UNITED STATES SECURITIES AND EXCHANGE COMMISSION
| | | | | |
☒x
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31,
2020
2022 | | | | | |
☐o
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38163
| | |
PetIQ, Inc. |
(Exact name of registrant as specified in its charter) |
|
| | | | |
Delaware | 35-2554312 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
|
923 S. Bridgeway Place
230 E. Riverside Dr. | 83616 |
Eagle,, Idaho | (Zip Code) |
(Address of principal executive offices) |
|
208-939-8900
| | |
208-939-8900 |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
Class A Common Stock, $0.001 par value | PETQ | The NasdaqNASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻o No ⌧x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻o No ⌧x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ⌧x No ◻o Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧x No ◻o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large acceleratedAccelerated Filer o | | Accelerated filer ⌧x | Accelerated filer ◻
|
|
|
Non-accelerated filer ◻o (Do not check if a smaller reporting company) | | Smaller reporting company ☐o |
|
|
Emerging growth company ☐o |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒x If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐o Yes ⌧x No
As of June 30,
2020,2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of common equity held by non-affiliates of the registrant was
$725.8$456.8 million. Shares of Class A common stock held by each executive officer, director and by certain persons that own 10 percent or more of the outstanding Class A common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February
26, 2021,28, 2023 we had
26,048,03328,986,307 shares of Class A common stock and
2,893,761244,540 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
We intend to file with the Securities and Exchange Commission, not later than 120 days after the close of our fiscal year ended December 31, 2020,2022, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required to be disclosed under Part III of Form 10-K.
Table of Contents
PART I
The following discussion should be read in conjunction withCautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, such as statements about our audited consolidated financialplans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and accompanying notes thereto included elsewhere in this Annual Report. The following discussion includes certainsimilar expressions. Examples of forward-looking statements. For a discussionstatements include, without limitation:
•statements regarding our strategies, results of important factors, including the continuing development ofoperations or liquidity;
•statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;
•statements of management’s goals and objectives; and
•assumptions underlying statements regarding us or our business.
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors
whichthat could cause actual results to differ materially from
theany future results,
referred to in the historical information andperformances, or achievements expressed or implied by the forward-looking
statements. Forward-looking statements
presented herein, see “Item 1A, Risk Factors”should not be read as a guarantee of future performance or results, and
“Cautionary Note Regarding Forward-Looking Statements” containedwill not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual
Report; changes in general economic or market conditions, including inflation, that could affect overall consumer spending in our industry; the impact of COVID-19 on our business and the global economy and our ability to successfully grow our business through acquisitions and our ability to integrate acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; our ability to keep and retain key employees; our ability to achieve or sustain profitability; and the risks set forth under the “Risk Factors” section of this Annual Report.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.
Summary of Selected Risk Factors Associated with Our Business
Our business operations are subject to numerous risks and uncertainties, including the risks described in the section titled “Risk Factors” included under Part I, Item 1A of this Annual Report. The following is only a summary of the principal risks associated with an investment in our Class A common stock. Material risks that may adversely affect our business, financial condition or results of operations included, but are not limited to, the following:
•Unfavorable economic conditions could reduce spending on our products and limit our ability to grow our business and negatively affect our results of operations.
•Pandemics and disease outbreaks, including the COVID-19 pandemic, and any related economic downturn have in the past and could continue to negatively impact our business, financial condition and results of operations.
•We may seek to grow our business through acquisitions of or investments in new or complementary businesses, facilities, technologies or products, or through strategic alliances, and the failure to manage acquisitions,
investments or strategic alliances, or the failure to integrate them with our existing business, could have a material adverse effect on us.
•We are dependent on a relatively limited number of customers for a significant portion of our net sales.
•We may not be able to successfully implement our growth strategy in our Products segment on a timely basis or at all.
•We may be unsuccessful in opening new wellness centers, which could adversely affect our growth;
•We operate in a highly competitive industry and may lose market share or experience margin erosion if we are unable to compete effectively.
•Resistance from veterinarians to authorize prescriptions, or attempts/efforts on their part to discourage pet owners to purchase from retailers and pharmacies could cause our net sales to decrease and could materially adversely affect our financial condition and results of operations.
•Our growth and business are dependent on trends that may change, and our historical growth may not be indicative of our future growth.
•We may not be able to manage our manufacturing and supply chain effectively, which may adversely affect our results of operations.
•Shipping is a critical part of our business and any changes in, or disruptions to, our shipping arrangements could adversely affect our business, financial condition, and results of operations.
•The growth of our business depends in part on our ability to accurately predict consumer trends, successfully introduce new products and improve existing products, and expand into new offerings.
•We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.
•We have a substantial amount of debt, which could adversely affect our financial position and our ability to raise additional capital and prevent us from fulfilling our obligations.
•If our cash from operations is not sufficient to meet our current or future operating needs, expenditures and debt service obligations, our business, financial condition and results of operations may be materially adversely affected.
•The trading price of our Class A common stock is highly volatile and the market price of our shares of Class A common stock may decline in spite of our operating performance.
•We are subject to extensive and ongoing governmental regulation and we may incur material costs in order to comply with existing or future laws and regulations, and our failure to comply may result in enforcement, recalls and other adverse actions or significant penalties.
•Our principal asset is our interest in HoldCo, and, accordingly, we depend on distributions from HoldCo to pay our taxes and expenses. HoldCo’s ability to make such distributions may be subject to various limitations and restrictions.
PART I
Unless the context requires otherwise, references
in this Annual Report to ‘‘PetIQ, Inc.,’’ ‘‘PetIQ,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘our’’ or ‘‘us’’ refer collectively to PetIQ, Inc. and its consolidated subsidiaries, including PetIQ Holdings, LLC, a Delaware limited liability company, which we refer to as “HoldCo.”
PetIQ is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail including veterinary,and e-commerce channels with our branded and distributed medications as well as health and wellness items, which isare further supported by our own world-class medicationmedications manufacturing facility in Omaha, Nebraska.Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national veterinarian service platform VIP Petcare (“VIP”), operates in over 2,9002,600 retail partner locations in 41 states providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care we can give them.provide.
We have two reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution
business.businesses. The Services
segmentssegment consists of veterinary services and related product
sales provided by the Company directly to consumers.sales.
We are the sole managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, through
Holdco,HoldCo, operate and control all of the business and affairs of Opco.
Attractive Pet Industry Trends. By year-end 2020, in the wake of a pet acquisition surge triggered by COVID-19,2022, approximately 58%52% of total U.S. households owned a dog or a cat, compared to 50% of total U.S. households in 2010,2010. Packaged Facts estimates that by 2026 approximately 55% of United States households will own a pet:
▪Pet Humanization: In the United States, according to The Human Animal Bond Research Institute (HABRI) and Zoetis data for 2021, 95% of pet owners consider their pet a part of their family, and 98% reported that they have personally experienced health benefits from having a pet in their lives. With pets increasingly viewed as companions, friends and family members, pet owners behave like “pet parents” with a strong inclination for spending disposable income to meet all of their pets’ needs during all economic cycles. Pets have become a household and individual spending priority. In a Packaged Facts. Stay-at-home/work-from-home trends, demographic trendsFacts survey conducted in 2022, 68% of consumers reported that they have been cutting back on household expenses due to price inflation, economic uncertainty, or other factors, however only 14% to 15% reported cutting back in pet ownershipcare categories.
▪Household demographics: There is an increase in high income homes with pets. According to Packaged Facts households with pets and changing attitudes towardannual household income of $100,000 or more increased 1.3 million from 2017 to 2019 and 3.9 million from 2019 to 2021.
▪Increasing Consumer Focus on Pet Health and Wellness: Consumers are exhibiting greater interest in improved health for their pets support our continued growth, throughand, as a result, are increasing their spending on veterinary care as well as purchases of the following: | | | |
most effective veterinarian-grade pet products and supplies. In 2022, in the wake of COVID-19, Packaged Facts survey data showed that 58% of dog owners and 54% of cat owners strongly agree that they "look for products to improve my pet's’ health and wellness." | ∎
|
| Pet Humanization: In the United States, according to Packaged Facts data for 2020, 95% of dog or cat owners strongly or somewhat agree that they view their pets as family members. In addition, in 2020, 86% of dog owners and 84% of cat owners agreed that their pets have had a positive impact on their mental health. With pets increasingly viewed as companions, friends and family members, pet owners behave like “pet parents” with a strong inclination for spending disposable income to meet all of their pets’ needs during all economic cycles. Pets have become a household and individual spending priority.
|
| | | |
| ∎
|
| Increasing Consumer Focus on Pet Health and Wellness: Consumers are exhibiting greater interest in improved health for their pets and, as a result, are increasing their spending on veterinary care as well as purchases of the most effective veterinarian-grade pet products and supplies. In 2020, in the wake of COVID-19, Packaged Facts data show that 42% of dog owners and 43% of cat owners are paying closer attention to their pets’ health and wellness. In addition, 32% of dog/cat owners who consider their pets part of the family are concerned about the affordability of routine health care for their pets and 42% are concerned about the affordability of emergency care for their pets. Pet owners of all demographic and income levels aspire to purchase leading veterinarian-grade treatments.
|
▪Increasing Focus on Affordable Products and Services: According to Packaged Facts, 32% of dog/cat owners who consider their pets part of the family are concerned about the affordability of routine health care for their pets and 42% are concerned about the affordability of emergency care for their pets. In a 2021 survey, 68% of pet owners agreed that they were seeking lower prices, special offers, and sales on pet products. Pet owners of all demographic and income levels aspire to purchase leading veterinarian-grade treatments.
| | | |
| ∎
|
| Increasing Pet Age and Incidents of Pet Disease: Pets are living longer and, as a result, have increasing medical needs. Packaged Facts cites Association for Pet Obesity Prevention (APOP) data for 2018 show that 56% of dogs and 60% of cats are overweight, and Packaged Facts cites Merck Animal Health estimates from 2018 that up to 75% of older dogs have heart disease. Packaged Facts also found in a July-August 2020 survey that 38% of dog and 36% of cat owners have a pet that is 7 years old or older, and in a November-December 2020 survey that 17% of dog owners report having pets with aging-related special needs.
|
| | | |
| ∎
|
| Increasing Market Size and Consumer Spending: Pet spending in the United States has steadily increased every year since 1994, with Americans spending approximately $98 billion on pet products and services for their pets in 2020, up from $73 billion in 2014. Packaged Facts projects the total U.S. pet products and services market to grow at a CAGR of 5% from 2020 to 2024.
|
Strong Growth in Pet Products. According to Packaged Facts, the $98.0$122.8 billion U.S. consumers spent on pet products and services in 2020 nearly2021 more than doubled 2010 spending of $53.7 billion. Veterinary channel sales of pet medications grew from an estimated $7.3$6.7 billion in 20192018 to $7.7$8.3 billion in 2020,2021, and overall retail and veterinary channel sales of pet medications and supplements are estimated to growhave grown from $9.7 billion in 2018 to $11.2$12.6 billion in 2020,2021, according to Packaged Facts, with pet supplement sales growing from $636$626 million in 2018 to $797$942 million in 20202021 in keeping with increasing consumer attention to pet health and wellness. Additionally, our innovative pet treats compete in the U.S. dog and cat treat market, which has grown every year since 2012. According to Packaged Facts, the U.S. dog and cat treat market has grown from $6.5 billion in 2018 to $7.3 billion in 2020.
Growth of Pet Medication Purchases from Retail Channeland E-commerce Channels. We believe the market for U.S. retail sales of pet medications reached $11.6 billion in 2021, inclusive of sales through veterinarians, brick-and-mortar stores and online retailers. Packaged Facts projects that pet medication and health and wellness products in the retail channelsales will likely outpace growth in the broader pet industry.grow to $13.8 billion by 2026. The COVID-19 pandemic has accelerated pet owner has increasingly purchased veterinarian gradepurchases of veterinary-grade pet products from the retail channeland e-commerce channels including both brick and mortarbrick-and-mortar and online offerings. We believe thatthis migration will continue in the future as more consumers take advantage of the convenience of their local retail store and online, become awareonline.
There are significant opportunities to grow our brand awareness, increase our net sales and profitability and deliver shareholder value by executing on the following initiatives:
Grow Consumer Awareness of Our Products in the Retail Channel& E-commerce Channels. We are an established category creatorleader in the pet health and wellness and medication market. While weWe maintain strong relationships with the top distributors to the veterinary channel, we have strong penetration of the retail channeland e-commerce channels and high awareness among retailers. With our broad retail network that includes the top U.S. retailers,pet parents. We believe we are increasingly focused on providing these retailers with excellent value and on building consumer awareness and converting more pet owners to use products we manufacture or distribute. As retailers continue to see the value our proprietary products bring to their bottom line and in helping them compete with other OTC channels, and as pet owners learn that our proprietary value-branded products offer the same active ingredients as leading brands at lower prices, we believewill increase our share of the overall pet Rx and OTC medications and health and wellness products market willthrough our broad network that includes leading U.S. retailers and e-commerce partners. We are increasingly focused on building consumer awareness, converting more pet owners to use products we manufacture or distribute and providing excellent value. In addition, our retail and e-commerce partners continue to grow.see that our proprietary manufactured products bring significant value to their pet health and wellness category sales and profit. We continue to build pet owner awareness that our proprietary manufactured products offer the same quality and active ingredients at a significant savings versus national veterinary brands.
Increase Volume of Products with Existing RetailersRetailer & E-commerce Partners. We conduct business with the majority of leading U.S. retailers and e-commerce partners with our core product offerings. We believe our net sales and profitability will continue to grow as we expand the number of products we have available for sale at each retailer.sale. We also planinvest in research and development investments to creativelysupport our own proprietary manufactured products that we expect to help us expand SKU placement within new and existing accounts through
our in-house merchandising capabilities.accounts. Additionally, we believe we are positioned to expandgain additional item placement and distribution in retail partners where we are also operating our presence within leading retailers as a result of the growth of our Services segment.
veterinarian services offering.
Provide Veterinarian Services in Conjunction with our Retail Partners. Through our Services segment, we participate in the veterinary services industry, which grew from $28.5 billion in 2018 to $31.0$32.3 billion in 2020, according to Packaged Facts. This growth equally reflects increased consumer focus on pet health and the veterinary industry’s effective response to COVID-19 related challenges.wellness. We provide a comprehensive suite of services at 2,9002,600 community clinic locations and wellness centers hosted at retailers across 41 states, which includesstates. Our services include diagnostic tests, vaccinations, prescription medications, microchipping, grooming and hygiene and wellness checks. We believe we have the ability to expand thosethese offerings within ournew and existing retail footprint,retailers which will provide an additional earnings stream, as well aswe expect to help drive pet parent traffic to our retail partners for the purchase of pet medication and health and wellness products, thereby expanding the sales of our product offerings through our retail partners. In addition, we opened 27We expect to continue to open new wellness centers within retail partners in 2020 and we expectover the next several years with the potential to openhave approximately 1,000 wellness centers by 2024.centers. We believe that our wellness centers will help us address the $10.0 billion underserved veterinary market according to an L.E.K. Consulting report from 2017, consisting of an estimated $7.4 billion of services and an estimated $2.6 billion in related product revenue generated from such services based on management estimates.Human Capital
Our Products
Through our Products segment, we are a manufacturer and distributor of pet medication and health and wellness products to the retail and e-commerce channels. We focus our offerings on innovative, proprietary value-branded products, and leading third-party branded products for dogs and cats, including pet Rx medications, OTC medications, and wellness products. We offer and supply these products to customers primarily in the United States.
Rx Medications
The Company employed approximately 2,072 people as of December 31, 2020,Rx pet medications we sell include flea and tick control, heartworm preventatives, arthritis, thyroid, diabetes and pain treatments, antibiotics and other specialty medications, all of which 2,034require a prescription from a veterinarian. We develop and manufacture our own proprietary value-branded products and distribute well-known leading third-party branded medications.
Our proprietary value-branded Rx medications allow consumers to care for their pets with the same quality and active ingredients of national branded medications at a lower cost. We plan to continue to develop and manufacture our own proprietary manufactured products available at a value to pet parents which compete with other national branded pet Rx medication currently available.
We sell over 350 SKUs of the most popular pet Rx medications to retailers and e-commerce partners, in multiple formats, that previously had been available primarily through the veterinarian channel. Our retail and e-commerce partners then sell these pet Rx medications to pet owners who have a prescription. We source these pet Rx medications directly from
manufacturers or through licensed distributors. Several of the top-selling Rx pet medications that we distribute include Nexgard®, Heartgard® Plus and Vetmedin®.
OTC Medications
The pet OTC medications we sell are employedprimarily within the United States. Our workforce is comprisedflea and tick control and behavior management categories and do not require a prescription from a veterinarian. These products are available in multiple forms that consumers choose between, such as spot on (topical) treatments, chewables, oral tablets and collars. We develop and manufacture our own propriety value-branded products and distribute well-known leading third-party branded OTC medications.
We sell over 320 SKUs of approximately 49% full timethe leading OTC-branded and 51% part time employees. Of our total employees, approximately 1,561value-branded medications within the Animal Health OTC category to the retail and e-commerce channels. Most of our employees worked in our Services division. In addition,manufactured OTC medication volume is represented by PetArmor, Capstar, Nextstar, Sentry and Sergeants brands and we regularly contract with veterinarianshave manufacturing capabilities to provide veterinary services in our mobile community clinicsproduce multiple product forms within flea and tick control.
Health and Wellness Products
Our health and wellness
centers. During the year ending December 31, 2020, we had approximately 2,700 veterinariansproducts include specialty treats, dental treats and nutritional supplements (including hip and joint, vitamins and skin and coat products) and treats that
were independent contractors.COVID-19 provided us with a defining momentdisguise medication to supportaid in pet’s pill ingestion. We manufacture and further developdistribute more than 400 SKUs of proprietary wellness products for dogs and entrenchcats, mainly under our employee-centric culture. This year, we enhanced the ways we help our employees care for themselvesPetArmor, VetIQ, Minties and their families including:
| ● | Paying all Services segment employees at two-thirds pay with full benefits during the three to seven month period of clinic closures. |
| ● | Offering Families First Coronavirus Employee Paid Leave rights, encouraging employees to care for COVID-impacted family members. |
| ● | Arranging for work from home options for office employees. |
| ● | Enhancing our Company-wide paid, sick-leave policy. |
The animal health industry is highly competitive and PetIQ is a fast growing company. We hired 1,054 new team members in 2020. PetIQ’s benefit offerings are designed to meet the evolving needs of a diverse workforce across the Company. Attraction and retention of key talent is a focal point for the Company. To support these objectives, our human resources programs are designed to reward and support employees through competitive pay and benefits; support and facilitate internal talent mobility; and evolve and invest in technology, tools, and resources to enable employees at work. Some examples of key programs and initiatives that are focused to attract and retain our workforce include:
● | The Company established four core values that serve as the foundation for our business: commitment, quality, integrity and teamwork. |
● | The Company has implemented an annual review process which is a culmination of multiple touch-points between employees and managers to focus on development programs and career paths/succession. |
● | The Company holds quarterly Town Halls to invite dialogue among employees and leaders. |
● | The Company works to continuously improve and promote health and wellness resources. During COVID-19, the Company adopted several policies supporting supplemental personal and family leave as well as remote-working flexibility. |
● | Free mental and behavioral health resources, including on-demand access to the Employee Assistance Program (EAP) for employees and their dependents. |
Sentry product lines. Seasonality● | Investment in paid days off and annual financial support for continuing education for the Company’s employee veterinarians. |
● | The Company encourages and supports renewal of all professional licenses and professional memberships. |
● | The Company encourages and financially rewards employee veterinary talent referrals reinforcing our search for key veterinary talent. |
● | The Company offers total rewards to all employees to include competitive pay, various output related bonus plans in both the Service and Product segments, a 401(k) plan with three percent Company match, paid time off, maternity leave, health, vision and dental insurance, and other ancillary benefits. |
Seasonality
While many of our products are sold consistently throughout the year, we do experience seasonality in the form of increased demand for our flea and tick product offerings in the first half of the year, both leading up to and throughout the spring and summer seasons. Additionally we may experience fluctuations in net sales related to the inventory management strategies of our retail customers.
Similarly, the practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months as there are more fleas, ticks, and mosquitos during these months and products and services sold to prevent or treat illness or diseases related to these insects.
Our Products
Through our Products segment, we are a manufacturer and distributor of pet medication and health and wellness products to the retail channel, and also have strong relationships with distribution to veterinarians. We focus our product offerings on innovative, proprietary value-branded products, and leading third-party branded products for dogs and cats, including pet Rx medications, OTC medications, and wellness products. We offer and supply these products to customers primarily in the United States.
Rx Medications
Our Rx pet medications include heartworm preventatives, arthritis, thyroid, diabetes and pain treatments, antibiotics and other specialty medications, all of which require a prescription from a veterinarian. We co-develop and manufacture our own proprietary value-branded products and distribute well-known leading third-party branded medications.
Our proprietary value-branded Rx medications allow consumers to care for their pets with the same quality of branded medications at a lower cost. We plan to develop, and bring to retail customers, proprietary value-branded versions of other popular pet Rx medications currently available only in branded versions at premium prices.
We also sell to retailers more than 330 SKUs of the most popular pet Rx medications, in multiple formats, that previously had only been available primarily through the veterinarian channel. These retailers then sell these pet Rx medications to pet owners who have a prescription. We source these pet Rx medications directly from manufacturers or through licensed distributors. Several of the top-selling Rx medications that we distribute include Nexgard®, Heartgard® Plus and Vetmedin®.
OTC Medications and Supplies
The OTC medications we sell are primarily within the flea and tick control and behavior management categories of the broader Health & Wellness industry. These products are available in multiple forms that consumers choose between, such as spot on (topical) treatments, chewables, oral tablets and collars.
We sell to the retail channel more than 450 SKUs of the most popular leading OTC-branded and value-branded medications within the Animal Health OTC category. With the 2019 acquisition of the Perrigo Animal Health business unit, we have
now expanded our manufacturing capabilities to include multiple product forms within flea & tick control. Most of our manufactured OTC Medication volume is represented by PetArmor, Capstar, Sentry and Sergeants brands.
Health and Wellness Products
Our health and wellness products include specialty treats and other pet products such as dental treats and nutritional supplements (including hip and joint, vitamins and skin and coat products). We manufacture and distribute more than 400 SKUs of proprietary wellness products for dogs and cats, mainly under our PetArmor, VetIQ, Minties and Sentry product lines.
Specific products in this category include dental treats, such as Minties dental treats; nutritional supplements, such as our VetIQ products, hip and joint chews, vitamin chews and treats that disguise medication to aid in pets’ pill ingestion; and treats, such as our Pur Luv, Vet Works & Betsy Farms dog treats.
Product Innovation
We offer a broad portfolio of pet medications and health and wellness products to our retail
and e-commerce customers, including an array of products that we develop, manufacture and distribute. To continue to grow our pet Rx medication, OTC medications and other health and wellness product offerings, we invest in research and development on an ongoing basis. We use a combination of in-house specialists, third-party consultants and animal health research and development experts to expand our proprietary value-branded portfolio and develop next-generation versions of our
currentexisting pet products.
In addition, we have harnessed our position to emerge as an attractive partner for outside research and development researchers and entrepreneurs developing
and manufacturing new products and technologies in the strategic pet health and wellness field. We believe these scientists and entrepreneurs seek out our partnership on innovative products given our experience in proprietary value-branded manufacturing and relationships with key retail
and e-commerce channel contacts. Our process of assessing partnerships with any outside research and development opportunity includes performing our own internal research and development review, testing and quality control procedures.
Traditional industry sales channels for pet Rx medications, OTC medications, and other health and wellness products include sales through the veterinarian, retail and e-commerce channels, depending primarily on the product involved. In recent years the retail and e-commerce channels have become intertwined with brick and mortar retailers expanding their online presence and online retailers opening brick and mortar stores.
Historically, pet Rx and flea and tick medications have been sold through veterinarian offices and, to a lesser extent, e-commerce. We have focused on making these products, as well as our proprietary value-branded products, available directly to consumers through retail outlets,and e-commerce partners, which offer consumers convenient access to these products at lower prices and in more convenient locations.prices. Our retail channel sales channels are primarily concentrated in five sub-channels of retail: (i) food, drug and mass market
sales (e.g.,
Walmart,Kroger, Target and
Kroger)Walmart); (ii) club stores (e.g.,
Sam’sBJ’s Wholesale Club, Costco Wholesale and
BJ’s WholesaleSam's Club); (iii) pet specialty stores (e.g.,
Petco, PetSmart
Petco and independent pet stores); (iv) e-commerce (e.g.,
Chewy.comAmazon.com and
Amazon.com)Chewy.com); and (v) independent pharmacies and pharmacy distributors. We believe we are a key participant in the sales growth of pet medication products to the retail channel, with the additional benefit of having access to the veterinary channel through solid relationships with established distributors.
Approximately 99% of our 20202022 and 20192021 net sales were generated from customers located in the United States and Canada, with the remainder from foreign locations. Our customers are primarily national superstore chains, e-commerce, retailers, and national pet superstore chains, such as Walmart, Sam’sAmazon, Chewy.com, Costco, Kroger, Petco, PetSmart, Sam's Club, Costco, PetSmart, Petco, Kroger, Target, Chewy.com, Amazon, and The Tractor Supply Company.Company, and Walmart. We supply each of these customers on a national basis. Our largest retail customers in 20202022 were Chewy.com and Walmart, which represented 31%25% and 11%10%, respectively, of our net
sales. Our largest retail customers in 20192021 were Chewy.com and Walmart, which represented 22%26% and 12%9%, respectively, of our net sales.
Finally, we believe that maintaining our level of customer care is critical in retaining and expanding our relationships with our key customers. Our in-house customer care representatives participate in ongoing training programs under the supervision of our training managers. These training sessions include a variety of topics such as product knowledge, computer usage and customer service tips. Our customer care representatives promptly respond to customer inquiries related to products, order status, prices and shipping. We believe that our customer care representatives are a valuable source of feedback regarding customer satisfaction.
