Freshpet, Inc. — Q1 2023 Form 10-Q
Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Freshpet manufactures and markets fresh pet food and treats, sold through retail channels and company-owned refrigerated displays. The company reported approximately 25,650 retail locations with Freshpet Fridges at quarter-end.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $167.5 million | $132.2 million |
| Gross profit / GAAP gross margin | $50.8 million / 30.3% | $44.8 million / 33.9% |
| Adjusted gross profit / margin | $64.4 million / 38.5% | $50.6 million / 38.3% |
| SG&A | $72.3 million | $60.6 million |
| Loss from operations | $(21.5) million | $(15.9) million |
| Net loss | $(24.8) million; $(0.52) per diluted share | $(17.5) million; $(0.40) per diluted share |
| Adjusted EBITDA, non-GAAP | $3.0 million | $(0.3) million |
| Net cash used in operating activities | $(13.7) million | $(34.8) million |
Sales rose 26.7%, driven by velocity gains and higher pricing. Grocery, Mass and Club sales increased to $146.8 million from $115.5 million; Pet Specialty and Natural sales were $20.7 million versus $16.7 million. GAAP gross margin declined despite slightly higher adjusted gross margin.
At March 31, 2023, cash and cash equivalents were $337.1 million and short-term investments were $49.3 million; working capital was $457.4 million, compared with $172.4 million at year-end 2022. Total assets were $1.40 billion and stockholders’ equity was $948.9 million. Investing cash outflow was $107.4 million, including $58.0 million of capital expenditures and $49.3 million of short-term investment purchases.
Freshpet issued $402.5 million principal amount of 3.00% unsecured convertible senior notes due 2028; the net carrying value was $391.6 million. The notes have an initial conversion price of approximately $69.68 per share. The company spent $66.2 million on capped-call transactions intended to reduce potential dilution or offset certain conversion payments, subject to a cap. It terminated its credit facility in March and had no borrowings outstanding under it.
Material changes and unusual items
- Net loss widened by $7.2 million year over year. Management cited higher SG&A, including $4.4 million more media spend, higher depreciation, and unabsorbed plant costs, partly offset by contribution from higher sales.
- Reported gross margin fell 3.6 percentage points, primarily due to higher capacity-related depreciation, share-based compensation, and unabsorbed plant costs; lower input and quality costs partly offset these pressures. SG&A declined as a share of sales, to 43.1% from 45.9%.
- Interest expense increased to $3.2 million, including a $2.5 million write-off of unamortized fees when the credit facility was terminated.
- After losing board representation at an investee, Freshpet stopped equity-method accounting and began accounting for its investment under the equity-securities measurement alternative. The carrying value was $24.4 million at March 31; the filing says the final lagged equity-method adjustment would be recorded in June 2023.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Freshpet expects to spend an additional $180 million during the remainder of fiscal 2023 on production projects, refrigerators, maintenance and other capital needs; it spent approximately $60 million on capital in Q1.
- Management stated available cash, short-term investments, expected operating cash flow and potential capital-market access should fund operations and obligations for at least the next 12 months. This depends on achieving expected revenue and cash flow and managing costs and working capital; additional financing may be needed and may not be available on favorable terms.
- Key risks include timely completion and benefits of kitchen expansions, matching manufacturing capacity to demand, inflation and input costs, supply-chain execution, ERP implementation, competition, customer concentration, shareholder activism, and potential dilution or accounting impacts from convertible notes.
- Phillips Feed Service alleges breach of contract and seeks more than $8.3 million plus additional damages; Freshpet disputes the claims and has counterclaimed for amounts owed. Management does not currently expect a material adverse outcome, but says an unfavorable resolution could be materially adverse.
- Management reported disclosure controls and procedures were effective at quarter-end. ERP implementation and transition work continued; the filing says it had not materially affected internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and adjusted gross margin translate into improved GAAP margins and reduced operating losses as capacity expands.
- Actual remaining-2023 capital spending, kitchen-project timing and costs, and the resulting operating cash flow and liquidity needs.
- The terms and potential dilution or cash-settlement consequences of the convertible notes and capped calls, including any conversion or reclassification triggers.
- Developments in the Phillips litigation and the timing and valuation of the investee accounting adjustment.
- Progress in stabilizing the ERP system and managing the operational and financial risks associated with rapid capacity growth.