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EX-10.1 - EX-10.1 - Freshpet, Inc.frpt-ex101_7.htm
EX-31.1 - EX-31.1 - Freshpet, Inc.frpt-ex311_6.htm
EX-32.1 - EX-32.1 - Freshpet, Inc.frpt-ex321_8.htm
EX-31.2 - EX-31.2 - Freshpet, Inc.frpt-ex312_9.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2015.

OR

¨

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

Commission file number: 001-36729

 

FRESHPET, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

20-1884894

(State of Incorporation or Organization)

 

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

 

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

 

 

07094

(Address of Principal Executive Offices)

 

(Zip Code)

(201) 520-4000

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 registrant was required to submit and post such files.)    x  Yes    ¨  No

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 10, 2015 was 33,506,125.

 

 

 

 


 

 

 

 

TABLE OF CONTENTS

 

Forward-Looking Statements

3

     

 

Part I. Financial Information  

 

    Item 1.

 

Financial Statements

4

   

 

Consolidated Balance Sheets

4

   

 

Consolidated Statements of Operations and Comprehensive Loss

5

   

 

Consolidated Statements of Cash Flows

6

   

 

Notes to Consolidated Financial Statements

7

    Item 2.

 

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

14

    Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

25

    Item 4.

 

Controls and Procedures

25

Part II. Other Information

25

    Item 1.

 

Legal Proceedings

25

    Item 1A.

 

Risk Factors

26

    Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

26

    Item 6.

 

Exhibits

26

 

 

 

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;

·

our ability to generate sufficient cash flow or raise capital on acceptable terms;

·

the loss of key members of our senior management team;

·

allegations that our products cause injury or illness or fail to comply with government regulations;

·

the loss of a significant customer;

·

the effectiveness of our marketing and trade spending programs;

·

our ability to introduce new products and improve existing products;

·

our limited manufacturing capacity;

·

the impact of government regulation, scrutiny, warning and public perception;

·

the effect of false marketing claims;

·

adverse weather conditions, natural disasters, pestilences and other natural conditions affecting our operations;

·

our ability to develop and maintain our brand;

·

volatility in the price of our common stock; and

·

other factors discussed under the headings “Risk Factors” and “Business” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the Securities and Exchange Commission (the “Form 10-K”) and  “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report.

 

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.


3


 

Item 1. Financial Statements

 

 

FRESHPET, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

June 30,

2015

 

 

December 31,

2014

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,046,925

 

 

$

36,259,252

 

Short-term investments

 

7,499,205

 

 

 

 

Accounts receivable, less allowance for doubtful accounts of $502,781 on June 30, 2015 and $359,425 on December 31, 2014

 

6,297,531

 

 

 

5,360,400

 

Inventories, net

 

7,811,256

 

 

 

7,314,151

 

Prepaid expenses and other current assets

 

689,654

 

 

 

1,291,379

 

Total Current Assets

 

38,344,571

 

 

 

50,225,182

 

Property, plant and equipment, net

 

69,183,959

 

 

 

57,825,961

 

Deposits on equipment

 

3,856,464

 

 

 

2,883,234

 

Other assets

 

1,492,825

 

 

 

1,527,483

 

Total Assets

$

112,877,819

 

 

$

112,461,860

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

7,154,534

 

 

 

5,423,905

 

Accrued expenses

 

2,406,790

 

 

 

2,938,316

 

Accrued warrants

 

777,103

 

 

 

706,940

 

Total Current Liabilities

$

10,338,427

 

 

$

9,069,161

 

Total Liabilities

$

10,338,427

 

 

$

9,069,161

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Common stock — voting, $0.001 par value, 200,000,000 shares authorized, 33,505,104 and 33,468,342 issued and outstanding on June 30, 2015 and December 31, 2014, respectively

 

33,505

 

 

 

33,468

 

Additional paid-in capital

 

292,179,262

 

 

 

288,216,882

 

Accumulated deficit

 

(189,673,375

)

 

 

(184,857,651

)

Total Stockholders' Equity

 

102,539,392

 

 

 

103,392,699

 

Total Liabilities and Stockholders' Equity

$

112,877,819

 

 

$

112,461,860

 

 

See accompanying notes to the unaudited consolidated financial statements.

 


4


 

FRESHPET, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

NET SALES

$

28,359,404

 

 

$

20,386,038

 

 

$

55,414,078

 

 

$

39,736,235

 

COST OF GOODS SOLD

 

14,699,240

 

 

 

10,313,193

 

 

 

28,500,895

 

 

 

20,370,265

 

GROSS PROFIT

 

13,660,164

 

 

 

10,072,845

 

 

 

26,913,183

 

 

 

19,365,970

 

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

 

15,694,304

 

 

 

13,401,264

 

 

 

31,486,007

 

 

 

24,995,794

 

LOSS FROM OPERATIONS

 

(2,034,140

)

 

 

(3,328,419

)

 

 

(4,572,824

)

 

 

(5,629,824

)

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Expenses, net

 

(68,831

)

 

 

(43,477

)

 

 

(64,682

)

 

 

(85,076

)

Fees on Debt Guarantee

 

 

 

 

(1,807,969

)

 

 

 

 

 

(3,645,216

)

Interest Expense

 

(110,679

)

 

 

(1,078,935

)

 

 

(148,218

)

 

 

(2,032,910

)

 

 

(179,510

)

 

 

(2,930,381

)

 

 

(212,900

)

 

 

(5,763,202

)

LOSS BEFORE INCOME TAXES

 

(2,213,650

)

 

 

(6,258,800

)

 

 

(4,785,724

)

 

 

(11,393,026

)

INCOME TAX EXPENSE

 

15,000

 

 

 

8,000

 

 

 

30,000

 

 

 

16,000

 

NET LOSS

 

(2,228,650

)

 

 

(6,266,800

)

 

 

(4,815,724

)

 

 

(11,409,026

)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(2,228,650

)

 

$

(10,771,075

)

 

$

(4,815,724

)

 

$

(18,256,717

)

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-BASIC

$

(0.07

)

 

$

(0.77

)

 

$

(0.14

)

 

$

(1.30

)

-DILUTED

$

(0.07

)

 

$

(0.77

)

 

$

(0.14

)

 

$

(1.30

)

WEIGHTED AVERAGE SHARES OF COMMON STOCK

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OUTSTANDING USED IN COMPUTING NET LOSS PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-BASIC

 

33,484,997

 

 

 

14,035,660

 

 

 

33,477,415

 

 

 

14,035,660

 

-DILUTED

 

33,484,997

 

 

 

14,035,660

 

 

 

33,477,415

 

 

 

14,035,660

 

 

See accompanying notes to the unaudited consolidated financial statements.


