UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission File Number 001-36729
FRESHPET, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
400 Plaza Drive, 1st Floor
Secaucus, New Jersey
(Address of Principal Executive Offices)
20-1884894
(I.R.S. Employer Identification No.)
07094
(Zip Code)
(201) 520-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: None
Title of each class
Common Stock, $0.001 par value per share
Name of exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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.
Large accelerated filer
Non-Accelerated filer
Emerging growth company
☐
☐ (Do not check if a smaller reporting company)
☒
Accelerated filer
Smaller reporting company
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held
by non-affiliates was approximately $439 million.
As of March 1, 2018, 35,138,826 shares of common stock of the registrant were outstanding.
The information required by Items 10, 11, 12, 13, and 14 will be furnished (and are hereby incorporated) by an amendment hereto or pursuant to a definitive proxy statement
pursuant to Regulation 14A that will contain such information.
Documents Incorporated By Reference
Freshpet, Inc.
Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Relate Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Signatures
Exhibits and Financial Statement Schedules
PART IV
2
4
10
22
22
22
23
24
26
28
43
45
63
63
64
65
65
65
65
65
66
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;
•
the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require;
• our ability to manage our supply chain effectively;
•
volatility in the price of our common stock; and
• other factors discussed under the headings “Risk Factors,” “Business,” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this report.
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible
for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our
expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this report. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You
should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
3
ITEM 1. BUSINESS
P ART I
Overview
Freshpet, Inc. (“Freshpet” or the “Company”) is disrupting the $28.0 billion North American pet food industry by driving consumers to reassess
conventional dog and cat food offerings that have remained essentially unchanged for decades. We position our brand to benefit from mainstream
trends of growing pet humanization and consumer focus on health and wellness. We price our products to be accessible to the average consumer,
providing us with broad demographic appeal and allowing us to penetrate multiple classes of retail, including grocery (including online), mass, club,
pet specialty and natural. We have successfully expanded our network of Freshpet Fridges within leading blue-chip retail chains. The strength of our
business model extends to our customers, who we believe find that Freshpet grows their pet category sales, drives higher traffic, increases shopper
frequency and delivers category leading margins. As of December 31, 2017, Freshpet Fridges were located in over 18,000 stores, and we believe
there is an opportunity to install a Freshpet Fridge in at least 30,000 stores across North America. Additionally, we believe that there are
opportunities to expand our network into international markets as demonstrated with our recent initiatives in the U.K. market.
Our Industry
We primarily compete in the North American dog and cat food market which we estimate has grown at an average compounded annual growth rate
of approximately 5% from 2012 to 2017. We believe pet food spending in North America will continue to increase at a similar rate over the next five
years. Of the total market, we estimate that dog food, cat food and treats & mixers accounted for retail sales of $28.0 billion. The pet food market has
historically been resilient as consumers continue to spend on their pets even during economic downturns.
We believe the following trends are driving growth in our industry:
Pet
ownership.
There are currently 84.6 million pet-owning households, or 68% of total households, and over 300 million pets in the United States,
according to the American Pet Products Association.
Pet
humanization
. According to Packaged Facts, 83% of U.S. pet owners view their pets as members of the family. As pets are increasingly
viewed as companions, friends and family members, pet owners are being transformed into “pet parents” who spare no expense for their loved ones,
driving premiumization across pet categories. This trend is reflected in food purchasing decisions. Nearly 80% of U.S. pet owners are as concerned
about the quality of their pet’s food as they are about their own, according to market researcher Mintel.
Increasing
consumer
focus
on
health
&
wellness.
Consumers are increasingly purchasing fresh, natural and organic food products. We believe
consumers are seeking simple, fresh and easy to understand food products from brands they trust and made with ingredients that are transparently
sourced.
The pet food purchasing decision is underpinned by higher brand loyalty than many other consumer packaged goods categories. A consumer
selecting a pet food brand resists frequent switching in order to avoid disrupting the pet’s diet, resulting in high repeat purchasing behavior. As a
result, we believe that as consumers try fresh, refrigerated pet food, they are likely to become repeat users of the product.
Even though long-term consumer trends of pet humanization and health and wellness are well documented, conventional pet food sold as dry kibble
or in wet cans has not changed substantially for decades. We believe that the pet food industry has not kept pace with how consumers think about
food for their families, including their pets. As a result, consumers are searching for higher quality, less processed food for their dogs and cats—
meals that measure up to today’s sensibilities of what actually constitutes “good food.” Freshpet was specifically designed to address this growing
need with affordable offerings accessible to the average consumer.
Our Opportunity
4
Our Mission and Values
We started Freshpet with a single-minded mission—to bring the power of real, fresh food to our dogs and cats. And, we are committed to doing so in
ways that are good for Pets, People and Planet.
Pets
Our pets are members of our family and deserve to eat the kind of fresh, healthy food that we do. We cook our fresh, nutritious pet food with the
same care that we would take in preparing human food. Through the Freshpet Foundation, we support nutritional research in areas of prevention,
care and treatment of diseases in dogs. Since founding Freshpet, we have donated over three million fresh meals to pets via shelters, charitable
organizations and humane societies. Our team members get paid time off to pursue activities that help pets in their community. We also participate
in Random Acts of Kindness to do our part to improve the lives of pets and pet parents.
People
People include our team members, our partners and pet parents. We treat our team members with respect and are committed to helping them
develop professionally and personally. We try to be good partners with customers, distributors and suppliers by conducting business with honesty
and transparency. Additionally, we strive to help pet owners by providing pet parenting resources.
Planet
We are committed to being socially responsible and minimizing our environmental impact. The electricity used in the Freshpet Kitchens is 100%
wind-powered. Freshpet Kitchens is a landfill-free facility and we plant trees to offset carbon emissions. We also strive to conserve energy by
continually improving the efficiency of our Freshpet Fridges and partnering with freight and logistics providers committed to sustainable practices.
Our commitment to our values helps us engage with consumers, motivate our team members and attract strong partners, which allows us to fulfill
our mission of delivering the best nutritional product choices to improve the well-being of our pets, enrich pet parents’ lives and contribute to
communities. Freshpet—Pets, People, Planet.
Our Products
Our products consist of dog food, cat food and dog treats. All Freshpet products are made according to our nutritional philosophy of fresh, meat-
based nutrition and minimal processing. Our proprietary recipes include real, fresh meat and varying combinations of vitamin-rich vegetables, leafy
greens and anti-oxidant rich fruits, without the use of preservatives, additives or artificial ingredients. Our unique product attributes appeal to diverse
consumer needs across multiple classes of retail where Freshpet is sold. Consequently, our brand resonates across a broad cross-section of pet
parent demographics.
All of our products are sold under the Freshpet brand name, with ingredients, packaging and labeling customized by class of trade. Our products are
customized to different classes of trade and are available in multiple forms, including slice and serve rolls, bagged meals and tubs.
We also offer fresh treats across all classes of retail under the Dognation and Dog Joy labels.
5
Our Product Innovation
As the first manufacturer of fresh, refrigerated pet food distributed across North America, product innovation is core to our strategy. We take a fresh
approach to pet food and are not constrained by conventional pet food products, attributes and production capabilities. We employ a tightly-knit,
creative team of marketing and research and development professionals, and we consult with outside experts through our Nutrition Council, which
consist of PhD’s in nutrition and veterinary nutritionists. Our team often identifies pet parents’ needs by evaluating emerging demand trends in both
pet food and human food. Our research and development facility located next door to the Freshpet Kitchens tests small batches of new recipes and
tries out new cooking techniques. New products are refined iteratively with the help of consumer panel data to arrive at products that we believe can
be commercially successful.
The success of our approach is evidenced by our broad product portfolio today. We began Freshpet by producing fresh, refrigerated slice and serve
rolls, and over time have steadily expanded into successful new product forms including bags, tubs and treats. We also introduced new fresh recipes
and ingredients, such as proteins and grain-free options never before seen in pet food that cater to the specific dietary requirements of pets.
Our recently opened Innovation Center, next door to our Freshpet Kitchens manufacturing plant, helped us ensure that we remain capable of strong
innovation including creating new product platforms to expand the breadth of our fresh offerings. We expect that new product introductions will
continue to meaningfully drive growth going forward.
Our Supply Chain
Manufacturing:
All of our products are manufactured in the United States. We own and operate what we believe to be the first fresh, refrigerated pet
food manufacturing facility in North America, the Freshpet Kitchens at Bethlehem, Pennsylvania. This 100,000 square foot facility was built to United
States Department of Agriculture standards and houses four production lines customized to produce fresh, refrigerated food. In 2017, approximately
94% of our product volume was manufactured by us.
Ingredients
and
Packaging:
Our products are made with natural and fresh ingredients including meat, vegetables, fruits, whole grains, vitamins and
minerals. We use high quality food grade plastic packaging materials. Over 60% of our ingredients are sourced locally from within a 200 mile radius
of the Freshpet Kitchens, 96% are from North America and none are sourced from China. We maintain rigorous standards for ingredient quality and
safety. By volume, our largest input, fresh chicken, represents approximately 50% of total ingredients. In order to retain operating flexibility and
negotiating leverage, we do not enter into exclusivity agreements or long-term commitments with any of our suppliers. All of our suppliers are well-
established companies that have the scale to support our growth. For every ingredient, we either use multiple suppliers or have identified alternative
sources of supply that meet our quality and safety standards.
Distribution:
Beginning in 2016, outbound transportation from our facility is handled through a third-party refrigerated freight broker. We expect to be
able to leverage certain distribution costs as volumes grow. We use national and regional distributors to cover the grocery (including online), mass,
pet specialty and natural retail classes.
Our Product Quality and Safety
We go to great lengths to ensure product quality, consistency and safety from ingredient sourcing to finished product. Our company-owned
manufacturing facility allows us to exercise significant control over production. Our quality assurance team includes 17 professionals with significant
experience in pet and human food production.
Our production processes are designed to meet science-based quality standards with documented plans for Hazard Analysis Critical Control Points
and Hazard Analysis Risk Based Preventive Control to monitor established production controls, calibrate instruments, record data and perform
corrective actions. Our on-site laboratory has microbial and composition testing capabilities. Quality control approvals are based on a positive
release strategy, wherein a batch can only be shipped when it passes control point record reviews and laboratory testing. At the end of each working
day, a third shift consisting of a cleaning crew sanitizes all equipment that is in contact with food material. Before commencing production the next
day, quality assurance professionals swab equipment to test for potential contaminants.
Freshpet’s food safety program is certified at Safe Quality Food Level III, which is the highest standard determined under the Global Food Safety
Initiative Benchmarks. We believe our systems and standards for product quality and safety can support our growth and ensure continued success in
the market.
6
Our Customers and Distributors
We sell our products throughout United States, Canada, and the United Kingdom, generating the vast majority of our sales in the United States. The
strength of our business model makes us an attractive partner for leading blue-chip retailers, who we believe find that Freshpet grows the sales of
their pet category, drives higher traffic, increases shopper frequency and delivers category-leading margins. Our Freshpet Fridge locations have
been consistently increasing as we add new retail accounts and add stores in existing accounts. We are in over 18,000 stores and believe there is
opportunity for us to install a Freshpet Fridge in at least 30,000 stores in North America. We sell our products through the following classes of retail:
grocery (including online), mass, club, pet specialty and natural.
Our customers determine whether they wish to purchase our products either directly from us or through a third-party distributor. In 2017, our largest
distributor by net sales, McLane Company, Inc., accounted for 18% of our net sales.
The Freshpet Fridge
We sell our products through a growing network of company-owned branded refrigerators, the Freshpet Fridges. Our Freshpet Fridges are typically
four feet wide by seven feet high, and replace standard shelving in the pet aisle or an end-cap of a retail store. Our Freshpet Fridge designs are
constantly evolving with all new models featuring prominent edge-lit LED headers, LED interior lighting, crisp black interiors and frameless glass
swing doors for aesthetics and easy access. We use state-of-the-art refrigeration technology and environmentally friendly refrigerants to minimize
energy consumption and environmental impact.
We design, produce, install and maintain the Freshpet Fridge through a combination of in-house resources and world-class partners. We source our
Freshpet Fridges from five leading global commercial refrigerator manufacturers with whom we have a collaborative approach to refrigerator design
and innovation. Once ordered by us, Freshpet Fridges are shipped to distribution centers for delivery and installation in retail stores.
Installation into retail locations and ongoing maintenance of the Freshpet Fridge is coordinated by Freshpet and executed through leading third-party
service providers. All of our Freshpet Fridges are protected by a manufacture r warranty of three years. Our refrigerators are designed to be highly
reliable, and at any given time less than 1% of the network is out of service for maintenance. Moreover, to ensure quality, cleanliness and
appropriate in-stock levels, we employ brokerage partners to conduct a physical audit of the Freshpet Fridge network on an ongoing basis, with
photographic results of our Freshpet Fridge in the network transmitted back to Freshpet and reviewed by members of our sales team.
We currently estimate less than 15 month cash-on-cash payback for the average Freshpet Fridge installation, calculated by comparing our total
current costs for a refrigerator (including installation and maintenance) to our current margin on net revenues. We believe our attractive value
proposition to retailers and pet parents will allow us to continue penetrating store locations of existing and new customers. The Freshpet Fridge
provides a highly-visible merchandising platform, allows us to control how our brand is presented to consumers at point-of-sale and represents a
significant point of differentiation from other pet food competitors.
Marketing and Advertising
Our marketing strategy is designed to educate consumers about the benefits of fresh refrigerated pet food and build awareness of the Freshpet
brand. We deploy a broad set of marketing tools across television, digital and public relations to reach consumers through multiple touch points and
increase product trials.
Our network of over 18,000 branded Freshpet Fridges in prominent locations within blue-chip retailers helps to introduce consumers to our brand
and instantly distinguish Freshpet from traditionally merchandised pet food. We have effectively used national TV advertising to drive incremental
consumers to try Freshpet products. We expect to realize greater benefits from national TV advertising as we continue to grow the network of
Freshpet store loca tions nationwide. We have also expanded our online presence to better target consumers seeking information on healthy pet
food. We reach consumers across multiple digital and social media platforms including websites, blogs and online reviews, as well as with tailored
messaging on popular digital hubs including Instagram, Facebook, Twitter and YouTube.
Our marketing strategy has allowed us to drive new consumers to our brand and develop a highly engaged community of users who actively
advocate for Freshpet.
7
Competition
Pet food is a highly competitive industry. We compete with manufacturers of conventional pet food such as Mars, Nestlé and Big Heart Pet Brands
(part of The J.M. Smucker Company). We also compete with specialty and natural pet food manufacturers such as Colgate-Palmolive and Blue
Buffalo (expected to be part of General Mills pending completion of the recently announced acquisition). In addition, we compete with many regional
niche brands in individual geographic markets.
Given a North American retail landscape dominated by large retailers, with limited shelf space and a significant number of competing products,
competitors actively support their brands through marketing, advertising, promotional spending and discounting.
Competitive factors in the pet food industry include product quality, ingredients, brand awareness and loyalty, product variety, product packaging and
design, reputation, price, advertising, promotion and nutritional claims. We believe that we compete effectively with respect to each of these factors.
Team Members
As of December 31, 2017, we had 260 employees, of which all but two are located in the United States. None of our employees are represented by
a labor union or by any collective bargaining arrangements with respect to his or her employment with us. We believe that our employee relations
are good.
We were incorporated in Delaware in November 2004 and currently exist as a Delaware corporation. Our principal executive offices are located at
400 Plaza Drive, 1st Floor, Secaucus, New Jersey 07094. Our telephone number is (201) 520-4000.
Our Corporate Information
Website Information
The address of our corporate website is www.freshpet.com. Our Annual Reports on Form 10-K, annual proxy statements and related proxy cards are
made available on our website at the same time they are mailed to stockholders. Our quarterly reports on Form 10-Q, periodic reports on Form 8-K
and amendments to those reports that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), are available through our website, free of charge, as soon as reasonably practicable after they have been electronically filed or
furnished to the Securities and Exchange Commission (the “SEC”). Our website also provides access to reports filed by our directors, executive
officers and certain significant shareholders pursuant to Section 16 of the Exchange Act. In addition, our Corporate Governance Guidelines, General
Code of Ethics, Code of Ethics for Executive Officers and Principal Accounting Personnel and charters for the committees of our board of directors
are available on our website as well as other shareholder communications. The information contained in or that can be accessed through our
website does not constitute a part of, and is not incorporated by reference into, this report. You may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website, www.sec.gov, which contains reports, proxy and
information statements and other information that we file electronically with the SEC.
Trademarks and Other Intellectual Property
We believe that our rights in our trademarks and service marks are important to our marketing efforts to develop brand recognition and differentiate
our brand from our competitors and are a valuable part of our business. We own a number of trademarks and service marks that have been
registered, or for which applications are pending, with the United States Patent and Trademark Office including, among others, Freshpet, Freshpet
Select, Vital, Nature’s Fresh, Roasted Meals, Fresh From The Kitchen, Freshpet Dog Joy and Dognation Treats.
We believe that our intellectual property has substantial value and has significantly contributed to our success to-date. We are continually developing
new technology and enhancing proprietary technology related to our pet food, Freshpet Fridges and manufacturing operations.
We also rely on unpatented proprietary expertise, recipes and formulations, continuing innovation and other trade secrets to develop and maintain
our competitive position.
8
Government Regulation
Along with our brokers, distributors, and ingredients and packaging suppliers, we are subject to extensive laws and regulations in the United States
by federal, state and local government authorities. In the United States, the federal agencies governing the manufacture, distribution and advertising
of our products include, among others, the Federal Trade Commission, the U.S. Food and Drug Administration (“FDA”), the U.S. Department of
Agriculture, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. Under various statutes,
these agencies, among other things, prescribe the requirements and establish the standards for quality and safety and regulate our marketing and
advertising to consumers. Certain of these agencies, in certain circumstances, must not only approve our products, but also review the
manufacturing processes and facilities used to produce these products before they can be marketed in the United States. In addition to agency
regulation, we are required to comply with state feed control requirements in the United States. We are also subject to the laws of Canada, including
the Canadian Food Inspection Agency, and the United Kingdom, including the Food Standards Agency, as well as provincial and local regulations.
We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer
protection regulations that regulate retailers or govern the promotion and sale of merchandise. Our operations, and those of our distributors and
suppliers, are subject to various laws and regulations relating to environmental protection and worker health and safety matters. We monitor
changes in these laws and believe that we are in material compliance with applicable laws.
Information Systems
We employ a comprehensive Enterprise Resource Planning (“ERP”) system provided by a leading global software provider and are supported by a
local consulting partner. This system covers order entry, customer service, accounts payable, accounts receivable, purchasing, asset management
and manufacturing. Our order management process is automated via Electronic Data Interchange with virtually all our customers, which feeds orders
directly to our ERP platform. We complement the ERP system with a Warehouse Management System, which allows us to improve tracking and
management of ingredients and streamline manufacturing.
We backup data every hour and store a copy locally for immediate restoration if needed. All data is transmitted to a secure offsite cloud storage
service daily for disaster recovery needs. We believe our systems infrastructure is scalable and can support our future growth.
9
I TEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Before you purchase our common stock, you should carefully consider the risks
described below and the other information contained in this report, including our consolidated financial statements and accompanying notes. If any of
the following risks actually occurs, our business, financial condition, results of operations or cash flows could be materially adversely affected. In any
such case, the trading price of our common stock could decline, and you could lose all or part of your investment.
Risks Related to Our Business and Industry
We
may
not
be
able
to
successfully
implement
our
growth
strategy
on
a
timely
basis
or
at
all.
Our future success depends, in large part, on our ability to implement our growth strategy of expanding distribution by installing new Freshpet
Fridges, attracting new consumers to our brand and launching new products. Our ability to increase awareness, consumer trial and adoption of our
products, and to implement this growth strategy depends, among other things, on our ability to:
• partner with customers to secure space for our Freshpet Fridges;
•
implement our marketing strategy;
• develop new product lines and extensions;
• partner with distributors to deliver our products to customers;
•
continue to compete effectively in multiple classes of retail, including grocery (including online), mass, club, pet specialty and natural; and
• expand and maintain brand loyalty.
