`
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31,June 30, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 |
400 Plaza Drive, 1st Floor, Secaucus, New Jersey | 07094 |
(Address of principal executive offices) | ( |
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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 |
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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, 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 |
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Non-accelerated filer |
| ☐ |
| Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 1,July 31, 2020, the registrant had 40,266,18140,474,693 shares of common stock, $0.001 par value per share, outstanding.
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Part I. Financial Information | |||
Item 1. | |||
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| Consolidated Statements of Operations and Comprehensive Income (Loss) | ||
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Item 2. | Management’s Discussion and Analysis of Financial Conditions and Results of Operations | ||
Item 3. |
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Item 4. |
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Part II. Other Information |
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Item 1. |
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Item 1A. |
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Item 6. |
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2
Forward-Looking Statements
This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
• |
| our ability to successfully implement our growth strategy; |
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| our ability to timely complete the construction of our Freshpet Kitchens 2.0, Kitchens South and Kitchens 3.0 (together, the “Freshpet Kitchens expansion projects”) and achieve the anticipated benefits therefrom; |
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| the effect of the novel coronavirus (“COVID-19”) on our business, employees, suppliers, customers and end consumers; |
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| the loss of key members of our senior management team; |
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| allegations that our products cause injury or illness or fail to comply with government regulations; |
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| the loss of a significant customer; |
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| the entrance of new competitors into our industry; |
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| the effectiveness of our marketing and trade spending programs; |
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| our ability to introduce new products and improve existing products; |
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| our limited manufacturing capacity; |
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| the impact of government regulation, scrutiny, warning and public perception; |
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| the effect of false marketing claims; |
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| adverse weather conditions, natural disasters, pestilences and other natural conditions affecting our operations; |
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| our ability to develop and maintain our brand; |
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| the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require; |
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| our ability to manage our supply chain effectively; |
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| our ability to generate sufficient cash flow or raise capital on acceptable terms; |
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| volatility in the price of our common stock; and |
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| other factors discussed under 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 and in this report. |
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
3
Item 1. Financial Statements
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2020 |
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| December 31, 2019 |
| June 30, | December 31, | ||||||||
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| 2020 | 2019 | ||||||
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents | $ | 149,486,159 |
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| $ | 9,471,676 |
| $ | 107,727,885 | $ | 9,471,676 | ||||
Short-term investments |
| 20,000,000 |
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| — |
| 20,001,196 | — | ||||||
Accounts receivable, net of allowance for doubtful accounts |
| 20,295,397 |
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| 18,580,840 |
| 22,651,347 | 18,580,840 | ||||||
Inventories, net |
| 16,005,370 |
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| 12,542,269 |
| 18,692,994 | 12,542,269 | ||||||
Prepaid expenses |
| 2,998,336 |
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| 3,275,992 |
| 2,782,085 | 3,275,992 | ||||||
Other current assets(1) |
| 10,720,781 |
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| 10,452,990 |
| 765,463 | 10,452,990 | ||||||
Total Current Assets |
| 219,506,043 |
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| 54,323,767 |
| 172,620,970 | 54,323,767 | ||||||
Property, plant and equipment, net |
| 195,607,774 |
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| 165,287,597 |
| 220,074,510 | 165,287,597 | ||||||
Deposits on equipment |
| 4,298,520 |
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| 3,600,931 |
| 6,134,329 | 3,600,931 | ||||||
Operating lease right of use assets |
| 8,846,194 |
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| 9,154,234 |
| 8,690,401 | 9,154,234 | ||||||
Other assets |
| 3,708,158 |
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| 3,759,058 |
| 4,340,100 | 3,759,058 | ||||||
Total Assets | $ | 431,966,689 |
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| $ | 236,125,587 |
| $ | 411,860,310 | $ | 236,125,587 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable | $ | 20,420,592 |
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| $ | 18,667,729 |
| $ | 9,090,164 | $ | 18,667,729 | ||||
Accrued expenses(1) |
| 20,440,468 |
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| 22,132,928 |
| 8,985,593 | 22,132,928 | ||||||
Current operating lease liabilities |
| 1,241,168 |
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| 1,185,058 |
| 1,336,694 | 1,185,058 | ||||||
Total Current Liabilities | $ | 42,102,228 |
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| $ | 41,985,715 |
| 19,412,451 | 41,985,715 | ||||||
Long term debt |
| — |
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| 54,466,099 |
| — | 54,466,099 | ||||||
Long term operating lease liabilities |
| 8,069,160 |
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| 8,409,252 |
| 7,856,832 | 8,409,252 | ||||||
Total Liabilities | $ | 50,171,388 |
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| $ | 104,861,066 |
| $ | 27,269,283 | $ | 104,861,066 | ||||
STOCKHOLDERS' EQUITY: |
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Common stock — voting, $0.001 par value, 200,000,000 shares authorized, 40,271,411 issued and 40,257,242 outstanding on March 31, 2020, and 36,162,433 issued and 36,148,264 outstanding on December 31, 2019 |
| 40,271 |
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| 36,162 |
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Common stock — voting, $0.001 par value, 200,000,000 shares authorized, 40,480,225 issued and 40,466,056 outstanding on June 30, 2020, and 36,162,433 issued and 36,148,264 outstanding on December 31, 2019 | 40,480 | 36,162 | |||||||||||||
Additional paid-in capital |
| 588,357,121 |
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| 334,299,172 |
| 591,386,109 | 334,299,172 | ||||||
Accumulated deficit |
| (206,325,650 | ) |
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| (202,735,417 | ) | (206,172,555 | ) | (202,735,417 | ) | ||||
Accumulated other comprehensive income |
| (20,215 | ) |
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| (79,170 | ) | ||||||||
Treasury stock, at cost — 14,169 shares on March 31, 2020 and on December 31, 2019 |
| (256,226 | ) |
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| (256,226 | ) | ||||||||
Accumulated other comprehensive income (loss) | (406,781 | ) | (79,170 | ) | |||||||||||
Treasury stock, at cost — 14,169 shares on June 30, 2020 and on December 31, 2019 | (256,226 | ) | (256,226 | ) | |||||||||||
Total Stockholders' Equity |
| 381,795,301 |
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| 131,264,521 |
| 384,591,027 | 131,264,521 | ||||||
Total Liabilities and Stockholders' Equity | $ | 431,966,689 |
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| $ | 236,125,587 |
| $ | 411,860,310 | $ | 236,125,587 |
See accompanying notes to the unaudited consolidated financial statements.
