Freshpet Inc

Note1 – 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, Canada and other international markets, into major retail classes including Grocery, Mass and Club, Pet Specialty, Natural, and Digital 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”). The consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). All amounts included in the consolidated financial statements have been rounded except where otherwise stated. As figures are rounded, numbers presented throughout this document maynot* 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.

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. 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.

Segments – The Company operates as a single operating segment reporting to its chief operating decision maker.

Investment in Unconsolidated Company – The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, butnot control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than20% 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.

In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by its proportionate share of the net income or loss. The Company has elected to record its share of equity in income (losses) of equity method investment on aone-quarter lag based on the most recently available financial statements.

Through2022, we invested a total of $31,200 in a privately held company that operates in our industry, withno additional investments during2023. The Company concluded that it isnot the primary beneficiary, which is primarily the result of the Company's conclusion that it doesnot have the power to direct activities that most significantly impact economic performance. Prior to* March 30, 2023,the Company accounted for the investment under the equity method of accounting based on our ability to exercise significant influence, based on our representation on and the makeup of the investee's Board of Directors. 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 isnot* material to the Company's consolidated financial statements.

On* March 30, 2023,the Companyno* longer had representation on the investee's Board of Directors, and therefore determined that significant influence had been lost as of that date. As such, as of* March 30, 2023,the Company stopped accounting for the investment as an equity method investment and began to account for the investment under ASC Topic321* ("ASC321"), Investments - Equity Securities. As of* December 31, 2023,the Company's ability to exercise significant influence continues to be restricted as itno* longer has, or the ability to obtain, board representation and it hasno means of participation in any decision making processes as the privately held investee's Board of Directors is closely held.

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Because the investee is a privately held company, there isnot a means to obtain a readily determinable fair value of the entity. The Company follows ASC321 using the measurement alternative to measure investments in investees that donot have readily determinable fair value and over which the Company doesnot have significant influence. Under ASC321, the initial carrying value of the investment is equal to the previous carrying amount of the investment under the equity method. As the Company has historically recorded its proportionate share of income or loss from the investee on aone-quarter lag, the final adjustment to the carrying value of the investment was recorded in* June 2023.*The carrying amount of the investment is subsequently adjusted for any impairment or adjustments resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. Dividends and distributions, if any, from the investee would be recognized in the period in which they are received and recorded in other income on the consolidated statement of operations.

The Company performs a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the company estimates the investment's fair value in accordance with the principles of ASC Topic820 ("ASC820"), Fair Value Measurements and Disclosures. If the fair value is less than the investment's carrying value, the entity recognizes an impairment loss in earnings equal to the difference between the carrying value and fair value. There wereno observable price changes, impairment, or other matters that would require adjustment to the investment during the year ended* December 31, 2023.*

March2023 Issuance of $402.5 million of 3.00% Convertible Senior Notes (the "Convertible Notes")**– In conjunction with the issuance of the $402.5 million Convertible Notes in* March 2023,*the Company evaluated the debt instrument and its embedded features to determine if the contract or the embedded components of the contract qualified as a derivative that would be required to be separately accounted for in accordance with the relevant accounting literature.

The Company accounts for the Convertible Notes as a single liability measured at amortized cost. The Company uses the effective interest rate method to amortize the debt issuance costs to interest expense over the respective term of the Convertible Notes.

Inventories – Inventories are stated at the lower of cost or market, using thefirst-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,2 years for plates & dies, 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 donot extend the useful life of the assets overtwo 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 isnot 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.

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Leases – The Company is a lessee in noncancelable (1) operating leases, and (2) finance leases, which it accounts for in accordance with Accounting Standards Codification (ASC) Topic842, Leases.

The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right of use asset and a lease liability at the lease commencement date. For both operating and finance leases, the right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received; andthe lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. For operating leases, amortization of the right of use asset is calculated as the difference between the straight-line lease expense over the lease term and the accretion of interest on the lease liability each period. For the finance lease, the right of use asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of the useful life of the underlying asset or the end of the lease term. Amortization of the finance lease right of use asset is recognized and presented separately from interest expense on the lease liability.

The Company’s leases donot provide an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments for those leases. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms in a similar economic environment.