Proprietary Value-Branded Products
None of our suppliers for our proprietary value-branded products are individually significant. We believe there is ample available capacity, including of active pharmaceutical ingredients,
(“API”), for our
value-addedvalue-branded products, including at contract manufacturing organizations around the world. Our proprietary value-branded products are currently manufactured by us at our facilities in Omaha, Nebraska, Daytona Beach, Florida and Springville, Utah and through a network of manufacturing facilities owned and operated by contract manufacturing partners across the United States and in Europe. We expect that the combined capacities of our facilities and those of our contract manufacturing partners will meet our forecasted needs for our proprietary value-branded products for the foreseeable future.
We purchase branded and other products that we distribute, but do not manufacture, from a variety of sources in the United States and Europe, including certain manufacturers and licensed distributors. We believe that having strong relationships with our suppliers will ensure the availability of an adequate volume of products ordered by our retail customers and will enable us to provide more and better product information.
Fulfillment, Warehousing and Shipping
To accomplish efficient fulfillment for Rx medication products across the United States into retail, we utilize our established medication distribution channels with our distribution partner, Anda, Inc. We have a multi-year contract with Anda, Inc., which automatically renews for successive two year terms.
For most products, our in-house fulfillment and distribution operations manage the entire supply chain, beginning with the placement of the order, continuing through order processing and then fulfilling and shipping of the product to the customer. All customer orders are processed by our customer service team. We inventory our products at, and fill most customer orders from our distribution centers in Daytona Beach, Florida, Omaha, Nebraska and Springville, Utah. We also use third-party warehouse providers to fulfill a small amount of our orders. We ship our products using common carriers.
Product Quality and Safety
We believe that product safety and quality are critical. We have developed, implemented and enforced a robust product safety and quality program. We have established critical control points throughout the entire supply chain from ingredient sourcing to finished goods to ensure compliance with our quality program.
The food safety program at our Utah plant, where our pet treats are made, is certified at Safe Quality Food (“SQF”) Level II (Food Safety) under Global Food Safety Initiative (GFSI)("GFSI") Benchmarks. To achieve this qualification level, our Utah facility has been built to comply with particular food safety specifications and allows for correct airflow to prevent cross-contamination, among other things. This qualification level also requires us to have certain standard operating procedures in place written to SQF code specifications, hold regular training seminars for manufacturing employees and maintain reporting documentation evidencing compliance with such standard operating procedures.
In addition, our food safety and quality program includes strict guidelines for incoming ingredients, batching, processing, packaging and finished goods. As part of our focus on food safety and quality, we have implemented batch and lot traceability controls across our manufacturing network, including at our manufacturing facilities, where such controls have been implemented into our enterprise resource planning system. These controls allow us to track and tie discreet, inbound raw material components through the manufacturing process to the ultimate finished product, allowing us to maintain and control all finished product lot details and quickly access process manufacturing details.
At the Florida facility where our Rx and some OTC medications are held for distribution, we maintain a Veterinary Prescription Drug Wholesale Distributor license with the State of Florida Department of Business and Professional Regulation, which is the same government entity that regulates distribution facilities for human medications. In connection with our maintenance of this license, the State of Florida conducts random inspections of our facility. To pass these inspections, we must demonstrate safety compliance at the highest standard, including maintaining correct plant temperatures and environmental controls.
As described above, we use contract manufacturers to produce certain of our proprietary value-branded products. To ensure product quality, consistency and safety standards, we actively monitor each contract manufacturer’s operations through the standard operating procedures and facility audits described above.
At our Omaha location
EPAU.S. Environmental Protection Agency ("EPA") and
FDAU.S. Food and Drug Administration ("FDA") regulated products are produced,
and packaged, and distributed from our nearby state of the art distribution center.
This includesProducts include dog and cat flea and tick spot-on, shampoo, collars, toothpaste and hairball paste. We have a robust quality management program that includes quality processes for the laboratory, incoming inspection, manufacturing and packaging inspections, supplier quality, change control, deviations, and corrective and preventative
actions (CAPA).actions. We manage customer interaction through our call centers and social media to ensure that products maintain the highest quality. All call data is tracked, trended and reviewed for signals that may indicate product quality issues. The Omaha site is inspected several times annually by external auditors and we perform annual internal audits and mock recalls. We have received high marks and consistently maintain compliance with
cGMPscurrent good manufacturing practices ("cGMPs") and retain certifications as required.
All of our contract manufacturing facilities are required to have quality control standard operating procedures in place. We require our contract manufacturing facilities to maintain third-party certifications and pass our own quality system and safety audits, and for FDA-regulated products, to comply with the Good Manufacturing Practices of the FDA. Third-party certifications provide an independent and external assessment that a product and/or process complies with applicable safety regulations and standards,
thoughalthough a regulatory authority may disagree with that assessment. In addition, our quality control team conducts reviews of all aspects of our supply chain to ensure that ingredients, finished goods and manufacturing processes meet our strict safety and quality requirements and that all of our ingredients are rigorously tested prior to being used in our products.
Any consumer may call our customer service line, where we have trained representatives on staff. Any call reporting an adverse event relating to our products is further addressed by our third-party vendor, SafetyCall, through its own on-site veterinarians. On a quarterly basis, we submit filings in accordance with the EPA specifications reporting any adverse event associated with our flea and tick products.
Marketing and Advertising
Our marketing strategy largely focuses on building awareness and educating pet owners about our various brands and products. To accomplish this goal, we use a combination of television, digital marketing (e.g. digital coupons, display ads, pay per click, email), social media marketing and in-store displays and promotions. Our marketing message highlights the quality and cost-savings our products offer customers such as our proprietary, value-branded flea and tick products that contain the same active ingredients as leading brands at lower prices.
The pet medication and health and wellness industry is highly competitive. In our Products segment, we compete on the basis of product quality, product availability, quality, palatability, loyalty and trust, product variety and ingredients,
product packaging and design, shelf space, reputation and brand, price point and promotional efforts. We compete directly and indirectly with both manufacturers and distributors of pet medication and health and wellness products and online distributors, as well as with veterinarians. We directly face competition from companies that distribute various pet medications to traditional retailers and pet health and wellness products to traditional retailerscompanies such as Elanco (formerly Bayer AG), Central Garden and Pet Company, Hartz (Unicharm Corp.), Mars, Inc. (“Mars”), Manna Pro, Nestlé S.A. (“Nestlè”), Spectrum Holdings, Promika LLC, Tevra Brands, (“Tevra”), and The J.M. Smucker Company, (“Smucker”), most of which are larger than we are and have greater financial resources. Similarly, we face intense competition from manufacturers who sell pet medications and pet health and wellness products to e-commerce and other retailers and to veterinarians, who compete directly with our retailers to offer consumers pet flea and tick and other pet health and wellness products.
Our retail customers compete with veterinarians for the sale of Rx and OTC pet medications and other health and wellness products. Many pet owners may prefer the convenience of purchasing their pet medications or other health products during a veterinarian visit. In order to effectively compete with veterinarians, we and retail partners must continue to price competitively and to educate pet owners about the product availability, service and savings offered by purchasing pet medications and other health products in their retail stores or from their websites.
Within our Services segment, we compete directly with veterinarians. Our primary competitors for our veterinary clinics in most markets are individual practitioners or small, regional multi-clinic practices. In addition, some national companies such as Banfield Pet Hospitals, VCA Animal Hospitals, or Petco are developing or have developed networks of veterinary clinics or hospitals in markets in which we currently operate.
Our Trademarks and Other Intellectual Property
We believe that our intellectual property is valuable and has contributed to the success of our business. Our primary trademarks include “PetIQ,” “PetArmor,” “VIP Petcare,” “VetIQ PetCare,” “VetIQ,” “Capstar,” “Advecta,” “SENTRY,” “Sergeants,
” “PetLock,” “Heart Shield Plus,” “TruProfen,” “Betsy Farms,” “PetAction,” “Minties,” “Vera” and “Delightibles” all of which are registered with the U.S. Patent and Trademark Office. We also have numerous other trademark registrations and pending applications, in the U.S., Canada and Europe, for product names that are central to our branding. Our trademarks are assets that reinforce our brand, our sub-brands and our consumers’ perception of our products. The current registrations of these trademarks in the U.S. and foreign countries are effective for varying periods of time and may be renewed periodically, provided that we, as the registered owner, or our licensees where applicable, comply with all applicable renewal requirements including, where necessary, the continued use of the trademarks in connection with the goods or services identified in the applicable registrations. In addition to trademark protection, we own numerous URL designations, including www.petarmor.com, www.vetiqpetcare.com, www.vippetcare.com,
petvet.vippetcare.com,www.petvet.vippetcare.com, www.vetiq.com, www.advecta.com, www.sentrypetcare.com, www.sergeants.com, www.delightibles.com and www.mintiestreats.com, which are important to the successful implementation of our marketing and advertising strategy. We also have patents and pending patent applications for products, formulas and packaging that we consider important to our business. Including various methods of use, interomone, pheromone compositions and spot-on pesticide compositions. We rely on and carefully protect unpatented proprietary expertise, recipes and formulations, continuing innovation and other trade secrets to develop and maintain our competitive position. The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the
SEC,Securities and Exchange Commission ("SEC"), and any references to our websites are intended to be inactive textual references only.
Along with our contract manufacturers, ingredient and packaging suppliers and third-party shipping providers, we are subject to a broad range of laws and regulations, both in the U.S. and elsewhere, intended to protect public health and safety, natural resources and the environment. Our products and operations in the U.S. are subject to regulation by the FDA, the EPA, the Florida Department of Health and the USDAU.S. Department of Agriculture ("USDA") and by various other federal, state, local and foreign authorities regarding the registration, manufacturing, processing, packaging, storage, distribution, advertising, labeling and export of our products, including drug and food safety standards.
All Rx animal drugs are required to be approved by the FDA through either a New Animal Drug Application or, in the case of generic Rx animal drugs, an Abbreviated New Animal Drug Application (“ANADA”). Two of our proprietary value-branded products, TruProfen and Heart Shield Plus, have been approved by the FDA under ANADAs submitted to the FDA by third parties. We have agreements with these third parties that hold approved ANADAs to private label or proprietary value-branded products under such ANADAs. However, the third parties that hold the ANADAs are ultimately responsible for compliance with regulatory obligations associated with these products.
In addition, our foreign subsidiaries are subject to the laws of the United Kingdom, the Republic of Ireland and the European Union, as well as provincial and local regulations.
Under various statutes and regulations, these agencies and authorities, among other things, (i) prescribe the requirements for registration and establish the standards for quality and safety, (ii) regulate our marketing, advertising and sales to consumers and (iii) control the importing and exporting of our products. Certain of these agencies, in certain circumstances, must not only approve our products, but also review the manufacturing processes and facilities used to produce these products before they can be marketed in the United States and elsewhere. In particular, certain of our pet products require EPA or FDA approval prior to marketing. To market such a regulated pet product, the regulatory agency must approve a new product, supported by data from animal safety and effectiveness studies that adequately demonstrate the safety and efficacy of that product in the target animal for the intended indication; or, in the case of generic versions of previously approved reference-listed pet products, the regulatory agency, supported by data to demonstrate, among other things, that the proposed generic product has the same active ingredients in the same concentration as the reference-listed product and is bioequivalent to the reference listed product. After approval, manufacturers are required to collect reports of adverse events and submit them on a regular basis to either the EPA or FDA. Some of the approved products we distribute are held by third parties with whom we contract to distribute those products under our own label.
We are subject to labor and employment laws, safety and health regulations and other laws, including those promulgated by the EPA and the National Labor Relations Board. Our operations, and those of our contract manufacturers, ingredient and packaging suppliers and third-party shipping providers, are subject to various laws and regulations relating to worker health and safety matters as well as environmental and natural resource protection, including the availability and use of pesticides, emissions and discharges to the environment, and the treatment, handling, storage and disposal of materials and wastes. We monitor changes in these laws and believe that we are in material compliance with applicable laws and regulations. No assurance can be given, however, that material costs and liabilities will not arise in the future, such as due to a change in the law or the discovery of currently unknown conditions.
Certain states have laws, rules and regulations which require that veterinary medical practices be either wholly-owned or majority-owned by licensed veterinarians and that corporations which are not wholly-owned or majority-owned by licensed veterinarians refrain from providing, or holding themselves out as providers of, veterinary medical care. In these states and provinces, we provide management and other administrative services to veterinary practices rather than owning such practices or providing such care. In some cases, in addition to providing management and administrative services we may lease the veterinary facility and equipment to the veterinary practice. Although we have structured our operations to comply with our understanding of the veterinary medicine laws of each state and province in which we operate, interpretive legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed.
In addition, all of the states in which we operate impose various registration permit and/or licensing requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinarians practicing in our animal wellness centers are required to maintain valid state licenses to practice.
Human Capital
We employed approximately 1,888 people as of December 31, 2022, of which 1,847 are employed within the United States. Our workforce is comprised of approximately 57% full time and 43% part time employees. Of our total employees, approximately 1,338 of our employees worked in our Services division. In addition, we regularly contract with veterinarians to provide veterinary services in our mobile community clinics and wellness centers. During the year ending December 31, 2022, we had approximately 1,555 veterinarians that were independent contractors.
The animal health industry is highly competitive and PetIQ is a fast growing company. PetIQ’s benefit offerings are designed to meet the evolving needs of a diverse workforce across the Company. Attraction and retention of key talent is a focal point for the Company. To support these objectives, our human resources programs are designed to reward and support employees through competitive pay and benefits; support and facilitate internal talent mobility; and evolve and invest in technology, tools, and resources to enable employees at work. Some examples of key programs and initiatives that are focused to attract and retain our workforce include:
•Four core values that serve as the foundation for our business: commitment, quality, integrity and teamwork.
•A Diversity, Equity & Inclusion ("DEI") leadership team that is comprised of employees representing in all functions.
•An annual review process to focus on employee skills and career growth and strengthen supervisor-employee relationships.
•Quarterly Town Halls to invite dialogue among employees and leaders.
•Free mental and behavioral health resources, including on-demand access to the Employee Assistance Program for employees and their dependents.
•Encouraging and supporting renewal of all professional licenses and professional memberships.
•Total rewards to all employees to include competitive pay, various output related bonus plans in both the Service and Product segments, a 401(k) plan with four percent Company match, paid time off, parental leave, health, vision and dental insurance, and other ancillary benefits.
Our Corporate Information
Our principal executive offices are located at 923 S. Bridgeway Place,230 East Riverside Drive, Eagle, Idaho 83616. Our telephone number is 208-939-8900. The address of our corporate website is www.petiq.com, and our investor relations website is located at http://ir.petiq.com. The contents of our website are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Our
Annual Reportsannual reports on Form 10-K, annual proxy statements and related proxy cards are made available on our website at the same time they are mailed to stockholders. Our quarterly reports on Form 10-Q, periodic reports on Form 8-K and amendments to those reports that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available through our website, free of charge, as soon as reasonably practicable after they have been electronically filed or furnished to the SEC. Our website also provides access to reports filed by our directors, executive officers and certain significant shareholders pursuant to Section 16 of the Exchange Act. In addition, General Code of Ethics and charters for the committees of our board of directors are available on our website as well as other shareholder communications. The information contained in or that can be accessed through our website does not constitute a part of, and is not incorporated by reference into, this
report.Annual Report. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy information statements and other information related to issuers that file electronically with the SEC.
Item 1A – Risk Factors
Our
You should carefully consider the risks described below in addition to the other information set forth in this Annual Report. If any of the risks, events, and uncertainties described in the risk factors listed below actually occurs, our business, results of operations, cash flows, and financial condition may be materially and adversely affected by a numberaffected. The risk factors listed below are not exhaustive. Additional risks not currently known to us or that we presently deem immaterial may emerge or become material at any time and may negatively impact our business, reputation, financial condition, results of factors, includingoperations or the following:trading price of our common stock.
Risks Related to
Ourour Business and Industry
There is significant uncertainty regarding
Unfavorable economic conditions and the extent to which and how long the COVID-19 pandemic and its related effects will impact the U.S. economy and related demand forconsumer behavior trends they drive could reduce spending on our products and services and as a result,limit our ability to grow our business and negatively affect our results of operations.
Our results of operations may be affected by unfavorable changes in the domestic and global economy on us or our customers and potential customers. The keeping of pets and the purchase of pet-related products and services may constitute discretionary spending for some consumers and any material decline in the amount of consumer discretionary spending may reduce overall levels of pet ownership or spending on pets. Unfavorable economic conditions, including conditions resulting from an economic recession in the United States or other major markets, financial and credit market fluctuations, inflation, rising interest rates, international trade relations, political turmoil, natural catastrophes, outbreaks of contagious diseases (such as the COVID-19 pandemic), lower corporate earnings, reduction in business confidence and activity, warfare, including Russia's war with Ukraine, and terrorist attacks, could cause a decrease in consumer sentiment, adversely impact our retail customers and suppliers and our wellness centers, and negatively affect the growth of our business and our results of operations. Our competitors, many of which are larger and have greater financial resources than we do, may respond to challenging market conditions by lowering prices in an attempt to attract our customers. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or how any such event may impact our business.
Pandemics or disease outbreaks, such as the COVID-19 pandemic and any related economic downturn have impacted and in the future operatingmay continue to negatively impact our business, financial condition and results of operations.
Pandemics or disease outbreaks, such as the COVID-19 pandemic, have impacted and may continue to impact our business through adversely affected workforces, economies and financial
condition.The global COVID-19 pandemic has created significant volatility, disruption and uncertainty. It has resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and the implementation of social distancing measures,markets globally, leading to the closurea reduction or inability for our customers, partners, suppliers or vendors or other parties with whom we do business to meet their contractual obligations, and for a period of businesses and causing weakened economic conditions and an economic slowdown and recession. There is significant uncertainty regarding the extent to which and how long COVID-19 and its related effects will impact the U.S. economy and related demand fortime, a reduction in customer spending on our products and services. services, and such conditions may reoccur in the future. For example, in our Services segment, we closed or cancelled clinics in 2020 and 2021 in response to COVID-19 and related public health measures and following initial reopening we experienced an elevated level of clinic closures due to labor shortages related to the COVID-19 pandemic.
The extent to which COVID-19
or other pandemics or disease outbreaks will impact our business,
financial condition and
operating results
during 2021of operations in the future will depend on future developments,
including the duration and continued spread of COVID-19, the availability and effectiveness of vaccines, and the impact on our customers and employees, as well as the U.S. economy, all of which are highly
uncertain and cannot be predicted.The COVID-19 pandemic may have other adverse effects on our business, operating results and financial condition, including changes in customer and consumer behavior related to pandemic fears, quarantines and market downturns, as well as impacts on our workforce if the virus becomes widespread in any of our markets. For example, the Company has experienced an elevated level of absenteeism due to COVID-19 related illnesses and as a result between 12% and 16% of service segment operations are temporarily closed week to week. If the virus were to affect a significant amount of the workforce employed or operating at our facilities, we may experience delays or the inability to produce and deliver products to our retail partners on a timely basis. In addition, one or more of our customers, service providers or suppliers may experience financial distress, file for bankruptcy protection, go out of business, or suffer disruptions in their business due to the COVID-19 outbreak.
We are uncertain of the potential full magnitude or duration of the business and economic impacts from the COVID-19 pandemic. This inherent uncertainty, due in part to rapidly changing governmental directives, public health challenges and progress, including the availability and effectiveness of vaccines, and market reactions thereto, makes it challenging for our management to estimate the future performance of our business and plan accordingly. Should the potential adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, it is likely to result in an adverse impact on our business, results of operations and financial condition, at least for the near term.
Finally, the impacts from the COVID-19 pandemic and efforts to contain it heighten the risks described in other risk factors in this Form 10-K.
uncertain.
We may seek to grow our business through acquisitions of or investments in new or complementary businesses, facilities, technologies or products, or through strategic alliances, and the failure to manage acquisitions, investments or strategic alliances, or the failure to integrate them with our existing business, could have a material adverse effect on us.
From time to time we may consider opportunities to acquire or make investments in new or complementary businesses, facilities, technologies or products, or enter into strategic alliances, that may enhance our capabilities, expand our manufacturing network, complement our current products or expand the breadth of our markets. Potential and completed acquisitions and investments and other strategic alliances involve numerous risks, including:
| ● | problems integrating the purchased business, facilities, technologies or products; |
| ● | issues maintaining uniform standards, procedures, controls and policies; |
| ● | unanticipated costs associated with acquisitions, investments or strategic alliances; |
| ● | diversion of management’s attention from our existing business; |
| ● | adverse effects on existing business relationships with suppliers, contract manufacturers, and retail customers; |
| ● | risks associated with entering new markets in which we have limited or no experience; |
| ● | potential loss of key employees of acquired businesses; and |
| ● | increased legal and accounting compliance costs. |
•problems integrating the purchased business, facilities, technologies, products or brands;
•issues maintaining uniform standards, procedures, controls and policies;
•unanticipated costs;
•diversion of management’s attention from our existing business;
•adverse effects on existing business relationships with suppliers, contract manufacturers, and retail customers;
•risks associated with entering new markets in which we have limited or no experience;
•potential loss of key employees of acquired businesses; and
•increased legal and accounting compliance costs.
We do not know if we will be able to identify acquisitions or strategic relationships we deem suitable, whether we will be able to successfully complete any such transactions on favorable terms or at all or whether we will be able to successfully integrate any acquired business, facilities, technologies or products into our business or retain any key personnel, suppliers or customers. Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, facilities, technologies and products and to obtain any necessary financing. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent
management from focusing on our operations. If we are unable to integrate any acquired businesses, facilities, technologies and products effectively, our business, results of operations and financial condition could be materially adversely affected.
Completed acquisitions may result in additional goodwill and/or an increase in other intangible assets on our balance sheet. We are required annually, or as facts and circumstances exist, to test goodwill and other intangible assets to determine if impairment has occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or the fair value of other intangible assets in the period the determination is made. Should the value of goodwill or other intangible assets become impaired, there could be a material adverse effect on our financial condition and results of operations.
We are dependent on a relatively limited number of customers for a significant portion of our net sales.
Our largest retail customers in
20202022 were Chewy.com and Walmart, which accounted for
31%25% and
11%,10% respectively, of our net sales. Our largest retail customers in
20192021 were Chewy.com and Walmart, which accounted for
22%26% and
12%9%, respectively, of our net sales. No other retail customer has accounted for 10% or more of our net sales during these two years. If we were to lose any of our key customers, or if any of our key customers reduce the amount of their orders, consolidate, reduce their store footprint, experience financial or operational difficulties or generate less traffic, our business, financial condition and results of operations may be materially adversely affected.
In addition, we generally do not enter into long-term contracts with our retail customers. As a result, we rely on consumers’ continuing demand for our products and our position in the market for all purchase orders. Our customers are sophisticated and have the ability to replace our proprietary value brands with various other supply options if we do not compete aggressively for their business. If our retail customers change their pricing, margin expectations or business terms (including through the imposition of warehouse and other fees), change their business strategies as a result of industry consolidation or otherwise, reduce the number of brands or product lines they carry, decrease their advertising or promotional efforts for, or the amount of shelf space they allocate to, our products or allocate greater shelf space to other
products, our net sales could decrease and our business, financial condition and results of operations maywould be materially adversely affected.
We may not be able to successfully implement our growth strategy in our Products segment on a timely basis or at all.
Our future success depends, in large part, on our ability to implement our growth strategy, including introducing products and expanding into new markets, attracting new consumers to our brand and sub-brands, improving placement of our products in the stores of our retail customers, and expanding our distribution and online sales through our retail partners. Our ability to implement this growth strategy depends, among other things, on our ability to:
| ● | develop new proprietary value-branded products and product line extensions that appeal to consumers; |
| ● | continue to effectively compete in our industry; |
| ● | increase our brand and sub-brand recognition by effectively implementing our marketing strategy and advertising initiatives; |
| ● | maintain and, to the extent necessary, improve our high standards for product quality, safety and integrity; |
| ● | expand and maintain brand and sub-brand loyalty; |
| ● | secure shelf space and wellness center space in the stores of our retail customers; |
| ● | increase profitability of our mobile clinics or wellness centers; and |
| ● | enter into distribution and other strategic arrangements with traditional retailers and other potential distributors of our products. |
•develop new proprietary value-branded products and product line extensions that appeal to consumers;
•continue to effectively compete in our industry;
•increase our brand and sub-brand recognition by effectively implementing our marketing strategy and advertising initiatives;
•maintain and, to the extent necessary, improve our high standards for product quality, safety and integrity;
•expand and maintain brand and sub-brand loyalty;
•secure shelf space in the stores of our retail customers; and
•enter into distribution and other strategic arrangements with traditional retailers and other potential distributors of our products.
We may not be able to successfully implement our growth strategy and may need to change our strategy in order to maintain our growth. If we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful, our business, financial condition and results of operations
maywould be materially adversely
affected.affected.
We may be unsuccessful in opening new wellness centers, which could adversely affect our growth
One of the key means to achieving our growth strategy is through opening new clinics, both wellness centers and mobile clinics, and operating those on a profitable basis. During 2020, we have opened 27We expect to continue to open new wellness centers within retail partners and we planover the next several
years with the potential to
open an additional 130 to 170 wellness centers in 2021 with an expectedhave approximately 1,000 wellness
centers by the end of 2024.centers. Our ability to open new clinics is dependent upon a number of factors, many of which are beyond our control, including our ability to:
| ● | identify locations and retail partners that can support our wellness centers; |
| ● | reach acceptable lease or host arrangement terms; |
| ● | hire, train, and retain the skilled veterinarians and skilled employees necessary to staff the clinics and wellness centers; |
| ● | obtain, in a timely manner and for an acceptable cost, required licenses, permits, and regulatory approvals; |
| ● | respond effectively to any changes in local, state, and federal law and regulations that adversely affect our ability to open new wellness centers or clinics; and |
| ● | control construction and other launch costs to open the wellness centers and clinics. |
•hire, train, and retain the skilled veterinarians and skilled employees necessary to staff the clinics and wellness centers;
•identify locations and retail partners that can support our wellness centers;
•compete for sites and secure wellness center space in the stores of our retail partners;
•reach acceptable lease or host arrangement terms;
•obtain, in a timely manner and for an acceptable cost, required licenses, permits, and regulatory approvals;
•increase profitability of our mobile clinics and wellness centers;
•respond effectively to any changes in local, state, and federal law and regulations that adversely affect our ability to open new wellness centers or clinics; and
•control construction and other launch costs to open the wellness centers and clinics.
