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Note 10 - Equity Incentive Plans and Equity

12 Months Ended

Dec. 31, 2020

Share-based Payment Arrangement [Text Block]

Note 10 – Equity Incentive Plans and Equity:

Total compensation cost for share-based payments recognized for the years ended December 31, 2020, 2019, and 2018 was approximately $10.9 million, $7.8 million, and $6.8 million, respectively. Cost of goods sold for the years ended December 31, 2020, 2019, and 2018 included share-based compensation of approximately $2.1 million, $0.9 million, and $0.9 million, respectively. Selling, general, and administrative expense for the year ended December 31, 2020, 2019, and 2018 included share-based compensation of approximately $8.8 million, $6.9 million, and $5.9 million, respectively. Capital expenditures recorded for the Freshpet Kitchens expansion project included share-based compensation of approximately $0.2 million and $0.2 million during the years ended December 31, 2020 and 2019, respectively.

2010 Stock Plan—In December 2010, the Company approved the 2010 Stock Plan (the “2010 Plan”) under which options to purchase approximately 2,146,320 shares of the Company’s common stock were granted to employees and affiliates of the Company (in 2012, the 2010 Plan was amended to allow for option to purchase approximately 2,220,280 shares of the Company’s common stock). These options are either time-based (vest over four years), performance-based (vest when performance targets are met, as defined in the stock option grant agreement), or vest at the occurrence of an exit event which is defined as a Change of Control in the Company, as defined in the stock grant agreement.

The options granted have maximum contractual terms of 10 years. The Board of Directors froze the 2010 Stock Plan such that no further grants may be issued under the 2010 Stock Plan.

At December 31, 2020, the total number of unexercised options for the 2010 Plan is 26,130.

2014 Omnibus Incentive Plan—In November 2014, the Company approved the 2014 Omnibus Incentive Plan (the “2014 Plan”) under which 1,479,200 shares of common stock may be issued or used for reference purposes as awards granted under the 2014 Plan. In September 2016, the 2014 Plan was amended to allow for the granting of an additional 2,500,000 shares of common stock to be issued or used for reference purposes as awards granted, for a total of 3,979,200 shares. In September 2020, the 2014 Plan was amended to allow for the granting of an additional 700,000 shares of common stock to be issued or used for reference purposes as awards granted, for an available total of 4,679,200 shares. These awards may be in the form of stock options, stock appreciation rights, restricted stock, as well as other stock-based and cash-based awards. As of December 31, 2020, the awards granted were either time-based (cliff vest over three years), performance-based (vest when performance targets are met, as defined in the stock option grant agreement), or restricted stock units (employee RSUs cliff vest over three years and non-employee director RSUs cliff vest over one year). The total number of unexercised options and RSUs for the 2014 Plan is 2,610,490.

At December 31, 2020, there were 908,433 shares of common stock available to be issued or used for reference purposes under the 2014 Plan.

NASDAQ Marketplace Rules Inducement Award—During the year ended December 31, 2016, 500,000 service period stock options and 500,000 performance-based stock options were granted to the Company’s CEO as an inducement under the NASDAQ Marketplace Rules and during the first quarter of 2020, 15,000 service period stock options were granted to the Executive Vice President of Finance, at the time, who is currently Chief Financial Officer as an inducement under the NASDAQ Marketplace Rules, and therefore outside of any Plan. Under the terms of the applicable agreement, each grant is governed as if issued under the 2014 Omnibus Plan. The awards granted are time-based (cliff vest over four years and three years, respectively) and performance-based (vest when performance targets are met, as defined in the stock option grant agreement).

Service Period Stock Options—A summary of service period stock options outstanding and changes under the plans during the year ended December 31, 2020 is presented below:

Options	*Shares*			*Weighted Average Exercise Price*		*Average Remaining Contractual Term*		*Aggregate Intrinsic Value*
Outstanding at December 31, 2019		1,359,990		$	11.50				(Dollars in thousands)
Granted		382,910			127.89
Exercised		(415,499	)		8.97
Forfeited		(357	)		11.00
Outstanding at December 31, 2020		1,327,044		$	45.88		7.0	$	128,778
Exercisable at December 31, 2020		874,153		$	10.99		5.7	$	115,520

All of the options exercisable at December 31, 2020 were in-the-money, which account for the entire aggregate intrinsic value. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019, and 2018 were $48.8 million, $18.4 million, and $7.3 million, respectively.

A summary of the nonvested service period stock options as of December 31, 2020, and changes during the year ended December 31, 2020, is presented below:

	*Number of Options*			*Weighted-Average Grant-Date Fair Value Per Share*
Nonvested as of December 31, 2019		347,796		$	8.11
Granted		382,910			64.75
Vested		(277,458	)		6.17
Forfeited		(357	)		5.61
Nonvested as of December 31, 2020		452,891		$	57.19

As of December 31, 2020, there was $24.7 million of total unrecognized compensation costs related to non-vested service period options, of which $5.9 million will be incurred in 2021, $5.7 million will be incurred in 2022, $4.9 million will be incurred in 2023 and the remaining $8.2 million will be incurred in 2024.

