EDGAR 10-K Filing

Company CIK: 1611647
Filing Year: 2021
Filename: 1611647_10-K_2021_0001437749-21-003615.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
Freshpet, Inc. (“Freshpet,” the “Company,” "we" or "our") is disrupting the over $38.0 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, 2020, our household penetration within North America was approximately 4 million, with a target of 11 million households by 2025, an increase from our prior target of 8 million. 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 will grow at an average compounded annual growth rate of 5.7% from 2020 to 2025. We believe pet food spending in North America will continue to increase at a similar rate during this same time period. 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 approximately 85 million pet owning households in the United States, which represents approximately 67% of total households, and over 170 million dogs and cats in the United States, according to the American Pet Products Association.
Pet humanization. According to Packaged Facts, 95% 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. According to an American Pet Products Association's Pulse Study published in December 2020, 64% of pet parents feel they are closer/more bonded with their pet due to the COVID-19 pandemic. We believe that pet owners' closer bond to their pets aligns with recent trends, which the COVID-19 pandemic has further accelerated.
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.
Our Opportunity
Even though long-term consumer trends of pet humanization and health and wellness are well documented, conventional pet food sold as dry kibble or wet food in 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 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. Freshpet's carefully selected ingredients and gentle cooking process ensures best-in-class bioavailable nutrition. Hundreds of customer testimonials each year underscore Freshpet's support of a long and healthy life. Further, since founding Freshpet, we have donated over five million fresh meals to pets via shelters, charitable organizations and humane societies. We also participate in Random Acts of Kindness to do our part to improve the lives of pets and pet parents. We also support giving pets a leg-up on living their best life and have donated over ten million fresh meals to pets via shelters, charitable organizations and humane societies.
People
People include our team members, pet parents, and our partners. We treat our team members with respect and are committed to helping them develop professionally and personally. Benefits include industry leading compensation with stock grants and 401k matching for all Freshpet team members in addition to health insurance benefits in the top 5% of plans. These efforts contribute to a net promoter score of 8.3 (90th percentile). Additionally, we strive to be good partners with customers, distributors and suppliers by conducting business with honesty and transparency knowing that we cannot grow without their support.
Planet
We are committed to minimizing our environmental impact while providing the healthiest, tastiest pet food possible. Freshpet Kitchens Bethlehem is a landfill-free facility thanks to state-of-the-art recycling, digesting, and waste-to-energy processes. The electricity used in the Freshpet Kitchens Bethlehem and its refrigerators in its over 22,000 retail locations is matched with 100% U.S. wind energy renewable energy credits. Freshpet's chiller fleet efficiency has improved every year with our latest units being up to 7.5x more efficient than units from just 6 years ago. Nature's Fresh became Freshpet's first carbon neutral brand thanks to our carbon offset partnership with Conservation International. These efforts and more help ensure a healthy planet for generations to come.
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.
Our products are sold under the Freshpet brand name, with ingredients, packaging and labeling customized by different classes of trade and are available in multiple forms.
We also offer fresh treats across all classes of retail under the Dognation and Dog Joy labels.
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. 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 Innovation Center, which is part of our Freshpet Kitchens, helps us ensure that we remain capable of strong innovation including creating new product platforms to expand the breadth of our fresh pet food offerings. We expect that new product introductions and the introduction of new cooking techniques will continue to delight our consumers and 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, Freshpet Kitchens Bethlehem. This 240,000 square foot facility was built to United States Department of Agriculture standards and currently houses five production lines customized to produce fresh, refrigerated food. We are currently in the process of commissioning the sixth and final line which is expected to go live by the first half of 2021.
In 2020 we also made a $15.8 million investment at a manufacturing facility, titled "Freshpet Kitchens South." Freshpet Kitchens South currently has one production line with the space to add more production lines in the future.
In 2020, approximately 99% of our product volume was manufactured with Freshpet owned equipment.
Expansion: Due to the continued growth of the Company’s fresh pet food sales, the Company has plans to continue expanding its manufacturing capacity.
The construction of Freshpet Kitchens Ennis, located in Ennis, Texas, began in 2020. We expect initial production to begin by the first half of 2022.
We are also expanding our capacity capabilities at Freshpet Kitchens South.
Ingredients and Packaging: Our products are made with natural and fresh ingredients including meat, vegetables, fruits, whole grains, vitamins and minerals. Over 60% of our ingredients are sourced locally from within a 200 mile radius of the Freshpet Kitchens, and 96% are from North America. We maintain rigorous standards for ingredient quality and safety. By volume, our largest input, fresh chicken, represents approximately 48% 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: 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. For certain retailers, we use national and regional distributors.
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 13 salaried quality assurance supervisors, specialists and analysts, and 32 quality technicians 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. Before commencing production, 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.
Our Customers and Distributors
We sell our products throughout the 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 approximately 22,700 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 2020, our largest distributor by net sales, McLane Company, Inc., accounted for 18% of our net sales and our largest customer, Target, accounted for 8% 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 manufacturer warranty of three years. Our refrigerators are designed to be highly reliable, and at any given time less than 0.5% 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 Fridges transmitted back to Freshpet for review by members of our sales team.
We currently estimate less than 12 month cash-on-cash payback for the average Freshpet Fridge installation, calculated by comparing our total current costs for a refrigerator (including installation) 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, allowing 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. Our total chiller fleet at retailers covers over one million cubic feet of space.
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 fridges at approximately 22,700 retail 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 locations 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, TikTok 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.
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 General Mills. 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 & Human Capital Resources
We desire to progress towards a fair, healthy and safe workplace, while creating work environment policies that promote diversity, equality and inclusion for our valued employees. We believe that when we create a workplace where our colleagues are engaged, committed and empowered for the long-term, we are better positioned to create value for our Company, as well as for our stockholders. We are proud of our focus on promoting human rights across our operations - from our supply chain to our products - and are committed to build our business on a foundation of ethics.
Attracting and retaining talent at all levels is vital to continuing our success. We promote work-life balance of our employees, we invest in our employees through high-quality benefits and various health and wellness initiatives, and we have created a healthy work environment in our offices. In order to incentivize and engage our workforce, Freshpet provides:
● Industry-leading compensation, including stock compensation for every employee ● Industry-leading healthcare offered equitably for every employee
● Multi-year equity grants to "One-of -a-Kind Talent" employees identified by the Board ● Competitive perquisites, including pet insurance, free healthy snack room and catered lunches
● 401(k) matching for every employee ● Rigorous focus on Diversity & Inclusion to create an inclusive culture to attract, engage and retain our diverse talent
As of December 31, 2020, we had 591 employees, of which all but seven 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.
Our Corporate Information
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.
Website Information
The address of our corporate website is www.freshpet.com. Our annual reports, annual proxy statements and related proxy cards are made available on our website at the same time they are mailed to stockholders. Our annual reports on Form 10-K, 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. The SEC 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, Vital, Nature’s Fresh, Roasted Meals, Fresh From The Kitchen, Freshpet Dog Joy, Dognation, Homestyle Creations and Pets People Planet.
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.
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 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.
During Q1 2020, the Company has began to upgrade its ERP system. This upgrade process is expected to run through Q4 of 2021.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. The following is a discussion of the risks, uncertainties and assumptions that we believe are material to our business, which should be considered in conjunction with 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. While the risks are organized by headers, and each risk is discussed separately, many are interrelated. 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 the COVID-19 Outbreak
The COVID-19 outbreak has had a material impact on the U.S. and global economies and could have a material adverse impact on our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations.
In December 2019, a novel coronavirus disease ("COVID-19") was reported and by March 2020, the WHO had characterized COVID-19 as a pandemic. While the COVID-19 outbreak has not negatively impacted our sales to date, it is impossible to predict the impact of the pandemic going forward. Continued quarantines, government restrictions on movements, rollout of vaccines or other governmental or societal responses could impact our business in the future, perhaps materially.
The COVID-19 pandemic could disrupt our third party business partners' ability to meet their obligations to us, which may negatively affect our operations. These third parties include those who supply our ingredients, packaging, and other necessary operating materials, contract manufacturers, distributors, and logistics and transportation services providers. As a result of the continued COVID-19 outbreak, global supply may become constrained, which may cause the price of certain ingredients and raw materials used in our products to increase and/or we may experience disruptions to our operations.
Workforce limitations and travel restrictions resulting from COVID-19 and related government actions have in the past, and may in the future, affect many aspects of our business. If a significant percentage of our workforce or any key employees are unable to work, including because of illness or travel or government restrictions in connection with the COVID-19 pandemic, our operations, including manufacturing at our Freshpet Kitchens, may be negatively affected. Additionally, the Company has incurred, and may continue to incur, additional costs related to initiatives that increase workplace safety and attempt to minimize potential manufacturing shutdowns.
Our results of operations depend on, among other things, our ability to maintain and increase sales volume with our existing retail customers and consumers, and to attract new customers and consumers. Our ability to implement our advertising, increase our distribution, and innovate new products that are designed to increase and maintain sales volumes may be negatively affected as a result of decreased retailer traffic, modifications to retailer shelf reset timing or other activities during the COVID-19 outbreak. Retailers may also alter their normal inventory receiving and product restocking practices during pandemics, epidemics or disease outbreaks such as COVID-19, which may negatively impact our business.
Adverse and uncertain economic conditions, such as decreases in per capita income or the level of disposable income, increased unemployment or a decline in consumer confidence as a result of the COVID-19 outbreak, could have an adverse effect on distributor, retailer and consumer demand for our products. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns. Prolonged unfavorable economic conditions, including as a result of COVID-19 or similar outbreaks, and any resulting recession or slowed economic growth, may have an adverse effect on our sales and profitability.
Towards the second half of Q1 2020, consumer demand for our products surged, primarily as a result of our end consumers stocking up on our products and increased pet adoption during the pandemic. During the initial surge, we could not fulfill demand for all of our product orders. If future surges outpace our capacity build or occur at unexpected times, we may be unable to fully meet our consumers' and customers' demands for our products. We cannot guarantee that the additional demand we have experienced for our products during COVID-19 will continue when the pandemic ends.
The future impact of COVID-19 on our business, including the duration of the pandemic and governmental and societal responses, are impossible to predict and could materially impact our business, financial condition and results of operations.
Risks Related to our Growth Strategy
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 by attracting new consumers to our brand, expanding distribution through the installation of new Freshpet Fridges 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:
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implement our marketing strategy;
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expand and maintain brand loyalty;
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partner with customers to secure space for our Freshpet Fridges;
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develop new product lines and extensions;
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partner with distributors to deliver our products to customers;
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continue to compete effectively in multiple classes of retail, including grocery (including online), mass, club, pet specialty and natural; and
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build capacity to meet demands.
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 our contractual restrictions.
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. From time to time, we may seek to raise additional capital by accessing the debt and/or equity markets to fund capital expenditures or otherwise. 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. For additional possible effects of such offerings, see "Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities, which 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."
Risks Related to Competition in Our Industry
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.
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.
Risks Related to our Products and Customers
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. 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. Failure to develop and market new products that appeal to consumers and meet our objectives could negatively impact our business, financial condition and results of operations.
If we fail to develop and maintain our brand, or the quality of our products that customers have come to expect, our business could suffer.
We believe that developing and maintaining our brand and the quality of our products is critical to our success. The importance of our brand recognition and the quality of our products may become even greater as competitors offer more products similar to ours. Our financial success is directly dependent on consumer perception of our brand and our products. Our brand-building activities involve providing high-quality products, 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 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 2020, ten customers, who purchase either directly from us or through third-party distributors, collectively accounted for approximately 70% of our net sales. This percentage 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 (including due to the COVID-19 pandemic), 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. To the extent customers seek to reduce their usual or customary inventory levels 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 reduction could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to maintain or increase prices for our products, our results of operations may be adversely affected.
