusted SG&A expense partially offset by higher net sales and Adjusted Gross Profit. As a long-term target as part of our capacity plan by 2025, we have targeted an Adjusted EBITDA Margin of approximately 25% measured on a yearly basis. 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 anticipate making 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 our Annual Report for factors that could cause our results to differ, in some cases materially.

2421

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, plant start-up 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, launch expense, 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 and COVID-19 expenses. 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, launch expenses, plant start-up expense, 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 and COVID-19 expenses. Beginning with the period ending September 30, 2022, we anticipate no longer adding back launch expenses and plant start-up expense in our calculation of Adjusted EBITDA. This change is part of a renewed focus on capital efficiency, that will provide greater clarity on our path toward generating positive net income as the business scales further following our planned capacity additions.

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, ~~provide~~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.

2522

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 orour cash requirements for our working capital needs.

Additionally, Adjusted EBITDA excludes (i) non-cash share-based compensation expense, which is and will remain a key element of our overall long-term incentive compensation package, (ii) certain costs essential to our sales growth and strategy, including an allowance for marketing expenses for each new store added to our network and non-capitalizable freight costs associated with Freshpet Fridge replacements, and (iii) plant start-up expense incurred to add manufacturing lines and additional Freshpet Kitchens. 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:

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
	(Dollars in thousands)												(Dollars in thousands)
Net (loss) income	$	(7,475	)	$	153		$	(18,364	)	$	(3,437	)
Net loss													$	(20,586	)	$	(7,475	)	$	(38,128	)	$	(18,364	)
Depreciation and amortization		7,654			5,441			14,743			9,894			7,880			7,654			15,867			14,743
Interest expense		654			80			1,556			784			1,671			654			2,243			1,556
Income tax expense		16			22			32			43			41			16			82			32
EBITDA	$	849		$	5,696		$	(2,033	)	$	7,284		$	(10,994	)	$	849		$	(19,936	)	$	(2,033	)
Loss on equity method investment	$	337		$	-		$	585		$	-		$	717			337		$	2,027			585
Loss on disposal of equipment		46			34			106			36			48			46			91			106
Non-cash share-based compensation		6,690			2,286			12,770			4,464			6,294			6,690			12,589			12,770
Launch expense (a)		1,018			686			1,749			1,642			504			1,018			1,136			1,749
Plant start-up expense (b)		1,130			725			2,973			1,192			5,293			1,130			10,040			2,973
Equity offering expenses (c)		(125	)		—			—			58			—			(125	)		—			—
Enterprise Resource Planning (d)		247			129			850			402			1,991			247			3,008			850
COVID-19 expense (e)		681			1,642			1,639			1,859			—			681			—			1,639
Adjusted EBITDA	$	10,873		$	11,199		$	18,639		$	16,938		$	3,853		$	10,873		$	8,955		$	18,639
Adjusted EBITDA as a % of Net Sales		10.0	%		14.0	%		9.2	%		11.3	%		2.6	%		10.0	%		3.2	%		9.2	%

(a)

Represents new store marketing allowance of $1,000 for each store added to our distribution network, as well as the non-capitalized freight costs associated with Freshpet Fridge replacements. The expense enhances the overall marketing spend to support our growing distribution network.

(b)

Represents additional operating costs, inclusive of inventory disposal, incurred in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens expansion projects.

(c)

Represents fees associated with public offerings of our common stock.

(d)

Represents implementation and other costs associated with the implementation of an ERP system.