5


 

FRESHPET, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

For the Six Months Ended

 

 

June 30,

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(4,815,724

)

 

$

(11,409,026

)

Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

Provision for losses on accounts receivable

 

24,001

 

 

 

211,565

 

Loss on disposal of equipment and deposits on equipment

 

80,679

 

 

 

70,710

 

Fees on debt guarantee

 

 

 

 

3,645,216

 

Share based compensation

 

3,664,450

 

 

 

485,852

 

Fair value adjustment for outstanding warrants

 

70,163

 

 

 

 

Change in reserve for inventory obsolescence

 

(5,031

)

 

 

(79,292

)

Depreciation and amortization

 

3,624,282

 

 

 

3,124,096

 

Amortization of deferred financing costs and loan discount

 

70,974

 

 

 

126,047

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

(961,132

)

 

 

(2,085,862

)

Inventories

 

(492,074

)

 

 

(161,317

)

Prepaid expenses and other current assets

 

601,725

 

 

 

(1,115,719

)

Other assets

 

(44,947

)

 

 

(94,067

)

Accounts payable

 

739,238

 

 

 

1,735,920

 

Accrued expenses and accrued interest on long-term debt

 

(497,140

)

 

 

1,100,936

 

Net cash flows provided by (used in) operating activities

 

2,059,464

 

 

 

(4,444,941

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of short-term investments

 

(7,499,205

)

 

 

 

Acquisitions of property, plant and equipment, software and deposits on equipment

 

(10,035,332

)

 

 

(10,361,113

)

Acquisitions of land and building

 

(4,979,710

)

 

 

 

Proceeds from sale of equipment

 

 

 

 

234,127

 

Net cash flows used in investing activities

 

(22,514,247

)

 

 

(10,126,986

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Borrowings on long-term debt

 

 

 

 

7,500,000

 

Exercise of options to purchase common stock

 

242,456

 

 

 

 

Proceeds from preferred stock - Series C issued

 

 

 

 

6,550,996

 

Net cash flows provided by financing activities

 

242,456

 

 

 

14,050,996

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(20,212,327

)

 

 

(520,931

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

36,259,252

 

 

 

2,444,754

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

16,046,925

 

 

$

1,923,823

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Interest paid

$

99,744

 

 

$

1,884,534

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Preferred stock dividend accretion

$

 

 

$

6,847,691

 

Property, plant and equipment purchases in accounts payable

$

1,975,350

 

 

$

2,192,628

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6


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,” “we” or the “Company”), a Delaware corporation, manufactures and markets natural fresh, refrigerated meals and treats for dogs and cats. The Company’s products are distributed throughout the United States and Canada into major retail classes including Grocery and Mass (which includes club) as well as Pet Specialty and Natural retail.

Principles of Consolidation – The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The financial statements include the accounts of the Company as well as other wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation - The accompanying consolidated balance sheet as of June 30, 2015, statements of operations and comprehensive loss for the three and six months ended June 30, 2015 and 2014, and statements of cash flows for the six months ended June 30, 2015 and 2014 are unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and in accordance with the rules and regulations of the United States Securities and Exchange Commission. In the opinion of management, the interim unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2015, the results of its operations for the three and six months ended June 30, 2015 and 2014, and its cash flows for the six months ended June 30, 2015 and 2014. The financial data and other information disclosed in these notes related to the three and six months ended  June 30, 2015 and 2014 are unaudited. The results for three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015, any other interim periods, or any future year or period.

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 Form 10-K.

Estimates and Uncertainties - The preparation of 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 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.

Short-Term Investments – The Company holds interest-bearing certificates of deposits with financial institutions with maturities ranging from three months to one year. Certificates of deposit are classified as short-term investments and interest is recorded as other expenses, net. Historically, interest income has not been material. The Company will continue to monitor interest income and will disclose separately if significant.

Reclassifications – Certain prior period amounts were reclassified to conform to the current year’s presentation.

 

 

Note 2 – Recently Issued Accounting Standards:

On May 28, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is not permitted. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

On April 7, 2015, the FASB issued ASU 2015-03, “Interest—Imputation of Interest,” which requires that debt issuance cost be presented on the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This new guidance will be effective for the Company beginning January 1, 2016. ASU 2015-03 will not have an impact on the Company’s consolidated financial statements other than presentation.

7


FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires that an entity carry its inventory at lower of cost or net realizable value (which replaces “lower of cost or market”) if the FIFO or average cost methods are used. This new guidance will be effective for the Company beginning January 1, 2016. The effects ASU 2015-11 will depend on future valuation of our inventory.

Note 3 – Inventories:

 

 

June 30,

2015

 

 

December 31,

2014

 

Raw Materials

 

$

1,565,204

 

 

$

2,321,458

 

Packaging Components Material

 

 

1,155,470

 

 

 

1,158,967

 

Finished Goods

 

 

5,167,106

 

 

 

3,905,219

 

 

 

 

7,887,780

 

 

 

7,385,644

 

Reserve for Obsolete Inventory

 

 

(76,524

)

 

 

(71,493

)

 

 

$

7,811,256

 

 

$

7,314,151

 

 

 

Note 4 – Property, Plant and Equipment:

Property, plant and equipment, net are summarized as follows:

 

 

June 30,

2015

 

 

December 31,

2014

 

Refrigeration Equipment

 

$

51,273,422

 

 

$

47,789,991

 

Machinery and Equipment

 

 

20,114,639

 

 

 

19,677,778

 

Building, Land and Improvements

 

 

14,982,550

 

 

 

9,985,917

 

Furniture and Office Equipment

 

 

2,003,443

 

 

 

1,826,249

 

Leasehold Improvements

 

 

140,672

 

 

 

627,962

 

Construction in Progress

 

 

7,501,985

 

 

 

1,941,754

 

Automotive Equipment

 

 

317,292

 

 

 

314,885

 

 

 

 

96,334,003

 

 

 

82,164,536

 

Less: Accumulated Depreciation and Amortization

 

 

(27,150,044

)

 

 

(24,338,575

)

 

 

$

69,183,959

 

 

$

57,825,961

 

Depreciation expense related to property, plant and equipment totaled $1,840,270 and $3,567,245 for the three and six months ended June 30, 2015, of which $632,476 and $1,251,730 was recorded to cost of goods sold for the three and six months ended June 30, 2015, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense. Depreciation expense related to property, plant and equipment totaled $1,521,953 and $3,098,094 for the three and six months ended June 30, 2014, of which $604,662 and $1,231,484 was recorded to cost of goods sold for the three and six months ended June 30, 2014, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.