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.
If our products are alleged to cause injury or illness, be mislabeled or misbranded, 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. For example, we have had legal claims brought against us in California for our use of the word “natural” in describing certain of our products. 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 quality or 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 or legal challenges, hurt the value of our brands, lead to a decline in consumer confidence in and demand for our products, and lead to increased scrutiny, fines, or other penalties 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 harm our brand image, be costly and time-consuming and may require management to spend time defending the claims rather than operating our business.
Risks Related to our Manufacturing and Supply Chain
Our manufacturing capacity and expansion plans could have a material adverse effect on our business, financial condition and results of operations.
Due to limited manufacturing capacity and our continued growth, the Company is expanding its manufacturing capacity. See "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations - Recent Developments - Supporting Freshpet's Growth." 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. 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 accurately align our manufacturing capabilities with demand, it could have a material adverse effect on our business, financial condition and results of operations.
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. For example, during Q4 2020, we experienced a delay in our distribution chain due to winter storms in the Northeastern United States, which negatively impacted our results of operations for Q4 2020.
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.
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.
Restrictions imposed in reaction to outbreaks of animal diseases could have a material adverse effect on our business, 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 certain 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 certain 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 (including due to COVID-19), 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 demand 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.
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.
Risks Related to Government Regulation and Legal Proceedings
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, such as products being mislabeled or misbranded. 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.
From time to time, we may be subject to litigation, government investigations or governmental proceedings, which may adversely impact our results of operations and financial condition.
From time to time, we have been and may continue to be involved in various legal, regulatory or administrative investigations, negotiations or proceedings arising in the normal course of business. In the event of litigation, government investigations or governmental proceedings, we are subject to the inherent risks and uncertainties that may result if outcomes differ from our expectations. In the event of adverse outcomes in any litigation, investigation or government proceeding, we could be required to pay substantial damages, fines or penalties and cease certain practices or activities, which could materially harm our business. For example, 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 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.
Risks Related to Intellectual Property
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.
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 trademarks 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 competitors 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.
Further, 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, (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.
Risks Related to our International Operations
We may face difficulties as we expand into countries in which we have no prior operating experience.
In recent years, we have expanded our global footprint by entering into new markets and may expand into additional markets in the future. For example, we currently do business with three retailers in the United Kingdom, where our products are selling in 390 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.
In addition, our expansion into new countries may require significant resources and the efforts and attention of our management and other personnel, which will divert resources from our existing business operations. As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our operations outside of the United States and Canada.
Risks Related to Environmental Regulation and Environmental Risks
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.
Risks Related to Information Technology and Cyber Security
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. 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.
Risks Related to Our NOLs
We may be unable to use some or all of our net operating loss carryforwards, which could adversely affect our financial results.
As of December 31, 2020, we had federal net operating loss (“NOLs”) carryforwards of approximately $239.8 million and state NOLs of approximately $189.8 million that we may use to offset against taxable income for U.S. federal and state income tax purposes, respectively. In general, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its “pre-ownership change” 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 or sales of our common stock in amounts greater than specified levels, which are generally 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. In addition, under the tax reform bill commonly known as the Tax Cuts and Jobs Act, (i) the amount of NOLs generated in taxable years beginning after December 31, 2017 that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, and (ii) NOLs generated in taxable years beginning after December 31, 2017 cannot be carried back to prior taxable years. 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.
Risks Related to LIBOR Phase-out
Certain of our variable rate indebtedness uses LIBOR as a benchmark, which is subject to regulatory uncertainty that could increase the cost of our variable rate indebtedness.
Certain of our variable rate indebtedness uses LIBOR as a benchmark for establishing the rate of interest and may be hedged with LIBOR-based interest rate derivatives. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. In 2017, the U.K.'s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established. If LIBOR ceases to exist or is materially altered, this change could have an adverse effect on our financing costs by increasing the cost of our variable rate indebtedness.
Risks Related to Ownership of Our Common Stock
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.
Our quarterly operating results may fluctuate significantly, including because of the risks described in this "Risks Factors" section. Accordingly, results for any one period are not necessarily indicative of results to be expected for any future period. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price 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.
The trading price of our common stock has been, and may continue to be, volatile, and you may not be able to resell your shares at or above the purchase price. Such volatility could be based on various factors relating to our Company and industry, including those described in this “Risks Factors" section.
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 have defended against such lawsuits in the past.
Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.
As of December 31, 2020, we had 40,718,240 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.
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. 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. The Company and its shareholders are in the process of a 5 year governance transition plan that if approved and implemented, would remove many of these restrictions.
Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities, which 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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our corporate headquarters, located in Secaucus, New Jersey and consisting of approximately 24,000 square feet of office space, is subject to a lease agreement that expires on June 30, 2024.
We own the Freshpet Kitchens Bethlehem ("Kitchens 1.0" and "Kitchens 2.0"). Kitchens 1.0 is approximately a 100,000 square-foot manufacturing facility, and Kitchens 2.0 is approximately a 140,000 square foot manufacturing facility, each located in Bethlehem, Pennsylvania (together, the "Freshpet Kitchens Bethlehem"). We believe that our properties have been adequately maintained, are in good condition generally and are suitable and adequate for our business as presently conducted.
Additionally we own a second location in Ennis, Texas ("Freshpet Kitchens Ennis"), which is in the process of being constructed. We are currently in the initial design and engineering phase for Freshpet Kitchens Ennis. We expect initial production to begin by the first quarter of 2022. For additional information on our production facilities, see "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operation - Recent Developments - Supporting Freshpet's Growth."

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
We are party to litigation proceedings. While the results of such litigation proceedings cannot be predicted with certainty, management believes that the final outcome will not have a material adverse effect on our financial condition, results of operations or cash flows. See also “Item 1A. Risk Factors” and Note 9 to our Consolidated Financial Statements for a discussion of certain legal proceedings involving the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for registrant’s common equity, related stockholder matters and issueR purchases of equity secuRIties
Market Information
Shares of our common stock are publicly traded on the Nasdaq Global Market under the symbol "FRPT".
The number of stockholders of record of our common stock as of February 18, 2021 was 261. This number excludes stockholders whose stock is held in nominee or street name by brokers.
Dividend Policy
Since we became a publicly traded company in 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.
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 five year period ended December 31, 2020. The graph assumes that $100 was invested on December 31, 2015, in each of our common stock, the NASDAQ Composite and the Russell 3000. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.
Date
Freshpet, Inc.
NASDAQ Composite
Russell 3000
31-Dec-15
$ 100.00
$ 100.00
$ 100.00
31-Dec-16
$ 119.55
$ 107.50
$ 110.42
31-Dec-17
$ 223.20
$ 137.86
$ 131.23
31-Dec-18
$ 378.80
$ 132.51
$ 122.06
31-Dec-19
$ 696.00
$ 179.19
$ 156.89
31-Dec-20
$ 1,672.44
$ 257.38
$ 186.42

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 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. For more information regarding our consolidated results and liquidity and capital resources for the year ended December 31, 2019 as compared to the year ended December 31, 2018, refer to "Part II-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Annual Report on Form 10-K, which information is incorporated herein by reference.
Overview
We started Freshpet with a single-minded mission to bring the power of real, fresh food to our dogs and cats. We were inspired by the rapidly growing view among pet owners that their dogs and cats are a part of their family, leading them to demand healthier pet food choices. Since 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
Observations on the Effects of COVID-19
In December 2019, a novel coronavirus disease ("COVID-19") was reported, and by March 2020, the World Health Organization ("WHO") had characterized COVID-19 as a pandemic.
Due to COVID-19, our retail customers experienced a surge in consumption as consumers stocked up on food and necessities towards the second half of Q1 2020. The unexpected surge in consumption caused a spike in orders which at times were greater than our production capacity.
At the end of Q1, we announced our post-surge pivot. That strategic pivot was built on a foundation that said, if we could keep our employees safe, then we could rebuild our supply and that would enable us to replenish our product supply in retail stores, which would allow us to turn to our advertising to drive consumption and household penetrations gains. As a result, we invested in each of those areas, including safety enhancement to protect our team, incremental capacity at Freshpet Kitchens South, incremental retail coverage, new e-commerce purchase and delivery options and additional media advertising.
The Company made and continues to make investments designed to protect its team members. These efforts include taking the temperature of every team member and administering a brief health screening before entering our Freshpet Kitchens, installing increased space for social distancing, instituting staggered shifts, enhancing daily sanitation efforts and weekly deep cleaning of all common areas, requiring use of face coverings by all employees, and limiting visitors, who must also submit to a health check before entering the facilities.
Despite the COVID-19 related disruptions, our ability to bring the power of fresh to pet parents has continued, in part due to our post-surge pivot. Consumers' increased interest in their pets, the strong appeal of the Freshpet idea and products, our ability to continuously run our manufacturing facilities and successfully add capacity, the increased impact of our advertising, and our customers' realization of the value that Freshpet brings to their pet food category offerings and stores has resulted in some of our strongest growth. As noted above, the unexpected surge in consumption towards the second half of Q1 2020, as well as the subsequent strong growth, has caused us to draw down on trade inventory and have higher out of stocks than usual. With the additional capacity brought on during Q2 through Q4, as well as Freshpet Kitchens 2.0 beginning production in October 2020, we believe we will be able to rebuild our trade inventory and decrease our out of stocks during the first half of 2021.
We are unsure how long the COVID-19 pandemic will require us to absorb higher costs to protect and reward our employees while simultaneously ensuring we can support our pet parents with a continual supply of Freshpet products. We are also monitoring our supply of raw materials, ingredients and packaging materials. Although we have not experienced any extended supply interruptions to date and our chicken prices for the year are fixed contractually, subject to limited exceptions, we have used our secondary suppliers from time-to-time, and have also experienced higher beef prices as a result of reduced supplies. As of December 31, 2020, COVID-19 related expenses were $3.9 million.
We will continue to monitor the retail environment and pet parent demand, and intend to adapt to changing conditions to continue to drive growth and meet our goal of "changing the way people feed their pets forever" during the evolving COVID-19 pandemic.
Supporting Freshpet's Growth
At the Company's February 2020 Investor Day, Freshpet presented its "Feed the Growth - 5 by 2025" strategic plan. The plan looked to add 5 million more households by 2025, for a total 8 million households. During 2020, the Company continued to see increased sales growth and household penetration despite capacity limits and less than planned advertising spend. As a result, the Company is raising its 2025 household penetration target from 8 million to 11 million households. To support the strategic plan Freshpet is committed to invest in production capacity as well as upgrades to our systems and processes. The Company is continuously evaluating its ability to feed as many pets as possible and minimize its impact on the environment, and will continue to make investments that provides the necessary returns on its investments to deliver on Pets, People, Planet.
Manufacturing Site Manufacturing Capability Investments to be Made
Freshpet Kitchens Bethlehem Kitchens 1.0
Kitchens 1.0 is approximately a 100,000 square-foot manufacturing facility in Bethlehem, PA. It has 4 manufacturing lines, each of which has the ability to produce our Freshpet Recipes 7 days a week/24 hours a day.
Kitchens 2.0
Kitchens 2.0 is a 140,000 square-foot addition to our Bethlehem, PA campus. It will have two manufacturing lines. Freshpet Kitchens 2.0 will make greater use of automation to improve quality, safety and reduce costs. In addition Kitchens 2.0 delivers on our commitment to continue to minimize our manufacturing impact. Production of saleable product began in October 2020. Freshpet Kitchens 2.0 is expected to produce at full capacity by the middle of 2021.
