Freshpet, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results; comparisons are with the three months ended March 31, 2014 unless noted. Freshpet manufactures and markets fresh, refrigerated pet food in the United States and Canada.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $27.1 million | $19.4 million |
| Gross profit / margin | $13.3 million / 49% | $9.3 million / 48% |
| Operating loss | $2.5 million | $2.3 million |
| Net loss | $2.6 million | $5.1 million |
| Net loss attributable to common stockholders | $2.6 million | $7.5 million |
| Operating cash flow | $1.1 million provided | $0.2 million used |
| Investing cash flow | $12.5 million used | $4.5 million used |
Sales rose 40% year over year; excluding the Freshpet Baked product test, management reported growth of 37%. Gross margin improved one percentage point, which management attributed mainly to higher sales and manufacturing efficiencies at Freshpet Kitchens. SG&A increased 36% to $15.8 million, but declined to 58% of sales from 60%. Higher share-based compensation, outbound freight, advertising, Baked-test research and development, and other operating costs contributed to the increase.
Adjusted EBITDA, a non-GAAP measure, was $2.0 million versus $0.8 million; GAAP operating and net losses persisted. The filing cautions that Adjusted EBITDA excludes items including share-based compensation and certain growth-related costs and is not a substitute for GAAP measures or a measure of cash available for investment.
Financial position and liquidity
- At March 31, cash and equivalents were $24.9 million and short-term investments were $7.5 million. Working capital was $37.6 million.
- Total assets were $113.0 million; total liabilities were $10.3 million and stockholders’ equity was $102.7 million.
- The company had no debt outstanding and reported compliance with credit-facility covenants. It reported $40 million available under its credit facilities, comprising a $10 million revolving facility and $30 million of capital-expenditure commitments.
- Investing cash use included $7.5 million of short-term investment purchases and approximately $5.0 million of property, equipment, software, and equipment deposits. Cash declined by $11.3 million during the quarter.
Business developments, outlook, and risks
- Freshpet Fridge locations increased 20.9% year over year, from 11,596 to 14,019. Grocery, Mass and Club generated 76% of Q1 sales; Pet Specialty, Natural and Other generated 24%.
- The company began a plant-capacity expansion intended to support growth and distribution. Management expected $24–$26 million of capital expenditures on the project during 2015 and 2016; $3.2 million was recorded in Q1.
- Management said it expects cash, operating cash flow, and borrowing capacity to fund foreseeable needs, including expansion, but cautioned that financing may be needed if cash generation or growth differs from expectations. No specific revenue or earnings guidance was provided.
- Risks include limited manufacturing capacity, dependence on continued sales growth and effective marketing, commodity-price volatility, and customer and supplier concentration. One distributor accounted for 20% of sales in Q1 2015; three vendors supplied approximately 50% of raw materials. Three other vendors supplied approximately 91% of treats finished goods.
- The company disclosed ordinary-course claims, primarily insurance-covered, and said it was not party to material pending legal proceedings. It reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
- After quarter-end, on May 5, 2015, selling stockholders completed a secondary offering of 6,110,353 shares at $21.47 per share. Freshpet received no proceeds.
Important facts for investors to verify
- Whether sales growth and the 14,019-store footprint translate into sustained sales velocity and improved profitability.
- Actual expansion spending, project timing, capacity gains, and funding requirements compared with the stated $24–$26 million plan.
- Cash conversion and working-capital needs, especially as receivables and inventory rise with sales.
- Concentration exposure among distributors, customers, and key suppliers, and any changes in those relationships.
- The terms and remaining availability of the credit facilities; the filing states no debt was outstanding at quarter-end.
- The effect of elevated share-based compensation and other excluded items when assessing non-GAAP Adjusted EBITDA.