FRPT Freshpet Inc

Item 1. Financial Statements

See accompanying notes to the unaudited consolidated financial statements.

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See accompanying notes to the unaudited consolidated financial statements.

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See accompanying notes to the unaudited consolidated financial statements.

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FRESHPET, INC. AND SUBSIDIARIES

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

(1) Stores at September 30, 2016 and September 30, 2015 consisted of 7,669 and 6,695 Grocery and 3,785 and 3,518 Mass and Club, respectively.

(2) Stores at September 30, 2016 and September 30, 2015 consisted of 4,505 and 4,185 Pet Specialty and 302 and 272 Natural, respectively.

* Includes sales from Freshpet Baked product of $0.9 million and $1.8 million, or 2.5% and 5.9% of total net sales, for the three months ended September 30, 2016 and 2015, respectively.

Net sales increased $4.0 million, or 13%, to $34.5 million for the three months ended September 30, 2016 as compared to the same period in the prior year. The $4.0 million increase in net sales was driven by growth in the Grocery, Mass, and Club refrigerated channel of $4.9 million, partially offset by declines in Pet Specialty of less than $0.1 million and Baked of $0.9 million. The Company experienced an increase of Freshpet Fridge store locations, which grew by 10.8% from 14,670 as of September 30, 2015 to 16,261 as of September 30, 2016.

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Gross Profit

Gross profit increased $1.3 million, or 9%, to $15.4 million for the three months ended September 30, 2016 as compared to the same period in the prior year. The increase in gross profit was primarily driven by higher net sales, partially offset by increased depreciation due to our Freshpet Kitchens expansion and non-capitalizable start-up costs associated with the Freshpet Kitchens expansion.

Our gross profit margin of 44% for the three months ended September 30, 2016 decreased 150 basis points compared to the same period in the prior year, primarily related to 146 basis points due to increased depreciation of our Freshpet Kitchens expansion, and 157 basis points due to non-capitalizable start-up costs associated with the Freshpet Kitchens expansion.

Adjusted Gross Profit was $17.1 million and $14.7 million in the three months ended September 30, 2016 and 2015, respectively. Adjusted Gross Profit Margin was 49.6% and 48.1% in the three months ended September 30, 2016 and 2015, respectively. Adjusted Gross Profit excludes $1.2 million of depreciation expense and $0.5 million of non-capitalizable plant start-up costs in the three months ended September 30, 2016, and $0.6 million of depreciation expense in the three months ended September 30, 2015. See “—Non-GAAP Financial Measures” for how we define Adjusted Gross Profit and a reconciliation of Adjusted Gross Profit to Gross Profit, the closest comparable U.S. GAAP measure.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1.5 million, or 9%, to $14.5 million for the three months ended September 30, 2016 as compared to the same period in the prior year. Key components of the dollar decrease include lower outbound freight costs of $0.3 million due to optimizations realized with our new logistics provider, lower advertising expenses of $1.8 million, lower share-based compensation expenses of $1.0 million, and lower non-recurring costs of $0.3 million, offset by higher depreciation costs of $0.2 million, and incremental operating expenses of $1.7 million. The increased operating expenses were primarily due to new hires, increased employee benefit costs, and increased refrigerator repairs due to our growing Freshpet Fridge network.

As a percentage of net sales, selling, general and administrative expenses decreased to 42% for the three months ended September 30, 2016 from 53% for the three months ended September 30, 2015. Adjusted SG&A decreased as a percentage of net sales to 41% in the third quarter of 2016 as compared to 47% of net sales in the third quarter of 2015. Adjusted SG&A excludes $0.7 million and $1.7 million for non-cash items related to share-based compensation in the third quarter of 2016 and 2015, respectively, and $0.3 million of change in estimate of leadership transition costs in the third quarter of 2016. See “—Non-GAAP Financial Measures” for how we define Adjusted SG&A and a reconciliation of Adjusted SG&A to SG&A, the closest comparable U.S. GAAP measure.