There is no guarantee that a sufficient number of suitable sites or hosts will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new wellness centers, or if openings are significantly delayed, our earnings or revenue growth and our business could be materially and adversely affected, as we expect a portion of our growth to come from new locations.
There is also no guarantee that, once open, wellness centers will be profitable, which may require us to incur costs to close wellness centers and may cause revenue to decline.
As part of our longer-term growth strategy, we may enter into geographic markets in which we have little or no prior operating history. The challenges of entering new markets include (i) difficulties in hiring experienced personnel, (ii) lack
of familiarity with local real estate markets and demographics, (iii) lack of consumer familiarity with our brand, and (iv) competitive and economic conditions, and discretionary spending patterns that are different from and more difficult to predict or satisfy than in our existing markets. In addition, wellness centers that we open in new markets may take longer to reach expected sales and profit levels on a consistent basis, and may have higher construction, occupancy, and operating costs, than wellness centers that we open in existing markets, thereby affecting our overall profitability. Any failure on our part to recognize or respond to these challenges maywould adversely affect the success of any new wellness centers.
We may experience difficulties hiring skilled veterinarians due to shortages that could disrupt our business.
From time to time we may experience shortages of skilled veterinarians in markets in which we operate mobile clinics and wellness centers, which may require us to enhance wages and benefits to recruit and retain enough qualified veterinarians to adequately staff mobile clinics and wellness centers. If we are unable to recruit and retain qualified veterinarians, or to control our labor costs, our business, financial conditions and results of operations may be materially adversely affected.
If we continue to grow,
rapidly, we may not be able to manage our growth effectively.
Our historical
rapid growth has placed and, if continued, may continue to place significant demands on our management and our operational and financial resources. Our organizational structure may become more complex as we add additional staff, and we would likely require more resources to grow and continue to improve our operational, management and financial controls. If we are not able to manage our growth effectively, our business, financial condition and results of operations
maywould be materially adversely affected.
We currently purchase our distributed Rx and OTC medications from manufacturers and licensed distributors. We do not have a long term guaranteed supply of medications at pre-established prices for the majority of our products.
We currently do not manufacture the vast majority of our branded products that we distribute and we are depending on certain manufacturers and licensed distributors for our supply of products. We cannot guarantee that we will be able to purchase an adequate supply of Rx and OTC medications from manufacturers and licensed distributors to meet our customers’ demands, or that we will be able to purchase these medications at competitive prices. As these medications represent a significant portion of our net sales, our failure to fill customer orders for these medications could adversely impact our net sales. If we are forced to pay higher prices for these medications to ensure an adequate supply, we cannot guarantee that we will be able to pass along to our customers any increases in the prices we pay for these medications. Manufacturers may also decide to compete further with us by pursuing or increasing their efforts in direct marketing and sales of their products. These manufacturers can sell their products at lower prices and maintain a higher gross margin on their product sales than we can. In this event, retailers may elect to purchase Rx and OTC medications directly from those manufacturers. Additionally, in the event that the manufacturers of these Rx and OTC medications take action to prohibit our licensed distributors from selling such medications to us entirely, or dictate the pricing at which our licensed distributors sell such medications to us or that our retail customers sell such medications to end consumers, our financial condition and results of operations could be materially and adversely affected.
We operate in a highly competitive industry and may lose market share or experience margin erosion if we are unable to compete effectively.
The pet products and services retail industry is highly competitive. In our Products segment, we compete on the basis of product quality, product availability, quality, palatability, loyalty and trust, product variety and ingredients, product packaging and design, shelf space, reputation and brand, price point and promotional efforts. We compete directly and indirectly with both manufacturers and distributors of pet medication and health and wellness products and online distributors, as well as with veterinarians. We directly face competition from companies that distribute various pet medications to traditional retailers and pet health and wellness products to traditional retailerscompanies such as Elanco (formerly Bayer AG), Central Garden and Pet Company, Hartz (Unicharm Corp.), Mars, Inc., Manna Pro, Nestlé S.A,S.A., Spectrum Holdings, Promika LLC, Tevra Brands, and The J.M. Smucker Company, most of which are larger than we are and have greater financial resources. Similarly, we face intense competition from manufacturers who sell pet medications and pet health and wellness products to e-commerce and other retailers and to veterinarians, who compete directly with our retailers to offer consumers pet flea and tick and other pet health and wellness products.
Our retail customers compete with online retailers and veterinarians for the sale of Rx and OTC pet medications and other health and wellness products. Veterinarians hold a competitive advantage over us because many pet owners may find it more convenient or preferable to purchase these products directly from their veterinarians at the time of an office visit. In order to effectively compete with veterinarians, we and retail partners must continue to price competitively and to educate pet owners about the product availability, service and savings offered by purchasing pet medications and other health products in their retail stores.
Within our Services segment, we compete directly with veterinarians. Our primary competitors for our veterinary clinics in most markets are individual practitioners or small, regional multi-clinic practices. In addition, some national companies such as Banfield Pet Hospitals, VCA Animal Hospitals, or Petco are developing or have developed networks of veterinary clinics in markets in which we currently operate.
These competitors may be able to identify and adapt to changes in consumer preferences more quickly than us due to their resources and scale. They may also be more successful in marketing and selling their products,
or services, better able to increase prices to reflect cost pressures and better able to increase their promotional activity, which may impact us and the entire pet health and wellness industry. If these or other competitive pressures cause our products to lose market share or experience margin erosion, our business, financial condition and results of operations
maywould be materially adversely affected.
Resistance from veterinarians to authorize prescriptions, or attempts/efforts on their part to discourage pet owners to purchase from retailers and pharmacies could cause our net sales to decrease and could materially adversely affect our financial condition and results of operations.
Since we began our operations, some veterinarians have resisted providing, or simply refuse to provide, pet owners with a copy of their pet’s prescription or authorizing the prescription to an outside pharmacy, thereby effectively preventing outside pharmacies from filling such prescriptions under state law. We have also been informed by customers and consumers that veterinarians on certain occasions have tried to discourage pet owners from purchasing from the retail channel. If the number of veterinarians who refuse to authorize prescriptions should increase, or if veterinarians are successful in discouraging pet owners from purchasing from outside retailers and pharmacies, our net sales could decrease and our financial condition and results of operations
maywould be materially adversely affected.
Any damage to our reputation or our brand or sub-brands may materially adversely affect our business, financial condition and results of operations.
Maintaining, developing and expanding our reputation with consumers, our retail customers and our suppliers is critical to our success. Our brand and sub-brands may suffer if our marketing plans or product initiatives are not successful. The importance of our brand and sub-brands may decrease if competitors offer more products with formulations similar to the products that we manufacture. Further, our brand and sub-brands may be negatively impacted due to real or perceived quality issues or if consumers perceive us as being untruthful in our marketing and advertising, even if such perceptions are not accurate. Product contamination, the failure to maintain high standards for product quality, safety and integrity, including raw materials and ingredients obtained from suppliers, or allegations of product quality issues, mislabeling or contamination, even if untrue or caused by our contract manufacturing partners or raw material suppliers, may reduce demand for our products or cause production and delivery disruptions. We maintain guidelines and procedures to ensure the quality, safety and integrity of our products. However, we may be unable to detect or prevent product and/or ingredient quality issues, mislabeling or contamination, particularly in instances of fraud or attempts to cover up or obscure deviations from our guidelines and procedures. If any of our products become unfit for consumption, cause injury or are mislabeled, we may have to engage in a product recall and/or be subject to liability. Damage to our reputation or our brand or sub-brands or loss of consumer confidence in our products for any of these or other reasons could result in decreased demand for our products and our business, financial condition and results of operations may be materially adversely affected.
Our growth and business are dependent on trends that may change, and our historical growth may not be indicative of our future growth.
The growth of our business depends primarily on the continued shift from consumers purchasing pet health and wellness products from veterinarians to purchasing such products through traditional retail channels, growth of the pet health and wellness products market and popularity of pet ownership, transitions from traditional veterinarians to mobile clinics and wellness centers, as well as on general economic conditions. These trends may not continue or may change. In the event of a decline in consumers purchasing pet health and wellness products through traditional retail channels, a change in pet
health and wellness trends or a decrease in the overall number of pets, or during challenging economic times, we may be unable to persuade our retail customers and consumers to purchase our products, and our business, financial condition and results of operations maywould be materially adversely affected and our growth rate may slow or stop.
There may be decreased spending on pets in a challenging economic climate.
The United States has from time to time experienced challenging economic conditions, including the COVID-19 pandemic, and the global financial markets have recently undergone and may continue to experience significant volatility and disruption. Our business, financial condition and results of operations may be materially adversely affected by a challenging economic climate, including adverse changes in interest rates, volatile commodity markets and inflation, contraction in the availability of credit in the market and reductions in consumer spending. The keeping of pets and the purchase of pet-related products may constitute discretionary spending for some consumers and any material decline in the amount of consumer discretionary spending may reduce overall levels of pet ownership or spending on pets. As a result, a slow-down in the general economy may cause a decline in demand for our products. In addition, we cannot predict how worsening economic conditions would affect consumer behavior and our retail customers and suppliers, generally. If economic conditions result in decreased spending on pets and have a negative impact on our retail customers and suppliers, our business, financial condition and results of operations may be materially adversely affected.
Our business depends, in part, on the sufficiency and effectiveness of our marketing and trade promotion programs and incentives.
Due to the competitive nature of our industry, we must effectively and efficiently promote and market our products
and services through television, internet and print advertisements as well as through trade promotions and incentives to sustain and improve our competitive position in our market. Marketing investments may be costly. In addition, we may, from time to time, change our marketing strategies and spending, including the timing or nature of our trade promotions and incentives. We may also change our marketing strategies and spending in response to actions by our customers, competitors and other companies that manufacture and/or distribute pet health and wellness
products.products or provide health and wellness services. The sufficiency and effectiveness of our marketing and trade promotions and incentives are important to our ability to retain and improve our market share and margins. If our marketing and trade promotions and incentives are not successful or if we fail to implement sufficient and effective marketing and trade promotions and incentives or adequately respond to changes in industry marketing strategies, our business, financial condition and results of operations
maywould be adversely affected.
If our products or services are alleged to cause injury or illness or our products fail to comply with governmental regulations, we may need to recall our products and/or may experience related claims and reputational damage.
Our products may be subject to product recalls, including voluntary recalls or withdrawals, if they are alleged to pose a risk of injury or illness, or if they are alleged to have been mislabeled, misbranded or adulterated or to otherwise be in violation of governmental regulations. We may also voluntarily recall or withdraw products in order to protect our brand or reputation if we determine that they do not meet our standards, whether for quality, palatability, appearance or otherwise. If there is any future product recall or withdrawal, it could result in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation and lost sales due to the unavailability of the product for a period of time, and our business, financial condition and results of operations may be materially adversely affected. In addition, a product recall or withdrawal may require significant management attention and could result in enforcement action by regulatory authorities.
We also may be subject to product liability claims if the consumption or use of our products is alleged to cause injury or illness. Although we carry product liability insurance, our insurance may not be adequate to cover all liabilities that we may incur in connection with product liability claims. For example, punitive damages are generally not covered by insurance. If we are subject to substantial product liability claims in the future, we may not be able to continue to maintain our existing insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage. This could result in future product liability claims being uninsured. If there is a product liability judgment against us or a settlement agreement related to a product liability claim, our business, financial condition and results of operations may be materially adversely affected. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims could be costly and time-consuming and may require management to spend time defending claims rather than operating our business.
Additionally, we may be subject to claims for veterinary malpractice or negligence in the event as a result of services provided by our veterinarians. Although we carry appropriate insurance, our insurance may not be adequate to cover all
liabilities that we may incur in connection with veterinary malpractice or negligence claims. Additionally, any such claims may result in reputational damage to our services segment and our business, financial condition and results of operations may be materially adversely affected.
To the extent our retail customers purchase products in excess of consumer consumption in any period, our net sales in a subsequent period may be adversely affected as our retail customers seek to reduce their inventory levels.
From time to time, our retail customers may purchase more products than they expect to sell to consumers during a particular time period. Our retail customers may grow their inventory in anticipation of, or during, our promotional events, which typically provide for reduced prices during a specified time or other incentives. Our retail customers may also increase inventory in anticipation of a price increase for our products, or otherwise over-order our products as a result of overestimating demand for our products. If a retail customer increases its inventory during a particular reporting period as a result of a promotional event, anticipated price increase or otherwise, then our net sales during the subsequent reporting period may be adversely impacted as our retail customers seek to reduce their inventory to customary levels. This effect may be particularly pronounced when the promotional event, price increase or other event occurs near the end or beginning of a reporting period or when there are changes in the timing of a promotional event, price increase or similar event, as compared to the prior year. To the extent our retail customers seek to reduce their usual or customary inventory levels or change their practices regarding purchases in excess of consumer consumption, our net sales and results of operations
maywould be materially adversely affected in that or subsequent periods.
We may not be able to manage our manufacturing and supply chain effectively, which may adversely affect our results of operations.
We must accurately forecast demand for all of our products in order to ensure that we have enough products available to meet the needs of our retail customers. Our forecasts are based on multiple assumptions that may cause our estimates to be inaccurate and affect our ability to obtain adequate manufacturing capacity (whether our own manufacturing capacity or contract manufacturing capacity) in order to meet the demand for our proprietary value-branded products, which could prevent us from meeting increased retail customer or consumer demand and harm our brand, our sub-brands and our business. If we do not accurately align our manufacturing capabilities with demand, our business, financial condition and results of operations may be materially adversely affected.
If for any reason we were to change any one of our contract manufacturers, we could face difficulties that might adversely affect our ability to maintain an adequate supply of our proprietary value-branded products, and we would incur costs and expend resources in the course of making the change. Moreover, we might not be able to obtain terms as favorable as those received from our current contract manufacturers, which in turn would increase our costs.
In addition, we must continuously monitor our inventory and product mix against forecasted demand. If we underestimate demand, we risk having inadequate supplies. We also face the risk of having too much inventory on hand that may reach its expiration date and become unsalable, and we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory. If we are unable to manage our supply chain effectively, our operating costs could increase and our profit margins could decrease.
We rely on third parties to provide us with materials and services, and are subject to increased labor and material costs and potential disruptions in supply.
The materials used to manufacture our products may be subject to availability constraints and price volatility caused by changes in demand, weather conditions, supply conditions, government regulations, economic climate and other factors, including any impacts caused by the COVID-19 pandemic. In addition, labor costs may be subject to volatility caused by the supply of labor, governmental regulations, economic climate and other factors. Increases in the demand for, availability or the price of, materials used to manufacture our products and increases in labor costs could increase the costs to manufacture our products, result in product delivery delays or shortages, and impact our ability to launch new products on a timely basis or at all. We may not be able to pass all or a material portion of any higher material or labor costs on to our customers, which could materially adversely affect our operating results and financial condition.
Certain third-party suppliers are the sole or exclusive source of certain materials and services necessary for production of our products. We may be unable to meet demand for certain of our products if any of our third-party suppliers cease or interrupt operations, fail to renew contracts with us or otherwise fail to meet their obligations to us.
Shipping is a critical part of our business and any changes in, or disruptions to, our shipping arrangements could adversely affect our business, financial condition, and results of operations. We currently rely on third-party national and regional logistics providers to deliver products to our manufacturing and distribution warehouses from our third-party suppliers and contract manufacturers and to deliver products from our manufacturing and distribution warehouses to our retail customers. If we are not able to negotiate acceptable pricing and other terms with these providers, or if these providers experience performance problems or other difficulties in processing our orders or delivering our products, it could negatively impact our results of operations and our customers’ experience. For example, changes to the terms of our shipping arrangements may adversely impact our margins and profitability. In addition, our ability to receive inbound inventory efficiently and ship merchandise to our retail customers may be negatively affected by factors beyond our and these providers’ control, including inclement weather, fire, flood, power loss, earthquakes, acts of war or terrorism or other events specifically impacting our or other shipping partners, such as
labor disputes, financial difficulties, system failures and other disruptions to the operations of the shipping companies on which we rely. We are also subject to risks of damage or loss during delivery by our shipping vendors. If any of the foregoing occurs, our business, financial condition and results of operations may be materially adversely affected.
Changes affecting the availability of the London Inter-bank Offered Rate (“LIBOR”) may have consequences for us that cannot yet be reasonably predicted.
We have outstanding debt with variable interest rates based on LIBOR. Advances under our revolving credit facility and our term loan facility generally bear interest based on (i) the Eurodollar Rate (as defined in our credit agreements and calculated using LIBOR) or (ii) the Base Rate (as defined in our credit agreements). The LIBOR benchmark has been the subject of national, international and other regulatory guidance and proposals to reform. In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than it has in the past, and LIBOR may ultimately cease to exist after 2021. Alternative benchmark rates may replace LIBOR and could affect our debt securities, debt payments and receipts. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our contracts that terminate after 2021. There is uncertainty about how applicable law and the courts will address the replacement of LIBOR with alternative rates on variable rate retail loan contracts and other contracts that do not include alternative rate fallback provisions. If LIBOR ceases to exist after 2021, the interest rates on our revolving credit facility and our term loan facility will be based on the Base Rate or an alternative benchmark rate, which may result in higher interest rates. In addition, any changes to benchmark rates may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our results of operations and cash flows. Uncertainty as to the nature of such potential changes may also adversely affect the trading market for our securities
The growth of our business depends in part on our ability to accurately predict consumer trends, successfully introduce new products and improve existing products, and expand into new offerings.
Our growth depends, in part, on our ability to successfully introduce new products, including our manufactured products, and improve and reposition our existing products to meet the requirements of our retail partners and those of pet parents. This, in turn, depends on our ability to predict and respond to evolving consumer trends, demands and preferences. The success of our innovation and product development efforts is affected by the technical capability of our product development staff and third-party consultants in developing and testing new products, including complying with governmental regulations, our attractiveness as a partner for outside research and development scientists and entrepreneurs and the success of our management and sales team in introducing and marketing new products.
We may be unable to determine with accuracy when or whether any of our products now under development will be approved or launched, and we may be unable to develop or otherwise acquire product candidates or products. Additionally, we cannot predict whether any such products, once launched, will be commercially successful. Furthermore, the timing and cost of our R&D initiatives may increase as a result of additional government regulation or otherwise, making it more time-consuming and/or costly to research, test and develop new products. If we are unable to successfully develop or otherwise acquire new products, our financial condition and results of operations may be materially adversely affected.
A failure of one or more key information technology systems, networks or processes may materially adversely affect our ability to conduct our business.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our sales and marketing, accounting and financial and legal and compliance functions, engineering and product development tasks, research and development data, communications, supply chain, order entry and fulfillment and other business processes. We also rely on third parties and virtualized infrastructure to operate and support our information technology systems. The failure of our information technology systems to perform as
we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer.
In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyberattacks and computer viruses. The failure of our information technology systems to perform as a result of any of these factors or our failure to effectively restore our systems or implement new systems could disrupt our entire operation and could result in decreased sales, increased overhead costs, excess inventory and product shortages and a loss of important information. Further, to the extent that we have customer information in our databases, any unauthorized disclosure of, or access to, such information could result in claims under data protection laws and regulations and could damage our reputation and result in lost sales. If any of these risks materialize, our reputation and our ability to conduct our business may be materially adversely affected.
We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees, suppliers and others, including personal identification information. Security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber-attacks. Attacks may be targeted at us, our customers and suppliers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our business, financial condition and results of operations.
Our success depends on our ability to attract and retain key employees and the succession of senior management.
Our continued growth and success requires us to hire, retain and develop our leadership team. If we are unable to attract and retain talented, highly qualified senior management and other key executives, as well as provide for the succession of senior management, our growth and results of operations may be adversely impacted.
Risks Related to Finance and Accounting
We have a substantial amount of debt, which could adversely affect our financial position and our ability to raise additional capital and prevent us from fulfilling our obligations under our obligations.
As of December 31, 2022, we had total outstanding indebtedness of approximately $458.9 million consisting of $295.5 million outstanding under a term loan, $143.8 million of outstanding 4.0% convertible senior notes due 2026 (the “Notes”) and $19.7 million in other debt. Additionally, we had an unused credit facility with $125.0 million of availability as of December 31, 2022. Our substantial indebtedness may:
•make it difficult for us to satisfy our financial obligations, including with respect to our indebtedness;
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other general business purposes;
•require us to use a substantial portion of our cash flow from operations to make debt service payments instead of other purposes, thereby reducing the amount of cash flow available for future working capital, capital expenditures, acquisitions, or other general business purposes, which is exacerbated given recent increases in interest rates;
•expose us to the risk of continued increased interest rates as certain of our borrowings, including under our credit facilities, are at variable rates of interest;
•limit our ability to pay dividends;
•limit our flexibility to plan for, or react to, changes in our business and industry;
•place us at a competitive disadvantage compared with our less-leveraged competitors;
•increase our vulnerability to the impact of adverse economic, competitive, and industry conditions; and
•increase our cost of borrowing.
In addition, the credit agreement governing our credit facility contains, and the agreements governing our future indebtedness may contain, restrictive covenants that may limit our ability to engage in activities that may be in our long-term best interest. These restrictive covenants include, among others, limitations on our ability and the ability of our affiliates, including HoldCo, to incur additional indebtedness and liens, engage in sale leaseback transactions, pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock, prepay, redeem, or repurchase certain debt, make acquisitions, investments, loans, and advances, or sell or otherwise dispose of assets. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our debt.
The terms of the agreements governing our indebtedness limit, but do not prohibit, us from incurring additional indebtedness, and the additional indebtedness incurred in compliance with these restrictions could be substantial. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.
Operating our business requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay the Notes and any other debt when due, which may seriously harm our business.
Our ability to generate cash to meet our operating needs, expenditures and debt service obligations will depend on our future performance and financial condition, which will be affected by financial, business, economic, legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, competitive pressure and consumer preferences. If our cash flow and capital resources are insufficient to fund our debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. Our current and future debt agreements, including the Notes, the ABL Facility (defined herein) and the Term Loan B (defined herein) restrict our ability to take these actions and we may not be able to affect any such alternative measures on commercially reasonable terms or at all. If we cannot make scheduled payments on our debt, holders of our indebtedness can terminate their commitments to loan money, can declare all outstanding principal and interest to be due and payable, and, to the extent such debt is secured, foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. In addition, any downgrade of our debt ratings by any of the major rating agencies, which could result from our financial performance, acquisitions or other factors, would also negatively impact our access to additional debt financing (including leasing) or refinancing on favorable terms, or at all. Even if we are successful in taking any such alternative actions, such actions may not allow us to meet our scheduled debt service obligations and, as a result, our business, financial condition and results of operations may be materially adversely affected.
In addition, holders of the Notes have the right to require us to repurchase all or a portion of the Notes on the occurrence of a fundamental change, as defined in the Indenture at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. Further, if a make-whole fundamental change as defined in the indenture governing the Notes (the “Indenture”) occurs prior to the maturity date of the Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. On the conversion of the Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments for the Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make such repurchases of the Notes surrendered or pay cash with respect to the Notes being converted.
We cannot be certain that additional financing will be available on reasonable terms when needed, or at all.
We have historically incurred net losses and we may not attain and sustain profitability in future periods. As a result, we may need additional financing. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, our credit rating, the condition of the capital markets, and other factors. To the extent we use available funds or draw on our ABL Facility, we may need to raise additional funds and we cannot assure investors that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Class A common stock, and our existing stockholders may experience dilution. In the event that we are unable to obtain additional financing on favorable terms, our interest expense and principal repayment requirements could increase significantly, which could have a material adverse effect on our business, financial condition and results of operations.
Changes affecting the availability of the London Inter-bank Offered Rate (“LIBOR”) may have consequences for us that cannot yet be reasonably predicted.
We have outstanding debt with variable interest rates based on LIBOR. Our Term Loan B generally bear interest based on (i) the Adjusted Eurodollar Rate (as defined in the agreement governing our Term Loan B and calculated using LIBOR) or (ii) the Base Rate (as defined in the agreement governing our Term Loan B). The LIBOR benchmark has been the subject of national, international and other regulatory guidance and proposals to reform. In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. ICE Benchmark Administration, the administrator for LIBOR, ceased publishing United States Dollar LIBOR (“USD LIBOR”) for one week and two-month tenors after December 31, 2021, and confirmed its intention to cease all remaining USD LIBOR tenors after June 30, 2023. Concurrently, the United Kingdom Financial Conduct Authority announced the cessation or loss of representativeness of the USD LIBOR tenors from those dates. The Alternative Reference Rates Committee, a group of market participants convened by the United States Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (“SOFR”), a rate calculated based on repurchase agreements backed by United States Treasury securities, as its recommended alternative benchmark rate to replace USD LIBOR. At this time, it is not known whether or when SOFR or other alternative reference rates will attain market traction as replacements for LIBOR. These reforms may cause LIBOR to perform differently than it has in the past, and LIBOR will cease to exist after June 30, 2023. After the cessation of LIBOR, alternative benchmark rates will replace LIBOR and could affect our debt securities, debt payments and receipts. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our contracts that terminate after June 30, 2023. There is uncertainty about how applicable law and the courts will address the replacement of LIBOR with alternative rates on variable rate retail loan contracts and other contracts that do not include alternative rate fallback provisions. After June 30, 2023, the interest rates on our Term Loan B will be based on the Base Rate or an alternative benchmark rate (which may or may not be based on SOFR), which may result in higher interest rates. In addition, any changes to benchmark rates may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our results of operations and cash flows. Uncertainty as to the nature of such potential changes may also adversely affect the trading market for our securities.
