frpt-20240930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_______________________________________________

FORM 10-Q

_______________________________________________


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36729

_______________________________________________

FRESHPET, INC.

(Exact Name of Registrant as Specified in its Charter)

_______________________________________________


Delaware			20-1884894
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1545 US-206, 1st Floor, Bedminster, New Jersey			07921
(Address of principal executive offices)			(Zip Code)

________________________________________________

Registrant’s telephone number, including area code: (201) 520-4000

________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	FRPT	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 31, 2024 the registrant had 48,536,779 shares of common stock, $0.001 par value per share, outstanding.

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TABLE OF CONTENTS


		Page No.
Part I. Financial Information		5
Item 1.	Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	36
Part II. Other Information		37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 5.	Other Information	37
Item 6.	Exhibits	38

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Forward-Looking Statements

This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” "target," “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

•our ability to meet our sustainability targets, goals, and commitments, including due to the impact of climate change;

•changes in global economic and financial market conditions generally, such as continued inflation and interest rate increases;

•the impact of various worldwide or macroeconomic events, such as the ongoing conflict between Russia and Ukraine and the current conflict in Israel and the Gaza Strip, on U.S. and global economics, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations;

•our ability to successfully implement our growth strategy, including related to implementing our marketing strategy and building capacity to meet demand, such as through the timely expansion of certain of our Freshpet Kitchens (collectively, our Freshpet Kitchens Bethlehem, Freshpet Kitchens South and Freshpet Kitchens Ennis);

•our ability to successfully implement new processes and systems as we continue to stabilize and improve our ERP;

•our ability to timely complete the construction at our Freshpet Kitchens Ennis and achieve the anticipated benefits therefrom;

•the loss of key members of our senior management team;

•allegations that our products cause injury or illness or fail to comply with government regulations;

•the loss of a significant customer;

•the entrance of new competitors into our industry;

•the effectiveness of our marketing and trade spending programs;

•our ability to introduce new products and improve existing products;

•our ability to match our manufacturing capacity with demand;

•the impact of government regulation, scrutiny, warning and public perception;

•the effect of false marketing claims;

•adverse weather conditions, natural disasters, pestilences and other natural conditions affecting our operations;

•our ability to develop and maintain our brand;

•the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require, including those effects caused by sustained inflation;

•our ability to manage our supply chain effectively;

•global or local pandemics, such as COVID-19;

•the failure of our information technology systems to perform adequately, including as a result of any interruptions, intrusions, cyber attacks or physical or electronic security breaches of such systems;

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•actions of activist stockholders;

•volatility in the price of our common stock; and

•other factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the headings "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023 and our subsequent Quarterly Reports on Form 10-Q.

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FRESHPET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)


	September 30, 2024		December 31, 2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	274,594	$	296,871
Accounts receivable, net of allowance for doubtful accounts	65,015		56,754
Inventories, net	72,791		63,238
Prepaid expenses	5,768		7,615
Other current assets	3,126		2,841
Total Current Assets	421,294		427,319
Property, plant and equipment, net	1,039,980		979,164
Deposits on equipment	1,118		1,895
Operating lease right of use assets	3,671		3,616
Long term investment in equity securities	33,446		23,528
Other assets	32,189		28,899
Total Assets	$	1,531,698	$	1,464,421
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	35,481	$	36,096
Accrued expenses	50,396		49,816
Current operating lease liabilities	1,290		1,312
Current finance lease liabilities	2,075		1,998
Total Current Liabilities	$	89,242	$	89,222
Convertible senior notes	394,633		393,074
Long term operating lease liabilities	2,556		2,591
Long term finance lease liabilities	23,820		26,080
Total Liabilities	$	510,251	$	510,967
Commitments and contingencies	—		—
STOCKHOLDERS' EQUITY:
Common stock — voting, $0.001 par value, 200,000 shares authorized, 48,551 issued and 48,537 outstanding on September 30, 2024, and 48,277 issued and 48,263 outstanding on December 31, 2023	48		48
Additional paid-in capital	1,321,767		1,282,984
Accumulated deficit	(299,928)		(328,731)
Accumulated other comprehensive loss	(184)		(591)
Treasury stock, at cost — 14 shares on September 30, 2024 and on December 31, 2023	(256)		(256)
Total Stockholders' Equity	1,021,447		953,454
Total Liabilities and Stockholders' Equity	$	1,531,698	$	1,464,421

See accompanying notes to the unaudited condensed consolidated financial statements.