Income/(Loss) from Operations

Income from operations increased $2.8 million to $0.8 million for the three months ended September 30, 2016 as compared to a loss from operations of $2.0 million in the same period in the prior year as a result of the factors discussed above.

Interest Expense

For the three months ended September 30, 2016, interest expense was $0.2 million, which related to fees and interest expense on our short-term borrowings of our 3-year $10.0 million Revolving Facility and $30.0 million term loan commitment earmarked for capital expenditures. Interest expense for the three months ended September 30, 2015 was $0.1 million.

Other Income/(Expenses), net

Other income/(expenses), net decreased $0.4 million, or 91%, to less than $0.1 million for the three months ended September, 2016, primarily related to the revaluation of warrants. Income related to the revaluation of warrants was less

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than $0.1 million for the three months ended September 30, 2016 as compared to income of $0.4 million for the same p eriod in the prior year.

Net Income/(Loss)

Net income increased $2.3 million to $0.6 million for the three months ended September 30, 2016 as compared to a loss of $1.7 million for the same period in the prior year.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

(1) Stores at September 30, 2016 and September 30, 2015 consisted of 7,669 and 6,695 Grocery and 3,785 and 3,518 Mass and Club, respectively.

(2) Stores at September 30, 2016 and September 30, 2015 consisted of 4,505 and 4,185 Pet Specialty and 302 and 272 Natural, resp ectively.

* Includes sales from Freshpet Baked product of $3.6 million and $3.3 million, or 3.6% and 3.9% of total net sales, for the nine months ended September 30, 2016 and 2015, respectively.

Net sales increased $13.0 million, or 15%, to $99.0 million for the nine months ended September 30, 2016 as compared to the same period in the prior year. The $13.0 million increase in net sales was driven by growth in the Grocery, Mass, and Club refrigerated channel of $11.6 million, Pet Specialty of $1.1 million, and Baked of $0.3 million. The Company experienced an increase of Freshpet Fridge store locations, which grew by 10.8% from 14,670 as of September 30, 2015 to 16,261 as of September 30, 2016.

Gross Profit

Gross profit increased $4.2 million, or 10%, to $45.2 million for the nine months ended September 30, 2016 compared to the same period in the prior year. The increase in gross profit was primarily driven by higher net sales, partially offset by manufacturing throughput constraints associated with new product innovation, selling mix, increased depreciation due to our Freshpet Kitchens expansion, and non-capitalizable start-up costs associated with Freshpet Kitchens expansion.

Our gross profit margin of 46% for the nine months ended September 30, 2016, decreased 203 basis points as compared to the same period in the prior year primarily related to 51 basis points due to increased depreciation of our Freshpet Kitchens expansion, and 122 basis points due to non-capitalizable start-up costs associated with the Freshpet Kitchens expansion.

Adjusted Gross Profit was $49.0 million and $42.9 million in the nine months ended September 30, 2016 and 2015, respectively. Adjusted Gross Profit Margin was 49.5% and 49.8% in the nine months ended September 30, 2016 and 2015, respectively. Adjusted Gross Profit excludes $2.7 million of depreciation expense and $1.2 million of non-capitalizable plant start-up costs in the nine months ended September 30, 2016, and $1.9 million of depreciation expense in the nine months ended September 30, 2015. See “—Non-GAAP Financial Measures” for how we define Adjusted Gross Profit and a reconciliation of Adjusted Gross Profit to Gross Profit, the closest comparable U.S. GAAP measure.

Selling, General and Administrative Expenses

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Selling , general and administrative expenses increased $1.4 million, or 3%, to $48.9 million for the nine months ended September 30, 2016 as compared to the same period in the prior year. Key components of the dollar increase include additional outbound freight c osts of $0.1 million due to increased volume, higher depreciation of $0.7 million, additional non-recurring costs of $0.7 million ($1.3 million of leadership transition costs in 2016 as compared to $0.6 million of secondary fees in 2015), and incremental o perating expenses of $2.2 million, offset by lower advertising expenses of $0.3 million and lower share-based compensation expense of $2.0 million. The increased operating expenses were primarily due to new hires, increased employee benefit costs and incre ased refrigerator repairs due to our growing Freshpet Fridge network.