We may not be able to successfully implement our growth strategy or to grow consistently from period to period. Our business, financial condition
and results of operations will be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that
ultimately proves unsuccessful.
We
expect
to
need
capital
in
the
future
for
business
development,
and
we
may
not
be
able
to
generate
sufficient
cash
flow
or
raise
capital
on
acceptable
terms
to
meet
our
needs.
Developing our business will require significant capital in the future. To meet our capital needs, we expect to rely on our cash flow from operations,
our credit facilities, and other third-party financing. Third-party financing in the future may not, however, be available on terms favorable to us, or at
all. Our ability to obtain additional funding will be subject to various factors, including general 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 documents.
Additionally, our ability to make payments on and to refinance any indebtedness and to fund planned expenditures for our growth plans will depend
on our ability to generate cash in the future. If our business does not achieve the levels of profitability or generate the amount of cash that we
anticipate or if we expand faster than anticipated, we may need to seek additional debt or equity financing to operate and expand our business.
We believe that cash and cash equivalents, 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. However, our ability to
continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and
cash flow from operations and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to
general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that
our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. Further, our capital
requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur
unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may seek alternative financing,
such as selling additional debt or equity securities, and we cannot assure you that we will be able to do so on favorable terms, if at all. 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
10
of additional financings unattractive. Our inability to raise capital could impede our growth or otherwise require us to forego growth opportunities and
co uld materially adversely affect our business, financial condition and results of operations.
Failure
to
retain
our
senior
management
or
failure
to
hire
and
integrate
suitable
replacements
may
adversely
affect
our
operations.
Our success is substantially dependent on the continued service of certain members of our senior management. These members of senior
management are primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral
to our brand and culture, and the reputation we enjoy with suppliers, contract manufacturers, distributors, customers and consumers. The loss of the
services of any of these employees could have a material adverse effect on our business and prospects, as we may not be able to find and integrate
suitable replacements on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which
may cause the price of our common stock to decline.
If
our
products
are
alleged
to
cause
injury
or
illness
or
fail
to
comply
with
governmental
regulations,
we
may
suffer
adverse
public
relations,
need
to
recall
our
products
and
experience
product
liability
claims.
We may be exposed to product recalls, including voluntary recalls or withdrawals, and adverse public relations if our products are alleged to cause
injury or illness or if we are alleged to have mislabeled or misbranded our products or otherwise violated governmental regulations. We may also
voluntarily recall or withdraw products that we consider below our standards, whether for taste, appearance or otherwise, in order to protect our
brand reputation. Consumer or customer concerns (whether justified or not) regarding the safety of our products could adversely affect our business.
A product recall or withdrawal could result in substantial and unexpected expenditures, destruction of product inventory, and lost sales due to the
unavailability of the product for a period of time, which could reduce profitability and cash flow. In addition, a product recall or withdrawal may require
significant management attention. Product recalls, product liability claims (even if unmerited or unsuccessful), or any other events that cause
consumers to no longer associate our brands with high quality and safe products may also result in adverse publicity, hurt the value of our brands,
lead to a decline in consumer confidence in and demand for our products, and lead to increased scrutiny by federal and state regulatory agencies of
our operations, which could have a material adverse effect on our business, financial condition and results of operations.
We also may be subject to product liability claims and adverse public relations if consumption or use of our products is alleged to cause injury or
illness. While we carry product liability insurance, our insurance may not be adequate to cover all liabilities we may incur in connection with product
liability claims. For example, punitive damages are generally not covered by insurance. In addition, we may not be able to continue to maintain our
existing insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage (which may result in future product
liability claims being uninsured). A product liability judgment against us or our agreement to settle a product liability claim could also result in
substantial and unexpected expenditures, which would reduce profitability and cash flow. In addition, even if product liability claims against us are
not successful or are not fully pursued, these claims could be costly and time-consuming and may require management to spend time defending the
claims rather than operating our business.
The
loss
of
a
significant
customer,
certain
actions
by
a
significant
customer
or
financial
difficulties
of
a
significant
customer
could
adversely
affect
our
results
of
operations.
A relatively limited number of customers account for a large percentage of our net sales. During 2017, ten customers, who purchase either directly
from us or through third-party distributors, collectively accounted for more than 67% of our net sales. In 2017, our largest distributor by net sales,
McLane Company, Inc., accounted for 18% of our net sales. These percentages may increase if there is consolidation among retailers or if mass
merchandisers grow disproportionately to their competition. We expect that a significant portion of our revenues will continue to be derived from a
small number of customers; however, these customers may not continue to purchase our products in the same quantities as they have in the past.
Our customers are not contractually obligated to purchase from us. Changes in our customers’ strategies, including a reduction in the number of
brands they carry, shipping strategies, a shift of shelf space to or increased emphasis on private label products (including “store brands”), a
reduction in shelf space for pet food items or a reduction in the space allocated for our Freshpet Fridges may adversely affect our sales.
Requirements that may be imposed on us by our customers, such as sustainability, inventory management or product specification requirements,
may have an adverse effect on our results of operations. Additionally, especially during economic downturns, our customers may face financial
difficulties, bankruptcy or other business disruptions that may impact their operations and their purchases from us and may affect their ability to pay
us for products purchased from us. Customers may grow their inventory in anticipation of a price increase, or in anticipation of, or during, our
promotional events, which typically provide for reduced prices during a specified time or other customer or consumer incentives. To the extent
customers seek to reduce their
11
usual or customary inventory leve ls or change their practices regarding purchases in excess of consumer consumption, our sales and results of
operations could be adversely impacted in that period. If our sales of products to one or more of our significant customers are reduced, this reduc
tion could have a material adverse effect on our business, financial condition and results of operations.
Our
operating
results
depend,
in
part,
on
the
sufficiency
and
effectiveness
of
our
marketing
and
trade
spending
programs.
In general, due to the highly competitive nature of the businesses in which we compete, we must execute effective and efficient marketing
investments and trade spending programs with respect to our businesses overall to sustain our competitive position in our markets. Marketing
investments may be costly. Additionally, we may, from time to time, change our marketing and trade spending strategies, including the timing,
amount or nature of television advertising and related promotional programs. The sufficiency and effectiveness of our marketing and trade spending
practices is important to our ability to retain or improve our market share or margins. If our marketing and trade spending programs are not
successful or if we fail to implement sufficient and effective marketing and trade spending programs, our business, financial condition and results of
operations may be adversely affected.
The
growth
of
our
business
depends
on
our
ability
to
introduce
new
products
and
improve
existing
products
in
anticipation
of
changes
in
consumer
preferences
and
demographics.
Our business is focused on the development, manufacture, marketing and distribution of pet food products. If consumer demand for our products
decreased, our business would suffer. Sales of pet food products are subject to evolving consumer preferences and changing demographics. A
significant shift in consumer demand away from our products or a decline in pet ownership could reduce our sales or the prestige of our brand, which
would harm our business, financial condition and results of operations.
A key element of our growth strategy depends on our ability to develop and market new products and improvements to our existing products that
meet our standards for quality and appeal to consumer preferences. The success of our innovation and product development efforts is affected by
our ability to anticipate changes in consumer preferences and demographics, the technical capability of our product development staff in developing
and testing product prototypes, including complying with governmental regulations, and the success of our management and sales team in
introducing and marketing new products. Failure to develop and market new products that appeal to consumers could negatively impact our
business, financial condition and results of operations.
Additionally, the development and introduction of new products requires substantial research, development and marketing expenditures, which we
may be unable to recoup if the new products do not gain widespread market acceptance. Efforts to accelerate our innovation may exacerbate risks
associated with innovation. If we are unsuccessful in meeting our objectives with respect to new or improved products, our business, financial
condition and results of operations could be harmed.
Limited
manufacturing
capacity
could
have
a
material
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.
All of the products we manufacture in-house are processed through our Freshpet Kitchens in Bethlehem, Pennsylvania, which we believe is North
America’s first fresh, refrigerated pet food manufacturing facility. Accordingly, we have limited available manufacturing capacity to meet our quality
standards. Due to our continued growth, we have completed a capital expansion project at our Freshpet Kitchens manufacturing facility to expand
our plant capacity and increase distribution. New equipment related to the capital expansion project went into service in 2016. The expansion
increased our production capacity by 130% at our Freshpet Kitchens.
An unforeseen event, such as a natural disaster or work stoppage, at our Freshpet Kitchens could significantly limit our manufacturing capacity.
Accurate forecasting of sales demand is critical to ensuring available capacity. Our forecasts are based on multiple assumptions, which may cause
our estimates to be inaccurate, affecting our ability to obtain adequate manufacturing capacity.
If our growth exceeds our expectations, we may not be able to increase our own manufacturing capacity to, or obtain contract manufacturing
capacity at, a level that meets demand for our products, which could prevent us from meeting increased customer demand and harm our business.
However, if we overestimate our demand and overbuild our capacity, we may have significantly underutilized assets, and we may experience
reduced margins. If we do not
12
accurately align our manufacturing capabilities with deman d, it could have a material adverse effect on our business, financial condition and results
of operations.
Government
regulation,
scrutiny,
warnings
and
public
perception
could
increase
our
costs
of
production
and
increase
legal
and
regulatory
expenses.
Manufacturing, processing, labeling, packaging, storing and distributing pet products are activities subject to extensive federal, state and local
regulation, as well as foreign regulation. In the United States, these aspects of our operations are regulated by the FDA, and various state and local
public health and agricultural agencies. The FDA Food Safety Modernization Act of 2011 provides direct recall authority to the FDA and includes a
number of other provisions designed to enhance food safety, including increased inspections by the FDA of domestic and foreign food facilities and
increased review of food products imported into the United States. In addition, many states have adopted the Association of American Feed Control
Officials’ model pet food regulations or variations thereof, which generally regulate the information manufacturers provide about pet food. Complying
with government regulation can be costly or may otherwise adversely affect our business. Failure to comply with applicable laws and regulations
could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material
adverse effect on our business, financial condition and results of operations.
Our business is also affected by import and export controls and similar laws and regulations, both in the United States and elsewhere. Issues such
as national security or health and safety, which slow or otherwise restrict imports or exports, could adversely affect our business. In addition, the
modification of existing laws or regulations or the introduction of new laws or regulations could require us to make material expenditures or otherwise
adversely affect the way that we have historically operated our business.
Our
business
may
be
subject
to
false
marketing
claims.
From time to time we may be subject to claims from competitors or consumers, including consumer class actions, alleging that our product claims
are deceptive. Regardless of their merit, these claims can require significant time and expense to investigate and defend. Whether or not a false
marketing claim is successful, such assertions could have an adverse effect on our business, financial condition and results of operations, and the
negative publicity surrounding them could harm our reputation and brand image.
Adverse
weather
conditions,
natural
disasters,
pestilences
and
other
natural
conditions
can
disrupt
our
operations,
which
can
adversely
affect
our
business,
financial
condition
and
results
of
operations.
The ingredients that we use in the production of our products (including, among others, meat, vegetables, fruits, carrageenans, whole grains,
vitamins and minerals) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, fires, earthquakes,
tornadoes and pestilences. Adverse weather conditions may be impacted by climate change and other factors. Adverse weather conditions and
natural disasters can reduce crop size and crop quality, which in turn could reduce our supply of ingredients, lower recoveries of usable ingredients,
increase the prices of our ingredients, increase our transportation costs or increase our cost of storing ingredients if harvests are accelerated and
processing capacity is unavailable. Additionally, the growth of crops, as well as the manufacture and processing of our products, requires significant
amounts of water. Drought or other causes of a reduction of water in aquifers may affect availability of water, which in turn may adversely affect our
results of operations. Competing manufacturers may be affected differently by weather conditions and natural disasters depending on the location of
their supplies or operations. If our supply of ingredients is reduced, we may not be able to find enough supplemental supply sources on favorable
terms, if at all, which could impact our ability to supply product to our customers and adversely affect our business, financial condition and results of
operations. Increased costs for ingredients or other inputs could also adversely affect our business, financial condition and results of operations as
described in “—The inputs, commodities and ingredients that we require are subject to price increases and shortages that could adversely affect our
results of operations.”
Additionally, adverse weather conditions, natural disasters or other natural conditions affecting our operating activities or major facilities could cause
an interruption or delay in our production or delivery schedules and loss of inventory and/or data or render us unable to accept and fulfill customer
orders in a timely manner, or at all. If our operations are damaged by a fire, flood or other disaster, for example, we may be subject to supply or
delivery interruptions, destruction of our facilities and products or other business disruptions, which could adversely affect our business, financial
condition and results of operations.
If
we
fail
to
develop
and
maintain
our
brand,
our
business
could
suffer.
13
We believe that developing and maintaining our brand is critical to our success. The impo rtance of our brand recognition may become even greater
as competitors offer more products similar to ours. Our financial success is directly dependent on consumer perception of our brand. Our brand-
building activities involve providing high-quality produc ts, increasing awareness of our brand, creating and maintaining brand loyalty and increasing
the availability of our products.
The success of our brand may suffer if our marketing plans or product initiatives do not have the desired impact on our brand’s image or its ability to
attract customers. Further, our brand value could diminish significantly due to a number of factors, including consumer perception that we have acted
in an irresponsible manner, adverse publicity about our products (whether or not valid), our failure to maintain the quality of our products, product
contamination, the failure of our products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers.
The growing use of social and digital media by consumers increases the speed and extent that information and opinions can be shared. Negative
posts or comments about us or our brands or products on social or digital media could damage our brands and reputation. If we fail to maintain the
favorable perception of our brands, our business, financial condition and results of operations could be negatively impacted.
The
pet
food
product
category
in
which
we
participate
is
highly
competitive.
If
we
are
unable
to
compete
effectively,
our
results
of
operations
could
be
adversely
affected.
The pet food product category in which we participate is highly competitive. There are numerous brands and products that compete for shelf space
and sales, with competition based primarily upon brand recognition and loyalty, product packaging, quality and innovation, taste, nutrition, breadth of
product line, price and convenience. We compete with a significant number of companies of varying sizes, including divisions or subsidiaries of
larger companies. We face strong competition from competitors’ products that are sometimes sold at lower prices. Price gaps between our products
and our competitors’ products may result in market share erosion and harm our business. A number of our competitors have broader product lines,
substantially greater financial and other resources and/or lower fixed costs than we have. Our competitors may succeed in developing new or
enhanced products, including fresh, refrigerated pet food, that are more attractive to customers or consumers than our products. These competitors
may also prove to be more successful in marketing and selling their products or may be better able to increase prices to reflect cost pressures. We
may not compete successfully with these other companies or maintain or grow the distribution of our products. We cannot predict the pricing or
promotional activities of our competitors or whether they will have a negative effect on us. Many of our competitors engage in aggressive pricing and
promotional activities. There are competitive pressures and other factors which could cause our products to lose market share or decline in sales or
result in significant price or margin erosion, which would have a material adverse effect on our business, financial condition and results of operations.
If
the
operating
capacity
or
reputation
of
our
Freshpet
Fridges
is
harmed,
our
business,
financial
condition
and
results
of
operations
may
suffer.
Our success depends on our network of company-owned branded refrigerators, known as Freshpet Fridges. If the operating capacity of our Freshpet
Fridges is harmed by external factors, such as adverse weather or energy supply, or internal factors, such as faulty manufacturing or insufficient
maintenance, our products contained in those fridges may be damaged and need to be discarded. In addition, if our Freshpet Fridges fail to operate
as intended, for any reason, the reputation of our Freshpet Fridges with customers and the reputation of our brand with consumers may decline. In
such event, customers may choose to discontinue, or not to expand, their use of Freshpet Fridges and our products and consumers may choose to
forgo purchasing our products. Additionally, growing concern about the environmental impact of refrigerators could likewise harm the reputation of
our Freshpet Fridges with customers and our brand with consumers. Any such harm to the operating capacity or reputation of our Freshpet Fridges
could adversely affect our business, financial condition and results of operations.
If
we
are
not
successful
in
protecting
our
intellectual
property
rights,
our
business,
financial
conditions
and
results
of
operations
may
be
harmed.
We rely on trademark, copyright, trade secret, patent and other intellectual property laws, as well as nondisclosure and confidentiality agreements
and other methods, to protect our intellectual property rights as well as the intellectual property of third parties with respect to which we are subject to
non-use and non-disclosure obligations. We may need to engage in litigation or similar activities to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of proprietary rights of others. Any such litigation could require us to expend significant
resources and divert the efforts and attention of our management and other personnel from our business operations. The steps we take to prevent
misappropriation, infringement or other violation of our intellectual property or the intellectual property of others may not be successful. In addition,
effective patent, copyright, trademark and trade secret protection may be unavailable or limited for some of our trademarks and patents in some
foreign countries. Failure to protect our intellectual property could harm our business, financial condition and results of operations.
14
Our brand names and trademarks are important to our business, and we have registered or applied to register many of these trademarks. We cannot
assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our
use of the trademarks. In the event that our tradem arks are successfully challenged, we could be forced to rebrand our products, which could result
in the loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you
that competito rs will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.
We rely on unpatented proprietary know-how in the areas of recipes, ingredients sourcing, cooking techniques, packaging, transportation and
delivery. It is possible that others will independently develop the same or similar know-how or otherwise obtain access to our proprietary know-how.
To protect our trade secrets and other proprietary know-how, we require employees, consultants, advisors and collaborators to enter into
confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection in the event of any unauthorized use,
misappropriation or disclosure of our trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of
our recipes, methods and other know-how, we could be materially adversely affected.
We
may
not
be
able
to
successfully
implement
initiatives
to
improve
productivity
and
streamline
operations
to
control
or
reduce
costs.
Failure
to
implement
such
initiatives
could
adversely
affect
our
results
of
operations.
Because our ability to effectively implement price increases for our products can be affected by factors outside of our control, our profitability and
growth depend significantly on our efforts to control our operating costs. Because many of our costs, such as energy and logistics costs, packaging
costs and ingredient, commodity and raw product costs, are affected by factors outside or substantially outside our control, we generally must seek
to control or reduce costs through operating efficiency or other initiatives. If we are not able to identify and complete initiatives designed to control or
reduce costs and increase operating efficiency on time or within budget, our results of operations could be adversely impacted. In addition, if the cost
savings initiatives we have implemented to date, or any future cost-savings initiatives, do not generate expected cost savings, our business, financial
condition and results of operations could be adversely affected.
The
inputs,
commodities
and
ingredients
that
we
require
are
subject
to
price
increases
and
shortages
that
could
adversely
affect
our
results
of
operations.
The primary inputs, commodities and ingredients that we use include meat, vegetables, fruits, carrageenans, whole grains, vitamins, minerals,
packaging and energy (including wind power). Prices for these and other items we use may be volatile, and we may experience shortages in these
items due to factors beyond our control, such as commodity market fluctuations, availability of supply, increased demand (whether for the item we
require or for other items, which in turn impacts the item we require), weather conditions, natural disasters, currency fluctuations, governmental
regulations (including import restrictions), agricultural programs or issues, energy programs, labor strikes and the financial health of our suppliers.
Input, commodity and ingredient price increases or shortages may result in higher costs or interrupt our production schedules, each of which could
have a material adverse effect on our results of operations. Production delays could lead to reduced sales volumes and profitability, as well as loss
of market share. Higher costs could adversely impact our earnings. For example, fuel prices affect our transportation costs for both ingredients and
finished product. If we are not able to implement our productivity initiatives or increase our product prices to offset price increases of our inputs,
commodities and ingredients, as a result of consumer sensitivity to pricing or otherwise, or if sales volumes decline due to price increases, our
results of operations could be adversely affected. Our competitors may be better able than we are to implement productivity initiatives or effect price
increases or to otherwise pass along cost increases to their customers. Moreover, if we increase our prices in response to increased costs, we may
need to increase marketing spending, including trade promotion spending, in order to retain our market share. Such increased marketing spending
may significantly offset the benefits, if any, of any price increase and negatively impact our business, financial condition and results of operations.
If
the
ingredients
we
use
in
our
products
are
contaminated,
alleged
to
be
contaminated
or
are
otherwise
rumored
to
have
adverse
effects,
our
results
of
operations
could
be
adversely
affected.