Kitchens 2.0 will cost $115.0 million when fully completed. To date, we have invested approximately $104.5 million, with the remaining spend to be incurred in the first half of 2021.
Freshpet Kitchens South During 2020, the Company officially opened a manufacturing facility called "Freshpet Kitchens South," which cooked its first meal in February 2020.
In order to ensure we are able to deliver on projected growth, the Company is also looking to add additional manufacturing lines. The capacity build out is expected to occur in two phases.
By the end of 2021, we expect the first phase of Freshpet Kitchens South to be completed. By the start of 2023, we expect the second phase to be completed which includes a second building that will house additional manufacturing lines.
During 2020, the Company invested approximately $15.8 million. From 2021 to 2023, we expect to make an additional investment of $180 million to complete phase 1 and phase 2.
Freshpet Kitchens Ennis During the end of 2019, the Company started its initial design and engineering phase of Kitchens Ennis, which sits on 74 acres in Ennis, Texas. We expect initial production to begin by the first half of 2022.
Projected spend on the project is $530 to $600 million. We have invested approximately $31.0 million in the project to date.
Additionally, the Company is upgrading its enterprise resource planning ("ERP") system. The project commenced in Q1 2020 and is expected to run through Q4 of 2021.
On February 19, 2021, the Company entered into the Sixth Amended and Restated Loan and Security Agreement, by and among the Company, as borrower, City National Bank, as the arranger and administrative agent, and the lenders party thereto (the "New Loan Agreement"), which amends and restates in full the Company's Fifth Amended and Restated Loan and Security Agreement. The New Loan Agreement provides for a $350 million senior secured credit facility, encompassing a $300 million delayed draw term loan facility and a $50 million revolving loan facility, which replaces the Company's prior $130 million delayed draw term loan facility and $35 million revolving loan facility.
To meet our capital needs, we expect to rely on our current and future cash flow from operations, our available borrowing capacity, and access to the debt and equity markets, where appropriate.
Components of our Results of Operations
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 parts of Europe and have installed Freshpet Fridges in approximately 22,700 retail stores as of December 31, 2020. 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.
●
Increasing penetration of Freshpet Fridge locations in major classes of retail, including grocery (including online), mass, club, pet specialty and natural. The impact of new Freshpet Fridge installations on our net sales varies by retail class and depends on numerous factors including store traffic, refrigerator size, placement within the store and proximity to other stores that carry our products.
●
Consumer trends including growing pet ownership, pet humanization and a focus on health and wellness.
We believe that as a result of the above key factors, we will continue to penetrate the pet food marketplace and increase our share of the pet food category.
Gross Profit
Our gross profit is net of costs of goods sold, which include the costs of product manufacturing, product ingredients, packaging materials, inbound freight and depreciation.
Our gross profit margins are also impacted by the cost of ingredients, packaging materials, labor and overhead, and share-based compensation related to direct labor and overhead. We expect to mitigate any adverse movement in input costs through a combination of cost management and price increases.
Selling, General and Administrative Expenses
Due to our Feed the Growth initiative, which has increased our investment level in media to drive growth, our selling, general and administrative (“SG&A”) expenses as a percentage of net sales has decreased. SG&A as a percentage of net sales was 49.1% in 2018, 46.6% in 2019 and 42.3% in 2020. We believe that as we continue to realize the benefits of our Feed the Growth initiative, SG&A expenses will continue to decrease as a percentage of net sales.
Our selling, general and administrative expenses consist of the following:
Outbound freight. We utilize a third-party logistics provider for outbound freight that ships directly to retailers as well as third-party distributors.
Marketing & advertising. Our marketing and advertising expenses primarily consist of national television media, digital marketing, social media and grass roots marketing to drive brand awareness. These expenses may vary from quarter to quarter depending on the timing of our marketing and advertising campaigns. Our Feed the Growth initiative will focus on growing the business through increased marketing investments.
Freshpet Fridge operating costs. Freshpet Fridge operating costs consist of repair costs and depreciation. The purchase and installation costs for new Freshpet Fridges are capitalized and depreciated over the estimated useful life. All new refrigerators are covered by a manufacturer warranty for three years. We subsequently incur maintenance and freight costs for repairs and refurbishments handled by third-party service providers.
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 products 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.
Share-based compensation. We account for all share-based compensation payments issued to employees, directors and non-employees using a fair value method. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the grant date. We recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to us using the straight-line basis.
Other general & administrative costs. Other general and administrative costs include plant salaried and non-plant personnel salaries and benefits, as well as corporate general & administrative costs.
Income Taxes
We had federal net operating loss (“NOL”) carry forwards of approximately $239.8 million as of December 31, 2020, of which, approximately $175.0 million, generated in 2017 and prior, will expire between 2025 and 2037. The NOL generated in 2018, 2019 and 2020, of approximately $64.4 million, will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. We may be subject to 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, 2020, we had approximately $189.8 million of state NOLs, which expire between 2020 and 2038. At December 31, 2020, 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
Twelve Months Ended December 31,
Amount
% of Net Sales
Amount
% of Net Sales
Amount
% of Net Sales
(Dollars in thousands)
Net sales
$ 318,790
%
$ 245,862
%
$ 193,237
%
Cost of goods sold
185,880
131,665
103,247
Gross profit
132,910
114,197
89,990
Selling, general and administrative expenses
134,908
114,450
94,876
Income (Loss) from operations
(1,998 )
(1 )
(253 )
(0 )
(4,886 )
(3 )
Other income/(expenses), net
(102 )
(0 )
Interest expense
(1,212 )
(0 )
(991 )
(0 )
(296 )
Income (Loss) before income taxes
(3,123 )
(1 )
(1,239 )
(1 )
(5,284 )
(3 )
Income tax expense
Net Income (loss)
$ (3,188 )
(1 )%
$ (1,383 )
(1 )%
$ (5,361 )
(3 )%
Twelve Months Ended December 31, 2020 Compared To Twelve Months Ended December 31, 2019
Net Sales
The following table sets forth net sales by class of retail:
Year Ended December 31,
% of
% of
Amount
Net Sales
Store Count
Amount
Net Sales
Store Count
(Dollars in thousands)
Grocery (including Online), Mass and Club (1)
$ 272,008
%
17,770
$ 206,550
%
16,278
Pet Specialty and Natural (2)
46,782
%
4,946
39,312
%
5,292
Net Sales
$ 318,790
%
22,716
$ 245,862
%
21,570
(1)
Stores at December 31, 2020 and December 31, 2019 consisted of 12,560 and 11,315 grocery (including online) and 5,210 and 4,963 mass and club, respectively.
(2)
Stores at December 31, 2020 and December 31, 2019 consisted of 4,470 and 4,837 pet specialty and 476 and 455 natural, respectively.
Net sales increased $72.9 million, or 29.7%, to $318.8 million for the twelve months ended December 31, 2020 as compared to the same period in the prior year. The $72.9 million increase in net sales was driven by growth in the Grocery (including Online), Mass, and Club refrigerated channel of $65.4 million, and Pet Specialty and Natural of $7.5 million. The net sales increase was driven by overall velocity gains and an increase of Freshpet Fridges store locations, which grew by 5.3% from 21,570 as of December 31, 2019 to 22,716 as of December 31, 2020.
Gross Profit
Gross profit increased $18.7 million, or 16.4%, to $132.9 million for the twelve months ended December 31, 2020 as compared to the same period in the prior year. The increase in gross profit was primarily driven by higher net sales offset by decreased gross margin.
Our gross profit margin of 41.7% for the twelve months ended December 31, 2020, was a decrease of 470 basis points compared to the same period in the prior year, due to plant start-up cost of 190 basis points, COVID-19 related cost of 110 basis points, increased processing cost of 100 basis points, increased depreciation and stock compensation cost of 70 basis points, increased beef input cost of 70 basis points, partially offset by increase in sales price and shifting selling mix of 70 basis points.
Adjusted Gross Profit was $154.1 million and $121.5 million in the years ended December 31, 2020 and 2019, respectively. Adjusted Gross Profit Margin as a percentage of net sales was 48.3% and 49.4% in the years ended December 31, 2020 and 2019, respectively. Adjusted Gross Profit excludes $9.6 million of depreciation and amortization expense, $6.0 million of plant start-up expense, $2.1 million of non-cash share-based compensation and $3.5 million of COVID-19 expense in 2020 and excludes $6.4 million of depreciation and amortization expense and $0.9 million of non-cash share-based compensation in 2019. See “-Non-GAAP Financial Measures” for how we define Adjusted Gross Profit and a reconciliation of Adjusted Gross Profit to Gross Profit, the closest comparable U.S. GAAP measure.
Selling, General and Administrative Expenses
SG&A expenses increased $20.5 million, or 17.9%, to $134.9 million for the twelve months ended December 31, 2020 as compared to the same period in the prior year. Key components of the dollar increase include higher media spend of $3.2 million, increased variable cost due to volume of $7.9 million, which includes freight cost and brokerage, higher depreciation and share-based compensation expense of $3.4 million, increased loss on disposal of assets of $1.0 million, cost associated with implementation of new ERP of $1.7 million, COVID-19 cost of $0.4 million, increased selling expense of $1.1 million and higher incremental operating expenses of $2.3 million, offset by lower launch expense of $1.1 million. The increased operating expenses were primarily due to new hires and increased employee benefit costs. As a percentage of net sales, selling, general and administrative expenses decreased to 42.0% for the twelve months ended December 31, 2020 from 46.6% for the twelve months ended December 31, 2019.
Adjusted SG&A Expenses was $107.2 million and $92.5 million in the years ended December 31, 2020 and 2019, respectively. Adjusted SG&A Expenses decreased as a percentage of net sales to 33.7% in the year ended December 31, 2020 as compared to 37.6% of net sales in the year ended December 31, 2019. The decrease of 400 basis points in Adjusted SG&A Expenses is a result of 220 basis point gain in SG&A leverage and 180 basis point increase related to media ad spend decrease as a percentage of net sales. Adjusted SG&A Expenses excludes $11.5 million of depreciation and amortization expense, $8.8 million of non-cash share-based compensation, $3.4 million of launch expense, $1.8 million of loss on disposal of equipment, $0.1 million of equity offering expenses, $1.7 million in enterprise resource planning expense, and $0.4 million in COVID-19 expenses in 2020, while excluding $9.6 million of depreciation and amortization expense, $6.9 million of non-cash share-based compensation, $4.6 million of launch expense, $0.6 million of loss on disposal of equipment, and $0.3 million of equity offering expenses in 2019. 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 $1.7 million from a loss of $0.3 million for the twelve months ended December 31, 2019 to a loss of $2.0 million for the twelve months ended December 31, 2020 as a result of the factors discussed above.
Interest Expense
Interest expense was $1.2 million and $1.0 million for the twelve months ended December 31, 2020 and 2019, respectively, relating primarily to our credit facilities. See “-Liquidity and Capital Resources.”
Other Income/(Expenses), net
Other income/(expenses), net increased $0.1 million from an income of less than $0.1 million for the twelve months ended December 31, 2019 to income of $0.1 million for the twelve months ended December 31, 2020.
Net Loss
Net loss increased $1.8 million, or 130.6%, to net loss of $3.2 million for the twelve months ended December 31, 2020 as compared to net loss of $1.4 million for the same period in the prior year. Net loss was 1.0% of net sales for the twelve months ended December 31, 2020 as compared to a net loss of 0.6% of net sales for the same period in the prior year.
