FRESHPET, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q) – Marketscreener.com
The following discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and cash flows as
of and for the periods presented below. The following discussion and analysis
should be read in conjunction with the accompanying unaudited con…….
The following discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and cash flows as
of and for the periods presented below. The following discussion and analysis
should be read in conjunction with the accompanying unaudited consolidated
financial statements and related notes in Item 1 and with the audited
consolidated financial statements and the related notes included in our Annual
Report on Form 10-K for the year ended December 31, 2021 (our "Annual Report").
In addition to historical information, this discussion and analysis contains
forward-looking statements based on current expectations that involve risks,
uncertainties and assumptions, such as our plans, objectives, expectations, and
intentions. Our actual results and the timing of events may differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those set forth in the section entitled
"Forward-Looking Statements" in this report and in the section entitled "Risk
Factors" in our Annual Report.
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 Freshpet's inception 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
Throughout 2022 revenue growth remains strong and vibrant across dollars, units
and consumer penetration. As Freshpet has grown and faced supply chain
adversity, we have established that we need incremental resources across three
areas. These include improvements in logistics and supply chain, quality
(lowering HPP & disposals), and procurement/hedging of major ingredients. We
have implemented improvement programs and action plans in each area and expect
to begin to see positive impact in the latter months of 2022 and into 2023.
In order to manage ingredient costs, our third price increase of 2.6% went into
effect during September 2022. Thus far, it appears that most major retailers
have reflected that in their shelf prices and to date, we have not seen an
adverse effect on our growth rates.
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Increased Focus on Cash As part of the Company's increased focus on cash, we are changing how we report Adjusted Gross Profit, Adjusted SG&A, and Adjusted EBITDA. Beginning for the period ended September 30, 2022, we are no longer adding back launch expenses and plant start-up expense in our calculation of our non-GAAP metrics. This change is reflective of our increased focus on cash, and we believe that this revised presentation will provide greater clarity on our path toward generating positive net income as the business scales further following the Company's planned capacity additions.
The presentation for Adjusted Gross Profit, Adjusted SG&A, and Adjusted EBITDA
for the prior year period and prior quarter period has been recast as shown
below to reflect these changes to enhance comparability between periods.
The impact of the change on an annual basis is as follows:
FY 2020 FY 2021
(Dollars in thousands)
Gross profit $ 132,910$ 162,146
Depreciation expense 9,576 16,545
Non-cash share-based compensation 2,132 4,152
COVID-19 expense (a) 3,497 1,753
Adjusted Gross Profit $ 148,115$ 184,596
Adjusted Gross Profit as a % of Net Sales 46.5 % 43.4 %
(a) 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 related to mitigating potential supply
chain disruptions during the pandemic included in cost of goods sold. As of
the fourth quarter of 2021, all remaining COVID-19 related expenses are part
of our operating performance.
FY 2020 FY 2021
(Dollars in thousands)
SG&A expenses $ 134,908$ 186,809
Depreciation and amortization expense 11,549 13,923
Non-cash share-based compensation 8,793 20,846
Loss on disposal of equipment 1,805 1,000
Equity offering expenses (a) 58 -
Enterprise Resource Planning (b) 1,682 1,379
COVID-19 expense (c) 357 5
Organization changes (d) - -
Adjusted SG&A Expenses $ 110,664$ 149,656
Adjusted SG&A Expenses as a % of Net Sales 34.7 % 35.2 %
(a) Represents fees associated with public offerings of our common stock.
(b) Represents implementation, amortization of deferred implementation costs and
other costs associated with the implementation of an ERP system.
(c) 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 related to mitigating potential supply
chain disruptions during the pandemic. As of the fourth quarter of 2021, all
remaining COVID-19 related expenses are part of our operating performance.
Represents transition costs related to the organization changes designed to
(d) support growth, including several changes in organizational structure
designed to enhance capabilities and support long-term growth objectives.
