NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
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,” "us" 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 unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The unaudited consolidated 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. The interim unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of management, the interim unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2021, the results of its operations and changes to stockholders’ equity for the three months ended March 31, 2021 and 2020, and its cash flows for the three months ended March 31, 2021 and 2020. The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, or any other interim periods, or any future year or period. Certain amounts that appear in this report may not add up because of differences due to rounding.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K for the year ended December 31, 2020.
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 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 our consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results, as determined at a later date, could differ from those estimates.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
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).
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, short-term investments, 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 March 31, 2021, the Company only maintained Level 1 assets and liabilities.
Trade accounts 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 10 shares totaling $1,529 for the three months ended March 31, 2021, and withheld 10 shares totaling $644 for the three months ended March 31, 2020.
Debt Issuance Cost – During the first quarter of 2021, as part of the Sixth Amended and Restated Loan and Security Agreement (as amended, the "New Loan Agreement"), the Company incurred an additional $3,166 of fees associated with the debt modification, of which $2,713 of the fees were related to the Delayed Draw Term Loan with the remaining balance relating to the Revolving Loan Facility. The Company also wrote down $485 of fees incurred from the prior credit facilities. 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 March 31, 2021, there was $2,996 of debt issuance cost that was recorded to other assets and $773 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.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Net Sales - Information about the Company’s net sales by class of retailer is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Grocery (including Online), Mass and Club
|
|
$
|
79,071
|
|
|
$
|
60,819
|
|
Pet Specialty and Natural
|
|
|
14,342
|
|
|
|
9,279
|
|
Net Sales
|
|
$
|
93,414
|
|
|
$
|
70,098
|
|
Recently Adopted Accounting Standards
In January 2020, the FASB issued Accounting Standards Update ("ASU") 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. We adopted the requirements of ASU 2020-01 prospectively as of January 1, 2021. The adoption of ASU 2020-01 did not have a significant impact on our consolidated financial statements.
Note 2 – Inventories:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw Materials and Work in Process
|
|
$
|
9,163
|
|
|
$
|
9,347
|
|
Packaging Components Material
|
|
|
2,442
|
|
|
|
1,872
|
|
Finished Goods
|
|
|
10,744
|
|
|
|
8,365
|
|
|
|
|
22,349
|
|
|
|
19,584
|
|
Reserve for Obsolete Inventory
|
|
|
(524
|
)
|
|
|
(465
|
)
|
Inventories, net
|
|
$
|
21,825
|
|
|
$
|
19,119
|
|
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 3 – Property, Plant and Equipment:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Refrigeration Equipment
|
|
$
|
111,536
|
|
|
$
|
107,703
|
|
Machinery and Equipment
|
|
|
115,613
|
|
|
|
106,176
|
|
Building, Land, and Improvements
|
|
|
103,850
|
|
|
|
101,786
|
|
Furniture and Office Equipment
|
|
|
5,883
|
|
|
|
5,687
|
|
Leasehold Improvements
|
|
|
1,314
|
|
|
|
1,301
|
|
Automotive Equipment
|
|
|
65
|
|
|
|
160
|
|
Construction in Progress
|
|
|
85,671
|
|
|
|
44,497
|
|
|
|
|
423,931
|
|
|
|
367,310
|
|
Less: Accumulated Depreciation
|
|
|
(92,560
|
)
|
|
|
(86,237
|
)
|
Property, plant and equipment, net
|
|
$
|
331,371
|
|
|
$
|
281,073
|
|
Depreciation expense related to property, plant and equipment totaled $6,585 for the three months ended March 31, 2021, of which $3,800 was recorded to cost of goods sold for the three months ended March 31, 2021, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.
Depreciation expense related to property, plant and equipment totaled $4,373 for the three months ended March 31, 2020, of which $1,744 was recorded to cost of goods sold for the three months ended March 31, 2020, with the remainder of depreciation and amortization expense recorded to selling, general and administrative expense.
Note 4 – Accrued Expenses:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accrued Compensation and Employee Related Costs
|
|
|
5,321
|
|
|
|
8,185
|
|
Accrued Chiller Cost
|
|
|
2,151
|
|
|
|
2,049
|
|
Accrued Customer Consideration
|
|
|
626
|
|
|
|
502
|
|
Accrued Freight
|
|
|
1,596
|
|
|
|
1,002
|
|
Accrued Production Expenses
|
|
|
823
|
|
|
|
705
|
|
Accrued Marketing
|
|
|
432
|
|
|
|
684
|
|
Accrued Corporate Expenses
|
|
|
1,581
|
|
|
|
1,629
|
|
Other Accrued Expenses
|
|
|
1,040
|
|
|
|
615
|
|
Accrued expenses
|
|
$
|
13,570
|
|
|
$
|
15,371
|
|
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 5 – Debt:
On February 19, 2021, the Company entered into the New Loan Agreement, which amended and restated in full the Company’s Fifth Amended and Restated Loan and Security Agreement, dated as of April 17, 2020. The New Loan Agreement provides for a $350,000 senior secured credit facility (the "New Credit Facility"), encompassing a $300,000 delayed draw term loan facility (the "Delayed Draw Facility") and a $50,000 revolving loan facility (the "Revolving Loan Facility"), which replaces the Company's prior $130,000 delayed draw term loan facility and $35,000 revolving loan facility.
