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 six months ended
Overview
We started
Recent Developments
Continued Observations on the Effects of COVID-19
Due to COVID-19, our retail customers experienced a surge in consumption in the
second half of Q1 2020 as consumers stocked up on food and necessities. The
unexpected surge in consumption caused a spike in
At the end of Q1 2020, we announced our post-surge pivot. That strategic pivot was built on a foundation that said, if we could keep our employees safe, then we could rebuild our supply and that would enable us to replenish our product supply in retail stores, which would allow us to turn on our advertising to drive consumption and household penetration gains. As a result, we invested in each of those areas, including safety enhancements to protect our team, incremental capacity at Kitchens South, incremental retail coverage, new e-commerce purchase and delivery options and additional media advertising.
The Company made and continues to make investments designed to protect its team
members. These efforts include taking the temperature of every team member and
administering a brief health screening before entering our
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Despite the COVID-19 related disruptions, our ability to bring the power of
fresh to pet parents has continued, in part due to our post-surge
pivot. Consumers' increased interest in their pets, the strong appeal of the
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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Supporting
At the Company's
Manufacturing Site Manufacturing Capability Investments to be Made
Kitchens 1.0
Kitchens 1.0 is an approximately
100,000 square-foot manufacturing
facility in Bethlehem, PA. It has
four manufacturing lines, each of
which has the ability to produce
our Freshpet Recipes seven days a
week/24 hours a day.
Kitchens 2.0 Kitchens 2.0 cost
Freshpet Kitchens Kitchens 2.0 is an approximately approximately
Bethlehem 140,000 square-foot addition to $116.0 million .
our Bethlehem, PA campus. It has
two manufacturing lines. Freshpet
Kitchens 2.0 makes greater use of
automation to improve quality,
safety and reduce costs. In
addition, Kitchens 2.0 delivers
on our commitment to continue to
minimize our manufacturing
impact. Production of saleable
product began in October 2020.
During 2020, the Company
officially opened a manufacturing
facility called "Freshpet
Kitchens South," which cooked its
first meal in February 2020.
To date, we have invested
In order to ensure we are able to approximately $31.3
deliver on projected growth, the million in Freshpet
Company is also looking to add Kitchens South. From the
Freshpet Kitchens additional manufacturing lines. second quarter of 2021 to
South The capacity build out is 2023, we expect to make an
expected to occur in two phases. additional investment of
approximately $165.0
By the end of 2021, we expect the million to complete phase
first phase of Freshpet Kitchens 1 and phase 2.
South to be completed. By the
start of 2023, we expect the
second phase to be completed,
which will include a second
building that will house
additional manufacturing lines.
During the end of 2019, the
Company started its initial Projected spend on the
design and engineering phase of project is $530.0 million
Freshpet Kitchens Freshpet Kitchens Ennis, which to $600.0 million . We have
Ennis sits on 74 acres in Ennis, Texas. invested approximately
We expect initial production to $114.2 million in the
begin by the second quarter of project to date.
2022.
Additionally, the Company is upgrading its enterprise resource planning ("ERP") system. The project commenced in Q1 2020 and is expected to run through Q4 of 2021.
In order to fund the strategic capital investments as well as provide the
Company with capital flexibility, in
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In addition, on
The Company intends to use the net proceeds from the equity offering, borrowings
from the New Credit Facility and cash from operations to continue to fund the
Components of our Operating Results
Net Sales
Our net sales are derived from the sale of pet food to our customers, who
purchase either directly from us or through third-party distributors. 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.
• Increased 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.
Our gross profit margins are also impacted by the cost of ingredients, packaging materials, and labor and overhead and share-based compensation related to direct labor and overhead. 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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