Freshpet Inc

Previous wording

Our net sales are derived from the sale of pet food 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 27,097 retail stores as of March 31, 2024. 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.

Current wording

Our net sales are derived from the sale of pet food 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 27,497 retail stores as of June 30, 2024. 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.

Previous wording

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Current wording

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

Previous wording

Net sales increased $56.3 million, or 33.6%, to $223.8 million for the three months ended March 31, 2024 as compared to $167.5 million in the same period in the prior year. The $56.3 million increase in net sales was driven by growth in the Grocery, Mass, International and Digital channel of $44.3 million, with the remaining growth in the Pet Specialty and Club channel. The net sales increase was primarily driven by volume gains of 30.6%.

Current wording

Net sales increased $51.9 million, or 28.3%, to $235.3 million for the three months ended June 30, 2024 as compared to $183.3 million in the same period in the prior year. The $51.9 million increase in net sales was driven by growth in the Grocery, Mass, International, and Digital channel of $37.4 million, with the remaining growth in the Pet Specialty and Club channel. The net sales increase was entirely driven by volume gains of 28.3%.

Previous wording

Gross profit was $88.2 million, or 39.4% as a percentage of net sales, for the three months ended March 31, 2024, compared to $50.8 million, or 30.3% as a percentage of net sales, in the prior year period. The increase in gross profit as a percentage of net sales was primarily due to improved leverage on plant expenses, reduced quality costs, and lower input cost as a percentage of sales. For the three months ended March 31, 2024, Adjusted Gross Profit was $101.5 million, or 45.3% as a percentage of net sales, compared to $64.4 million, or 38.5% as a percentage of net sales, in the prior year period.

Current wording

Gross profit was $94.0 million, or 39.9% as a percentage of net sales, for the three months ended June 30, 2024, compared to $59.2 million, or 32.3% as a percentage of net sales, in the prior year period. The increase in gross profit as a percentage of net sales was primarily due to lower input costs, reduced quality costs, and improved leverage on plant expenses. For the three months ended June 30, 2024, Adjusted Gross Profit was $108.0 million, or 45.9% as a percentage of net sales, compared to $73.0 million, or 39.8% as a percentage of net sales, in the prior year period.

Previous wording

Selling, general and administrative expenses ("SG&A") were $79.7 million for the three months ended March 31, 2024, compared to $72.3 million in the prior year period. As a percentage of net sales, SG&A decreased to 35.6% for the three months ended March 31, 2024, compared to 43.1% in the prior year period. The decrease of 750 basis points in SG&A as a percentage of net sales was mainly a result of reduced logistics costs and media as a percentage of net sales, in addition to lower share-based compensation.

Current wording

Selling, general and administrative expenses ("SG&A") were $95.7 million for the three months ended June 30, 2024, compared to $76.0 million in the prior year period. As a percentage of net sales, SG&A decreased to 40.7% for the three months ended June 30, 2024, compared to 41.5% in the prior year period. The decrease of 80 basis points in SG&A as a percentage of net sales was mainly a result of reduced logistics costs and media as a percentage of net sales, offset by higher share-based compensation.

Previous wording

Adjusted SG&A for the three months ended March 31, 2024, was $70.9 million, or 31.7% as a percentage of net sales, compared to $61.5 million, or 36.7% as a percentage of net sales, in the prior year period.

Current wording

Adjusted SG&A for the three months ended June 30, 2024, was $72.9 million, or 31.0% as a percentage of net sales, compared to $64.0 million, or 34.9% as a percentage of net sales, in the prior year period.

Previous wording

The Company recorded interest and other income, net of $3.3 million for the three months ended March 31, 2024 as a result of interest income generated from cash and cash equivalents as compared to $0.9 million for the three months ended March 31, 2023.

Current wording

The Company recorded interest and other income, net of $2.9 million for the three months ended June 30, 2024 as a result of interest income generated from cash and cash equivalents as compared to $4.1 million for the three months ended June 30, 2023.

Previous wording

Adjusted EBITDA was $30.6 million for the three months ended March 31, 2024, compared to $3.0 million in the prior year period. The increase in Adjusted EBITDA was a result of increased Adjusted Gross Profit partially offset by higher Adjusted SG&A expenses.