(1) | See Note 10 for additional information. |
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4
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
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| For the Three Months Ended |
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||
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| March 31, |
| June 30, | June 30, | |||||||||||||||||||
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| 2020 |
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| 2019 |
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
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NET SALES |
| $ | 70,097,805 |
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| $ | 54,792,202 |
| $ | 79,980,060 | $ | 60,052,179 | $ | 150,077,864 | $ | 114,844,381 | ||||||||
COST OF GOODS SOLD |
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| 38,308,179 |
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| 28,877,221 |
| 46,046,979 | 32,725,598 | 84,355,157 | 61,602,819 | ||||||||||||
GROSS PROFIT |
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| 31,789,626 |
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| 25,914,981 |
| 33,933,081 | 27,326,581 | 65,722,707 | 53,241,562 | ||||||||||||
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES |
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| 34,675,943 |
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| 29,232,250 |
| 33,702,103 | 32,672,284 | 68,378,046 | 61,904,534 | ||||||||||||
LOSS FROM OPERATIONS |
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| (2,886,317 | ) |
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| (3,317,269 | ) | ||||||||||||||||
INCOME (LOSS) FROM OPERATIONS | 230,978 | (5,345,703 | ) | (2,655,339 | ) | (8,662,972 | ) | |||||||||||||||||
OTHER INCOME/(EXPENSES): |
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Other Income/(Expenses), net |
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| 21,518 |
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| 17,295 |
| 23,586 | (20,748 | ) | 45,104 | (3,453 | ) | ||||||||||
Interest Expense |
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| (703,834 | ) |
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| (102,776 | ) | (79,869 | ) | (275,649 | ) | (783,703 | ) | (378,425 | ) | ||||||||
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| (682,316 | ) |
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| (85,481 | ) | (56,283 | ) | (296,397 | ) | (738,599 | ) | (381,878 | ) | ||||||||
LOSS BEFORE INCOME TAXES |
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| (3,568,633 | ) |
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| (3,402,750 | ) | ||||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | 174,695 | (5,642,100 | ) | (3,393,938 | ) | (9,044,850 | ) | |||||||||||||||||
INCOME TAX EXPENSE |
|
| 21,600 |
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| 19,250 |
| 21,600 | 19,250 | 43,200 | 38,500 | ||||||||||||
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | (3,590,233 | ) |
| $ | (3,422,000 | ) | ||||||||||||||||
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | 153,095 | $ | (5,661,350 | ) | $ | (3,437,138 | ) | $ | (9,083,350 | ) | |||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS): |
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Change in foreign currency translation |
| $ | 58,955 |
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| 91,047 |
| $ | (386,566 | ) | $ | (153,321 | ) | $ | (327,611 | ) | $ | (62,274 | ) | ||||
TOTAL OTHER COMPREHENSIVE INCOME |
|
| 58,955 |
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| 91,047 |
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TOTAL COMPREHENSIVE LOSS |
| $ | (3,531,278 | ) |
| $ | (3,330,953 | ) | ||||||||||||||||
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS |
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TOTAL OTHER COMPREHENSIVE (LOSS) | (386,566 | ) | (153,321 | ) | (327,611 | ) | (62,274 | ) | ||||||||||||||||
TOTAL COMPREHENSIVE INCOME (LOSS) | $ | (233,471 | ) | $ | (5,814,671 | ) | $ | (3,764,749 | ) | $ | (9,145,624 | ) | ||||||||||||
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS | ||||||||||||||||||||||||
-BASIC |
| $ | (0.10 | ) |
| $ | (0.10 | ) | $ | 0.00 | $ | (0.16 | ) | $ | (0.09 | ) | $ | (0.25 | ) | |||||
-DILUTED |
| $ | (0.10 | ) |
| $ | (0.10 | ) | $ | 0.00 | $ | (0.16 | ) | $ | (0.09 | ) | $ | (0.25 | ) | |||||
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING USED IN COMPUTING NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS |
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-BASIC |
|
| 37,443,758 |
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| 35,668,323 |
| 40,338,982 | 35,930,350 | 38,891,370 | 35,800,061 | ||||||||||||
-DILUTED |
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| 37,443,758 |
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| 35,668,323 |
| 41,509,819 | 35,930,350 | 38,891,370 | 35,800,061 | ||||||||||||
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See accompanying notes to the unaudited consolidated financial statements.
5
FRESHPET, INC. AND SUBSIDIARIES
CHANGES TO STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock - Voting |
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| Treasury Stock |
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| Common Stock - Voting | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||
| Number of Shares Issued |
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| Amount |
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| Additional Paid-in Capital |
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| Accumulated Deficit |
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| Accumulated Other Comprehensive Income |
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| Number of Shares |
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| Amount |
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| Total Stockholders' Equity |
| Number of Shares Issued | Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Number of Shares | Amount | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||
BALANCES, December 31, 2019 |
| 36,162,433 |
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| $ | 36,162 |
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| $ | 334,299,172 |
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| $ | (202,735,417 | ) |
| $ | (79,170 | ) |
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| 14,169 |
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| $ | (256,226 | ) |
| $ | 131,264,521 |
| 36,162,433 | $ | 36,162 | $ | 334,299,172 | $ | (202,735,417 | ) | $ | (79,170 | ) | 14,169 | $ | (256,226 | ) | $ | 131,264,521 | |||||||||||||||
Exercise of options to purchase common stock |
| 44,156 |
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| 44 |
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| 402,512 |
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| — |
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| — |
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| — |
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| — |
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| 402,556 |
| 44,156 | 44 | 402,512 | — | — | — | — | 402,556 | ||||||||||||||||||||||||
Issuance of restricted stock units |
| 64,823 |
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| 65 |
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| (644,664 | ) |
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| — |
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| — |
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| — |
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| — |
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| (644,599 | ) | 64,823 | 65 | (644,664 | ) | — | — | — | — | (644,599 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| — |
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| — |
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| 2,241,847 |
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| — |
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| — |
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| — |
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| — |
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| 2,241,847 |
| — | — | 2,241,847 | — | — | — | — | 2,241,847 | ||||||||||||||||||||||||
Shares issued in primary offering |
| 3,999,999 |
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| 4,000 |
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|
| 252,058,254 |
|
|
| — |
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|
| — |
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|
| — |
|
|
| — |
|
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| 252,062,254 |
| 3,999,999 | 4,000 | 252,058,254 | — | — | — | — | 252,062,254 | ||||||||||||||||||||||||
Foreign Currency Translation |
| — |
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| — |
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| — |
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| — |
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| 58,955 |
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| — |
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| — |
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| 58,955 |
| — | — | — | — | 58,955 | — | — | 58,955 | ||||||||||||||||||||||||
Net loss |
| — |
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|
| — |
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| — |
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| (3,590,233 | ) |
|
| — |
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|
| — |
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|
| — |
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| (3,590,233 | ) | — | — | — | (3,590,233 | ) | — | — | — | (3,590,233 | ) | ||||||||||||||||||||||
BALANCES, March 31, 2020 |
| 40,271,411 |
|
| $ | 40,271 |
|
| $ | 588,357,121 |
|
| $ | (206,325,650 | ) |
| $ | (20,215 | ) |
|
| 14,169 |
|
| $ | (256,226 | ) |
| $ | 381,795,301 |
| 40,271,411 | $ | 40,271 | $ | 588,357,121 | $ | (206,325,650 | ) | $ | (20,215 | ) | 14,169 | $ | (256,226 | ) | $ | 381,795,301 | |||||||||||||||
Exercise of options to purchase common stock | 199,796 | 200 | 1,687,780 | — | — | — | — | 1,687,980 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock units | 9,018 | 9 | (991,706 | ) | — | — | — | — | (991,697 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 2,332,915 | — | — | — | — | 2,332,915 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued in primary offering | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation | — | — | — | — | (386,566 | ) | — | — | (386,566 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | 153,095 | — | — | — | 153,095 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCES, June 30, 2020 | 40,480,225 | $ | 40,480 | $ | 591,386,109 | $ | (206,172,555 | ) | $ | (406,781 | ) | 14,169 | $ | (256,226 | ) | $ | 384,591,027 |
| Common Stock - Voting |
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| Treasury Stock |
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| Common Stock - Voting | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||
| Number of Shares Issued |
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| Amount |
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| Additional Paid-in Capital |
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| Accumulated Deficit |
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| Accumulated Other Comprehensive Income |
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| Number of Shares |
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| Amount |
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| Total Stockholders' Equity |
| Number of Shares Issued | Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Number of Shares | Amount | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||
BALANCES, December 31, 2018 |
| 35,556,595 |
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| $ | 35,556 |
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| $ | 323,079,437 |
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| $ | (201,352,682 | ) |
| $ | (31,610 | ) |
|
| 14,169 |
|
| $ | (256,226 | ) |
| $ | 121,474,475 |
| 35,556,595 | $ | 35,556 | $ | 323,079,437 | $ | (201,352,682 | ) | $ | (31,610 | ) | 14,169 | $ | (256,226 | ) | $ | 121,474,475 | |||||||||||||||
Exercise of options to purchase common stock |
| 248,195 |
|
|
| 248 |
|
|
| 1,791,420 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,791,668 |
| 248,195 | 248 | 1,791,420 | — | — | — | — | 1,791,668 | ||||||||||||||||||||||||
Issuance of restricted stock units |
| 61,532 |
|
|
| 62 |
|
|
| (673,836 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (673,774 | ) | 61,532 | 62 | (673,836 | ) | — | — | — | — | (673,774 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| — |
|
|
| — |
|
|
| 1,260,126 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,260,126 |
| — | — | 1,260,126 | — | — | — | — | 1,260,126 | ||||||||||||||||||||||||
Foreign Currency Translation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 91,047 |
|
|
| — |
|
|
| — |
|
|
| 91,047 |
| — | — | — | — | 91,047 | — | — | 91,047 | ||||||||||||||||||||||||
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| (3,422,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,422,000 | ) | — | — | — | (3,422,000 | ) | — | — | — | (3,422,000 | ) | ||||||||||||||||||||||
BALANCES, March 31, 2019 |
| 35,866,322 |
|
| $ | 35,866 |
|
| $ | 325,457,147 |
|
| $ | (204,774,682 | ) |
| $ | 59,437 |
|
|
| 14,169 |
|
| $ | (256,226 | ) |
| $ | 120,521,542 |
| 35,866,322 | $ | 35,866 | $ | 325,457,147 | $ | (204,774,682 | ) | $ | 59,437 | 14,169 | $ | (256,226 | ) | $ | 120,521,542 | ||||||||||||||||
Exercise of options to purchase common stock | 194,497 | 194 | 1,983,685 | — | — | — | — | 1,983,879 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock units | 29,126 | 29 | (579,207 | ) | — | — | — | — | (579,178 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 1,480,882 | — | — | — | — | 1,480,882 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation | — | — | — | — | (153,321 | ) | — | — | (153,321 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (5,661,350 | ) | — | — | — | (5,661,350 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCES, June 30, 2019 | 36,089,945 | $ | 36,089 | $ | 328,342,507 | $ | (210,436,032 | ) | $ | (93,884 | ) | 14,169 | $ | (256,226 | ) | $ | 117,592,454 |
See accompanying notes to the unaudited consolidated financial statements.
