Note 9 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

Note 9 – Commitments and Contingencies

Leases:

We have various noncancelable operating lease agreements for office and warehouse space with original remaining lease terms of two years to nine years, some of which include an option to extend the lease term for up to four years. Because the Company is not reasonably certain to exercise the renewal options on these lease arrangements, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments. The Company’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants.

As of July 2023, we also entered into a finance lease agreement for manufacturing equipment with an initial term of ten years, which includes an option to extend the lease term for up to ten years, which the Company is not reasonably certain to exercise. The agreement did not include termination options for either party to the lease or restrictive financial or other covenants. In connection with the manufacturing equipment lease, which is a new asset class, we elected the practical expedient to combine lease and non-lease components to determine the right of use asset and lease liability. 

Weighted-average remaining lease term (in years) and discount rate related to operating and finance leases were as follows:

	Operating Leases			Finance Lease
Weighted-average remaining lease term		2.97			9.5
Weighted-average discount rate		6.2	%		8.6	%

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments.

Maturities of lease liabilities under noncancelable operating leases and finance lease as of December 31, 2023 were as follows:

	As of December 31, 2023
	Operating Leases			Finance Lease
2024	$	1,511		$	4,336
2025		1,210			4,336
2026		1,239			4,336
2027		337			4,336
2028 and beyond		-			23,844
Total lease payments	$	4,297		$	41,188
Less: Imputed interest		(394	)		(13,110	)
Present value of lease liabilities	$	3,903		$	28,078

A summary of lease costs for 2023 and 2022 were as follows:

		For the Twelve Months Ended December 31,
	Statement of Operations and Comprehensive Loss Location	2023		2022
Operating Lease:
Lease cost	Cost of goods sold and selling, general and administrative	$	1,752	$	1,752
Finance Lease:
Amortization of right of use asset	Cost of goods sold	$	1,459	$	-
Interest on lease liabilities	Interest Expense	$	1,235	$	-
Variable lease cost (a)	Cost of goods sold (a)	$	6,733	$	-

       (a) Variable lease cost primarily consists of the procurement and manufacturing costs capitalized to inventory. During the period, $6,733 of variable lease costs were capitalized to inventory and will be captured as part of cost of goods sold as the inventory turns. 

Supplemental balance sheet information as of December 31, 2023 and December 31, 2022 related to leases are as follows:

	Balance Sheet Location	As of December 31, 2023		As of December 31, 2022
Assets:
Operating leases	Operating lease right of use assets	$	3,616	$	5,165
Finance lease, net	Property, plant and equipment, net		27,728		-
Total lease assets		$	31,344	$	5,165
Liabilities:
Current:
Operating lease liabilities	Current operating lease liabilities	$	1,312	$	1,510
Finance lease liabilities	Current finance lease liabilities		1,998		-
Long-term:
Operating lease liabilities	Long term operating lease liabilities		2,591		4,200
Finance lease liabilities	Long term finance lease liabilities		26,080		-
Total lease liabilities		$	31,981	$	5,710

Supplemental cash flow information and non-cash activity relating to operating and finance leases are as follows:

	For the Twelve Months Ended December 31,
Operating cash flow information:		2023		2022
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,802	$	1,764
Cash paid for amounts included in the measurement of finance lease liabilities (i.e. interest)	$	1,235	$	-
Finance cash flow information:
Cash paid for amounts included in the measurement of finance lease liabilities (i.e. principal payment)	$	1,109	$	-

Commitments: 

As of December 31, 2023, the Company has the following future commitments:

In August 2023, we entered into a lease arrangement for a to-be constructed office space, which will contribute right of use assets and lease liabilities upon lease commencement, which is anticipated to occur by the end of 2024. As of December 31, 2023, the future commitments related to this arrangement are not determinable as they are variable in nature. Our current headquarters lease in Secaucus, NJ expires in June 2024. 

Certain of the Company’s executives are covered by employment contracts requiring the Company to pay severance in the event of certain terminations.

The future minimum payments due under manufacturing and service obligations for five years were as follows:

	December 31, 2023
2024	$	10,003
2025		6,194
2026		1,500
2027		1,500
2028 and beyond		1,500
Total Manufacturing and Servicing Obligations	$	20,697

Legal Obligations:

We are currently involved in various claims and legal actions that arise in the ordinary course of our business. None of these claims or proceedings, most of which are covered by insurance, are expected to have a material adverse effect on our business, financial condition, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operations or cash flows. 

On April 8, 2022, Phillips Feed Service, Inc., d/b/a Phillips Feed And Pet Supply ("Phillips") filed a complaint against the Company in U.S. District Court for the Eastern District of Pennsylvania (Allentown Division) for damages allegedly sustained as a result of the termination of the Company's distribution arrangement with Phillips, a former distributor of Freshpet products. Phillips asserts a claim for breach of contract, and seeks monetary damages in excess of $8,300 based on a claimed "termination payment" under a 2018 "Letter Of Intent" and additional damages based on a claim for improper notice of termination. Phillips also claims a right of setoff with respect to monies owed by Phillips to the Company.

On July 5, 2022, the Company answered the complaint disputing the claimed damages, assertions of breach of contract, and the right of offset. In addition, the Company counterclaimed breach of contract for amounts owed to Freshpet earned while Phillips served as an authorized distributor of Freshpet product.

As of December 31, 2022, due to the claims and counterclaims between the parties, the Company reclassified the amounts due from Phillips of $8,971 to other noncurrent assets.

The fact discovery period in this action closed on December 31, 2023, subject to the parties' agreement that each side may take an additional deposition on financial issues if needed.

The parties are engaged in the expert discovery phase, which will close on March 31, 2024. The case is scheduled for a non-jury trial on September 16, 2024.

Based on information currently available and advice of counsel, we do not believe that the outcome of any of this matter is likely to have a material adverse effect on our business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of this matter, if unfavorable, may be materially adverse to our business, financial condition, results of operations or liquidity. Legal costs such as outside counsel fees and expenses are charged to selling, general and administrative expenses in the period incurred.