During the three months ended March 31, 2014, the Company completed a project to analyze the estimated future years of service on its existing refrigeration equipment. Based on this analysis, the Company estimates that the useful life of its refrigeration equipment increased from 6 to 9 years. The Company applied this change in estimate prospectively, which reduced depreciation by approximately $1.8 million for fiscal year 2014 and is expected to reduce depreciation by $2.0 million for fiscal year 2015. The useful life of the other classes of property, plant and equipment remains unchanged.

During the three months ended June 30, 2015, the Company purchased a building and 6.5 acres of land adjacent to the Company’s manufacturing facility in Bethlehem, Pennsylvania. The assets have been recorded in Building, Land and Improvements at cost of approximately $5.0 million, of which approximately $2.1 million was the value of the land, with the remaining portion representing the value of the building. The previous owner is currently occupying the land and building through no later than April 1, 2016.

8


FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 5 – Accrued Expenses:

 

 

 

June 30,

2015

 

 

December 31,

2014

 

Accrued Compensation

 

$

1,189,186

 

 

$

1,802,756

 

Other Accrued Expenses

 

 

400,392

 

 

 

406,179

 

Accrued Marketing

 

 

36,986

 

 

 

127,028

 

Accrued Freight

 

 

84,696

 

 

 

97,561

 

Accrued Chiller Maintenance

 

 

669,530

 

 

 

349,792

 

Accrued Sales and Use Tax

 

 

26,000

 

 

 

155,000

 

 

 

$

2,406,790

 

 

$

2,938,316

 

 

Note 6 – Debt:

Prior to the Initial Public Offering (“IPO”) and related debt refinancing, the Company’s outstanding debt consisted of a $1.5 million stockholder note (the “Stockholder Note”), a $27.0 million revolving note payable (the “$27.0 Million Revolver”), a $62.5 million revolving note payable (the “$62.5 Million Revolver”) and $2.0 million in shareholder convertible notes (the “Convertible Notes”). Each of these was repaid concurrent with the closing of the IPO.

 

On November 13, 2014, in connection with the IPO, the Company entered into senior secured credit facilities (the “Debt Refinancing”) comprised of a 5-year $18.0 million term facility (the “Term Facility”), a 3-year $10.0 million revolving facility (the “Revolving Facility”) and a $12.0 million additional term loan commitment earmarked primarily for capital expenditures (the “Capex Commitments” and together with the Term Facility and Revolving Facility, the “Credit Facilities” and such loan agreement, the “Loan Agreement”).

On December 23, 2014, the Company repaid the outstanding $18.0 million and modified the terms of the $40.0 million Credit Facilities. The $18.0 million term facility was extinguished, the 3-year $10.0 million Revolving Facility remained unchanged, and the $12.0 million term loan commitment earmarked for capital expenditures was increased to $30.0 million.

 

Any drawn Capex Commitments (the “Capex Loans”) will mature on the fifth anniversary of the execution of the Loan Agreement. Any undrawn Capex Commitments will expire on the third anniversary of the execution of the agreement. Under the terms of the Loan Agreement, the commitments for the Revolving Facility may be increased up to $20.0 million subject to certain conditions.

 

The Loan Agreement provides for the maintenance of various covenants, including financial covenants, and includes events of default that are customary for facilities of this type.  As of June 30, 2015, the Company was in compliance with all the covenants in its credit agreement.

As of June 30, 2015, the Company had no debt outstanding.

 

 

Note 7 – Redeemable Preferred Stock:

Concurrent with the closing of the IPO on November 13, 2014, the Company redeemed all of the outstanding shares of Series B Preferred Stock (“Series B”), including cumulative dividends, for a cash payment of $34,998,957. Additionally, immediately prior to the closing of the IPO, the Company converted the outstanding shares of Series C Preferred Stock (“Series C”) to 11,067,090 shares of common stock. Based on the Series C anti-dilutive clause, the conversion from Series C to common stock was to be equivalent to the 1-to-0.7396 common stock share split that occurred in connection with the IPO.  The converted Series C included 2,477,756 Series C shares related to the Fees on Debt Guarantee, which were converted to 1,832,531 shares of common stock.

9


FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the three and six months ended June 30, 2014, the Company issued an additional 771,622 and 1,247,808 shares, respectively, of Series C at $5.25 per share. The dividends accrued during the three months ended June 30, 2014 were $1,198,304 for the Series B and $3,305,970 for the Series C. The dividends accrued during the six months ended June 30, 2014 were $2,352,131 for the Series B and $4,495,559 for the Series C. There were no dividends accrued as of June 30, 2015 due to the redemption of Series B and conversion of Series C upon the close of the IPO.

 

 

Note 8 – Guarantee Agreement:

In connection with the $62.5 Million Revolver (see Note 6), the Company entered into a Fee and Reimbursement Agreement with certain stockholders who were also guarantors of the note. That agreement stipulated that the Company would pay each guarantor a contingent fee equal to 10% per annum of the amount that each guarantor had committed to guarantee. The payment was to be made in the form of newly issued shares of Series C at a price of $5.25 per share. The fee accrued only from and after the date that the guarantor entered into the guarantee, and if at any time any guarantor’s obligation was terminated in full or in part, the fee would continue to accrue only with respect to the amount, if any, of such guarantor’s remaining commitment under the credit agreement.

Immediately prior to the closing of the IPO, the Company converted outstanding fees under the guarantee into 2,477,756 shares of Series C, which were then converted into 1,832,531 shares of common stock.