We buy our ingredients from third-party suppliers. If these materials are alleged or prove to include contaminants that affect the safety or quality of
our products or are otherwise rumored to have adverse effects, for any reason, we may need to find alternate ingredients for our products, delay
production of our products, or discard or otherwise dispose of our products, which could adversely affect our results of operations. Additionally, if this
occurs after the affected product has been distributed, we may need to withdraw or recall the affected product and we may experience adverse
publicity or product liability claims. In either case, our business, financial condition and results of operations could be adversely affected.
15
Restrictions
imposed
in
reaction
to
outbreaks
of
animal
diseases
could
have
a
material
adverse
effect
on
our
b
usiness,
financial
condition
and
results
of
operations.
The cost of the protein-based ingredients we use in our products has been adversely impacted in the past by the publicity surrounding animal
diseases, such as bovine spongiform encephalopathy, or “mad cow disease.” As a result of extensive global publicity and trade restrictions imposed
to provide safeguards against mad cow disease, the cost of alternative sources of the protein-based ingredients we use in our products has from
time to time increased significantly and may increase again in the future if additional cases of mad cow disease are found.
If mad cow disease or other animal diseases, such as foot-and-mouth disease or highly pathogenic avian influenza, also known as “bird flu,” impacts
the availability of the protein-based ingredients we use in our products, we may be required to locate alternative sources for protein-based
ingredients. Those sources may not be available to sustain our sales volumes, may be more costly and may affect the quality and nutritional value of
our products. If outbreaks of mad cow disease, foot-and-mouth disease, bird flu or any other animal disease or the regulation or publicity resulting
therefrom impacts the cost of the protein-based ingredients we use in our products, or the cost of the alternative protein-based ingredients necessary
for our products as compared to our current costs, we may be required to increase the selling price of our products to avoid margin deterioration.
However, we may not be able to charge higher prices for our products without negatively impacting future sales volumes.
We
rely
on
co-packers
to
provide
our
supply
of
treat
products.
Any
failure
by
co-packers
to
fulfill
their
obligations
or
any
termination
or
renegotiation
of
our
co-packing
agreements
could
adversely
affect
our
results
of
operations.
We have supply agreements with co-packers that require them to provide us with specific finished products. We rely on co-packers as our sole-
source for treat products. We also anticipate that we will rely on sole suppliers for future products. The failure for any reason of a co-packer to fulfill
its obligations under the applicable agreements with us or the termination or renegotiation of any such co-packing agreement could result in
disruptions to our supply of finished goods and have an adverse effect on our results of operations. Additionally, from time to time, a co-packer may
experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of finished goods or require that we incur
additional expense by providing financial accommodations to the co-packer or taking other steps to seek to minimize or avoid supply disruption, such
as establishing a new co-packing arrangement with another provider. During an economic downturn, our co-packers may be more susceptible to
experiencing such financial difficulties, bankruptcies or other business disruptions. A new co-packing arrangement may not be available on terms as
favorable to us as the existing co-packing arrangement, if at all.
If
we
do
not
manage
our
supply
chain
effectively,
including
inventory
levels,
our
business,
financial
condition
and
results
of
operation
may
be
adversely
affected.
The inability of any supplier, co-packer, third-party distributor or transportation provider to deliver or perform for us in a timely or cost-effective
manner could cause our operating costs to increase and our profit margins to decrease. We must continuously monitor our inventory and product
mix against forecasted deman d or risk having inadequate supplies to meet consumer demand, as well as having too much inventory on hand that
may reach its expiration date and become unsaleable. Changes in the availability and cost of freight may affect our supply chain and ultimately the
pricing and availability of our products. If we are unable to manage our supply chain effectively and ensure that our products are available to meet
consumer demand, our operating costs could increase and our profit margins could decrease.
Failure
by
our
transportation
providers
to
deliver
our
products
on
time
or
at
all
could
result
in
lost
sales.
We use third-party transportation providers for our product shipments. We rely on one such provider for almost all of our shipments. Transportation
services include scheduling and coordinating transportation of finished products to our customers, shipment tracking and freight dispatch services.
Our use of transportation services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and
employee strikes and inclement weather, which may impact the ability of providers to provide delivery services that adequately meet our shipping
needs, including keeping our products adequately refrigerated during shipment. Any such change could cause us to incur costs and expend
resources. Moreover, in the future we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers
that we currently use, which in turn would increase our costs and thereby adversely affect our business, financial condition and results of operations.
16
If
we
are
unable
to
maintain
or
increase
prices
for
our
products,
our
results
of
operations
may
be
adversely
af
fected.
We rely in part on price increases to neutralize cost increases and improve the profitability of our business. Our ability to effectively implement price
increases or otherwise raise prices for our products can be affected by a number of factors, including competition, our competitors’ pricing and
marketing, aggregate industry supply, category limitations, market demand and economic conditions, including inflationary pressures. During
challenging economic times, our ability to increase the prices of our products may be particularly constrained. Additionally, customers may pressure
us to rescind price increases that we have announced or already implemented (either through a change in list price or increased promotional
activity). If we are unable to maintain or increase prices for our products (or must increase promotional activity), our results of operations could be
adversely affected. Furthermore, price increases generally result in volume losses, as consumers purchase fewer units. If such losses (also referred
to as the elasticity impact) are greater than expected or if we lose distribution due to a price increase (which may result from a customer response or
otherwise), our business, financial condition and results of operations could be adversely affected.
We
may
face
difficulties
as
we
expand
into
countries
in
which
we
have
no
prior
operating
experience.
We may choose to expand our global footprint by entering into new markets. For example, we recently expanded our business to two retailers in the
United Kingdom, where our products are selling in 370 stores. As we expand our business into new countries we may encounter regulatory,
personnel, technological and other difficulties that increase our expenses or delay our ability to become profitable in such countries. This may have
an adverse effect on our business.
If
we
are
unable
to
attract,
train
and
retain
employees,
we
may
not
be
able
to
grow
or
successfully
operate
our
business.
Our success depends in part upon our ability to attract, train and retain a sufficient number of employees who understand and appreciate our culture
and are able to represent our brand effectively and establish credibility with our business partners and consumers. If we are unable to hire and retain
employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our
staffing needs or any material increase in turnover rates of our employees may adversely affect our business, financial condition and results of
operations.
Unionization
activities
or
labor
disputes
may
disrupt
our
operations
and
affect
our
profitability.
Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor
unions in the future. If a significant number of our employees were to become unionized and collective bargaining agreement terms were significantly
different from our current compensation arrangements, it could adversely affect our business, financial condition and results of operations. In
addition, a labor dispute involving some or all of our employees may harm our reputation, disrupt our operations and reduce our revenues, and
resolution of disputes may increase our costs.
As an employer, we may be subject to various employment-related claims, such as individual or class actions or government enforcement actions
relating to alleged employment discrimination, employee classification and related withholding, wage-hour, labor standards or healthcare and benefit
issues. Such actions, if brought against us and successful in whole or in part, may affect our ability to compete or could materially adversely affect
our business, financial condition and results of operations.
Disruptions
in
the
worldwide
economy
may
adversely
affect
our
business,
results
of
operations
and
financial
condition.
Adverse and uncertain economic conditions may impact distributor, customer and consumer demand for our products. In addition, our ability to
manage normal commercial relationships with our suppliers, contract manufacturers, distributors, customers, consumers and creditors may suffer.
Consumers have access to lower-priced offerings and, during economic downturns, may shift purchases to these lower-priced or other perceived
value offerings. Customers may become more conservative in response to these conditions and seek to reduce their inventories. For example,
during the economic downturn from 2007 through 2009, customers significantly reduced their inventories. Our results of operations depend upon,
among other things, our ability to maintain and increase sales volume with our existing customers, to attract new consumers and to provide products
that appeal to consumers at prices they are willing and able to pay. Prolonged unfavorable economic conditions may have an adverse effect on our
sales and profitability.
17
We
are
subject
to
environmental
regulation
and
environmental
risks,
which
may
adversely
affect
our
business.
Climate
change
or
concerns
regarding
climate
change
may
increase
environmental
regulation
and
environmental
risks.
As a result of our agricultural and food processing operations, we are subject to numerous environmental laws and regulations. Many of these laws
and regulations are becoming increasingly stringent and compliance with them is becoming increasingly expensive. Changes in environmental
conditions may result in existing legislation having a greater impact on us. Additionally, we may be subject to new legislation and regulation in the
future. For example, increasing concern about climate change may result in additional federal and state legal and regulatory requirements to reduce
or mitigate the effects of green-house gas emissions. Compliance with environmental legislation and regulations, particularly if they are more
aggressive than our current sustainability measures used to monitor our emissions and improve our energy efficiency, may increase our costs and
adversely affect our results of operations. We cannot predict the extent to which any environmental law or regulation that may be enacted or
enforced in the future may affect our operations. The effect of these actions and future actions on the availability and use of pesticides could
adversely impact our financial position or results of operations. If the cost of compliance with applicable environmental laws or regulations increases,
our business, financial condition and results of operations could be negatively impacted.
Intellectual
property
infringement
or
violation
claims
may
adversely
impact
our
results
of
operations.
We may be subject to claims by others that we infringe on their intellectual property or otherwise violate their intellectual property rights. To the
extent we develop, introduce and acquire products, the risk of such claims may be exacerbated. Any such claims, even those without merit, could
(i) require us to expend significant resources, (ii) cause us to cease making or using products that incorporate the challenged intellectual property,
(iii) require us to redesign, reengineer or rebrand our products or packaging, including our Freshpet Fridges located in over 18,000 retail stores,
(iv) divert management’s attention and resources or (v) require us to enter into royalty or licensing agreements in order to obtain the right to use a
third-party’s intellectual property, which may not be available to us on acceptable terms or at all. Any of such events may adversely impact our
business, financial condition and results of operations.
Our
business
operations
could
be
disrupted
if
our
information
technology
systems
fail
to
perform
adequately.
The efficient operation of our business depends on our information technology systems, some of which are managed by third-party service
providers. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and
fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business
and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations
to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control,
including fire, natural disasters, power outages, systems failures, security breaches, cyber-attacks and viruses. Any such damage or interruption
could have a material adverse effect on our business, financial condition and results of operations.
We
are
subject
to
cyber
security
risks
and
may
incur
increasing
costs
in
an
effort
to
minimize
those
risks.
Our business employs systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding
our customers, employees, suppliers and others, including personal identification information. Security breaches could expose us to a risk of loss or
misuse of this information, litigation, and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly-
evolving types of cyber-attacks. Attacks may be targeted at us, our customers and suppliers, or others who have entrusted us with information.
Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train
employees, and engage third-party experts and consultants. Advances in computer capabilities, new technological discoveries or other
developments may result in the technology used by us to protect transaction or other data being breached or compromised. In addition, data and
security breaches can also occur as a result of non-technical issues, including breach by us or by persons with whom we have commercial
relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in
a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which
could have an adverse effect on our business, financial condition and results of operations.
18
If
we
are
unable
to
substantially
utilize
our
net
operating
loss
carryforward,
our
financial
results
will
be
adversely
affected.
As of December 31, 2017, we had federal net operating loss (“NOLs”) carryforwards of approximately $175.0 and state NOLs of approximately
$143.4 million. In general, a corporation that undergoes an ‘‘ownership change’’ is subject to limitations on its ability to utilize its prechange NOLs to
offset future taxable income. In general, under the U.S. Internal Revenue Code of 1986, as amended (the “Code”), an ownership change occurs if
the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through and aggregation rules) increases by
more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). Purchases of
our common stock in amounts greater than specified levels, which will be beyond our control, could create a limitation on our ability to utilize our
NOLs for tax purposes in the future. Limitations imposed on our ability to utilize NOLs could cause U.S. federal and state income taxes to be paid
earlier than would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating
the benefit of such NOLs. Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs before they expire. If any of
these events occur, we may not derive some or all of the expected benefits from our NOLs. In addition, NOLs incurred in one state may not be
available to offset income earned in a different state. Furthermore, there may be periods during which the use of NOLs is suspended or otherwise
limited for state tax purposes, which could accelerate or permanently increase state taxes owed.
Failure
to
maintain
effective
internal
controls
in
accordance
with
Section
404
of
the
Sarbanes-Oxley
Act
could
have
a
material
adverse
effect
on
our
business
and
stock
price.
As a publicly traded company, we are required to comply with the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act of
2002, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management
report on the effectiveness of controls over financial reporting. Pursuant to the JOBS Act, our independent registered public accounting firm will not
be required to attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report
required to be filed with the SEC or the date we are no longer an emerging growth company, which may be up to five full fiscal years following our
initial public offering in November 2014.
If we identify weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 in a timely
manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to
express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to
investigations by NASDAQ, the SEC or other regulatory authorities, which could require additional financial and management resources.
Our
quarterly
operating
results
may
fluctuate
significantly
and
could
fall
below
the
expectations
of
securities
analysts
and
investors
due
to
seasonality
and
other
factors,
some
of
which
are
beyond
our
control,
resulting
in
a
decline
in
our
stock
price.
Risks Related to Ownership of Our Common Stock
Our quarterly operating results may fluctuate significantly because of several factors, including:
•
the timing of installation of new Freshpet Fridges and related expenses;
• profitability of our Freshpet Fridges, especially in new markets;
•
•
changes in interest rates;
impairment of long-lived assets;
• macroeconomic conditions, both nationally and locally;
• negative publicity relating to the consumption of products we serve;
•
changes in consumer preferences and competitive conditions;
• expansion to new markets;
•
•
increases in infrastructure costs; and
fluctuations in commodity prices.
19
As a result of these factors, our quarterly and annual operating results may fluctuate significantly. Accordingly, results for any one quarter are not
nec essarily indicative of results to be expected for any other quarter or for any year for any particular future period may decrease. In the future,
operating results may fall below the expectations of securities analysts and investors. In that event, the pri ce of our common stock would likely
decrease.
The
price
of
our
common
stock
has
been
and
may
continue
to
be
volatile
and
you
may
lose
all
or
part
of
your
investment.
Since our initial public offering and through March 1, 2018, our share price has ranged from a high of $25.92 per share to a low of $5.60 per share.
The market price of our common stock could fluctuate significantly, and you may not be able to resell your shares at or above the purchase price.
Those fluctuations could be based on various factors in addition to those otherwise described in this report, including those described under “—Risks
Related to Our Business and Industry” and the following:
• our operating performance and the performance of our competitors or pet food companies in general;
•
•
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in earnings estimates or recommendations by research analysts who follow us or other companies in our industry;
• global, national or local economic, legal and regulatory factors unrelated to our performance;
•
•
•
the number of our shares publicly traded;
future sales of our common stock by our officers, directors and significant stockholders;
the arrival or departure of key personnel; and
• other developments affecting us, our industry or our competitors.
In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be unrelated to the
operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock. The
price of our common stock could fluctuate based upon factors that have little or nothing to do with our business, financial condition and results of
operations, and those fluctuations could materially reduce our common stock price.
As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products. In the
past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price and we are currently
defending against the claims made in Curran v. Freshpet, Inc. et al. This type of litigation could result in substantial costs and divert our
management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
Future
sales
of
our
common
stock,
or
the
perception
that
such
sales
may
occur,
could
depress
our
common
stock
price.
As of December 31, 2017, we had 35,132,548 shares of common stock outstanding, and our Certificate of Incorporation authorizes us to issue up to
200 million shares of common stock.
In the future, we may issue additional shares of common stock or other securities if we need to raise additional capital. The number of new shares of
our common stock issued in connection with raising additional capital could constitute a material portion of the then outstanding shares of our
common stock. Any future sales of our common stock, or the perception that such sales may occur, could negatively impact the price of our common
stock.
If
securities
or
industry
analysts
do
not
publish
research
or
publish
inaccurate
or
unfavorable
research
about
our
business,
our
stock
price
and
trading
volume
could
decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our
business. If one or more of the analysts who cover us downgrades our common stock or publishes inaccurate or unfavorable research about our
business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly,
demand for our common stock could decrease, which could cause our stock prices and trading volume to decline.
20
Our
principal
stockholder
and
its
affiliates
own
a
substantial
portion
of
our
outstanding
equity,
and
their
interests
may
not
always
coincide
with
the
interests
of
the
other
holders.
As of December 31, 2017, MidOcean Partners and certain of its affiliates (“MidOcean”) owned approximately 20.8% of our common stock. As a
result, MidOcean could potentially have significant influence over all matters presented to our stockholders for approval, including election and
removal of our directors, change in control transactions and the outcome of all actions requiring a majority stockholder approval.
In addition, a member who currently serves on our Board of Directors is associated with MidOcean. The interests of MidOcean may not always
coincide with the interests of the other holders of our common stock, and the concentration of control in MidOcean will limit other stockholders’ ability
to influence corporate matters. The concentration of ownership and voting power of MidOcean may also delay, defer or even prevent an acquisition
by a third-party or other change of control of our Company and may make some transactions more difficult or impossible without their support, even
if such events are in the best interests of our other stockholders. Therefore, the concentration of voting power that MidOcean has may have an
adverse effect on the price of our common stock. We may also take actions that our other stockholders do not view as beneficial, which may
adversely affect our results of operations and financial condition and cause the value of your investment to decline.
We
have
no
current
plans
to
pay
dividends
for
the
foreseeable
future.
We intend to retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends
for the foreseeable future. Any future determination to declare and pay cash dividends will be at the discretion of our Board of Directors and will
depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and such other factors as
our Board of Directors deems relevant. Our ability to pay dividends may also be limited by covenants of any future outstanding indebtedness we or
our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a
price greater than that which you paid for it.
Provisions
in
our
charter
documents
and
Delaware
law
may
delay
or
prevent
our
acquisition
by
a
third-party,
even
if
the
acquisition
would
be
beneficial
to
our
stockholders,
and
could
make
it
more
difficult
for
you
to
change
our
management.
Our Certificate of Incorporation and Bylaws and Delaware law contain several provisions that may make it more difficult for a third-party to acquire
control of us without the approval of our Board of Directors. For example, we have a classified Board of Directors with three-year staggered terms,
which could delay the ability of stockholders to change membership of a majority of our Board of Directors. These provisions may make it more
difficult or expensive for a third-party to acquire a majority of our outstanding equity interests. These provisions also may delay, prevent or deter a
merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the
market price for their common stock.
We
are
an
emerging
growth
company
and,
as
a
result
of
the
reduced
disclosure
and
governance
requirements
applicable
to
emerging
growth
companies,
our
common
stock
may
be
less
attractive
to
investors.
We are an emerging growth company, as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various
reporting requirements applicable to other public companies, but not to emerging growth companies, including, but not limited to, an exemption from
the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements
pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation
or golden parachute arrangements. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth
anniversary of the completion of our initial public offering in November 2014, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or
more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or
(iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the
second quarter of that fiscal year.
We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors
find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price
may be more volatile.
21
Claims
for
indemnification
by
our
directors
and
officers
may
reduce
our
available
funds
to
satisfy
successful
third-party
claims
agai
nst
us
and
may
reduce
the
amount
of
money
available
to
us.
Our Certificate of Incorporation and Bylaws provide that we will indemnify our directors and officers, in each case, to the fullest extent permitted by
Delaware law. In addition, we have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other
employees as determined by our Board of Directors. Under the terms of such indemnification agreements, we are required to indemnify each of our
directors and officers, to the fullest extent permitted by the laws of the state of Delaware, if the basis of the indemnitee’s involvement was by reason
of the fact that the indemnitee is or was a director or officer of the Company or any of its subsidiaries or was serving at the Company’s request in an
official capacity for another entity. We must indemnify our officers and directors against all reasonable fees, expenses, charges and other costs of
any type or nature whatsoever, including any and all expenses and obligations paid or incurred in connection with investigating, defending, being a
witness in, participating in (including on appeal), or preparing to defend, be a witness or participate in any completed, actual, pending or threatened
action, suit, claim or proceeding, whether civil, criminal, administrative or investigative, or establishing or enforcing a right to indemnification under
the indemnification agreement. The indemnification agreements also require us, if so requested, to advance within 30 days of such request all
reasonable fees, expenses, charges and other costs that such director or officer incurred, provided that such person will return any such advance if it
is ultimately determined that such person is not entitled to indemnification by us. Any claims for indemnification by our directors and officers may
reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Future
offerings
of
debt
securities,
which
would
rank
senior
to
our
common
stock
upon
our
bankruptcy
or
liquidation,
and
future
offerings
of
equity
securities
that
may
be
senior
to
our
common
stock
for
the
purposes
of
dividend
and
liquidating
distributions,
may
adversely
affect
the
market
price
of
our
common
stock.
