FRESHPET, INC. The following discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and cash flows as
of and for the periods presented below. The following discussion and analysis
should be read in conjunction with the accompanying unaudited consolidated
financial statements and related notes in Item 1 and with the audited
consolidated financial statements and the related notes included in our Annual
Report on Form 10-K for the year ended
In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section entitled "Forward-Looking Statements" in this report and in the section entitled "Risk Factors" in our Annual Report.
For information regarding our consolidated operating results, financial
condition, liquidity and cash flows for the three months ended
Overview
We started
Recent Developments
During late 2021, we announced two price increases designed to address the margin impact of inflation on our input costs, logistics and labor. The first price increase occurred during Q4 2021, and the second price increase occurred during Q1 2022. We believe the price increases caused our Q4 2021 and Q1 2022 household penetration growth to be below our historical rate, but we believe we are still progressing towards our long-term household penetration goals as the more recent trend shows acceleration more in-line with our historical rate. We believe the household penetration impact as a reaction to our price increases, to be a short-term setback when the higher pricing first appears on the shelf, but we expect it to turn positive through product distribution and media. We believe our buying rate will likely benefit from the higher pricing. Further, depending on the broader macroeconomic environment, including inflationary costs due to energy costs and raw ingredients, further pricing increases could be considered later in 2022. We have excess buffer capacity in our plans to ensure continuity of operations and insulate us from disruptions, minimizing out-of-stocks that we have previously experienced during certain consumption surges due to the COVID-19 pandemic and adverse supply chain issues due to inclement weather, as well as prepare us for the increased demand we expect by the end of 2022. In addition, we are introducing an enhanced long-term capacity expansion plan to provide greater capital efficiency and support long-term targeted net sales growth. See "-Liquidity and Capital Resources."
Continued Observations on the Effects of COVID-19
Our priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees, maximizing the availability of our products, and executing our "Feed the Growth" strategy.
We are unsure how long the COVID-19 pandemic, including current and evolving
health and safety guidance and local health and safety responses as well as
emergence of new variants, will require us to absorb higher costs to protect and
reward our employees while simultaneously ensuring we can support our pet
parents with a continual supply of
We will continue to monitor the retail environment and pet parent demand, and intend to adapt to changing conditions to continue to drive growth and meet our goal of "changing the way people feed their pets forever" during the evolving COVID-19 pandemic.
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Components of our Results of Operations
Net Sales
Our net sales are derived from the sale of products that are sold to retailers
through broker and distributor arrangements. Our products are sold to consumers
through a fast-growing network of company-owned branded refrigerators, known as
Freshpet Fridges, located in our customers' stores. We continue to roll out
Freshpet Fridges at leading retailers across
Our net sales growth is driven by the following key factors:
• Increasing sales velocity from the average Freshpet Fridge due to increasing
awareness, trial and adoption of Freshpet products and innovation. Our
investments in marketing and advertising help to drive awareness and trial at
each point of sale.
• Increasing penetration of Freshpet Fridge locations in major classes of
retail, including Grocery (including online), Mass, Club, Pet Specialty, and
Natural. The impact of new Freshpet Fridge installations on our net sales
varies by retail class and depends on numerous factors including store
traffic, refrigerator size, placement within the store, and proximity to other
stores that carry our products.
• Consumer trends including growing pet ownership, pet humanization and a focus
on health and wellness.
We believe that as a result of the above key factors, we will continue to penetrate the pet food marketplace and increase our share of the pet food category.
Gross Profit
Our gross profit is net of costs of goods sold, which include the costs of product manufacturing, product ingredients, packaging materials and inbound freight, as well as depreciation and amortization and non-cash share based compensation.
We expect to mitigate any adverse movement in input costs through a combination of cost management and price increases.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of the following:
Outbound freight. We use a third-party logistics provider for outbound freight that ships directly to retailers as well as third-party distributors.
Marketing & advertising. Our marketing and advertising expenses primarily consist of national television media, digital marketing, social media and grass roots marketing to drive brand awareness. These expenses may vary from quarter to quarter depending on the timing of our marketing and advertising campaigns. Our Feed the Growth initiative will focus on growing the business through increased marketing investments.
Freshpet Fridge operating costs. Freshpet Fridge operating costs consist of repair costs and depreciation. The purchase and installation costs for new Freshpet Fridges are capitalized and depreciated over the estimated useful life. All new refrigerators are covered by a manufacturer warranty for three years. We subsequently incur maintenance and freight costs for repairs and refurbishments handled by third-party service providers.
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Research & development. Research and development costs consist of expenses to develop and test new products. The costs are expensed as incurred.
Brokerage. We use third-party brokers to assist with monitoring our products at the point-of-sale as well as representing us at headquarters for various customers. These brokers visit our retail customers' store locations to ensure items are appropriately stocked and maintained.
Share-based compensation. We account for all share-based compensation payments issued to employees, directors and non-employees using a fair value method. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the grant date. We recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to us using the straight-line single option method.
Other general & administrative costs. Other general and administrative costs include non-plant personnel salaries and benefits, as well as corporate general & administrative costs.
Income Taxes
We had federal net operating loss ("NOL") carry forwards of approximately
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