As a percentage of net sales, selling, general and administrative expenses decreased to 49% for the nine months ended September 30, 2016 from 55% for the nine months ended September 30, 2015. Adjusted SG&A decreased as a percentage of net sales to 45% in the first nine months of 2016 as compared to 48% of net sales in the same period of 2015. Adjusted SG&A excludes $3.3 million and $5.3 million for non-cash items related to share-based compensation in the nine months ended September 30, 2016 and 2015, respectively, $1.3 million of leadership transition expenses in the nine months ended September 30, 2016, and $0.6 million of costs associated with the secondary offering in the nine months ended September 30, 2015. See “—Non-GAAP Financial Measures” for how we define Adjusted SG&A and a reconciliation of Adjusted SG&A to SG&A, the closest comparable U.S. GAAP measure.

Income/(Loss) from Operations

Loss from operations decreased $2.8 million, or 42%, to $3.8 million for the nine months ended September 30, 2016 as compared to a loss from operations of $6.5 million in the same period in the prior year as a result of the factors discussed above.

Interest Expense

For the nine months ended September 30, 2016, interest expense was $0.5 million, which related to fees and interest expense on our short-term borrowings of our 3-year $10.0 million Revolving Facility and $30.0 million term loan commitment earmarked for capital expenditures. Interest expense for the nine months ended September 30, 2015 was $0.3 million.

Other (Income)/Expenses, net

Other (income)/expenses, net, decreased $0.2 million, or 128%, to $0.1 million primarily related to the revaluation of warrants. Income related to the revaluation of warrants was less than $0.1 million for the nine months ended September 30, 2016 compared to income of $0.3 million for the same period in the prior year.

Net Income/(Loss)

Net loss decreased $2.1 million, or 32%, to $4.4 million for the nine months ended September 30, 2016 as compared to a loss of $6.5 million for the same period in the prior year.

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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 Gr oss Profit

• Adjusted Gross Profit as a percentage of net sales (Adjusted Gross Margin)

• Adjusted SG&A expenses

• Adjusted SG&A expenses as a percentage of net sales

• EBITDA

• Adjusted EBITDA

The non-GAAP financial measures are not financial measures prepared in accordance with U.S. GAAP. We define Adjusted Gross Profit as Gross Profit before non-cash depreciation expense and plant start-up costs. We define Adjusted SG&A Expenses as SG&A Expenses before non-cash share-based compensation, leadership transition expenses, and fees related to a secondary offering. EBITDA represents net loss plus depreciation and amortization, interest expense, and income tax expense. Adjusted EBITDA represents EBITDA plus loss on disposal of equipment, plant start-up expense, share-based compensation, warrant fair valuation, launch expenses, fees related to a secondary offering, and leadership transition costs.

We believe that each of these non-GAAP financial measures provides an additional metric 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, provides 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 an important component of internal budgeting and setting management compensation.

The non-GAAP financial measures are presented here because we believe they are useful to investors in assessing the operating performance of our business without the effect of non-cash items, and other items as detailed below. The non-GAAP financial measures should not be considered in isolation or as alternatives to net loss, income from operations or any other measure of financial performance calculated and prescribed in accordance with U.S. GAAP. Neither EBITDA nor Adjusted EBITDA should be considered a measure of discretionary cash available to us to invest in the growth of our business. Our non-GAAP financial measures may not be comparable to similarly titled measures in other organizations because other organizations may not calculate non-GAAP financial measures in the same manner as we do.

Our presentation of the non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. We recognize that the non-GAAP financial measures have limitations as analytical financial measures. For example, the non-GAAP financial measures do not reflect:

Additionally, Adjusted EBITDA excludes (i) non-cash stock based compensation expense, which is and will remain a key element of our overall long term incentive compensation package, and (ii) certain costs essential to our sales growth and strategy, including an allowance for marketing expenses for each new store added to our network and non-capitalizable freight costs associated with Freshpet Fridge replacements. Adjusted EBITDA also excludes certain cash charges

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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 income/(loss), the most directly comparable financial measure presented in accordance with U.S. GAAP:

(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 wit h Freshpet Fridge replacements. The expense enhances the overall marketing spend to support our growing distribution network.