Right of use assets for the operating and finance leases are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic360-10, Property, Plant, and Equipment - Overall, to determine whether a right of use asset is impaired, and if so, the amount of the impairment loss to recognize.No such loss was recognized as of* December 31, 2023.*

The Company monitors for events or changes in circumstances that require a reassessment of it leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding right of use asset.

The Company has elected the practical expedient to combine lease and non-lease components when determining the right of use asset and lease liability. The Company has also electednot to recognize right of use assets and lease liabilities for short-term leases that have a lease term of12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term.

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 thannot, the deferred tax asset willnot be realized. At* December 31, 2023* and2022, the Company determined that full valuation of its net deferred tax assets and liabilities is appropriate.

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.

Cash Equivalents – The Company holds treasury bills with original maturities when purchased of less thanthree months, within cash and cash equivalents, carried at amortized cost on the Consolidated Balance Sheet. Treasury bills have been classified as held-to-maturity as we have the ability and intent to hold them to maturity. As of* December 31, 2023,the Company had $134,570 of treasury bills within cash equivalents, which included $692 of amortized discount. As of December 31, 2022,the Company hadno* treasury bills within cash equivalents.

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Short-Term Investments – The Company, from time to time, holds treasury bills with original maturities when purchased of greater thanthree months, within short-term investments, carried at amortized cost on the Consolidated Balance Sheet. Treasury bills have been classified as held-to-maturity as we have the ability and intent to hold them to maturity. As of* December 31, 2023,all of the Company's treasury bills within short-term investments matured during the year at $115,000, which included $1,559 of interest income. As of December 31, 2022,*all of the Company's treasury bills within short-term investments matured during the year at $20,000, which included $160 of interest income.

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.

Implementation Costs of Cloud Computing Arrangement – As of* December 31, 2023and2022,* the Company's deferred implementation costs of our new ERP system associated with our cloud computing arrangement, which were reflected within prepaid and other assets, were $9,895 and $9,444, respectively. The cost will be recognized over the term of the agreement, which began in thefirst quarter of2022.

Fair Value of Financial Instruments – Financial Accounting Standards Board (“FASB”) ASC820, Fair Value Measurements and Disclosure 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 (Level1 measurement) and the lowest priority to unobservable inputs (Level3 measurement).

Thethree levels of the fair value hierarchy are as follows:

Our financial assets and liabilities include cash and cash equivalents, receivables, accounts payable and accrued liabilities, the fair values of which approximate their carrying values due to the short-term nature of these instruments. The Company holds certain financial assets within cash and cash equivalents in the form of held-to-maturity treasury bills as we have the ability and intent to hold them to maturity, as such, they arenot fair valued each reporting period but instead measured at amortized cost. The fair value of these assets is based on quoted market prices for the same or similar securities within less active markets, which the Company determined to be Level2 inputs. As of* December 31, 2023,*the fair value of these treasury bills approximates their carrying value due to the short-term nature of these instruments.

Certain financial and non-financial assets, including the equity method investment, operating lease right-of-use assets and property, plant, and equipment are reported at their carrying values and arenot subject to recurring fair value measurements. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset* may**not* be recoverable. For the investment in equity securities, we have elected the measurement alternative under which we measure this investment at cost minus impairment, if any, plus or minus changes resulting from observable price changes, if any, in orderly transactions for an identical or a similar investment of the same issuer, for which the change in fair value would be included in net income.

Refer to Note7 for the fair value of our Convertible Senior Notes.

As of* December 31, 2023*, the Company only maintained Level1 and Level2 assets and liabilities.

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Debt Issuance Cost– The Company's policy is to record debt issuance costs as a direct deduction to the related debt liability in the Consolidated Balance Sheet and to amortize these debt issuance costs to interest expense over the term of the related debt using the effective interest method.

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 donot 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.

Sales taxes and other similar taxes are excluded from revenue.

There wereno contract assets as of* December 31, 2023and2022*.

Net Sales– Information about the Company’s net sales by class of retailer is as follows:

Advertising – Advertising costs are expensed when incurred, with the exception of production costs which are expensed thefirst time advertising takes place. Advertising costs, consisting primarily of media ads, were $97,877, $71,720 and $53,687, in2023,2022 and2021, respectively. As of* December 31, 2023,*2022 and2021 we had $56, $553 and $1,173, 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 throughthird-party carriers. Shipping and handling cost totaled $57,427, $63,891, and $47,713 in2023, 2022 and2021, respectively.