The New Credit Facility matures on February 19, 2026 and borrowings thereunder bear interest at variable rates depending on the Company's election, either at a base rate or at LIBOR (or a comparable successor rate if LIBOR no longer exists), in each case, plus an applicable margin. Subject to the Company's leverage ratio, the applicable margin varies 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 1/28th of the total single term loan ("the Initial Combined Delayed Draw Term Loan"). Commencing on August 19, 2023, the amount of any outstanding Delayed Draw Term Loans, combined with the Initial Combined Delayed Draw Term Loan, shall be repayable in equal consecutive quarterly installments equal to 1/28th of the outstanding Delayed Draw Term Loans and the remainder shall be due and payable on February 19, 2026.
Borrowings under the New Credit Facility are 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's 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.
As of March 31, 2021, the Company had no debt outstanding under the Credit Facility.
In connection with entering into the New Credit Facility, the Company incurred $3,166 of debt issuance cost, which is capitalized on the balance sheet and amortized over the life of the New Credit Facility, and wrote off $485 of fees incurred from the prior credit facilities.
As of March 31, 2021, there was $3,769 of debt issuance cost from the New Credit Facility as well as fees incurred from the prior credit facilities.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 6 – Leases:
We have various noncancelable 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:
Weighted-average remaining lease term
|
|
|
5.20
|
|
Weighted-average discount rate
|
|
|
6.14
|
%
|
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments.
Maturities of lease liabilities under noncancelable operating leases as of March 31, 2021 were as follows:
Operating Lease Obligations
|
|
March 31, 2021
|
|
2021 (a)
|
|
$
|
1,326
|
|
2022
|
|
|
1,768
|
|
2023
|
|
|
1,802
|
|
2024
|
|
|
1,511
|
|
2025 and beyond
|
|
|
2,786
|
|
Total lease payments
|
|
$
|
9,193
|
|
Less: Imputed interest
|
|
|
(1,108
|
)
|
Present value of lease liabilities
|
|
$
|
8,084
|
|
|
(a)
|
Excluding the three months ended March 31, 2021.
|
A summary of rent expense for the three months ended March 31, 2021 and 2020 was as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating lease cost
|
|
$
|
447
|
|
|
$
|
452
|
|
Supplemental cash flow information and non-cash activity relating to operating leases are as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
434
|
|
|
$
|
284
|
|
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 7 – Equity Incentive Plans:
Total compensation cost for share-based payments recognized for the three months ended March 31, 2021 and 2020 is $6,151 and $2,242, respectively. During the three months ended March 31, 2021, 34 and 37 service period stock options and performance stock options, respectively, were exercised. During the three months ended March 31, 2021, 30 service period restricted stock units were granted at a weighted average grant-date fair market value of $155.06. During the three months ended March 31, 2021, 33 service period restricted stock units vested.
Note 8 – Earnings Per Share Attributable to Common Stockholders:
Basic net (loss) per share of common stock is calculated by dividing net (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net (loss) per share of common stock is computed by giving effect to all potentially dilutive securities.
For the three months ended March 31, 2021 and 2020, there were no adjustments between net loss and net loss attributable to common stockholders.
The potentially dilutive securities are as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Service Period Stock Options
|
|
|
1,318
|
|
|
|
1,356
|
|
Restricted Stock Units
|
|
|
199
|
|
|
|
242
|
|
Performance Stock Options
|
|
|
961
|
|
|
|
34
|
|
Total
|
|
|
2,478
|
|
|
|
1,632
|
|
For the three months ended March 31, 2021 and 2020, diluted net loss per share of common stock is the same as basic net loss per share of common stock, due to the fact that potentially dilutive securities would have an antidilutive effect as the Company incurred a net loss during such period.
FRESHPET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share data)
Note 9 – Concentrations:
Concentration of Credit Risk—The Company maintains its cash balances in financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 each. At times, such balances may be in excess of the FDIC insurance limit.
Note 10 – Commitments and Contingencies:
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.
Note 11 – Subsequent Events:
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued for recognitions or disclosures.
The Company did not identify any recognized or unrecognized subsequent events that have required adjustment or disclosure in the financial statements.