6
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended |
| For the Six Months Ended | ||||||||||||
| March 31, |
| June 30, | ||||||||||||
|
| 2020 |
|
|
| 2019 |
| 2020 | 2019 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
| ||||||||
Net loss | $ | (3,590,233 | ) |
| $ | (3,422,000 | ) | $ | (3,437,138 | ) | $ | (9,083,350 | ) | ||
Adjustments to reconcile net loss to net cash flows provided by operating activities: |
|
|
|
|
|
|
| ||||||||
Provision for loss/(gains) on accounts receivable |
| 90,712 |
|
|
| 28,778 |
| 6,631 | (2,520 | ) | |||||
Loss on disposal of equipment |
| 1,662 |
|
|
| 8,028 |
| 35,855 | 684 | ||||||
Share-based compensation |
| 2,178,214 |
|
|
| 1,200,336 |
| 4,464,116 | 2,630,180 | ||||||
Inventory obsolescence |
| 117,937 |
|
|
| 10,238 |
| 151,123 | 105,170 | ||||||
Depreciation and amortization |
| 4,453,031 |
|
|
| 3,720,091 |
| 9,893,912 | 7,643,452 | ||||||
Amortization of deferred financing costs and loan discount |
| 625,299 |
|
|
| 28,775 |
| 691,467 | 72,294 | ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| ||||||||
Accounts receivable |
| (1,805,269 | ) |
|
| (5,010,252 | ) | (4,077,138 | ) | (7,027,205 | ) | ||||
Inventories |
| (3,581,038 | ) |
|
| (1,802,222 | ) | (6,301,848 | ) | (4,013,770 | ) | ||||
Prepaid expenses and other current assets |
| 9,865 |
|
|
| (929,849 | ) | 10,181,434 | (177,392 | ) | |||||
Operating lease right of use |
| 308,040 |
|
|
| 241,785 |
| 463,833 | (177,249 | ) | |||||
Other assets |
| 11,786 |
|
|
| (36,010 | ) | (211,754 | ) | (44,498 | ) | ||||
Accounts payable |
| 655,688 |
|
|
| 2,555,681 |
| (3,430,173 | ) | (158,556 | ) | ||||
Accrued expenses |
| (1,692,460 | ) |
|
| (832,986 | ) | (13,147,335 | ) | (31,969 | ) | ||||
Other lease liabilities |
| (283,982 | ) |
|
| (217,469 | ) | (400,784 | ) | 229,194 | |||||
Other current liabilities | — | 200,000 | |||||||||||||
Net cash flows used in operating activities |
| (2,500,748 | ) |
|
| (4,457,076 | ) | (5,117,799 | ) | (9,835,535 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
| ||||||||
Purchase of short-term investments |
| (20,000,000 | ) |
|
| — |
| (20,001,196 | ) | — | |||||
Acquisitions of property, plant and equipment, software and deposits on equipment |
| (34,237,980 | ) |
|
| (10,453,923 | ) | (73,250,757 | ) | (22,888,753 | ) | ||||
Net cash flows used in investing activities |
| (54,237,980 | ) |
|
| (10,453,923 | ) | (93,251,953 | ) | (22,888,753 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
| ||||||||
Proceeds from common shares issued in primary offering, net of issuance cost |
| 252,062,254 |
|
|
| — |
| 252,062,253 | — | ||||||
Proceeds from exercise of options to purchase common stock |
| 402,556 |
|
|
| 1,791,668 |
| 2,090,536 | 3,775,548 | ||||||
Tax withholdings related to net shares settlements of restricted stock units |
| (644,599 | ) |
|
| (673,774 | ) | (1,636,296 | ) | (1,252,953 | ) | ||||
Proceeds from borrowings under Credit Facilities |
| 20,933,000 |
|
|
| 10,000,000 |
| 20,933,000 | 35,307,000 | ||||||
Repayment of borrowings under Credit Facilities |
| (76,000,000 | ) |
|
| — |
| (76,000,000 | ) | (7,500,000 | ) | ||||
Financing fees paid in connection with borrowings | (823,532 | ) | (406,859 | ) | |||||||||||
Net cash flows provided by financing activities |
| 196,753,211 |
|
|
| 11,117,894 |
| 196,625,961 | 29,922,736 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
| 140,014,483 |
|
|
| (3,793,105 | ) | 98,256,209 | (2,801,552 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
| 9,471,676 |
|
|
| 7,554,388 |
| 9,471,676 | 7,554,388 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 149,486,159 |
|
| $ | 3,761,283 |
| $ | 107,727,885 | $ | 4,752,836 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
| ||||||||
Interest paid | $ | 766,950 |
|
| $ | 29,717 |
| $ | 789,417 | $ | 165,844 | ||||
NON-CASH FINANCING AND INVESTING ACTIVITIES: |
|
|
|
|
|
|
| ||||||||
Property, plant and equipment purchases in accounts payable | $ | 8,671,690 |
|
| $ | 463,546 |
| $ | 1,427,123 | $ | 7,662,437 | ||||
Non-cash acquisitions of property, plant and equipment | $ | — |
|
| $ | 1,749,901 |
|
See accompanying notes to the unaudited consolidated financial statements.
7
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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” 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 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 March 31,June 30, 2020, the results of its operations and changes to stockholders’ equity for the three and six months ended March 31,June 30, 2020 and 2019, and its cash flows for the threesix months ended March 31,June 30, 2020 and 2019.2019. The results for the three and six months ended March 31,June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, or any other interim periods, or any future year or period. Certain amounts that appear in this report may not add up because of differences due to rounding.
These 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-K10-K for the year ended December 31, 2019.2019.
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. Actual results, as determined at a later date, could differ from those estimates.
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:
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.
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.
19
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.