(b) Represents additional operating costs incurred in 2016 in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens expansion project.

(c) Represents non-cash stock based compensation expense.

(d) Represents the change of fair value for the outstanding common stock warrants.

(e) Represents fees associated with the secondary public offering of ou r common stock, which was completed on May 5, 2015.

(f) Represents charges associated within our former Chief Executive Officer’s separation agreement as well as changes in estimates associated with leadership transition costs.

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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:

(a) Represents non-cash depreciation expense included in Cost of Goods Sold.

(b) Represents additional operating costs incurred in 2016 in connection with the start-up of our new manufacturing lines as part of the Freshpet Kitchens expansion project.

The following table provides a reconciliation of Adjusted SG&A Expenses to SG&A Expenses, the most directly comparable financial measure presented in accordance with U.S. GAAP:

(a) Represents non-cash stock based compensation expense.

(b) Represents fees associated with the secondary public offering of our common stock, which was completed on May 5, 2015.

(c) Represents charges associated within our former Chief Executive Officer’s separation agreement as well as changes in estimates associated with leadership transition costs.

Liquidity and Capital Resources

Developing our business will require significant capital in the future. To meet our capital needs, we expect to rely on our current and future cash flow from operations, and our current available borrowing capacity. Our ability to obtain additional funding will be subject to various factors, including general market conditions, our operating performance, the market’s perception of our growth potential, lender sentiment and our ability to incur additional debt in compliance with other contractual restrictions, such as financial covenants under our debt agreements.

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Additionally, our ability t o make payments on, and to refinance, any indebtedness under our Credit Facilities and to fund any necessary expenditures for our growth will depend on our ability to generate cash in the future. If our business does not achieve the levels of profitability or generate the amount of cash that we anticipate or if we expand faster than anticipated, we may need to seek additional debt or equity financing to operate and expand our business. Future third-party financing may not be available on favorable terms or at all.

We believe that cash and cash equivalents, expected cash flow from operations and planned borrowing capacity are adequate to fund debt service requirements, operating lease obligations, capital expenditures and working capital obligations for the foreseeable future. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. Further, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may seek alternative financing, such as selling additional debt or equity securities, and we cannot assure you that we will be able to do so on favorable terms, if at all. Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity or convertible debt securities, existing stockholders may experience dilution, and such new securities could have rights senior to those of our common stock. These factors may make the timing, amount, terms and conditions of additional financings unattractive. Our inability to raise capital could impede our growth or otherwise require us to forego growth opportunities and could materially adversely affect our business, financial condition and results of operations.

Working Capital consists of current assets net of current liabilities. The working capital decrease to $(0.3) million at September 30, 2016 compared with $16.2 million at December 31, 2015 is primarily related to a decrease in cash and cash equivalents as a result of $26.1 million of capital expenditures, partially offset by cash flows from operations of $7.3 million, the increase in working capital assets and liabilities of $0.3 million and proceeds from the exercise of stock options of $2.0 million.

Our primary cash needs are for ingredients, purchases and operating expenses, marketing expenses and capital expenditures to procure Freshpet Fridges and expand and improve our manufacturing plant to support our net sales growth. The Company invested $17.4 million in the Freshpet Kitchens expansion project during 2016. A portion of the new equipment was placed in service in July, which resulted in incremental depreciation expense of $0.5 million in the third quarter. With the wind down of the expansion project, we expect to run the business and payback short-term borrowings with cash flow from operations.

We normally carry three to four weeks of finished goods inventory. The average duration of our accounts receivable is approximately three weeks.

As of September 30, 2016, our capital resources consisted primarily of $3.5 million cash on hand and $30.0 million available under our Credit Facilities. As noted above, we undertook a capital expansion project at our Freshpet Kitchens manufacturing facility. In order to fund the expansion, we borrowed $10.0 million under our Credit Facilities in the second and third quarter, and repaid $1.0 million during the third quarter of 2016. We expect to repay the remainder of this indebtedness by the end of the first half of 2017.