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FRESHPET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands, except per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023
NET SALES	$	253,367	$	200,621	$	712,469	$	551,474
COST OF GOODS SOLD	151,120		134,328		428,112		375,177
GROSS PROFIT	102,247		66,293		284,357		176,297
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES	90,338		73,371		265,734		221,638
INCOME (LOSS) FROM OPERATIONS	11,909		(7,078)		18,623		(45,341)
OTHER INCOME (EXPENSES):
Interest and Other Income, net	2,963		4,130		9,158		9,185
Interest Expense	(2,923)		(4,148)		(8,734)		(10,648)
Gain on Equity Investment	—		—		9,918		—
	40		(18)		10,342		(1,463)
INCOME (LOSS) BEFORE INCOME TAXES	11,949		(7,096)		28,965		(46,804)
INCOME TAX EXPENSE	54		70		162		210
LOSS ON EQUITY METHOD INVESTMENT	—		—		—		1,890
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	11,895	$	(7,166)	$	28,803	$	(48,904)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in foreign currency translation	$	604	$	(296)	$	407	$	(2,329)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	604		(296)		407		(2,329)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	12,499	$	(7,462)	$	29,210	$	(51,233)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
-BASIC	$	0.25	$	(0.15)	$	0.59	$	(1.02)
-DILUTED	$	0.24	$	(0.15)	$	0.57	$	(1.02)
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
-BASIC	48,509		48,194		48,436		48,123
-DILUTED	50,282		48,194		50,203		48,123

See accompanying notes to the unaudited condensed consolidated financial statements.

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FRESHPET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)


	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Shares	Treasury Stock		Total Stockholders' Equity
BALANCES, June 30, 2024	48,493	$	48	$	1,308,623	$	(311,823)	$	(788)	14	$	(256)	$	995,804
Exercise of options to purchase common stock	51	—		1,320		—		—		—	—		1,320
Vesting of restricted stock units	7	—		(82)		—		—		—	—		(82)
Share-based compensation expense	—	—		11,906		—		—		—	—		11,906
Foreign currency translation	—	—		—		—		604		—	—		604
Net income	—	—		—		11,895		—		—	—		11,895
BALANCES, September 30, 2024	48,551	$	48	$	1,321,767	$	(299,928)	$	(184)	14	$	(256)	$	1,021,447


	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Shares	Treasury Stock		Total Stockholders' Equity
BALANCES, June 30, 2023	48,185	$	48	$	1,275,510	$	(336,855)	$	(663)	14	$	(256)	$	937,784
Exercise of options to purchase common stock	40	—		1,111		—		—		—	—		1,111
Vesting of restricted stock units	15	—		(9)		—		—		—	—		(9)
Share-based compensation expense	—	—		7,132		—		—		—	—		7,132
Foreign currency translation	—	—		—		—		(296)		—	—		(296)
Net loss	—	—		—		(7,166)		—		—	—		(7,166)
BALANCES, September 30, 2023	48,240	48		$	1,283,744	$	(344,021)	$	(959)	14	$	(256)	$	938,556


	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Shares	Treasury Stock		Total Stockholders' Equity
BALANCES, December 31, 2023	48,277	$	48	$	1,282,984	$	(328,731)	$	(591)	14	$	(256)	$	953,454
Exercise of options to purchase common stock	196	—		5,516		—		—		—	—		5,516
Vesting of restricted stock units	78	—		(2,241)		—		—		—	—		(2,241)
Share-based compensation expense	—	—		35,508		—		—		—	—		35,508
Foreign currency translation	—	—		—		—		407		—	—		407
Net income	—	—		—		28,803		—		—	—		28,803
BALANCES, September 30, 2024	48,551	$	48	$	1,321,767	$	(299,928)	$	(184)	14	$	(256)	$	1,021,447


