Freshpet, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Freshpet manufactures and sells fresh, refrigerated pet food and treats through its branded in-store refrigerators. It completed its IPO in November 2014.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $86.8 million | $63.2 million |
| Gross profit / margin | $42.2 million / 49% | $27.2 million / 43% |
| SG&A | $48.6 million | $39.6 million |
| Operating loss | $6.4 million | $12.4 million |
| Net loss | $37.3 million | $21.7 million |
| Adjusted EBITDA | $5.5 million | $(0.2) million |
| Cash used in operating activities | $8.0 million | $11.2 million |
| Capital expenditures | $17.1 million | $24.6 million |
| Cash and cash equivalents at year-end | $36.3 million | $2.4 million |
| Debt at year-end | None outstanding | $76.1 million |
Working capital was $41.9 million at year-end, versus $3.4 million in 2013. The company reported a $6.4 million annual operating loss despite positive adjusted EBITDA; adjusted EBITDA is a non-GAAP measure and excludes specified expenses.
Fourth quarter
Q4 2014 sales were $24.5 million, up from $17.7 million in Q4 2013. Gross profit was $12.0 million, with a 48.9% margin, compared with $6.4 million and 36.2%. Operations produced $0.6 million of income, versus a $1.8 million loss. Net loss was $16.4 million versus $5.2 million, substantially affected by the IPO-related preferred-stock conversion and guarantee-fee accounting.
Changes and notable items
- Annual sales increased 37%; Freshpet Fridge locations grew 24% to 13,386. Management cited wider distribution and sales-velocity gains.
- Gross margin improved six percentage points, primarily from higher volume, manufacturing efficiencies at the Bethlehem facility, and 2013 plant-startup costs that did not recur at the same level.
- Net loss widened, in large part because the company recorded $25.9 million of debt-guarantee fees and an $82.7 million additional loss attributable to common stockholders when Series C preferred stock converted at the IPO. The latter is included in the loss attributable to common stockholders, not the $37.3 million GAAP net loss.
- The IPO generated $164.4 million in net proceeds. Proceeds and related refinancing were used to repay debt and redeem Series B preferred stock; all debt was repaid by year-end. The company retained a $10 million revolving facility and increased capital-expenditure loan commitments to $30 million.
- Management expected approximately $23–$25 million of capital expenditures for plant expansion and distribution. It stated that available cash, expected operating cash flow, and borrowing capacity were adequate for foreseeable needs, while noting funding depends on revenue, cash generation, and cost management.
- Management reported effective disclosure controls at the reasonable-assurance level. The 10-K did not include management’s annual internal-control assessment or auditor attestation under the newly public company transition provisions.
Outlook, risks, and contingencies
Management’s growth strategy centers on expanding refrigerator placements, building consumer awareness, and introducing products. It cited a potential North American installation base of at least 35,000 stores, compared with 13,386 at year-end. The filing gives no specific revenue or earnings guidance.
- Key execution risks include limited manufacturing capacity, dependence on the Bethlehem plant and third-party distribution, and the need to expand capacity in line with demand.
- Customer concentration is significant: McLane, a distributor serving several retailers, accounted for 22% of sales; ten customers collectively represented more than 68%. No individual customer exceeded 10% in 2014, according to the filing.
- Input-cost, ingredient-supply, food-safety, product-liability, regulatory, and competitive risks could affect costs, sales, or brand reputation. Three vendors supplied approximately 54% of raw materials; three vendors supplied 96% of treat finished goods.
- Federal NOL carryforwards were approximately $163.0 million and state NOLs $124.5 million, subject to expiration and potential ownership-change limitations. A full valuation allowance was recorded against deferred tax assets.
- The company disclosed ordinary-course claims, primarily employment-related, and stated that no material legal proceeding was pending as of the report date.
Most important facts for investors to verify
- Whether sales growth and refrigerator expansion translate into sustained operating profitability and positive operating cash flow.
- Actual capacity, timing, and cost of the planned plant expansion and the projected $23–$25 million capital program.
- The terms, availability, covenant requirements, and utilization of the $10 million revolving facility and $30 million capex commitments.
- The economics behind adjusted EBITDA, including excluded costs, and the impact of stock compensation and other non-cash or IPO-related items.
- Exposure to key customers, distributors, ingredient suppliers, treat co-packers, and refrigerated transport providers.