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The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by (or used in) operating, investing and financing activities and our ending balance of cash.

Net Cash Provided by Operating Activities.

Cash provided by operating activities consists primarily of net income adjusted for certain non-cash items (provision for loss on receivables, loss on disposal of equipment, depreciation and amortization, share based compensation, and the fair valuation of warrants).

For the nine months ended September 30, 2016, net cash provided by operating activities was $7.3 million, primarily consisting of adjusted net income of $6.4 million, which excludes $10.8 million of non-cash items primarily relating to $3.5 million of share based compensation and $7.0 million of depreciation and amortization. Proceeds were offset by a change in operating assets and liabilities of $0.9 million. Change in assets of $2.1 million is primarily related to growth in accounts receivable, which is primarily due to growth in net sales and an increase in the number of stores with a Freshpet fridge. The increase in liabilities of $3.0 million was due to timing of payments and accrued leadership transition costs.

For the nine months ended September 30, 2015, net cash provided by operating activities was $5.0 million, which primarily consisted of adjusted net income of $4.4 million, which excludes $10.9 million of non-cash items primarily relating to $5.1 million of share based compensation, which includes the fair value adjustment of warrants, and $5.5 million of depreciation and amortization. In addition, for the nine months ended September 30, 2015 there was $0.6 million of proceeds due to the change in operating assets and liabilities as a result of the increase of net liabilities being greater than the increase in net assets. The decrease in accounts payable was due to timing. The increase in accounts receivable was primarily due to growth in net sales. The decrease in inventory was due to timing of raw material purchases. The change in the other assets and liabilities was due to timing.

Net Cash Used in Investing Activities

Net cash used in investing activities was $22.8 million for the nine months ended September 30, 2016, relating primarily to September 30, 2016 capital expenditures for Freshpet Kitchens of $19.8 million (including the Freshpet Kitchens expansion of $17.4 million and recurring capital expenditures of $2.4 million) and investment in fridges and other capital spend of $6.3 million. The cash used in investing activities was partially offset by maturities of short-term investments of $3.3 million.

Net cash used in investing activities was $26.3 million for the nine months ended September 30, 2015, which relates primarily to purchases of short-term investments, net of settlement, of $3.7 million, capital expenditures related to the Freshpet Kitchens of $11.2 million (including the Freshpet Kitchens expansion of $10.2 million and recurring capital expenditures of $1.0 million), purchase of a building with 6.5 acres of land adjacent to our Freshpet Kitchens for $5.0 million and investment in fridges as well as other miscellaneous capital spend of $6.4 million.

Net Cash from Financing Activities

Net cash from financing activities was $11.0 million for the nine months ended September 30, 2016, attributable to the exercise of stock options of $2.0 million and the proceeds from borrowing $10.0 million under our Credit Facilities, partially offset by repayments of short term borrowing of $1.0 million.

Net cash from financing activities was $0.3 million for the nine months ended September 30, 2015, attributable to the exercise of stock options.

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Indebtedness

On November 13, 2014, the Company entered into senior secured credit facilities (the “Debt Refinancing”) comprised of a 5-year $18.0 million term facility (the “Term Facility”), a 3-year $10.0 million revolving facility (the “Revolving Facility”) and a $12.0 million additional term loan commitment earmarked primarily for capital expenditures (the “Capex Commitments” and together with the Term Facility and Revolving Facility, the “Credit Facilities” and such loan agreement, the “Loan Agreement”). On December 23, 2014, the Company repaid the outstanding $18.0 million and modified the terms of the $40.0 million Credit Facilities. The $18.0 million term facility was extinguished, the 3-year $10.0 million Revolving Facility remained unchanged, and the $12.0 million term loan commitment earmarked for capital expenditures was increased to $30.0 million. Any undrawn Capex Commitments will expire on the third anniversary of the execution of the agreement. Under the terms of the Loan Agreement, the commitments for the Revolving Facility may be increased up to $20.0 million subject to certain conditions. The Loan Agreement provides for the maintenance of various covenants, including financial covenants, and includes events of default that are customary for facilities of this type.