Adjusted EBITDA
Adjusted EBITDA increased $17.7 million from $29.2 million for the twelve months ended December 31, 2019 to $46.9 million for the twelve months ended December 31, 2020. Adjusted EBITDA as a percentage of net sales increased 280 basis points from 11.9% for the twelve months ended December 31, 2019 to 14.7% for the twelve months ended December 31, 2020. The increase is a result of leverage gain on Adjusted SG&A excluding media of 220 basis points and decreased media spend as part of our Feed the Growth initiative of 170 basis points, partially offset by a decrease in Adjusted Gross Margin of 110 basis points.
Non-GAAP Financial Measures
Freshpet uses the following non-GAAP financial measures in its financial communications. These non-GAAP financial measures should be considered as supplements to the GAAP reported measures, should not be considered replacements for, or superior to, the GAAP measures and may not be comparable to similarly named measures used by other companies.
•
Adjusted Gross Profit
•
Adjusted Gross Profit as a percentage of net sales
•
Adjusted SG&A expenses
•
Adjusted SG&A expenses as a percentage of net sales
•
EBITDA
•
Adjusted EBITDA
•
Adjusted EBITDA as a percentage of net sales
Such financial measures are not financial measures prepared in accordance with U.S. GAAP. We define Adjusted Gross Profit as Gross Profit before non-cash depreciation expense, plant start-up expenses, non-cash share-based compensation and COVID-19 expenses. We define Adjusted SG&A as SG&A expenses before depreciation and amortization expense, non-cash share-based compensation, launch expense, net gain/loss on disposal of equipment, equity offering expenses, implementation and other costs associated with the implementation of an ERP system, litigation expenses, and COVID-19 expenses. EBITDA represents net income (loss) plus interest expense, income tax expense, and depreciation and amortization. Adjusted EBITDA represents EBITDA plus net gain/loss on disposal of equipment, non-cash share-based compensation, launch expenses, plant start-up expenses, equity offering expenses, implementation and other costs associated with the implementation of an ERP system, litigation expenses and COVID-19 expenses. We have changed our method for calculating Adjusted Gross Profit, Adjusted SG&A and Adjusted EBITDA in light of certain non-recurring expenses related to the COVID-19 pandemic and in light of the implementation of a new ERP system.
We believe that each of these non-GAAP financial measures provide additional metrics to evaluate our operations and, when considered with both our U.S. GAAP results and the reconciliation to the closest comparable U.S. GAAP measures, provide a more complete understanding of our business than could be obtained absent this disclosure. We use the non-GAAP financial measures, together with U.S. GAAP financial measures, such as net sales, gross profit margins and cash flow from operations, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our operating performance and to compare our performance to that of our peers and competitors.
Adjusted EBITDA is also an important component of internal budgeting and setting management compensation.
The non-GAAP financial measures are presented here because we believe they are useful to investors in assessing the operating performance of our business without the effect of non-cash items, and other items as detailed below. The non-GAAP financial measures should not be considered in isolation or as alternatives to net income (loss), income (loss) from operations or any other measure of financial performance calculated and prescribed in accordance with U.S. GAAP. Neither EBITDA nor Adjusted EBITDA should be considered a measure of discretionary cash available to us to invest in the growth of our business. Our non-GAAP financial measures may not be comparable to similarly titled measures in other organizations because other organizations may not calculate non-GAAP financial measures in the same manner as we do.
Our presentation of the non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. We recognize that the non-GAAP financial measures have limitations as analytical financial measures. For example, the non-GAAP financial measures do not reflect:
●
our capital expenditures or future requirements for capital expenditures;
●
the interest expense, or the cash requirements necessary to service interest expense or principal payments, associated with indebtedness;
●
depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor any cash requirements for such replacements; and
●
changes in 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:
Twelve Months Ended December 31,
(Dollars in thousands)
Net loss
$ (3,188 )
$ (1,383 )
$ (5,361 )
Depreciation and amortization
21,125
15,921
14,068
Interest expense
1,211
Income tax expense
EBITDA
$ 19,213
$ 15,673
$ 9,080
Loss on disposal of equipment
1,805
Non-cash share-based compensation
10,925
7,834
6,808
Launch expense (a)
3,421
4,563
3,540
Plant start-up expenses (b)
5,962
-
-
Equity offering fees (c)
Enterprise Resource Planning (d)
1,682
-
-
Litigation expense (e)
-
-
COVID-19 expense (f)
3,854
-
-
Adjusted EBITDA
$ 46,920
$ 29,159
$ 20,280
Adjusted EBITDA as a % of Net Sales
14.7 %
11.9 %
10.5 %
(a)
Represents new store marketing allowance of $1,000 for each store added to our distribution network, as well as the non-capitalized freight costs associated with Freshpet Fridge replacements. The expense enhances the overall marketing spend to support our growing distribution network.
(b)
Represents additional operating costs incurred in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens expansion projects.
(c)
Represents fees associated with public offerings of our common stock.
(d) Represents implementation and other costs associated with the implementation of an ERP system.
(e)
Represents fees associated with the response to two securities lawsuits.
(f) Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs to mitigate potential supply chain disruptions during the pandemic.
The following table provides a reconciliation of Adjusted Gross Profit to Gross Profit, the most directly comparable financial measure presented in accordance with U.S. GAAP:
Twelve Months Ended
December 31,
(Dollars in thousands)
Gross Profit
$ 132,910
$ 114,197
$ 89,990
Depreciation expense
9,576
6,370
6,089
Plant start-up expense (a)
5,962
-
-
Non-cash share-based compensation
2,132
COVID-19 expense (b)
3,497
-
-
Adjusted Gross Profit
$ 154,077
$ 121,489
$ 96,938
Adjusted Gross Profit as a % of Net Sales
48.3 %
49.4 %
50.2 %
(a)
Represents additional operating costs incurred in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens expansion projects.
(b)
Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs to mitigate potential supply chain disruptions during the pandemic included in cost of good sold.
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:
Twelve Months Ended
December 31,
(Dollars in thousands)
SG&A expenses
$ 134,908
$ 114,450
$ 94,876
Depreciation and amortization expense
11,549
9,551
7,977
Non-cash share-based compensation
8,793
6,912
5,949
Launch expense (a)
3,421
4,563
3,540
Loss on disposal of equipment
1,805
-
Equity offering expenses (b)
Enterprise Resource Planning (c)
1,682
-
-
Litigation expense (d)
-
-
COVID-19 expense (e)
-
-
Adjusted SG&A Expenses
$ 107,243
$ 92,473
$ 76,698
Adjusted SG&A Expenses as a % of Net Sales
33.6 %
37.6 %
39.7 %
(a)
Represents new store marketing allowance of $1,000 for each store added to our distribution network, as well as, the non-capitalized freight costs associated with Freshpet Fridge replacements. The expense enhances the overall marketing spend to support our growing distribution network.
(b)
Represents fees associated with public offerings of our common stock.
(c)
Represents implementation and other costs associated with the implementation of an ERP system.
(d)
Represents fees associated with the response to two securities lawsuits.
(e)
Represents COVID-19 expenses including (i) costs incurred to protect the health and safety of our employees during the COVID-19 pandemic, (ii) temporary increased compensation expense to ensure continued operations during the pandemic, and (iii) costs to mitigate potential supply chain disruptions during the pandemic.
Liquidity and Capital Resources
Developing our business will require significant capital in the future. We expect to make future capital expenditures of approximately $700.0 million in connection with the development of Freshpet Kitchens Bethlehem, Freshpet Kitchens Ennis, and Freshpet Kitchens South. To meet our capital needs, we expect to rely on our current and future cash flow from operations, our current available borrowing capacity, and access to the debt and equity markets, if appropriate. Our ability to obtain additional funding will be subject to various factors, including general market conditions, our operating performance, the market’s perception of our growth potential, lender sentiment and our ability to incur additional debt in compliance with other contractual restrictions, such as financial covenants under our debt agreements.
Additionally, our ability to make payments on, and to refinance, any indebtedness under our credit facilities and to fund any necessary expenditures for our growth will depend on our ability to generate cash in the future. If our business does not achieve the levels of profitability or generate the amount of cash that we anticipate or if we expand faster than anticipated, we may need to seek additional debt or equity financing to operate and expand our business. Future third-party financing may not be available on favorable terms or at all.
Our primary cash needs, in addition to our plant expansions, are for ingredients, purchases and operating expenses, marketing expenses and capital expenditures to procure Freshpet Fridges. We believe that cash and cash equivalents, expected cash flow from operations, planned borrowing capacity and our ability to access the capital markets, if appropriate, are adequate to fund our debt service requirements, operating lease obligations, capital expenditures and working capital obligations for the foreseeable future. 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.
The following table sets forth, for the periods indicated, our working capital:
December 31,
December 31,
(Dollars in thousands)
Cash and cash equivalents
$ 67,247
$ 9,472
Accounts receivable, net of allowance for doubtful accounts
18,438
18,581
Inventories, net
19,119
12,542
Prepaid expenses
3,378
3,276
Other current assets
10,453
Accounts payable
(16,452 )
(18,668 )
Accrued expenses
(15,371 )
(22,133 )
Current operating lease liabilities
(1,298 )
(1,185 )
Total Working Capital
$ 75,975
$ 12,338
Working Capital consists of current assets net of current liabilities. Working capital increased $63.7 million to $76.0 million at December 31, 2020 compared with $12.3 million at December 31, 2019. The increase was primarily a result of an increase of cash and cash equivalents, inventory, prepaid expenses, and decreased accounts payable and accrued expenses offset by a decrease in accounts receivable and other current assets.
We normally carry three to four weeks of finished goods inventory. The average duration of our accounts receivable is approximately 25 days.
For the year ended December 31, 2020 our capital resources consisted of primarily $67.2 million cash on hand and $163.0 million available under our credit facilities, net of $2.0 million reserved for two letters of credit. For the year ended December 31, 2019, our capital resources consisted primarily of $9.5 million cash on hand and $33.0 million available under our credit facilities. The credit facilities will mature in April 2025.
We borrowed $20.9 million under our credit facilities during the first quarter of 2020, bringing the Company's total outstanding debt to $76.0 million. The total outstanding debt of $76.0 million was repaid during the second quarter of 2020. As of December 31, 2020, we had no debt outstanding under our credit facilities. There was $54.5 million of debt outstanding (including $0.7 million of debt issuance costs) under the credit facilities as of December 31, 2019.
The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by operating, investing and financing activities and our ending balance of cash.
Year Ended
December 31,
(Dollars in thousands)
Cash at the beginning of period
$ 9,472
$ 7,554
Net cash generated in operating activities
21,193
16,317
Net cash used in investing activities
(162,462 )
(70,633 )
Net cash provided by financing activities
199,044
56,234
Cash at the end of period
$ 67,247
$ 9,472
Net Cash Provided by Operating Activities
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 assets, depreciation and amortization, share-based compensation, deferred financing costs and loan discounts and inventory obsolescence).
Net cash provided by operating activities of $21.2 million in 2020 was primarily attributable to:
●
$31.5 million of net income adjusted for reconciling non-cash items, which excludes $34.9 million of non-cash items primarily related to $21.1 million in depreciation and amortization, $10.9 million in share-based compensation and $1.8 million in loss on disposal of equipment.
This was partially offset by:
●
$10.3 million decrease due to changes in operating assets and liabilities. The decrease is mainly due to the change in accrued expenses, inventory, accounts payable, other assets, and other lease liabilities, offset by change in prepaid expenses and other current assets and operating lease right of use.
Net cash provided by operating activities of $16.3 million in 2019 was primarily attributable to:
●
$23.5 million of net income adjusted for reconciling non-cash items, which excludes $24.9 million of non-cash items primarily related to $15.9 million in depreciation and amortization $7.8 million in share-based compensation and $0.8 million in loss on disposal of equipment.