Current wording

Adjusted EBITDA was $35.1 million for the three months ended June 30, 2024, compared to $9.0 million in the prior year period. The increase in Adjusted EBITDA was a result of increased Adjusted Gross Profit, partially offset by higher Adjusted SG&A expenses.

Previous wording

See "—Non-GAAP Financial Measures" for how we define Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net income (loss) the closest comparable U.S. GAAP measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures; see the section entitled "Forward-Looking Statements" in this report and the section entitled "Risk Factors" in our Annual Report for factors that could cause our results to differ, in some cases materially.

Current wording

See "—Non-GAAP Financial Measures" for how we define Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net income (loss) the closest comparable U.S. GAAP measure, certain limitations of Non-GAAP measures and why management has included such Non-GAAP measures.

Previous wording

As a result of the factors discussed above, income from operations increased by $30.0 million to an income from operations of $8.5 million for the three months ended March 31, 2024 as compared to a loss from operations of $21.5 million for the same period in the prior year.

Current wording

As a result of the factors discussed above, income from operations increased by $45.0 million to an income from operations of $6.7 million for the six months ended June 30, 2024 as compared to a loss from operations of $38.3 million for the same period in the prior year.

Previous wording

Interest expense decreased $0.1 million to interest expense of $3.1 million for the three months ended March 31, 2024 as compared to interest expense of $3.2 million for the same period in the prior year. The decrease was primarily driven by the termination of our Credit Agreement in the prior year period resulting in the write-off of unamortized fees of $2.5 million, which were recorded to interest expense, partially offset by a $1.8 million increase (net of the $1.0 million of capitalized interest) as a result of interest incurred on our Convertible Notes as compared to interest incurred on the Credit Agreement that existed in the prior year period, as well as a $0.6 million increase related to the interest on our finance lease liability.

Current wording

Interest expense decreased $0.7 million to $5.8 million for the six months ended June 30, 2024 as compared to $6.5 million for the same period in the prior year. The decrease was primarily driven by the termination of our Credit Agreement in the prior year period resulting in the write-off of unamortized fees of $2.5 million, which were recorded to interest expense, partially offset by a $0.6 million increase (net of capitalized interest) as a result of interest incurred on our Convertible Notes compared to interest incurred in the prior year period, as well as a $1.2 million increase related to the interest on our finance lease liability.

Previous wording

The $9.9 million gain on equity investment for the three months ended March 31, 2024, resulted from the change in fair value of the Company's equity interest in a privately held company, as discussed in Note 1 of our (unaudited) condensed consolidated financial statements.

Current wording

The $9.9 million gain on equity investment for the six months ended June 30, 2024, resulted from the change in fair value of the Company's equity interest in a privately held company, as discussed in Note 1 - Summary of Significant Accounting Policies of our (unaudited) condensed consolidated financial statements.

Previous wording

Net income increased $43.4 million to a net income of $18.6 million for the three months ended March 31, 2024, as compared to a net loss of $24.8 million for the same period in the prior year due to contribution from higher sales, improved gross margin, reduced logistics costs as a percentage of net sales, and gain on equity investment, partially offset by increased SG&A expenses including increased media spend of $6.1 million.

Current wording

Net income increased $58.6 million to net income of $16.9 million for the six months ended June 30, 2024, as compared to a net loss of $41.7 million for the same period in the prior year due to contribution from higher sales, improved gross margin, reduced logistics costs as a percentage of net sales, and gain on equity investment, partially offset by increased SG&A expenses.

Previous wording

Such financial measures are not financial measures prepared in accordance with U.S. GAAP. We define Adjusted Gross Profit as Gross Profit before depreciation expense, non-cash share-based compensation, and loss on disposal of manufacturing equipment. We define Adjusted SG&A as SG&A expenses before depreciation and amortization expense, non-cash share-based compensation, implementation and other costs associated with the implementation of an ERP system, fees related to the Capped Call Transactions, loss on disposal of equipment, and advisory fees related to activism engagement. EBITDA represents net income (loss) plus interest expense net of interest income, income tax expense and depreciation and amortization. Adjusted EBITDA represents EBITDA plus loss on equity method investment, gain on equity investment, non-cash share-based compensation, implementation and other costs associated with the implementation of an ERP system, loss on disposal of property, plant and equipment, fees related to the Capped Call Transactions, and advisory fees related to activism engagement.