The fees on debt guarantee were recognized as a liability by the Company and recorded at fair value at issuance. The instrument was then adjusted to its then fair value at each reporting period with changes in fair value recorded in the consolidated statement of operations and comprehensive loss. Historically, the Company measured the fair value of the outstanding fee on debt guarantee using an option pricing method with several possible distribution outcomes depending on the timing and kind of liquidity event. Expected volatility was estimated utilizing the historical volatility of similar companies. The risk-free interest rates were based on the U.S. Treasury yield for a period consistent with the expected contractual life.

 

Note 9 – Equity Incentive Plans:

 

Total compensation cost for share-based payments recognized for the three months ended June 30, 2015 and 2014 was $1,832,141 and $242,926, respectively. Total compensation cost for share-based payments recognized for the six months ended June 30, 2015 and 2014 was $3,719,961 and $485,852, respectively.

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 vest over 5 years. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the 2006 Plan). The options granted have maximum contractual terms of up to 10 years. At June 30, 2015, there were zero shares available for grant as the plan is frozen.

During the three months ended June 30, 2015, 28,508 shares were exercised at a weighted average exercise price of $6.52. During the six months ended June 30, 2015, there were 30,898 shares exercised at a weighted average exercise price of $6.50.

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 the granting of approximately 2,220,280 options to purchase shares of the Company’s common stock). These options are either time-based (vest over 4 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 or an initial public offering registered under the Securities Act, as defined in the stock grant agreement.

In November, 2014, the Company made modifications that affected all performance-based awards and all exit-event awards under the 2010 Plan. Performance-based awards were modified to time vested awards that cliff vest over two years. At the time of modification, the original performance-based awards’ vesting criteria was not considered probable.

10


FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The exit-event awards were modified to performance-based awards. At December 31, 2014, the new performance-based awards vesting criteria was considered probable. The modified awards were fair valued on the modification date. 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.

During the six months ended June 30, 2015, there were 5,864 shares exercised at a weighted average exercise price of $7.10, all of which were exercised during the three months ended June 30, 2015.

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. These awards may be in the form of stock options, stock appreciation rights, restricted stock, as well as other stock-based and cash-based awards. As of June 30, 2015, the stock options granted were either time-based (cliff vest over 3 years) or performance-based (vest when performance targets are met, as defined in the stock option grant agreement).

In addition to stock options granted under the 2014 Plan, the Company may issue restricted stock units to the board of directors as compensation for their services. The fair value of restricted stock units is based on the share price on the date of grant. Restricted stock units granted in 2014 vest over one year, and the Company will settle these awards by common stock transfer. During the three months ended June 30, 2015, there were no restricted stock units granted.

During the three months ended June 30, 2015, there were no grants or exercises. During the six months ended June 30, 2015 there were 6,550 units granted, at a weighted average exercise price of $17.00, and there were no exercises.

At June 30, 2015, there were 936,648 shares of common stock available to be issued or used for reference purposes under the 2014 Plan.

 

 

Note 10 – Net Loss Attributable to Common Stockholders:

Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive securities. Diluted net loss per common share is the same as basic net loss per common share, due to the fact that potentially dilutive securities would have an antidilutive effect as the Company incurred a net loss for the three and six months ended June 30, 2015 and June 30, 2014.

The potentially dilutive securities excluded from the determination of diluted loss per share, as their effect is antidilutive, are as follows:

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Convertible Preferred Series C (on an as-if converted basis)

 

 

 

 

 

9,165,576

 

 

 

 

 

 

8,832,453

 

Service Period Stock Options

 

 

2,004,957

 

 

 

1,082,121

 

 

 

2,011,236

 

 

 

1,082,429

 

Warrants

 

 

61,117

 

 

 

61,117

 

 

 

61,117

 

 

 

61,117

 

 

 

 

2,066,074

 

 

 

10,308,814

 

 

 

2,072,353

 

 

 

9,975,999

 

 

The computation of net income attributable to common stockholders is as follows:

 

11


FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

 

$

(2,228,650

)

 

$

(6,266,800

)

 

$

(4,815,724

)

 

$

(11,409,026

)

Preferred stock dividends on Series B and Series C*

 

 

 

 

 

(4,504,275

)

 

 

 

 

 

(6,847,691

)

Net loss attributable to common stockholders

 

$

(2,228,650

)

 

$

(10,771,075

)

 

$

(4,815,724

)

 

$

(18,256,717

)

* See Note 7 – Redeemable Preferred Stock for further detail and discussion.

 

 

Note 11 – Related Party Transactions:

Payments made to a stockholder for distribution services totaled $2,463,805 and $4,964,241 during the three and six months ended June 30, 2015, and $2,239,980 and $4,075,684 during the three and six months ended June 30, 2014. Payments of $1,542,212 and $3,263,029 for the three and six months ended June 30, 2015, and $1,320,810 and $2,480,467 for the three and six months ended June 30, 2014, were made to stockholders for the purchase of raw materials. In addition, there were payments of $129,623 and $159,212 for the three and six months ended June 30, 2015, and $40,230 and $143,630 for the three and six months ended June 30, 2014, related to rent and associated utilities and maintenance to a stockholder who was also a landlord of one of our locations. The rent and associated utilities and maintenance cost were at market rates.  As of June 30, 2015 the Company is no longer occupying the space, and as such, will no longer incur rent. None of the payments made above were to stockholders who are either an employee, board member, subsidiary, or affiliate of the Company.

In connection with the $62.5 Million Revolver, certain stockholders were guarantors of the note. That agreement stipulated that the Company pay each guarantor a contingent fee equal to 10% per annum of the amount that each guarantor has committed to guarantee. The $62.5 Million Revolver was repaid in connection with the IPO. See Note 8 for further detail.

 

 

Note 12 – Concentrations:

Concentration of Credit Risk—The Company maintains its cash balances in financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 each. At times, such balances may be in excess of the FDIC insurance limit.

Major Customers—For the three months ended June 30, 2015 and 2014, net sales to one of our distributors, which sells directly to three of our customers, accounted for 22% of our net sales in both periods. For the three months ended June 30, 2015, one customer accounted for 10% of our net sales, while for the same period in 2014, no customer accounted for more than 10% of our net sales.

For the six months ended June 30, 2015 and 2014, net sales to one of our distributors which sells directly to three of our customers, accounted for 21% and 23% of our net sales, respectively. For the six months ended June 30, 2015 one customer accounted for 11% of our net sales, while for the same period in 2014, no customer accounted for more than 10% of our net sales.