This was partially offset by:
●
$7.2 million decrease due to changes in operating assets and liabilities. The decrease is mainly due to the change in prepaid expenses and other current assets, accounts receivable, and inventories, offset by change in accrued expenses, accounts payable, and operating lease right of use.
Net Cash Used in Investing Activities
Net cash used in investing activities of $162.5 million in 2020 relates primarily to:
●
$67.4 million capital expenditures related to Freshpet Kitchens Bethlehem expansion.
● $6.1 million capital expenditures related to Freshpet Kitchens South expansion.
● $30.6 million capital expenditures related to Freshpet Kitchens Ennis expansion.
● $7.5 million in plant recurring capital expenditures.
●
$23.0 million capital expenditures relating to investment in fridges and other capital spend.
●
$27.9 million in connection with an equity method investment pursuant to which the Company received a 19% interest in a privately held company.
● $20.0 million purchase of short-term investments.
This was partially offset by:
●
$20.0 million proceeds from maturities of short-term investments.
Net cash used in investing activities of $70.6 million in 2019 relates primarily to:
●
$48.5 million capital expenditures related to the Freshpet Kitchens, which includes $36.8 million related to the expansion project Kitchens 2.0, $7.5 million related to other expansion projects and $4.7 million related to non-expansion capital expenditures.
●
$20.8 million capital expenditures related to investments in fridges.
● $1.3 million related to other capital spend that includes office equipment, computers and miscellaneous office expenses.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $199.0 million in 2020 mainly attributable to:
● $252.1 million of proceeds from common shares issued in a primary offering, net of issuance cost.
●
$20.9 million of proceeds from borrowing under our credit facilities.
●
$5.4 million of proceeds from the exercise of stock options.
This was partially offset by:
●
$76.0 million repayment of borrowing under our credit facilities.
●
$2.6 million for tax withholdings related to net share settlements of restricted stock units.
●
$0.8 million for debt issuance cost related to the new credit facilities.
Net cash provided by financing activities was $56.2 million in 2019 mainly attributable to:
●
$72.3 million of proceeds from borrowing under our credit facilities.
●
$4.4 million of proceeds from the exercise of stock options.
This was partially offset by:
●
$18.5 million repayment of borrowing under our credit facilities.
●
$1.3 million of purchase of stock for tax withholding.
● $0.7 million in financing fees in connection with borrowing.
Indebtedness
See Note 8 and Note 16 to our Consolidated Financial Statements for a discussion of our debt obligations.
Contractual Obligations and Commitments
The following table sets forth our expected contractual obligations as of December 31, 2020:
Payments Due by Period
Total
Less than 1 Year
Between 1-3 Years
Between 3-5 Years
More than 5 Years
(Dollars in thousands)
Operating lease obligations
$ 9,627
$ 1,760
$ 5,081
$ 2,449
$
Manufacturing processing obligations
11,865
2,904
8,249
-
Utility servicing obligations
3,283
1,955
-
Warehouse obligations
1,528
1,528
-
-
-
Total
$ 26,303
$ 6,622
$ 14,228
$ 5,116
$
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:
Revenue Recognition and Incentives - Revenue is reported net of applicable trade incentives and allowances. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis. The Company applies judgment in the determination of the amount of consideration the Company receives from its customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Revenue the Company recognizes varies with changes in trade incentives the Company offers to its customers and their consumers. Trade incentives consist primarily of customer pricing allowances and merchandising funds, and consumer coupons are offered through various programs to customers and consumers. 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 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 criteria as a condition to the vesting. For certain performance-based awards, the quantity of awards received can range based on the level of performance achieved. The performance-based awards with financial criteria either have a Net Sales or Adjusted EBITDA target within FY 2021 through FY 2024. 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 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 probability assessment 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
For a discussion of recent accounting pronouncements, see Note 2 (Recently Issued Accounting Standards) to our audited consolidated financial statements included in this report.
Segment
We have determined we operate in one segment: the manufacturing, marketing and distribution of pet food and pet treats for dogs and cats.
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.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements or holdings in variable interest entities.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 interest at variable rates. During the year ended December 31, 2020, we borrowed $20.9 million under our credit facilities, bringing the Company's total outstanding debt to $76.0 million, of which the total $76.0 million was repaid as of December 31, 2020.
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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRESHPET, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Freshpet, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Freshpet, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A 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 financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the probability of achieving the vesting performance criteria of share-based awards
As discussed in Notes 1 and 10 to the consolidated financial statements, the Company recognizes share-based compensation based on the value of the number of share-based payment awards that are ultimately expected to vest during the period. Share-based awards with performance-based vesting conditions require the achievement of certain financial criteria as a condition to the vesting. For certain performance-based awards, the quantity of awards received can range based on the level of performance achieved. The performance-based awards with financial criteria either have 1) an annual or cumulative revenue target or 2) an adjusted earnings before interest, taxes, depreciation and amortization target within fiscal years 2021 through 2024. At each reporting period, the Company reassesses the probability of achieving the performance criteria required to meet those vesting targets. When achievement of the vesting criteria is considered probable, compensation cost is recognized. As of December 31, 2020, there were 248,999 unvested performance-based options outstanding that were deemed not probable, with an aggregate fair value of $18.2 million.
We identified the assessment of the probability of achieving the vesting performance criteria of share-based awards as a critical audit matter. Evaluating the assumptions relating to the Company’s determination of the probability that the performance criteria will be achieved for the share-based awards involved subjective auditor judgment. In particular, judgment was required to assess the probability of meeting the Company's future performance targets, including forecasted revenue.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company's share-based compensation process, including a control related to the Company's assessment of assumptions that were used in the determination that a performance criteria was probable of achievement. To assess the Company's ability to accurately forecast revenue, we compared the Company's historical revenue forecasts to actual results. We compared forecasted revenue to those in communications to the Board of Directors, press releases and analyst reports. We evaluated the timing of the Company's expansion projects by comparing the progress of the Company's plans to construction milestones achieved.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Short Hills, New Jersey
February 22, 2021
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
December 31,
(Dollars in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$ 67,247 $ 9,472
Accounts receivable, net of allowance for doubtful accounts
18,438 18,581
Inventories, net
19,119 12,542
Prepaid expenses
3,378 3,276
Other current assets
914 10,453
Total Current Assets
109,096 54,324
Property, plant and equipment, net
281,073 165,288
Deposits on equipment
3,710 3,601
Operating lease right of use assets
7,866 9,154
Equity method investment
27,894 -
Other assets
4,749 3,759
Total Assets
$ 434,388 $ 236,126
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
$ 16,452 $ 18,668
Accrued expenses
15,371 22,133
Current operating lease liabilities
1,298 1,185
Total Current Liabilities
$ 33,121 $ 41,986
Long term debt
- 54,466
Long term operating lease liabilities
7,098 8,409
Total Liabilities
$ 40,219 $ 104,861
STOCKHOLDERS' EQUITY:
Common stock - voting, $0.001 par value, 200,000,000 shares authorized, 40,732,409 issued and 40,718,240 outstanding on December 31, 2020, and 36,162,433 issued and 36,148,264 outstanding on December 31, 2019
41 36
Additional paid-in capital
600,388 334,299
Accumulated deficit
(205,924 ) (202,735 )
Accumulated other comprehensive income (loss)
(80 ) (79 )
Treasury stock, at cost - 14,169 shares on December 31, 2020 and on December 31, 2019
(256 ) (256 )
Total Stockholders' Equity
394,169 131,265
Total Liabilities and Stockholders' Equity
$ 434,388 $ 236,126
See accompanying notes to the consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended
December 31,
(Dollars in thousands except share and per share data)
NET SALES
$ 318,790
$ 245,862
$ 193,237
COST OF GOODS SOLD
185,880
131,665
103,247
GROSS PROFIT
132,910
114,197
89,990
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
134,908
114,450
94,876
INCOME (LOSS) FROM OPERATIONS
(1,998 )
(253 )
(4,886 )
OTHER INCOME/(EXPENSES):
Other Income/(Expenses), net
(102 )
Interest Expense
(1,212 )
(991 )
(296 )
(1,125 )
(986 )
(399 )
INCOME (LOSS) BEFORE INCOME TAXES
(3,123 )
(1,239 )
(5,284 )
INCOME TAX EXPENSE
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ (3,188 )
$ (1,383 )
$ (5,361 )
OTHER COMPREHENSIVE INCOME (LOSS):
Change in foreign currency translation
$ (1 )
$ (48 )
$ (108 )
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(1 )
(48 )
(108 )
TOTAL COMPREHENSIVE INCOME (LOSS)
$ (3,189 )
$ (1,430 )
$ (5,469 )
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
-BASIC
$ (0.08 )
$ (0.04 )
$ (0.15 )
-DILUTED
$ (0.08 )
$ (0.04 )
$ (0.15 )
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING USED IN COMPUTING NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
-BASIC
39,757,660
35,950,117
35,329,170
-DILUTED
39,757,660
35,950,117
35,329,170
See accompanying notes to the consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Common Stock - Voting
Treasury Stock
Number of Shares Issued
Amount
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Income
Number of Shares
Amount
Total Stockholders' Equity
BALANCES, December 31, 2017
35,132,548
$
$ 312,783
$ (195,991 )
$
-
$ -
$ 116,903
Exercise of options to purchase common stock
349,464
-
3,325
-
-
-
-
3,325
Issuance of restricted stock units
74,583
-
-
-
-
-
(256 )
(256 )
Share-based compensation expense
-
-
6,971
-
-
-
-
6,971
Foreign Currency Translation
-
-
-
-
(108 )
-
-
(108 )
Net income (loss)
-
-
-
(5,361 )
-
-
-
(5,361 )
BALANCES, December 31, 2018
35,556,595
$
$ 323,080
$ (201,353 )
$ (32 )
14,169
$ (256 )
$ 121,474
Exercise of options to purchase common stock
513,540
4,460
-
-
-
-
4,460
Issuance of restricted stock units
92,298
-
(1,295 )
-
-
-
-
(1,295 )
Share-based compensation expense
-
-
8,055
-
-
-
-
8,055
Foreign Currency Translation
-
-
-
-
(47 )
-
-
(48 )
Net income (loss)
-
-
-
(1,383 )
-
-
-
(1,383 )
BALANCES, December 31, 2019
36,162,433
$
$ 334,299
$ (202,735 )
$ (79 )
14,169
$ (256 )
$ 131,265
Exercise of options to purchase common stock
478,844
-
5,441
-
-
-
-
5,441
Issuance of restricted stock units
91,133
-
(2,568 )
-
-
-
-
(2,568 )
Share-based compensation expense
-
-
11,157
-
-
-
-
11,157
Shares issued in primary offering
3,999,999
252,058
-
-
-
-
252,062
Foreign Currency Translation
-
-
-
-
(1 )
-
-
(1 )
Net income (loss)
-
-
-
(3,188 )
-
-
-
(3,188 )
BALANCES, December 31, 2020
40,732,409
$
$ 600,388
$ (205,924 )
$ (80 )
14,169
$ (256 )
$ 394,169
See accompanying notes to the consolidated financial statements.