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FY 2020 FY 2021
(Dollars in thousands)
Net loss $ (3,188 )$ (29,699 )
Depreciation and amortization 21,125 30,468
Interest expense 1,211 2,882
Income tax expense 65 162
EBITDA $ 19,213$ 3,813
Loss on equity method investment - 2,005
Loss on disposal of equipment 1,805 1,000
Non-cash share-based compensation 10,925 24,998
Equity offering expenses (a)
58 - Enterprise Resource Planning (b) 1,682 1,379 COVID-19 expense (c) 3,854 1,758 Organization changes (d) - - Adjusted EBITDA $ 37,537$ 34,953 Adjusted EBITDA as a % of Net Sales 11.8 % 8.2 % (a) Represents fees associated with public offerings of our common stock.
(b) Represents implementation, amortization of deferred implementation costs and
other costs associated with the implementation of an ERP system.
(c) 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 related to mitigating potential supply
chain disruptions during the pandemic. As of the fourth quarter of 2021, all
remaining COVID-19 related expenses are part of our operating performance.
Represents transition costs related to the organization changes designed to
(d) support growth, including several changes in organizational structure
designed to enhance capabilities and support long-term growth objectives.
Prior to September 30, 2022, the Company presented for the following items as
adjustments to its non-GAAP metrics. Those details are provided again here for
your convenience and for consideration in making comparisons to prior periods:
FY 2020 FY 2021
(Dollars in thousands)
Plant start-up expense $ 5,962$ 4,868
Launch expense 3,421 3,130
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The impact of the change on a quarterly basis is as follows:
Three Months Ended
3/31/2021 6/30/2021 9/30/2021 12/31/2021 3/31/2022 6/30/2022 9/30/2022
(Dollars in thousands)
Gross profit $ 36,315$ 43,091$ 41,525$ 41,216$ 44,753$ 51,080$ 44,545
Depreciation expense 3,800 4,021 4,075 4,649 4,701 4,295 5,159
Non-cash share-based
compensation 710 1,203 1,058 1,182 1,168 1,170 2,450
COVID-19 expense (a) 953 681 119 - - - -
Adjusted Gross Profit $ 41,778$ 48,996$ 46,777$ 47,047$ 50,622$ 56,545$ 52,154
Adjusted Gross Profit as a %
of Net Sales 44.7 % 45.1 % 43.5 % 40.6 % 38.3 % 38.7 % 34.5 %
(a) 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 related to mitigating potential supply
chain disruptions during the pandemic included in cost of goods sold. As of
the fourth quarter of 2021, all remaining COVID-19 related expenses are part
of our operating performance.
Three Months Ended
3/31/2021 6/30/2021 9/30/2021 12/31/2021 3/31/2022 6/30/2022 9/30/2022
(Dollars in thousands)
SG&A expenses $ 46,033$ 49,557$ 42,365$ 48,854$ 60,631$ 69,215$ 60,449
Depreciation and amortization
expense 3,289 3,633 3,671 3,330 3,285 3,585 3,387
Non-cash share-based
compensation 5,370 5,487 4,688 5,300 5,127 5,124 5,371
Loss on disposal of equipment 60 46 412 482 43 48 124
Equity offering expenses (a) 125 (125 ) - - - -
Enterprise Resource Planning
(b) 603 247 273 256 1,018 1,991 1,937
COVID-19 expense (c) 4 - - - - - -
Organization changes (d) - - - - - - 734
Adjusted SG&A Expenses $ 36,582$ 40,269$ 33,321$ 39,486$ 51,158$ 58,467$ 48,896
Adjusted SG&A Expenses as a %
of Net Sales 39.2 % 37.1 % 31.0 % 34.1 % 38.7 % 40.0 % 32.3 %
(a) Represents fees associated with public offerings of our common stock.
(b) Represents implementation, amortization of deferred implementation costs and
other costs associated with the implementation of an ERP system.
(c) 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 related to mitigating potential supply
chain disruptions during the pandemic. As of the fourth quarter of 2021, all
remaining COVID-19 related expenses are part of our operating performance.