Major Suppliers—The Company purchased approximately 48% and 49% of its raw materials from three vendors during the three and six months ended June 30, 2015, and approximately 50% and 53% of its raw materials from three vendors during the three and six months ended June 30, 2014.

The Company also purchased approximately 97% and 95% of its treats finished goods from three vendors for the three and six months ended June 30, 2015, and approximately 91% and 89% from three vendors for the three and six months ended June 30, 2014.

The Company purchased approximately 68% and 71% of its packaging material from three vendors during the three and six months ended June 30, 2015, and approximately 79% and 77% of its packaging material from three vendors during the three and six months ended June 30, 2014.

12


FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net Sales By Class of Retail – The following table sets forth net sales by class of retail:

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Grocery, Mass and Club

 

$

21,629,868

 

 

$

15,271,944

 

 

$

42,113,913

 

 

$

29,851,193

 

Pet Specialty, Natural and Other

 

 

6,729,536

 

 

 

5,114,094

 

 

 

13,300,165

 

 

 

9,885,042

 

Net Sales

 

$

28,359,404

 

 

$

20,386,038

 

 

$

55,414,078

 

 

$

39,736,235

 

 

 

 

Note 13 – Subsequent Events:

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or unrecognized subsequent events that have required adjustment or disclosure in the financials.

 

 

 

13


 

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

The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Form 10-K.

 

In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions set forth under the sections entitled "Forward-Looking Statements" in this report and "Risk Factors" in our Form 10-K. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section entitled "Risk Factors" in our Form 10-K.

 

Overview

We started Freshpet with a single-minded mission to bring the power of real, fresh food to our dogs and cats. We were inspired by the rapidly growing view among pet owners that their dogs and cats are a part of their family, leading them to demand healthier pet food choices. Over the last nine years, we have created a comprehensive business model to deliver wholesome pet food that “pet parents” can trust, and in the process we believe we have become one of the fastest growing pet food companies in North America. Our business model is difficult for others to replicate and we see significant opportunity for future growth by leveraging the unique elements of our business, including our brand, our product know-how, our Freshpet Kitchens, our refrigerated distribution, our Freshpet Fridge and our culture.

 

Recent Developments

Due to our continued growth, we have commenced a capital expansion project at our Freshpet Kitchens manufacturing facility to expand our plant capacity and increase distribution. We expect to invest approximately $30.0 to $32.0 million in capital expenditures in the capital expansion project during 2015 and 2016, with $5.3 million of capital expenditures recorded during the six months ended June 30, 2015.  We believe the expansion will increase our production capacity at our Freshpet Kitchens by at least 130%.

In addition to the expansion, during the second quarter of fiscal year 2015 we were able to acquire property directly adjacent to our Freshpet Kitchens in Bethlehem, Pennsylvania. The acquired property provides us with additional flexibility for our long term manufacturing, distribution, and any research and development needs. The cost of the property was $5.0 million, of which approximately $2.1 million was the value of the 6.5 acres of land, with the remaining portion representing the value of the building. The previous owner is currently occupying the land and building through no later than April 1, 2016.

During the first quarter of 2015, we introduced a new non-refrigerated product, Freshpet Baked, on a test basis at one of our retailers.  We were pleased with the initial results and as such have decided to expand the test to a select group of retailers.

On May 5, 2015, the Company completed its secondary public offering (File No. 333-203368), in which the selling stockholders sold 6,110,353 shares of common stock, including 797,002 shares of common stock as a result of the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $21.47 per share. The aggregate amount of gross consideration paid by the public for shares sold in the offering was approximately $131 million.  The Company incurred approximately $0.6 million of fees associated with the secondary public offering. The Company did not receive any of the proceeds from the sale of shares in the secondary public offering.

Net Sales

Our net sales are derived from the sale of pet food to our customers, who purchase either directly from us or through third party distributors. Our products are sold to consumers through a fast-growing network of company-owned branded refrigerators, known as Freshpet Fridges, located in our customers’ stores. We continue to roll out Freshpet Fridges across leading retailers across North America and have installed Freshpet Fridges in 14,354 retail stores as of June 30, 2015. All of our products are sold under the Freshpet brand name, with ingredients, packaging and labeling customized by class of retail. Sales are recorded net of discounts, slotting, returns and promotional allowances.

14


 

Our net sales growth is driven by the following key factors:

·

Increasing sales velocity from the average Freshpet Fridge due to increasing awareness, trial and adoption of Freshpet products. Our investments in marketing and advertising help to drive awareness and trial at each point of sale.

·

Continued innovation and new product introductions. New products introduced since 2011 represented 37% of our net sales in 2014. From time to time, we review our product line and may remove products that are not meeting sales or profitability goals.

·

Increased penetration of Freshpet Fridge locations in major classes of retail, including grocery, mass, club, pet specialty and natural. The impact of new Freshpet Fridge installations on our net sales varies by retail class and depends on numerous factors including store traffic, refrigerator size, placement within the store, and proximity to other stores that carry our products.

·

Consumer trends including growing pet ownership, pet humanization and a focus on health and wellness.

We believe that as a result of the above key factors, we will continue to penetrate the pet food marketplace and increase our share of the pet food category.

Gross Profit

Our gross profit is net of costs of goods sold, which include the costs of product manufacturing, product ingredients, packaging materials and inbound freight. The construction of our scalable manufacturing facility in Bethlehem, Pennsylvania was completed in November 2013, replacing our Quakertown, Pennsylvania facility, and has significantly improved our production efficiency. Growing capacity utilization of our new facility will allow us to leverage fixed costs and thereby expand our gross profit margins.

Our gross profit margins are impacted by the cost of ingredients and packaging materials. We expect to mitigate any adverse movement in input costs through a combination of cost management and price increases. We implemented modest price increases in 2011 and 2012 that offset increased ingredient costs and did not perceive a decline in demand.  During the second quarter of 2015 we implemented a price increase for our beef products that offset increased ingredient costs.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist of the following:

Outbound freight. Outbound freight from our Freshpet Kitchens is managed by a national third party refrigerated and frozen human food manufacturer that delivers our product to grocery retailers in the United States. Additionally, we sell through third-party distributors for the mass, club, pet specialty and natural classes in the United States and Canada. As our sales volume increases, we expect our outbound freight costs to decrease as a percentage of net sales as we achieve benefits of scale.