FRESHPET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended
December 31,
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$ (3,188 )
$ (1,383 )
$ (5,361 )
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Provision for loss/(gains) on accounts receivable
(23 )
(15 )
Loss on disposal of equipment
1,805
Share-based compensation
10,925
7,834
6,808
Inventory obsolescence
Depreciation and amortization
21,125
15,922
14,068
Amortization of deferred financing costs and loan discount
Changes in operating assets and liabilities:
Accounts receivable
(8,019 )
Inventories
(6,808 )
(3,338 )
Prepaid expenses and other current assets
9,437
(11,969 )
Operating lease right of use
1,289
-
Other assets
(719 )
(262 )
Accounts payable
(5,922 )
2,777
Accrued expenses
(6,762 )
13,082
1,531
Other lease liabilities
(1,198 )
(265 )
(31 )
Net cash flows from operating activities
21,193
16,317
18,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments
(20,000 )
-
-
Proceeds from maturities of short-term investments
20,000
-
-
Investments in equity method investment
(27,894 )
-
-
Acquisitions of property, plant and equipment, software and deposits on equipment
(134,568 )
(70,633 )
(16,274 )
Net cash flows used in investing activities
(162,462 )
(70,633 )
(16,274 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common shares issued in primary offering, net of issuance cost
252,062
-
-
Proceeds from exercise of options to purchase common stock
5,441
4,460
3,325
Tax withholdings related to net shares settlements of restricted stock units
(2,568 )
(1,295 )
(256 )
Proceeds from borrowings under Credit Facilities
20,933
72,291
6,000
Repayment of borrowings under Credit Facilities
(76,000 )
(18,500 )
(6,000 )
Financing fees paid in connection with borrowings
(824 )
(723 )
-
Net cash flows provided by financing activities
199,044
56,234
3,069
NET CHANGE IN CASH AND CASH EQUIVALENTS
57,775
1,917
5,370
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
9,472
7,554
2,184
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ 67,247
$ 9,472
$ 7,554
SUPPLEMENTAL CASH FLOW INFORMATION:
Taxes paid
$
$
$
Interest paid
$ 1,061
$
$
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Property, plant and equipment purchases in accounts payable
$ 11,281
$ 7,575
$
Non-cash acquisitions of property, plant and equipment
$ -
$ 1,750
$ -
See accompanying notes to the consolidated financial statements.
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”, the “Company”, "we" or "our"), a Delaware corporation, manufactures and markets natural fresh meals, and treats for dogs and cats. The Company’s products are distributed throughout the United States and other international markets into major retail classes including Grocery (including online), Mass and Club, Pet Specialty, and Natural retail.
Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All amounts included in the consolidated financial statements have been rounded except where otherwise stated. As figures are rounded, numbers presented throughout this document may not add up precisely to the totals we provide and percentages may not precisely reflect the absolute figures.
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.
Equity method investment - The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company applies the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock. The Company has elected to record its share of equity in income (losses) of equity method investment on a one-quarter lag based on the most recently available financial statements.
In applying the equity investment method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by our proportionate share of the net income or loss.
Variable interest entities ("VIEs") - In accordance with the applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which it has a variable interest is a variable interest entity. The Company's analysis includes both quantitative and qualitative reviews to determine if we must consolidate a variable interest entity as its primary beneficiary.
Estimates and Uncertainties - The preparation of 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. Estimates are used in determining, among other items, trade incentives, share-based compensation and useful lives for long-lived assets. Actual results, as determined at a later date, could differ from those estimates.
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.
Trade Account Receivable - The allowance for doubtful accounts is based on the Company's assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer's ability to pay.
Restricted Stock Tax Withholdings - To meet payroll tax withholdings obligations arising from the vesting of restricted share units, the Company withheld 32,611 shares totaling $2.6 million in 2020, 32,096 shares totaling $1.3 million in 2019, and 14,169 shares totaling $0.3 million in 2018.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Income Taxes - The Company provides for deferred income taxes for temporary differences 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 temporary 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, 2020, and 2019, the Company determined that full valuation of its net deferred tax assets and liabilities is appropriate.
Treasury Stock - The Company may purchase or withhold shares of stock to satisfy statutory employee tax obligations upon the issuance of restricted stock units to employees. Such repurchased or withheld shares are treated as treasury stock and carried at cost on the Consolidated Balance Sheet in Stockholders’ equity. As of December 31, 2020, the Company had $0.3 million of treasury stock related to employee tax withholdings.
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. The Company estimates grant date fair value of its options using the Black-Scholes Merton option-pricing model. Share awards are amortized under the straight-line method over the requisite service period of the entire award. The Company accounts for forfeitures as they occur.
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).
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. Certain assets, including the equity method investment, right-of-use assets and property and equipment are also subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review.
As of December 31, 2020, the Company only maintained Level 1 assets and liabilities.
Debt Issuance Cost - During the first quarter of 2020, the Company paid the outstanding balance of the Delayed Draw Term Loan associated with the Fourth Amended and Restated Loan and Security Agreement and wrote down $0.6 million of the related fees to interest expense.
During the second quarter of 2020, as part of the Fifth Amended and Restated Loan and Security Agreement (as amended, the "2020 Loan Agreement"), the Company incurred an additional $0.8 million of fees associated with the debt modification, of which $0.6 million of the fees were related to the delayed draw term loan with the remaining balance relating to the revolving loan facility. The Company's policy is to record the debt issuance cost related to the delayed draw term loan, net of debt, for the portion of the delayed draw term loan that is outstanding, with the remaining amount recorded within assets. As of December 31, 2020, there was $0.9 million of debt issuance cost that were recorded to other assets and less than $0.3 million was recorded to other current assets.
The Company amortizes debt issuance costs categorized as assets on a straight-line basis over the term of the loan and amortizes the debt issuance costs that are categorized net of debt using the effective interest method, over the term of the loan.
Revenue Recognition and Incentives - Revenues primarily consist of the sale of pet food products that are sold to retailers through broker and distributor arrangements. These revenue contracts generally have single performance obligations. Revenue, which includes shipping and handling charges billed to the customer, is reported net of applicable trade incentives and allowances. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components.
Revenue from product sales is recognized when obligations under the terms of the contract with the customer are satisfied, which occurs once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods.
The amount of consideration the Company receives and revenue the Company recognizes varies with changes in trade incentives the Company offers to its customers and their consumers. Trade incentives consists primarily of customer pricing allowances and merchandising funds, and consumer coupons are offered through various programs to customers and consumers. 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.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales taxes and other similar taxes are excluded from revenue.
There were no contract assets as of December 31, 2020 and 2019.
Information about the Company’s net sales by class of retailer is as follows:
Twelve Months Ended
December 31,
(Dollars in thousands)
Grocery (including Online), Mass and Club
$ 272,008 $ 206,550 $ 158,506
Pet Specialty and Natural
46,782 39,312 34,731
Net Sales
$ 318,790 $ 245,862 $ 193,237
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 $38.5 million, $34.3 million, and $29.4 million, in 2020, 2019, and 2018, respectively. As of December 31, 2020, 2019, and 2018 we had $0.1 million, $0.6 million and $0.3 million, respectively, of production cost in prepaid expense, representing advertising that had yet to take place.
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 $27.2 million, $19.8 million, and $15.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Research & Development - Research and development costs consist of expenses to develop and test new products. The costs are expensed as incurred. Research and development costs totaled $0.8 million, $1.2 million and $0.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Note 2 - Recently Issued Accounting Standards:
Recently Adopted Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The reported results for the twelve months ended December 31, 2020 reflect the application of ASU 2016-13. The application of the update did not have a material impact to our allowance for doubtful accounts. Please see the description of the Company's "Trade accounts receivable" accounting policy above.
Effective January 1, 2019, the Company adopted Accounting Standards Codification (ASC) Topic 842, Leases. ASC Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize on the balance sheet assets and liabilities arising from operating leases. As we elected the cumulative-effect adoption method, prior-period information has not been restated.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standards Effective in Future Years
In January 2020, the FASB issued Accounting Standards Update No. 2020-01, Investments - Equity Services (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The standard addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. The standard is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. The Company is in the process of evaluating the impact the adoption of this standard will have, however, the Company does not expect the adoption of this standard to have a material impact on their financial condition and results of operations.
We consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB).
Note 3 - Inventories:
Inventories are summarized as follows:
December 31,
December 31,
(Dollars in thousands)
Raw Materials and Work in Process
$ 9,347 $ 4,453
Packaging Components Material
1,872 1,419
Finished Goods
8,365 6,842
19,584 12,715
Reserve for Obsolete Inventory
(465 ) (173 )
$ 19,119 $ 12,542
Note 4 - Property, Plant and Equipment:
December 31,
December 31,
(Dollars in thousands)
Refrigeration Equipment
$ 107,703 $ 97,568
Machinery and Equipment
106,176 54,274
Building, Land, and Improvements
101,786 25,621
Furniture and Office Equipment
5,687 4,932
Leasehold Improvements
1,301 395
Automotive Equipment
160 309
Construction in Progress
44,497 58,587
367,310 241,687
Less: Accumulated Depreciation
(86,237 ) (76,400 )
$ 281,073 $ 165,288
Depreciation and amortization expense related to property, plant and equipment totaled approximately $20.8 million, $15.6 million, and $13.8 million, for the years ended December 31, 2020, 2019 and 2018, respectively; of which $9.6 million, $6.4 million, and $6.1 million was recorded in cost of goods sold for 2020, 2019 and 2018, respectively; with the remainder of depreciation and amortization expense being recorded to selling, general and administrative expense.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Equity Method Investment:
On September 2, 2020, the Company acquired a 19% interest in a privately held company that operates in our industry for $27.9 million. The total $27.9 million is comprised of an initial investment of $26.6 million and $1.3 million of transaction costs. The Company concluded that they are not the primary beneficiary, which is primarily the result of the Company's conclusion that it does not have the power to direct activities that most significantly impact the economic performance. However, the Company completed an analysis over the investment and determined that based on the circumstances within the agreement, the Company does have the ability to exercise significant influence even though the Company's percentage of ownership is below 20%. As a result, this investment is accounted for under the equity method of accounting. The basis difference between the Company's carrying value of its investment and the amount of underlying equity in net assets of the privately held company is not material to the Company's consolidated financial statements.
There is no equity in income (loss) of equity method investment included in our Consolidated Statement of Operation and Comprehensive Loss for the periods presented as the results were not material to Freshpet's consolidated financial statements.
Note 6 - Income Taxes
A summary of income taxes as follows:
Year Ended December 31,
Current: (Dollars in thousands)
Federal
$ - $ - $ -
State
65 144 77
International
- - -
$ 65 $ 144 $ 77
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.
The reconciliation of the statutory federal income tax rate to the Company’s effective tax is presented below:
Year Ended December 31,
Tax at federal statutory rate
21.0 % 21.0 % 21.0 %
State taxes, net of federal
39.2 % 36.6 % (1.2 %)
Permanent items
284.4 % 312.2 % (2.4 %)
Other
5.6 % 5.6 % (0.1 %)
State rate change
0.2 % (24 %) 15.8 %
Valuation allowance
(352.5 %) (362.7 %) (34.5 %)
Effective tax rate
(2.1 %) (11.6 %) (1.5 %)
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, 2020, 2019 and 2018.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
Year Ended December 31,
(Dollars in thousands)
Net operating loss
$ 60,268 $ 49,626 $ 45,831
Stock option expense
6,454 5,063 1,155
Property and equipment
(11,941 ) (10,372 ) (9,688 )
Other
1,194 966 552
Less: Valuation allowance
(55,975 ) (45,283 ) (37,850 )
Net deferred income tax assets
$ - $ - $ -
At December 31, 2020, the Company had federal net operating loss (“NOL”) carryforwards of $239.8 million, of which $175.0 million, generated in 2017 and prior, will expire between 2025 and 2037. The NOL generated in 2018, 2019 and 2020 of $64.4 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company may be subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code. 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, 2020, the Company had $189.8 million of State NOLs which expire between 2020 and 2039, and had $10.0 million 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, 2020, 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 2020.