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Recently Issued Accounting Pronouncements

In* November 2023,the Financial Accounting Standards Board ("FASB") issuedASU2023-07, Segment Reporting (Topic280): Improvements to Reportable Segment Disclosures* to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This guidance will be effective for the Company for the annual report for the fiscal year ending* December 31, 2024*and subsequent interim periods. Early adoption is permitted and retrospective adoption is required for all prior periods presented. The Company is currently evaluating the provisions of this guidance and its effect on its future consolidated financial statements.

In* December 2023,the FASB issuedASU2023-09, Improvements to Income Tax Disclosures,which requires improved disclosures related to the rate reconciliation and income taxes paid. This ASU requires companies to reconcile the income tax expense attributable to continuing operations to the statutory federal income tax rate applied to pre-tax income from continuing operations. Additionally, this ASU requires companies to disclose the total amount of income taxes paid during the period. This guidance will be effective for the Company for the annual report for the fiscal year ending December 31,*2025, with early adoption permitted. The guidance is required to be applied on a prospective basis with the option to apply retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the provisions of this guidance and its effect on its future consolidated financial statements.

The Company didnot adopt any new Accounting Standard Updates during2023.

Note2 – Inventories, net:

Inventories are summarized as follows:

Note3 – Property, Plant and Equipment, net:

Property, plant and equipment are summarized as follows:

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Depreciation and amortization expense related to property, plant and equipment totaled $58,169, $34,332, and $29,467 in2023, 2022 and2021, respectively; of which $42,667, $20,774, and $16,545 was recorded in cost of goods sold for2023,2022 and2021, respectively, with the remainder of depreciation expense being recorded to selling, general and administrative expense.

Note4 – Income Taxes

A summary of income taxes as follows:

The provisions for income taxes donot 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:

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 thannot that some portion or all of the deferred income tax assets willnot 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 thannot that the Company’s deferred income tax assets willnot 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, 2023,*2022 and2021.

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

At* December 31, 2023*, the Company had federal net operating loss (“NOL”) carryforwards of $420.3 million, of which $175.4 million, generated in2017 and prior, will expire between2025 and2037. The NOL generated from2018 through2023, of approximately $244.9 million, will have an indefinite carryforward period but can generally only be used to offset80% of taxable income in any particular year. The Company* maybe subject to the net operating loss utilization provisions of Section382* 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. We have completed several analyses under Section382 of the Code in the past which concluded that certain annual limitations exist. At* December 31, 2023*, the Company had $312.8 million of state NOLs which expire between2024 and2043, and had $20.7 million of foreign NOLs in the United Kingdom which donot 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, 2023,there wereno* uncertain positions. The Company’s U.S. federal and state net operating losses have occurred since its inception in2005 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 didnot have any unrecognized tax benefits and hasnot accrued any interest or penalties through2023,2022 and2021.

The Company considered the impact of the disallowance of certain compensation tax deductions in excess of*$1.0* million under Internal Revenue Code Section162(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.

Note5 – Accrued Expenses:

Accrued expenses are summarized as follows:

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Note6 – Debt:

On* February 19, 2021,the Company entered into the Sixth Amended and Restated Loan and Security Agreement ("Credit 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 Credit Agreement provided for a $350,000 senior secured credit facility (as amended the "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 replaced the Company's prior $130,000 delayed draw term loan facility and $35,000 revolving loan facility. The Company incurred an additional $3,263 of fees associated with the debt modification, of which $2,797 was related to the Delayed Draw Term Loan ("DDTL") (as defined below) with the remaining balance relating to the Revolving Loan Facility (as defined below). 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.

The Credit Facility had an original maturity date of* February 19, 2026and borrowings thereunder bore interest at variable rates depending on the Company's election, either at a base rate or at the adjusted term SOFR (which rate was to be calculated based upon aone*-month tenor in effect on such date and was to be determined on a daily basis), 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 SOFR loans. The Company had the option to borrow term loans under the Delayed Draw Facility ("Delayed Draw Term Loans") until* August 19, 2023,*subject to certain conditions.