Performance Based Options—Performance based option vesting is contingent upon the Company achieving certain annual Net Sales or Adjusted EBITDA goals. A summary of performance-based stock options outstanding and changes under the plans during the year ended December 31, 2020 is presented below:

Options	*Shares*			*Weighted Average Exercise Price*		*Average Remaining Contractual Term*		*Aggregate Intrinsic Value*
Outstanding at December 31, 2019		1,372,819		$	18.31
Granted		844,508			139.02
Exercised		(63,315	)		27.34
Forfeited		(35,000	)		15.65
Outstanding at December 31, 2020		2,119,012		$	66.19		7.8	$	161,231
Exercisable at December 31, 2020		1,008,964		$	11.05		5.9	$	132,110

A summary of the nonvested performance-based options as of December 31, 2020, and changes during the year ended December 31, 2020, is presented below:

	*Number of Options*			*Weighted-Average Grant-Date Fair Value Per Share*
Nonvested as of December 31, 2019		1,338,361		$	10.89
Granted		844,508			70.83
Vested		(1,037,823	)		6.97
Forfeited		(35,000	)		7.49
Nonvested as of December 31, 2020		1,110,046		$	60.25

As of December 31, 2020, unrecognized compensation costs related to the 861,047 performance-based awards for which the achievement of the vesting criteria is considered probable as of December 31, 2020 have performance target dates ranging from December 31, 2021 through December 31, 2024. The total unrecognized compensation costs for these performance-based awards was $44.2 million as of December 31, 2020, of which $12.5 million will be incurred in 2021, $11.8 million will be incurred in 2022, $10.3 million will be incurred in 2023 and the remaining $9.6 million will be incurred in 2024.

As of December 31, 2020, there were 248,999 unvested performance-based options outstanding that were deemed not probable, with an aggregate fair value of $18.2 million.

Service Period Restricted Stock Units—The following table includes activity related to outstanding restricted stock units during the twelve months ended December 31, 2020.

	*Shares*			*Weighted-Average Grant-Date Fair Value Per Unit*
Outstanding at December 31, 2019		240,229		$	29.07
Granted		55,134			63.68
Issued Upon Vesting		(123,744	)		24.33
Forfeited		(1,328	)		45.32
Outstanding at December 31, 2020		170,291		$	43.60

As of December 31, 2020, there was approximately $4.0 million of total unrecognized compensation costs related to restricted stock units, of which $2.6 million will be incurred in 2021, $1.2 million will be incurred in 2022, and $0.2 million will be incurred in 2023.

Performance Based Restricted Stock Units—The following table includes activity related to outstanding restricted stock units during the twelve months ended December 31, 2020.

	*Shares*		*Weighted-Average Grant-Date Fair Value Per Unit*
Outstanding at December 31, 2019		-	$	-
Granted		22,894		55.54
Outstanding at December 31, 2020		22,894	$	55.54

As of December 31, 2020, unrecognized compensation costs related to the 22,894 performance-based RSUs for which the achievement of the vesting criteria is considered probable as of December 31, 2020 have performance target dates related to the twelve months ended December 31, 2023. The total unrecognized compensation costs for these performance-based awards was $2.4 million as of December 31, 2020, of which $0.8 million will be incurred in 2021, $0.8 million will be incurred in 2022, and the remaining $0.8 will be incurred in 2023.

Grant Date Fair Value of Options—The weighted average grant date fair value of options (service period options and performance based options) granted during the years ended December 31, 2020, 2019, and 2018 were $68.93, $24.24 and $14.27 per share, respectively.

Expected Volatility—Expected volatility was based on the historical volatility of the Company’s common stock.

Weighted Average Expected Term—The Company determined the expected term based on the “shortcut method” described in FASB ASC 718, Compensation—Stock Compensation (an expected term based on the midpoint between the vesting date and the end of the contractual term).

Risk-Free Interest Rate—The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.

Expected Dividend Yield—The Company has not historically declared dividends, and no future dividends are expected to be available to benefit option holders. Accordingly, the Company used an expected dividend yield of zero in the valuation model.

	*Year Ended December 31,*
	*2020*	*2019*	*2018*
Weighted average exercise price of options granted	$ 135.55	$ 48.64	$ 27.60
Expected volatility	46.9% - 51.5%	47.6% - 48.5%	48.9% - 50%
Average expected terms in years	5.8 - 7	6 - 6.6	6 - 6.6
Risk-free interest rate	0.3% - 1.69%	2.27%	2.62% - 2.96%
Expected dividend yield	0.0%	0.0%	0.0%