(e)

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

2623

The following table provides a reconciliation of Adjusted Gross Profit to Gross Profit, the most directly comparable financial measure presented in accordance with U.S. GAAP:

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
	(Dollars in thousands)												(Dollars in thousands)
Gross Profit	$	43,091		$	33,933		$	79,405		$	65,723
Gross profit													$	51,080		$	43,091		$	95,833		$	79,405
Depreciation expense		4,021			2,550			7,821			4,294			4,295			4,021			8,996			7,821
Plant start-up expense (a)		1,130			725			2,973			1,192			5,293			1,130			10,040			2,973
Non-cash share-based compensation		1,203			493			1,913			941			1,170			1,203			2,339			1,913
COVID-19 expense (b)		681			1,546			1,634			1,763			—			681			—			1,634
Adjusted Gross Profit	$	50,126		$	39,248		$	93,746		$	73,914		$	61,838		$	50,126		$	117,208		$	93,746
Adjusted Gross Profit as a % of Net Sales		46.1	%		49.1	%		46.4	%		49.3	%		42.4	%		46.1	%		42.1	%		46.4	%

(a)

Represents additional operating costs, inclusive of inventory disposal, incurred in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens expansion projects.

(b)

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.

The following table provides a reconciliation of Adjusted SG&A Expenses to SG&A Expenses, the most directly comparable financial measure presented in accordance with U.S. GAAP:

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
	(Dollars in thousands)												(Dollars in thousands)
SG&A expenses	$	49,557		$	33,702		$	95,589		$	68,378		$	69,215		$	49,557		$	129,846		$	95,589
Depreciation and amortization expense		3,633			2,891			6,922			5,600			3,585			3,633			6,871			6,922
Non-cash share-based compensation		5,487			1,793			10,857			3,523			5,124			5,487			10,250			10,857
Launch expense (a)		1,018			686			1,749			1,642			504			1,018			1,136			1,749
Loss on disposal of equipment		46			34			106			36			48			46			91			106
Equity offering expenses (b)		(125	)		—			—			58			—			(125	)		—			—
Enterprise Resource Planning (c)		247			129			850			402			1,991			247			3,008			850
COVID-19 expense (d)		—			96			5			96			—			—			—			5
Adjusted SG&A Expenses	$	39,251		$	28,073		$	75,100		$	57,020		$	57,963		$	39,251		$	108,489		$	75,100
Adjusted SG&A Expenses as a % of Net Sales		36.1	%		35.1	%		37.2	%		38.0	%		39.7	%		36.1	%		39.0	%		37.2	%

(a)

	(b)	Represents fees associated with public offerings of our common stock.
	(c)	Represents implementation and other costs associated with the implementation of an ERP system.
	(d)	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. As of the fourth quarter of 2021, all remaining COVID-19 related expenses are part of our operating performance.

2724

Liquidity and Capital Resources

~~Developing our business will require significant capital in the future.~~ We expect to make future capital expenditures ~~of approximately $675.0 million~~ in connection with the completion of our planned development and of Freshpet Kitchens ~~Bethlehem, Freshpet Kitchens~~ Ennis Phase 1, Ennis Chicken Processing and Freshpet Kitchens ~~South~~South. During FY 2022, we expect to ~~enable estimated~~spend approximately $320 million of capital expenditures to meet our capacity ~~of approximately $2.0 billion in annual net sales.~~needs as well as recurring capital expenditures. 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. 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.

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, 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. ~~Further,~~Expanding certain of our Freshpet Kitchens, including any long-term capacity expansion, 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 ~~forgo~~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 New Loan Agreement, 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 to a term Secured Overnight Financing Rate (or "Term SOFR", as defined in the Amended Credit Agreement).

The following table sets forth, for the periods indicated, our working capital:

June 30,

December 31,

2021

2020

(Dollars in thousands)

Cash and cash equivalents
$ 280,323 $ 67,247
Accounts receivable, net of allowance for doubtful accounts
33,962 18,438
Inventories, net
24,597 19,119
Prepaid expenses
3,940 3,378
Other current assets
1,795 914
Accounts payable
(39,159 ) (16,452 )
Accrued expenses
(16,707 ) (15,371 )
Current operating lease liabilities
(1,336 ) (1,298 )
Total Working Capital
$ 287,415 $ 75,975