	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Shares	Treasury Stock		Total Stockholders' Equity
BALANCES, December 31, 2022	48,051	$	48	$	1,325,524	$	(295,117)	$	1,370	14	$	(256)	$	1,031,569
Exercise of options to purchase common stock	131	—		4,172		—		—		—	—		4,172
Vesting of restricted stock units	58	—		(859)		—		—		—	—		(859)
Share-based compensation expense	—	—		21,118		—		—		—	—		21,118
Purchase of capped call options	—	—		(66,211)		—		—		—	—		(66,211)
Foreign currency translation	—	—		—		—		(2,329)		—	—		(2,329)
Net loss	—	—		—		(48,904)		—		—	—		(48,904)
BALANCES, September 30, 2023	48,240	$	48	$	1,283,744	$	(344,021)	$	(959)	14	$	(256)	$	938,556

See accompanying notes to the unaudited condensed consolidated financial statements.

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FRESHPET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	For the Nine Months Ended September 30,
	2024		2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	28,803	$	(48,904)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Provision for loss on accounts receivable	15		9
Loss on disposal of property, plant and equipment	1,054		688
Share-based compensation	37,862		24,952
Inventory obsolescence	732		—
Depreciation and amortization	52,249		45,436
Write-off and amortization of deferred financing costs and loan discount	1,559		3,548
Change in operating lease right of use asset	1,045		1,175
Loss on equity method investment	—		1,890
Gain on equity investment	(9,918)		—
Changes in operating assets and liabilities:
Accounts receivable	(8,294)		3,148
Inventories	(8,852)		(773)
Prepaid expenses and other current assets	(803)		(696)
Other assets	(1,540)		(3,495)
Accounts payable	8,839		2,300
Accrued expenses	2,355		11,109
Operating lease liability	(1,187)		(1,419)
Net cash flows provided by operating activities	103,919		38,968
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments	—		(113,441)
Proceeds from maturities of short-term investments	—		113,441
Acquisitions of property, plant and equipment, software and deposits on equipment	(128,828)		(161,642)
Net cash flows used in investing activities	(128,828)		(161,642)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options to purchase common stock	5,516		4,172
Tax withholdings related to net shares settlements of restricted stock units	(1,440)		(859)
Purchase of capped call options	—		(66,211)
Proceeds from issuance of convertible senior notes	—		393,518
Debt issuance costs	—		(2,026)
Principal payments under finance lease obligations	(1,444)		(548)
Net cash flows provided by financing activities	2,632		328,046
NET CHANGE IN CASH AND CASH EQUIVALENTS	(22,277)		205,372
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	296,871		132,735
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	274,594	$	338,107
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	13,766	$	8,691
Operating right-of-use assets obtained in exchange for lease obligations	$	1,785	$	—
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Property, plant and equipment purchases in accounts payable and accrued expenses	$	7,338	$	23,030
Non-cash addition of finance lease to property, plant and equipment	$	—	$	29,187
Tax withholdings related to net shares settlements of restricted stock units in accrued expenses	$	803	$	—

See accompanying notes to the unaudited condensed consolidated financial statements.

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FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

Note 1 – 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, International, Digital, Pet Specialty, and Club.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The unaudited condensed consolidated financial statements include the accounts of the Company as well as the Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The interim unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of management, the interim unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2024, the results of its operations and changes to stockholders’ equity for the three and nine months ended September 30, 2024 and 2023, and its cash flows for the nine months ended September 30, 2024 and 2023. The results for the three and nine months ended September 30, 2024, are not necessarily indicative of results to be expected for the year ending December 31, 2024, or any other interim periods, or any future year or period. All amounts included herein have been rounded except where otherwise stated. As figures are rounded, numbers presented throughout this document may not add up precisely to the totals we provide and percentages may not precisely reflect the absolute figures.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K for the year ended December 31, 2023.