In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities.
Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive
a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing
stockholders or reduce the market price of our common stock, or both, and may result in future Section 382 limitations that could reduce the rate at
which we utilize our NOL carryforwards. Preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend
payments or both that could limit our ability to make a dividend distribution to the holders of our common stock. Our decision to issue securities in
any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount,
timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market
price of our common stock and diluting their ownership interest in our company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters, located in Secaucus, New Jersey and consisting of approximately 20,000 square feet of office space, is subject to a
lease agreement that expires on June 30, 2024.
We own the Freshpet Kitchens, our approximately 100,000 square foot manufacturing facility in Bethlehem, Pennsylvania, and our approximately
50,000 square foot Innovation Center. We believe that our properties have been adequately maintained, are in good condition generally and are
suitable and adequate for its business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
A securities lawsuit, Curran v. Freshpet, Inc. et al, Docket No. 2:16-cv-02263, was instituted April 21, 2016 in the United States District Court District
of New Jersey against us and certain of our 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 seek to recover damages for investors under the federal securities laws. The Company
believes that the plaintiffs’ allegations are without merit and intends to vigorously defend against the claims. While the initial motion to dismiss was
denied, the Company is still in the early stages of this litigation. Therefore, the Company is unable to estimate a reasonably possible range of loss, if
any, that may result from this matter.
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
22
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
23
P ART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
The price range per share of common stock presented below represents the highest and lowest closing prices of our common stock on the NASDAQ
Global Market for the periods indicated. Our common stock trades under the symbol “FRPT.”
Fiscal Year Ended December 31, 2015
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
$
$
$
$
$
$
$
$
20.05
25.46
19.88
10.85
8.36
10.13
10.96
10.15
11.85
16.70
17.65
20.10
$
$
$
$
$
$
$
$
$
$
$
$
High
High
13.47
17.72
9.99
6.10
5.86
7.03
8.26
8.05
9.50
10.90
14.50
14.90
Low
Low
The number of stockholders of record of our common stock as of March 1, 2018 was 90. This number excludes stockholders whose stock is held in
nominee or street name by brokers.
Dividend Policy
Since we became a publicly traded company on November 7, 2014, we have not declared or paid, and do not anticipate declaring or paying in the
foreseeable future, any cash dividends on our capital stock. Any future determination to declare and pay cash dividends will be at the discretion of
our Board of Directors in accordance with applicable laws and will depend on, among other things, our financial condition, results of operations, cash
requirements, contractual restrictions and such other factors as our Board of Directors deems relevant. Our ability to pay dividends may also be
limited by covenants of any future outstanding indebtedness we or our subsidiaries incur.
Issuer Purchases of Equity Securities
None.
Stock Performance Graph
This
performance
graph
shall
not
be
deemed
“soliciting
material”
or
to
be
“filed”
with
the
SEC
for
purposes
of
Section
18
of
the
Exchange
Act
or
otherwise
subject
to
the
liabilities
under
that
Section,
and
shall
not
be
deemed
to
be
incorporated
by
reference
into
any
filing
of
Freshpet,
Inc.
under
the
Securities
Act
of
1933,
as
amended
(the
“Securities
Act”),
or
the
Exchange
Act.
24
The following graph compares our total common stock return with the total return for (i) the NASDAQ Composite Index (the “NASDAQ Composite”)
and (ii) the Russell 3000 Index (the “Russell 3000”) for the period from November 7, 2014 (the date our common stock commenced trading on the
NASDAQ Global Market) through December 31, 2017. Although our common stock was initially listed at $15 .00 per share on the date our common
stock was first listed on the NASDAQ, November 7, 2014, the $15.00 price is not reflected in the graph. Instead, the figures represented below
assume an investment of $100 in our common stock at the closing price of $19 .11 on November 7, 2014 and in the NASDAQ Composite and the
Russell 3000 on November 7, 2014 and the reinvestment of dividends into shares of common stock. The comparisons in the table are required by
the SEC and are not intended to forecast or be indicati ve of possible future performance of our common stock.
Date
7-Nov-14
31-Dec-14
31-Dec-15
31-Dec-16
31-Dec-17
Freshpet, Inc.
$
$
$
$
$
100.00
89.27
44.43
53.11
99.16
25
Russell 3000
NASDAQ Composite
$
$
$
$
$
100.00 $
102.23 $
108.09 $
116.20 $
149.02 $
100.00
101.45
99.96
110.37
131.17
I TEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report. The selected
consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our
historical results are not necessarily indicative of our future results.
We derived the consolidated statements of operations data for the fiscal years ended December 31, 2017, 2016 and 2015 and the consolidated
balance sheets data as of December 31, 2017 and 2016 from our audited consolidated financial statements appearing elsewhere in this report. The
consolidated statement of operations data for the years ended December 31, 2014 and 2013 and the consolidated balance sheet data as of
December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements, which are not included in this report.
Consolidated Statement of Operations Data
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Loss from operations
Other income (expenses), net
Fees on debt guarantee (1)
Interest expense
Loss before income taxes
Income tax expense
Net loss
Preferred stock dividends on Series B and Series C (2)
Additional loss to common stockholders upon
conversion of Series C Preferred Stock into
common stock (3)
Net loss attributable to common stockholders
Net loss per share
Basic
Diluted
Weighted Average shares of common stock
outstanding
Basic
Diluted
2017
Year Ended December 31,
2015
(Dollars in thousands except share and per share data)
2014
2016
$
156,379
$
133,054
$
116,186
$
83,963
72,416
75,167
(2,751)
(525)
—
(910)
(4,187)
75
(4,262) $
—
72,683
60,371
62,586
(2,215)
(182)
—
(698)
(3,095)
66
(3,161) $
—
61,537
54,649
58,297
(3,648)
449
—
(455)
(3,653)
58
(3,711) $
—
2013
63,151
35,958
27,193
39,574
(12,381)
(538)
(5,245)
(3,492)
(21,656)
31
(21,687)
(8,596)
$
86,764
44,546
42,218
48,299
(6,081)
(665)
(25,937)
(4,614)
(37,297)
42
(37,339) $
(11,286)
—
(4,262) $
—
(3,161) $
—
(3,711) $
(82,655)
(131,280) $
—
(30,283)
(0.12) $
(0.12) $
(0.09) $
(0.09) $
(0.11) $
(0.11) $
(9.63) $
(9.63) $
(2.91)
(2.91)
$
$
$
$
34,487,239
34,487,239
33,674,416
33,674,416
33,497,940
33,497,940
13,632,042
13,632,042
10,415,014
10,415,014
26
Freshpet Fridge store locations at period end
Other Financial Data
Grocery and Online
Pet
Mass and Club
Natural
Total Freshpet Fridge store locations at period end
EBITDA (4)
Adjusted EBITDA (4)
Adjusted Gross Profit (4)
Adjusted SG&A Expenses (4)
Capital Expenditures
Freshpet Kitchens and other plant capital
expenditures
Freshpet Fridge and other capital
expenditures
Cash and cash equivalents
Short-term investments
Working capital (5)
Total assets
Total debt
Redeemable preferred stock:
Series B
Series C
Total stockholders' equity (deficit)
2017
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
2013
9,056
4,630
3,930
388
18,004
9,415
17,565
78,207
70,764
$
7,953
4,530
3,814
312
16,609
7,490
17,654
66,027
57,323
$
6,887
4,294
3,555
279
15,015
4,376
11,110
57,216
53,981
$
6,130
3,979
3,035
242
13,386
(321) $
5,515
44,785
46,469
5,367
3,051
2,247
171
10,836
(6,974)
(192)
30,555
38,686
$
3,287
20,817
24,071
2,226
12,987
As of December 31,
2015
(Dollars in thousands)
$
$
$
2,184
$
3,908
—
10,265
133,900
—
—
575
126,451
7,000
8,029
3,250
16,246
113,098
—
14,905
17,131 $
11,656
24,643
2014
2013
36,259 $
—
41,156
112,462
—
2,445
—
3,435
62,617
76,112
—
—
116,903 $
—
—
107,783 $
—
—
103,950 $
—
—
103,393 $
30,728
70,463
(131,058)
$
Total cash outflows of capital expenditures
$
13,003 $
29,952 $
32,153 $
9,716
9,135
8,082
Consolidated Balance Sheet Data
2017
2016
(1)
(2)
(3)
(4)
Represents fees paid to certain stockholders for acting as guarantors for a portion of our prior payment obligations under the $62.5 million revolving note
payable (the “$62.5 Million Revolver”). Pursuant to a Fee and Reimbursement Agreement, the Company was obligated to pay each guarantor a
contingent fee equal to 10% per annum of the amount each guarantor committed to guarantee. Portions of the proceeds from our initial public offering
(“IPO”) and related debt refinancing were used to repay the borrowings under the $62.5 Million Revolver, relieving us of our future fees on the debt
guarantee. Concurrently, with the closing of the IPO, the outstanding guarantee fees were converted into shares of our Series C Preferred Stock, par
value $0.001 (the “Series C Preferred Stock”), which were then converted into common stock. See our consolidated financial statements and the notes
thereto for additional information.
Represents dividends associated with our redeemable Series B and Series C preferred stock. Holders of Series B Preferred Stock (the “Series B
Preferred Stock”) were entitled to receive dividends payable in additional fully paid and non-assessable shares of Series B Preferred Stock at a rate per
annum of 15% of the original issue price. Such dividends were to be fully cumulative from the first day of issuance and accrued without interest on both
the initial Series B Preferred Stock obtained and shares obtained via dividend, on a quarterly basis. Holders of Series C Preferred Stock were entitled to
dividends at a rate of 8% per annum of the Series C Preferred Stock original issue price. Once the Series C Preferred Stock was converted to common
stock, the accrued dividends that had not been declared by the Board of Directors were relinquished.
Immediately prior to the conversion of Series C Preferred Stock to common stock, the Series C Preferred Stock were fair valued utilizing the Common
Stock share price at the date of conversion. The difference between fair value and book value was recorded as net loss attributable to common
stockholders.
EBITDA, Adjusted EBITDA, Adjusted Gross Profit and Adjusted SG&A Expenses are not financial measures prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. These metrics are explained in more detail in the section “Non-GAAP Financial Measures” in “Item 7—
Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” where they are reconciled to the closest GAAP measure.
(5)
Represents current assets minus current liabilities.
27
I TEM 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The
following
discussion
contains
forward-looking
statements
that
involve
risks
and
uncertainties.
Our
actual
results
may
differ
materially
from
those
discussed
in
these
forward-looking
statements
as
a
result
of
various
factors,
including
those
set
forth
in
“Risk
Factors.”
The
following
discussion
of
our
financial
condition
and
results
of
operations
should
be
read
in
conjunction
with
our
consolidated
financial
statements
included
elsewhere
in
this
report,
as
well
as
the
information
presented
under
“Selected
Financial
Data.”
Overview
We started Freshpet with a single-minded mission to bring the power of real, fresh food to our dogs and cats. We were inspired by the rapidly
growing view among pet owners that their dogs and cats are a part of their family, leading them to demand healthier pet food choices. Since
inception of the company in 2006, we have created a comprehensive business model to deliver wholesome pet food that pet parents can trust, and
in the process we believe we have become one of the fastest growing pet food companies in North America. Our business model is difficult for
others to replicate and we see significant opportunity for future growth by leveraging the unique elements of our business, including our brand, our
product know-how, our Freshpet Kitchens, our refrigerated distribution, our Freshpet Fridge and our culture.
Recent Developments
New
Revenue
Recognition
Policy
In May 2014, the Financial Accounting Standard Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers,” (Topic 606)
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. The Company will adopt Topic 606 in the first quarter of 2018 using the full retrospective method approach requiring the company to
restate each prior reporting period presented. The adoption is not expected to have a material impact on our financial statements and is limited to
classification differences within the statement of operating income from cost of goods to a reduction to net sales. The net effect will decrease net
sales for 2017 by approximately 2.6% lower than under the previous accounting standard.
The impact of the policy on an annual basis is expected to be as follows:
Current Policy under ASC 605
Net Sales
Cost of Sales
Gross Profit
Gross Margin
Adjusted Gross Margin (1)
New Policy under ASC 606
Net Sales
Cost of Sales
Gross Profit
Gross Margin
Adjusted Gross Margin (1)
2017
Year Ended December 31,
2016
2015
2014
156,379
83,963
72,416
$
$
133,054
72,683
60,371
$
$
116,186
61,537
54,649
$
$
46.3%
50.0%
45.4%
49.6%
47.0%
49.2%
152,359
79,943
72,416
$
$
129,707
69,336
60,371
$
$
113,505
58,856
54,649
$
$
47.5%
51.3%
46.5%
50.9%
48.1%
50.4%
86,764
44,546
42,218
48.7%
51.6%
84,154
41,936
42,218
50.2%
53.2%
$
$
$
$
28
The impact of the policy on a quarterly basis is expected to be as follows:
Current Policy under ASC 605
Net Sales
Cost of Sales
Gross Profit
Gross Margin
Adjusted Gross Margin (1)
New Policy under ASC 606
Net Sales
Cost of Sales
Gross Profit
Gross Margin
Adjusted Gross Margin (1)
12/31/2017
9/30/2017
6/30/2017
3/31/2017
12/31/2016
9/30/2016
6/30/2016
3/31/2016
Three Months Ended
$
$
40,697
21,756
18,940
$ 41,200
21,697
$ 19,503
$ 39,969
21,799
$ 18,170
$ 34,514
18,711
$ 15,803
$
$
34,061
18,841
15,220
$ 34,536
19,185
$ 15,351
$ 33,002
18,090
$ 14,912
$ 31,454
16,566
$ 14,888
46.5%
50.1%
47.3%
50.9%
45.5%
49.1%
45.8%
49.9%
44.7%
49.9%
44.4%
49.6%
45.2%
48.7%
47.3%
50.2%
$
$
39,829
20,888
18,940
$ 40,125
20,622
$ 19,503
$ 38,728
20,559
$ 18,170
$ 33,678
17,874
$ 15,803
$
$
33,310
18,090
15,220
$ 33,768
18,417
$ 15,351
$ 32,100
17,188
$ 14,912
$ 30,529
15,641
$ 14,888
47.6%
51.2%
48.6%
52.2%
49.6%
50.7%
46.9%
51.2%
45.7%
51.1%
45.5%
50.7%
46.5%
50.1%
48.8%
51.8%
(1)
Adjusted Gross Margin is not a financial measure prepared in accordance with U.S. generally accepted accounting principles, or GAAP.
These metrics are explained in more detail in the section “Non-GAAP Financial Measures” in “Item 7—Management’s Discussion and
Analysis of Financial Conditions and Results of Operations,” where they are reconciled to the closest GAAP measure.
Amendment
of
Debt
During the third quarter of 2017, we amended our Credit Facilities to replace our Term Facility (as defined below) and Capex Commitments (as
defined below) of $30.0 million and $10.0 million Revolving Facility with a straight $30.0 million revolver (the “New Revolving Facility”) and the ability
to increase the New Revolving Facility by an additional $10.0 million. The New Revolving Facility will mature in September 2020 and borrowings
thereunder will bear interest at variable rates depending on the Company’s election, either at a base rate or at the London Interbank Offered Rate
(“LIBOR”), in each case, plus an applicable margin. Subject to the Company’s leverage ratio, the applicable margin will vary between 0.75% and
1.25% for base rate loans and 1.75% and 2.25% for LIBOR loans. The amendment resulted in a reduction in the unused rate of between 25 and 75
basis points and a reduction in the total rate of between 200 and 250 basis points. At closing, we had total borrowings of $5.5 million under the $30.0
million New Revolving Facility, with $24.5 million available. All borrowings were fully repaid by December 31, 2017.
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
over 18,000 retail stores as of December 31, 2017. 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.
Our net sales growth is driven by the following key factors:
•
•
Increasing sales velocity from the average Freshpet Fridge due to increasing awareness, trial and adoption of Freshpet products and
innovation. Our investments in marketing and advertising help to drive awareness and trial at each point of sale.
Increased penetration of Freshpet Fridge locations in major classes of retail, including grocery (including online), mass, club, pet specialty and
natural. The impact of new Freshpet Fridge installations on our net sales varies by retail class and depends on numerous factors including
store traffic, refrigerator size, placement within the store and proximity to other stores that carry our products.
• Consumer trends including growing pet ownership, pet humanization and a focus on health and wellness.
We believe that as a result of the above key factors, we will continue to penetrate the pet food marketplace and increase our share of the pet food
category.
29
Gross
Profit
Our gross profit is net of costs of goods sold, which include the costs of product manufacturing, product ingredients, packaging materials, spoils and
inbound freight. In 2016, we completed a capital expansion project at our Freshpet Kitchens facility that further increased our production capacity by
130%. Over time, increasing 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, packaging materials, and 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
(“SG&A”)
Expenses
SG&A costs as a percentage of net sales have historically decreased from 81.3% in 2012 to 62.7% in 2013, 55.7% in 2014, 50.2% in 2015 and
47.0% in 2016. Due to our Feed the Growth initiative, which increases our investment in media, our SG&A as a percentage of net sales increased
slightly to 48.1% in 2017. We believe that as we begin to realize the benefits of our Feed the Growth initiative, SG&A expenses will once again
decrease as a percentage of net sales.
Our SG&A expenses consist of the following:
Outbound
freight.
Prior to the second quarter of 2016, outbound freight from our Freshpet Kitchens was managed by a national third-party
refrigerated and frozen human food manufacturer. During the second quarter of 2016, we transitioned to a new third-party logistics provider. Through
our new third-party logistics provider’s infrastructure, we continue to realize cost efficiencies in logistics.
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
(“R&D”).
R&D costs consist of expenses to develop and test new products. The costs are expensed as incurred.
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 appropriately stocked and
maintained.
Stock
compensation
. We account for all share-based compensation payments issued to employees, directors and non-employees using a fair value
method. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the grant date. We
recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders
the required services to us using the straight-line single option method.
Other
general
&
administrative
costs.
Other general and administrative costs include non-plant personnel salaries and benefits, as well as corporate
general & administrative costs.
30
Income
Taxes
We had federal net operating loss (“NOL”) carry forwards of approximately $175.0 million as of December 31, 2017, which expire between 2025 and
2037. We may be subject to certain limitations in our annual utilization of NOL carry forwards to off-set future taxable income pursuant to
Section 382 of the Internal Revenue Code, which could result in NOLs expiring unused. At December 31, 2017, we had approximately $143.4 million
of state NOLs, which expire between 2017 and 2037. At December 31, 2017, 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.
Results of Operations
2017
Amount
% of
Net Sales
Twelve Months Ended December 31,
2016
Amount
% of
Net Sales
(Dollars in thousands)
2015
Amount
% of
Net Sales
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Loss from operations
Other income/(expenses):
Other income/(expenses), net
Interest expense
Loss before income taxes
Income tax expense
Net Loss
$
$
156,379
83,963
72,416
75,167
(2,751)
(525)
(910)
(4,186)
75
(4,261)
100% $
54
46
48
(2)
(0)
(0)
(3)
0
(3)% $
133,054
72,683
60,371
62,586
(2,215)
(182)
(698)
(3,095)
66
(3,161)
100% $
55
45
47
(2)
$
(0)
0
(2)
0
(2)% $
116,186
61,537
54,649
58,297
(3,648)
449
(455)
(3,653)
58
(3,711)
100%
53
47
50
(3)
0
(0)
(3)
0
(3)%
Twelve
Months
Ended
December
31,
2017
Compared
To
Twelve
Months
Ended
December
31,
2016
Net
Sales
The following table sets forth net sales by class of retail:
Twelve Months Ended December 31,
Amount
2017
% of
Net Sales
Store
Count
(Dollars in thousands)
Amount
2016
% of
Net Sales
Store
Count
Grocery (including Online), Mass and Club* (1)
Pet Specialty and Natural (2)
Net Sales
$
$
126,438
29,941
156,379
81%
19
100%
12,986 $
5,018
18,004 $
104,709
28,345
133,054
79%
21
100%
11,767
4,842
16,609
(1)
(2)
Stores at December 31, 2017 and December 31, 2016 consisted of 9,056 and 7,953 grocery (including online) and 3,930 and 3,814 mass and club,
respectively.