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 valuemethod. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the grant date. Werecognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders therequired 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 $198.1 million as of December 31, 2019, of which, approximately $175.0 million, generated in 2017 and prior, will expire between 2025 and 2037. The NOL generated in 2018 and 2019, of approximately $23.1 million, will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company may be subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code(theCode (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. Although we have not completed an analysis under Section 382 of the Code, it is likely that the utilization of the NOLs will be limited. At December 31, 2019, we had approximately $160.0 million of state NOLs, which expire between 2020 and 2039. At December 31, 2019, 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 March 31, |
| |||||||||||||
| 2020 |
|
| 2019 |
| ||||||||||
| Amount |
|
| % of Net Sales |
|
| Amount |
|
| % of Net Sales |
| ||||
| (Dollars in thousands) |
| |||||||||||||
Net sales | $ | 70,098 |
|
|
| 100 | % |
| $ | 54,792 |
|
|
| 100 | % |
Cost of goods sold |
| 38,308 |
|
|
| 55 |
|
|
| 28,877 |
|
|
| 53 |
|
Gross profit |
| 31,790 |
|
|
| 45 |
|
|
| 25,915 |
|
|
| 47 |
|
Selling, general and administrative expenses |
| 34,676 |
|
|
| 50 |
|
|
| 29,232 |
|
|
| 53 |
|
Loss from operations |
| (2,886 | ) |
|
| (4 | ) |
|
| (3,317 | ) |
|
| (6 | ) |
Other income/(expenses), net |
| 21 |
|
|
| 0 |
|
|
| 17 |
|
|
| 0 |
|
Interest expense |
| (704 | ) |
|
| (1 | ) |
|
| (103 | ) |
|
| (0 | ) |
Loss before income taxes |
| (3,569 | ) |
|
| (5 | ) |
|
| (3,403 | ) |
|
| (6 | ) |
Income tax expense |
| 21 |
|
|
| 0 |
|
|
| 19 |
|
|
| 0 |
|
Net loss | $ | (3,590 | ) |
|
| (5 | )% |
| $ | (3,422 | ) |
|
| (6 | )% |
20
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
Amount | % of Net Sales | Amount | % of Net Sales | Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Net sales | $ | 79,980 | 100 | % | $ | 60,052 | 100 | % | $ | 150,078 | 100 | % | $ | 114,844 | 100 | % | ||||||||||||||||
Cost of goods sold | 46,047 | 58 | 32,726 | 54 | 84,355 | 56 | 61,603 | 54 | ||||||||||||||||||||||||
Gross profit | 33,933 | 42 | 27,326 | 46 | 65,723 | 44 | 53,241 | 46 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 33,702 | 42 | 32,672 | 54 | 68,378 | 46 | 61,904 | 54 | ||||||||||||||||||||||||
Income (Loss) from operations | 231 | 0 | (5,346 | ) | (9 | ) | (2,655 | ) | (2 | ) | (8,663 | ) | (8 | ) | ||||||||||||||||||
Other income/(expenses), net | 24 | 0 | (21 | ) | (0 | ) | 45 | 0 | (3 | ) | (0 | ) | ||||||||||||||||||||
Interest expense | (80 | ) | (0 | ) | (275 | ) | (0 | ) | (784 | ) | (0 | ) | (378 | ) | (0 | ) | ||||||||||||||||
Income (Loss) before income taxes | 175 | 0 | (5,642 | ) | (9 | ) | (3,394 | ) | (2 | ) | (9,044 | ) | (8 | ) | ||||||||||||||||||
Income tax expense | 22 | 0 | 19 | 0 | 43 | 0 | 39 | 0 | ||||||||||||||||||||||||
Net Income (loss) | $ | 153 | 0 | % | $ | (5,661 | ) | (9 | )% | $ | (3,437 | ) | (2 | )% | $ | (9,083 | ) | (8 | )% |
Three Months Ended March 31,June 30, 2020 Compared to Three Months Ended March 31,June 30, 2019
Net Sales
The following table sets forth net sales by class of retailer:
Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
|
| Three Months Ended March 31, |
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| % of | % of | ||||||||||||||||||||||||||||||||||||||||
|
| Amount |
|
| % of Net Sales |
|
| Store Count |
|
| Amount |
|
| % of Net Sales |
|
| Store Count |
| Amount | Net Sales | Store Count | Amount | Net Sales | Store Count | ||||||||||||||||||||||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Grocery (including Online), Mass and Club (1) |
| $ | 60,819 |
|
|
| 87 | % |
|
| 16,686 |
|
| $ | 45,708 |
|
|
| 83 | % |
|
| 14,786 |
| $ | 68,284 | 85 | % | 16,929 | $ | 49,921 | 83 | % | 15,101 | ||||||||||||||
Pet Specialty and Natural (2) |
|
| 9,279 |
|
|
| 13 |
|
|
| 5,181 |
|
|
| 9,084 |
|
|
| 17 |
|
|
| 5,267 |
| 11,696 | 15 | % | 5,191 | 10,131 | 17 | % | 5,313 | ||||||||||||||||
Net Sales |
|
| 70,098 |
|
|
| 100 | % |
|
| 21,867 |
|
| $ | 54,792 |
|
|
| 100 | % |
|
| 20,053 |
| $ | 79,980 | 100 | % | 22,120 | $ | 60,052 | 100 | % | 20,414 |
(1) | Stores at June 30, 2020 and June 30, 2019 consisted of 11,841 and 10,547 Grocery and 5,088 and 4,554 Mass and Club, respectively. |
(2) | Stores at June 30, 2020 and June 30, 2019 consisted of 4,728 and 4,872 Pet Specialty and 463 and 441 Natural, respectively. |
(1)Stores at March 31, 2020 and March 31, 2019 consisted of 11,614 and 10,231 Grocery and 5,072 and 4,555 Mass and Club, respectively.
(2)Stores at March 31, 2020 and March 31, 2019 consisted of 4,722 and 4,842 Pet Specialty and 459 and 425 Natural, respectively.
Net sales increased $15.3$19.9 million, or 27.9%33.2%, to $70.1$80.0 million for the three months ended March 31,June 30, 2020 as compared to the same period in the prior year. The $15.3$19.9 million increase in net sales was driven by growth of $15.1$18.4 million in our Grocery (including Online), Mass, and Club refrigerated channel and $0.2$1.6 million in our Pet Specialty and Natural refrigerated channel. Our Freshpet Fridge store locations grew by 9.0%8.4% to 21,86722,120 as of March 31,June 30, 2020 compared to 20,05320,414 as of March 31,June 30, 2019.
Gross Profit
Gross profit increased $5.9$6.6 million, or 22.7%24.2%, to $31.8$33.9 million for the three months ended March 31,June 30, 2020 as compared to the same period in the prior year. The increase in gross profit was primarily driven by higher net sales.sales, offset by increased cost.
Our gross
Gross profit margin of 45.4%42.4% for the three months ended March 31,June 30, 2020 decreased 190310 basis points compared to the same period in the prior year, due to increased processingCOVID-19 related cost of 100190 basis points, plant start-up cost of 90 basis points, increased labor and overhead cost of 100 basis points due to 7 day production ramp up, plant start-upprocessing cost of 60 basis points, increased depreciation mainly related to Kitchens South of 50 basis points, and increased stock compensation cost of 30 basis points, related to COVID-19 related cost, partially offset by increase in sales price and shifting selling mix of 100110 basis points.
Adjusted Gross Profit was $34.7$39.2 million and $27.6$29.1 million in the three months ended March 31,June 30, 2020 and 2019, respectively. Adjusted Gross Profit Margin was 49.5%49.1% and 50.4%48.5% in the three months ended March 31,June 30, 2020 and 2019, respectively. Adjusted Gross Profit excludes $1.7$2.6 million of depreciation expense, $0.5 million of share-based compensation expense, $1.5 million in COVID-19 expenses, and $0.5$0.7 million of plant start-up expense and $0.4 million of share-based compensation expense and $0.2 million in COVID-19 expenses in the three months ended March 31,June 30, 2020 and excludes $1.6 million of depreciation expense and $0.1$0.2 million of share-based compensation expense in the three months ended March 31,June 30, 2019. See “—Non-GAAP Financial Measures” for how we define Adjusted Gross Profit and a reconciliation of Adjusted Gross Profit to Gross Profit, the closest comparable U.S. GAAP measure.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.4$1.0 million, or 18.6%3.2%, to $34.7$33.7 million for the three months ended March 31,June 30, 2020 as compared to the same period in the prior year. Key components of the dollar increase include higher media expense of $1.7 million, higher incremental operating costs of $1.3$1.4 million, higher variable cost due to volume of $1.2 million and depreciation and options expense of $1.2$1.1 million, offset by decreased media expense of $2.7 million. The increased operating expenses were primarily due to new hires, and increased employee incentive and benefit costs. As a percentage of net sales, selling, general and administrative expenses decreased to 49.5%42.1% for the three months ended March 31,June 30, 2020 from 53.4%54.4% for the three months ended March 31,June 30, 2019.