	June 30,			December 31,
	2022			2021
	(Dollars in thousands)
Cash and cash equivalents	$	307,345		$	72,788
Short-term investments		19,840			—
Accounts receivable, net of allowance for doubtful accounts		62,090			34,780
Inventories, net		60,679			35,574
Prepaid expenses		2,547			5,834
Other current assets		2,220			1,349
Accounts payable		(39,507	)		(42,612	)
Accrued expenses		(19,437	)		(14,950	)
Current operating lease liabilities		(1,446	)		(1,384	)
Current portion of long term debt		(10,449	)		-
Total Working Capital	$	383,882		$	91,379

Working capital consists of current assets net of current liabilities. Working capital increased ~~$211.4~~$292.5 million to ~~$287.4~~$383.9 million at June 30, ~~2021~~2022 compared with working capital of ~~$76.0~~$91.4 million at December 31, ~~2020.~~2021. The increase was primarily a result of an increase of ~~$213.1~~$234.6 million in cash and cash equivalents ~~driven mainly~~as we fund our capital expansion plan, an increase in accounts receivable of $27.3 million of which $9.5 million was a result of increased sales, and $17.8 million was a result of an increase of 11 days outstanding as a result of the new ERP transition, an increase in inventory of $25.1 million and an decrease in accounts payable of $3.1 million as a result of timing and capital expenditures of approximately $19.8 million related to our capital expansion plan. The increase was partially offset by ~~the equity offering~~an increase of ~~our common stock in February 2021~~accrued expenses of ~~$332.2~~$4.5 million.

We normally carry ~~three~~four to ~~four~~five weeks of finished goods inventory. The average duration of our accounts receivable is approximately 25 days. As of June 30, 2022, our accounts receivable aging increased by approximately 11 days as a result of the ERP implementation.

As of June 30, ~~2021,~~2022, our capital resources consisted primarily of ~~$280.3~~$307.3 million of cash and cash equivalents on hand, ~~$348.0~~$19.8 million of short-term investments, and $271.8 million available under our $350.0 million ~~credit facilities,~~Credit Facility, which reflects ~~$2.0~~$0.2 million reserved for two letters of credit.

We expect to fund our ongoing operations and obligations with cash and cash equivalents, short-term investments, cash flow from operations and available funds under our ~~credit facilities.~~Credit Facility.

The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows ~~provided by (or~~ used ~~in)~~in operating, investing and provided by financing activities and our ending balance of cash:

	Six Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2022			2021
	(Dollars in thousands)						(Dollars in thousands)
Cash at the beginning of period	$	67,247		$	9,472		$	72,788		$	67,247
Net cash from (used in) operating activities		2,935			(5,118	)
Net cash used in operating activities								(62,402	)		2,935
Net cash used in investing activities		(117,592	)		(93,252	)		(118,006	)		(117,592	)
Net cash provided by financing activities		327,733			196,626			414,965			327,733
Cash at the end of period	$	280,323		$	107,728		$	307,345		$	280,323

Net Cash used in Operating Activities

Cash ~~from~~used in 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, and share-based compensation).

Net cash used in operating activities of $62.4 million for the six months ended June 30, 2022, was primarily attributed to:

•

$3.0 million of net loss, adjusted for reconciling non-cash items, which excludes $35.1 million primarily related to $15.9 million of depreciation and amortization, $12.6 million of share-based compensation, $3.5 million of inventory obsolescence, and $2.0 million of loss on investments in equity method investment.

This was offset by:

•

$59.4 million decrease due to changes in operating assets and liabilities. The decrease is primarily due to the change in accounts receivable, inventories and other assets, primarily offset by the change in accrued expenses.

Net cash from operating activities of $2.9 million for the six months ended June 30, 2021, was primarily attributed to:

•

$11.6 million of net income, adjusted for reconciling non-cash items, which excludes $29.9 million primarily related to $14.7 million of depreciation and amortization, $12.8 million of share-based compensation, $0.8 million of amortization of deferred financing costs, $0.7 million of change in operating lease right of use asset, and $0.6 million of investments in equity method investment.