Stores at December 31, 2017 and December 31, 2016 consisted of 4,630 and 4,530 pet specialty and 388 and 312 natural, respectively.
*Includes net sales from Freshpet Baked of $1.8 million, or 1.2% of total net sales, for the twelve months ended December 31, 2017 and $4.4 million,
or 3.3% of total net sales, for the twelve months ended December 31, 2016.
Net sales increased $23.3 million, or 18%, to $156.4 million for the twelve months ended December 31, 2017 as compared to the same period in the
prior year. The $23.3 million increase in net sales was driven by growth in the Grocery (including Online), Mass, and Club refrigerated channel of
$21.7 million, and Pet Specialty and Natural of $1.6 million. The net sales increase was driven by overall velocity gains and an increase of Freshpet
Fridges store locations, which grew by 8.4% from 16,609 as of December 31, 2016 to 18,004 as of December 31, 2017.
Gross
Profit
Gross profit increased $12.0 million, or 20%, to $72.4 million for the twelve months ended December 31, 2017 as compared to the same period in
the prior year. The increase in gross profit was primarily driven by higher net sales, and production efficiencies, partially offset by increased
depreciation due to our Freshpet Kitchens.
31
Our gross profit margin of 46.3% for the twelve months ended December 31, 2017, was an increase of 90 basis points compared to the same period
in the prior year, primarily related to cost savings and ma rgin improvement through scale and plant startup costs in the prior year, partially offset by
a decrease due to additional depreciation of our Freshpet Kitchens expansion.
Adjusted Gross Profit was $78.2 million and $66.0 million in the years ended December 31, 2017 and 2016, respectively. Adjusted Gross Profit
Margin as a percentage of net sales was 50.0% and 49.6% in the years ended December 31, 2017 and 2016, respectively. Adjusted Gross Profit
excludes $5.8 million of depreciation expense in 2017 and $4.0 million of depreciation expense and $1.6 million of non-capitalizable plant start-up
costs in 2016. 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
SG&A expenses increased $12.6 million, or 20%, to $75.2 million for the twelve months ended December 31, 2017 as compared to the same period
in the prior year. Key components of the dollar increase include higher media spend of $5.5 million, higher depreciation expense of $1.0 million,
increased variable cost due to volume of $2.1 million, which includes freight cost and brokerage, and higher incremental operating expenses of $5.2
million, offset by prior year non-recurring costs related to leadership transition expenses of $1.2 million. The increased operating expenses were
primarily due to new hires and increased employee benefit costs, which include variable compensation.
As a percentage of net sales, selling, general and administrative expenses increased to 48.1% for the twelve months ended December 31, 2017
from 47.0% for the twelve months ended December 31, 2016. Adjusted SG&A increased as a percentage of net sales to 45.3% in the in the year
ended December 31, 2017 as compared to 43.1% of net sales in the year ended December 31, 2016. Adjusted SG&A excludes $4.2 million and
$4.0 million for non-cash items related to share-based compensation in the years ended December 31, 2017 and 2016, respectively, $0.1 million of
litigation expense in 2017 and $1.3 million of leadership transition costs in 2016. Adjusted SG&A is a Non-GAAP measure. See “—Non-GAAP
Financial Measures” for how we define Adjusted SG&A, a reconciliation of Adjusted SG&A to SG&A, the closest comparable U.S. GAAP measure,
certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.
Loss
from
Operations
Loss from operations increased $0.5 million from a loss of $2.2 million for the twelve months ended December 31, 2016 to a loss of $2.7 million for
the twelve months ended December 31, 2017 as a result of the factors discussed above.
Interest
Expense
Interest expense was $0.9 million and $0.7 million for the twelve months ended December 31, 2017 and 2016, respectively, relating primarily to our
Credit Facilities (as defined below). Interest expense in the twelve months ended December 31, 2017 includes $0.3 million of accelerated
amortization of debt issuance costs related to the amendment of our Credit Facilities (as defined below). See “—Liquidity and Capital Resources.”
Other
Income/(Expenses),
net
Other income/(expenses), net increased $0.3 million from a loss of $0.2 million for the twelve months ended December 31, 2016 to a loss of $0.5
million for the twelve months ended December 31, 2017, primarily related to $0.2 million from the revaluation of warrants. Expense related to the
revaluation of warrants was $0.3 million for the twelve months ended December 31, 2017 compared to expense of less than $0.1 million for the
same period in the prior year.
Net
Loss
Net loss increased $1.1 million, or 35%, to $4.3 million for the twelve months ended December 31, 2017 as compared to net loss of $3.2 million for
the same period in the prior year. Net loss was 2.7% of net sales for the twelve months ended December 31, 2017 as compared to a net loss of
2.4% of net sales for the same period in the prior year.
32
Twelve
Months
Ended
December
31,
2016
Compared
To
Twelve
Months
Ended
December
31,
2015
Net
Sales
The following table sets forth net sales by class of retail:
Twelve Months Ended December 31,
Amount
2016
% of
Net Sales
Store
Count
(Dollars in thousands)
Amount
2015
% of
Net Sales
Store
Count
Grocery (including Online), Mass and Club* (1)
Pet Specialty and Natural (2)
Net Sales
$
$
104,709
28,345
133,054
79%
21
100%
11,767 $
4,842
16,609 $
89,132
27,054
116,186
77%
23
100%
10,442
4,573
15,015
(1)
(2)
Stores at December 31, 2016 and December 31, 2015 consisted of 7,953 and 6,887 grocery (including online) and 3,814 and 3,555 mass and club,
respectively.
Stores at December 31, 2016 and December 31, 2015 consisted of 4,530 and 4,294 pet specialty and 312 and 279 natural, respectively.
*Includes net sales from Freshpet Baked product test of $4.4 million, or 3.3% of total net sales, for the twelve months ended December 31, 2016 and
$4.6 million, or 4% of total net sales, for the twelve months ended December 31, 2015.
Net sales increased $16.9 million, or 15%, to $133.1 million for the twelve months ended December 31, 2016 as compared to the same period in the
prior year. The $16.9 million increase in net sales was driven by growth in the Grocery (including Online), Mass, and Club refrigerated channel of
$15.6 million and Pet Specialty of $1.3 million. The net sales increase was driven by overall velocity gains and an increase of Freshpet Fridges store
locations, which grew by 10.6% from 15,015 as of December 31, 2015 to 16,609 as of December 31, 2016.
Gross
Profit
Gross profit increased $5.7 million, or 10%, to $60.4 million for the twelve months ended December 31, 2016 as compared to the same period in the
prior year. The increase in gross profit was primarily driven by higher net sales, partially offset by increased depreciation due to our Freshpet
Kitchens expansion and non-capitalizable start-up costs associated with the Freshpet Kitchens expansion.
Our gross profit margin of 45.4% for the twelve months ended December 31, 2016, was a decrease of 166 basis points compared to the same
period in the prior year, primarily related to 82 basis points due to increased depreciation of our Freshpet Kitchens expansion, and 122 basis points
due to non-capitalizable start-up costs associated with the Freshpet Kitchens expansion, offset by operational efficiencies.
Adjusted Gross Profit was $66.0 million and $57.2 million in the years ended December 31, 2016 and 2015, respectively. Adjusted Gross Profit
Margin as a percentage of net sales was 49.6% and 49.2% in the years ended December 31, 2016 and 2015, respectively. Adjusted Gross Profit
excludes $4.0 million of depreciation expense and $1.6 million of non-capitalizable plant start-up costs in December 31, 2016, and $2.6 million of
depreciation expense in 2015. 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 $4.3 million, or 7%, to $62.6 million for the twelve months ended December 31, 2016 as
compared to the same period in the prior year. Key components of the dollar increase include higher broker commissions of $0.4 million, increased
non-recurring costs of $0.7 million (which consist of leadership transition costs in the year ended 2016 and secondary fees in the year ended 2015),
higher share-based compensation expenses of $0.3 million, higher chiller expenses of $1.2 million (of which $0.7 million relates to increased
depreciation on Freshpet Fridges), incremental operating expenses of $3.6 million, lower outbound freight costs of $0.2 million due to optimizations
realized with our new logistics provider, lower advertising expenses of $0.9 million, and lower R&D costs of $0.8 million. The increased operating
expenses were primarily due to new hires and increased employee benefit costs, which include variable compensation.
As a percentage of net sales, SG&A expenses decreased to 47% for the twelve months ended December 31, 2016 from 50% for the twelve months
ended December 31, 2015. Adjusted SG&A decreased as a percentage of net sales to 43% in
33
the year ended December 31, 2016 as compared to 46% of net sales in the year ended December 31, 2015. Adjusted SG&A excludes $4.0 mi llion
and $3.7 million for non-cash items related to share-based compensation in the years ended December 31, 2016 and 2015, respectively, $1.3 million
of leadership transition costs in 2016 and $0.6 million of secondary fees in 2015. Adjusted SG&A is a No n-GAAP measure. See “—Non-GAAP
Financial Measures” for how we define Adjusted SG&A, a reconciliation of Adjusted SG&A to SG&A, the closest comparable U.S. GAAP measure,
certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.
Loss
from
Operations
Loss from operations decreased $1.4 million, or 39%, to $2.2 million for the twelve months ended December 31, 2016 as compared to the same
period in the prior year as a result of the factors discussed above.
Interest
Expense
For the twelve months ended December 31, 2016 interest expense increased $0.2 million, or 54%, to $0.7 million, which related to fees and interest
expenses on our short-term borrowings under our 3-year $10.0 million Revolving Facility and $30.0 million term loan commitment earmarked for
capital expenditures. Interest expense for the twelve months ended December 31, 2015 was $0.5 million. See “—Liquidity and Capital Resources.”
Other
Income/(Expenses),
net
Other income/(expenses), net decreased $0.6 million from income of $0.4 million to expense of $0.2 million for the twelve months ended December
31, 2016 as compared to the same period in the prior year, primarily related to the revaluation of warrants. Expense related to the revaluation of
warrants was less than $0.1 million for the twelve months ended December 31, 2016 compared to income of $0.5 million for the same period in the
prior year.
Net
Loss
Net loss decreased $0.6 million, or 15%, to $3.2 million for the twelve months ended December 31, 2016 as compared to the same period in the
prior year. Net loss was 2% of net sales for the twelve months ended December 31, 2016 as compared to a net loss of 3% of net sales for the same
period in the prior year.
34
Selected Quarterly Financial Data
The following quarterly consolidated statement of operations data for the 12 fiscal quarters ended December 31, 2017 has been prepared on a basis
consistent with our audited annual consolidated financial statements and includes, in the opinion of management, all normal recurring adjustments
necessary for a fair statement of the financial information contained herein. The following quarterly data should be read together with our
consolidated financial statements included elsewhere in this report.
Freshpet Fridge store locations
Net sales
Gross profit
Gross profit margin
Net income (loss)
Freshpet Fridge store locations
Net sales
Gross profit
Gross profit margin
Net income (loss)
Freshpet Fridge store locations
Net sales
Gross profit
Gross profit margin
Net loss
Non-GAAP Financial Measures
Q1
Q2
Q3
Q4
2017
17,031
34,514
15,803
$
45.8%
(2,880)
$
17,357
39,969
18,170
$
45.5%
(2,652)
$
2016
17,650
41,200
19,503
$
47.3%
(246)
$
18,004
40,696
18,940
46.5%
1,517
Q1
Q2
Q3
Q4
15,429
31,454
14,888
$
47.3%
(1,772)
$
15,795
33,002
14,912
$
45.2%
(3,243)
$
2015
16,261
34,536
15,351
$
44.4%
621
$
16,609
34,061
15,220
44.7%
1,233
Q1
Q2
Q3
Q4
14,019
27,055
13,253
$
49.0%
(2,587)
$
14,354
28,359
13,660
$
48.2%
(2,229)
$
14,670
30,571
14,047
$
45.9%
(1,675)
$
15,015
30,201
13,689
45.3%
2,780
$
$
$
$
$
$
We have presented the following non-GAAP financial measures in this report. These non-GAAP financial measures should be considered only as
supplements to GAAP reported measures, should not be considered replacements for, or superior to, GAAP measures and may not be comparable
to similarly named measures used by other companies.
• Adjusted Gross Profit
• Adjusted Gross Profit as a percentage of net sales
• Adjusted SG&A
• Adjusted SG&A as a percentage of net sales
• EBITDA
• Adjusted EBITDA
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 and plant start-up costs. We define Adjusted SG&A as SG&A expenses before non-cash share-based
compensation, leadership transition expenses, fees related to a secondary offering and litigation expense. EBITDA represents net loss plus interest
expense (including Fees on debt guarantee, which we believe were at cost of our prior financing agreement akin to interest expense), income tax
expense, and depreciation and amortization. Adjusted EBITDA represents EBITDA plus loss on disposal of equipment, plant start-up expense,
share-based compensation, warrant fair valuation, launch expenses, fees related to a secondary offering, leadership transition costs and litigation
expense.
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
35
flow from operations, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance
across perio ds, 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 loss, income from operations or any other measure of financial performance calculated and prescribed in
accordance with U.S. GAAP. Neither EBITDA nor Adjusted EBITDA should be considered a measure of discretionary cash available to us to invest
in the growth of our business. Our non-GAAP financial measures may not be comparable to similarly titled measures in other organizations because
other organizations may not calculate non-GAAP financial measures in the same manner as we do.
Our presentation of the non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the
expenses that are excluded from that term or by unusual or non-recurring items. We recognize that the non-GAAP financial measures have
limitations as analytical financial measures. For example, the non-GAAP financial measures do not reflect:
•
•
•
•
our capital expenditures or future requirements for capital expenditures;
the interest expense (including Fees on debt guarantee which we believe were at cost of our prior financing agreement 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 any cash requirements for such replacements; and
changes in or cash requirements for our working capital needs.
Additionally, Adjusted EBITDA excludes (i) non-cash share-based compensation expense, which is and will remain a key element of our overall long-
term incentive compensation package, 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:
Net Loss
Fees on debt guarantee (a)
Depreciation and amortization
Interest expense
Income tax expense
EBITDA
Loss on disposal of equipment
Launch expense (b)
Plant start-up expenses (c)
Non-cash share-based compensation (d)
Warrant fair valuation (e)
Secondary fees (f)
Leadership transition expenses (g)
Litigation expense (h)
Adjusted EBITDA
2017
(4,262) $
—
12,692
910
75
9,414 $
104
3,066
—
4,438
335
—
63
145
17,565 $
$
$
$
Twelve Months Ended December 31,
2016
2015
2014
(Dollars in thousands)
(3,161) $
—
9,887
698
66
7,490 $
190
2,813
1,628
4,193
49
—
1,291
—
17,654 $
(3,711) $
—
7,574
455
58
4,376 $
94
2,626
—
3,924
(503)
593
—
—
11,110 $
(37,339) $
25,937
6,425
4,614
42
(321) $
309
3,513
113
1,564
337
—
—
—
5,515 $
2013
(21,687)
5,245
5,945
3,492
31
(6,974)
503
3,305
1,996
978
—
—
—
—
(192)
(a)
Represents fees paid to certain stockholders for acting as guarantors for a portion of our prior payment obligations under the $62.5 Million
Revolver. Pursuant to a Fee and Reimbursement Agreement, the Company was obligated to
36
pay each guarantor a continge nt fee equal to 10% per annum of the amount each guarantor committed to guarantee. Portions of the
proceeds from our IPO and related debt refinancing were used to repay the borrowings under the $62.5 Million Revolver, relieving us of our
future fees on the debt guarantee. Concurrently, with the closing of the IPO, the outstanding guarantee fees were converted into shares of our
Series C Preferred Stock, which were then converted into common stock. See our consolidated financial statements and the notes for
additional information.
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.
Represents additional operating costs incurred in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens
expansion project in 2016, and additional operating costs incurred in 2013 and in the first quarter of 2014 in connection with the opening of our
new primary manufacturing facility in Bethlehem, Pennsylvania, which was completed in the fourth quarter of 2013.
Represents non-cash share-based compensation expense.
Represents the change of fair value for the outstanding common stock warrants. All outstanding warrants were converted to common stock in
September 2017.
Represents fees associated with the secondary public offering of our common stock, which was completed on May 5, 2015.
Represents charges associated within our former Chief Executive Officer’s separation agreement as well as changes in estimates associated
with leadership transition costs.
Represents fees associated with the response to a securities lawsuit, Curran v. Freshpet, Inc. et al, Docket No. 2:16-cv-02263.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
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:
Gross Profit (as reported)
Depreciation expense (a)
Plant start-up expenses (b)
Adjusted Gross Profit
Adjusted Gross Profit as a % of Net Sales
$
$
$
72,416
5,791
—
78,207
$
50.0%
60,371
4,028
1,628
66,027
$
49.6%
$
$
$
54,649
2,566
—
57,216
$
49.2%
42,218
2,454
113
44,785
$
51.6%
2017
Twelve Months Ended December 31,
2016
2015
2014
2013
27,193
1,366
1,996
30,555
48.4%
(a)
(b)
Represents non-cash depreciation expense included in Cost of Goods Sold.
Represents additional operating costs incurred in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens
expansion project in 2016, and additional operating costs incurred in 2013 and in the first quarter of 2014 in connection with the opening of our
new primary manufacturing facility in Bethlehem, Pennsylvania, which was completed in the fourth quarter of 2013.
The following table provides a reconciliation of Adjusted SG&A to SG&A expenses, the most directly comparable financial measure presented in
accordance with U.S. GAAP:
2017
Twelve Months Ended December 31,
2016
2015
2014
$
$
$
$
SG&A expenses (as reported)
Non-cash share-based compensation (a)
Secondary fees (b)
Leadership transition expenses (c)
Litigation expense (d)
Adjusted SG&A Expenses
Adjusted SG&A Expenses as a % of Net Sales
$
$
75,167
4,195
—
63
145
70,764
62,586
3,972
—
1,291
—
57,323
58,297
3,723
593
—
—
53,981
48,299
1,830
—
—
—
46,469
$
45.3%
$
43.1%
$
46.5%
$
53.6%
2013
39,574
888
—
—
—
38,686
61.3%
(a)
(b)
(c)
Represents non-cash share-based compensation expense.
Represents fees associated with the secondary public offering of our common stock, which was completed on May 5, 2015.
Represents charges associated within our former Chief Executive Officer’s separation agreement, as well as changes in estimates associated
with leadership transition costs.
37
(d)
Represents fees associated with the response to a securities l awsuit, Curran v. Freshpet, Inc. et al, Docket No. 2:16-cv-02263.
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 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.
We believe that cash and cash equivalents, 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. However, our ability to
continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and
cash flow from operations and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to
general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that
our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. Further, our capital
requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur
unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may seek alternative financing,
such as selling additional debt or equity securities, and we cannot assure you that we will be able to do so on favorable terms, if at all. 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.
Working Capital consists of current assets net of current liabilities. Working capital increased $9.7 million to $10.3 million at December 31, 2017
compared with $0.6 million at December 31, 2016. The increase was a result of increased accounts receivable inventory, and a decrease in
borrowing offset by an increase in accounts payable, accrued expenses, and a decrease in cash.
We normally carry three to four weeks of finished goods inventory. The average duration of our accounts receivable is approximately three weeks.