Adjusted SG&A decreased as a percentage of net sales to 41.3%35.1% in the three months ended March 31,June 30, 2020 as compared to 45.4%46.4% of net sales in the three months ended March 31,June 30, 2019. The decrease of 4101,130 basis points in Adjusted SG&A is a result of 250270 basis point gain in SG&A leverage, and 160860 basis points leverage gain in media. Since the start of the Company’s Feed The Growth Initiative, the Company has gained approximately 660 basis points of leverage on
21
Adjusted SG&A.Adjusted SG&A excludes $2.7$2.9 million of depreciation expense, $1.7$1.8 million of non-cash share-based compensation expense, $1.0$0.7 million of launch expense, $0.3$0.1 million in enterprise resource planning expense, and $0.1 million of equity offering expenseCOVID-19 expenses in the three months ended March 31,June 30, 2020 while excluding $2.1$2.3 million of depreciation and amortization expense, $1.1$1.2 million for share-based compensation expense, and $1.1$0.9 million of launch expense and $0.3 million of secondary offering expense in the three months ended March 31,June 30, 2019. 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.
Loss
Income (Loss) from Operations
Loss
Income (Loss) from Operations decreased $0.4$5.1 million to $2.9a profit of $0.2 million for the three months ended March 31,June 30, 2020 as compared to the same period in the prior year as a result of the factors discussed above.
Interest Expense
Interest expense relating primarily to our credit facilities was $0.7$0.1 million for the three months ended March 31,June 30, 2020, of which $0.6 million was related to the recognition of debt issuance fees with the repayment of the Draw Term Loan, while interest expense was $0.1$0.3 million in the three months ended March 31,June 30, 2019.
Other Income/(Expenses), net
Other income (expenses), net increased less than $0.1 million for the three months ended March 31,June 30, 2020 compared to the same period in the prior year.
Net LossIncome (Loss)
Net lossIncome (loss) increased $0.2$5.8 million to $3.6income of $0.2 million for the three months ended March 31,June 30, 2020 as compared to loss of $3.4$5.7 million for the same period in the prior year as a result of the factors discussed above.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net Sales
The following table sets forth net sales by class of retailer:
Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Amount | Net Sales | Store Count | Amount | Net Sales | Store Count | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Grocery (including Online), Mass and Club (1) | $ | 129,103 | 86 | % | 16,929 | $ | 95,628 | 83 | % | 15,101 | ||||||||||||||
Pet Specialty and Natural (2) | 20,975 | 14 | % | 5,191 | 19,216 | 17 | % | 5,313 | ||||||||||||||||
Net Sales | $ | 150,078 | 100 | % | 22,120 | $ | 114,844 | 100 | % | 20,414 |
(1) | Stores at June 30, 2020 and June 30, 2019 consisted of 11,841 and 10,547 Grocery and 5,088 and 4,554 Mass and Club, respectively. |
(2) | Stores at June 30, 2020 and June 30, 2019 consisted of 4,728 and 4,872 Pet Specialty and 463 and 441 Natural, respectively. |
Net sales increased $35.2 million, or 30.7%, to $150.1 million for the six months ended June 30, 2020 as compared to the same period in the prior year. The $35.2 million increase in net sales was driven by growth of $33.5 million in our Grocery (including Online), Mass, and Club refrigerated channel and $1.7 million in our Pet Specialty and Natural refrigerated channel. Our Freshpet Fridge store locations grew by 8.4% to 22,120 as of June 30, 2020 compared to 20,414 as of June 30, 2019.
Gross Profit
Gross profit increased $12.5 million, or 23.4%, to $65.7 million for the six months ended June 30, 2020 as compared to the same period in the prior year. The increase in gross profit was primarily driven by higher net sales, offset by increased cost.
Gross profit margin of 43.8% for the six months ended June 30, 2020 decreased 260 basis points compared to the same period in the prior year, due to COVID-19 related cost of 120 basis points, plant start-up cost of 80 basis points, increased processing cost of 80 basis points, increased plant cost related to the ramp up of 7 day production of 50 basis points, increased depreciation mainly related to Kitchen South of 20 basis points, increased stock compensation cost of 20 basis points, partially offset by increase in sales price and shifting selling mix of 110 basis points.
Adjusted Gross Profit was $73.9 million and $56.7 million in the six months ended June 30, 2020 and 2019, respectively. Adjusted Gross Profit Margin was 49.3% and 49.4% in the six months ended June 30, 2020 and 2019, respectively. Adjusted Gross Profit excludes $4.3 million of depreciation expense, $0.9 million of share-based compensation expense, $1.8 million in COVID-19 expenses, and $1.2 million of plant start-up expense in the six months ended June 30, 2020 and excludes $3.2 million of depreciation expense and $0.3 million of share-based compensation expense in the six months ended June 30, 2019. See “—Non-GAAP Financial Measures” for how we define Adjusted Gross Profit and a reconciliation of Adjusted Gross Profit to Gross Profit, the closest comparable U.S. GAAP measure.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.5 million, or 10.5%, to $68.4 million for the six months ended June 30, 2020 as compared to the same period in the prior year. Key components of the dollar increase include higher incremental operating costs of $2.6 million, higher variable cost due to volume of $2.6 million and depreciation and options expense of $2.3 million, partially offset by decreased media spend of $1.0 million. The increased operating expenses were primarily due to new hires, and increased employee incentive and benefit costs. As a percentage of net sales, selling, general and administrative expenses decreased to 45.6% for the six months ended June 30, 2020 from 53.9% for the six months ended June 30, 2019.
Adjusted SG&A decreased as a percentage of net sales to 38.0% in the six months ended June 30, 2020 as compared to 45.9% of net sales in the six months ended June 30, 2019. The decrease of 790 basis points in Adjusted SG&A is a result of 260 basis point gain in SG&A leverage, and 540 basis points leverage gain in media. Adjusted SG&A excludes $5.6 million of depreciation expense, $3.5 million of non-cash share-based compensation expense, $1.6 million of launch expense, $0.4 million in enterprise resource planning expense, $0.1 million in equity offering expense, and $0.1 million in COVID-19 expenses in the six months ended June 30, 2020,while excluding $4.5 million of depreciation and amortization expense, $2.3 million for share-based compensation expense, $2.0 million of launch expense, and $0.3 million of secondary offering expense in the six months ended June 30, 2019. 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.
Loss from Operations
Loss from Operations decreased $6.0 million to $2.7 million for the six months ended June 30, 2020 as compared to the same period in the prior year as a result of the factors discussed above.
Interest Expense
Interest expense relating to our credit facilities was $0.8 million for the six months ended June 30, 2020, of which $0.6 million related to the recognition of debt issuance fees with the repayment of the Draw Term Loan, while interest expense was $0.4 million in the six months ended June 30, 2019.
Other Income/(Expenses), net
Other income (expenses), net increased less than $0.1 million for the six months ended June 30, 2020 compared to the same period in the prior year.
Net Loss
Net loss decreased $5.6 million to $3.4 million for the six months ended June 30, 2020 as compared to loss of $9.1 million for the same period in the prior year as a result of the factors discussed above.
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 GAAP reported measures, should not be considered replacements for, or superior to, the GAAP measures and may not be comparable to similarly named measures used by other companies.
•Adjusted Gross Profit
•
| 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 |
Such financial measures are not financial measures prepared in accordance with U.S. GAAP. We define Adjusted Gross Profit as Gross Profit before non-cash depreciation expense, plant start-up expense, COVID-19 expenses and non-cash share-based compensation. We define Adjusted SG&A as SG&A expenses before depreciation and amortization expense, non-cash share-based compensation, launch expense, loss (gain) on disposal of equipment, fees related to equity offerings andof our common stock, fees associated with due diligence of new enterprise resource planning (“ERP”) software.software and COVID-19 expenses. EBITDA represents net lossincome (loss) plus interest expense, income tax expense, and depreciation and amortization. Adjusted EBITDA represents EBITDA plus loss on disposal of equipment, non-cash share-based compensation, launch expenses, plant start-up expense, fees related to equity offerings of our common stock, COVID-19 expenses and fees associated with due diligence of new ERP software. We have changed our method for calculating Adjusted Gross Profit, Adjusted SG&A and Adjusted EBITDA in light of certain non-recurring expenses related to the COVID-19 pandemic.