The Company considered 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.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Accrued Expenses:
(Dollars in thousands)
Legal Contingency
$ - $ 10,100
Accrued Compensation and Employee Related Costs
8,185 6,391
Accrued Chiller Cost
2,049 1,576
Accrued Customer Consideration
502 635
Accrued Freight
1,002 703
Accrued Production Expenses
705 414
Accrued Marketing
684 1,188
Accrued IT/Systems 805 -
Other Accrued Expenses
1,439 1,127
$ 15,371 $ 22,133
Note 8 - Debt:
On April 17, 2020, the Company entered into the 2020 Loan Agreement, which amended and restated in full the Company's Fourth Amended and Restated Loan and Security Agreement, dated as of May 15, 2019. The 2020 Loan Agreement provided for a $165.0 million senior secured credit facility (the "Credit Facility"), encompassing a $130.0 million delayed draw term loan facility (the "Delayed Draw Facility") and a $35.0 million revolving loan facility (the "Revolving Loan Facility"), which replaced the Company's prior $55.0 million delayed draw term loan facility and $35.0 million revolving loan facility.
The Credit Facility had a maturity date of April 17, 2025 and borrowings thereunder bored interest at variable rates depending on the Company's election, either at a base rate or at LIBOR, in each case, plus an applicable margin. Subject to the Company's leverage ratio, the applicable margin varied between 0.50% and 1.00% for base rate loans and 1.50% and 2.00% for LIBOR loans.
Borrowings under the Credit Facility were secured by substantially all of the Company's and certain of its subsidiaries' assets.
During the first quarter of 2020, the Company borrowed an additional $20.9 million under the Credit Facility, which consisted of $13.9 million related to Delayed Draw Term Loans, net of unamortized debt issuance cost of less than $0.1 million, and $7.0 million related to the Revolving Loan Facility, bringing the total outstanding debt to $76.0 million. Subsequent to the additional borrowings, the Company paid down the total outstanding debt on its Credit Facility of $76.0 million during the second quarter of 2020. As a result, the Company had no debt outstanding under the Credit Facility as of December 31, 2020.
Net borrowings under our credit facilities totaled $54.5 million at December 31, 2019, of which $40.5 million net of unamortized debt issuance cost of $0.6 million, related to the Draw Term Loans and $14.0 million related to the Revolving Loan Facility.
In connection with entering into the Credit Facility, the Company incurred $0.8 million of debt issuance cost which is capitalized on the balance sheet and amortized over the life of the Credit Facility. As of December 31, 2020, there was $1.2 million of the remaining debt issuance cost from the Credit Facility as well as fees incurred from the prior credit facilities.
Interest expense and fees totaled $1.2 million, $1.0 million and $0.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. There was $0.1 million accrued interest on the credit facilities as of December 31, 2020, $0.3 million of accrued interest on the credit facilities as of December 31, 2019, and less than $0.1 million of accrued interest on the credit facilities as of December 31, 2018. See Note 16, Subsequent Events, for additional information on our new credit facility that was executed on February 19, 2020.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingencies
Commitments - The Company’s obligations include leases for office space under non-cancelable operating leases, manufacturing processing and utility servicing that expire at various dates through April 1, 2027.
Leases:
We have various noncancellable lease agreements for office and warehouse space, as well as office equipment, with original remaining lease terms of two years to nine years, some of which include an option to extend the lease term for up to five years. Because the Company is not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments. The Company’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants.
Weighted-average remaining lease term (in years) and discount rate related to operating leases were as follows:
December 31,
Weighted-average remaining lease term
5.43 6.22
Weighted-average discount rate
6.1 % 6.1 %
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the date of adoption to determine the present value of lease payments.
Costs related to lease obligations for the years ended December 31, 2020 and 2019 were as follows:
For the Twelve Months Ended December 31,
(Dollars in thousands)
Operating lease cost
$ 1,796 $ 1,606
Supplemental cash flow information and non-cash activity relating to operating leases are as follows:
For the Twelve Months Ended December 31,
Operating cash flow information:
(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities
$ 1,707 $ 1,425
Right-of-use assets obtained in exchange for lease obligations
$ 18 $ 724
As of December 31, 2020, future minimum payments due under lease obligations for five years were as follows:
Operating Lease Obligations December 31, 2020
(Dollars in thousands)
$ 1,760
1,768
1,802
1,511
2025 and beyond
2,786
Total lease payments
$ 9,627
Less: Imputed interest
(1,231 )
Present value of lease liabilities
$ 8,396
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for operating leases, in accordance with the leasing standard was $0.7 million in 2018.
As of December 31, 2020, future minimum payments due under manufacturing and service obligations for five years were as follows:
Manufacturing and Servicing Obligations
December 31, 2020
(Dollars in thousands)
$ 4,862
3,106
3,213
4,783
2025 and beyond
Total Manufacturing and Servicing Obligations $ 16,676
Certain of the Company’s executives are covered by employment contracts requiring the Company to pay severance in the event of certain terminations.
Legal Obligations:
A shareholder derivative lawsuit, Meldon v. Freshpet, Inc. et al, Docket No. 2:18-cv-10166, was instituted June 5, 2018 in the United States District Court for the District of New Jersey against us and certain of our current and former executive officers and directors on behalf of certain holders of our common stock. We were served with a copy of the complaint in June 2018. The plaintiffs sought to recover damages for investors based on state law claims (alleged breaches of fiduciary duty, waste, and unjust enrichment) in connection with the alleged violations of federal securities laws alleged in the Curran action. On April 3, 2019, the Court granted a stay of the Meldon case pending resolution of certain matters in a related case, Curran v. Freshpet, Inc., which has been settled. The parties to the Meldon action then entered into settlement discussions, after which the parties reached an agreement in principle to settle the case based on the Company's commitment to continue certain governance practices. The parties also reached agreement on attorneys' fees. The settlement was approved and certified on August 4, 2020.
In addition, we are currently involved in various claims and legal actions that arise in the ordinary course of our business, including claims resulting from employment related matters. None of these claims or proceedings, most of which are covered by insurance, are expected to have a material adverse effect on our business, financial condition, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operations or cash flows.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Equity Incentive Plans and Equity:
Total compensation cost for share-based payments recognized for the years ended December 31, 2020, 2019, and 2018 was approximately $10.9 million, $7.8 million, and $6.8 million, respectively. Cost of goods sold for the years ended December 31, 2020, 2019, and 2018 included share-based compensation of approximately $2.1 million, $0.9 million, and $0.9 million, respectively. Selling, general, and administrative expense for the year ended December 31, 2020, 2019, and 2018 included share-based compensation of approximately $8.8 million, $6.9 million, and $5.9 million, respectively. Capital expenditures recorded for the Freshpet Kitchens expansion project included share-based compensation of approximately $0.2 million and $0.2 million during the years ended December 31, 2020 and 2019, respectively.
2010 Stock Plan-In December 2010, the Company approved the 2010 Stock Plan (the “2010 Plan”) under which options to purchase approximately 2,146,320 shares of the Company’s common stock were granted to employees and affiliates of the Company (in 2012, the 2010 Plan was amended to allow for option to purchase approximately 2,220,280 shares of the Company’s common stock). These options are either time-based (vest over four years), performance-based (vest when performance targets are met, as defined in the stock option grant agreement), or vest at the occurrence of an exit event which is defined as a Change of Control in the Company, as defined in the stock grant agreement.
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.
At December 31, 2020, the total number of unexercised options for the 2010 Plan is 26,130.
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. In September 2020, the 2014 Plan was amended to allow for the granting of an additional 700,000 shares of common stock to be issued or used for reference purposes as awards granted, for an available total of 4,679,200 shares. These awards may be in the form of stock options, stock appreciation rights, restricted stock, as well as other stock-based and cash-based awards. As of December 31, 2020, 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). The total number of unexercised options and RSUs for the 2014 Plan is 2,610,490.
At December 31, 2020, there were 908,433 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 and during the first quarter of 2020, 15,000 service period stock options were granted to the Executive Vice President of Finance, at the time, who is currently Chief Financial Officer as an inducement under the NASDAQ Marketplace Rules, and therefore outside of any Plan. Under the terms of the applicable agreement, each grant is governed as if issued under the 2014 Omnibus Plan. The awards granted are time-based (cliff vest over four years and three years, respectively) and performance-based (vest when performance targets are met, as defined in the stock option grant agreement).
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service Period Stock Options-A summary of service period stock options outstanding and changes under the plans during the year ended December 31, 2020 is presented below:
Options
Shares
Weighted Average Exercise Price Average Remaining Contractual Term Aggregate Intrinsic Value
Outstanding at December 31, 2019 1,359,990 $ 11.50 (Dollars in thousands)
Granted
382,910 127.89
Exercised
(415,499 ) 8.97
Forfeited
(357 ) 11.00
Outstanding at December 31, 2020
1,327,044 $ 45.88 7.0 $ 128,778
Exercisable at December 31, 2020
874,153 $ 10.99 5.7 $ 115,520
All of the options exercisable at December 31, 2020 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, 2020, 2019, and 2018 were $48.8 million, $18.4 million, and $7.3 million, respectively.
A summary of the nonvested service period stock options as of December 31, 2020, and changes during the year ended December 31, 2020, is presented below:
Number of Options
Weighted-Average Grant-Date Fair Value Per Share
Nonvested as of December 31, 2019 347,796 $ 8.11
Granted 382,910 64.75
Vested (277,458 ) 6.17
Forfeited (357 ) 5.61
Nonvested as of December 31, 2020 452,891 $ 57.19
As of December 31, 2020, there was $24.7 million of total unrecognized compensation costs related to non-vested service period options, of which $5.9 million will be incurred in 2021, $5.7 million will be incurred in 2022, $4.9 million will be incurred in 2023 and the remaining $8.2 million will be incurred in 2024.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance Based Options-Performance based option vesting is contingent upon the Company achieving certain annual Net Sales or Adjusted EBITDA goals. A summary of performance-based stock options outstanding and changes under the plans during the year ended December 31, 2020 is presented below:
Options
Shares
Weighted Average Exercise Price
Average Remaining Contractual Term
Aggregate Intrinsic Value
Outstanding at December 31, 2019 1,372,819 $ 18.31
Granted
844,508 139.02
Exercised
(63,315 ) 27.34
Forfeited (35,000 ) 15.65
Outstanding at December 31, 2020
2,119,012 $ 66.19 7.8 $ 161,231
Exercisable at December 31, 2020
1,008,964 $ 11.05 5.9 $ 132,110
A summary of the nonvested performance-based options as of December 31, 2020, and changes during the year ended December 31, 2020, is presented below:
Number of Options
Weighted-Average Grant-Date Fair Value Per Share
Nonvested as of December 31, 2019 1,338,361 $ 10.89
Granted 844,508 70.83
Vested (1,037,823 ) 6.97
Forfeited (35,000 ) 7.49
Nonvested as of December 31, 2020 1,110,046 $ 60.25
As of December 31, 2020, unrecognized compensation costs related to the 861,047 performance-based awards for which the achievement of the vesting criteria is considered probable as of December 31, 2020 have performance target dates ranging from December 31, 2021 through December 31, 2024. The total unrecognized compensation costs for these performance-based awards was $44.2 million as of December 31, 2020, of which $12.5 million will be incurred in 2021, $11.8 million will be incurred in 2022, $10.3 million will be incurred in 2023 and the remaining $9.6 million will be incurred in 2024.
As of December 31, 2020, there were 248,999 unvested performance-based options outstanding that were deemed not probable, with an aggregate fair value of $18.2 million.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service Period Restricted Stock Units-The following table includes activity related to outstanding restricted stock units during the twelve months ended December 31, 2020.