As of December 31, 2017, our capital resources consisted primarily of $2.2 million cash on hand and $30.0 million available under our Credit
Facilities. In the third quarter of 2017, we amended our Credit Facilities, to replace our Term Facility and Capex Commitments of $30.0 million and
$10.0 million Revolving Facility (the New Revolving Facility) and the ability to increase the New Revolving Facility by an additional $10.0 million. The
New Revolving Facility will mature in September 2020. The amendment resulted in a reduction in the unused rate of between 25 and 75 basis
points and a reduction in the total rate of between 200 and 250 basis points. The existing facility, which had $7.5 million outstanding, was repaid with
proceeds from the New Revolving Facility and cash on hand.
38
The foll owing table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by (used in) operating, investing and
financing activities and our ending balance of cash.
Cash at the beginning of period
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Cash at the end of period
Net
Cash
Provided
by
Operating
Activities
2017
Year Ended December 31,
2016
(Dollars in thousands)
2015
$
$
3,908 $
10,270
(13,004)
1,010
2,184 $
8,029 $
12,800
(26,689)
9,768
3,909 $
36,259
6,738
(35,260)
292
8,029
Cash provided by operating activities consists primarily of net income adjusted for certain non-cash items (provision for gain/loss on receivables, loss
on disposal of equipment, depreciation and amortization, share-based compensation, deferred financing costs and loan discounts and the fair
valuation of warrants).
For the twelve months ended December 31, 2017, net cash provided by operating activities was $10.3 million, consisting of net income, adjusted for
reconciling non-cash items, of $14.0 million and an increase in operating assets and liabilities of $3.7 million. Net income, adjusted for reconciling
non-cash items, excludes $18.3 million of non-cash items primarily relating to $4.4 million of share-based compensation and $12.7 million of
depreciation and amortization. The increase in assets of $9.7 million is primarily related to growth in accounts receivable and inventory. The growth
in accounts receivable is primarily due to growth in net sales. The increase in inventory is a result of timing of sales in December year-over-year as
well as manufacturing of certain new items towards the end of the fourth quarter of 2017 that will reach retailers in January and February of 2018.
The increase in liabilities of $6.0 million was due to timing of payments, including $2.1 million related to accrued compensation.
For 2016, net cash provided by operating activities was $12.8 million, primarily consisting of net income adjusted for non-cash items of $11.2 million,
which excludes $14.3 million of non-cash items primarily relating to $4.2 million of share-based compensation and $9.9 million of depreciation and
amortization, and proceeds from an increase in operating assets and liabilities of $1.6 million. The increase in assets of $1.5 million is primarily
related to growth in accounts receivable, which is primarily due to growth in net sales and an increase in the number of stores with a Freshpet fridge.
The increase in liabilities of $3.1 million was due to timing of payments and accrued leadership transition costs.
For 2015, net cash provided by operating activities was $6.7 million, which consisted of net income, adjusted for non-cash items, of $3.7 million, and
a $0.7 million decrease related to changes in operating assets and liabilities. The change in operating assets and liabilities is primarily due to the
increase in accounts receivable of $1.7 and a decrease in accrued expenses of $0.7 million, offset by a decrease in inventories of $0.6 million,
decrease in prepaid expenses and other current assets of $1.1 million, and an increase in accounts payable of $0.2 million. The increase in accounts
receivable is primarily due to growth in net sales. The change in remaining operating accounts is due to timing.
Net
Cash
Used
in
Investing
Activities
Net cash used in investing activities of $13.0 million for the twelve months ended December 31, 2017 relates primarily to capital expenditures related
to the Freshpet Kitchens of $3.3 million and investments in fridges as well as other miscellaneous capital spend of $9.7 million.
Net cash used in investing activities of $26.7 million for the twelve months ended December 31, 2016 relates primarily to capital expenditures related
to the Freshpet Kitchens of $20.8 million (including the Freshpet Kitchens expansion of $17.6 million and recurring capital expenditures of $3.2
million), investments in fridges, as well as other miscellaneous capital spend of $9.1 million, offset by maturities of short-term investments of $3.2
million.
Net cash used in investing activities of $35.3 million for the twelve months ended December 31, 2015 relates primarily to capital expenditures related
to the Freshpet Kitchens of $19.1 million (including the Freshpet Kitchens expansion of $17.6 million and recurring capital expenditures of $1.5
million), investments in fridges as well as other miscellaneous capital spend of $8.0 million, purchase of a building with 6.5 acres of land adjacent to
our Freshpet Kitchens for $5.0 million, and purchases of short-term investments, net of settlement, of $3.2 million.
39
Net
Cash
Provided
by
Financing
Activities
Net cash provided by financing activities was $1.0 million for the twelve months ended December 31, 2017, attributable to proceeds from the
exercise of stock options of $8.3 million and the proceeds from borrowing $7.5 million under our Credit Facilities, partially offset by repayments of
short-term borrowing of $14.5 million, and debt issuance costs of $0.3 million.
Net cash from financing activities was $9.8 million for the year ended December 31, 2016, attributable to proceeds from the exercise of stock options
of $2.8 million and the proceeds from borrowing $10.0 million under our Credit Facilities, partially offset by repayments of short-term borrowing of
$3.0 million.
Net cash from financing activities was $0.3 million in 2015, related to proceeds from the exercise of options.
Indebtedness
On November 13, 2014, 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 modified the terms of the $40.0 million Credit Facilities. The $18.0 million Term Facility was repaid and
extinguished, the 3-year $10.0 million Revolving Facility remained unchanged, and the $12.0 million Capex Commitments was increased to $30.0
million. Amounts borrowed under the Capex Commitments reduce the $30.0 million available such that the borrowed funds are no longer available
after repayment. Any drawn Capex Commitments will mature on the fifth anniversary of the execution of the Loan Agreement, and undrawn Capex
Commitments will expire on the third anniversary of the execution of the Loan Agreement. Under the terms of the Loan Agreement, the commitments
for the $10.0 million Revolving Facility may be increased up to $20.0 million subject to certain conditions.
On September 21, 2017, the Company further amended the Loan Agreement (the “New Loan Agreement”) which modified the $10.0 million
Revolving Facility to $30.0 million and extinguished the $30.0 million Capex Commitments. The New Loan Agreement has a term of three years and
the ability to increase the New Revolving Facility by $10.0 million, with borrowings bearing interest at variable rates.
The New Revolving Facility matures in September 2020 and borrowings thereunder will bear interest at variable rates depending on the Company’s
election, either at a base rate or at the London Interbank Offered Rate (“LIBOR”), in each case, plus an applicable margin. Subject to the Company’s
leverage ratio, the applicable margin will vary between 0.75% and 1.25% for base rate loans and 1.75% and 2.25% for LIBOR loans.
The Company had $7.5 million outstanding under the existing Credit Facilities prior to closing, which was repaid with proceeds from the New
Revolving Facility and cash on hand. Upon closing, the Company had $5.5 million outstanding and $24.5 million available under the New Revolving
Facility.
In connection with this amendment, the Company accelerated the amortization of $0.3 million of unamortized debt issuance costs related to the
existing Loan Agreement. These costs are included in Interest Expense in the twelve months ended December 31, 2017.
The New 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. During the year ended December 31, 2017, the Company borrowed $7.5 million under our Credit Facilities,
partially offset by repayments of short-term borrowings of $14.5 million, and debt issuance costs of $0.3 million . The Company was in compliance
with all covenants in the New Loan Agreement and had no outstanding debt as of December 31, 2017. Interest expense and fees totaled $0.5
million, $0.7 million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. There was less than $0.1 million of
accrued interest on the Credit Facilities as of December 31, 2017 and 2016.
40
The following table sets forth our expected contractual obligations as of December 31, 2017:
Contractual Obligations and Commitments
Operating lease obligations
Manufacturing processing obligations
Utility servicing obligations
Total
Total
$
$
5,920,134 $
1,903,728
7,532,560
15,356,422 $
Less than 1
Year
Payments Due by Period
Between 1-3
Years
1,477,923 $
830,953
822,150
3,131,026 $
715,375 $
251,520
—
966,895 $
Between 3-5
Years
1,541,771 $
821,255
872,219
3,235,246 $
More than 5
Years
2,185,064
—
5,838,191
8,023,255
Critical Accounting Policies
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States, or 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.
While our significant accounting policies are described in the notes to our financial statements appearing in this report, we believe that the following
critical accounting policies are most important to understanding and evaluating our reported financial results.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of net sales and expenses during the reporting period.
We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies related
to the more significant areas involving management’s judgments and estimates. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances. Actual results, as determined at a later date, could differ from those
estimates. To the extent that there are differences between our estimate and the actual results, our future financial statement presentation, financial
condition, results of operations and cash flows will be affected.
The following critical accounting policies reflect significant judgments and estimates used in preparation of our consolidated financial statements:
Income
Taxes
—We account for income taxes under the asset and liability method in accordance with authoritative guidance for income taxes. We
recognize deferred tax assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. We measure deferred tax
assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recorded or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the
enactment date.
At December 31, 2017, we had federal NOL carryforwards of approximately $175.0 million, which expire at various dates between 2025 and 2037.
We may be subject to the NOL utilization provisions of Section 382 of the Code. The effect of an ownership change would be the imposition of an
annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon our
value immediately before the ownership change, changes to our capital during a specified period prior to the change and the federal published
interest rate. Although we have not completed a Code Section 382 analysis, if we were to undergo an ownership change it is likely that the utilization
of the NOLs will be substantially limited.
A valuation allowance is appropriate when management believes it is more likely than not, the deferred tax asset will not be realized. At
December 31, 2017 and 2016, we determined that a valuation allowance of 100% is deemed appropriate.
41
Revenue
Recognition
and
Incentives
—Revenue from product sales is generally recognized upon shipment or delivery to our customers, at which
point title and risk of loss is transferred and the selling price is fixed or d eterminable. This completes the revenue-earning process specifically that
an arrangement exists, delivery has occurred, ownership has transferred, the price is fixed and collectability is reasonably assured. A provision for
payment discounts and product re turn allowances, which is estimated based upon our historical performance, management’s experience and
current economic trends, is recorded as a reduction of sales in the same period that the revenue is recognized.
Our trade incentive, consisting primarily of customer pricing allowances and merchandising funds and from time-to-time, consumer coupons are
offered through various programs to customers and consumers. Sales are recorded net of estimated trade incentive spending, which is recognized
as incurred at the time of sale. Accruals for expected payouts under these programs are included as accrued expense in the consolidated balance
sheet. Coupon redemption costs are also recognized as reduction to calculate net sales when the coupons are issued. Estimates of trade promotion
expense and coupon redemption costs are based upon programs offered, timing of those offers, estimated redemption/usage rates from historical
performance, management’s experience and current economic trends.
Share-based
Compensation—
We account for all share-based compensation payments issued to employees, directors and nonemployees using a
fair value method. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the date of
grant. We recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient
renders the required services to us using the straight-line single option method.
We estimate the fair value of stock option awards on the date of grant using the Black-Scholes valuation model which requires that we make certain
assumptions regarding: (i) the expected volatility in the market price of our common stock; (ii) dividend yield; (iii) risk-free interest rate; and (iv) the
period of time employees are expected to hold the award prior to exercise (referred to as the expected term).
We have outstanding share-based awards that have performance-based vesting conditions in addition to time-based vesting. Awards with
performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. We
recognize the estimated fair value of performance-based awards as share-based compensation expense over the performance period based upon
our determination of whether it is probable that the performance targets will be achieved. At each reporting period, we reassess the probability of
achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be
achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the
probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not
met, no share-based compensation expense is recognized for the cancelled shares, and, to the extent share-based compensation expense was
previously recognized for those cancelled shares, such share-based compensation expense is reversed.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standard Board (“FASB”) issued ASU No. 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.
The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In connection with this ASU, the FASB
also issued ASU No. 2016-10 regarding identification of performance obligations and licensing considerations, ASU No. 2016-12 regarding narrow
scope improvements and practical expedients- and ASU No. 2016-08 which clarifies the implementation of guidance on principal versus agent
considerations. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 to fiscal years beginning after December 15, 2017, with
early adoption permitted only for fiscal years beginning after December 15, 2016. Topic 606 permits two methods of adoption: retrospectively to each
prior reporting period presented (full retrospective method), or modified retrospectively with the cumulative effect of applying the guidance as of the
date of initial application (the cumulative catch-up transition method).
The Company will adopt Topic 606 in the first quarter of 2018 using the full retrospective method approach requiring the company to adopt Topic 606
to each prior reporting period presented. The adoption is not expected to have a material impact on our financial statements and is limited to
classification differences within the statement of operating income from cost of goods sold to a reduction to net sales. The net effect will decrease
net sales for 2017 by approximately 2.6% lower than under the previous accounting standard. The new accounting standard will not impact Net
Income.
In February 2016, the FASB issued ASU No. 2016-02, "Leases,” which requires lessees to recognize the assets and liabilities that arise from leases
on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying
42
asset for the lease term. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. The amendments should be applied at the beginning of the earliest period presented using a modified
retrospective approach with earlier application permitted as of the beginning of an interim or ann ual reporting period. The Company is assessing the
impact of ASU No. 2016-02 on its corporate office lease, and upon adoption of this guidance, expects to record the lease on its consolidated balance
sheet in accordance with ASU No. 2016-02.
We have determined we operate in one segment: the manufacturing, marketing and distribution of pet food and pet treats for dogs and cats.
Segment
Inflation
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including
food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating
results to the extent that such increases cannot be passed along to our customers. The impact of inflation on food, labor and energy costs can
significantly affect the profitability of our Company.
While we have been able to offset inflation and other changes in the costs of key operating resources through price increases, productivity
improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time,
competitive conditions could limit our pricing flexibility. In addition, macroeconomic conditions could make additional price increases imprudent.
There can be no assurance that all future cost increases can be offset by increased prices or that increased prices will be fully absorbed without any
resulting changes in their purchasing patterns.
We have no off balance sheet arrangements or any holdings in variable interest entities.
Off Balance Sheet Arrangements
JOBS Act
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can
delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected
not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on
which adoption of such standards is required for other public companies.
As an emerging growth company we are not required to, among other things, (i) provide an auditor’s attestation report on our systems of internal
controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth
public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, (iii) comply with any requirement that may be
adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report
providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive
compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive
Officer’s compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an
emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth
anniversary of the completion of our initial public offering in November 2014, (ii) the first fiscal year after our annual gross revenue are $1.0 billion or
more, (iii) the date on which we have, during the previous three year period, issued more than $1.0 billion in non-convertible debt securities or
(iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the
second quarter of that fiscal year.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 agreements, which bears
43
interest at vari able rates. As of December 31, 2017, we borrowed $7.5 million under our Credit Facilities, and all was repaid as of December 31,
2017. A change in interest rates of 100 basis points would cause a $0.1 million increase or decrease in annual interest expense for every $10.0
million in borrowings.
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.
44
I TEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRESHPET, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
Notes to Consolidated Financial Statements
Page
46
47
48
49
50
51
45
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Freshpet, Inc.:
Opinion
on
the
Consolidated Financial
Statements
We have audited the accompanying consolidated balance sheets of Freshpet Inc. and subsidiaries (the Company) as of December 31, 2017 and
2016, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the
years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and
2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with
U.S. generally accepted accounting principles.
Basis
for
Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we
are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Short Hills, New Jersey
March 7, 2018
46
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
Inventories, net
Prepaid expenses
Other current assets
Total Current Assets
Property, plant and equipment, net
Deposits on equipment
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses
Accrued warrants
Borrowings under Credit Facilities
Total Current Liabilities
Other liabilities
Total Liabilities
STOCKHOLDERS' EQUITY:
Common stock — voting, $0.001 par value, 200,000,000 shares authorized,
35,132,548 and 33,961,650 issued and outstanding on December 31, 2017
and December 31, 2016, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income/(loss)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
December 31,
2017
December 31,
2016
$
$
$
$
$
2,184,259 $
12,721,521
10,118,394
1,200,834
732,960
26,957,968
100,598,639
4,370,922
1,972,805
133,900,334 $
9,173,169
7,519,348
—
—
16,692,517 $
304,839
16,997,356 $
3,908,177
8,886,790
5,402,735
741,091
304,560
19,243,353
101,493,080
3,620,444
2,094,339
126,451,216
6,884,155
4,531,139
253,391
7,000,000
18,668,685
—
18,668,685
35,132
312,783,195
(195,991,478)
76,129
116,902,978
133,900,334 $
33,961
299,477,706
(191,729,136)
—
107,782,531
126,451,216
See
accompanying
notes
to
the
consolidated
financial
statements.
47
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
NET SALES
COST OF GOODS SOLD
GROSS PROFIT
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
LOSS FROM OPERATIONS
OTHER INCOME/(EXPENSES):
Other Income/(Expenses), net
Interest Expense
LOSS BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET LOSS
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
OTHER COMPREHENSIVE INCOME:
Change in foreign currency translation
TOTAL OTHER COMPREHENSIVE INCOME
TOTAL COMPREHENSIVE LOSS
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS
-BASIC
-DILUTED
WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING USED IN COMPUTING NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS
-BASIC
-DILUTED
December 31,
2017
156,379,210 $
83,963,292
72,415,918
75,167,168
(2,751,250)
2016
133,053,517 $
72,682,634
60,370,883
62,585,833
(2,214,950)
2015
116,186,372
61,537,230
54,649,142
58,296,814
(3,647,672)
(525,404)
(910,492)
(1,435,896)
(4,187,146)
75,195
(4,262,341)
(4,262,341) $
76,129 $
76,129 $
(4,186,212) $
(181,850)
(698,119)
(879,969)
(3,094,919)
65,754
(3,160,673)
(3,160,673) $
— $
— $
(3,160,673) $
448,943
(454,567)
(5,624)
(3,653,296)
57,516
(3,710,812)
(3,710,812)
—
—
(3,710,812)
(0.12) $
(0.12) $
(0.09) $
(0.09) $
(0.11)
(0.11)
$
$
$
$
$
$
$
34,487,239
34,487,239
33,674,416
33,674,416
33,497,940
33,497,940
See
accompanying
notes
to
the
consolidated
financial
statements.
48
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
BALANCES, DECEMBER 31, 2014
Exercise of options to purchase common stock
Issuance of restricted stock units
Share-based compensation expense
Net loss
BALANCES, DECEMBER 31, 2015
Exercise of options to purchase common
stock
Share-based compensation expense
Net loss
BALANCES, DECEMBER 31, 2016
Exercise of options to purchase common
stock
Issuance of restricted stock units
Conversion of warrants to common stock
Share-based compensation expense
Net loss
Foreign Currency Translation
BALANCES, DECEMBER 31, 2017
Common Stock - Voting
Number of
Shares Issued
Amount
Additional Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
33,468,342 $
44,432
24,166
—
—
33,536,940 $
33,468 $
44
24
—
—
33,537 $
288,216,882 $
291,705
(24)
3,976,423
—
292,484,986 $
(184,857,651 ) $
—
—
—
(3,710,812 )
(188,568,463 ) $
424,710
425
2,767,570
—
—
—
33,961,650 $
—
—
33,961 $
4,225,149
—
299,477,706 $
—
(3,160,673 )
(191,729,136 ) $
— $
—
—
—
—
— $
—
—
—
— $
103,392,699
291,749
—
3,976,423
(3,710,812 )
103,950,060
2,767,995
4,225,149
(3,160,673 )
107,782,531
1,073,788
1,074
8,279,386
—
—
8,280,460
59,183
37,927
—
—
—
35,132,548 $
59
38
—
—
—
35,132 $
(59)
587,981
4,438,181
—
—
312,783,195 $
—
—
—
(4,262,341 )
—
(195,991,478 ) $
—
—
—
—
76,129
76,129 $
—
588,019
4,438,181
(4,262,341 )
76,129
116,902,978
See
accompanying
notes
to
the
consolidated
financial
statements.