22
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 a more complete understanding of our business than could be obtained absent this disclosure. We use the non-GAAP financial measures, together with U.S. GAAP financial measures, such as net sales, gross profit margins and cash flow from operations, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our operating performance and to compare our performance to that of our peers and competitors.
Adjusted EBITDA is also an important component of internal budgeting and setting management compensation.
The non-GAAP financial measures are presented here because we believe they are useful to investors in assessing the operating performance of our business without the effect of non-cash items, and other items as detailed below. The non-GAAP financial measures should not be considered in isolation or as alternatives to net income (loss), income (loss) from operations or any other measure of financial performance calculated and prescribed in accordance with U.S. GAAP. Neither EBITDA nor Adjusted EBITDA should be considered a measure of discretionary cash available to us to invest in the growth of our business. Our non-GAAP financial measures may not be comparable to similarly titled measures in other organizations because other organizations may not calculate non-GAAP financial measures in the same manner as we do.
Our presentation of the non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. We recognize that the non-GAAP financial measures have limitations as analytical financial measures. For example, the non-GAAP financial measures do not reflect:
25 |
Additionally, Adjusted EBITDA excludes (i) non-cash share-based compensation expense, which is and will remain a key element of our overall long-term incentive compensation package, and (ii) certain costs essential to our sales growth and strategy, including an allowance for marketing expenses for each new store added to our network and non-capitalizable freight costs associated with Freshpet Fridge replacements. 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 | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income (loss) | $ | 153 | $ | (5,661 | ) | $ | (3,437 | ) | $ | (9,083 | ) | |||||
Depreciation and amortization | 5,441 | 3,923 | 9,894 | 7,643 | ||||||||||||
Interest expense | 80 | 276 | 784 | 379 | ||||||||||||
Income tax expense | 22 | 19 | 43 | 38 | ||||||||||||
EBITDA | $ | 5,696 | $ | (1,443 | ) | $ | 7,284 | $ | (1,023 | ) | ||||||
Loss (gain) on disposal of equipment | 34 | (7 | ) | 36 | 1 | |||||||||||
Non-cash share-based compensation | 2,286 | 1,430 | 4,464 | 2,630 | ||||||||||||
Launch expense (a) | 686 | 948 | 1,642 | 2,071 | ||||||||||||
Plant start-up expenses (b) | 725 | — | 1,192 | — | ||||||||||||
Equity offering expenses (c) | — | 265 | 58 | 299 | ||||||||||||
Enterprise Resource Planning (d) | 129 | — | 402 | — | ||||||||||||
COVID-19 expense (e) | 1,642 | — | 1,859 | — | ||||||||||||
Adjusted EBITDA | $ | 11,199 | $ | 1,193 | $ | 16,938 | $ | 3,978 | ||||||||
Adjusted EBITDA as a % of Net Sales | 14.0 | % | 2.0 | % | 11.3 | % | 3.5 | % |
23
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (Dollars in thousands) |
| |||||
Net loss |
| $ | (3,590 | ) |
| $ | (3,422 | ) |
Depreciation and amortization |
|
| 4,453 |
|
|
| 3,720 |
|
Interest expense |
|
| 704 |
|
|
| 103 |
|
Income tax expense |
|
| 22 |
|
|
| 19 |
|
EBITDA |
| $ | 1,589 |
|
| $ | 420 |
|
Loss on disposal of equipment |
|
| 2 |
|
|
| 8 |
|
Non-cash share-based compensation |
|
| 2,178 |
|
|
| 1,200 |
|
Launch expense (a) |
|
| 957 |
|
|
| 1,123 |
|
Plant start-up expenses (b) |
|
| 467 |
|
|
| — |
|
Equity offering expenses (c) |
|
| 58 |
|
|
| 34 |
|
Enterprise Resource Planning software(d) |
|
| 273 |
|
|
| — |
|
COVID-19 expense (e) |
|
| 217 |
|
|
| — |
|
Adjusted EBITDA |
| $ | 5,741 |
|
| $ | 2,785 |
|
Adjusted EBITDA as a % of Net Sales |
|
| 8.2 | % |
|
| 5.1 | % |
(a) |
|
(b) | Represents additional operating costs incurred in connection with the start-up of our new |
| Represents |
| Represents fees associated with |
|
|
(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 mitigate potential supply chain disruptions during the pandemic. |
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 | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross Profit | $ | 33,933 | $ | 27,327 | $ | 65,723 | $ | 53,242 | ||||||||
Depreciation expense (a) | 2,550 | 1,589 | 4,294 | 3,155 | ||||||||||||
Plant start-up expense (b) | 725 | — | 1,192 | — | ||||||||||||
Non-cash share-based compensation (c) | 493 | 186 | 941 | 334 | ||||||||||||
COVID-19 expense (d) | 1,546 | — | 1,763 | — | ||||||||||||
Adjusted Gross Profit | $ | 39,248 | $ | 29,102 | $ | 73,914 | $ | 56,731 | ||||||||
Adjusted Gross Profit as a % of Net Sales | 49.1 | % | 48.5 | % | 49.3 | % | 49.4 | % |
(a) | Represents depreciation and amortization expense included in cost of goods sold. |
(b) | Represents additional operating costs incurred in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens expansion projects. |
(c) | Represents non-cash share-based compensation expense included in cost of goods sold. |
(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 mitigate potential supply chain disruptions during the |
The following table provides a reconciliation of Adjusted Gross ProfitSG&A Expenses to Gross Profit,SG&A Expenses, the most directly comparable financial measure presented in accordance with U.S. GAAP:
|
| Three Months Ended |
| |||||||
|
| March 31, |
| |||||||
|
| 2020 |
|
|
|
| 2019 |
| ||
|
| (Dollars in thousands) |
| |||||||
Gross Profit |
| $ | 31,790 |
|
|
|
| $ | 25,915 |
|
Depreciation expense (a) |
|
| 1,744 |
|
|
|
|
| 1,566 |
|
Plant start-up expense (b) |
|
| 467 |
|
|
|
|
| — |
|
Non-cash share-based compensation (c) |
|
| 449 |
|
|
|
|
| 148 |
|
COVID-19 expense (d) |
|
| 217 |
|
|
|
|
| — |
|
Adjusted Gross Profit |
| $ | 34,667 |
|
|
|
| $ | 27,629 |
|
Adjusted Gross Profit as a % of Net Sales |
|
| 49.5 | % |
|
|
|
| 50.4 | % |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
SG&A expenses | $ | 33,702 | $ | 32,672 | $ | 68,378 | $ | 61,904 | ||||||||
Depreciation and amortization expense (a) | 2,891 | 2,334 | 5,600 | 4,486 | ||||||||||||
Non-cash share-based compensation (b) | 1,793 | 1,244 | 3,523 | 2,296 | ||||||||||||
Launch expense (c) | 686 | 948 | 1,642 | 2,071 | ||||||||||||
Loss (gain) on disposal of equipment | 34 | (7 | ) | 36 | 1 | |||||||||||
Equity offering expenses (d) | — | 265 | 58 | 299 | ||||||||||||
Enterprise Resource Planning (e) | 129 | — | 402 | — | ||||||||||||
COVID-19 expense (f) | 96 | — | 96 | — | ||||||||||||
Adjusted SG&A Expenses | $ | 28,073 | $ | 27,888 | $ | 57,020 | $ | 52,751 | ||||||||
Adjusted SG&A Expenses as a % of Net Sales | 35.1 | % | 46.4 | % | 38.0 | % | 45.9 | % |
(a) | Represents non-cash depreciation |
(b) |
|
| Represents non-cash share-based compensation expense included in |
| 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. |
(d) | Represents fees associated with public offerings of our common stock. |
(e) | Represents fees associated with due diligence of new Enterprise Resource Planning software. | |
(f) | 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 mitigate potential supply chain disruptions during the |
24
The following table provides a reconciliation of Adjusted SG&A Expenses to SG&A Expenses, the most directly comparable financial measure presented in accordance with U.S. GAAP:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (Dollars in thousands) |
| |||||
SG&A expenses |
| $ | 34,676 |
|
| $ | 29,232 |
|
Depreciation and amortization expense (a) |
|
| 2,709 |
|
|
| 2,154 |
|
Non-cash share-based compensation (b) |
|
| 1,729 |
|
|
| 1,052 |
|
Launch expense (c) |
|
| 957 |
|
|
| 1,123 |
|
Loss on disposal of equipment |
|
| 2 |
|
|
| — |
|
Equity offering expenses (d) |
|
| 58 |
|
|
| 34 |
|
Enterprise Resource Planning software (e) |
|
| 273 |
|
|
| — |
|
Adjusted SG&A Expenses |
| $ | 28,948 |
|
| $ | 24,869 |
|
Adjusted SG&A Expenses as a % of Net Sales |
|
| 41.3 | % |
|
| 45.4 | % |
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Developing our business will require significant capital in the future. To meet our capital needs, we expect to rely on our current and future cash flow from operations and our current and future available borrowing capacity. 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 are for ingredients, packaging and operating expenses, marketing expenses and capital expenditures to procure Freshpet Fridges and expand and improve our manufacturing plant to support our net sales growth.