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, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted.

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 a one-quarter lag based on the most recently available financial statements.

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FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

Through 2022, we invested a total of $31,200 in a privately held company that operates in our industry, with no additional investments thereafter. The Company concluded that it is not the primary beneficiary as it does not 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 its ability to exercise significant influence, based on its representation on and the makeup of the investee's Board of Directors.

On March 30, 2023, the Company no 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 Accounting Standards Codification (ASC) Topic 321 ("ASC 321"), Investments - Equity Securities. As of September 30, 2024, the Company's ability to exercise significant influence continues to be restricted as it no longer has, or the ability to obtain, board representation and it has no means of participation in any decision making processes as the privately held investee's Board of Directors is closely held.

Because the investee is a privately held company, there is not a means to obtain a readily determinable fair value of the entity. The Company follows ASC 321 using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence. Under ASC 321, the initial carrying value of the investment is equal to the previous carrying amount of the investment under the equity method. 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 Topic 820 (“ASC 820”), 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. On March 26, 2024, the investee completed an equity funding, which we concluded represented an orderly transaction for an identical equity security with no differences in rights and obligations. As a result, pursuant to the ASC 321 measurement alternative, we adjusted the carrying amount of our equity investment from $23,528 as of December 31, 2023 to $33,446 as of March 31, 2024, recognizing a gain of $9,918 in earnings for the three months ended March 31, 2024, based on the observable transactional price of the identical equity security issued by the investee.

March 2023 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.

Leases – The Company is a lessee in noncancelable (1) operating leases, and (2) finance leases, which it accounts for in accordance with ASC Topic 842, 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; and the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date.

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FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

The Company's leases do not 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 Subtopic 360-10, 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 September 30, 2024.

The Company monitors for events or changes in circumstances that require a reassessment of its 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 elected not to recognize right of use assets and lease liabilities for short-term leases that have a lease term of 12 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 effects 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 than not, the deferred tax asset will not be realized. At December 31, 2023, the Company determined that full valuation of its net deferred tax assets and liabilities is appropriate.

The net income position as of September 30, 2024 would be fully offset by our federal NOL carry forwards, resulting in no federal income tax expense in the current period. We maintain a full valuation allowance against our deferred tax assets. The Company will consider releasing some or all of the valuation allowance as future evidence supporting such release is recognized. Currently, the evidence supporting the maintenance of a full valuation allowance outweighs the evidence supporting any release.

Cash Equivalents – The Company holds treasury bills with original maturities when purchased of less than three 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 September 30, 2024, the Company had $99,604 of treasury bills within cash equivalents, which included $364 of amortized discount. As of December 31, 2023, the Company had $134,570 of treasury bills within cash equivalents, which included $692 of amortized discount.

Short-Term Investments – The Company, from time to time, holds treasury bills with original maturities when purchased of greater than three 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 September 30, 2024 and December 31, 2023, there were no short-term investments.

Trade Accounts Receivable – The allowance for doubtful accounts is based on the Company's assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer's ability to pay.

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FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

Implementation Costs of Cloud Computing Arrangement – As of September 30, 2024 and December 31, 2023, 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 $9,338 and $9,895, respectively. The cost will be recognized over the term of the agreement, which began in the first quarter of 2022.

Fair Value of Financial Instruments – ASC 820 guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

•Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies.

•Level 3 - Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

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 are not 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 Level 2 inputs. As of September 30, 2024, 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 operating lease right-of-use assets and property, plant and equipment are reported at their carrying values and are not 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 Note 6 - Convertible Senior Notes for the fair value of our Convertible Senior Notes.

As of September 30, 2024, the Company maintained Level 1 and Level 2 assets and liabilities.

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FRESHPET, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share data)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Grocery, Mass, International and Digital	$	208,889	$	167,781	$	585,574	$	462,772
Pet Specialty and Club

SEC Form 10-Q filed by Freshpet Inc.