Current wording

Such financial measures are not financial measures prepared in accordance with U.S. GAAP. We define Adjusted Gross Profit as Gross Profit before depreciation expense, non-cash share-based compensation, and loss on disposal of manufacturing equipment. We define Adjusted SG&A as SG&A expenses before depreciation and amortization expense, non-cash share-based compensation, implementation and other costs associated with the implementation of an ERP system, fees related to the Capped Call Transactions, loss on disposal of equipment, and advisory fees related to activism engagement. EBITDA represents net income (loss) plus interest expense net of interest income, income tax expense and depreciation and amortization expense. Adjusted EBITDA represents EBITDA plus loss on equity method investment, gain on equity investment, non-cash share-based compensation expense, implementation and other costs associated with the implementation of an ERP system, loss on disposal of property, plant and equipment, fees related to the Capped Call Transactions, and advisory fees related to activism engagement.

Previous wording

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

Current wording

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

Previous wording

To meet our capital needs, we issued approximately $402.5 million in convertible notes in March 2023 (the “Convertible Notes”), used $66.2 million of the proceeds to enter into capped call transactions, and used $11.0 million of the proceeds on debt issuance related costs. Further, on March 13, 2023, in connection with the proposed offering of the Convertible Notes, the Company, notified City National Bank, of Freshpet's intent to terminate the Credit Agreement, and such termination became effective as of March 15, 2023 (the "Termination Date"). The Company had no borrowings outstanding under the Credit Agreement as of the date of the Termination Date.

Current wording

To meet our capital needs, we issued approximately $402.5 million in convertible notes in March 2023 (the “Convertible Notes”), used $66.2 million of the proceeds to enter into capped call transactions, and used $11.0 million of the proceeds on debt issuance related costs. Further, on March 13, 2023, in connection with the proposed offering of the Convertible Notes, the Company notified City National Bank of Freshpet's intent to terminate the Credit Agreement, and such termination became effective as of March 15, 2023 (the "Termination Date"). The Company had no borrowings outstanding under the Credit Agreement as of the Termination Date.

Previous wording

We expect to make future capital expenditures in connection with the completion of our planned development of Freshpet Kitchens Ennis Phase 2 and 3. During the three months ended March 31, 2024, we spent approximately $46.5 million of capital to meet our capacity needs as well as recurring capital expenditures. We expect to spend an additional $163.5 million in the remainder of fiscal 2024.

Current wording

We expect to make future capital expenditures in connection with the completion of our planned development of Freshpet Kitchens Ennis Phase 2 and 3. During the six months ended June 30, 2024, we spent approximately $94.8 million of capital to meet our capacity needs as well as recurring capital expenditures. We expect to spend an additional $105.2 million in the remainder of fiscal 2024.

Previous wording

Our primary cash needs, in addition to our plant expansions, are for purchasing ingredients, operating expenses, marketing expenses and capital expenditures to procure Freshpet Fridges. We believe that cash and cash equivalents, expected cash flow from operations, amounts previously raised through the issuance of the Convertible Notes and our ability to access the capital markets, if appropriate, are adequate to fund our debt requirements, operating and finance lease obligations, capital expenditures and working capital obligations for the foreseeable future. We believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to general economic factors, including but not limited to increasing interest rates and inflation, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. Expanding certain of our Freshpet Kitchens primarily comprises our material future cash requirement. However, our capital requirements, including our cash requirements, may vary materially from those currently planned if, for example, our revenues do not reach expected levels, or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may seek alternative financing, such as selling additional debt or equity securities, and we cannot assure you that we will be able to do so on favorable terms, if at all. Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity or if the Convertible Notes are converted to common shares, existing stockholders may experience dilution, and such new securities could have rights senior to those of our common stock. These factors may make the timing, amount, terms and conditions of additional financing unattractive. Our inability to raise capital could impede our growth or otherwise require us to forego growth opportunities and could materially adversely affect our business, financial condition and results of operations.