49
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Provision for loss/(gains) on accounts receivable
Loss on disposal of equipment and deposits on equipment
Share-based compensation
Fair value adjustment for outstanding warrants
Change in reserve for inventory obsolescence
Depreciation and amortization
Amortization of deferred financing costs and loan discount
Changes in operating assets and liabilities
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses
Other liabilities
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments
Proceeds from maturities of short-term investments
Acquisitions of property, plant and equipment, software and deposits on
equipment
Acquisitions of land and building
Proceeds from sale of equipment
Net cash flows used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs
Exercise of options to purchase common stock
Proceeds from borrowings under Credit Facilities
Repayment of borrowings under Credit Facilities
Net cash flows provided by financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF PERIOD
SUPPLEMENTAL CASH FLOW INFORMATION:
Taxes paid
Interest paid
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment purchases in accounts payable
Conversion of warrants to common stock
2017
December 31,
2016
2015
$
(4,262,341) $
(3,160,673) $
(3,710,812)
17,348
103,716
4,438,181
334,628
291,898
12,692,355
426,534
(3,852,079)
(5,007,557)
(797,427)
(90,135)
2,682,094
2,988,209
304,839
10,270,263
(5,164)
189,531
4,193,490
49,077
(117,944)
9,887,168
150,272
(1,850,907)
1,568,656
(816,020)
(398,059)
853,854
2,256,582
—
12,799,863
11,985
93,599
3,923,857
(502,626)
(105,022)
7,573,535
144,823
(1,682,304)
565,726
1,061,748
(198,902)
192,583
(629,373)
—
6,738,817
—
—
—
3,250,000
(7,499,205)
4,249,205
(13,003,756)
(29,952,536)
(27,015,112)
—
—
(13,003,756)
—
13,442
(26,689,094)
(5,026,250)
30,957
(35,260,405)
(270,885)
8,280,460
7,500,000
(14,500,000)
1,009,575
(1,723,918)
3,908,177
2,184,259 $
—
2,767,995
10,000,000
(3,000,000)
9,767,995
(4,121,236)
8,029,413
3,908,177 $
—
291,749
—
—
291,749
(28,229,839)
36,259,252
8,029,413
58,885 $
519,280 $
76,945 $
445,277 $
56,353
332,244
1,006,178 $
588,019 $
1,404,550 $
— $
2,036,114
—
$
$
$
$
$
See
accompanying
notes
to
the
consolidated
financial
statements.
50
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of the Business and Summary of Significant Accounting Policies:
Nature of the Business – Freshpet, Inc. (hereafter referred to as “Freshpet” 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 other
international markets into major retail classes including Grocery and Mass (which includes club), and Online, as well as Pet Specialty, and Natural
retail.
Basis of Presentation – The accompanying consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the U.S. (“U.S. GAAP”).
Principles of Consolidation – The financial statements include the accounts of the Company as well as the Company’s wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation.
Segments – The Company operates as a single operating segment reporting to its chief operating decision maker.
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.
Cash and Cash Equivalents – The Company at times considers money market funds and all other highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Short-Term Investments – The Company at times 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.
Accounts Receivable – The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for
estimated uncollectible accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful
accounts based on its history of write-offs and collections and current credit conditions. Accounts receivable are written off when management
deems them to be uncollectible.
Inventories – Inventories are stated at the lower of cost or market, using the first-in, first-out method. When necessary, the Company provides
allowances to adjust the carrying value of its inventories to the lower of cost or net realizable value, including any costs to sell or dispose and
consideration for obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value.
Property, Plant and Equipment – Property, plant and equipment are recorded at cost. The Company provides for depreciation on the straight-line
method by charges to income at rates based upon estimated recovery periods of 7 years for furniture and office equipment, 5 years for automotive
equipment, 9 years for refrigeration equipment, 5 to 10 years for machinery and equipment, and 15 to 39 years for building and improvements.
Capitalized cost includes the costs incurred to bring the property, plant and equipment to the condition and location necessary for its intended use,
which includes any necessary delivery, electrical and installation cost for equipment. Maintenance and repairs that do not extend the useful life of the
assets over two years are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the term of the related lease
or the estimated useful lives on the straight-line method.
Long-Lived Assets – The Company evaluates all long-lived assets for impairment. Long-lived assets are evaluated for impairment whenever events
or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of the asset. Recoverability of assets held for sale is measured by a
comparison of the carrying amount of an asset or asset group to their fair value less estimated costs to sell. Estimating future cash flows and
calculating fair value of assets requires significant estimates and assumptions by management. If the carrying amount is not fully recoverable, an
impairment loss is recognized to reduce the carry amount to fair value, and is charged to expense in the period of impairment.
51
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes – The Company provides for deferred income taxes for temporary dif ferences between financial and income tax reporting, principally
net operating loss carryforwards, depreciation, and share-based compensation. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the years in which those t emporary differences are expected to be recovered or settled.
A valuation allowance is appropriate when management believes it is more likely than not, the deferred tax asset will not be realized. At
December 31, 2017, and 2016, the Company determined that a valuation allowance of 100% is appropriate.
Revenue Recognition and Incentives – Revenue from product sales is recognized upon shipment to the customers as terms are free on board
(“FOB”) shipping point, at which point title and risk of loss is transferred and the selling price is fixed or determinable. This completes the revenue-
earning process specifically that an arrangement exists, delivery has occurred, ownership has transferred, the price is fixed and collectability is
reasonably assured. A provision for payment discounts and product return allowances, which is estimated based upon the Company’s historical
performance, management’s experience and current economic trends, is recorded as a reduction of sales in the same period that the revenue is
recognized.
Trade incentives, consisting primarily of customer pricing allowances and merchandising funds, and consumer coupons are offered through various
programs to customers and consumers. Sales are recorded net of estimated trade incentive spending, which is recognized as incurred at the time of
sale. Accruals for expected payouts under these programs are included as accrued expense in the consolidated balance sheet. Coupon redemption
costs are also recognized as reductions of net sales when the coupons are issued. Estimates of trade promotion expense and coupon redemption
costs are based upon programs offered, timing of those offers, estimated redemption/usage rates from historical performance, management’s
experience and current economic trends.
Advertising – Advertising costs are expensed when incurred, with the exception of production costs which are expensed the first time advertising
takes place. Advertising costs, consisting primarily of media ads, were $22,127,170, $15,374,392, and $16,302,237, in 2017, 2016, and 2015,
respectively.
Shipping and Handling Costs/Freight Out – Costs incurred for shipping and handling are included in selling, general, and administrative expenses
within the statement of operations and comprehensive loss. Shipping and handling costs primarily consist of costs associated with moving finished
products to customers, including costs associated with our distribution center and the cost of shipping products to customers through third-party
carriers. Shipping and handling cost totaled $12,892,928, $11,202,392, and $11,407,908 for the years ended December 31, 2017, 2016, and 2015,
respectively.
Research & development – Research and development costs consist of expenses to develop and test new products. The cost are expensed as
incurred.
Share-based Compensation – The Company recognizes share-based compensation based on the value of the portion of share-based payment
awards that is ultimately expected to vest during the period. Share-based compensation expense recognized in the statement of operations included
compensation expense for share-based payment awards granted subsequent to December 31, 2006, based on the grant date fair value estimated.
Share awards are amortized under the straight-line method over the requisite service period of the entire award. Upon the adoption of ASU 2016-09,
the Company no longer estimates expected forfeitures but accounts for forfeitures as they occur.
The Company determines the fair value of the stock options granted as either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
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).
52
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The three levels of the fair value hierarchy are as follows:
• Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the
measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-
traded instruments and listed equities.
• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g.,
quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not
active). Level 2 includes financial instruments that are valued using models or other valuation methodologies.
• Level 3 – Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined
using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.
The carrying amounts reported in the balance sheets for cash and cash equivalents, other receivables, accounts payable and accrued expenses
approximate their fair value based on the short-term maturity of these instruments. The warrant liability is recorded at fair value with changes in fair
value reflected in the statement of operations and comprehensive loss.
As of December 31, 2017, the Company only maintained Level 1 assets and liabilities.
Note 2 – Recently Issued Accounting Standards:
In May 2014, the Financial Accounting Standard Board (“FASB”) issued ASU No. 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.
The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In connection with this ASU, the FASB
also issued ASU No. 2016-10 regarding identification of performance obligations and licensing considerations, ASU No. 2016-12 regarding narrow
scope improvements and practical expedients- and ASU No. 2016-08 which clarifies the implementation of guidance on principal versus agent
considerations. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 to fiscal years beginning after December 15, 2017, with
early adoption permitted only for fiscal years beginning after December 15, 2016. Topic 606 permits two methods of adoption: retrospectively to each
prior reporting period presented (full retrospective method), or modified retrospectively with the cumulative effect of applying the guidance as of the
date of initial application (the cumulative catch-up transition method).
The Company will adopt Topic 606 in the first quarter of 2018 using the full retrospective method approach requiring the company to adopt Topic 606
to each prior reporting period presented. The adoption is not expected to have a material impact on our financial statements and is limited to
classification differences within the statement of operating income from cost of goods sold to a reduction to net sales. The net effect will decrease
net sales for 2017 by approximately 2.6% lower than under the previous accounting standard. The new accounting standard will not impact Net
Income.
In February 2016, the FASB issued ASU No. 2016-02, "Leases,” which requires lessees to recognize the assets and liabilities that arise from leases
on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The amendments should be applied at the
beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim
or annual reporting period. The Company is assessing the impact of ASU No. 2016-02 on its corporate office lease, and upon adoption of this
guidance, expects to record the lease on its consolidated balance sheet in accordance with ASU No. 2016-02.
53
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Inven tories:
Inventories are summarized as follows:
Raw Materials and Work in Process
Packaging Components Material
Finished Goods
Reserve for Obsolete Inventory
Note 4 – Property, Plant and Equipment:
Refrigeration Equipment
Machinery and Equipment
Building, Land, and Improvements
Furniture and Office Equipment
Automotive Equipment
Leasehold Improvements
Construction in Progress
Less: Accumulated Depreciation and Amortization
December 31,
2017
2016
2,471,498 $
804,616
7,105,425
10,381,539
(263,145)
10,118,394 $
1,568,789
908,771
3,219,634
5,697,194
(294,459)
5,402,735
December 31,
2017
2016
70,489,454 $
47,558,838
25,543,568
4,404,735
319,496
375,661
3,763,894
152,455,646
(51,857,007)
100,598,639 $
62,603,188
45,953,884
25,114,611
3,941,995
317,615
297,681
2,841,035
141,070,009
(39,576,929)
101,493,080
$
$
$
$
Depreciation and amortization expense related to property, plant and equipment totaled approximately $12,441,468, $9,708,062 and $7,433,876 for
the years ended December 31, 2017, 2016 and 2015, respectively; of which $5,791,459, $4,028,022 and $2,566,013 was recorded in cost of goods
sold for 2017, 2016 and 2015, respectively; with the remainder of depreciation and amortization expense being recorded to selling, general and
administrative expense.
Due to our continued growth, the Company has completed a capital expansion project at its Freshpet Kitchens manufacturing facility to expand the
plant capacity and increase distribution. Since 2015, the Company invested approximately $35.5 million in capital expenditures related to this project,
with $0.3 million recorded during 2017 and $17.6 million recorded during each of 2016 and 2015. New equipment related to the capital expansion
project went into service in 2016, which resulted in incremental depreciation expense of approximately $1.6 million in the year ended December 31,
2016.
Note 5 – Income Taxes:
A summary of income taxes as follows:
Current:
Federal
State
2017
December 31,
2016
2015
$
$
—
75,195
75,195
$
$
— $
65,754
65,754 $
—
57,516
57,516
The provisions for income taxes do not bear a normal relationship to loss before income taxes primarily as a result of the valuation allowance on
deferred tax assets.
54
The reconciliation of the statutory federal income tax rate to the Company’s effective tax is presented below:
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax at federal statutory rate
Impact of 2017 Tax Act
State taxes, net of federal
Permanent items
Other
Valuation allowance
Effective tax rate
2017
Year Ended December 31,
2016
2015
34.00%
445.05
(0.42)
(5.94)
(0.17)
(474.34)
(1.83)%
34.00%
—
1.95
(3.19)
0.54
(35.43)
(2.13)%
34.00%
—
0.95
(1.33)
(0.09)
(35.11)
(1.58)%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether
it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax
assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss
carryforwards. The Company believes that it is more likely than not that the Company’s deferred income tax assets will not be realized. The
Company has experienced taxable losses from inception. As such, there is a full valuation allowance against the net deferred tax assets as of
December 31, 2017 and 2016.
Net operating loss
Stock option expense
Property and equipment
Other
Less: Valuation allowance
Net deferred tax
December 31,
2017
2016
42,484,665
235,994
(8,635,268)
680,480
(34,765,871)
—
59,491,094
3,155,006
(10,400,982)
981,050
(53,226,168)
—
At December 31, 2017, the Company had federal net operating loss (“NOL”) carryforwards of $174,951,283, which expire between 2025 and 2037.
The Company may be subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code. The effect of an
ownership change would be the imposition of an annual limitation on the use of NOL carry forwards attributable to periods before the change. The
amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a
specified period prior to the change, and the federal published interest rate. 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, 2017, the Company had $143,444,509 of State NOLs which expire
between 2017 and 2037, and had $1,657,143 of foreign NOLs which do not expire.
Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The
Company has analyzed its tax positions and has concluded that as of December 31, 2017, there were, no uncertain positions. The Company’s U.S.
federal and state net operating losses have occurred since its inception in 2005 and as such, tax years subject to potential tax examination could
apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing
authorities. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. The Company did not
have any unrecognized tax benefits and has not accrued any interest or penalties through 2017.
55
Net deferred tax assets and liabilities are summarized as follows:
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total deferred tax assets
Total deferred tax liabilities
Valuation allowance
Net deferred income tax assets
December 31,
2017
2016
$
$
43,401,139 $
(8,635,268)
(34,765,871)
— $
63,627,150
(10,400,982)
(53,226,168)
—
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law making significant changes to the Internal
Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 34% to 21% for tax years beginning after
December 31, 2017, which will result in a reduction of approximately $18.9 million for the deferred tax assets related to net operating losses and
other assets, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the
mandatory deemed repatriation of foreign earnings. The 2017 Tax Act had no impact on tax expense primarily due to us maintaining a full valuation
allowance against our net deferred tax assets.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for
certain income tax effects of the 2017 Tax Act. We did not identify items with the exception of Internal Revenue Code Section 162(m) noted below
for which the income tax effects of the 2017 Tax Act have not been completed and could not be reasonably estimated as of December 31, 2017, and
as such, our financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is complete.
The Company is in the process of considering the impact of the disallowance of certain incentive based compensation tax deductibility under Internal
Revenue Code Section 162(m) however to the extent an adjustment to the deferred tax asset is required the impact will be offset by a corresponding
adjustment to the valuation allowance.
Note 6 – Accrued Expenses:
Accrued Compensation
Accrued Chiller Cost
Accrued Marketing
Accrued Freight
Accrued Utility
Accrued VAT
Accrued Leadership Transition Expenses (1)
Other Accrued Expenses
December 31,
2017
2016
$
$
3,877,133 $
1,371,940
795,407
354,959
198,000
172,711
—
749,198
7,519,348 $
1,895,443
1,010,018
282,784
359,009
124,000
—
428,150
431,735
4,531,139
(1) Accrued Leadership Transition Costs represent unpaid costs detailed within our former Chief Executive Officer’s separation agreement.
Note 7 – Debt:
On November 13, 2014, the Company entered into senior secured credit facilities (the “Debt Refinancing”) comprised of a five-year $18.0 million
term facility (the “Term Facility”), a three-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 three-year $10.0 million Revolving Facility
56
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remained unchanged, and the $12.0 million term loan commitment earmarked for capital expenditures was increased to $30.0 million.
On September 21, 2017, the Company amended the Loan Agreement (the “New Loan Agreement”) which modified the $10.0 million Revolving
Facility to $30.0 million (the “New Revolving Facility”) and extinguished the $30.0 million Capex Commitments. The New Loan Agreement has a term
of three years and the ability to increase the New Revolving Facility by $10.0 million, with borrowings bearing interest at variable rates.
The Company had $7.5 million outstanding under the existing Credit Facilities prior to closing, which was repaid with proceeds from the New
Revolving Facility and cash on hand. Upon closing, the Company had $5.5 million outstanding and $24.5 million available under the New Revolving
Facility. In connection with this amendment, the Company accelerated the amortization of $0.3 million of unamortized debt issuance costs related to
the existing Loan Agreement. These costs are included in Interest Expense in the twelve months ended December 31, 2017.
The New Revolving Facility matures in September 2020 and borrowings thereunder will bear interest at variable rates depending on the Company’s
election, either at a base rate or at the London Interbank Offered Rate (“LIBOR”), in each case, plus an applicable margin. Subject to the Company’s
leverage ratio, the applicable margin will vary between 0.75% and 1.25% for base rate loans and 1.75% and 2.25% for LIBOR loans.
The New 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.
During the year ended December 31, 2017, the Company borrowed $7.5 million under our Credit Facilities, partially offset by repayments of short-
term borrowing of $14.5 million, and debt issuance costs of $0.3 million . The Company was in compliance with all the covenants in the New Loan
Agreement and had no outstanding debt as of December 31, 2017. Interest expense and fees totaled $0.9 million, $0.7 million, and $0.5 million for
the years ended December 31, 2017, 2016, and 2015, respectively. There was less than $0.1 million of accrued interest on the Credit Facilities as of
December 31, 2017 and 2016.
Note 8 – Commitments and Contingencies:
Commitments – The Company leases office space under non-cancelable operating leases that expire at various dates through June 30, 2024. As of
December 31, 2017, future minimum rentals due under these leases for the next five years were as follows:
2018
2019
2020
2021
2022
2023 and thereafter
December 31,
2017
$
$
966,895
1,531,129
1,599,897
1,637,059
1,598,186
8,023,255
15,356,422
Rent expense related to these non-cancelable operating leases was $480,349, $473,853, and $393,718 for the years ended December 31, 2017,
2016, and 2015, respectively.
Certain of the Company’s executives are covered by employment contracts requiring the Company to pay severance in the event of certain
terminations.
Note 9 – Warrant:
In connection with a loan transaction with a bank prior to 2011, and in consideration thereof, the Company issued to a bank a warrant to purchase up
to an aggregate of 61,117 shares of voting common stock of the Company at a purchase price of $6.28 per share. The warrant was recorded as a
liability with adjustments to fair value recorded in the statement of operations.
57
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The warrant was exercised upon surrender to the Company, on a net basis, such that, with out the exchange of any funds, such holder purchased
that number of shares otherwise issuable upon exercise of its warrant less that number of shares having a current market price at the time of
exercise equal to the aggregate exercise price that would oth erwise have been paid by such holder upon the exercise of the warrant.
The outstanding warrants were converted to common stock in September 2017. Upon conversion, the fair value of the warrant of $588,019 was
recorded to additional paid in capital and common stock. During the year ended December 31, 2017, prior to conversion, the Company recorded
expense of $334,628 in the statement of operations.
Note 10 – Equity Incentive Plans:
Total compensation cost for share-based payments recognized for the years ended December 31, 2017, 2016, and 2015 was approximately
$4,438,181, $4,225,149, and $3,976,423, respectively. Cost of goods sold the year ended December 31, 2017, 2016, and 2015 included share-
based compensation of approximately $243,063, $221,559, and $201,086, respectively. Selling, general, and administrative expense for the year
ended December 31, 2017, 2016, and 2015 included share-based compensation of approximately $4,195,118, $3,971,930, and $3,722,770,
respectively. Capital expenditures recorded during the years ended December 31, 2016 and 2015 for the Freshpet Kitchens expansion project
included share-based compensation of approximately $31,660 and $52,566 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 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, 2017, 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 or an initial public offering registered under the Securities
Act, 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 is 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, 2017, 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, 2017, there were 2,173,343 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
58
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 st ock 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, 2017 is presented below:
Options
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Shares
2,788,285 $
340,618
(1,073,788)
(17,073)
(7,776)
2,030,266 $
677,849 $
Weighted
Average
Exercise Price
Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
8.61
11.00
7.71
10.15
9.01
9.47
9.87
6.6
5.8
$
$
19,323,665
6,242,098
All of the options exercisable at December 31, 2017 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, 2017, 2016, and 2015 were $8,081,050, $1,467,076, and $531,962, respectively.