Borrowings under the Credit Facility were secured by substantially all of the Company's and certain of its subsidiaries' assets. The Credit Agreement required 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 Credit Agreement also included events of default customary for agreements of this type. The Credit Facility included a quarterly commitment fee on any unused amounts at a per annum rate between 0.30% to 0.50% depending on the aggregate principal outstanding.

On* April 29, 2022,*the Company entered into the First Amendment to the Credit Agreement, which amendment, among other things, (i) made amendments to allow for the Company's projected capital expenditures without either triggering mandatory prepayment obligations or violating the covenant and (ii) replaced the LIBOR interest rate for U.S. dollar loans with a term Secured Overnight Financing Rate ("Term SOFR").

On* March 13, 2023,the Company notified City National Bank, of Freshpet's intent to terminate the Credit Agreement, with such termination to be effective as of March 15, 2023 (*the "Termination Date"), in connection with the offering of the Convertible Notes.

As of* March 13, 2023,the Termination Date and December 31, 2022,the Company hadno borrowings outstanding under the Credit Facility. Interest expense and fees totaled $2,785, $5,208 and $2,882 in2023,* 2022 and2021, respectively. Interest expense in2023 included $2,478 of debt issuance costs written off in conjunction with the termination of the Credit Facility in* March 2023.There was $0 of accrued interest on the credit facilities as of December 31, 2023* and $904 accrued interest on the credit facilities as of* December 31, 2022.*

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Note7 – Convertible Senior Notes:

In* March 2023,we issued $402,500 aggregate principal amount of 3.0% convertible senior notes due2028.* The Convertible Notes were issued in a private offering to qualified institutional buyers pursuant to Rule144A under the Securities Act of1933, as amended (the Securities Act"). The net proceeds from the sale of the Convertible Notes were approximately $391,492 after deducting offering and issuance costs related to the Convertible Notes and before the2023 Capped Call transactions, as described below.

The Convertible Notes are our senior, unsecured obligations and accrue interest at a rate of 3.0% per annum, payable semi-annually in arrears on* April 1and October 1of each year, beginning on October 1, 2023.The Convertible Notes will mature on April 1, 2028unless earlier converted, redeemed or repurchased by us. Before January 3, 2028,noteholders will have the right to convert their Convertible Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended on June 30, 2023 (and only during such calendar quarter), if the last reported sale price of our common stock, par value $0.001 per share (the "common stock"), for each of at least20* trading days (whether ornot consecutive) during a period of30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to130% of the conversion price on each applicable trading day; (2) during thefive consecutive business day period immediately after any10 consecutive trading day period (the "measurement period") in which the trading price per*$1,000* principal amount of notes, as determined following a request by a holder or holders of the Convertible Notes in the manner described in indenture pursuant to which the Convertible Notes were issued and are governed (the “Indenture”), for each trading day of the measurement period, was less than98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the Convertible Notes for redemption, but only with respect to the convertible notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events (e.g., a fundamental change or the making of certain distributions). On or after* January 3, 2028,until the close of business on thesecond* scheduled trading day immediately preceding the maturity date, a holder* may*convert its Convertible Notes at any time, regardless of the foregoing circumstances.

We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion rate for the Convertible Notes is 14.3516 shares of common stock per*$1,000* principal amount of Notes, which represents an initial conversion price of approximately $69.68 per share of common stock. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, in connection with a make-whole fundamental change (as defined in the Indenture), which shall include among other things the Company's delivery of a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event or redemption, as the case* may*be.

We* maynot* redeem the Convertible Notes prior to* April 3, 2026.We mayredeem for cash all or any portion of the Convertible Notes, at our option, on or after April 3, 2026and on or before the40th scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for each of at least 20 trading days (whether ornot* consecutive) during the 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we send the notice of redemption, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. However, we* maynot* redeem less than all of the outstanding Convertible Notes unless at least $100 million aggregate principal amount of Convertible Notes are outstanding andnot called for redemption as of the time we send the related redemption notice.