Any borrowings under the Credit Facilities bear interest at variable rates depending on our election, either at a base rate or at LIBOR, in each case, plus an applicable margin. The initial applicable margin is 3.75% for base rate loans and 4.75% for LIBOR loans. Thereafter, subject to our leverage ratio, the applicable base rate margin will vary from 2.75% and 3.75% and the applicable LIBOR rate margin will vary from 3.75% and 4.75%. The Credit Facilities are secured by substantially all of our assets. The Loan Agreement provides for the maintenance of various covenants, including financial covenants.  The Loan Agreement includes events of default that are usual for facilities and transactions of this type.

As of September 30, 2016, the Company was in compliance with all the covenants in the Loan Agreement and had $9.0 million in debt outstanding under the Credit Facilities. There was no accrued interest as of September 30, 2016 or December 31, 2015. Interest expense and fees totaled $0.2 million and $0.5 million for the three and nine months ended September 30, 2016, respectively. Interest expense and fees totaled $0.1 million and $0.3 million for the three and nine months ended September 30, 2015, respectively.

Contractual Obligations

There were no material changes to our commitments under contractual obligations, as disclosed in our Form 10-K, with the exception of borrowings under our Credit Facilities, accrued leadership transition costs, and our corporate lease. The Accrued leadership transition costs of $0.6 million are due in less than one year, and less than $0.1 million is due between one and three years. Borrowings under the Credit Facilities of $9.0 million are due between three and five years. Our corporate lease was renewed in July 2016. Obligations under this lease are $0.9 million between one and three years, $1.0 million between three and five years, and $1.4 million beyond five years.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements or any holdings in variable interest entities.

Critical Accounting Policies and Significant Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with U.S. GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Form 10-K.

Recent Accounting Pronouncements

In May 2014, the Financing Accounting Standard Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 to fiscal

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years beginning after December 15, 2017, and early adoption is only permitted for fiscal years beginning after December 15, 2016. The standard permits the use of either the retr ospective or cumulative effect transition method. The FASB also issued ASU No. 2016-10 regarding identification of performance obligations and licensing considerations and ASU No. 2016-12 regarding narrow scope improvements and practical expedients. The Co mpany is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial r eporting.

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

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which requires that an entity carry its inventory at lower of cost or net realizable value (which replaces “lower of cost or market”) if the first-in first-out (“FIFO”) or average cost methods are used. This new guidance is effective for the Company’s fiscal year beginning after December 15, 2016. The impact of ASU No. 2015-11 will depend on future valuation of the Company’s inventory.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The new guidance was adopted beginning January 1, 2016. The effects of ASU 2015-17 will change retrospectively how deferred tax assets and liabilities are classified within the balance sheet and notes thereto. Due to the Company’s full valuation allowance, deferred tax assets and liabilities have not been disclosed within the consolidated balance sheet.

In February 2016, the FASB issued ASU No. 2016-02, "Leases,” which requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is assessing the impact of ASU No. 2016-02 on its corporate office lease, and upon adoption of this guidance, expects to record the lease on its consolidated balance sheet in accordance with ASU No. 2016-02.

In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations,” which clarifies the implementation of guidance on principal versus agent considerations. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements under ASU No. 2014-09. The Company is assessing the impact of ASU No. 2016-08 on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company elected to early adopt this amendment in the second quarter of 2016. The Company has elected to account for forfeitures when they occur rather than estimating the number of awards that are expected to vest. The impact on the Company’s Consolidated Statements of Operations and Comprehensive Income/(Loss) was not material. The amendments related to excess tax benefits are not material due to the Company’s net operating losses.

In August 2016, FASB issued ASU No. 2016-15, “Statement of Cash Flows”, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows, such as proceeds from insurance claims. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company accounts for all applicable cash flows in accordance with this guidance and does not expect the standard to have a material impact on its consolidated financial statements and financial statement disclosures.

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