A summary of the nonvested service period stock options as of December 31, 2017, and changes during the year ended December 31, 2017, is
presented below:
Nonvested as of December 31, 2016
Granted
Vested
Forfeited
Nonvested as of December 31, 2017
Number of Options
Weighted-Average
Grant-Date Fair Value
Per Share
1,346,503
$
340,618
(317,631)
(17,073)
1,352,417
$
5.04
5.61
5.28
5.30
5.12
As of December 31, 2017, there was $4,874,172 of total unrecognized compensation costs related to non-vested service period options, of which
$2,791,187 will be incurred in 2018, $1,471,586 will be incurred in 2019, and the remaining $611,400 will be incurred in 2020.
Performance
Based
Options
—
Performance based option vesting is contingent upon the Company achieving certain annual or cumulative
revenue goals. A summary of performance-based stock options outstanding and changes under the plans during the year ended December 31, 2017
is presented below:
Options
Outstanding at December 31, 2016
Granted
Forfeited
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Weighted
Average
Exercise Price
Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
10.24
13.62
11.46
10.50
9.05
8.4
8.4
$
$
9,755,757
388,618
Shares
1,357,561 $
253,240
(456,408)
1,154,393 $
39,253 $
59
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the nonvested performance-based options as of December 31, 2017, and changes during the year ended December 31, 2017, is
presented below:
Nonvested as of December 31, 2016
Granted
Vested
Forfeited
Nonvested as of December 31, 2017
Number of Options
Weighted-Average
Grant-Date Fair Value
Per Share
1,357,561
$
253,240
(39,253)
(456,408)
1,115,140
$
7.47
6.66
4.52
7.72
7.28
In the years ended December 31, 2016 and 2015, the achievement of certain vesting criteria related to some of the Company’s performance-based
awards under the 2010 and 2014 plans was considered no longer probable. The Company reversed $56,815 and $2,573,484 in the years ended
December 31, 2016 and 2015.
As of December 31, 2017, unrecognized compensation costs related to the 477,624 performance-based awards for which the achievement of the
vesting criteria is considered probable as of December 31, 2017 have performance target dates ranging from December 31, 2017 through December
31, 2020. There was approximately $1,848,245 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 $738,267 will be incurred in 2018, $554,343
will be incurred in 2019, and the remaining $555,635 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, 2016.
Outstanding at December 31, 2016
Granted
Issued Upon Vesting
Forfeited
Outstanding at December 31, 2017
Shares
Weighted-Average
Grant-Date Fair Value
Per Unit
97,515
130,321
(59,183)
(3,413)
165,240
$
$
9.05
11.54
9.05
9.99
10.99
As of December 31, 2017, there was approximately $1,200,973 of total unrecognized compensation costs related to restricted stock units, of which
$625,775 will be incurred in 2018, $426,707 will be incurred in 2019, and $148,490 will be incurred in 2020.
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, 2017, 2016, and 2015 were $6.06, $5.09 and $7.66 per share, respectively.
Expected
Volatility—
For the grants during the year ended December 31, 2013, the expected volatility was based on the historical volatility of the
Company’s common stock.
The Company utilized its historical stock price as an indicator of volatility for all grants prior to 2013. The grants during 2014 all occurred while the
Company was publicly traded. Subsequent to the IPO, we no longer deemed it appropriate to use historical volatility as it was not representative of
the Company’s stock on the public market. As such expected volatility that was utilized was based upon the volatility of a group of similar entities,
referred to as “guideline” companies. As Freshpet has more historical data based on more time as a public company, the historical volatility of
Freshpet becomes a more significant input.
Weighted
Average
Expected
Term
—The Company determined the expected term based on the “shortcut method” described in FASB ASC 718,
Compensation— Stock
Compensation
(an expected term based on the midpoint between the vesting date and the end of the contractual term).
60
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Weighted average exercise price of options granted
Expected volatility
Average expected terms in years
Risk-free interest rate
Expected dividend yield
Note 11 – Net Loss Attributable to Common Stockholders:
$
2017
12.12
Year Ended December 31,
2016
9.71
$
$
45.6% - 50.1%
52.6% - 53.2%
6.5 - 6.6
5.3 - 7.2
1.92% - 1.93%
1.26% - 1.36%
0.0%
0.0%
2015
17.00
45.6%
5.4 - 6.4
1.60%
0.0%
Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common
share 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 years ended December 31, 2017, 2016 and 2014.
In the years ended December 31, 2017, 2016, and 2015, there were no reconciling items between Net Loss/Income and Net Loss attributable to
common stockholders.
The potentially dilutive securities excluded from the determination of diluted loss per share, as their effect is antidilutive, are as follows:
Service Period Stock Options
Restricted Stock Units
Performance
Warrants
Total
Note 12 – Retirement Plan:
Twelve Months Ended December 31,
2017
2016
2015
2,559,532
148,150
39,253
—
2,746,935
2,299,468
65,439
—
61,117
2,426,024
1,991,209
—
—
61,117
2,052,326
The Company sponsors a safe harbor 401(k) plan covering all employees. All employees are eligible to participate. Active participants in the plan
may make contributions of up to 50% of their compensation, subject to certain limitations. Company contributions totaled approximately $594,627 in
2017, $497,731 in 2016, and $380,357 in 2015.
Note 13 – Related Party Transactions:
Payments made to a privately held entity, who is a stockholder of the Company, for the purchase of raw materials totaled approximately $9,069,618
in 2017, $6,565,384 in 2016, and $6,068,038 in 2015. The Company believes that all payments made to the shareholder are at market value and
thus at arms-length .
Note 14 – Concentrations:
Concentration
of
Credit
Risk
—The Company maintains its cash balances in financial institutions that are insured by the Federal Deposit
Insurance Corporation up to $250,000 each. At times, such balances may be in excess of the FDIC insurance limit.
61
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Majo
r
Customers
—In 2017, 2016, and 2015, net sales to one of our distributors which sells directly to three of our customers, accounted for 18%,
23%, and 22% of our net sales, respectively. In both 2017 and 2016, no customers accounted for 10% of our net sales , while for the same period in
2015, one customer accounted for more than 10% of our net sales.
Major
Suppliers
—The Company purchased approximately 24% of its raw materials from one vendor during 2017, approximately 23% of its raw
materials from one vendor during 2016, and approximately 34% of its raw materials from two vendors during 2015.
Of the finished goods product volume not manufactured by us, the Company also purchased approximately 88% of its finished goods from three
vendors in 2017, approximately 89% from four vendors in 2016, and approximately 90% from three vendors in 2015.
The Company purchased approximately 91% of its packaging material from three vendors during 2017, 84% of its packaging material from three
vendors during 2016, and approximately 64% of its packaging material from three vendors during 2015.
Net
Sales
by
Class
of
Retail
—The following table sets forth net sales by class of retail.
Grocery (including Online), Mass and Club
Pet Specialty and Natural
Net Sales
Note 15 – Unaudited Quarterly Results:
Twelve Months Ended December 31,
2016
104,708,513 $
28,345,003
133,053,517 $
2017
126,437,742 $
29,941,468
156,379,210 $
2015
89,131,925
27,054,447
116,186,372
$
$
Unaudited quarterly results for the years ended December 31, 2017, 2016, and 2015 were as follows:
2017:
Net sales
Income/(loss) from operations
Net Income/(loss)
Net Income/(loss) attributable to common stockholders
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
2016:
Net sales
Income/(loss) from operations
Net Income/(loss)
Net Income/(loss) attributable to common stockholders
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
2015:
Net sales
Income/(loss) from operations (1)
Net Income/(loss) (1)
Net Income/(loss) attributable to common stockholders (1)
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
34,513,935
(2,740,471)
(2,879,525)
(2,879,525)
(0.09)
(0.09)
31,453,700
(1,599,195)
(1,771,802)
(1,771,802)
(0.05)
(0.05)
27,054,674
(2,424,578)
(2,587,074)
(2,587,074)
(0.08)
(0.08)
39,968,983
(1,827,121)
(2,652,162)
(2,652,162)
(0.08)
(0.08)
33,002,209
(2,974,942)
(3,243,002)
(3,243,002)
(0.10)
(0.10)
28,359,404
(2,078,083)
(2,228,650)
(2,228,650)
(0.07)
(0.07)
41,199,780
199,024
(245,548)
(245,548)
(0.01)
(0.01)
34,536,151
808,196
620,730
620,730
0.02
0.02
30,570,506
(2,013,698)
(1,675,350)
(1,675,350)
(0.05)
(0.05)
40,696,512
1,617,318
1,514,895
1,514,895
0.04
0.04
34,061,456
1,550,989
1,233,400
1,233,400
0.04
0.04
30,201,788
2,868,688
2,780,262
2,780,262
0.08
0.08
(1)
Fourth quarter 2015 results include the reversal of $2.6 million of share-based compensation expense related to performance-based awards.
See Note 10.
62
ITEM 9. — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9a. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of December 31, 2017. Based on the evaluation of our disclosure controls and procedures as of December 31, 2017, our
Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the
reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in
accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, using the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (1992). This evaluation
was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer. Based on this assessment, management concluded that as of December 31, 2017, the Company’s internal control over financial reporting
was effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-
15(d) of the Exchange Act during the three months ended December 31, 2017 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal
control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable
assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent
limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of
the controls. The 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.
63
ITEM 9b. OTHER INFORMATION
None.
64
P ART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be furnished (and is hereby incorporated by reference) by an amendment hereto or pursuant to a definitive
proxy statement pursuant to Regulation 14A that will contain such information.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be furnished (and is hereby incorporated by reference) by an amendment hereto or pursuant to a definitive
proxy statement pursuant to Regulation 14A that will contain such information.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be furnished (and is hereby incorporated by reference) by an amendment hereto or pursuant to a definitive
proxy statement pursuant to Regulation 14A that will contain such information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
The information required by this item will be furnished (and is hereby incorporated by reference) by an amendment hereto or pursuant to a definitive
proxy statement pursuant to Regulation 14A that will contain such information.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be furnished (and is hereby incorporated by reference) by an amendment hereto or pursuant to a definitive
proxy statement pursuant to Regulation 14A that will contain such information.
65
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
P ART IV
(1)
(2)
(3)
Financial Statements – See Index to the Consolidated Financial Statements appearing on page 46.
Financial Statement Schedules – None.
Exhibits – The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
66
Exhibit No.
3.1
Description
Third Amended and Restated Certificate of Incorporation (incorporated by reference to the Company’s Registration on
Form S-8 filed on December 12, 2014)
EXHIBIT INDEX
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Amended and Restated Bylaws (incorporated by reference to the Company’s Registration on Form S-8 filed on
December 12, 2014)
Warrant Agreement, dated as of October 5, 2007, between the Company and City National Bank, a national banking
association (incorporated by reference to the Company’s Registration Statement on Form S-1filed on September 12,
2014)
Amended and Restated Credit Agreement, dated as of April 12, 2013, among the Company, the several banks and other
lenders from time to time parties to thereto and OneWest Bank, FSB, as administrative agent for the lenders
(incorporated by reference to the Company’s Registration Statement on Form S-1filed on September 12, 2014)
First Amendment to Amended and Restated Credit Agreement, dated as of May 7, 2013, among the Company, the
several banks and other lenders from time to time parties thereto and OneWest Bank, FSB, as administrative agent for
the lenders (incorporated by reference to the Company’s Registration Statement on Form S-1filed on September 12,
2014)
Second Amendment to Amended and Restated Credit Agreement, dated as of July 2, 2013, among the Company, the
several banks and other lenders from time to time parties thereto and OneWest Bank, FSB, as administrative agent for
the lenders (incorporated by reference to the Company’s Registration Statement on Form S-1filed on September 12,
2014)
Third Amendment to Amended and Restated Credit Agreement, dated as of September 30, 2013, among the Company,
the several banks and other lenders from time to time parties thereto and OneWest Bank, FSB, as administrative agent
for the lenders (incorporated by reference to the Company’s Registration Statement on Form S-1filed on September 12,
2014)
Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 28, 2014, among the Company, the
several banks and other lenders from time to time parties thereto and OneWest Bank N.A. (incorporated by reference to
Amendment No. 1 to the Company’s Registration Statement on Form S-1filed on October 2, 2014)
Fifth Amendment to Amended and Restated Credit Agreement, dated as of October 23, 2014, among the Company, the
several banks and other lenders from time to time parties thereto and OneWest Bank N.A. (incorporated by reference to
Amendment No. 2 to the Company’s Registration Statement on Form S-1filed on October 27, 2014)
Third Amended and Restated Loan and Security Agreement by and among Freshpet, Inc. as Borrower, the lenders that
are signatories hereto as the Lenders, and City National Bank, together with its successors and assigns as the Arranger
and Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
filed with the SEC on November 7, 2017)
Freshpet, Inc. 2014 Omnibus Incentive Plan (incorporated by reference to the Company’s Registration Statement on
Form S-8 filed on December 12, 2014)
Professor Connor’s, Inc. 2010 Stock Option Plan (incorporated by reference to the Company’s Registration on Form S-8
filed on December 12, 2014)
Professor Connor’s, Inc. 2006 Stock Plan (incorporated by reference to the Company’s Registration on Form S-8 filed on
December 12, 2014)
Form of Restricted Stock Agreement Pursuant to the Freshpet, Inc. 2014 Omnibus Incentive Plan (incorporated by
reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on October 27, 2014)
Form of Restricted Stock Unit Agreement Pursuant to the Freshpet, Inc. 2014 Omnibus Incentive Plan (incorporated by
reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on October 27, 2014)
67
Exhibit No.
10.13
Description
Form of Incentive Stock Option Agreement Pursuant to the Freshpet, Inc. 2014 Omnibus Incentive Plan (incorporated by
reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on October 27, 2014)
10.14
Form of Nonqualified Stock Option Agreement Pursuant to the Freshpet, Inc. 2014 Omnibus Incentive Plan (incorporated
by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on October 27, 2014)
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Form of Stock Appreciation Rights Agreement Pursuant to the Freshpet, Inc. 2014 Omnibus Incentive Plan (incorporated
by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on October 27, 2014)
Form of Freshpet, Inc. Non-Employee Director Compensation Policy (incorporated by reference to Amendment No. 3 to
the Company’s Registration Statement on Form S-1 filed on November 4, 2014)
Form of Employment Agreement between Richard Thompson and Freshpet, Inc. (incorporated by reference to
Amendment No. 3 to the Company’s Registration Statement on Form S-1 filed on November 4, 2014)
Form of Employment Agreement between Scott Morris and Freshpet, Inc. (incorporated by reference to Amendment No.
3 to the Company’s Registration Statement on Form S-1 filed on November 4, 2014)
Form of Employment Agreement between Cathal Walsh and Freshpet, Inc. (incorporated by reference to Amendment No.
3 to the Company’s Registration Statement on Form S-1 filed on November 4, 2014)
Form of Indemnification Agreement between Freshpet, Inc. and each of its directors and executive officers (incorporated
by reference to Amendment No. 3 to the Company’s Registration Statement on Form S-1 filed on November 4, 2014)
Form of Second Amended and Restated Stockholders Agreement (incorporated by reference to Amendment No. 3 to the
Company’s Registration Statement on Form S-1 filed on November 4, 2014)
Amended and Restated Fee and Reimbursement Agreement among Freshpet, Inc. and the other parties thereto dated as
of April 15, 2013 (incorporated by reference to the Company’s Registration Statement on Form S-1 filed on September
12, 2014)
Amendment No. 1 to the Amended and Restated Fee and Reimbursement Agreement among Freshpet, Inc. and the
other parties thereto dated as of October 9, 2013 (incorporated by reference to the Company’s Registration Statement on
Form S-1 filed on September 12, 2014)
Amendment No. 2 to the Amended and Restated Fee and Reimbursement Agreement among Freshpet, Inc. and the
other parties thereto dated as of April 7, 2014 (incorporated by reference to the Company’s Registration Statement on
Form S-1 filed on September 12, 2014)
Form of Amendment No. 3 to the Amended and Restated Fee and Reimbursement Agreement among Freshpet, Inc. and
the other parties thereto (incorporated by reference to Amendment No. 3 to the Company’s Registration Statement on
Form S-1 filed on November 4, 2014)
10.26
Distribution Agreement between Tyson Foods, Inc. and Freshpet, Inc. dated as of January 6, 2009 (incorporated by
reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on October 27, 2014)
10.27
10.28
10.29
Amendment to the Distribution Agreement between Tyson Foods, Inc. and Freshpet, Inc. dated as of August 8, 2014
(incorporated by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on October
27, 2014)
Form of Selldown Agreement (incorporated by reference to Amendment No. 3 to the Company’s Registration Statement
on Form S-1 filed on November 4, 2014)
Separation and Consulting Agreement, dated as of March 9, 2016, by and between Freshpet, Inc. and Richard
Thompson (incorporated by reference to the Company’s Form 8-K filed on March 9, 2016)
68
Exhibit No.
10.35
21.1*
23.1*
31.1*
31.2*
32.1*
101.INS*
101.SCH*
101.CAL*
101.LAB*
101.PRE*
101.DEF*
* Filed herewith.
Description
Employment Agreement, dated as of July 27, 2016, by and between Freshpet, Inc. and William B. Cyr (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2016)
List of Subsidiaries
Consent of KPMG LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
XBRL Instance Document
XBRL Schema Documents
XBRL Calculation Linkbase Document
XBRL Labels Linkbase Document
XBRL Presentation Linkbase Document
XBRL Definition Linkbase Document
69
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on March 7, 2018.
SIGNATURES
FRESHPET, INC.
By: /s/ Richard Kassar
Name: Richard Kassar
Title: Chief Financial Officer
* * * *
Power of Attorney
Each person whose signature appears below constitutes and appoints Richard Kassar as his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on March 7, 2018.
Signature
/s/ William B. Cyr
William B. Cyr
/s/ Richard Kassar
Richard Kassar
/s/ Charles A. Norris
Charles A. Norris
/s/ J. David Basto
J. David Basto
/s/ Daryl G. Brewster
Daryl G. Brewster
/s/ Lawrence S. Coben
Lawrence S. Coben
/s/ Walter N. George III
Walter N. George III
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Accounting and Financial Officer)
Director
Director
Director
Director
Director
70
/s/ Christopher B. Harned
Christopher B. Harned
/s/ Robert C. King
Robert C. King
/s/ Jonathan S. Marlow
Jonathan S. Marlow
/s/ Craig D. Steeneck
Craig D. Steeneck
Director
Director
Director
Director
71
Exact Name of Subsidiaries of Registrant as Specified in the Subsidiary’s
Charter
Subsidiaries of Freshpet, Inc.
Professor Connors Canada Inc.
FP Foods Realty PA, LLC
Freshpet Europe LTD
Freshpet NE B.V.
Exhibit 21.1
State or Other Jurisdiction of
Incorporation or Organization
Ontario, Canada
Pennsylvania
England and Wales
The Netherlands
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Freshpet, Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-200936) on Form S-8 of Freshpet, Inc. of our report dated
March 7, 2018, with respect to the consolidated balance sheets of Freshpet Inc. and subsidiaries as of December 31, 2017 and 2016, the
related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in
the three year period ended December 31, 2017, which report appears in the December 31, 2017 annual report on Form 10-K of Freshpet, Inc.
/s/ KPMG LLP
Short Hills, New Jersey
March 7, 2018
Exhibit 31.1
I, William B. Cyr, certify that:
1. I have reviewed this annual report on Form 10-K of Freshpet, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: March 7, 2018
2
/s/ William B. Cyr _
William B. Cyr
Chief Executive Officer
Exhibit 31.2
I, Richard Kassar, certify that:
1. I have reviewed this annual report on Form 10-K of Freshpet, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: March 7, 2018
2
/s/ Richard Kassar _
Richard Kassar
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO § 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K of Freshpet, Inc., a Delaware corporation (the
“Company”), for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company as of the dates and for the periods expressed in the Report.
Date: March 7, 2018
/s/ William B. Cyr _
William B. Cyr
Chief Executive Officer
/s/ Richard Kassar _
Richard Kassar
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the
Report or as a separate disclosure document.