We have incurred net losses in the past and may be unable to achieve or sustain profitability in the future.
We incurred a net loss of $48.6 million for the year ended December 31, 2022. As of December 31, 2022, we had an accumulated deficit of $162.7 million. We expect to continue to incur significant product commercialization and regulatory, sales and marketing, clinic opening, and other expenses. In addition, our selling, general and administrative expenses increased following prior acquisitions to support the larger combined Company and product portfolio. The net income (loss) we earn may fluctuate significantly from quarter to quarter. We will need to generate additional net sales or increased gross margin to attain and sustain profitability, and we cannot be sure that we will achieve or sustain profitability for any substantial period of time. Our failure to achieve or sustain profitability could negatively impact the value of our Class A common stock.
The trading price of our Class A common stock is highly volatile and could reduce the market price of our shares of Class A common stock in spite of our operating performance.
The volatility in the trading price of our Class A common stock, as well as general economic, market or political conditions, could reduce the market price of shares of our Class A common stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly results of operations, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments and adverse publicity about our industry in or individual scandals, and in response the market price of shares of our Class A common stock could decrease significantly.
In the past few years, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of many companies, including our own. fluctuations have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry fluctuations, as well as
general economic, political, regulatory and market conditions, may continue to negatively impact investor confidence and the market price of equity securities, including our Class A common stock. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of several factors, including:
•the timing of new product and clinic launches;
•the timing and extent of customer inventory management decisions;
•our ability to procure product in a cost effective manner;
•expansion to new customers or product categories;
•seasonality of services;
•macroeconomic conditions, both nationally and locally;
•negative publicity relating to use of pet products outside the veterinary channel; and
•taxes.
Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our flea and tick product offerings are most significant in the first half of the year, both leading up to and throughout the spring and summer seasons. Adverse weather conditions may also affect customer traffic to our customers or our ability to meet customer delivery requirements.
Risk Related to Legal and Regulatory
If our products or services are alleged to cause injury or illness or our products fail to comply with governmental regulations, we may need to recall our products and/or may experience related claims and reputational damage.
Our products may be subject to product recalls, including voluntary recalls or withdrawals, if they are alleged to pose a risk of injury or illness, or if they are alleged to have been mislabeled, misbranded or adulterated or to otherwise be in violation of governmental regulations. We may also voluntarily recall or withdraw products in order to protect our brand or reputation if we determine that they do not meet our standards, whether for quality, palatability, appearance or otherwise. If there is any future product recall or withdrawal, it could result in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation and lost sales due to the unavailability of the product for a period of time, and our business, financial condition and results of operations may be materially adversely affected. In addition, a product recall or withdrawal may require significant management attention and could result in enforcement action by regulatory authorities.
We also may be subject to product liability claims if the consumption or use of our products is alleged to cause injury or illness. Although we carry product liability insurance, our insurance may not be adequate to cover all liabilities that we may incur in connection with product liability claims. For example, punitive damages are generally not covered by insurance. If we are subject to substantial product liability claims in the future, we may not be able to continue to maintain our existing insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage. This could result in future product liability claims being uninsured. If there is a product liability judgment against us or a settlement agreement related to a product liability claim, our business, financial condition and results of operations may be materially adversely affected. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims could be costly and time-consuming and may require management to spend time defending claims rather than operating our business.
Additionally, we may be subject to claims for veterinary malpractice or negligence in the event as a result of services provided by our veterinarians. Although we carry appropriate insurance, our insurance may not be adequate to cover all liabilities that we may incur in connection with veterinary malpractice or negligence claims. Additionally, any such claims may result in reputational damage to our services segment and our business, financial condition and results of operations may be materially adversely affected.
Failure to protect our intellectual property could harm our competitive position or require us to incur significant expenses to enforce our rights.
Our success depends in part on our ability to protect our intellectual property rights. Our trademarks such as “PetIQ,” “PetArmor,” “VIP Petcare,” “VetIQ PetCare,” “VetIQ,” “Capstar,” “Advecta,” “SENTRY,” “Sergeants,” “PetLock,” “Heart Shield Plus,” “TruProfen,” “Betsy Farms,” “PetAction,” “Minties,” “Vera,” and “Delightibles” and others are assets that support our brand, sub-brands and consumers’ perception of our products. We rely on trademark, copyright, trade secret, patent and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our trademarks, trade names, proprietary information, technologies and/or processes. Our non-disclosure agreements and confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes and may not provide an adequate remedy in the event of unauthorized disclosure
of such information, which could harm our competitive position. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for some of our intellectual property rights and trade secrets in foreign countries. We may need to engage in litigation or similar activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others. Any such litigation could require us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. If we fail to protect our intellectual property, our business, financial condition and results of operations may be materially adversely affected.
We may be subject to intellectual property infringement claims or other allegations, which could result in substantial damages and diversion of management’s efforts and attention.
We have obligations to respect third-party intellectual property. The steps we take to prevent misappropriation, infringement or other violation of the intellectual property of others may not be successful. From time to time, third parties have asserted intellectual property infringement claims against us, our suppliers, or our retail customers and may continue to do so in the future. Although we believe that our products and manufacturing processes do not infringe in any material respect upon proprietary rights of other parties and/or that meritorious defenses would exist with respect to any assertions of infringement of other parties, we may from time to time be found to infringe on the proprietary rights. For example, patent applications in the United States and some foreign countries are generally not publicly disclosed until the patent application is published, and we may not be aware of currently filed patent applications that relate to our products or processes. If patents later issue on these applications, we may be found liable for subsequent infringement. Such claims that our products or processes infringe these rights, regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. In part due to the complex technical issues and inherent uncertainties in intellectual property litigation, we cannot predict whether we will prevail in such proceedings. If such proceedings result in an adverse outcome, we could, among other things, be required to:
| ● | Pay substantial damages (potentially treble damages in the United States); |
| ● | cease the manufacture, use or sale of the infringing products; |
| ● | discontinue the use of the infringing processes; |
| ● | expend significant resources to develop non-infringing processes; |
| ● | expend significant resources to litigate matters or to develop non-infringing processes; and |
| ● | enter into licensing arrangements with the third party claiming infringement, which may not be available on commercially reasonable terms, or may not be available at all. |
•Pay substantial damages (potentially treble damages in the United States);
•cease the manufacture, use or sale of the infringing products;
•discontinue the use of the infringing processes;
•expend significant resources to develop non-infringing processes;
•expend significant resources to litigate matters or to develop non-infringing processes; and
•enter into licensing arrangements with the third party claiming infringement, which may not be available on commercially reasonable terms, or may not be available at all.
If any of the foregoing occurs, our ability to compete could be affected and our business, financial condition and results of operations may be materially adversely affected.
Adverse litigation judgments or settlements resulting from legal proceedings relating to our business operations could materially adversely affect our business, financial condition and results of operations.
From time to time, we are subject to allegations, and may be party to legal claims and regulatory proceedings, relating to our business operations. Such allegations, claims and proceedings may be brought by third parties, including our customers, employees, governmental or regulatory bodies or competitors. Defending against such claims and proceedings, regardless of their merits or outcomes, is costly and time consuming and may divert management’s attention and personnel resources from our normal business operations, and the outcome of many of these claims and proceedings cannot be predicted. If any of these claims or proceedings were to be determined adversely to us, a judgment, a fine or a settlement involving a payment of a material sum of money were to occur, or injunctive relief were issued against us, our reputation could be affected and our business, financial condition and results of operations could be materially adversely affected.
A failure of one or more key information technology systems, networks or processes may materially adversely affect our ability to conduct our business.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our sales and marketing, accounting and financial and legal and compliance
functions, engineering and product development tasks, research and development data, communications, supply chain, order entry and fulfillment and other business processes. We also rely on third parties and virtualized infrastructure to operate and support our information technology systems. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer.
In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyberattacks and computer viruses. The failure of our information technology systems to perform as a result of any of these factors or our failure to effectively restore our systems or implement new systems could disrupt our entire operation and could result in decreased sales, increased overhead costs, excess inventory and product shortages and a loss of important information. Further, to the extent that we have customer information in our databases, any unauthorized disclosure of, or access to, such information could result in claims under data protection laws and regulations and could damage our reputation and result in lost sales. If any of these risks materialize, our reputation and our ability to conduct our business may be materially adversely affected.
We are subject to extensive and ongoing governmental regulation and we may incur material costs in order to comply with existing or future laws and regulations, and our failure to comply may result in enforcement, recalls and other adverse actions or significant penalties.
We are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and safety, natural resources and the environment. See “Business—Government Regulation.” Our operations are subject to extensive and ongoing regulation by the FDA, EPA,
the U.S. Department of Agriculture (the “USDA”),USDA, the Florida Department of Health and by various other federal, state, local and foreign authorities regarding the manufacturing, processing, packaging, storage, distribution, advertising, labeling and import and export of our products, including drug and food safety standards. Our operations also are subject to regulation regarding the availability and use of pesticides, emissions and discharges to the environment, and the treatment, handling, storage and disposal of materials and wastes. Many of these laws and regulations are becoming increasingly stringent and compliance with them is becoming increasingly expensive. Costs of compliance, and the impacts on us of any non-compliance, with any such laws and regulations could materially adversely affect our business, financial condition and results of operations.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
| ● | restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls; |
| ● | fines, warning letters or holds on target animal studies; |
| ● | refusal by applicable regulatory authorities to approve pending applications or supplements to approved applications, or suspension or revocation of product approvals; |
| ● | product seizure or detention, or refusal to permit the import or export of products; and |
| ● | injunctions or the imposition of civil or criminal penalties. |
•restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;
•fines, warning letters or holds on target animal studies;
•refusal by applicable regulatory authorities to approve pending applications or supplements to approved applications, or suspension or revocation of product approvals;
•product seizure or detention, or refusal to permit the import or export of products; and
•injunctions or the imposition of civil or criminal penalties.
Regulatory policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of any current or future product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business.
Our business is also affected by export and import controls and similar laws and regulations, both in the United States and elsewhere. Issues such as national security or health and safety, which may slow or otherwise restrict imports or exports, may adversely affect our business, financial condition and results of operations.
Violations of or liability under any of these laws and regulations may result in administrative, civil or criminal fines or penalties against us, revocation or modification of applicable permits, environmental investigations or remedial activities, voluntary or involuntary product recalls, warning or untitled letters or cease and desist orders against or restrictions on operations that are not in compliance, among other things. Liability may be imposed under some laws and regulations regardless of fault or knowledge and regardless of the legality of the original action. These laws and regulations, or their interpretation, may change in the future and we may incur (directly, or indirectly through our contract manufacturers) material costs to comply with current or future laws and regulations or in any required product recalls.
Certain states have laws, rules and regulations which require that veterinary medical practices be owned by licensed veterinarians and that corporations which are not owned by licensed veterinarians refrain from providing, or holding themselves out as providers of, veterinary medical care. We may experience difficulty in expanding our operations into other states or provinces with similar laws, rules and regulations. Although we have structured our operations to comply with our understanding of the veterinary medicine laws of each state and province in which we operate, interpretive legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed. A determination that we are in violation of applicable restrictions on the practice of veterinary medicine in any jurisdiction in which we operate, could have a material adverse effect on us, particularly if we are unable to restructure our operations to comply with the requirements of that jurisdiction.
All of the states in which we operate impose various registration permit and/or licensing requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have
appointed a licensed veterinarian to act on behalf of each facility. All veterinarians practicing in our animal hospitals are required to maintain valid state licenses to practice.
Failure to comply with federal, state and international laws and regulations relating to permit and/or licensing requirements, or the expansion of existing or the enactment of new laws or regulation relating to permit and/or licensing requirements, could adversely affect our business and our financial condition.
We strive to comply with all applicable laws, regulations and other legal obligations relating to permit and/or licensing requirements. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. We cannot guarantee that our practices have complied, comply or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our filed permits and licenses with any applicable federal, state or international related laws, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to permit and/or licensing requirements. In addition, various federal, state and foreign legislative and regulatory bodies may expand existing laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding permit and/or licensing requirements. Any such changes may force us to incur substantial costs or require us to change our business practices. This could compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers or otherwise harm our business, financial condition and results of operations.
If we fail to comply with governmental regulations applicable to our Services business, various governmental agencies may impose fines, institute litigation or preclude us from operating in certain states.
Certain states and provinces have laws, rules and regulations which require that veterinary medical practices be owned by licensed veterinarians and that corporations which are not owned by licensed veterinarians refrain from providing, or holding themselves out as providers of, veterinary medical care. We may experience difficulty in expanding our operations into other states or provinces with similar laws, rules and regulations. Although we have structured our operations to comply with our understanding of the veterinary medicine laws of each state in which we operate, interpretive legal
precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed. A determination that we are in violation of applicable restrictions on the practice of veterinary medicine in any jurisdiction in which we operate, could have a material adverse effect on us, particularly if we are unable to restructure our operations to comply with the requirements of that jurisdiction. All of the states in which we operate impose various registration requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinarians practicing in our animal hospitals are required to maintain valid state licenses to practice.
Our success depends on
We are subject to environmental, health, and safety laws and regulations that could result in costs to us.
In connection with the ownership and operations of our
abilitybusiness, we are subject to
attractlaws and
retain key employeesregulations relating to the protection of the environment and health and safety matters, including those governing the management and disposal of wastes and the
successioncleanup of
senior management.Our continued growthcontaminated sites. We could incur costs, including fines and success requires us to hire, retainother sanctions, cleanup costs, and develop our leadership team. Ifthird-party claims, as a result of violations of or liabilities under environmental laws and regulations. Although we are unable to attract and retain talented, highly qualified senior management and other key executives, as well as provide for the successionnot aware of senior management,any of our growth and results of operations may be adversely impacted.
We may experience difficulties hiring skilled veterinarians due to shortages that could disrupt our business.
From time to time we may experience shortages of skilled veterinarians in markets insites at which we operate mobile clinics and wellness centers, which may require us to enhance wages and benefits to recruit and retain enough qualified veterinarians to adequately staff mobile clinics and wellness centers. If we are unable to recruit and retain qualified veterinarians, or to control our labor costs, our business, financial conditions and resultscurrently have material remedial obligations, the imposition of operations may be materially adversely affected.
We have incurred net lossesremedial obligations as a result of the discovery of contaminants in the pastfuture could result in additional costs.
Continuing political and
may be unablesocial attention to
sustain profitabilitythe issue of climate change has resulted in
the future.We incurred a net loss of $77.5 million for the year ended December 31, 2020. As of December 31, 2020, we had an accumulated deficit of $93.4 million. We expect to continue to incur significant product commercializationboth existing and pending international agreements and national, regional, or local legislation and regulatory salesmeasures to limit greenhouse gas emissions, such as cap and marketing, clinic opening,trade regimes, carbon taxes, restrictive permitting, increased fuel efficiency standards, and other expenses. In addition,incentives or mandates for renewable energy. Such measures could subject us and our generalvendors to additional costs and administrative expenses increased following prior acquisitionsrestrictions and require significant operating and capital expenditures, including with respect to support the larger combined Companywaste and product portfolio. The net income we earn may fluctuate significantly from quarter to quarter. We will need to generate additional net sales or increased gross margin to attainenergy reduction, compliance costs, and sustain profitability, and we cannot be sure that we will remain profitable for any substantial period of time. Our failure to maintain profitabilityworkforce initiatives, which could negativelyadversely impact the value of our Class A common stock.
If our cash from operations is not sufficient to meet our current or future operating needs, expenditures and debt service obligations, our business, financial condition, and results of operations may be materially adversely affected.
Our ability to generateand cash to meet our operating needs, expenditures and debt service obligations will depend on our future performance and financial condition, which will be affected by financial, business, economic, legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, competitive pressure and consumer preferences. If our cash flow and capital resources are insufficient to fund our debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. Our credit facility restricts our ability to take these actions and we may not be able to affect any such alternative measures on commercially reasonable terms or at all. If we cannot make scheduled payments on our debt, the lenders under our senior secured credit facilities can terminate their commitments to loan money, can declare all outstanding principal and interest to be due and payable, foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. In addition, any downgrade of our debt ratings by any of the major rating agencies, which could result from our financial performance, acquisitions or other factors, would also negatively impact our access to additional debt financing (including leasing) or refinancing on favorable terms, or at all. Even if we are successful in taking any such alternative actions, such actions may not allow us to meet our scheduled debt service obligations and, as a result, our business, financial condition and results of operations may be materially adversely affected.
flows.
The trading price of our Class A common stock is highly volatile. The trading price of our Class A common stock has fluctuated significantly since our IPO.
This volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our Class A common stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly results of operations, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments and adverse publicity about our industry in or individual scandals, and in response the market price of shares of our Class A common stock could decrease significantly.
In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of several factors, including:
| ● | the timing of new product and clinic launches; |
| ● | the timing and extent of customer inventory management decisions; |
| ● | our ability to procure product in a cost effective manner; |
| ● | expansion to new customers or product categories; |
| ● | seasonality of services; |
| ● | macroeconomic conditions, both nationally and locally; |
| ● | negative publicity relating to use of pet products outside the veterinary channel; and |
Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our flea and tick product offerings are most significant in the first half of the year, both leading up to and throughout the spring and summer seasons. Adverse weather conditions may also affect customer traffic to our customers or our ability to meet customer delivery requirements.
Risks Related to Our Company and Ourour Organizational Structure
Our principal asset is our interest in HoldCo, and, accordingly, we depend on distributions from HoldCo to pay our taxes and expenses. HoldCo’s ability to make such distributions may be subject to various limitations and restrictions.
We are a holding company and have no material assets other than our ownership of LLC Interests of HoldCo.membership interests in HoldCo (“LLC Interests”). As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of HoldCo and its subsidiaries and distributions we receive from HoldCo. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.
We anticipate that HoldCo iswill continue to be treated as a partnership for U.S. federal income tax purposes and, as such, isgenerally will not be subject to any entity-level U.S. federal income tax. Instead, taxable income iswill be allocated to holders of LLC Interests, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of HoldCo. Under the terms of the HoldCo, Agreement, HoldCo will be obligated to make tax distributions to holders of LLC Interests, including us. These tax distributions are funded from available cash of HoldCo and its subsidiaries. These tax distributions will be computed, for us, based on our actual tax liability as a result of the net taxable income allocated to uswell as a result of owning interests in HoldCo and, for all Continuing LLC Owners, based on the net taxable income of HoldCo allocated to such holder of LLC Interests multiplied by an assumed, combined tax rate equal to the maximum rate applicable to an individual resident in New York, New York (taking into account the deductibility of state and local taxes and other applicable adjustments). In addition to tax expenses, we will also incur expenses related to our operations. operations
We intend, as its managing member, to cause HoldCo to make cash distributions to the owners of LLC Interests, including us, in an amount sufficient to (i) fund all or part of their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses. However, HoldCo’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which HoldCo is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering HoldCo insolvent. Our credit agreement doesagreements do not currently restrict our ability to make tax distributions. distributions, except under limited circumstances. In addition, for taxable years beginning after December 31, 2017, liability for adjustments to a partnership’s tax return can be imposed on the partnership itself in certain circumstances, absent an election to the contrary. HoldCo could be subject to material liabilities pursuant to adjustments to its partnership tax returns if, for example, its calculations or allocations of taxable income or loss are incorrect, which also could limit its ability to make distributions to us.
Under the terms of the Limited Liability Company Agreement of HoldCo Agreement, tax distributions payable to us are computed based on our actual tax liability, whereas tax distributions payable to members of HoldCo besides us are computed based on an assumed combined tax rate equal to the maximum rate applicable to an individual resident in New York, New York (taking into account the deductibility of state and local taxes and other applicable adjustments). We expect such calculation to result in us often receiving less, and continuing partners of HoldCo (the "LLC Owners") often receiving more, than the respective pro rata shares of the total tax distributions paid by HoldCo.
If we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. In addition, if HoldCo does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired.
If we are deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of our ownership of HoldCo, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.
As the sole managing member of HoldCo, we will control and operate HoldCo. On that basis, we believe that our interest in HoldCo is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of HoldCo, our interest in HoldCo could be deemed an “investment security” for purposes of the 1940 Act.
We and HoldCo intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the merger or acquisition of the Company more difficult without the approval of our board of directors. Among other things:
| ● | a staggered board of directors; |
| ● | removal of directors, only for cause, by a supermajority of the voting power of stockholders entitled to vote; |
| ● | a provision denying stockholders the ability to call special meetings; |
| ● | a provision denying stockholders the ability to act by written consent; |
•a provision denying stockholders the ability to call special meetings;
•a provision denying stockholders the ability to act by written consent;
•advance notice requirements for stockholder proposals and nominations; and
•the authorization of Contentsundesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval.
| ● | provisions waiving the corporate opportunity doctrine with respect to Certain Sponsors and their affiliates; |
| ● | advance notice requirements for stockholder proposals and nominations; |
| ● | amendment of our amended and restated charter by a supermajority of the voting power of stockholders entitled to vote; and |
| ● | the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval. |
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management, and may discourage, delay or prevent a transaction involving a change of control of our Company that is in the best interest of our stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they are
viewed as discouraging future takeover attempts. In addition, because we are incorporated in Delaware, we have opted out of Section 203 of the General Corporation Law of the State of
Delaware (the “DGCL”).Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.
Our amended and restated certificate of incorporation authorizes our board of directors, without the approval of our stockholders, to issue shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our Class A common stock, which may reduce its value.
Delaware.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.
We are subject to
taxes by the U.S. federal, state and local
tax authorities,and non-U.S. taxes, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
| ● | changes in the valuation of our deferred tax assets and liabilities; |
| ● | expected timing and amount of the release of any tax valuation allowances; |
| ● | tax effects of stock-based compensation; or |
| ● | changes in tax laws, regulations or interpretations thereof. |
•changes in the valuation of our deferred tax assets and liabilities;
•expected timing and amount of the release of any tax valuation allowances;
•tax effects of stock-based compensation; or
•changes in tax laws, regulations or interpretations thereof.
For example, the Inflation Reduction Act of 2022 introduced a 15% alternative minimum tax on the “adjusted financial statement income” of certain large corporations and a 1% excise tax on certain actual and deemed stock repurchases, both of which become effective in 2023. While we do not expect to be an applicable corporation that is subject to the alternative minimum tax as currently enacted, we will be a covered corporation that could be subject to the stock repurchase excise tax.
In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state and local
and non-U.S. taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
We have U.S. federal net operating loss (“NOL”) carryforwards as a result of prior period losses, some of which, if not utilized will begin to expire in fiscal year 2037 for federal purposes. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our potential profitability.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” its ability to use its pre-change net operating loss carryforwards to offset its post-change taxable income or tax liability may be limited. Such an “ownership change” generally occurs if there is a greater than 50 percentage point change (by value) in its equity ownership by one or more stockholders or groups of stockholders who own at least 5% of our stock over a three-year period. We have experienced ownership changes in the past and may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards and other pre-change tax attributes to offset U.S. federal and state taxable income or tax liability may be subject to limitations, which could potentially result in increased future tax liability to us. Furthermore, under the current U.S. federal tax laws, the amount of net operating loss carryforwards from tax years beginning after December 31, 2017 that we are permitted to use in any taxable year beginning after December 31, 2020 is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the net operating loss deduction itself. Under current U.S. federal tax laws, net operating losses are generally not permitted to be carried back to prior taxable years. There is also a risk that, due to regulatory changes, such as suspensions of the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability.
Since we have no current plans to pay regular cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.
We have not paid, and do not anticipate paying, any regular cash dividends on our Class A common stock. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under the ABL Facility and Term Loan B. Therefore, any return on investment in our Class A common stock is solely dependent upon the appreciation of the
price of our Class A common stock on the open market, which may not occur. Please read “Dividend Policy” for more detail.
Item 1B. Unresolved Staff Comments
None.
The following table sets forth the location, size, use and lease expiration date of our material properties as of December 31, 2020.2022.
| | | | | | |
| | | | | | | | | | | | | |
LOCATION | | APPROXIMATE SIZE | | PRINCIPAL USE(S) | | LEASE EXPIRATION DATE |
Daytona Beach, Florida | | 142,900 square feet | | Manufacturing and distribution warehouse; office | | November 30, 20222025 |
Springville, Utah | | 242,000 square feet | | Manufacturing and distribution warehouse; office | | January 31, 2024 |
Omaha, Nebraska |
| 131,150 square feet |
| Manufacturing; office |
| Owned |
Omaha, Nebraska |
| 349,680 square feet |
| Distribution warehouse |
| September 30, 2026 |
Eagle, Idaho |
| 14,00065,000 square feet
|
| Corporate Headquarters |
| Owned |
We are obligated under non-cancelable leases for the facilities we do not own. Our leases have varying terms, typically with three to five year renewal options.
We believe that our current properties are adequate for our intended purposes and represent sufficient capacity for our near term plans.
Item 3 – Legal Proceedings
For a discussion of our “Legal Proceedings,” refer to Note 13 –
Legal ProceedingsCommitments and Contingencies in the notes to our audited consolidated financial statements of this Annual
Report on Form 10-K.
ItemReport.
Item 4 – Mine Safety Disclosures
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Holders of Record
As of February
26, 2021,28, 2023, there were approximately
1210 holders of record of our Class A common stock and
186 holders of record of our Class B common stock. The holders of our Class B common stock also hold LLC interests in
Holdco.HoldCo. There is no public market for these interests. A substantially greater number of holders of our stock are held in “street name” and held of record by banks, brokers, and other financial institutions.
We have not historically paid cash dividends on our common stock, and have no current plans to pay cash dividends on our Class A common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our
subsidiaries to us, including restrictions under our senior secured credit facilities and other indebtedness we may incur, and such other factors as our board of directors may deem relevant.