Shares
Weighted-Average Grant-Date Fair Value Per Unit
Outstanding at December 31, 2019 240,229 $ 29.07
Granted
55,134 63.68
Issued Upon Vesting (123,744 ) 24.33
Forfeited
(1,328 ) 45.32
Outstanding at December 31, 2020
170,291 $ 43.60
As of December 31, 2020, there was approximately $4.0 million of total unrecognized compensation costs related to restricted stock units, of which $2.6 million will be incurred in 2021, $1.2 million will be incurred in 2022, and $0.2 million will be incurred in 2023.
Performance Based Restricted Stock Units-The following table includes activity related to outstanding restricted stock units during the twelve months ended December 31, 2020.
Shares
Weighted-Average Grant-Date Fair Value Per Unit
Outstanding at December 31, 2019 - $ -
Granted
22,894 55.54
Outstanding at December 31, 2020
22,894 $ 55.54
As of December 31, 2020, unrecognized compensation costs related to the 22,894 performance-based RSUs for which the achievement of the vesting criteria is considered probable as of December 31, 2020 have performance target dates related to the twelve months ended December 31, 2023. The total unrecognized compensation costs for these performance-based awards was $2.4 million as of December 31, 2020, of which $0.8 million will be incurred in 2021, $0.8 million will be incurred in 2022, and the remaining $0.8 will be incurred in 2023.
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, 2020, 2019, and 2018 were $68.93, $24.24 and $14.27 per share, respectively.
Expected Volatility-Expected volatility was based on the historical volatility of the Company’s common stock.
Weighted Average Expected Term-The Company determined the expected term based on the “shortcut method” described in FASB ASC 718, Compensation-Stock Compensation (an expected term based on the midpoint between the vesting date and the end of the contractual term).
Risk-Free Interest Rate-The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected Dividend Yield-The Company has not historically declared dividends, and no future dividends are expected to be available to benefit option holders. Accordingly, the Company used an expected dividend yield of zero in the valuation model.
Year Ended December 31,
Weighted average exercise price of options granted
$ 135.55 $ 48.64 $ 27.60
Expected volatility
46.9% - 51.5% 47.6% - 48.5% 48.9% - 50%
Average expected terms in years
5.8 - 7 6 - 6.6 6 - 6.6
Risk-free interest rate
0.3% - 1.69% 2.27% 2.62% - 2.96%
Expected dividend yield
0.0% 0.0% 0.0%
Note 11 - Earnings Per Share Attributable to Common Stockholder:
Basic net earnings (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net earnings (loss) per share of common stock is computed by giving effect to all potentially dilutive securities. 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, 2020, 2019 and 2018.
In the years ended December 31, 2020, 2019, and 2018, 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:
Twelve Months Ended December 31,
Service Period Stock Options
1,355,590 1,500,156 2,018,050
Restricted Stock Units
190,006 235,847 213,591
Performance Stock Options
1,008,960 34,482 52,536
Total
2,554,556 1,770,485 2,284,177
Note 12 - Retirement Plan:
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 $1.4 million in 2020, $1.1 million, in 2019, and $0.8 million in 2018.
Note 13 - Related Party Transactions:
In September 2018, one of the Company’s raw material vendors was purchased by a significant stockholder of the Company. The purchase of the vendor by the stockholder, had no impact on the cadence or amount of the raw materials that the Company purchased from the vendor. As of June 10, 2019, the significant stockholder sold 3.3 million shares in the Company and is no longer considered a related party. Subsequent to the acquisition of the vendor by the stockholder, the Company had purchased approximately $1.5 million, and $0.7 million of raw materials from the vendor in 2019 and 2018, respectively.
The Company believes that all payments made to the vendor was at market value and thus at arms-length.
There were no related party transactions in 2020.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Major Customers-In 2020, 2019, and 2018, net sales to one of our distributors which sells directly to three of our customers, accounted for 18%, 17%, and 16% of our net sales, respectively. In 2020 and 2018, no customers accounted for 10% of our net sales, while in 2019 one customer accounted for more than 10% of our net sales. As of December 31, 2020, one distributor and two customers accounted for 8%, 23% and 20% respectively, of our accounts receivable. As of December 31, 2019, one distributer and two customers accounted for 19%, 19% and 14%, respectively, of our account receivable.
Major Suppliers-The Company purchased approximately 23% of its raw materials from one vendor during 2020, approximately 27% of its raw materials from one vendor during 2019, and approximately 17% of its raw materials from one vendor during 2018.
The Company purchased approximately 88% of its packaging material from five vendors during 2020, 80% of its packaging material from three vendors during 2019, and approximately 81% of its packaging material from three vendors during 2018.
Note 15 - Unaudited Quarterly Results:
Unaudited quarterly results for the years ended December 31, 2020, 2019, and 2018 were as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(Dollars in thousands except per share data)
2020:
Net sales
70,098 79,980 84,190 84,522
Income/(loss) from operations
(2,886 ) 231 3,760 (3,103 )
Net Income/(loss)
(3,590 ) 153 3,547 (3,298 )
Net Income/(loss) attributable to common stockholders
(3,590 ) 153 3,547 (3,298 )
Basic earnings/(loss) per common share (0.10 ) 0.00 0.09 (0.08 )
Diluted earnings/(loss) per common share
(0.10 ) 0.00 0.09 (0.08 )
2019:
Net sales
54,792 60,052 65,266 65,752
Income/(loss) from operations
(3,317 ) (5,346 ) 3,535 4,876
Net Income/(loss)
(3,422 ) (5,661 ) 3,067 4,633
Net Income/(loss) attributable to common stockholders
(3,422 ) (5,661 ) 3,067 4,633
Basic earnings/(loss) per common share
(0.10 ) (0.16 ) 0.09 0.13
Diluted earnings/(loss) per common share
(0.10 ) (0.16 ) 0.08 0.12
2018:
Net sales
43,170 47,625 50,800 51,643
Income/(loss) from operations
(3,410 ) (3,410 ) 44 1,890
Net Income/(loss)
(3,521 ) (3,501 ) (97 ) 1,757
Net Income/(loss) attributable to common stockholders
(3,521 ) (3,501 ) (97 ) 1,757
Basic earnings/(loss) per common share
(0.10 ) (0.10 ) (0.00 ) 0.05
Diluted earnings/(loss) per common share
(0.10 ) (0.10 ) (0.00 ) 0.05
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Subsequent Events:
On February 19, 2021, the Company entered into the Sixth Amended and Restated Loan and Security Agreement, by and among the Company, as borrower, City National Bank, as the arranger and administrative agent, and the lenders party thereto (the "New Loan Agreement"), which amends and restates in full the Company's 2020 Loan Agreement.
The New Loan Agreement provides for a $350 million senior secured credit facility (the "New Credit Facility"), encompassing a $300 million delayed draw term loan facility (the "Delayed Draw Facility") and a $50 million revolving loan facility (the "Revolving Loan Facility"), which replaces the Company's prior $130 million delayed draw term loan facility and $35 million revolving loan facility.
The New Credit Facility will mature on February 19, 2026, and borrowings thereunder will bear interest at variable rates depending on the Company's election, either at a base rate or at LIBOR, in each case, plus an applicable margin. Subject to the Company's leverage ratio, the applicable margin will vary between 0.75% and 2.25% for base rate loans and 1.75% and 3.25% for LIBOR loans. The Company has the option to borrow term loans under the Delayed Draw Facility ("Delayed Draw Term Loans") until August 19, 2023, subject to certain conditions. Commencing on August 19, 2022, the amount of any outstanding Delayed Draw Term Loans shall be repayable in equal consecutive quarterly installments equal to 1/28 of the outstanding Delayed Draw Term Loans. On August 19, 2023, the amortization will reset and the amount of any outstanding Delayed Draw Term Loans shall be repayable in equal consecutive quarterly installments equal to 1/28 of the outstanding Delayed Draw Term Loans and the remainder shall be due and payable on the maturity date.
Borrowings under the New Credit Facility will be secured by substantially all of the Company's and certain of its subsidiaries' assets. The New Loan Agreement requires compliance with various covenants customary for agreements of this type, including financial covenants and negative covenants that limit, among other things, the Company and its subsidiaries' ability to incur additional debt, create or incur liens, engage in mergers or consolidations, sell, transfer or otherwise dispose of assets, make voluntary prepayments to subordinated debt, permit a change of control, pay dividends or distributions, make investments, and enter into certain transactions with affiliates. The New Loan Agreement also includes events of default customary for agreements of this type.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None

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ITEM 9A. CONTROLS AND PROCEDURES
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, 2020. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, 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, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its Internal Control-Integrated Framework (2013). 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, 2020, the Company’s internal control over financial reporting was effective.
Our independent registered public accounting firm that audited the consolidated financial statements included in this annual report has issued an audit report on the effectiveness of our internal control over financial reporting, which is included within "Item 8. Financial Statements and Supplementary Data" under section "Report of Independent Registered Public Accounting Firm".
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, 2020 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.

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ITEM 9B. OTHER INFORMATION
ITEM 9b. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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.

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ITEM 11. EXECUTIVE COMPENSATION
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.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
(1) Financial Statements - See Index to the Consolidated Financial Statements appearing on page 46.
(2) Financial Statement Schedules - None.
(3) Exhibits - The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
EXHIBIT INDEX
Exhibit No.
Description
3.1
Fourth Amended and Restated Certificate of Incorporation of Freshpet, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed with the SEC on September 25, 2020)
3.2
Amendment and Restated Bylaws (incorporated by reference to the Company's Registration on Form S-8 filed on December 12, 2014)
4.1*
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
10.1
Fifth Amended and Restated Loan and Security Agreement Amendment, dated April 17, 2020, by and among the Company and City National Bank, a national banking association, as the arranger and administrative agent, and the lenders thereto (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on April 20, 2020)
10.2
Sixth Amended and Restated Loan and Security Agreement Amendment, dated February 19, 2021, by and among the Company and City National Bank, a national banking association, as the arranger and administrative agent, and the lenders thereto (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on February 19, 2021)
10.3
Freshpet, Inc. Second Amended and Restated 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8, filed with the SEC on October 7, 2020)
10.4*
Amendment to Freshpet, Inc. Second Amended and Restated 2014 Omnibus Incentive Plan
10.5
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)
10.6
Professor Connor’s, Inc. 2006 Stock Plan (incorporated by reference to the Company’s Registration on Form S-8 filed on December 12, 2014)
10.7
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)
10.8
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)
10.9
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)
10.10
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)
10.11
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)
10.12*
Summary of Non-Employee Director Compensation Arrangements
10.13
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)
10.14
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)
10.15*
Offer Letter Agreement, dated as of December 16, 2019, by and between Freshpet, Inc. and Heather Pomerantz
10.16
Employment Agreement, dated as of July 6, 2015, by and between Freshpet, Inc. and Stephen Weise (incorporated by reference to Exhibit 10.18 to the Company’s 10-K, Amendment No. 1, filed on April 30, 2019)
10.17
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)
10.18
Nonqualified Stock Option Inducement Award Agreement by and between Freshpet, Inc. and William B. Cyr, dated September 6, 2016 (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8, filed with the SEC on October 7, 2020)
Exhibit No.
Description
10.19
Nonqualified Stock Option Inducement Award Agreement by and between Freshpet, Inc. and Heather Pomerantz, dated January 12, 2020 (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8, filed with the SEC on October 7, 2020)
10.20
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)
21.1*
List of Subsidiaries
23.1*
Consent of KPMG LLP
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Schema Documents
101.CAL*
Inline XBRL Calculation Linkbase Document
101.LAB*
Inline XBRL Labels Linkbase Document
101.PRE*
Inline XBRL Presentation Linkbase Document
101.DEF*
Inline XBRL Definition Linkbase Document
EX-104
Inline XBRL Formatted Cover Page
* Filed herewith.