Over the next three years we also expect to invest over $300 million in capital expenditures to expand our plant capacity and increase distribution. We believe that our cash and cash equivalents, short-term investments, expected cash flow from operations and planned borrowing capacity are adequate to fund debt service requirements, operating lease obligations, capital expenditures and working capital obligations for the foreseeable future. From time to time, we may seek to raise additional capital by accessing the debt and/or equity markets to fund capital expenditures or otherwiseotherwise. However, our ability to continue to meet our capital resource requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations, our ability to manage costs and working capital successfully and our ability to access the debt and equity markets. 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, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels, or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may seek alternative
25
financing, such as selling additional debt or equity securities, and we cannot assure you that we will be able to do so on favorable terms, if at all. Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity or convertible debt securities, existing stockholders may experience dilution, and such new securities could have rights senior to those of our common stock. These factors may make the timing, amount, terms and conditions of additional financings unattractive. Our inability to raise capital could impede our growth or otherwise require us to forego growth opportunities and could materially adversely affect our business, financial condition and results of operations.
The following table sets forth, for the periods indicated, our working capital:
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Cash and cash equivalents | $ | 107,728 | $ | 9,472 | ||||
Short-term investments | 20,001 | — | ||||||
Accounts receivable, net of allowance for doubtful accounts | 22,651 | 18,581 | ||||||
Inventories, net | 18,693 | 12,542 | ||||||
Prepaid expenses | 2,782 | 3,276 | ||||||
Other current assets (1) | 765 | 10,453 | ||||||
Accounts payable | (9,090 | ) | (18,668 | ) | ||||
Accrued expenses (1) | (8,986 | ) | (22,133 | ) | ||||
Current operating lease liabilities | (1,337 | ) | (1,185 | ) | ||||
Total Working Capital | $ | 153,207 | $ | 12,338 |
(1) | Includes a $10.1 million legal contingency that was recorded as both a liability within accrued expenses, and a $10.1 million insurance receivable at December 31, 2020. The legal contingency was settled during the second quarter of 2020; the entire legal contingency was covered by insurance proceeds. |
|
|
| |||||
| March 31, |
|
| December 31, |
| ||
| 2020 |
|
| 2019 |
| ||
| (Dollars in thousands) |
| |||||
Cash and cash equivalents |
| 149,486 |
|
|
| 9,472 |
|
Short-term investments |
| 20,000 |
|
|
| — |
|
Accounts receivable, net of allowance for doubtful accounts |
| 20,295 |
|
|
| 18,581 |
|
Inventories, net |
| 16,005 |
|
|
| 12,542 |
|
Prepaid expenses |
| 2,998 |
|
|
| 3,276 |
|
Other current assets |
| 10,721 |
|
|
| 10,453 |
|
Accounts payable |
| (20,421 | ) |
|
| (18,668 | ) |
Accrued expenses |
| (20,440 | ) |
|
| (22,133 | ) |
Current operating lease liabilities |
| (1,241 | ) |
|
| (1,185 | ) |
Total Working Capital | $ | 177,403 |
|
| $ | 12,338 |
|
Working capital consists of current assets net of current liabilities. Working capital increased $165.1$140.9 million to $177.4$153.2 million at March 31,June 30, 2020 compared with working capital of $12.3 million at December 31, 2019. The increase was mainly a result of the equity raise presented within cash and cash equivalents and short-term investments, and an increase in accounts receivable and inventories, offset by an increaseas well as a decrease in accounts payable.payable and accrued expenses. The increase in accounts receivable and inventories is mainly due to the growing business. The increasedecrease in accounts payable was mainly due to capex spendthe timing of $8.7 million that was within accounts payable ascapital expenditure spend. The decrease in accrued expenses, net of March 31, 2020. The increase in accounts receivable and inventorythe legal contingency, is mainly a result of the growth the Company has experienced during the year.timing of our variable compensation.
We normally carry three to four weeks of finished goods inventory. The average duration of our accounts receivable is approximately three to four weeks.
As of March 31,June 30, 2020, our capital resources consisted primarily of $149.5$107.7 million of cash on hand, $20.0 million in short-term investments, and $35.0 million available under our credit facilities, of which $2.0 million is reserved for two Letters of Credit.Credit, and $130.0 million delayed draw term loan facility.
We expect to fund our ongoing operations and obligations with cash and cash equivalents, cash flow from operations and available funds under our credit facilities.
The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by (or used in) operating, investing and financing activities and our ending balance of cash.cash:
|
|
| Six Months Ended | ||||||||||||
| Three Months Ended March 31, |
| June 30, | ||||||||||||
| 2020 |
|
| 2019 |
| 2020 | 2019 | ||||||||
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||
Cash at the beginning of period | $ | 9,472 |
|
| $ | 7,554 |
| $ | 9,472 | $ | 7,554 | ||||
Net cash used in operating activities |
| (2,501 | ) |
|
| (4,457 | ) | (5,118 | ) | (9,835 | ) | ||||
Net cash used in investing activities |
| (54,238 | ) |
|
| (10,454 | ) | (93,252 | ) | (22,889 | ) | ||||
Net cash provided by financing activities |
| 196,753 |
|
|
| 11,118 |
| 196,626 | 29,923 | ||||||
Cash at the end of period | $ | 149,486 |
|
| $ | 3,761 |
| $ | 107,728 | $ | 4,753 | ||||
|
|
|
|
|
|
|
|
26
Net Cash Used in Operating Activities
Cash used in operating activities consists primarily of net loss adjusted for certain non-cash items (i.e., provision for loss on receivables, lossloss/(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).
For the threesix months ended March 31,June 30, 2020, net cash used in operating activities of $2.5$5.1 million was primarily attributed to:
• |
| $ |
• |
| $ |
This was partially offset by:
• |
| $ |
For the threesix months ended March 31,June 30, 2019, net cash used in operating activities of $4.5$9.8 million was primarily attributed to:
• |
| $ |
|
|
|
This was partially offset by:
• |
| $ | |
• | $0.2 million increase in other assets and liabilities. |
Net Cash Used in Investing Activities
Net cash used in investing activities of $54.2$93.3 million for the threesix months ended March 31,June 30, 2020, was primarily related to:
• |
| $ |
• |
| $ |
• |
| $20.0 million purchase of short term investments. |
Net cash used in investing activities of $10.5$22.9 million for the threesix months ended March 31,June 30, 2019, was primarily related to:
• |
| $ |
• |
| $ |
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $196.8$196.6 million for the threesix months ended March 31,June 30, 2020, attributable to:
• |
| $252.1 million of proceeds from common shares issued in primary offering, net of issuance cost. |
• |
| $20.9 million of proceeds from borrowings under our credit facilities. |
• |
| $ |
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This was partially offset by:
• |
| $76.0 million repayment of borrowings under credit facilities. |
• |
| $ | |
• | $0.8 million for debt issuance cost related to the new credit facility. |
Net cash provided by financing activities was $11.1$29.9 million for the threesix months ended March 31,June 30, 2019, attributable to:
• |
| $ |
• |
| $ |
This was partially offset by:
• | $7.5 million repayment of borrowings under our credit facilities. | ||
• |
| $ | |
• | $0.4 million financing fees paid in connection with borrowings. |
Indebtedness
For a discussion of our material indebtedness, see NotesNote 5 and 11 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 latest Annual Report Form 10-K.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements or any holdings in variable interest entities.