This was offset by:

•

$8.6 million decrease due to changes in operating assets and liabilities. The decrease is primarily due to the change in accounts receivable, inventories, other assets, and prepaid expenses and other current assets, offset by change in accounts payable and accrued expenses.

Net Cash Used in Investing Activities

Net cash used in ~~operating~~investing activities of ~~$5.1~~$118.0 million for the six months ended June 30, ~~2020,~~2022, was primarily attributed to:

•

$~~12.3~~94.9 million ~~of net income, adjusted for reconciling non-cash items, which excludes $15.7 million primarily~~capital expenditures related to ~~$9.9 million of depreciation~~Freshpet Kitchens, plant recurring capital expenditures, and ~~amortization, $4.5 million of share-based compensation, $0.7 million of amortization of deferred financing costs,~~expenditures relating to investment in fridges and ~~$0.5 million of change in operating lease right of use asset.~~ other capital spend.

~~This was offset by:~~

	•	$~~16.9~~19.8 million ~~decrease due to changes~~purchase of short-term investments.
	•	$3.3 million investment in operating assets and liabilities. The decrease is primarily due to the change in accounts receivable, inventories, accounts payable, and accrued expenses, offset by change in prepaid expenses and other current assetsequity method investment.

~~Net Cash Used in Investing Activities~~

Net cash used in investing activities of $117.6 million for the six months ended June 30, 2021, was primarily attributed to:

•

$3.0 million capital expenditures related to Freshpet Kitchens Bethlehem expansion.

	•	$15.5 million capital expenditures related to Freshpet Kitchens South ~~expansion.~~Expansion
	•	$83.2 million capital expenditures related to Freshpet Kitchens Ennis expansion.
	•	$3.1 million in plant recurring capital expenditures.
	•	$12.8 million capital expenditures relating to investment in fridges and other capital spend.

~~Net cash used in investing activities of $93.3 million for the six months ended June 30, 2020, was primarily attributed to:~~

	•	~~$46.3 million capital expenditures related to Freshpet Kitchens Bethlehem expansion.~~
	•	~~$5.8 million capital expenditures related to Freshpet Kitchens South expansion.~~

	•	~~$4.7 million capital expenditures related to Freshpet Kitchens Ennis expansion.~~
	•	~~$3.6 million in plant recurring capital expenditures.~~
	•	~~$12.9 million capital expenditures relating to investment in fridges and other capital spend.~~
	•	~~$20.0 million purchase of short-term investments.~~

Net Cash Provided by Financing Activities

Net cash provided by financing activities of $~~327.7~~415.0 million for the six months ended June 30, 2022, was primarily attributed to:

•

$337.8 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.
	•	$0.3 million cash proceeds from the exercise of stock options.

This was partially offset by:

•

$1.2 million for tax withholdings related to net share settlements of restricted stock units.

Net cash provided by financing activities of $327.7 million for the six months ended June 30, 2021, was primarily attributed to:

•

$332.2 million of proceeds from common shares issued in a primary offering, net of issuance cost.

•

$1.7 ~~million cash proceeds from the exercise of stock options.~~

~~This was partially offset by:~~

•

~~$3.3 million for debt issuance cost related to the New Credit Facility.~~

•

~~$2.9~~ ~~million for tax withholdings related to net share settlements of restricted stock units.~~

~~Net cash provided by financing activities of $196.6 million for the six months ended June 30, 2020, was primarily attributed to:~~

	•	~~$252.1 million of proceeds from common shares issued in a primary offering, net of issuance cost.~~
	•	~~$20.9 million of proceeds from borrowings under our credit facilities.~~

•

~~$2.1~~ million cash proceeds from the exercise of stock options.

This was partially offset by:

	•	$~~76.0~~3.3 million ~~repayment of borrowings under our credit facilities.~~for debt issuance cost related to the new Credit Facility.
	•	$~~1.3~~2.9 million for tax withholdings related to net share settlements of restricted stock units.
	•	~~$0.4 million financing fees paid in connection with borrowings~~

3027

Indebtedness

For a discussion of our material indebtedness, see Note 5 to our consolidated financial statements included in this report.

