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Curran v. Freshpet, Inc.

United States District Court, D. New Jersey

January 9, 2018

GARY CURRAN, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
FRESHPET, INC., RICHARD THOMPSON, RCHARD KASSAR, SCOTT MORRIS and CHARLES A. NORRIS, Defendants.

          OPINION

          HON. MADELINE COX ARLEO UNITED STATES DISTRICT JUDGE.

         THIS MATTER comes before the Court by way of Defendants Freshpet, Inc. (“Freshpet”), Richard Thompson, Richard Kassar, Scott Morris, and Charles A. Norris's (together, “Defendants”) Motion to Dismiss Lead Plaintiff Alaska Electrical Pension Fund's (“Lead Plaintiff”) Amended Complaint on behalf of itself and others similarly situated (“Plaintiffs”), ECF No. 28, pursuant to Fed.R.Civ.P. 12(b)(6). ECF No. 29. For the following reasons, the motion is DENIED.

         I. Background

         Plaintiffs are purchasers of Freshpet common stock between April 1, 2015 and November 11, 2015 (the “Class Period”). Am. Compl. ¶ 1. Plaintiffs allege that Defendants, a publicly traded company and several of its officers and directors, made misrepresentations in their statements to investors in violation of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l, 77o (the “Securities Act”) and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j, 78t (the “Exchange Act”). Id. ¶¶ 7-12. Lead Plaintiff seeks to certify a class of stockholders. Id. ¶¶ 13-19.

         A. Freshpet Business Model

         Defendant Freshpet is a manufacturer and marketer of natural fresh foods, refrigerated meals, and treats for dogs and cats. Id. ¶ 20. Freshpet describes its business model as “disrupting the North American pet food industry” by offering healthy, organic alternatives to traditional pet food. Id. ¶ 22. It distributes its products through branded refrigerators, known as “Freshpet Fridges” (“Fridges”), which are placed in retail locations. Id. ¶ 20. Freshpet claimed that its Fridges gave them a competitive advantage in several ways, including guaranteeing Freshpet exclusive shelf space in retail stores and allowing it greater control over its brand identity. Id. ¶ 23. Plaintiffs allege that Freshpet's growth strategy is therefore directly linked with its ability to install new Fridges in retail stores. Id. ¶ 24. These retailers include Petco, PetSmart, Target, and Walmart. Id. ¶¶ 33-51. At the beginning of the Class Period, Freshpet reported that it had installed 14, 019 Fridges in stores. Id.

         B. Allegedly Misleading Statements

         Plaintiffs allege that throughout the Class Period, Freshpet experienced issues with its largest customers and most popular products, which ultimately stunted the growth of its Fridges. Plaintiffs allege that despite being aware of these issues in early 2015, Defendants failed to disclose them until their November 2015 earnings report.

         Freshpet made its initial public offering in November 2014, and subsequently filed its annual financial report on Form 10-K for the period ending December 31, 2014 on March 31, 2015. Id. ¶¶ 79, 110. That same day, Freshpet issued a press release and held a conference call to discuss its earnings release and operations. Id. ¶ 112. On the call, individual Defendants provided details regarding Freshpet's outlook for the year, including statements about the growth of Freshpet Fridges. Id. They specifically stated, “For full-year 2015, we expect Freshpet Fridges in the range of 15, 100 to 15, 600, ” and “we are very confident that we are going to be where we need to be by the end of the year.” Id. ¶¶ 113-14. Following the March 31, 2015 call, the price of Freshpet common stock rose to a Class Period high of $25.46 on April 9, 2015. Id. ¶ 116.

         Freshpet subsequently filed a registration statement in connection with its Secondary Offering (the “Registration Statement”) on April 13, 2015. Id. ¶¶ 20, 25. The Registration Statement included guidance about the expected growth of Fridges (i.e. “We have successfully expanded our network of Freshpet Fridges within leading blue-chip retail chains . . . we believe there is an opportunity to install a Freshpet Fridge in at least 35, 000 stores across North America.”). Id. ¶ 51. Plaintiffs allege that Freshpet insiders and Defendants collectively sold 6.1 million shares of their personally held common stock in the Secondary Offering, earning gross proceeds of $131.1 million. Id. ¶ 154.

         Defendants reiterated this guidance in their August 11, 2015 earnings call. Id. ¶¶ 124-32. Defendant Kassar stated that he projected “net sales, excluding Freshpet Baked test product, to be in the range of $112 million to $114.5 million, representing an increase of 29% to 32% compared to 2014.” Id. ¶ 129. Also on August 11, Freshpet disclosed that its gross margin gains throughout the rest of 2015 were likely to be more modest than contemplated and were forecasted to come in 100 to 200 basis points below prior forecast for the year. Id. ¶ 132. In addition, the Company predicted it would be closer to the low end of its guidance for Fridge placement. Id. Plaintiffs allege that these statements caused analysts to lower their earnings per share ratings for Freshpet. Id. On August 12, 2015, the price of Freshpet common stock declined $0.87 per share, to close at $13.73 per share. Id. ¶ 133.

         On November 11, 2015, Freshpet issued a press release announcing its financial results for the third quarter of 2015, updating its previous guidance to note challenges to its business. Id. ¶ 133. Specifically, Defendants stated:

We experienced lower than expected Freshpet Fridge growth and our gross margin was negatively affected by manufacturing inefficiencies from new product innovation and the near term cost of adjusting processes on our primary products.

Id. ¶ 135. Defendants noted, “production capabilities including the production throughput of our new Freshpet Shredded product has been lower than originally projected, ” “we now expect Freshpet Fridges in the range of 14, 900 to 15, 000, ” and “[i]n the third quarter, our production rates were significantly lower than we had ever projected.” Id. ¶¶ 137-39.

         Plaintiffs allege that following the November 2015 disclosures, Freshpet was downgraded by several analysts. Id. ¶¶ 144-48. The price of Freshpet subsequently fell to $6.28 per share on November 12, 2015, the end of the Class Period. Id. ¶ 149.

         Plaintiffs allege that Defendants “artificially inflated” the price of Freshpet common stock during the Class Period by publicly stating materially false and misleading statements throughout 2015 about its “manufacturing, operations, forecasts, and business prospects.” Id. ¶¶ 156-57. Plaintiffs allege that they suffered losses from the decline in the common stock price of Freshpet after Defendants disclosed the truth about the company to the public in November 2015. Id.

         Plaintiffs specifically allege that Defendants misled investors about Freshpet's growth potential by failing to disclose material information with respect to: (1) Freshpet's ability to expand its Fridges in retail locations, including stores such as Target, BJ's, A&P, and Haggen; (2) difficulties producing Freshpet's baked product line at the forecasted profit margin stemming from a factory fire that halted production for two weeks; (3) and production problems with Freshpet's shredded product line stemming from the frequent break down of manufacturing equipment. Id. ¶¶ 86-108.

         Plaintiffs seek damages for violations of the Securities Act Sections 11, 12(a)(2) and 15, and the Exchange Act Sections 10(b) and 20(a). Id. ΒΆΒΆ 58-78, 165-70. Defendants ...


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