Represents transition costs related to the organization changes designed to
(d) support growth, including several changes in organizational structure
designed to enhance capabilities and support long-term growth objectives.
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Three Months Ended
3/21/2021 6/30/2021 9/30/2021
12/31/20213/31/20226/30/20229/30/2022
(Dollars in thousands)
Net loss $ (10,888 )$ (7,475 )$ (2,070 )$ (9,265 )$ (17,542 )$ (20,586 )$ (18,448 )
Depreciation and
amortization 7,089 7,654 7,746 7,979 7,986 7,880 8,546
Interest expense 901 654 677 650 571 1,671 1,817
Income tax expense 16 16 16 114 41 41 41
EBITDA $ (2,882 )$ 849$ 6,369
$ (523 )$ (8,944 )$ (10,994 )$ (8,044 )
Loss on equity method
investment
248 337 $ 539 881 1,310 $ 717 943 Loss on disposal of equipment 60 46 412 482 43 48 124 Non-cash share-based compensation 6,080 6,690 5,746 6,482 6,295 6,294 7,821 Equity offering expenses (a) 125 (125 ) - - - - - Enterprise Resource Planning (b) 603 247 273 256 1,018 1,991 1,937 COVID-19 expense (c) 957 681 119 - - - - Organization changes (d) - - - - - - 734 Adjusted EBITDA $ 5,191$ 8,725$ 13,458
$ 7,578$ (278 )$ (1,944 )$ 3,515
Adjusted EBITDA as a % of
Net Sales
5.6 % 8.0 % 12.5 % 6.5 % -0.2 % -1.3 % 2.3 % (a) Represents fees associated with public offerings of our common stock.
(b) Represents implementation, amortization of deferred implementation costs and
other costs associated with the implementation of an ERP system.
(c) 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 related to mitigating potential supply
chain disruptions during the pandemic. As of the fourth quarter of 2021, all
remaining COVID-19 related expenses are part of our operating performance.
Represents transition costs related to the organization changes designed to
(d) support growth, including several changes in organizational structure
designed to enhance capabilities and support long-term growth objectives.
Prior to September 30, 2022, the Company presented for the following items as
adjustments to its non-GAAP metrics. Those details are provided again here for
your convenience and for consideration in making comparisons to prior periods:
Three Months Ended
3/31/2021 6/30/2021 9/30/2021 12/31/2021 3/31/2022 6/30/2022 9/30/2022
(Dollars in thousands)
Plant start-up expense $ 1,843$ 1,130$ 588$ 1,306$ 4,748$ 5,293$ 8,015
Launch expense 731 1,018 562 819 632 504 1,542
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Components of our Results of Operations
Net Sales Our net sales are derived from the sale of products that are sold to retailers through broker and distributor arrangements. 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 at leading retailers across North America and parts of Europe and have installed Freshpet Fridges in approximately 24,651 retail stores as of September 30, 2022. 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, 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 and inbound
freight, as well as depreciation and amortization and non-cash share based
compensation.
We expect to continue to mitigate any adverse movement in input costs through a
combination of cost management and price increases.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of the following:
Outbound freight. We use 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 focuses 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.
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Research & development. Research and development costs consist of expenses to
develop and test new products. The costs are expensed as incurred.
Brokerage. We use 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 to 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 single option method.
Other general & administrative costs. Other general and administrative costs
include non-plant personnel salaries and benefits, as well as corporate
general & administrative costs.
Income Taxes
We had federal net operating loss ("NOL") carry forwards of approximately $291.8
million as of December 31, 2021, of which approximately $175.4 million,
generated in 2017 and prior, will expire between 2025 and 2037. The NOL
generated from 2018 through 2021, of approximately $116.4 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, 2021, we had approximately $229.5 million of
state NOLs, which expire between 2022 and 2041, and had $14.3 million of foreign
NOLs which do not expire. At December 31, 2021, 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.
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