Stock Repurchase ProgramOn September 6, 2022, the Company's Board of Directors authorized a stock repurchase program for up to $30 million of the Company’s outstanding shares of Class A common stock. Repurchases of Class A common stock may be made at management’s discretion from time to time in one or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations promulgated under Securities Exchange Act. The Company did not purchase any shares during the quarter ended December 31, 2022. As of December 31, 2022, $26.1 million in aggregate dollar value of shares remained available for purchase under the stock repurchase program.
The information contained in the following chart is not considered to be “soliciting material,” or “filed,” or incorporated by reference in any past or future filing by the Company under the Securities Act or Exchange Act unless and only to the extent that, the Company specifically incorporates it by reference. The following graph compares our total common stock return with the total return for (i) the NASDAQ Composite Index (the “NASDAQ Composite”) and (ii) the Russell 2000 Index (the “Russell 2000”) for the period from
July 26,December 31, 2017
(the date our common stock commenced trading on the NASDAQ Global Market) through December 31,
2020.2022. The figures represented below assume an investment of $100 in our common stock
at the closing price of $23.64 on
July 26,December 31, 2017 and in the NASDAQ Composite and the Russell 2000 on
July 26, 2017.the same date. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.
| | | | | | | | | |
Date | | | PetIQ | | | NASDAQ Composite | | | Russell 2000 |
July 26, 2017 | | $ | 100.00 | | $ | 100.00 | | $ | 100.00 |
December 31, 2017 | | | 92.39 | | | 107.48 | | | 106.46 |
December 31, 2018 | | | 99.28 | | | 103.31 | | | 93.50 |
December 31, 2019 | | | 105.96 | | | 139.70 | | | 115.68 |
December 31, 2020 | | | 162.65 | | | 200.67 | | | 136.93 |
| | | | | | | | | | | | | | | | | | | | |
| Date | | PetIQ | | NASDAQ Composite | | Russell 2000 |
| December 31, 2017 | | $ | 100.00 | | | $ | 100.00 | | | $ | 100.00 | |
| December 31, 2018 | | 107.46 | | | 96.12 | | | 87.82 | |
| December 31, 2019 | | 114.70 | | | 129.97 | | | 108.66 | |
| December 31, 2020 | | 176.05 | | | 186.69 | | | 128.61 | |
| December 31, 2021 | | 103.98 | | | 226.63 | | | 146.23 | |
| December 31, 2022 | | 42.22 | | | 151.61 | | | 114.70 | |
Item 6 – Selected Financial DataNot applicable.
[Reserved] Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
We conduct our business through PetIQ, LLC and its subsidiaries.
The following discussion and analysis of our financial condition and results of operations should be read together with our
audited consolidated financial statements and related notes and other financial information appearing elsewhere in this
report.Annual Report. This section of
the Form 10-Kthis Annual Report generally discusses
20202022 and
20192021 items and year-to-year comparisons of
20202022 to
2019.2021. Discussions of
20182020 items and year-to-year comparisons of
20192021 and
20182020 that are not included in this
Form 10-KAnnual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 31,
2019.This2021, which is incorporated by reference herein. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
PetIQ is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail
and e-commerce channels with our branded
and distributed medications
as well as health and wellness items, which
isare further supported by our
own world-class
medicationmedications manufacturing facility in Omaha,
Nebraska.Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national
veterinarian service platform
VIP, operates in over
2,9002,600 retail partner locations in 41 states providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care we can
give them.provide.
We have two reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segments consists of veterinary services, and related product sales, provided by the Company directly to consumers.
We are the sole managing member of Holdco,HoldCo, which is the sole member of Opco and, through Holdco,HoldCo, operate and control all of the business and affairs of Opco.
Macroeconomic Trends
Coronavirus Disease (COVID-19) Considerations
The global COVID-19 pandemic has created significant volatility, disruption and uncertainty. It has resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and the implementation of social distancing measures, leading
We, like other businesses, face challenges related to the closure of businesses and causing weakenedglobal economic conditions, the current economic downturn and anhigh inflation. Growth in the companion animal sectors is driven by overall economic slowdown and recession. There is significant uncertainty regarding the extent to which and how long COVID-19 and its related effects will impact the U.S. economydevelopment and related growth. In the past, certain of our customers and suppliers have been affected directly by economic downturns and inflation, which decreased the demand for our products and services. The extent
Industry sources have reported that pet owners indicated a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on pet care. Each of these factors, contributes to
which COVID-19 will impact our
businessability to incorporate inflationary challenges into our product pricing and
operating results during 2021 will depend on future developments, including the duration and continued spread of COVID-19, the availability and effectiveness of vaccines, andmitigate the impact on our
results. While these factors have mitigated the impact of prior downturns in the global economy, economic challenges, including the current economic downturn and inflation, could increase cost sensitivity among our customers,
which may result in reduced demand for our products, which could have a material adverse effect on our operating results and
employees, as well as the U.S. economy, all of which are highly uncertain and cannot be predicted.We made the strategic and difficult decision to temporarily close all of our veterinarian service clinics effective March 20, 2020 to protect the health and safety of our employees, customers and retail partners. We began to reopen veterinary service locations in May 2020 with 95% wellness centers and mobile clinics reopened by September 30, 2020. This effort required developing a number of protocols, including curbside service, development of a virtual line management process, procurement of personal protective equipment, training of team members, and more to facilitate our ability to re-open. Pursuant to various State and local executive orders and Public Health Departments, as well as the Department of Homeland Security and Centers for Disease Control and Prevention guidelines, it has determined that veterinary services are an essential business, and as such the Company does not expect an additional large scale disruption to its Services segment.
financial condition.
The amount of the decrease in business that we will ultimately experience remains uncertain. This is largely due to: (i) existing concerns that many non-essential businesses and employees face permanent closure or heavy reliance on newly-established federal government programs, such as the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), in order to remain in operation and the ultimate success of these programs remains unknown; (ii) uncertainty of consumer/pet owner response and more specifically, the timing of engaged demand as the public is reintroduced to our retail environments as government restrictions are lifted or reduced; and (iii) absenteeism as it relates to employee symptoms, illness, and or exposure to COVID-19.
Our Products segment has remained in operation at our main three facilities in Springville, Utah, Omaha, Nebraska, and Daytona Beach, Florida, as well as our contract manufacturing partner in Plano, Texas. We have implemented a variety of policies and procedures to ensure the health and safety of our workforce, including staggering break times, adding additional shifts to enhance social distancing, enhancing sanitation procedures, providing personal protective equipment to employees, and requiring social distancing. We also provided a $2 an hour temporary wage increase for our production employees during the twelve months ended December 31, 2020.
Our corporate and administrative personnel have been fully functional since we closed various administrative offices to employees and the general public, and implemented enhanced social distancing and work-from-home policies. A number of employees returned to these offices since we began re-opening, however a number of employees remain working remotely. We expect to continually review and adjust to local health conditions for the various jurisdictions in which we operate.
We are taking precautions to protect the safety and well-being of our employees while providing uninterrupted deliveries of products to our retailer partners. However, no assurance can be given that these actions will be sufficient, nor can we predict the level of disruption that will occur should the COVID-19 pandemic and its related macro-economic risks continue for an extended period of time. Additional information regarding risks and uncertainties to our business and results of operations related to the COVID-19 pandemic are set forth in Part I, Item 1A of this report.
Results of Operations
Components of our Results of Operations
Our Product Segment net sales consist of our total product sales net of product returns, allowances (discounts), trade promotions and incentives. We offer a variety of trade promotions and incentives to our customers, such as cooperative advertising programs and in-store displays. We recognize revenue when control transfers to our customers, in accordance with the terms of our contracts, which generally occurs upon shipment of product. Most contracts contain variable consideration, which is estimated at the time of sale and updated at each period end. Trade promotions are used to increase our aggregate net sales. Our net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.
Key factors that may affect our future Product sales growth
include:include new product introductions; expansion into other customer bases; expansion of items sold to existing customers, addition of new retail
customerscustomers; price competition; as well as whether maintaining and
to maintain pricing levels necessary for profitability; aggressive pricing by our competitors; and whether we can maintain and developdeveloping positive relationships with key retail customers. In addition, our products are primarily consumables and, as such, they experience a replenishment cycle.
Our Service Segment revenue consists of providing veterinary services to consumers and selling products to the consumer in conjunction with
providing those services. The customer generally renders payment at the time the service is
rendered.provided. Services Segment revenue is dependent on the number of clinics and wellness centers we run, dollars per pet and the number of pets we see in our clinics and wellness centers.
While many of our products are sold consistently throughout the year, we experience seasonality in the form of increased demand for our flea and tick product offerings in the first half of the year, both leading up to and throughout the spring and summer seasons. Additionally, our veterinary services experience seasonality as consumers typically seek more services in the warmer months.
Gross profit
is ourconsists of net product sales plus service revenue less cost of product sales and services. Our cost of product sales consists primarily of costs of raw goods, finished goods, packaging materials, manufacturing, shipping and handling costs and costs associated with our warehouses and distribution network. Cost of services are comprised of all service and product costs related to providing veterinary services, including but not limited to, salaries or contract costs of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, facilities rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold.
Gross margin measures our gross profit as a percentage of net sales. With respect to our proprietary products, we have a manufacturing network that includes leased and owned manufacturing facilities where we manufacture finished goods, as well as third-party contract manufacturing facilities from which we purchase finished
products predominately on a dollar-per-unit basis.products. The gross margin on our proprietary value-branded products is higher than on our distributed products. For distributed products, our costs are driven by the extent of value-added products and services we render with the distributed product. Gross profit in the services segment is driven by the number of pets that seek services in the individual clinics and wellness centers due to the relatively fixed cost nature of
providingoperating the clinic or wellness center.
Selling, General and Administrative Expenses
Our
selling, general and administrative expenses primarily consist of employee compensation and benefits expenses, sales and
merchandizingmerchandising expenses, advertising and marketing expenses,
a portion of rent and lease expenses,
IT and utilitiesinformation technology (“IT”), utility expenses, professional fees, insurance costs, R&D costs, host fees, banking charges, and consulting fees.
GeneralSelling, general and administrative expenses as a percentage of net sales have increased to
17.7%19.8% in
20202022 from
14.5%18.3% in
2019.2021. The increase in
selling, general and administrative expenses in
20202022 compared to
20192021 was primarily driven by
integrationincreased marketing and selling costs
as a result of supporting our proprietary brands, notably Capstar and Nextstar, higher expenses related to
centralization efforts, costs related to the additionacquisitions and integration of
overhead to support the Omaha facilities, incremental amortization expense on the newly acquired intangible assetspast acquisitions, and general growth in corporate services to correspond with the growth in the Company, partially offset by a decrease in
acquisition costs.amortization.
Our advertising and marketing expenses primarily consist of digital marketing (e.g. social, display and search, etc.), addressableonline video and streaming TV, e-mail, in-store merchandising and trade shows in an effort to build awareness and drive demand
for our products and services. These expenses may vary from quarter to quarter but
are typically
they are higher in the second and third quarters. Our Product Segment focuses on promoting
PetArmorour manufactured brands through direct-to-consumer, supported by trade promotions and merchandising. Our Services Segment focuses on promoting our veterinary services direct-to-consumer, geo-targeted around our retail locations, supported by in-store signage. We
generally expect our marketing expenses to increase commensurate with increases in revenue and market share for both segments.
As noted above, we experience seasonality in the form of increased demand for our flea and tick product offerings in the first half of the year, both leading up to and throughout the spring and summer seasons and, as a result, the sales and
merchandizingmerchandising expenses component of our
selling, general and administrative expenses generally increases during this period due to promotional spending relating to our flea and tick product lines.
Goodwill Impairment
Contingent Note revaluations
A portion of the purchase price for the acquisition of Community Veterinary Clinics, LLC, d/b/a (“VIP” and such acquisition the “VIP Acquisition”), was structured in the form of Contingent Notes (the “Contingent Notes”) that vested based on the combined Company EBITDA targets for the years ending December 31, 2019 and 2018. The Contingent Notes were earned based on consolidated company EBITDA as discussed in the accompanying financial statements, and were revalued each period through earnings. The combined Company EBITDA targets were met for each year end, and as such the Contingent Notes became fixed as of December 31, 2019 and 2018.
During the year ended December 31, 2020,2022, the Company recognized no additional expense duerecorded an impairment charge of $47.3 million related to the revaluationwrite-down of the Contingent Notes, but recognized $7.3 million duringfull goodwill balance of the year ended December 31, 2019.Services segment, and had no comparable event in 2021.
Net LossNet (Loss) Income
Our net (loss) incomeloss for future periods willmay be affected by the various factors described above. In addition, our historical results are impacted by Opco’s status as a pass-through entity for U.S. federal income tax purposes and our ownership percentage of Holdco.HoldCo. During the current year,2020, we recorded a valuation allowance which effectively removed our deferred tax assets based on the likelihood of realization. Improved profitability could reverse thatresult in reversal of the valuation allowance, resulting in significant swings in Net (loss) income. We anticipate future results will not be consistent as our net income will be subject to U.S. federal and state income taxes.loss. Our tax expense is impacted by our structure and, as a result, we expect our tax expense to fluctuate on a quarterly basis depending on the number of Exchangesexchanges of LLC interests that occur during each period.
We consolidate the financial position and results of operations of HoldCo. Our
Continuingcontinuing LLC Owners hold their equity investment in us primarily through LLC Interests in the Company’s subsidiary, HoldCo, and an equal number of shares of the Company’s Class B common stock. Our Class B Stock has voting, but no economic rights. Each LLC Interest, together with a share of Class B Stock held by the Continuing LLC, is exchangeable for a share of the Company’s Class A common stock (or at the option of the Company, the cash equivalent thereof). The Company is the managing member of HoldCo and owns a majority of the LLC Interests, and consolidates HoldCo in the Company’s Consolidated Financial Statements. The interest of the
Continuingcontinuing LLC Owners in HoldCo is reflected in our Consolidated Financial Statements as a non-controlling interest.
The following table sets forth our consolidated statements of operations in dollars and as a percentage of net sales for the periods presented:
| | | | | | | | | | | | |
| | | | | | | | % of Net Sales |
$'s in 000's | 2020 | | 2019 | | | 2020 | | 2019 |
Product sales | $ | 725,705 | | $ | 617,118 | | | 93.0 | % | | 87.0 | % |
Service revenue | | 54,346 | | | 92,313 | | | 7.0 | % | | 13.0 | % |
Total net sales | | 780,051 | | | 709,431 | | | 100.0 | % | | 100.0 | % |
Cost of products sold | | 584,401 | | | 530,031 | | | 74.9 | % | | 74.7 | % |
Cost of services | | 60,462 | | | 72,017 | | | 7.8 | % | | 10.2 | % |
Total cost of sales | | 644,863 | | | 602,048 | | | 82.7 | % | | 84.9 | % |
Gross profit | | 135,188 | | | 107,383 | | | 17.3 | % | | 15.1 | % |
General and administrative expenses | | 138,375 | | | 103,200 | | | 17.7 | % | | 14.5 | % |
Contingent note revaluation loss | | — | | | 7,320 | | | - | % | | 1.0 | % |
Operating loss | | (3,187) | | | (3,137) | | | (0.4) | % | | (0.4) | % |
Interest expense, net | | (26,299) | | | (14,495) | | | (3.4) | % | | (2.0) | % |
Foreign currency gain (loss), net | | 109 | | | (151) | | | 0.0 | % | | (0.0) | % |
Other income, net | | 571 | | | 172 | | | 0.1 | % | | 0.0 | % |
Total other expense, net | | (25,619) | | | (14,474) | | | (3.3) | % | | (2.0) | % |
Pretax net loss | | (28,806) | | | (17,611) | | | (3.7) | % | | (2.5) | % |
Income tax (expense) benefit | | (52,216) | | | 3,309 | | | (6.7) | % | | 0.5 | % |
Net loss | $ | (81,022) | | $ | (14,302) | | | (10.4) | % | | (2.0) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % of Net Sales for the Years ended December 31, |
| $'s in 000's | 2022 | | 2021 | | | | 2022 | | 2021 |
| Product sales | $ | 800,305 | | | $ | 825,395 | | | | | 86.8% | | 88.5% |
| Services revenue | 121,208 | | | 107,133 | | | | | 13.2% | | 11.5% |
| Total net sales | 921,513 | | | 932,528 | | | | | 100.0% | | 100.0% |
| Cost of products sold | 606,548 | | | 646,402 | | | | | 65.8% | | 69.3% |
| Cost of services | 105,302 | | | 99,733 | | | | | 11.4% | | 10.7% |
| Total cost of sales | 711,850 | | | 746,135 | | | | | 77.2% | | 80.0% |
| Gross profit | 209,663 | | | 186,393 | | | | | 22.8% | | 20.0% |
| Operating expenses | | | | | | | | | |
| Selling, general and administrative expenses | 182,561 | | | 170,521 | | | | | 19.8% | | 18.3% |
| Goodwill impairment | 47,264 | | | — | | | | | 5.1% | | —% |
| Operating (loss) income | (20,162) | | | 15,872 | | | | | (2.2)% | | 1.7% |
| Interest expense, net | 27,374 | | | 24,696 | | | | | 3.0% | | 2.6% |
| | | | | | | | | |
| Loss on debt extinguishment | — | | | 5,453 | | | | | —% | | 0.6% |
| Other (expense), net | (130) | | | (1,763) | | | | | —% | | (0.2)% |
| Total other expense, net | 27,244 | | | 28,386 | | | | | 3.0% | | 3.0% |
| Pretax net loss | (47,406) | | | (12,514) | | | | | (5.1)% | | (1.3)% |
| Income tax expense | (1,214) | | | (3,869) | | | | | (0.1)% | | (0.4)% |
| Net loss | $ | (48,620) | | | $ | (16,383) | | | | | (5.3)% | | (1.8)% |
Year Ended December 31,
20202022 Compared With Year Ended December 31,
20192021
Consolidated net sales increaseddecreased approximately $70.7$11.0 million, or 10%1.2%, to $780.1$921.5 million for the year ended December 31, 2020,2022, compared to $709.4$932.5 million for the year ended December 31, 2019.2021. This increasedecrease was driven by the expansionloss of manufactured items as a resultcertain distribution of the Perrigo Animal Health Acquisition, other growthproducts, which accounted for $36.1 million in the Products segment related to
distributed products led by the online channel, offset by decliningproduct sales in 2021. Partially mitigating the decline was a $14.1 million increase in our Services segment due to COVID-19 related closures.
revenue driven by an increase in average dollars per pet served.
Product sales
increaseddecreased approximately
$108.6$25.1 million, or
18%3.0%, to
$725.7$800.3 million for the year ended December 31,
2020,2022, compared to
$617.1$825.4 million for the year ended December 31,
2019.2021. This
increasedecrease was driven by
accelerated growththe loss of certain distribution of products, which accounted for $36.1 million in
manufacturedproduct sales in 2021 that did not recur, partially offset by price increases and the launch of new products
led by those produced in our Omaha facility and by velocity growth within current customers of distributed products, specifically the online channel.such as Nextstar.
Service revenue decreasedincreased approximately $38.0$14.1 million, or 41%13.1%, from $92.3$107.1 million to $54.3$121.2 million for the year ended December 31, 2020,2022, compared to the year ended December 31, 2019.2021. Same-store sales decreasedincreased approximately $38.8$20.5 million, or 46%25%, to $45.4$102.4 million for the year ended December 31, 2020,2022, compared to $84.2$82.0 million for the year ended December 31, 2019.2021. The decreaseincrease in same-store sales was driven by COVID-19 related closures. Non same-store salesthe maturation of clinics opened in 2021 and an increase in dollars per pet in 2022 as compared to 2021.
Gross profit
Gross profit increased
by approximately
$0.9$23.3 million, or
11%12.5%, to
$9.0$209.7 million for the year ended December 31,
2020,2022, compared to
$8.1$186.4 million for the year ended December 31,
2019. The increase2021. Products segment gross margin increased 250 basis points to 24.2% in
non same-store sales was a result of opening 80 additional wellness centers in 2019 an additional 27 wellness centers in 2020, as well as the maturation of clinics opened in the past six trailing quarters, offset by wellness centers moving into the same store sales base and COVID-19 related closures. Services revenue has rebounded to nearly the same levels prior to the COVID-19 pandemic, the Company is continuing to experience unplanned clinic closures due to absenteeism, which are expected to continue until the overall health situation improves. Gross profit
Gross profit increased by approximately $27.8 million, or 26%, to $135.2 million for the year ended December 31, 2020,2022 compared to $107.4 million for the year ended December 31, 2019. This21.7% in 2021. Services segment gross margin increased 620 basis points to 13.1% in 2022 compared to 6.9%in 2021. These increase is due to efficiency improvements in the significant Product sales growth,Services segment due to clinic optimization efforts and particularly in products manufactured in our Omaha, Nebraska facilityhigher average dollar per pet, as well as theprice increases and improved product mix (such as higher sales of Capstar assets acquired during 2020,and Nextstar, which carry a higher margin than our distributed product sales,sales) in the Products segment, partially offset by the loss of certain distribution business. Gross margin (gross profit as a negative gross profit in servicespercentage of sales) increased from 20.0% to 22.8% due to COVID-19 related closures.
Generalthe factors identified above.
Selling, general and administrative expenses
Consolidated
selling, general and administrative expenses (“
GSG&A”) increased approximately
$35.2$12.1 million, or
34%7.1%, to
$138.4$182.6 million for the year ended December 31,
2020,2022, compared to
$103.1$170.5 million for the year ended December 31,
2019.2021. As a percentage of net sales,
GSG&A increased from approximately
15%18.3% in
20192021 to
18%19.8% in
2020,2022, driven by
integrationadditional sales and marketing costs
related to centralization efforts, costs related to the addition of overhead to support
the Omaha facilities, incremental amortization expense on the newly acquired intangible assetsour brands of approximately $10.2 million, and general growth in corporate services to correspond with the growth in the Company, partially offset by a decrease in
acquisition costs.amortization of an in-process research and development agreement that did not recur in 2022.
SG&A by Segment
Beginning in the fourth quarter of 2022, the Company is allocating corporate expenses to each segment based on a percentage of net sales basis. As a result, the Company no longer separately presents SG&A in segment data. Segment reporting has been recast for 2022 and 2021 for comparability. For the years ended December 31, 2022 and 2021, total corporate expenses were $113.8 million (of which $100.7 million was allocated to Products and $13.1 million was allocated to Services) and $107.7 million (of which $95.3 million was allocated to Products and $12.4 million was allocated to Segments), respectively.
Products segment
GSG&A increased approximately
$3.2$9.7 million, or
11.7%7%, to
$30.5$142.4 million for the year ended December 31,
2020,2022, compared to
$27.3$132.7 million for the year ended December 31,
2019.2021. This increase was
primarily driven by
acquisitions, resultinga $9.9 million increase in
approximately $6.4 millionselling and marketing costs in
G&A costs related to the acquired Perrigo Animal Health business2022 in the
first six monthsProducts segment to promote new product launches and sales growth of
the year, primarily selling and distribution expenses. This was offset by a reduction in other costs, such as the centralization of certain functions like Company wide marketing to the corporate segment. our own brands..
Services segment GSG&A increased approximately $0.8$2.3 million, or 5%6%, to $16.8$40.1 million for the year ended December 31, 2020,2022, compared to $16.0$37.8 million for the year ended December 31, 2019.2021. This increase was primarily driven by higher
$1.3 million increase in stock and cash compensation and benefits costs asin the Services segment continuesin 2022 due to buildincreased headcount. Additionally variable costs increased approximately $1.0 million in 2022 as a result of increasing sales in the team, offset by declining variable selling costs, such asServices segment. Variable cost increases are primarily related to host fees and credit card service charges.
Unallocated Corporate
Unallocated corporate G&Aprocessing charges driven by increased $41.4revenue.
Goodwill Impairment
During the year ended December 31, 2022, the Company recorded an impairment charge of $47.3 million or 83.3%,related to $91.1the write-down of the full goodwill balance of the Services segment, and had no comparable event in 2021.
Other expenses
Interest expense, net, increased $2.7 million, to $27.4 million for the year ended December 31,
2020, from $49.72022, compared to $24.7 million for the year ended December 31,
2019. | ◾ | Increased corporate marketing efforts for approximately $6.7 million; |
| ◾ | Additional corporate compensation (both stock compensation and wages/bonus) of approximately $9.9 million, partially related to the severance accruals as part of integration activities; |
| ◾ | Increased professional fees and licensing costs, primarily related to the increased size of the Company, and fees for professional services provided to the Company in conjunction with new Sarbanes Oxley requirements as a result of losing Emerging Growth Company status during 2020.; |
| ◾ | Higher amortization on the inclusion of the Perrigo Animal Health Acquisition for the full year as well as new 2020 intangible asset acquisitions; |
| ◾ | A contract termination cost due to an alleged breach of contract related to the transition from the Perrigo Animal Health Acquisition of $7.8 million, and |
| ◾ | Other variable costs related to Company growth, such as insurance and information technology. |
2021. This increase was driven by higher interest rates on the Company's variable rate debt due to the United States Federal Reserve raising benchmark interest rates and due to the difference in borrowing rates on the Company's new debt facility. Additionally, the loss on debt extinguishment of $5.5 million in 2021 had no comparable event in 2022.
Pre-tax net increased $11.8 million, to $26.3loss
As a result of the factors described above including the non-cash goodwill impairment charge of $47.3 million for the year ended December 31, 2020, compared2022, pre-tax net loss increased $34.9 million to $14.5a pre-tax net loss of $47.4 million for the year ended December 31, 2019. This increase was driven by additional debt incurred to fund the Perrigo Animal Health Acquisition during 2019 being outstanding for the full year as well as the Convertible Notes entered into during May 2020 that were used to finance the Capstar Acquisition.Pre-tax net loss
As a result of the factors above, pre-tax net loss increased $11.2 million2022 compared to a pre-tax net loss of $28.8$12.5 million for the year ended December 31, 2020 compared to a pre-tax net loss of $17.6 million for the year ended December 31, 2019.
2021.