Upon the occurrence of a fundamental change (as defined in the Indenture), holders* mayrequire the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to100%* of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid additional interest, if any, to, but excluding, the fundamental change repurchase date.

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The effective interest rate for the Convertible Notes is 3.59%. Transaction costs of $11,008 attributable to the issuance of the Convertible Notes were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and are amortized to interest expense over the term of the Convertible Notes using the effective interest method.

The Company measures the fair value of its Convertible Notes for disclosure purposes. The fair value is based on observable market prices for this debt, which is traded in less active markets and is therefore classified as a Level2 fair value measurement. The following table discloses the carrying value and fair value of the Company's Convertible Notes as of* December 31, 2023:*

(1)The carrying amounts presented are net of unamortized debt issuance costs of $9,426 as of* December 31, 2023.*

Lender fees that were paid upfront to the lenders and debt issuance fees paid tothird parties are recorded as a discount to the carrying amount of debt and are being amortized to interest expense over the life of the debt. The total interest expense for thetwelve months ended* December 31, 2023,*recognized related to the Convertible Notes consists of the following:

As of* December 31, 2023,of the $9,426 interest expense incurred to date, $6,406 was paid during the year, with $3,019 of accrued interest expense as of the year end. Of the $9,426 of interest expense incurred, approximately $1,207 of interest expense was capitalized to construction in progress as of December 31, 2023,as the proceeds from the sale of the Convertible Notes are being used to fund construction on the Company's manufacturing facility expansion in Ennis, Texas. As of December 31, 2023,*$136 of the $1,207 was reclassified from construction in progress to assets placed in service.

Note8 – Purchase of Capped Call Options:

In connection with the pricing of the Convertible Notes issued in* March 2023,*we used $66,211 of the net proceeds from the Convertible Notes to enter into privately negotiated capped call transactions (collectively, the "Capped Call Transactions") with certain financial institutions.

The Capped Call Transactions are generally expected to reduce potential dilution to holders of our common stock upon any conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Convertible Notes upon conversion of the Convertible Notes in the event that the market price per share of our common stock is greater than the strike price of the Capped Call Transactions, with such reduction and/or offset subject to a cap.

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The Capped Call Transactions have an initial cap price of approximately $120.23 per share, which represents a premium of120% over the last reported sale price of our common stock of $54.65 per share on* March 15, 2023,*and is subject to certain adjustments under the terms of the Capped Call Transactions. Collectively, the Capped Call Transactions cover, initially, the number of shares of our common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes.

The Capped Call Transactions are accounted for as freestanding derivatives and recorded at the initial fair value in additional paid-in-capital in the Consolidated Balance Sheet withno recorded subsequent change to fair value as long as they meet the criteria for equity classification. As of* December 31, 2023,*the instrument continued to qualify for equity classification.

Note9 – Commitments and Contingencies

Leases:

We have various noncancelable operating lease agreements for office and warehouse space with original remaining lease terms oftwo years tonine years, some of which include an option to extend the lease term for up tofour years. Because the Company isnot reasonably certain to exercise the renewal options on these lease arrangements, the options arenot considered in determining the lease term and associated potential option payments are excluded from lease payments. The Company’s leases generally donot include termination options for either party to the lease or restrictive financial or other covenants.

As of* July 2023,we also entered into a finance lease agreement for manufacturing equipment with an initial term often years, which includes an option to extend the lease term for up toten years, which the Company isnot* reasonably certain to exercise. The agreement didnot include termination options for either party to the lease or restrictive financial or other covenants. In connection with the manufacturing equipment lease, which is a new asset class, we elected the practical expedient to combine lease and non-lease components to determine the right of use asset and lease liability.

Weighted-average remaining lease term (in years) and discount rate related to operating and finance leases were as follows:

As most of our leases donot 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 and finance lease as of* December 31, 2023*were as follows:

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A summary of lease costs for2023 and2022 were as follows:

(a) Variable lease cost primarily consists of the procurement and manufacturing costs capitalized to inventory. During the period, $6,733 of variable lease costs were capitalized to inventory and will be captured as part of cost of goods sold as the inventory turns.