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. We expect our marketing & advertising costs to decrease as a percentage of net sales as we leverage national advertising spend across a growing network of Freshpet Fridges.

Freshpet Fridge operating costs. Freshpet Fridge operating costs consist of repair costs, installation fees to third-party service providers, 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 one to 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. Through June 30, 2015, the Company has incurred approximately $0.7 million of research and development cost associated with our Freshpet Baked test.  

15


 

Brokerage. We utilize third-party brokers to assist with monitoring our Freshpet Fridges at the point-of-sale as well as representing us at headquarters for various customers. These brokers visit our retail customers’ store locations and ensure items are stocked, maintain Freshpet Fridge appearance, and replace missing price tags.

Other general & administrative costs. Other general and administrative costs include non-plant personnel salaries and benefits, as well as corporate general & administrative costs. We expect to incur incremental annual costs of approximately $2.0 million to $2.3 million per year related to operating as a public company.

Selling, general and administrative costs as a percentage of net sales have decreased from 62.7% in the year ended 2013 to 56.1% in the year ended 2014, and from 62.9% in the six months ended June 30, 2014 to 56.8% in the six months ended June 30, 2015. We expect our selling, general, and administrative expenses to decrease as a percentage of net sales as we continue to expand our distribution footprint and grow our net sales.

Fees on Debt Guarantee

In connection with the $62.5 Million Revolver, we entered into a Fee and Reimbursement Agreement with certain stockholders. That agreement stipulated that we pay each guarantor a contingent fee of 10% per annum of the amount each guarantor committed to guarantee. The fees on debt guarantee recognized in each period was a function of the outstanding note payable and the fair value of the underlying guarantee. We used a portion of the proceeds from the IPO and the related debt refinancing to repay the borrowings under the $62.5 Million Revolver, relieving us of future fees on the debt guarantee. The fees on debt guarantee liability were settled in the form of shares of our Series C at a price of $5.25 per share, which were then converted into shares of common stock at a 1-to-0.7396 ratio. During the six months ended June 30, 2014 we incurred $3.6 million of fees on debt guarantee. All accrued fees were settled in connection with the IPO. There are no outstanding fees as of June 30, 2015.

Income Taxes

We had federal net operating loss (“NOL”) carry forwards of approximately $163.0 million as of December 31, 2014, which expire between 2025 and 2034. We may be subject to certain limitations in our annual utilization of net operating loss carry forwards to off-set future taxable income pursuant to Section 382 of the Internal Revenue Code, which could result in NOLs expiring unused. At December 31, 2014, we had approximately $124.5 million of State NOLs, which expire between 2015 and 2034. At December 31, 2014, we had a full valuation allowance against our deferred tax assets as the realization of such assets was not considered more likely than not.

Results of Operations

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

Amount

 

 

% of

Net Sales

 

 

Amount

 

 

% of

Net Sales

 

 

Amount

 

 

% of

Net Sales

 

 

Amount

 

 

% of

Net Sales

 

Consolidated Statements of Operations Data

 

Net sales

$

28,359,404

 

 

 

100

%

 

$

20,386,038

 

 

 

100

%

 

$

55,414,078

 

 

 

100

%

 

$

39,736,235

 

 

 

100

%

Cost of goods sold

 

14,699,240

 

 

 

52

%

 

 

10,313,193

 

 

 

51

%

 

 

28,500,895

 

 

 

51

%

 

 

20,370,265

 

 

 

51

%

Gross profit

 

13,660,164

 

 

 

48

%

 

 

10,072,845

 

 

 

49

%

 

 

26,913,183

 

 

 

49

%

 

 

19,365,970

 

 

 

49

%

Selling, general and administrative expenses

 

15,694,304

 

 

 

55

%

 

 

13,401,264

 

 

 

66

%

 

 

31,486,007

 

 

 

57

%

 

 

24,995,794

 

 

 

63

%

Loss from operations

 

(2,034,140

)

 

 

(7

)%

 

 

(3,328,419

)

 

 

(16

)%

 

 

(4,572,824

)

 

 

(8

)%

 

 

(5,629,824

)

 

 

(14

)%

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses, net

 

(68,831

)

 

 

0

%

 

 

(43,477

)

 

 

0

%

 

 

(64,682

)

 

 

0

%

 

 

(85,076

)

 

 

0

%

Fees on debt guarantee

 

 

 

 

 

 

 

(1,807,969

)

 

 

(9

)%

 

 

 

 

 

 

 

 

(3,645,216

)

 

 

(9

)%

Interest expense

 

(110,679

)

 

 

0

%

 

 

(1,078,935

)

 

 

(5

)%

 

 

(148,218

)

 

 

0

%

 

 

(2,032,910

)

 

 

(5

)%

 

 

(179,510

)

 

 

 

 

 

 

(2,930,381

)

 

 

(14

)%

 

 

(212,900

)

 

 

 

 

 

 

(5,763,202

)

 

 

(15

)%

Loss before income taxes

 

(2,213,650

)

 

 

(8

)%

 

 

(6,258,800

)

 

 

(31

)%

 

 

(4,785,724

)

 

 

(9

)%

 

 

(11,393,026

)

 

 

(29

)%

Income tax expense

 

15,000

 

 

 

0

%

 

 

8,000

 

 

 

0

%

 

 

30,000

 

 

 

0

%

 

 

16,000

 

 

 

0

%

Net loss

$

(2,228,650

)

 

 

(8

)%

 

$

(6,266,800

)

 

 

(31

)%

 

$

(4,815,724

)

 

 

(9

)%

 

$

(11,409,026

)

 

 

(29

)%

16


 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Net Sales

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

 

Three months ended June 30,

 

 

2015

 

 

2014

 

 

Amount

 

 

Percentage of Net Sales

 

 

Store Count

 

 

Amount

 

 

Percentage of Net Sales

 

 

Store Count

 

Grocery, Mass and Club* (1)

$

21,629,868

 

 

 

76

%

 

 

10,036

 

 

$

15,271,944

 

 

 

75

%

 

 

8,560

 

Pet Specialty, Natural and Other (2)

 

6,729,536

 

 

 

24

%

 

 

4,318

 

 

 

5,114,094

 

 

 

25

%

 

 

4,033

 

Net Sales

$

28,359,404

 

 

 

100

%

 

 

14,354

 

 

$

20,386,038

 

 

 

100

%

 

 

12,593

 

(1)Stores at June 30, 2015 and June 30, 2014 consisted of 6,558 and 5,722 grocery and 3,478 and 2,838 mass, respectively.