Tax
(expense) benefitAs a result of continued exchanges by Continuing LLC Owners of LLC Interests and Class B common shares, offset by the use of LLC Interests as consideration in business combinations during 2018, theexpense
The Company now owns approximately
89.4%99.1% of
HoldcoHoldCo with the LLC Interests not held by the Company considered non-controlling interest.
HoldcoHoldCo is treated as a partnership for income tax reporting.
Holdco’sHoldCo’s members, including the Company, are liable for federal, state, and local income taxes based on their share of
Holdco’sHoldCo’s taxable income.
Income tax
(expense) benefitexpense totaled
(181.3%)(2.6)% and
18.8%(30.9)% of
pretax earningspre-tax net loss for the years ended December 31,
20202022 and
2019,2021, respectively.
OurThe tax rate is affected primarily
by the
recognition of achanges in valuation allowance,
goodwill impairment charge, return to provision adjustments, and state and local taxes during the year ended December 31,
2020 and the portion of income and expense allocated to the noncontrolling interest.2022. It is also affected by discrete items that may occur in any given year such as stock based compensation, but are not consistent from year to year.
Our effective income tax rate prior to the IPO differed from statutory rates primarily due to our pass-through entity structure for U.S. income tax purposes.Segment Adjusted EBITDA
Products Segment
Products segment Adjusted EBITDA increased approximately $43.7 million, or 59.4%, to $117.2 million for the year ended December 31, 2020, compared to $73.5 million for the year ended December 31, 2019. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are manufactured by
PetIQ or are distributed for other manufacturers. The significant growth in Products segment Adjusted EBITDA relates to significant sales growth of manufactured products, primarily produced at the Omaha facility with a minor contribution from the Capstar branded products in third and fourth quarters.
Services Segment
Services segment Adjusted EBITDA decreased approximately $16.7 million, or 83.1%, to $3.4 million for the year ended December 31, 2020, compared to $20.0 million for the year ended December 31, 2019. Services segment Adjusted EBITDA can fluctuate considerably based on the volume of pets seen in clinics, due to the relatively fixed cost nature of a clinic. Additionally, Services segment earnings are impacted by the Company’s growth strategy of opening new wellness centers and the impact of the Company’s same store portfolio, discussed further below under “Consolidated Non-GAAP Financial Measures”. Services segment Adjusted EBITDA was significantly impacted by the COVID-19 closures, as well as converting some community clinics to wellness centers, which transitions operations into the non-same store category.
Unallocated Corporate
Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including accounting, legal, human resources information technology and headquarters expenses, as well as executive and incentive compensation expenses and other miscellaneous costs. Unallocated corporate costs have primarily grown due to the growth in the size of the Company, including adding to administrative headcount through acquisitions, as well as headquarters growth to support the larger Company. Adjustments to unallocated corporate include expenses related to specific events, such as acquisition expenses, integration costs, and the fair value adjustment to the contingent note. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.
The following tables reconcile segment pre-tax net income to Adjusted EBITDA for the periods presented.
| | | | | | | | | | | | |
| | Year ended December 31, 2020 |
$'s in 000's | | Products | | Services | | Unallocated Corporate | | Consolidated |
Pretax net income (loss) | | $ | 112,027 | | $ | (22,839) | | $ | (117,994) | | $ | (28,806) |
Adjustments: | | | | | | | | | | | | |
Depreciation | | | 4,810 | | | 3,775 | | | 3,497 | | | 12,082 |
Interest, net | | | — | | | — | | | 26,299 | | | 26,299 |
Amortization | | | — | | | — | | | 12,815 | | | 12,815 |
Acquisition costs(1) | | | — | | | — | | | 2,620 | | | 2,620 |
Stock based compensation expense | | | — | | | — | | | 9,170 | | | 9,170 |
Non same-store revenue(2) | | | — | | | (8,987) | | | — | | | (8,987) |
Non same-store costs(2) | | | — | | | 22,256 | | | — | | | 22,256 |
Integration costs and costs of discontinued clinics(3) | | | — | | | — | | | 9,776 | | | 9,776 |
Clinic launch expense(4) | | | — | | | 3,085 | | | — | | | 3,085 |
Litigation expenses | | | — | | | — | | | 1,006 | | | 1,006 |
COVID-19 related costs(5) | | | 379 | | | 6,097 | | | — | | | 6,476 |
Adjusted EBITDA | | $ | 117,216 | | $ | 3,387 | | $ | (52,811) | | $ | 67,792 |
(1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
(2) | Non same-store revenue and costs relate to our Services Segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
(3) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
(4) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
(5) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
| | | | | | | | | | | | |
$'s in 000's | | Year ended December 31, 2019 |
December 31, 2019 | | Products | | Services | | Unallocated Corporate | | Consolidated |
Pretax net income (loss) | | $ | 58,081 | | $ | 4,134 | | $ | (79,826) | | $ | (17,611) |
Adjustments: | | | | | | | | | | | | |
Depreciation | | | 3,552 | | | 3,170 | | | 2,417 | | | 9,139 |
Interest, net | | | 66 | | | 135 | | | 14,294 | | | 14,495 |
Amortization | | | — | | | — | | | 5,994 | | | 5,994 |
Acquisition costs(1) | | | — | | | — | | | 6,147 | | | 6,147 |
Stock based compensation expense | | | — | | | — | | | 7,355 | | | 7,355 |
Purchase accounting adjustment to inventory | | | 4,805 | | | — | | | — | | | 4,805 |
Non same-store revenue(2) | | | — | | | (8,088) | | | — | | | (8,088) |
Non same-store costs(2) | | | — | | | 19,553 | | | — | | | 19,553 |
Fair value adjustment of contingent note(3) | | | — | | | — | | | 7,320 | | | 7,320 |
Integration costs and costs of discontinued clinics(4) | | | 551 | | | 374 | | | 2,863 | | | 3,788 |
Clinic launch expense(5) | | | — | | | 767 | | | — | | | 767 |
Litigation expenses | | | — | | | — | | | 529 | | | 529 |
SKU Rationalization(6) | | | 6,482 | | | — | | | — | | | 6,482 |
Adjusted EBITDA | | $ | 73,537 | | $ | 20,045 | | $ | (32,907) | | $ | 60,675 |
(1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
(2) | Non same-store revenue and costs relate to our Services Segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
(3) | Fair value adjustment on the contingent note represents the non cash adjustment to mark the 2019 Contingent Note to fair value. |
(4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
(5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
(6) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
Consolidated Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA plus adjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.
The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating
results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.
Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with
GAAP.Generally Accepted Accounting Principles ("GAAP"). The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:
| ● | EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| ● | EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | EBITDA does not reflect the interest expenses, or the cash requirements necessary to service interest or principal payments, on our debts; |
| ● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| ● | Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing core operations; and |
| ● | Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
•EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
•EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA does not reflect the interest expenses, or the cash requirements necessary to service interest or principal payments, on our debts;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements;
•Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing core operations; and
•Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only
supplementally.supplementary. You should review the reconciliations of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
The following table reconciles net loss to EBITDA and Adjusted EBITDA for the periods presented.
| | | | | | |
| | For the years ended |
| | December 31, 2020 | | December 31, 2019 |
Net loss | | $ | (81,022) | | $ | (14,302) |
Plus: | | | | | | |
Tax expense (benefit) | | | 52,216 | | | (3,309) |
Depreciation | | | 12,082 | | | 9,139 |
Amortization | | | 12,815 | | | 5,994 |
Interest | | | 26,299 | | | 14,495 |
EBITDA | | $ | 22,390 | | $ | 12,017 |
Acquisition costs(1) | | | 2,620 | | | 6,147 |
Integration costs and costs of discontinued clinics(2) | | | 9,776 | | | 3,788 |
SKU rationalization(3) | | | — | | | 6,482 |
Purchase accounting adjustment to inventory | | | — | | | 4,805 |
Stock based compensation expense | | | 9,170 | | | 7,355 |
Fair value adjustment of contingent note(4) | | | — | | | 7,320 |
Non same-store revenue(5) | | | (8,987) | | | (8,088) |
Non same-store costs(5) | | | 22,256 | | | 19,553 |
Clinic launch expenses(6) | | | 3,085 | | | 767 |
Litigation expenses | | | 1,006 | | | 529 |
COVID-19 related costs(7) | | | 6,476 | | | — |
Adjusted EBITDA | | $ | 67,792 | | $ | 60,675 |
37
| | | | | | | | | | | |
| Year Ended December 31, |
| $'s in 000's | 2022 | | 2021 |
| Net loss | $ | (48,620) | | | $ | (16,383) | |
| Plus: | | | |
| Tax expense | 1,214 | | | 3,869 | |
| Depreciation | 14,520 | | | 14,366 | |
| Amortization | 18,079 | | | 22,336 | |
Goodwill impairment(1) | 47,264 | | | — | |
| Interest | 27,374 | | | 24,696 | |
| EBITDA | $ | 59,831 | | | $ | 48,884 | |
Loss on debt extinguishment and related costs(2) | — | | | 6,438 | |
Acquisition costs(3) | 1,464 | | | 92 | |
| Stock based compensation expense | 11,363 | | | 9,428 | |
Integration costs(4) | 1,171 | | | (142) | |
| Litigation expenses | 3,862 | | | 4,105 | |
| CFO Transition | — | | | 928 | |
Adjusted EBITDA(5) | $ | 77,691 | | | $ | 69,733 | |
(1) Non-cash goodwill impairment due to a significant decline in the Company’s market capitalization, driven primarily by rising interest rates and macroeconomic conditions. Additionally, the Company made the strategic decision to slow expansion plans for the Services business this year.
(2) Loss on debt extinguishment and related costs are related to our entering into two new credit facilities, including the write off of deferred financing costs and related costs.
(3) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.
(4) Integration costs represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily in the Products segment.
(5) Effective December 31, 2022, the Company no longer includes non same-store operating results related to the Services segment wellness centers with less than six full quarters of operating results, and pre-opening expenses, as an adjustment to its calculation of Adjusted EBITDA. As a result, the presentation of Adjusted EBITDA for the year ended December 31, 2021 has been recast for comparability to remove non same-store operating results of $23.2 million.
(1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
(2) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
(3) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
(4) | Fair value adjustment on the contingent note represents the non cash adjustment to mark the 2019 Contingent Note to fair value. |
(5) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
(6) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
(7) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
Financial Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flow from operations, borrowings, and equity contributions. As of December 31,
20202022 and December 31,
2019,2021, our cash and cash equivalents were
$33.5$101.3 million and
$27.3$79.4 million, respectively. As of December 31,
2020,2022, we had
$15.0 million outstanding under aan unused revolving credit facility
$217.3with availability of $125.0 million,
$295.5 million outstanding under a term loan, $143.8 million of outstanding 4.0% Convertible Senior Notes due 2026 (the “Notes”), and
$16.3$19.7 million in other debt. The debt agreements bear interest at rates between
2.3%2.00% and
6.75%8.57%.
Our primary cash needs are for working capital and to support our growth plans, which may include acquisitions. Our maintenance capital expenditures have typically been less than 1.0% of net sales, but we may make additional capital expenditures as necessary to support our growth, such as the investment in additional veterinary clinics that is currently ongoing or the construction of new corporate headquarters, which
is also currently underway.was completed in 2021. Our primary working capital requirements are to carry inventory and receivable levels necessary to support our
increasing Product net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal
retailer demand.customer demand, which typically requires increases in working capital from the beginning of the year and expanding through the first two quarters. Then, as the flea and tick season ends and retailers reduce inventory, working capital typically decreases. As of December 31,
20202022 and December 31,
2019,2021, we had working capital (current assets less current liabilities) of
$141.2$220.6 million and
$112.4$200.5 million, respectively.
In addition to the liabilities on the Consolidated Balance sheet, the Company has approximately $52.6 million in open purchase orders with vendors which will require payment once the purchase orders are filled. In the
short term the Company intends to maintain a strong liquidity position and minimize the need for incremental borrowings on the Company's Asset Backed Line ("ABL"). In the long term, the Company intends to maintain a flexible liquidity position, which may include paying down long term debt prior to the respective due dates.
We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facility will be adequate to meet
short-term (i.e., the next twelve months) and longer-term our operating, investing, and financing
needs for the foreseeable future.needs. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through
the incurrence ofincurring additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms. As in the past, we will continue to explore opportunities to optimize our capital structure.
Cash provided by or used in Operating Activities
Net cash used inprovided by operating activities was $4.6$48.0 million for the year ended December 31, 2020,2022, compared to $20.8$23.8 million provided by operating activities for the year ended December 31, 2019. The change in operating cash flows primarily reflects lower earnings, offset by higher non-cash items such as stock-based compensation, depreciation and amortization, deferred tax adjustment, and decreases in working capital. Working capital changes are driven by increased accounts receivable resulting from our growing sales and increased inventory due to timing and composition of expected sales in 2021, offset by growth in accounts payable to purchase inventory. Net changes in assets and liabilities accounted for $23.0
million in cash used in operating activities for the year ended December 31, 2020 compared2021. The change in non cash items is primarily is driven by Services segment goodwill impairment of $47.3 million, which is non-cash in nature, and improvement in working capital. Working capital provided an incremental $18.5 million from $16.6 million outflow in 2021 to $7.2$1.9 million inflow in 2022. Changes are driven by lower growth in accounts receivable and by inventory growth while accounts payable growth provided working capital benefit driven by increase in inventory and timing of cash usedinventory purchases. Additionally, while net loss increased in operating activities for2022 vs. 2021, a large component of the year ended December 31, 2019.
net loss increase was driven by Services segment goodwill impairment which is non-cash in nature and had no comparable event in 2021.
Cash used in Investing Activities
Net cash used in investing activities was
$118.0$12.0 million for the year ended December 31,
2020,2022, compared to
$195.0$26.1 million for the year ended December 31,
2019.2021. The decrease in net cash used in investing activities is a result of the
purchase of Perrigo Animal Healthlower cash used in the
prior year, partially offset by the Acquisition of Capstar®. as well as increased purchase of property, plant, and equipment, primarily
due to
support the launchslower construction of
additionalnew wellness centers and
the one time nature of the construction of the new corporate
headquarters.headquarters, which was completed in 2021.
Cash provided by Financing Activities
Net cash provided byused in financing activities was $128.8$13.7 million for the year ended December 31, 2020,2022, compared to $135.1$48.3 million in net cash provided by financing activities for the year ended December 31, 2019.2021. The change in cash provided by financing activities is primarily driven by the Company’s issuancerefinance activities that occurred in 2021 and did not recur in 2022 as well as significant option exercise activity in 2021 that did not recur in 2022. Additionally, the Company used $3.9 million to repurchase 373,408 shares of Notesoutstanding Class A Common Stock at $10.33 per share under the newly approved stock buy back plan, inclusive of commissions.
Description of Indebtedness
On April 13, 2021, the Company entered into the ABL Facility and the purchaseTerm Loan B (each as defined below), which replaced both the Amended Revolving Credit Agreement and A&R Term Loan Agreement as well as fully repaid $27.5 million of capped call optionsthe Notes Payable – VIP Acquisition. As part of the termination of the Amended Revolving Credit Agreement and the A&R Term Loan Credit agreement, and the repayment in full of the Notes Payable – VIP Acquisition, the Company wrote off $5.5 million in deferred financing fees to financeloss on debt extinguishment and incurred an additional $0.9 million in costs related to the Capstar Acquisition, compared to financing obtainedtransaction which are included in selling, general and administrative expenses for the purchase of Perrigo Animal Health. During the year ended December 31, 2020, we received $137.92021. See Note 5 - "Debt" in the notes to our audited consolidated financial statements included in this Annual Report for definitions and descriptions of our Amended Revolving Credit Agreement, A&R Term Loan and Notes Payable - VIP Acquisition.
Senior Secured Asset-Based Revolving Credit Facility – ABL
On April 13, 2021, Opco entered into an asset-based revolving credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides revolving credit commitments of $125.0 million,
of proceeds from the issuance the Notes, net of issuance costs and paid $14.8 millionsubject to a borrowing base limitation (the “ABL Facility”). The borrowing base for the
Capped Call.DescriptionABL Facility at any time equals the sum of: (i) 90% of Indebtedness
eligible investment-grade accounts; plus (ii) 85% of eligible other accounts; plus, (iii) 85% of the net orderly liquidation value of the cost of certain eligible on-hand and in-transit inventory; plus, (iv) at the
option of Opco, 100% of qualified cash; minus (v) reserves. The ABL Facility bears interest at a variable rate plus a margin, with the variable rate being based on a base rate or LIBOR at the option of the Company. The rate at December 31, 2022 was 4.39%. The Company also pays a commitment fee on unused borrowings at a rate of 0.35%. In February 2023, Opco entered into the First Amendment Agreement to replace the interest rate benchmark from LIBOR to SOFR. For more information on the First Amendment, please see Note 17 – “Subsequent Events.”
The ABL Facility is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts (such collateral subject to such first-priority security interest, “ABL Priority Collateral”), and a second-priority security interest in all other personal and real property of HoldCo and its wholly-owned domestic subsidiaries (such collateral subject to such second-priority security interest, “Term Priority Collateral”), in each case, subject to customary exceptions. The ABL contains customary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.
Senior Secured Term Loan Facility – Term Loan B
On April 13, 2021, Opco entered into a term credit agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $300 million (the “Term Loan B”). The Term Loan B bears interest at a variable rate (with the variable rate being based on a base rate or LIBOR at the option of the Company) plus a margin of 3.25% in the case of base rate loans, or 4.25% in the case of LIBOR loans. LIBOR rates are subject to a 0.50% floor. The interest rate at December 31, 2022 was 8.57%. The Term Loan B requires quarterly amortization payments of 0.25% of the original principal amount, with the balance due on the seventh anniversary of the closing date.
The Term Loan B is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries, including a first-priority security interest in Term Priority Collateral and a second-priority security interest in ABL Priority Collateral, in each case, subject to customary exceptions. The Term Loan B contains customary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.
The Company’s Term Loan B allows for certain incremental transactions such as additional borrowings, making restricted payments, or making acquisitions, as long as the Company’s net leverage ratio is within pre-established ranges that vary depending on the proposed incremental transaction. The Company’s net leverage ratio as defined in the Term Loan B as of December 31, 2022 is shown below for illustrative purposes.
| | | | | |
| December 31, 2022 |
| Total debt | $ | 450,409 | |
| Total Capital Leases | 2,525 | |
| Less Cash | (101,265) | |
| Net Debt | 351,669 | |
| LTM Term Loan B defined EBITDA | 94,114 | |
Term Loan B net leverage(1) | 3.7x |
On May 19, 2020, the Company issued $143.8 million in aggregate principal amount of 4.00% Convertible Senior Notes due 2026 (the “Notes”) pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $137.9 million. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes will mature on June 1, 2026, unless earlier repurchased, redeemed or converted. Before January 15, 2026, holders will have the right to convert their Notes only upon the occurrence of certain events. From and after January 15, 2026, holders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock,
at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of Notes. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and
(2)(ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock.
The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.
The
carrying amount of the liability component was calculated using a discount rate of 13%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $53.3 million and was determined by deducting the fair value of the
liability component from the parNotes was $120.5 million as of December 31, 2022. The estimated fair value of the
Notes. The excessNotes is based on market rates at the closing trading price of the
principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual terms of the Notes.
A&R Credit Agreement
On July 8, 2019 the Company amended the existing revolving credit agreement of PetIQ, LLC and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”). The Amended Revolving Credit Agreement provides for a secured revolving credit facility of $110 million, with an accordion feature allowing an additional increase up to a total facility of $125 million and extends the maturity date of the revolving facility to July 8, 2024. In addition, the Amended Revolving Credit Agreement reduces the interest rate on Eurodollar rate loans and modifies certain financial covenants, including eliminating the maximum first lien net coverage ratio. The borrowers under the Amended Revolving Credit Facility incur fees between 0.375% and 0.50%Convertible Notes as unused facility fees, dependent on the aggregate amount borrowed.
All obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.
The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowers and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of December 31, 2022 and is classified as Level 2 in the fair value hierarchy.
Capped Call Transactions
On May 14, 2020
the borrowers and
guarantors thereunder were in compliance with these covenants.The Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of December 31, 2020, the borrowers and guarantors thereunder were in compliance with these covenants.
As of December 31, 2020, $15.0 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 2.3% at December 31, 2020.
A&R Term Loan Credit Agreement
Also on July 8, 2019, the Company amended and restated the existing term loan credit agreement of PetIQ, LLC (the “A&R Term Loan Credit Agreement”). The A&R Term Loan Credit Agreement was increased from $74.1 million to $220.0 million at an interest rate equal to the Eurodollar rate plus 4.50%, the proceeds of which were used to refinance the existing term loan facility and consummate the acquisition.
All obligations under the A&R Term Loan Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of PetIQ, LLC and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions.
The A&R Term Loan Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.
The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.
As of December 31, 2020, $217.3 million was outstanding under the A&R Term Loan Credit Agreement.
General Other Debt
The Company entered into a mortgage with a local bank to finance $1.9 million of the purchase price of a commercial building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and utilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time.
In JulyMay 19, 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset Acquisitions.” In the footnotescapped call transactions (the “Capped Call Transactions”) with two counterparties. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to the Notes, the underlying shares of Class A common stock and are intended to reduce, subject to a limit, the potential dilution with respect to the Class A common stock upon conversion of the Notes. The cap price of the Capped Call Transactions is $41.51 per share of Class A common stock, and is subject to certain adjustments under the terms of the Capped Call Transactions.
For additional discussion of our “indebtedness,” refer to Note 5 – “Debt” in the notes to our audited consolidated financial statements included in Item 8 to this Form 10-K. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest rate of 8.3%, resulting in an obligation of $17.5 million. In connection with the VIP Acquisition, the Company entered into a guarantee note and the Contingent Notes (together the “Notes Payable – VIP Acquisition”), which have a collective balance of $27.5 million and require quarterly interest payments of 6.75% with the balance payable July 17, 2023.
The Company paid deferred financing fees and debt discount related to the Notes of $6.4 million and $0.6 million of loan fees related to the A&R Credit Agreement during the year ended December 31, 2020.
The Company incurred debt issuance costs of $0.7 million during the year ended December 31, 2019, related to the A&R Credit Agreement and $5.1 million during the year ended December 31, 2019, related to the A&R Term Loan Credit Agreement.
Annual Report.Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2020:
| | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
$'s in 000's | | | Total | | | 2021 | | | 2022-2023 | | | 2024-2025 | | | Thereafter |
Long-term debt | | | $ | 419,757 | | $ | 6,219 | | $ | 38,731 | | $ | 8,316 | | $ | 366,491 |
Interest on debt | | | | 86,381 | | | 21,319 | | | 41,223 | | | 21,348 | | | 2,491 |
Operating lease obligations | | | | 23,243 | | | 5,861 | | | 10,380 | | | 5,637 | | | 1,365 |
Finance lease obligations | | | | 5,271 | | | 1,757 | | | 3,164 | | | 350 | | | — |
Product purchase obligations | | | | 67,057 | | | 49,245 | | | 7,662 | | | 7,964 | | | 2,186 |
R&D arrangement | | | | 20,100 | | | 6,000 | | | 14,100 | | | — | | | — |
Total contractual obligations | | | $ | 621,809 | | $ | 90,401 | | $ | 115,260 | | $ | 43,615 | | $ | 372,533 |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, whichaccounting policies have been prepared in accordance with accounting principles generally accepted in the United States, orestablished to conform to GAAP. The preparation of these financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation.compensation to ensure they are reasonable for reporting purposes. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. ActualHowever, actual results may differ from these estimates under different assumptions or conditions.
This summary should be read in conjunction with the more complete discussion of our
significant accounting policies
are describedand procedures included in Note 1 - Principal business Activity and Significant Accounting Policies in the notes to our
consolidated financial
statements appearing in this report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.statements.
The Company recognizes product sales when product control is transferred to the customer, which
is generally
occurs upon delivery or shipment of goods, depending on terms with a customer. Many customer contracts include some form of variable consideration such as discounts, rebates, and sales returns and
allowance.allowances. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration.
Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered at the time of service.
Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other temporary price reductions. These programs are offered to our customers both in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.
Both trade marketing expense and product introductory fees are recognized as reductions of revenue at the time the transfer of control of the associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as other current assets or accounts payable in the Consolidated Balance
Sheet.Sheets.
The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience.
Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in first-out (“FIFO”) method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves.
Purchase Accounting
The purchase method
Impairment of accounting requires companiesGoodwill
Goodwill is the excess of the consideration paid over the fair value of specifically identifiable assets, liabilities and contingent liabilities in a business combination. Intangible assets acquired are recorded at estimated fair value. Goodwill and intangible assets deemed to
assign values to assets and liabilities acquired based upon their fair values at the acquisition date. In most instances, therehave indefinite lives are not
readily defined or listed market pricesamortized, but are tested for
individual assetsimpairment annually during the fourth quarter, and
liabilities acquired in connection with a business, including intangible assets. The determination of fair value for assets and liabilities in many instances requires a high degree of estimation. The valuation of intangible assets, in particular, is very subjective. We generally obtain third-party valuations to assist us in estimating fair values. The use of different valuation techniques and assumptions could change the amounts and useful lives assigned to the assets and liabilities acquired and the related amortization expense.Accounting for Income Taxes
The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company’s annual tax rate and evaluate its tax positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are subject to challenge, and the Company may not be successful in defending these challenges.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In the event that it is determined thatat any time when events suggest an asset is notimpairment more likely than not to be realized, a valuation allowance is recorded against the asset. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the eventoccurred.
