Equity Incentive Plans and Equity | Note 10 – Equity Incentive Plans and Equity: Total compensation cost for share-based payments recognized for the years ended December 31, 2018, 2017, and 2016 was approximately $6,807,620, $4,438,181, and $4,225,149, respectively. Cost of goods sold the year ended December 31, 2018, 2017, and 2016 included share-based compensation of approximately $859,133, $243,063, and $221,559, respectively. Selling, general, and administrative expense for the year ended December 31, 2018, 2017, and 2016 included share-based compensation of approximately $5,948,487, $4,195,118, and $3,971,930, respectively. Capital expenditures recorded for the Freshpet Kitchens expansion project included share-based compensation of approximately $163,850 during the year ended December 31, 2018, and approximately $31,660 during the year ended December 31, 2016. 2006 Stock Plan —In December 2006, the Company approved the 2006 Stock Plan (the “2006 Plan”) under which options to purchase approximately 624,223 shares of the Company’s common stock were granted to employees and affiliates of the Company. These options are time-based (vest over five years). Certain option awards provide for accelerated vesting if there is a change in control (as defined in the 2006 Plan). At December 31, 2018, there were zero shares available for grant as the plan is frozen. 2010 Stock Plan —In December 2010, the Company approved the 2010 Stock Plan (the “2010 Plan”) under which options to purchase approximately 2,146,320 shares of the Company’s common stock were granted to employees and affiliates of the Company (in 2012, the 2010 Plan was amended to allow for option to purchase approximately 2,220,280 shares of the Company’s common stock). These options are either time-based (vest over four years), performance-based (vest when performance targets are met, as defined in the stock option grant agreement), or vest at the occurrence of an exit event which is defined as a Change of Control in the Company, as defined in the stock grant agreement. In December 2016, the Company modified 419,366 of its performance-based awards to time-based awards that vest over two years. At the time of the December 2016 modification the performance-based awards’ vesting criteria was not considered probable. All modified awards were fair valued on the modification date. As of December 31, 2016, the vesting of any remaining performance-based awards which were not modified in December 2016 were not considered probable of vesting and accordingly the Company has not recognized the related compensation expense. The options granted have maximum contractual terms of 10 years. The Board of Directors froze the 2010 Stock Plan such that no further grants may be issued under the 2010 Stock Plan. 2014 Omnibus Incentive Plan —In November 2014, the Company approved the 2014 Omnibus Incentive Plan (the “2014 Plan”) under which 1,479,200 shares of common stock may be issued or used for reference purposes as awards granted under the 2014 Plan. In September 2016, the 2014 Plan was amended to allow for the granting of an additional 2,500,000 shares of common stock to be issued or used for reference purposes as awards granted, for a total of 3,979,200 shares. These awards may be in the form of stock options, stock appreciation rights, restricted stock, as well as other share-based and cash-based awards. As of December 31, 2018, the awards granted were either time-based (cliff vest over three years), performance-based (vest when performance targets are met, as defined in the stock option grant agreement), or restricted stock units (employee RSUs cliff vest over three years and non-employee director RSUs cliff vest over one year). At December 31, 2018, there were 1,732,379 shares of common stock available to be issued or used for reference purposes under the 2014 Plan. NASDAQ Marketplace Rules Inducement Award —During the year ended December 31, 2016, 500,000 service period stock options and 500,000 performance-based stock options were granted to the Company’s CEO as an inducement under the NASDAQ Marketplace Rules. Under the terms of the agreement, the grant is governed as if issued under the 2014 Omnibus Plan. As of December 31, 2016, the awards granted were time-based (cliff vest over four years) and performance-based (vest when performance targets are met, as defined in the stock option grant agreement). Service Period Stock Options — A summary of service period stock options outstanding and changes under the plans during the year ended December 31, 2018 is presented below: Options Shares Weighted Average Exercise Price Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2017 2,030,266 $ 9.47 Granted 95,366 16.45 Exercised (323,494 ) 9.55 Forfeited (8,157 ) 7.20 Outstanding at December 31, 2018 1,793,981 $ 9.84 6.0 $ 40,029,245 Exercisable at December 31, 2018 1,110,938 $ 9.03 4.7 $ 25,881,315 All of the options exercisable at December 31, 2018 were in-the-money, which account for the entire aggregate intrinsic value. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016 were $7,315,845, $8,081,050, and $1,467,076, respectively. A summary of the nonvested service period stock options as of December 31, 2018, and changes during the year ended December 31, 2018, is presented below: Number of Options Weighted-Average Grant-Date Fair Value Per Share Nonvested as of December 31, 2017 1,352,417 $ 5.12 Granted 95,366 8.25 Vested (756,583 ) 5.00 Forfeited (8,157 ) 4.84 Nonvested as of December 31, 2018 683,043 $ 5.69 As of December 31, 2018, there was $2,671,816 of total unrecognized compensation costs related to non-vested service period options, of which $1,733,469 will be incurred in 2019, $874,360 will be incurred in 2020, and the remaining $63,987 will be incurred in 2021. Performance Based Options — Performance based option vesting is contingent upon the Company achieving certain annual or cumulative revenue or Adjusted EBITDA goals. A summary of performance-based stock options outstanding and changes under the plans during the year ended December 31, 2018 is presented below: Options Shares Weighted Average Exercise Price Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2017 1,154,393 $ 10.50 Granted 164,707 34.06 Exercised (25,970 ) 9.05 Forfeited (17,384 ) 7.10 Outstanding at December 31, 2018 1,275,746 $ 13.62 8.1 $ 24,306,420 Exercisable at December 31, 2018 52,536 $ 9.05 7.4 $ 1,214,118 A summary of the nonvested performance-based options as of December 31, 2018, and changes during the year ended December 31, 2018, is presented below: Number of Options Weighted-Average Grant-Date Fair Value Per Share Nonvested as of December 31, 2017 1,115,140 $ 7.28 Granted 164,707 17.75 Vested (39,253 ) 4.69 Forfeited (17,384 ) 9.31 Nonvested as of December 31, 2018 1,223,210 $ 8.75 As of December 31, 2018, unrecognized compensation costs related to the 786,511 performance-based awards for which the achievement of the vesting criteria is considered probable as of December 31, 2018 have performance target dates ranging from December 31, 2019 through December 31, 2021. There was approximately $2,440,062 of total unrecognized compensation costs related to non-vested performance-based options for which the achievement of the vesting criteria is considered probable as of December 31, 2018, of which $1,218,613 will be incurred in 2019, and the remaining $1,221,449 will be incurred in 2020. Restricted Stock Units — The following table includes activity related to outstanding restricted stock units during the twelve months ended December 31, 2018. Shares Weighted-Average Grant-Date Fair Value Per Unit Outstanding at December 31, 2017 165,240 $ 10.99 Granted 182,196 22.88 Issued Upon Vesting (74,583 ) 10.53 Forfeited (874 ) 14.37 Outstanding at December 31, 2018 271,979 $ 19.07 As of December 31, 2018, there was approximately $3,099,045 of total unrecognized compensation costs related to restricted stock units, of which $1,464,774 will be incurred in 2019, $1,102,101 will be incurred in 2020, and $532,170 will be incurred in 2021. Grant Date Fair Value of Options —The weighted average grant date fair value of options (service period options and performance based options) granted during the years ended December 31, 2018, 2017, and 2016 were $14.27, $6.06 and $5.09 per share, respectively. Expected Volatility— Expected volatility was based on the historical volatility of the Company’s common stock. Weighted Average Expected Term —The Company determined the expected term based on the “shortcut method” described in FASB ASC 718, Compensation— (an expected term based on the midpoint between the vesting date and the end of the contractual term). Risk-Free Interest Rate —The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Expected Dividend Yield —The Company has not historically declared dividends, and no future dividends are expected to be available to benefit option holders. Accordingly, the Company used an expected dividend yield of zero in the valuation model. Year Ended December 31, 2018 2017 2016 Weighted average exercise price of options granted $ 27.60 $ 12.12 $ 9.71 Expected volatility 48.9% - 50% 45.6% - 50.1% 52.6% - 53.2% Average expected terms in years 6 - 6.6 6.5 - 6.6 5.3 - 7.2 Risk-free interest rate 2.62% - 2.96% 1.92% - 1.93% 1.26% - 1.36% Expected dividend yield 0.0% 0.0% 0.0% |