(2)Stores at June 30, 2015 and June 30, 2014 consisted of 4,055 and 3,837 pet specialty and 263 and 196 natural, respectively.

 

* Includes sales from Freshpet Baked product test of $1.0 million, or 3% of total net sales, for the three months ended June 30, 2015.

Net sales increased $8.0 million, or 39%, to $28.4 million for the three months ended June 30, 2015 as compared to the same period in the prior year. Net sales include the impact of additional sales associated with the Freshpet Baked product test. Excluding the impact of the Freshpet Baked product test, net sales for the second quarter of 2015 increased 34% to $27.4 million as compared to the same period in the prior year. The increase in net sales was driven by increased velocity in Grocery and Mass, as well as Pet Specialty, Natural and Other channels. The Company also experienced an increase of Freshpet Fridges store locations, which grew by 14.0% from 12,593 as of June 30, 2014 to 14,354 as of June 30, 2015.

Gross Profit

Gross profit increased $3.6 million, or 36%, to $13.7 million for the three months ended June 30, 2015 as compared to the same period in the prior year. The increase in gross profit was primarily driven by higher refrigerated net sales, gross profit from our Freshpet Baked product test, and lower manufacturing costs per pound for our core Freshpet recipes due to greater efficiencies achieved at our Freshpet Kitchens in Bethlehem, Pennsylvania, which was completed in the fourth quarter of 2013. The increase in gross profit was partially offset by increased cost of goods sold related to product sales mix as a result of our new innovative products. During the second quarter of 2015, our new innovative products, which historically start with lower gross profit margin, had greater than expected initial sales volume. As a result, the gross profit margin of 48% for the second quarter of 2015, decreased 120 basis points compared to the same period in 2014.

Excluding our Freshpet Baked product test, gross profit margin slightly decreased 50 basis points during the second quarter of 2015 compared to the same period in the prior year, attributable to our new innovative products. Generally we have been able to optimize the production of our new innovative products over time as they are incorporated into our core Freshpet recipes. As a result, we expect our gross profit margin to increase as we realize efficiencies of scale with increased sales volume of our current core and new innovative products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $2.3 million, or 17%, to $15.7 million for the three months ended June 30, 2015 as compared to the same period in the prior year. Key components of the dollar increase include additional outbound freight costs of $0.6 million due to increased volume and sales, higher share-based compensation expense of $1.5 million, fees associated with the secondary public offering of $0.6 million, and incremental operating expenses of $1.0 million, which were partially offset by a decrease in advertising expenses and research and development of $1.3 million and $0.1 million, respectively. The increased operating expenses were primarily due to cost associated with a public company, new hires, increased employee benefit costs, and increased refrigerator repairs due to our growing Freshpet Fridge network. As a percentage of net sales, selling, general and administrative expenses decreased from 66% for the three months ended June 30, 2014 to 55% for the three months ended June 30, 2015. After adjusting $1.7 million and $0.2 million for non-cash items related to share-based compensation and the fair valuation of warrants in the second quarter of 2015 and 2014, respectively, as well as adjust $0.6 million of secondary costs during the second quarter of 2015, SG&A decreased as a percentage of net sales to 47% in the second quarter of 2015 compared to 65% of net sales in the second quarter of 2014.

17


 

Loss from Operations

Loss from operations decreased $1.3 million, or 39%, to $2.0 million for the three months ended June 30, 2015 as compared to the same period in the prior year as a result of the factors mentioned above.

Fees on Debt Guarantee

For the three months ended June 30, 2015, we did not incur any fees on debt guarantee. Fees on debt guarantee expense were $1.8 million for the three months ended June 30, 2014. All debt underlying the fees on debt guarantee was repaid upon the consummation of the IPO.

Interest Expense

For the three months ended June 30, 2015, interest expense was $0.1 million, which related to fees associated with our 3-year $10.0 million Revolving Facility and $30.0 million term loan commitment earmarked for capital expenditures (“Credit Facilities”). Interest expense for the three months ended June 30, 2014 was $1.1 million. All of the Company’s outstanding debt was repaid upon the consummation of the IPO.

Net Loss

Net loss decreased $4.0 million, or 64%, to $2.2 million for the three months ended June 30, 2015 as compared to the same period in the prior year. Net loss was 8% of net sales for the three months ended June 30, 2015 as compared to a net loss of 31% of net sales for the same period in the prior year.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Net Sales

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

 

Six months ended June 30,

 

 

2015

 

 

2014

 

 

Amount

 

 

Percentage of Net Sales

 

 

Store Count

 

 

Amount

 

 

Percentage of Net Sales

 

 

Store Count

 

Grocery, Mass and Club* (1)

$

42,113,913

 

 

 

76

%

 

 

10,036

 

 

$

29,851,193

 

 

 

75

%

 

 

8,560

 

Pet Specialty, Natural and Other (2)

 

13,300,165

 

 

 

24

%

 

 

4,318

 

 

 

9,885,042

 

 

 

25

%

 

 

4,033

 

Net Sales

$

55,414,078

 

 

 

100

%

 

 

14,354

 

 

$

39,736,235

 

 

 

100

%

 

 

12,593

 

(1)Stores at June 30, 2015 and June 30, 2014 consisted of 6,558 and 5,722 grocery and 3,478 and 2,838 mass, respectively.

(2)Stores at June 30, 2015 and June 30, 2014 consisted of 4,055 and 3,837 pet specialty and 263 and 196 natural, respectively.

* Includes sales from Freshpet Baked product test of $1.5 million, or 3% of total net sales, for the six months ended June 30, 2015.

Net sales increased $15.7 million, or 39%, to $55.4 million for the six months ended June 30, 2015 as compared to the same period in the prior year. Net sales include the impact of additional sales associated with the Freshpet Baked product test. Excluding the impact of the Freshpet Baked product test, net sales for the second quarter of 2015 increased 36% to $53.9 million as compared to the same period in the prior year. The increase in net sales was driven by increased velocity in Grocery and Mass, as well as Pet Specialty, Natural and Other channels. The Company also experienced an increase of Freshpet Fridges store locations, which grew by 14.0% from 12,593 as of June 30, 2014 to 14,354 as of June 30, 2015.