Supplemental balance sheet information as of* December 31, 2023and December 31, 2022*related to leases are as follows:

Supplemental cash flow information and non-cash activity relating to operating and finance leases are as follows:

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Commitments:

As of* December 31, 2023,*the Company has the following future commitments:

In* August 2023,we entered into a lease arrangement for a to-be constructed office space, which will contribute right of use assets and lease liabilities upon lease commencement, which is anticipated to occur by the end of2024.* As of* December 31, 2023,the future commitments related to this arrangement arenot* determinable as they are variable in nature. Our current headquarters lease in Secaucus, NJ expires in* June 2024.*

Certain of the Company’s executives are covered by employment contracts requiring the Company to pay severance in the event of certain terminations.

The future minimum payments due under manufacturing and service obligations forfive years were as follows:

Legal Obligations:

We are currently involved in various claims and legal actions that arise in the ordinary course of our business.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.

On* April 8, 2022,Phillips Feed Service, Inc., d/b/a Phillips Feed And Pet Supply ("Phillips") filed a complaint against the Company in U.S. District Court for the Eastern District of Pennsylvania (Allentown Division) for damages allegedly sustained as a result of the termination of the Company's distribution arrangement with Phillips, a former distributor of Freshpet products. Phillips asserts a claim for breach of contract, and seeks monetary damages in excess of $8,300 based on a claimed "termination payment" under a2018* "Letter Of Intent" and additional damages based on a claim for improper notice of termination. Phillips also claims a right of setoff with respect to monies owed by Phillips to the Company.

On* July 5, 2022,*the Company answered the complaint disputing the claimed damages, assertions of breach of contract, and the right of offset. In addition, the Company counterclaimed breach of contract for amounts owed to Freshpet earned while Phillips served as an authorized distributor of Freshpet product.

As of* December 31, 2022,*due to the claims and counterclaims between the parties, the Company reclassified the amounts due from Phillips of $8,971 to other noncurrent assets.

The fact discovery period in this action closed on* December 31, 2023,subject to the parties' agreement that each side may*take an additional deposition on financial issues if needed.

The parties are engaged in the expert discovery phase, which will close on* March 31, 2024.The case is scheduled for a non-jury trial on September 16, 2024.*

Based on information currently available and advice of counsel, we donot believe that the outcome of any of this matter is likely to have a material adverse effect on our business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of this matter, if unfavorable,* may*be materially adverse to our business, financial condition, results of operations or liquidity. Legal costs such as outside counsel fees and expenses are charged to selling, general and administrative expenses in the period incurred.

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(in thousands, except share data)

Note10 – Warrants:

In connection with an agreement we entered into with operators of Freshpet Kitchens South during thethird quarter of2022 in exchange for services, we issued our partner warrants to purchase up to an aggregate of 194,000 shares of voting common stock of the Company at a purchase price of $0.01 per share. The Company determined these warrants are accounted for under FASB ASC718 Stock Compensation. The warrants were recorded as a prepaid expense as the warrants were exercisable at the grant date. The prepaid expense will be amortized within Cost of Goods Sold as services are provided by the supplier. As of* December 31, 2023,and2022* there were $2,027 and $5,750 of warrants in prepaid expense, respectively and $0 and $1,438 of warrants in other assets, respectively.

During2022, 194,000 warrants were both issued and exercised, respectively. The grant date fair value of warrants granted during2022 was $50.32 per share.

Total amortization associated with partner warrants during2023 and2022 was $5,160 and $2,587, respectively.

Note11 – Equity Incentive Plans and Equity:

Total compensation cost for share-based payments recognized in2023, 2022 and2021 was approximately $19,774, $23,505 and $24,998, respectively. Cost of goods sold in2023, 2022 and2021 included share-based compensation of approximately $5,833, $4,706 and $4,152, respectively. Selling, general, and administrative expense in2023, 2022 and2021 included share-based compensation of approximately $13,941, $18,799 and $20,846, respectively.

The Company maintains the approved2014* Omnibus Incentive Plan** under which shares of common stock maybe issued or used for reference purposes as awards granted under the2014* Plan. These awards* maybe 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, 2023*, 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 overone year).

NASDAQ Marketplace Rules Inducement Award—During2016, 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.

During2022, as an inducement under the NASDAQ Marketplace Rules, and therefore outside of any Plan,40,120 service period stock options and 22,381 restricted stock units were granted to the Company's CFO.