Contractual Obligations

There were no material changes to our commitments under contractual obligations, as disclosed in our Annual Report.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Critical Accounting ~~Policies and Significant~~ Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States or ~~GAAP.~~("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting ~~policies and~~ estimates as compared to the critical accounting policies and estimates described in our Annual Report.

Recent Accounting Pronouncements

Recently Adopted Standards:

See Note 1 of our (unaudited) consolidated financial statements for additional information.

Standards Effective in Future Years:

We consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed herein were assessed and determined to be either not applicable or are expected to have minimal impact to our consolidated financial statements.

3128

Item 3. 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 June 30, ~~2021,~~2022, we ~~did not have any~~had $78.0 million 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.

Foreign Exchange Rates

Fluctuations in the currencies of countries where the Company operates outside the U.S. may have a significant impact on 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~~average exchange rates for revenues and expenses. The percentage of our consolidated revenue for the three and six months ended June 30, ~~2021~~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 Income (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 June 30, ~~2021,~~2022, there were no forward contracts outstanding.

3229

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date our disclosure controls and procedures were effective.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We transitioned to a new enterprise resource planning (ERP) system during the first quarter of 2022. Implementation, integration and transition efforts will continue thereafter. In connection with the implementation, integration and transition, and resulting business process changes, we continue to review and enhance the design and documentation of our internal control over financial reporting processes to maintain effective controls over our financial reporting following the completion of the implementation, integration and transition. To date, the implementation, integration and transition have not materially affected our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

3330

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are currently involved in various claims and legal actions that arise in the ordinary course of our business, including claims resulting from employment related matters. None of these claims or proceedings, most of which are covered by insurance, are expected to have a material adverse effect on our business, financial condition, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operations or cash flows. See Note 10 — Commitments and Contingencies for additional discussion of pending litigation.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report.

3431

Item 6.

Exhibits

Exhibit No.		Description
3.1		~~Fourth~~ Amended and Restated ~~Certificate of Incorporation~~Bylaws of Freshpet, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed with the SEC on ~~September 25, 2020)~~June 30, 2022)
~~3.2~~10.1		First Amendment to Sixth Amended and Restated ~~Bylaws~~Loan and Security Agreement, dated April 29, 2022, by and among the Company and City National Bank, as the arranger and administrative agent, and the lenders thereto (incorporated by reference ~~to Exhibit 3.1~~ to the Company's Current Report on Form 8-K filed with the SEC on ~~June 9, 2021)~~May 2, 2022)
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-101.INS*		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document.
EX-101.SCH*		Inline XBRL Taxonomy Extension Schema Document
EX-101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
EX-101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
EX-104		Inline XBRL Formatted Cover Page (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith.

3532

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August ~~3, 2021~~9, 2022		FRESHPET, INC.

		/s/ William B. Cyr William B. Cyr Chief Executive Officer (Principal Executive Officer)

		/s/ Heather Pomerantz
		Heather Pomerantz Chief Financial Officer
		(Principal Financial and Accounting Officer)

3633

	Three months ended					Six Months Ended
	June 30,					June 30,
	2021			2020		2021			2020
Net Income (Loss) Attributable to Common Stockholders	$	(7,475	)	$	153	$	(18,364	)	$	(3,437	)

Weighted Average Common Shares Outstanding, Basic		43,303			40,339		42,470			38,891
Dilutive Effect of Share-Based Awards:
Service Period Stock Options		0			1,032		0			0
Restricted Stock Units		0			114		0			0
Performance		0			25		0			0
Weighted Average Common Shares Outstanding, Diluted		43,303			41,510		42,470			38,891

Basic Earnings per Share	$	(0.17	)	$	0.00	$	(0.43	)	$	(0.09	)
Diluted Earnings per Share	$	(0.17	)	$	0.00	$	(0.43	)	$	(0.09	)