Current wording

Our primary cash needs, in addition to our plant expansions, are for purchasing ingredients, operating expenses, marketing expenses and capital expenditures to procure Freshpet Fridges. We believe that cash and cash equivalents, expected cash flow from operations, amounts previously raised through the issuance of the Convertible Notes and our ability to access the capital markets, if appropriate, are adequate to fund our debt service requirements, operating and finance lease obligations, capital expenditures and working capital obligations for the foreseeable future. We believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to general economic factors, including but not limited to increasing interest rates and inflation, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. Expanding certain of our Freshpet Kitchens primarily comprises our material future cash requirement. However, our capital requirements, including our cash requirements, may vary materially from those currently planned if, for example, our revenues do not reach expected levels, or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may seek alternative financing, such as issuing additional debt or equity securities, and we cannot assure you that we will be able to do so on favorable terms, if at all. Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity or if the Convertible Notes are converted to common shares, existing stockholders may experience dilution, and such new securities could have rights senior to those of our common stock. These factors may make the timing, amount, terms and conditions of additional financing unattractive. Our inability to raise capital could impede our growth or otherwise require us to forego growth opportunities and could materially adversely affect our business, financial condition and results of operations.

Previous wording

Working capital consists of current assets net of current liabilities. Working capital decreased $13.1 million to $325.0 million as of March 31, 2024 compared with working capital of $338.1 million as of December 31, 2023. The decrease was primarily a result of a decrease of $39.0 million in cash and cash equivalents, a decrease in prepaid expenses of $1.9 million, and an increase in accounts payable of $10.5 million as a result of timing and capital expenditures of approximately $16.1 million related to our capital expansion plan. The decrease was partially offset by an increase in accounts receivable of $11.8 million, an increase in inventories, net of $8.6 million, and a decrease in accrued expenses of $17.6 million due to timing and capital expenditures of approximately $1.3 million related to our capital expansion plan.

Current wording

Working capital consists of current assets net of current liabilities. Working capital decreased $22.9 million to $315.2 million as of June 30, 2024 compared with working capital of $338.1 million as of December 31, 2023. The decrease was primarily a result of a decrease of $45.2 million in cash and cash equivalents and an increase in accrued expenses of $3.1 million due to timing. The decrease was partially offset by an increase in accounts receivable of $11.4 million, an increase in inventories, net of $10.0 million, an increase in prepaid expenses of $1.0 million, an increase in other current assets of $0.7 million, a decrease in accounts payable of $2.0 as a result of timing, and a decrease of current operating lease liabilities of $0.3 million.

Previous wording

For the quarter ended March 31, 2024, our capital resources consisted primarily of $257.9 million of cash and cash equivalents on hand.

Current wording

As of June 30, 2024, our capital resources consisted primarily of $251.7 million of cash and cash equivalents on hand.

Previous wording

For the year ended December 31, 2023, our capital resources consisted primarily of $296.9 million of cash and cash equivalents on hand.

Current wording

As of December 31, 2023, our capital resources consisted primarily of $296.9 million of cash and cash equivalents on hand.

Previous wording

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

Current wording

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

Previous wording

Cash provided by (used in) operating activities consists primarily of net income (loss) adjusted for certain non-cash items (i.e., provision for loss (gains) on receivable, loss on disposal of property, plant and equipment, share-based compensation, change in reserve for inventory obsolescence, depreciation and amortization, write-off and amortization of deferred financing costs and loan discount, change in operating lease right of use asset, loss on equity method investment, and gain on equity investment).

Current wording

Net cash provided by (used in) operating activities consists primarily of net income (loss) adjusted for certain non-cash items (i.e., provision for loss (gains) on receivable, loss on disposal of property, plant and equipment, share-based compensation, change in reserve for inventory obsolescence, depreciation and amortization, write-off and amortization of deferred financing costs and loan discount, change in operating lease right of use asset, loss on equity method investment, and gain on equity investment).

Previous wording

Net cash provided by operating activities of $5.4 million for the three months ended March 31, 2024, was primarily attributed to:

Current wording

Net cash provided by operating activities of $47.8 million for the six months ended June 30, 2024, was primarily attributed to:

Previous wording

There were no material changes to our commitments under contractual obligations, as disclosed in our Annual Report, except as noted in Note 8 and 13 of our (unaudited) condensed consolidated financial statements.

Current wording

There were no material changes to our commitments under contractual obligations, as disclosed in our Annual Report, except as noted in Note 8 - Leases and Note 13 - Commitments and Contingencies of our (unaudited) condensed consolidated financial statements.

Previous wording

See Note 1 of our (unaudited) condensed consolidated financial statements for additional information.

Current wording

See Note 1 - Summary of Significant Accounting Policies of our (unaudited) condensed consolidated financial statements for additional information.