Under the terms of the applicable agreement, each grant is governed as if issued under the2014 Omnibus Plan. The awards granted are time-based (cliff vest over four years orthree years) and performance-based (vest when performance targets are met, as defined in the stock option grant agreement).

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Service Period Stock Options*—A summary of service period stock options outstanding and changes under the plans during the year ended December 31, 2023* is presented below:

Of the options exercisable at the end of* December 31, 2023,*810 shares were in-the-money, which account for the entire aggregate intrinsic value.

As of* December 31, 2023*, there was $9,287 of total unrecognized compensation costs related to non-vested service period options, of which $8,667 will be incurred in2024, and the remaining $620 will be incurred in2025.

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 in2023* is presented below:

Of the options exercisable at the end of* December 31, 2023,*1,059 shares were in-the-money, which account for the entire aggregate intrinsic value.

As of* December 31, 2023*, there was approximately $8,805 of total unrecognized compensation costs related to performance-based awards for which the achievement of the vesting criteria is considered probable, of which $7,255 will be incurred in2024, $760 will be incurred in2025, $730 will be incurred in2026, and the remaining $60 will be incurred in2027.

As of* December 31, 2023,there were 423 unvested performance-based options outstanding that were deemednot* probable, with an aggregate fair value of $30,965.

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Service Period Restricted Stock Units*—The following table includes activity related to outstanding restricted stock units in2023.*

As of* December 31, 2023*, there was approximately $14,395 of total unrecognized compensation costs related to restricted stock units, of which $7,224 will be incurred in2024, $4,893 will be incurred in2025, $2,241 will be incurred in2026, and the remaining $37 will be incurred in2027.

Performance Based Restricted Stock Units*—The following table includes activity related to outstanding restricted stock units in2023.*

As of* December 31, 2023,there was approximately $5,478 of total unrecognized compensation costs related to performance-based restricted stock units for which the achievement of the vesting criteria is considered probable, of which $2,743 will be incurred in2024,* and the remaining $2,735 will be incurred in2025.

Grant Date Fair Value of Options—The weighted average grant date fair value of options (service period options and performance based options) granted during in2023, 2022 and2021 were $35.81, $37.39 and $74.90 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 ASC718, 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.

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Expected Dividend Yield—The Company hasnot historically declared dividends, andno future dividends are expected to be available to benefit option holders. Accordingly, the Company used an expected dividend yield ofzero in the valuation model.

Note12 – Net Loss Per Share Attributable to Common Stockholder:

Basic net income (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 income (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 in2023, 2022 and2021.

In2023, 2022 and2021, there wereno reconciling items between net loss 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:

Note13 – Retirement Plan:

The Company sponsors a safe harbor401(k) plan covering all employees. All employees are eligible to participate. Active participants in the plan* maymake contributions of up to 50% of their compensation, subject to certain limitations. Company contributions totaled approximately $3,109 in2023*, $2,297 in2022 and $1,829 in2021.

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Note14 – 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—In2023,2022 and2021, net sales toone of our distributors accounted for 9%,8% and 16% of our net sales, respectively. In2023 and2022 one customer accounted for more than 10% of our net sales, respectively, while in2021, no customers accounted for10% of our net sales. As of* December 31, 2023*, one distributor andtwo customers accounted for 15%,21% and 13% respectively, of our accounts receivable. As of* December 31, 2022*, two distributors andtwo customers accounted for 15%,6%,26% and 11% respectively, of our accounts receivable. As of* December 31, 2021,*two distributors andtwo customers accounted for 20%,10%,14% and 13%, respectively, of our accounts receivable.

Major Suppliers—The Company purchased approximately 29% of its raw materials fromone vendor during2023, approximately 33% of its raw materials fromone vendor during2022, and approximately 21% of its raw materials fromone vendor during2021.

The Company purchased approximately 96% of its packaging material from five vendors during2023,91% of its packaging material from five vendors during2022, and approximately 84% of its packaging material from five vendors during2021.

Note15 – Subsequent Events:

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued for recognition or disclosures.

The Company didnot identify any recognized or unrecognized subsequent events that have required adjustment or disclosure in the financial statements.

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