Gross Profit

Gross profit increased $7.5 million, or 39%, to $26.9 million for the six months ended June 30, 2015 as compared to the same period in the prior year. The increase in gross profit was primarily driven by higher refrigerated net sales, gross profit from Freshpet Baked product test, and lower manufacturing costs per pound on our core Freshpet recipes due to the greater efficiencies achieved at our Freshpet Kitchens in Bethlehem, Pennsylvania, which was completed in the fourth quarter of 2013. The increase in gross profit was partially offset by increased cost of goods sold related to product sales mix as a result of our new innovative products. During the second quarter of 2015, our new innovative products, which historically start with lower gross profit margin, had greater than expected initial sales volume. As a result, the gross profit margin remained relatively consistent at 49% for six months June 30, 2015, compared to the same period in 2014.

18


 

Excluding our Freshpet Baked product test, gross profit margin slightly increased 40 basis points during the six months ended June 30, 2015 to 49.1% compared to the same period in the prior year, attributable to our new innovated products. Generally we have been able to optimize the production of our new innovative products over time as they are incorporated into our core Freshpet recipes. As a result, we expect our gross profit margin to increase as we realize efficiencies of scale with increased sales volume of our current core and new innovative products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $6.5 million, or 26%, to $31.5 million for the six months ended June 30, 2015 as compared to the same period in the prior year. Key components of the dollar increase include additional outbound freight costs of $1.2 million due to increased volume and sales, higher share-based compensation expense of $3.1 million, warrant expense related to the fair valuation of the outstanding warrants of $0.1 million, research and development cost related to the Freshpet Baked product test of $0.7 million, fees associated with the secondary offering of $0.6 million and incremental operating expenses of $1.8 million, slightly offset by a decrease in advertising cost of $0.9 million and research and development of $0.1 million. The increased operating expenses were primarily due to cost associated with a public company, new hires, increased employee benefit costs, and increased refrigerator repairs due to our growing Freshpet Fridge network. As a percentage of net sales, selling, general and administrative expenses decreased from 63% for the six months ended June 30, 2014 to 57% for the six months ended June 30, 2015. After adjusting $3.6 million and $0.4 million for non-cash items related to share-based compensation and the fair valuation of warrants in the six months ended June 30, 2015 and 2014, respectively, as well as adjust $0.6 million of secondary cost during the second quarter of 2015, SG&A decreased as a percentage of net sales to 49% in 2015 compared to 62% of net sales in 2014.

Loss from Operations

Loss from operations decreased $1.1 million, or 19%, to $4.6 million for the six months ended June 30, 2015 as compared to the same period in the prior year as a result of the factors mentioned above.

Fees on Debt Guarantee

For the six months ended June 30, 2015 we did not incur any fees on debt guarantee. Fees on debt guarantee expense were $3.6 million for the six months ended June 30, 2014. All debt underlying the fees on debt guarantee was repaid upon the consummation of the IPO.

Interest Expense

For the six months ended June 30, 2015, interest expense was $0.1 million, which related to fees associated with our 3-year $10.0 million Revolving Facility and $30.0 million term loan commitment earmarked for capital expenditures (“Credit Facilities”). Interest expense for the six months ended June 30, 2014 was $2.0 million. All of the Company’s outstanding debt was repaid upon the consummation of the IPO.

Net Loss

Net loss decreased $6.6 million, or 58%, to $4.8 million for the six months ended June 30, 2015 as compared to the same period in the prior year. Net loss was 9% of net sales for the six months ended June 30, 2015 as compared to a net loss of 29% of net sales for the same period in the prior year.

 

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures prepared in accordance with U.S. generally accepted accounting principles, or GAAP. As used herein, EBITDA represents net loss plus depreciation and amortization, interest expense (including fees on debt guarantee, which we believe were a cost of our prior financing arrangement akin to interest expense), and income tax expense. As used herein, Adjusted EBITDA represents EBITDA plus loss on disposal of equipment, new plant startup expense and processing, share based compensation, warrant fair valuation, launch expenses, and secondary fees.

We present EBITDA and Adjusted EBITDA because we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to net loss set

19


 

forth below, provides a more complete understanding of our business than could be obtained absent this disclosure. We use EBITDA and Adjusted EBITDA, together with financial measures prepared in accordance with GAAP, such as 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 further utilized for our covenant requirements under our credit agreement, and additionally as an important component of internal budgeting and setting management compensation.

EBITDA and Adjusted EBITDA 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.

EBITDA and Adjusted EBITDA should not be considered in isolation or as alternatives to net loss, income from operations or any other measure of financial performance calculated and prescribed in accordance with 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 Adjusted EBITDA may not be comparable to similarly titled measures in other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do.

Our presentation of Adjusted EBITDA 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 both EBITDA and Adjusted EBITDA have limitations as analytical financial measures. For example, neither EBITDA nor Adjusted EBITDA reflects:

·

our capital expenditures or future requirements for capital expenditures;

·

the interest expense (including fees on debt guarantee, which we believe were a cost of our prior financing arrangement akin to interest expense), or the cash requirements necessary to service interest expense or principal payments, associated with indebtedness;

·

depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor does EBITDA or Adjusted EBITDA reflect any cash requirements for such replacements; and

·

changes in or cash requirements for our working capital needs.

Additionally, Adjusted EBITDA excludes (i) non-cash stock 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 uncapitalizable 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 EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

20


 

The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net loss which is the most directly comparable financial measure presented in accordance with GAAP:

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

(Dollars in thousands)

 

 

(Dollars in thousands)

 

Net Loss

$

(2,229

)

 

$

(6,267

)

 

$

(4,816

)

 

$

(11,409

)

Fees on debt guarantee (a)

 

 

 

 

1,808

 

 

 

 

 

 

3,645

 

Depreciation and amortization

 

1,869

 

 

 

1,536

 

 

 

3,624

 

 

 

3,124

 

Interest expense

 

111

 

 

 

1,079

 

 

 

148

 

 

 

2,033

 

Income tax expense

 

15

 

 

 

8

 

 

 

30

 

 

 

16

 

EBITDA

$

(234

)

 

$

(1,836

)

 

$

(1,014

)