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. 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 latest Annual Report Form 10-K.
Recent Accounting Pronouncements
Recently Adopted Standards:
See Note 1 of our consolidated financial statements for additional information.
Standards Effective in Future Years:
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We consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed herein were assessed and determined to be either not applicable or are expected to have minimal impact to our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
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. During the quarter ended March 31,As of June 30, 2020, we borrowed $20.9 million fromdid not have any outstanding borrowings under our credit facilities, all of which was repaid as of March 31, 2020.facilities.
Commodity Price Risk
We purchase certain products 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 exchange rates for revenues and expenses. The percentage of consolidated revenue for both the three and six months ended March 31,June 30, 2020 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 March 31,June 30, 2020, there were no forward contracts outstanding.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date our disclosure controls and procedures were effective.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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Item 1. Legal Proceedings
A securities lawsuit, Curran v. Freshpet, Inc. et al, Docket No. 2:16-cv-02263, was instituted on April 21, 2016 in the United States District Court for the District of New Jersey against usthe Company and certain of ourthe Company's current and former executive officers and directors on behalf of certain purchasers of our common stock. We were served with a copy of the complaint in June 2016. The plaintiffs sought to recover damages for investors under the federal securities laws. TheOn October 3, 2019, the parties filed briefing on class certification and engaged in fact and expert discovery. The parties then entered into mediation andwith the District Court a motion for preliminary approval of settlement discussions, after whichthat attached the parties entered intoparties' stipulation of settlement to amicably resolve the dispute. All parties to the agreement believed that it was in their respective best interests to settle the dispute in order to avoid the risk, uncertainty, and costs associated with litigation. Under the settlement, Freshpet and its related defendants agreed to settle the litigation for $10.1 million, subject to the approval of the District Court.a proposed order. The settlement funds due were paid by the Company’s insurers, and the District Court approved the Final Judgment and Order of Dismissal with Prejudice on March 11, 2020. There2020 with a 30 day option to appeal. As of June 30, 2020, all settlement funds and legal fees related to the lawsuit had been dispersed as there was no appeal taken within 30 days from the entry of the Final Judgment. The Final Judgment became effective April 10, 2020.
A shareholder derivative lawsuit, Meldon v. Freshpet, Inc. et al, Docket No. 2:18-cv-10166, was instituted June 5, 2018 in the United States District Court for the District of New Jersey against us and certain of our current and former executive officers and directors on behalf of certain holders of our common stock. We were served with a copy of the complaint in June 2018. The plaintiffs seek to recover damages for investors based on state law claims (alleged breaches of fiduciary duty, waste, and unjust enrichment) in connection with the alleged violations of federal securities laws alleged in the Curran action. On April 3, 2019, the Court granted a stay of the Meldon case pending (i) the close of expert discovery in the Curran action or (ii) the dismissal with prejudice of the Curran action. The parties then entered into settlement discussions, after which the parties reached an agreement in principle to settle the case based on the Company’s commitment to continue certain governance practices. The parties also reached agreement on attorneys’ fees. The settlement is subject to Court approval. All parties believe that the agreement in principle to settle the dispute is in their respective best interests in order to avoid the risk, uncertainty, and costs associated with litigation. The parties are in the process of finalizing the settlement documents for submission to the District Court. As of March 31,June 30, 2020, the Company accrued for an estimated probable loss of $0.2 million, which represents the proposed settlement and accrued legal fees. The Company concluded that the insurance recovery is probable and recorded a gain contingency of $0.2 million within other current assets.
In addition, 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.
The information set forth below supplements, and should be read in conjunction with, the “Risk Factors” section in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2019.
The COVID-19 outbreak has had a material impact on the U.S. and global economies and could have a material adverse impact on our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations.
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. In late February 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and in March 2020, the WHO characterized COVID-19 as a pandemic.
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COVID-19 may affect demand for our products due to quarantines, government restrictions on movements, or other societal changes. Governmental or societal impositions of restrictions on public gatherings, especially if prolonged in nature, may have adverse effects on in-person traffic to retail stores and, in turn, our business. Even the perceived risk of infection or health risk may adversely affect traffic to retail customers and, in turn, our business, liquidity, financial condition and results of operations. Further, if any circumstances related to the pandemic cause consumers to change how they feel about the presence of pets in their households, that could have a material impact on demand.
The spread of pandemics, epidemics or disease outbreaks such as COVID-19 may also disrupt our third party business partners’ ability to meet their obligations to us, which may negatively affect our operations. These third parties include those who supply our ingredients, packaging, and other necessary operating materials, contract manufacturers, distributors, and logistics and transportation services providers. As a result of the current COVID-19 outbreak, transport restrictions related to quarantines or travel bans have been put in place and global supply may become constrained, each of which may cause the price of certain ingredients and raw materials used in our products to increase and/or we may experience disruptions to our operations.
Workforce limitations and travel restrictions resulting from pandemics, epidemics or disease outbreaks such as COVID-19 and related government actions may affect many aspects of our business. If a significant percentage of our workforce is unable to work, including because of illness or travel or government restrictions in connection with pandemics or disease outbreaks, our operations, including manufacturing at our Freshpet Kitchens may be negatively affected. Additionally, the Company has incurred, and may continue to incur additional costs related to initiatives that increase workplace safety and attempt to minimize potential manufacturing shutdowns.
Our results of operations depend on, among other things, our ability to maintain and increase sales volume with our existing retail customers and consumers, and to attract new customers and consumers. Our ability to implement our advertising, increase our distribution, and innovate new products, that are designed to increase and maintain sales volumes may be negatively affected as a result of decreased retailer traffic, modifications to retailer shelf reset timing or other activities during the COVID-19 outbreak. Retailers may also alter their normal inventory receiving and product restocking practices during pandemics, epidemics or disease outbreaks such as COVID-19, which may negatively impact our business.
Adverse and uncertain economic conditions, such as decreases in per capita income and level of disposable income, increased unemployment or a decline in consumer confidence as a result of the COVID-19 outbreak or similar situations, could have an adverse effect on distributor, retailer and consumer demand for our products. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns. Prolonged unfavorable economic conditions, including as a result of COVID-19 or similar outbreaks, and any resulting recession or slowed economic growth, may have an adverse effect on our sales and profitability.
Towards the second half of Q1 2020, consumer demand for our products surged. During this surge, we could not fulfill demand for all of our product orders. If such surges outpace our capacity build or occur at unexpected times, we may be unable to fully meet our consumers' and customers' demands for our products. Further, it is unknown what impact a "second wave" of outbreaks in 2020 or beyond could have on our operations and workforce. Such impacts could include effects on our business and operations from additional government restrictions on travel, shipping and workforce activities, including stay-at-home orders.
Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic, epidemic or disease outbreak, as well as third party actions taken to contain its spread and mitigate public health effects.
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Exhibit No. |
| Description | |
10.1 |
| ||
31.1* |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* |
| ||
EX-101.INS* |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document. | |
EX-101.SCH* |
| Inline XBRL Taxonomy Extension Schema Document | |
EX-101.CAL* |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
EX-101.LAB* |
| Inline XBRL Taxonomy Extension Label Linkbase Document | |
EX-101.PRE* |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
EX-101.DEF* |
| Inline XBRL Taxonomy Extension Definition Linkbase Document | |
EX-104 |
| Inline XBRL Formatted Cover | |
|
|
* Filed herewith.
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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: |
| FRESHPET, INC. |
|
| |
/s/ William B. Cyr William B. Cyr Chief Executive Officer (Principal Executive Officer) | ||
| ||
|
| /s/
|
|
| Richard Kassar Chief Financial Officer |
|
|
|
| ||
|
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