To assess goodwill for impairment, the Company, were to determine that it would not be able to realize alldepending on relevant facts and circumstances, performs either a qualitative assessment or a portion of its deferred tax assets inquantitative analysis utilizing a discounted cash flow valuation model. In performing the future, the unrealizable amount would be charged to earnings in the period in which that determination is made. Conversely, ifqualitative assessment, the Company were to determineevaluates relevant factors such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it would be able to realize deferred tax assets in the future in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period that the determination was made. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company believes it is more likely than not that the benefit fromcarrying value of the recorded deferred tax assets will not be realized and has recordedreporting unit is less than its fair value, then no further testing is required. In performing a valuation allowance.
quantitative analysis, the Company determines the fair value of a reporting unit using management’s assumptions about future cash flows based on
long-range strategic plans. This approach incorporates many assumptions including discount rates and future growth rates. In future periods, if we conclude we have future taxable income sufficientthe event the carrying amount of a reporting unit exceeded its fair value, an impairment loss would be recognized.
During the third quarter of 2022, the Company's market capitalization declined significantly, driven by rising interest rates and macroeconomic conditions. Additionally, the Company slowed its expansion plans for the Services reporting unit. Based on these events, the Company concluded that an indicator of impairment existed for the Services reporting unit related to
recognizegoodwill. As a result of the
deferred tax assets, we may reduce or eliminateCompany's impairment test, the
valuation allowance.Company determined that the fair value of the Services reporting unit was less than it's carrying value resulting in a non-cash goodwill impairment charge of $47.3 million, representing all of the goodwill in the Services reporting unit, during the twelve months ended December 31, 2022. The associated market capitalization reconciliation indicated that increasing the weighted average cost of capital used in the analysis of the Products reporting could indicate impairment to that reporting unit. Similarly, additional declines in the Company's stock price and market capitalization could indicate an incremental impairment is required. No impairment was recognized for the twelve months ended December 31, 2021 and 2020. For further discussion and details relating to the Company’s goodwill balances refer to Note 4 – Intangible Assets and Goodwill in the notes to our audited consolidated financial statements of this Annual Report.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes.
We are exposed to changes in interest rates because the indebtedness incurred under our
A&R Credit AgreementABL Facility and
A&R Term Loan
Credit AgreementB are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of December 31,
2020,2022, we had variable rate debt of approximately
$232.3$295.5 million under our
RevolverABL Facility and Term
Loan.Loan B. An increase of 1% would have increased our interest expense for the year ended December 31,
20202022 by approximately
$2.6$2.9 million.
ItemItem 8 – Financial Statements and Supplementary Data
Table of Contents
KPMG LLP
Suite 600
205 North 10th Street
Boise, ID 83702-5798
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Opinion on theConsolidated Financial Statements
We have audited the accompanying consolidated balance sheets of PetIQ, Inc. and subsidiaries (the Company) as of December 31, 20202022 and 2019,2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020,2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31,
2020,2022, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 202128, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Update No. 2016-02 Leases (Topic 842), and related amendments.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
46
Critical Audit Matters
Matter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
Evaluation of
deferred tax assets recorded for exchange transactionsAs discussed in Note 7 to the consolidated financial statements, as a resultgoodwill impairment assessment of the IPO and related reorganization transactions completed in July 2017, the Company held an economic interest of approximately 62% in PetIQ Holdings, LLC (“Holdco”) and consolidates the financial position and results of Holdco. The Company is the sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $53.1 million of deferred tax assets associated with these exchanges.Products reporting unit
We identified the evaluation of deferred tax assets recorded for exchange transactions as a critical audit matter. Complex auditor judgment, including specialized skills and knowledge, was required to evaluate the calculation of the deferred tax assets generated in exchange transactions as a result of the Company’s tax basis in the interest in the Holdco partnership acquired from the LLC Owners.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the deferred tax calculation. This included the internal control over the Company’s calculation of the deferred tax assets generated in exchange transactions. We involved tax professionals with specialized skills and knowledge who assisted in assessing the Company’s application of the relevant tax law for the exchanges, including:
● | evaluating the Company’s application of income tax law related to the tax basis in the interest acquired from the LLC Owners in exchange transactions |
● | performing an independent calculation of the tax basis in the interest acquired from the LLC Owners in exchange transactions and comparing it to the Company’s calculation |
Fair value estimate of convertible notes
As discussed in Notes 1 and 54 to the consolidated financial statements, the Company issued $143.8 million in aggregate principal amounttests goodwill for impairment at least annually and more frequently whenever events or circumstances occur indicating that it might be impaired. The Company has two reporting units, which are comprised of Convertible Senior Notes due 2026 (the Notes). In accountingthe Services reporting unit and the Products reporting unit. During the year ended December 31, 2022, the Company’s market capitalization declined significantly, driven by rising interest rates and macroeconomic conditions. Additionally, the Company slowed its expansion plans for the Notes,Services reporting unit. Based on these events, the Company separated the Notes into liability and equity components whose carrying values were calculatedperformed a quantitative goodwill impairment assessment using a fair value estimatediscounted cash flow model and recorded goodwill impairment of similar debt instruments without an associated conversion feature.$47.3 million, which represented the entire goodwill balance of the Services reporting unit. No impairment was identified related to the Products reporting unit goodwill, which totaled $183.3 million as of December 31, 2022.
We identified the evaluation of the fair value estimategoodwill impairment assessment of the NotesCompany’s Products reporting unit as a critical audit matter. A high degree of auditor judgment was requiredEvaluating the discount rate assumption used in assessing the interest rate that would be availablediscounted cash flow model used to the Company for a similar debt instrument that does not have an associated conversion feature. Additionally, minor changes to the interest rate could have a significant effect on the amounts allocated to the liability and equity components. The audit effort associated with the evaluation ofestimate the fair value estimateof the Products reporting unit required subjective auditor judgement and the involvement of valuation professionals with specialized skills and knowledge. Specifically, the discount rate assumption required subjective auditor judgment due to sensitivity to variation, which could impact the Company’s determination to not record an impairment charge for the Products reporting unit.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter.Company’s goodwill impairment process. This included controls overrelated to the interestdetermination of the discount rate assumption used into estimate the fair value measurement of the Notes.Products reporting unit. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the following:
● | performing an independent analysis of interest rate yields for similar debt instruments that do not have an associated conversion feature using publicly available market data. |
● | developing an independent estimate of the fair value of the Notes using an independent interest rate yield and information from the debt agreement, and comparing it to the Company’s estimate. |
Company’s discount rate assumption by comparing the discount rate used by the Company against a discount rate range that was independently developed using publicly available market data.
We have served as the Company’s auditor since 2014.
Boise, Idaho
February
26, 2021
28, 2023
PetIQ, Inc.
Consolidated Balance Sheets
(In 000’s except for per share amounts)
| | | | | | | |
| | | |
| | December 31, 2020 | | December 31, 2019 | |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 33,456 | | $ | 27,272 | |
Accounts receivable, net | | | 102,755 | | | 71,377 | |
Inventories | | | 97,773 | | | 79,703 | |
Other current assets | | | 8,312 | | | 7,071 | |
Total current assets | | | 242,296 | | | 185,423 | |
Property, plant and equipment, net | | | 63,146 | | | 52,525 | |
Operating lease right of use assets | | | 20,122 | | | 20,785 | |
Deferred tax assets | | | — | | | 59,780 | |
Other non-current assets | | | 1,870 | | | 3,214 | |
Intangible assets, net | | | 213,000 | | | 119,956 | |
Goodwill | | | 231,158 | | | 231,045 | |
Total assets | | $ | 771,592 | | $ | 672,728 | |
Liabilities and equity | | | | | | | |
Current liabilities | | | | | | | |
Accounts payable | | $ | 68,131 | | $ | 51,538 | |
Accrued wages payable | | | 10,540 | | | 9,082 | |
Accrued interest payable | | | 903 | | | 83 | |
Other accrued expenses | | | 8,815 | | | 3,871 | |
Current portion of operating leases | | | 4,915 | | | 4,619 | |
Current portion of long-term debt and finance leases | | | 7,763 | | | 3,821 | |
Total current liabilities | | | 101,067 | | | 73,014 | |
Operating leases, less current installments | | | 15,789 | | | 16,580 | |
Long-term debt, less current installments | | | 355,979 | | | 251,376 | |
Finance leases, less current installments | | | 3,338 | | | 3,331 | |
Other non-current liabilities | | | 1,397 | | | 117 | |
Total non-current liabilities | | | 376,503 | | | 271,404 | |
Commitments and contingencies (Note 13) | | | | | | | |
Equity | | | | | | | |
Additional paid-in capital | | | 356,442 | | | 300,120 | |
Class A common stock, par value $0.001 per share, 125,000 shares authorized; 25,711 and 23,554 shares issued and outstanding, respectively | | | 26 | | | 23 | |
Class B common stock, par value $0.001 per share, 100,000 shares authorized; 3,040 and 4,752 shares issued and outstanding, respectively | | | 3 | | | 5 | |
Accumulated deficit | | | (93,377) | | | (15,903) | |
Accumulated other comprehensive loss | | | (686) | | | (1,131) | |
Total stockholders' equity | | | 262,408 | | | 283,114 | |
Non-controlling interest | | | 31,614 | | | 45,196 | |
Total equity | | | 294,022 | | | 328,310 | |
Total liabilities and equity | | $ | 771,592 | | $ | 672,728 | |
| | |
PetIQ, Inc. Consolidated Balance Sheets (In 000’s except for per share amounts) |
| | | | | | | | | | | | | | |
| | | | |
| | December 31, 2022 | | December 31, 2021 |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 101,265 | | | $ | 79,406 | |
| Accounts receivable, net | | 118,004 | | | 113,947 | |
| Inventories | | 142,605 | | | 96,440 | |
| Other current assets | | 8,238 | | | 8,896 | |
| Total current assets | | 370,112 | | | 298,689 | |
| Property, plant and equipment, net | | 73,395 | | | 76,613 | |
| Operating lease right of use assets | | 18,231 | | | 20,489 | |
| Other non-current assets | | 1,373 | | | 2,024 | |
| Intangible assets, net | | 172,479 | | | 190,662 | |
| Goodwill | | 183,306 | | | 231,110 | |
| Total assets | | $ | 818,896 | | | $ | 819,587 | |
| Liabilities and equity | | | | |
| Current liabilities | | | | |
| Accounts payable | | $ | 112,995 | | | $ | 55,057 | |
| Accrued wages payable | | 11,512 | | | 12,704 | |
| Accrued interest payable | | 1,912 | | | 3,811 | |
| Other accrued expenses | | 7,725 | | | 11,680 | |
| Current portion of operating leases | | 6,595 | | | 6,500 | |
| Current portion of long-term debt and finance leases | | 8,751 | | | 8,350 | |
| Total current liabilities | | 149,490 | | | 98,102 | |
| Operating leases, less current installments | | 12,405 | | | 14,843 | |
| Long-term debt, less current installments | | 443,276 | | | 448,470 | |
| Finance leases, less current installments | | 907 | | | 2,493 | |
| Other non-current liabilities | | 1,025 | | | 459 | |
| Total non-current liabilities | | 457,613 | | | 466,265 | |
| Equity | | | | |
| Additional paid-in capital | | 378,709 | | | 368,006 | |
| Class A common stock, par value $0.001 per share, 125,000 shares authorized; 29,348 and 29,139 shares issued, respectively | | 29 | | | 29 | |
| Class B common stock, par value $0.001 per share, 8,402 shares authorized; 252 and 272 shares issued and outstanding, respectively | | — | | | — | |
| Class A treasury stock, at cost, 373 and 0 shares, respectively | | (3,857) | | | — | |
| Accumulated deficit | | (162,733) | | | (114,525) | |
| Accumulated other comprehensive loss | | (2,224) | | | (684) | |
| Total stockholders' equity | | 209,924 | | | 252,826 | |
| Non-controlling interest | | 1,869 | | | 2,394 | |
| Total equity | | 211,793 | | | 255,220 | |
| Total liabilities and equity | | $ | 818,896 | | | $ | 819,587 | |
See accompanying notes to the consolidated financialstatements.
PetIQ, Inc.
Consolidated Statements of Operations
(In 000’s except for per share amounts)
| | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Product sales | | $ | 725,705 | | $ | 617,118 | | $ | 450,229 |
Services revenue | | | 54,346 | | | 92,313 | | | 78,385 |
Total net sales | | | 780,051 | | | 709,431 | | | 528,614 |
Cost of products sold | | | 584,401 | | | 530,031 | | | 383,501 |
Cost of services | | | 60,462 | | | 72,017 | | | 61,825 |
Total cost of sales | | | 644,863 | | | 602,048 | | | 445,326 |
Gross profit | | | 135,188 | | | 107,383 | | | 83,288 |
Operating expenses | | | | | | | | | |
General and administrative expenses | | | 138,375 | | | 103,200 | | | 72,260 |
Contingent note revaluation loss | | | — | | | 7,320 | | | 3,280 |
Operating (loss) income | | | (3,187) | | | (3,137) | | | 7,748 |
Interest expense, net | | | (26,299) | | | (14,495) | | | (8,022) |
Foreign currency gain (loss), net | | | 109 | | | (151) | | | 45 |
Other income (expense), net | | | 571 | | | 172 | | | (345) |
Total other expense, net | | | (25,619) | | | (14,474) | | | (8,322) |
Pretax net (loss) income | | | (28,806) | | | (17,611) | | | (574) |
Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 |
Net (loss) income | | | (81,022) | | | (14,302) | | | 87 |
Net (loss) income attributable to non-controlling interest | | | (3,548) | | | (2,849) | | | 869 |
Net loss attributable to PetIQ, Inc. | | $ | (77,474) | | $ | (11,453) | | $ | (782) |
| | | | | | | | | |
Net loss per share attributable to PetIQ, Inc. Class A common stock | | | | | | | | | |
Basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
Diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
Weighted average shares of Class A common stock outstanding | | | | | | | | | |
Basic | | | 24,629 | | | 22,652 | | | 17,216 |
Diluted | | | 24,629 | | | 22,652 | | | 17,216 |
| | |
PetIQ, Inc. Consolidated Statements of Operations (In 000’s except for per share amounts) |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Product sales | $ | 800,305 | | | $ | 825,395 | | | $ | 725,705 | |
| Services revenue | 121,208 | | | 107,133 | | | 54,346 | |
| Total net sales | 921,513 | | | 932,528 | | | 780,051 | |
| Cost of products sold | 606,548 | | | 646,402 | | | 584,401 | |
| Cost of services | 105,302 | | | 99,733 | | | 60,462 | |
| Total cost of sales | 711,850 | | | 746,135 | | | 644,863 | |
| Gross profit | 209,663 | | | 186,393 | | | 135,188 | |
| Operating expenses | | | | | |
| Selling, general and administrative expenses | 182,561 | | | 170,521 | | | 138,375 | |
| Goodwill impairment | 47,264 | | | — | | | — | |
| Operating (loss) income | (20,162) | | | 15,872 | | | (3,187) | |
| Interest expense, net | 27,374 | | | 24,696 | | | 22,807 | |
| | | | | |
| Loss on debt extinguishment | — | | | 5,453 | | | — | |
| Other (expense), net | (130) | | | (1,763) | | | (680) | |
| Total other expense, net | 27,244 | | | 28,386 | | | 22,127 | |
| Pretax net loss | (47,406) | | | (12,514) | | | (25,314) | |
| Income tax expense | (1,214) | | | (3,869) | | | (60,413) | |
| Net loss | (48,620) | | | (16,383) | | | (85,727) | |
| Net loss attributable to non-controlling interest | (412) | | | (416) | | | (3,072) | |
| Net loss attributable to PetIQ, Inc. | $ | (48,208) | | | $ | (15,967) | | | $ | (82,655) | |
| | | | | |
| Net loss per share attributable to PetIQ, Inc. Class A common stock | | | | | |
| Basic | $ | (1.65) | | | $ | (0.57) | | | $ | (3.36) | |
| Diluted | $ | (1.65) | | | $ | (0.57) | | | $ | (3.36) | |
| Weighted average shares of Class A common stock outstanding | | | | | |
| Basic | 29,159 | | | 28,242 | | | 24,629 | |
| Diluted | 29,159 | | | 28,242 | | | 24,629 | |
See accompanying notes to the consolidated financialstatements.
PetIQ, Inc.
Consolidated Statements of Comprehensive Loss
($’s in 000’s)
| | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
Foreign currency translation adjustment | | | 363 | | | 366 | | | (613) |
Comprehensive (loss) income | | | (80,659) | | | (13,936) | | | (526) |
Comprehensive (loss) income attributable to non-controlling interest | | | (3,525) | | | (2,777) | | | 697 |
Comprehensive loss attributable to PetIQ | | $ | (77,134) | | $ | (11,159) | | $ | (1,223) |
| | |
PetIQ, Inc. Consolidated Statements of Comprehensive Loss ($’s in 000’s) |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net loss income | (48,620) | | | (16,383) | | | (85,727) | |
| Foreign currency translation adjustment | (1,553) | | | (65) | | | 363 | |
| Comprehensive loss | (50,173) | | | (16,448) | | | (85,364) | |
| Comprehensive loss attributable to non-controlling interest | (425) | | | (417) | | | (3,049) | |
| Comprehensive loss attributable to PetIQ | $ | (49,748) | | | $ | (16,031) | | | $ | (82,315) | |
See accompanying notes to the consolidated financial statements.
PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Cash flows from operating activities | | | | | | | | | |
Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | | | | | |
Depreciation and amortization of intangible assets and loan fees | | | 30,975 | | | 16,509 | | | 12,467 |
Termination of supply agreement | | | 7,801 | | | — | | | 16 |
Gain on disposition of property, plant, and equipment | | | (238) | | | (189) | | | (90) |
Stock based compensation expense | | | 9,170 | | | 7,355 | | | 3,812 |
Deferred tax adjustment | | | 51,511 | | | (3,458) | | | (843) |
Contingent note revaluation | | | — | | | 7,320 | | | 3,280 |
Other non-cash activity | | | 164 | | | 405 | | | (334) |
Changes in assets and liabilities | | | | | | | | | |
Accounts receivable | | | (31,652) | | | (14,123) | | | (14,209) |
Inventories | | | (17,846) | | | 30,448 | | | (36,610) |
Other assets | | | 556 | | | (1,619) | | | 1,423 |
Accounts payable | | | 17,435 | | | (7,595) | | | 15,701 |
Accrued wages payable | | | 1,424 | | | 2,800 | | | 1,979 |
Other accrued expenses | | | 7,121 | | | (2,718) | | | 908 |
Net cash (used in) provided by operating activities | | | (4,601) | | | 20,833 | | | (12,413) |
Cash flows from investing activities | | | | | | | | | |
Proceeds from disposition of property, plant, and equipment | | | 442 | | | 340 | | | 229 |
Purchase of property, plant, and equipment | | | (22,392) | | | (10,276) | | | (7,178) |
Purchase of Capstar and related intangibles | | | (96,072) | | | — | | | — |
Business acquisitions (net of cash acquired) | | | — | | | (185,090) | | | (93,052) |
Net cash used in investing activities | | | (118,022) | | | (195,026) | | | (100,001) |
Cash flows from financing activities | | | | | | | | | |
Proceeds from issuance of convertible notes - liability component | | | 90,465 | | | — | | | — |
Proceeds from issuance of convertible notes - equity component | | | 53,285 | | | — | | | — |
Payment for Capped Call options | | | (14,821) | | | — | | | — |
Proceeds from issuance of long-term debt | | | 837,675 | | | 818,387 | | | 538,028 |
Principal payments on long-term debt | | | (838,073) | | | (676,509) | | | (466,912) |
Payment of financing fees on Convertible Notes | | | (5,884) | | | — | | | — |
Proceeds from public offering of class A common stock, net of underwriting discounts and offering costs | | | — | | | — | | | 73,914 |
Tax distributions to LLC Owners | | | (47) | | | (1,686) | | | (1,485) |
Principal payments on finance lease obligations | | | (1,965) | | | (1,547) | | | (1,254) |
Payment of deferred financing fees and debt discount | | | (550) | | | (5,790) | | | (2,750) |
Tax withholding payments on Restricted Stock Units | | | (595) | | | (114) | | | — |
Exercise of options to purchase class A common stock | | | 9,274 | | | 2,318 | | | 1,429 |
Net cash provided by financing activities | | | 128,764 | | | 135,059 | | | 140,970 |
Net change in cash and cash equivalents | | | 6,141 | | | (39,134) | | | 28,556 |
Effect of exchange rate changes on cash and cash equivalents | | | 43 | | | 46 | | | (92) |
Cash and cash equivalents, beginning of period | | | 27,272 | | | 66,360 | | | 37,896 |
Cash and cash equivalents, end of period | | $ | 33,456 | | $ | 27,272 | | $ | 66,360 |
| | |
PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s) |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities | | | | | | |
| Net loss | | $ | (48,620) | | | $ | (16,383) | | | $ | (85,727) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | | |
| Depreciation, amortization of intangible assets and loan fees | | 35,468 | | | 39,300 | | | 27,483 | |
| Goodwill impairment | | 47,264 | | | — | | | — | |
| Loss on debt extinguishment | | — | | | 5,453 | | | — | |
| Loss (gain) on disposition of property, plant, and equipment | | 438 | | | (1,183) | | | (238) | |
| Stock based compensation expense | | 11,363 | | | 9,428 | | | 9,170 | |
| Deferred tax adjustment | | 599 | | | 3,487 | | | 59,708 | |
| Termination of supply agreement | | — | | | — | | | 7,801 | |
| Other non-cash activity | | (385) | | | 233 | | | 164 | |
| Changes in assets and liabilities | | | | | | |
| Accounts receivable | | (4,137) | | | (11,197) | | | (31,652) | |
| Inventories | | (46,297) | | | 1,283 | | | (17,846) | |
| Other assets | | 1,093 | | | (1,380) | | | 556 | |
| Accounts payable | | 58,546 | | | (12,131) | | | 17,435 | |
| Accrued wages payable | | (1,225) | | | 2,194 | | | 1,424 | |
| Other accrued expenses | | (6,083) | | | 4,663 | | | 7,121 | |
| Net cash provided by (used in) operating activities | | 48,024 | | | 23,767 | | | (4,601) | |
| Cash flows from investing activities | | | | | | |
| Proceeds from disposition of property, plant, and equipment | | — | | | 5,132 | | | 442 | |
| Purchase of property, plant, and equipment | | (11,973) | | | (31,270) | | | (22,392) | |
| Purchase of Capstar and related intangibles | | — | | | — | | | (96,072) | |
| | | | | | |
| Net cash used in investing activities | | (11,973) | | | (26,138) | | | (118,022) | |
| Cash flows from financing activities | | | | | | |
| Proceeds from issuance of convertible notes | | — | | | — | | | 143,750 | |
| Payment for Capped Call options | | — | | | — | | | (14,821) | |
| Proceeds from issuance of long-term debt | | 59,000 | | | 642,568 | | | 837,675 | |
| Principal payments on long-term debt | | (66,600) | | | (597,071) | | | (838,073) | |
| Payment of financing fees on Convertible Notes | | — | | | — | | | (5,884) | |
| Tax distributions to LLC Owners | | — | | | (70) | | | (47) | |
| Principal payments on finance lease obligations | | (1,493) | | | (1,926) | | | (1,965) | |
| Payment of deferred financing fees and debt discount | | — | | | (7,656) | | | (550) | |
| Tax withholding payments on Restricted Stock Units | | (875) | | | (937) | | | (595) | |
| Stock repurchase | | (3,857) | | | — | | | — | |
| | | | | | |
| Exercise of options to purchase class A common stock | | 115 | | | 13,426 | | | 9,274 | |
| Net cash (used in) provided by financing activities | | (13,710) | | | 48,334 | | | 128,764 | |
| Net change in cash and cash equivalents | | 22,341 | | | 45,963 | | | 6,141 | |
| Effect of exchange rate changes on cash and cash equivalents | | (482) | | | (13) | | | 43 | |
| Cash and cash equivalents, beginning of period | | 79,406 | | | 33,456 | | | 27,272 | |
| Cash and cash equivalents, end of period | | $ | 101,265 | | | $ | 79,406 | | | $ | 33,456 | |
See accompanying notes to the consolidated financial statements.
PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | |
| | For the Year Ended December 31, |
Supplemental cash flow information | | 2020 | | 2019 | | 2018 |
Interest paid | | $ | 19,402 | | $ | 13,632 | | $ | 7,220 |
Net change in property, plant, and equipment acquired through accounts payable | | | 279 | | | (1,814) | | | 25 |
Finance lease additions | | | 2,019 | | | (3,006) | | | 656 |
Deferred tax liability created by convertible debt issuance | | | (8,197) | | | — | | | — |
Net change of deferred tax asset from step-up in basis | | | — | | | 12,381 | | | 36,882 |
Income taxes paid, net of refunds | | | 130 | | | 249 | | | 640 |
Accrued tax distribution | | | (434) | | | 786 | | | 2,097 |
Issuance of note for termination, settlement, and asset acquisition agreement | | | 17,487 | | | — | | | — |
Purchase of intangible assets from note issuance | | | (9,686) | | | — | | | — |
Non cash consideration - Issuance of Contingent Notes | | | — | | | — | | | 6,900 |
Non cash consideration - Issuance of Guarantee Notes | | | — | | | — | | | 10,000 |
Non cash consideration - Issuance of Class B common stock and LLC Interests | | | — | | | — | | | 103,004 |
| | | | | | | | | |
See accompanying notes to the consolidated financial statements. |
PetIQ, Inc.
| | |
PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s) |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Supplemental cash flow information | 2022 | | 2021 | | 2020 |
| Interest paid | $ | 26,404 | | | $ | 19,189 | | | $ | 19,402 | |
| Net change in property, plant, and equipment acquired through accounts payable | 509 | | | 735 | | | 279 | |
| Finance lease additions | 59 | | | 1,191 | | | 2,019 | |
| Net change of deferred tax asset from step-up in basis | — | | | 3,348 | | | — | |
| Income taxes paid, net of refunds | 359 | | | 418 | | | 130 | |
| Accrued tax distribution | — | | | 7 | | | (434) | |
| Issuance of note for termination, settlement, and asset acquisition agreement | — | | | — | | | 17,487 | |
| Purchase of intangible assets from note issuance | — | | | — | | | (9,686) | |
See accompanying notes to the consolidated financial statements.
| | |
PetIQ, Inc. Consolidated Statements of Stockholders’ Equity (In 000’s)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | Additional | | | | | | | | Accumulated | | Comprehensive | | | | | | | | | | Paid-in | | Non-controlling | | Total | | | Deficit | | Loss | | Class A Common | | Class B Common | | Capital | | Interest | | Equity | | | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | Balance - January 1, 2018 | | $ | (3,493) | | $ | (687) | | | 13,223 | | $ | 13 | | | 8,268 | | $ | 8 | | $ | 70,873 | | $ | 38,130 | | $ | 104,844 | ASC 606 adoption, net of tax | | | (175) | | | — | | | — | | | — | | | — | | | — | | | — | | | (110) | | | (285) | Issuance of equity for business combination | | | — | | | 128 | | | — | | | — | | | 4,600 | | | 5 | | | 43,075 | | | 59,796 | | | 103,004 | Exchange of LLC Interests held by LLC Owners | | | — | | | (290) | | | 6,321 | | | 6 | | | (6,321) | | | (6) | | | 47,458 | | | (47,168) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 36,882 | | | — | | | 36,882 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,097) | | | (2,097) | Other comprehensive income | | | — | | | (441) | | | — | | | — | | | — | | | — | | | — | | | (172) | | | (613) | Public offering | | | — | | | — | | | 2,000 | | | 2 | | | — | | | — | | | 73,912 | | | — | | | 73,914 | Equity shift as a result of the public offering | | | — | | | (26) | | | — | | | — | | | — | | | — | | | (13,914) | | | 13,940 | | | — | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,504 | | | 1,308 | | | 3,812 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 76 | | | — | | | — | | | — | | | 1,429 | | | — | | | 1,429 | Net (loss) income | | | (782) | | | — | | | — | | | — | | | — | | | — | | | — | | | 869 | | | 87 | Balance - December 31, 2018 | | $ | (4,450) | | $ | (1,316) | | | 21,620 | | $ | 22 | | | 6,547 | | $ | 7 | | $ | 262,219 | | $ | 64,496 | | $ | 320,977 | Exchange of LLC Interests held by LLC Owners | | | — | | | (109) | | | 1,794 | | | 1 | | | (1,794) | | | (1) | | | 17,299 | | | (17,190) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,381 | | | — | | | 12,381 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (786) | | | (786) | Other comprehensive income | | | — | | | 294 | | | — | | | — | | | — | | | — | | | — | | | 72 | | | 366 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,902 | | | 1,453 | | | 7,355 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 119 | | | — | | | — | | | — | | | 2,318 | | | — | | | 2,318 | Issuance of stock vesting of RSU's | | | — | | | — | | | 21 | | | — | | | — | | | — | | | — | | | — | | | — | Net (loss) | | | (11,453) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,849) | | | (14,302) | Balance - December 31, 2019 | | $ | (15,903) | | $ | (1,131) | | | 23,554 | | $ | 23 | | | 4,752 | | $ | 5 | | $ | 300,120 | | $ | 45,196 | | $ | 328,310 | Exchange of LLC Interests held by LLC Owners | | | — | | | 105 | | | 1,712 | | | 2 | | | (1,712) | | | (2) | | | 15,461 | | | (15,566) | | | — | Equity component of Convertible Notes, net of offering costs and tax | | | — | | | — | | | — | | | — | | | — | | | — | | | 37,064 | | | 5,843 | | | 42,907 | Payment for capped call share options | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,803) | | | (2,018) | | | (14,821) | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 434 | | | 434 | Other comprehensive income | | | — | | | 340 | | | — | | | — | | | — | | | — | | | — | | | 23 | | | 363 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,921 | | | 1,249 | | | 9,170 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 395 | | | — | | | — | | | — | | | 9,274 | | | — | | | 9,274 | Issuance of stock vesting of RSU's, net of tax withholdings | | | — | | | — | | | 50 | | | — | | | — | | | — | | | (595) | | | — | | | (595) | Net (loss) | | | (77,474) | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,548) | | | (81,022) | Balance - December 31, 2020 | | $ | (93,377) | | $ | (686) | | | 25,711 | | $ | 26 | | | 3,040 | | $ | 3 | | $ | 356,442 | | $ | 31,614 | | $ | 294,022 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Loss | | Class A Common | | Class A Treasury Stock | | Class B Common | | Additional
Paid-in
Capital | | Non-controlling
Interest | | Total
Equity | | | | | | | Shares | | Dollars | | Shares | Dollars | | Shares | | Dollars | | | | | | | | Balance - January 1, 2020 | | $ | (15,903) | | | $ | (1,131) | | | 23,554 | | | $ | 23 | | | — | | $ | — | | | 4,752 | | | $ | 5 | | | $ | 300,120 | | | $ | 45,196 | | | $ | 328,310 | | | Exchange of LLC Interests held by LLC Owners | | — | | | 105 | | | 1,712 | | | 2 | | | — | | — | | | (1,712) | | | (2) | | | 15,725 | | | (15,830) | | | — | | | Payment for capped call share options | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (12,803) | | | (2,018) | | | (14,821) | | | Accrued tax distributions | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | 434 | | | 434 | | | Other comprehensive income | | — | | | 340 | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | 23 | | | 363 | | | Stock based compensation expense | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | 7,921 | | | 1,249 | | | 9,170 | | | Exercise of options to purchase common stock | | — | | | — | | | 395 | | | — | | | — | | — | | | — | | | — | | | 9,274 | | | — | | | 9,274 | | | Issuance of stock vesting of RSU's, net of tax withholdings | | — | | | — | | | 50 | | | — | | | — | | — | | | — | | | — | | | (595) | | | — | | | (595) | | | Net loss | | (82,655) | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | (3,072) | | | (85,727) | | | Balance - December 31, 2020 | | $ | (98,558) | | | $ | (686) | | | 25,711 | | | $ | 26 | | | — | | $ | — | | | 3,040 | | | $ | 3 | | | $ | 319,642 | | | $ | 25,983 | | | $ | 246,410 | | | Exchange of LLC Interests held by LLC Owners | | — | | | 66 | | | 2,768 | | | 3 | | | — | | — | | | (2,768) | | | (3) | | | 23,531 | | | (23,597) | | | — | | | Net increase in deferred tax asset from LLC Interest transactions | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | 3,235 | | | 113 | | | 3,348 | | | Accrued tax distributions | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | (7) | | | (7) | | | Other comprehensive income | | — | | | (64) | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | (1) | | | (65) | | | Stock based compensation expense | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | 9,109 | | | 319 | | | 9,428 | | | Exercise of options to purchase common stock | | — | | | — | | | 583 | | | — | | | — | | — | | | — | | | — | | | 13,426 | | | — | | | 13,426 | | | Issuance of stock vesting of RSU's, net of tax withholdings | | — | | | — | | | 77 | | | — | | | — | | — | | | — | | | — | | | (937) | | | — | | | (937) | | | Net loss | | (15,967) | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | (416) | | | (16,383) | | | Balance - December 31, 2021 | | $ | (114,525) | | | $ | (684) | | | 29,139 | | | $ | 29 | | | — | | $ | — | | | 272 | | | $ | — | | | $ | 368,006 | | | $ | 2,394 | | | $ | 255,220 | | | Exchange of LLC Interests held by LLC Owners | | — | | | — | | | 20 | | | — | | | — | | — | | | (20) | | | — | | | 199 | | | (199) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income | | — | | | (1,540) | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | (13) | | | (1,553) | | | Treasury stock purchase | | — | | | — | | | — | | | — | | | 373 | | (3,857) | | | — | | | — | | | — | | | — | | | (3,857) | | | Stock based compensation expense | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | 11,264 | | | 99 | | | 11,363 | | | Exercise of options to purchase common stock | | — | | | — | | | 2 | | | — | | | — | | — | | | — | | | — | | | 115 | | | — | | | 115 | | | Issuance of stock vesting of RSU's, net of tax withholdings | | — | | | — | | | 187 | | | — | | | — | | — | | | — | | | — | | | (875) | | | — | | | (875) | | | Net loss | | (48,208) | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | — | | | (412) | | | (48,620) | | | Balance - December 31, 2022 | | $ | (162,733) | | | $ | (2,224) | | | 29,348 | | | $ | 29 | | | 373 | | $ | (3,857) | | | 252 | | | $ | — | | | $ | 378,709 | | | $ | 1,869 | | | $ | 211,793 | |
Note that certain figures shown in the table above may not recalculate due to rounding.
See accompanying notes to the consolidated financial statements.
Notes to the consolidated financial statements Note 1 – Principal Business Activity and Significant Accounting Policies
Principal Business Activity and Principals of ConsolidationPetIQ is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. The company engagesWe engage with customers through more than 60,000 points of distribution across retail and e-commerce channels with itsour branded and distributed medications as well as health and wellness items, which isare further supported by its ownour world-class medications manufacturing facility in Omaha, Nebraska. The Company’sNebraska and health and wellness manufacturing facility in Springville, Utah. Our national veterinarian service platform VIP Petcare, operates in over 2,600 retail partner locations in 41 states providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care we can provide. PetIQ has 2two reporting segments: (i) Products; and (ii) Services. The Products segment consists of ourthe manufacturing and distribution business. The Services segmentssegment consists of veterinary services, and related product sales, provided by the Company directly to consumers. PetIQ is the managing member of PetIQ Holdings, LLC (“ Holdco”HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, through Holdco,HoldCo, operate and control all the business and affairs of Opco. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, the valuation of assets and liabilities in connection with acquisitions, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies.
Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are at cost, which approximates fair value due to their relatively short maturities. The guarantee note is carried at cost, which approximates fair value due to the recent issuance of the note. Our term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amounts approximate fair value.
A portion of the purchase price for the acquisition of Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP” and such acquisition, the “VIP Acquisition”) was structured in the form of Contingent Notes (the “Contingent Notes”) that vest based on the combined Company EBITDA targets for the years ending December 31, 2018 and 2019 (“Measurement Dates”). See Note 2 – “Business Combinations” for more information regarding the VIP Acquisition. The liabilities related to the 2018 and 2019 Contingent Notes became fixed asNotes.
The Contingent Notes began bearing interest at a fixed rate of 6.75%, with the balance payable July 17, 2023. The following table summarizes the Level 3 activity related toCompany fully repaid the Contingent Notes forin April 2021 as part of the twelve months ended December 31, 2019:
| | | $'s in 000's | | Balance at beginning of the period | $ | 2,680 | Change in fair value of contingent consideration | | 7,320 | Transfer out of level 3 | | (10,000) | Balance at the end of the period | $ | — |
refinance activity described in Note 5 – Debt. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the date of acquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are classified as cash and cash equivalents. The Company maintains its cash accounts in various deposit accounts, the balances of which at times exceeded federal deposit insurance limits during the periods presented.
Receivables and Credit Policy Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 45 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for credit losses equal to expected losses. The Company’s estimate is based on historical collection experience, a review of the current status of trade accounts receivable and known current economic conditions including the current and expected impact of COVID-19.conditions. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice. Other receivables consists of various receivables due from vendors, banking partners,institutions, employees, and notesgovernment agencies. Accounts receivable, from suppliers. Non-current portions of these other receivables are included in other non-current assets on the consolidated balance sheets.Accounts receivablenet consists of the following as of:
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Trade receivables | | $ | 96,381 | | $ | 67,551 | Other receivables | | | 7,094 | | | 4,257 | | | | 103,475 | | | 71,808 | Less: Allowance for doubtful accounts | | | (720) | | | (431) | Total accounts receivable, net | | $ | 102,755 | | $ | 71,377 |
| | | | | | | | | | | | | $'s in 000's | December 31, 2022 | | December 31, 2021 | | Trade receivables | $ | 104,612 | | | $ | 108,049 | | | Other receivables | 13,790 | | | 6,405 | | | 118,402 | | | 114,454 | | | Less: Allowance for doubtful accounts | (398) | | | (507) | | | Total accounts receivable, net | $ | 118,004 | | | $ | 113,947 | |
Inventories Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in first-out (“FIFO”)FIFO method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Major components of inventories consist of the following as of:
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Raw materials | | $ | 15,761 | | $ | 10,675 | Work in progress | | | 2,273 | | | 1,717 | Finished goods | | | 79,739 | | | 67,311 | Total inventories | | $ | 97,773 | | $ | 79,703 |
| | | | | | | | | | | | | $'s in 000's | December 31, 2022 | | December 31, 2021 | | Raw materials | $ | 17,464 | | | $ | 16,564 | | | Work in progress | 2,234 | | | 1,650 | | | Finished goods | 122,907 | | | 78,226 | | | Total inventories | $ | 142,605 | | | $ | 96,440 | |
Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charge was recorded for the years ended December 31, 2022, 2021 and 2020.
Depreciation and amortization is provided using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and finance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales and selling, general and administrative expenses in the consolidated statements of operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows:
| | | | | | Computer equipment and software |
|
| 3 years | Vehicle and vehicle accessories |
|
| 3-53-5 years
| Buildings |
|
| 33 years | Equipment |
|
| 2-152-15 years
| Leasehold improvements |
|
| 2-152-15 years
| Furniture and fixtures |
|
| 5-105-10 years
|
Goodwill and Intangible Assets Goodwill is the excess of the consideration paid over the fair value of specifically identifiable assets, liabilities and contingent liabilities in a business combination. Intangible assets acquired are recorded at estimated fair value. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are tested for impairment annually during the fourth quarter, and at any time when events suggest an impairment more likely than not occurred. To assess goodwill for impairment, the Company, depending on relevant facts and circumstances, performs either a qualitative assessment or a quantitative analysis utilizing a discounted cash flow valuation model. In performing the qualitative assessment, the Company evaluates relevant factors such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the carrying value of the reporting unit is less than its fair value, then no further testing is required. In performing a quantitative analysis, the Company determines the fair value of a reporting unit using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including discount rates and future growth rates. In the event the carrying amount of a reporting unit exceeded its fair value, an impairment loss would be recognized. During the three months ended September 30, 2022, the Company's market capitalization declined significantly, driven by rising interest rates and macroeconomic conditions. Additionally, the Company has slowed its expansion for the Services reporting segment. Based on these events, the Company concluded that an indicator of impairment existed for the Services segment related to its Goodwill during the three months ended September 30, 2022. See Note 4 - Intangible Assets and Goodwill for further information. As a result of the Company's impairment test, the Company determined that the fair value of the Services reporting unit was less than it's carrying value, resulting in a non-cash goodwill impairment charge of $47.3 million during the twelve months ended December 31, 2022. No impairment charge was recorded for the years ended December 31, 2021 and 2020.Indefinite-lived intangible assets are tested for impairment utilizing either a qualitative assessment or a quantitative analysis. For a qualitative assessment, the Company identifies and considers relevant key factors, events, and circumstances to determine whether it is necessary to perform a quantitative impairment test. The key factors considered include macroeconomic, industry, and market conditions, as well as the asset's actual and forecasted results. For the quantitative impairment tests, the Company compares the carrying amounts to the current fair market values. Intangible assets with definite lives are amortized over their estimated useful lives to reflect the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. NaN Due to aforementioned goodwill impairment, chargeduring the three months ended September 30, 2022, the Company determined that a triggering event had occurred for certain amortizable intangible assets and conducted Step 1 of impairment testing utilizing undiscounted cash flows. No additional impairment was recorded as a result of this test or was recorded for the years ended December 31, 2020, 2019,2022, 2021, and 2018.
2020. On May 19, 2020, wethe Company issued $143.8 million aggregate principal amount of Convertible Notes due 2026 (the “Notes”). See Note 5 – “Debt”. We separately account“Debt.” Simultaneously, with the issuance of the Notes, we bought capped call options from certain financial institutions to minimize the impact of potential dilution of our Class A common stock upon conversion of the
Notes. The premium for the liability and equity components of convertible debt instruments that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component iscapped call options was recorded as the equity component with a corresponding discount recorded on the debt. We recognize amortization of the resulting discount using the effective interest method as interest expenseadditional paid-in capital in our consolidated statements of operations. The equity component is not remeasuredbalance sheets as long as it continues to meet the conditions for equity classification.We have allocated issuance costs to the liability and equity components. Issuance costs attributable to the liability componentoptions are being amortized to expense over the respective term of the Notes, and issuance costs attributable to the equity component were netted with the respective equity componentsettleable in additional paid-in capital.
our Class A common stock. When Performance Obligations Are Satisfied A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of veterinary services. Revenue is generally recognized for product sales on a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the remaining benefits from the asset at this point in time. The Company determined that certain products manufactured to a customer’s specifications do not have an alternative future use at a reasonable profit margin due to costs associated with reworking, transporting and repackaging these products. These products are produced subject to purchase orders that include an enforceable right to payment. Therefore the Company determined that revenue on these products would be recognized over time, as the products are produced. This represents a minor subset of the products the Company manufactures. Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered at the time of service. Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its relative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data. The Company began offering subscription based veterinary service plans to customers of the Services segment in 2021, however total activity during the years ended December 31, 2022 and 2021 was immaterial. The performance obligations in our contracts are satisfied within one year. As such, we have not disclosed the transaction price allocated to remaining performance obligations as of December 31, 2020. 2022 and 2021. In addition to fixed contract consideration, most contracts include some form of variable consideration. The most common forms of variable consideration include discounts, rebates, and sales returns and allowances. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We believe there will not be significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in the market. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration. Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other temporary price reductions. These programs are offered to our customers both in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates. Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.
Both trade marketing expense and product introductory fees are recognized as reductions of revenue at the time the transfer of control of the associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in the Consolidated Balance Sheets.consolidated balance sheets. Significant Payment Terms Our customer contracts identify the product, quantity, price, payment and final delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are not typically granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will beis typically one year or less.
All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales. This includes shipping and handling costs after control over a product has transferred to a customer.
Sales tax collected from customers and remitted to governmental authorities is not included in revenue and is reflected as a liability on the Company’s consolidated balance sheets. PetIQ provides all customers with a standard or assurance type warranty. Either stated or implied, the Company provides assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No significant services beyond an assurance warranty are provided to customers. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Additionally customers from time to time will negotiate certain return provisions to facilitate seasonal retail inventory changes or to reset placement within stores. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Contract asset and liability balances as of December 31, 20202022 and 20192021 are immaterial. The Company does not have significant deferred revenue or unbilled receivable balances.
Cost of Services are comprised of all service and product costs related to the delivery of veterinary services, including but not limited to, salaries and contract costs of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold.
Research and Development and Advertising Costs Research and development and advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Research and development costs amounted to $2.3$2.1 million, $1.3$8.0 million, and $0.2$2.3 million and advertising costs were $10.1$20.1 million, $4.5$16.2 million, and $2.9$10.1 million for the years ended December 31, 2022, 2021, and 2020, 2019, and 2018, respectively.
Through the Perrigo Animal Health Acquisition, we entered into a product development and asset purchase agreement with a third party for certain product formulations in development by the third party. During the year ended December 31, 2021, the Company opted out of the arrangement for two of the product formulations, which reduced the amount potentially payable under the agreement. The Company may make payments of up to $20.5$3.3 million of payments over the course of the next several
years contingent on achievement of certain development and regulatory approval milestones.milestones on the remaining product formulation in development. Product development costs are expensed as incurred or as milestone payments become probable. There can be no assurance that these productsthis product will be approved by the U.S. Food and Drug Administration (“FDA”)FDA on the anticipated schedule or at all. Consideration paid after FDA approval will be capitalized and amortized to cost of goods sold over the economic life of each product. The expenses paid prior to FDA approval will be included in Generalselling, general and Administrativeadministrative expenses on the Consolidated Statementsconsolidated statements of Operations.operations. The Company accrued $2.0 million in research and development expense within accounts payable in the consolidated balance sheets related to the agreement as a milestone was determined to be probable during the year ended December 31, 2021. The amount was paid during the year ended December 31, 2022. There were no expenses incurred under the agreement for the periods ended December 31, 20202022 and 2019.2020. The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If the likelihood of an adverse legal outcome is determined to be probable and the amount of loss is estimable, then a liability is accrued in accordance with accounting guidance for Contingencies. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. The Company consults with both internal and external legal counsel related to litigation. See Note 13 for more information.
The Company expenses employee share-based awards under ASC Topic 718, Compensation—Stock Compensation, which requires compensation cost for the grant-date fair value of share-based awards to be recognized over the requisite service period. Stock options granted to executives and other employees are valued using the Black-Scholes option pricing model. See Note 9 for more information.
Accounting for Income Taxes The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense.
Interest expense, net, is comprised primarily of interest expense related to (i) our debt agreements, (ii) unused line fees, (iii) amortization of deferred loan fees and discounts, (iv) finance lease obligations and the mortgage note outstanding, offset by interest income earned on our demand deposits and other assets. Interest expense was $26.3$28.2 million, $14.9$24.7 million, and $8.3$22.8 million for the years ended December 31, 2020, 2019,2022, 2021, and 2018,2020, respectively, offset by $0.8 million, $0.0 million, $0.4 million, and $0.3$0.0 million of interest income, respectively.
The non-controlling interests on the consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, Holdco,HoldCo, held by the non-controlling holders of Class B common stock and limited liability company interests in Holdco.HoldCo. Non-controlling interests on the consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling holders of Class B common stock and Limited Liability Company interests in Holdco.EarningsHoldCo.
Basic earningsloss per share is computed by dividing net loss attributable to PetIQ, Inc. by the weighted average shares outstanding during the period. Diluted earningsloss per share is computed by dividing net loss attributable to PetIQ, Inc., adjusted as necessary for the impact of potentially dilutive securities, by the weighted-average shares outstanding during the period and the impact of securities that would have a dilutive effect on earningsloss per share. See Note 8 for further discussion.
Recently Issued Accounting Pronouncements / Adopted Accounting Standard Updates From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”) .Effective January 1, 2020, the Company
In 2022, we adopted Accounting Standards Update (“ASU”) No. 2016-13, "Financial Instruments - Credit Losses." This ASU 2021-10, Government Assistance (Topic 832) Disclosures by Business Entities about Government Assistance, which requires an organizationcertain footnote disclosure of assistance received from government entities. Certain states and localities we operate in offer various business incentives related to measure all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable information. Organizations will now use forward-looking information to better estimate their credit losses.investment or job creation which we may qualify for. The Company adopted this ASU using a modified retrospective approach. Under this method of adoption, the Company determined that there was no cumulative-effect adjustment to beginning Retained earnings on the consolidated balance sheet. Adoption of this standard did not impact the Company’s net loss and had no impact on the consolidated statement of cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The purpose of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. In addition, ASU 2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within the year of adoption. Originally under ASU 2016-02, an organization was required upon adoption to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach and restate the financial statements for all periods presented. In July 2018, the FASB issued ASU 2018-11, which amends ASU 2016-02 to provide organizations with an additional (and optional) transition method whereby it may elect to recognize and measure leases by applying the cumulative impact of adopting ASU 2016-02 to the opening retained earnings balance in the period of adoption, thereby removing the requirement that the financial statements of prior periods by restated. The Company adopted the provisions of this guidance effective January 1, 2019, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2019 and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. The Company elected the package of practical expedients and implemented internal controls and system functionality to enable the preparation of financial information upon adoption. In addition, the Company has elected to apply the practical expedient to not separate the lease and non-lease components for all of the Company’s leases.
The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company’s consolidated balance sheet related to operating leases. Accounting for finance leases remained substantially unchanged. In addition, the adoption of the standard did not have a material impact on the Company’s results of operationsCompany's Financial Statements or cash flows.
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, we intend to adopt ASU 2020-06 using the full retrospective approach. We expect the adoption of the new standard to result in a decrease to stockholders equity of $51.4 million and a corresponding increase to convertible senior notes. Interest expense, netexisting footnote disclosures for the year ending December 31, 2020 will decrease approximately $4.0 million. Interest expense, net, recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. Additionally we expect that the change will result in significantly more dilutive shares outstanding.
current period.
Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements.
Note 2 – Business Combination and Asset AcquisitionPerrigo Animal Health Acquisition
On July 8, 2019, PetIQ, Inc., through its subsidiary PetIQ, LLC, completed the acquisition of all the outstanding stock of Sergeant’s Pet Care Products, Inc. (“Sergeant’s”), d/b/a Perrigo Animal Health, including any assets related to Perrigo Company plc’s animal health business (the “Perrigo Animal Health Acquisition”). Sergeant’s is now an indirect wholly-owned subsidiary of the Company.
The fair value of the consideration is summarized as follows:
Acquisitions$'s in 000's | Fair Value | Inventories | $ | 17,998 | Property, plant and equipment | | 19,568 | Other current assets | | 13,048 | Other assets | | 9,680 | Indefinite-lived intangible assets | | 23,040 | Definite-lived intangible assets – 13 year weighted average life | | 14,480 | Goodwill | | 105,838 | Total assets | | 203,652 | | | | Liabilities assumed | | 19,259 | | | | Purchase price | $ | 184,393 | | | | Cash paid, net of cash acquired | $ | (185,090) | Post-closing working capital adjustment | | 697 | | | | Fair value of total consideration transferred | $ | (184,393) |
The definite-lived intangibles primarily relate to trademarks, customer relationships, and developed technology and know-how. The $14.6 million represents the fair value and will be amortized over the estimated useful lives of the assets through June 2039.
The indefinite-lived intangibles primarily relate to trademarks and in-process research and development.
Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. Approximately $105.8 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment.
Transaction costs of $6.1 million were incurred in the year ended December 31, 2019, and are included in General and Administrative expenses on the Consolidated Statements of Operations.
Capstar ® (nitenpyram) Acquisition
On July 31, 2020 the Company completed the acquisition of Capstar® and CapAction® and related assets (the “Capstar Acquisition”) from Elanco US Inc. for $95 million, plus the cost of certain outstanding finished goods inventory in saleable condition, using cash on hand as a result of the issuance of the 4.00% Convertible Senior Notes due 2026 (the “Notes”) in May 2020.2020, See Note 5 – “Debt” The Capstar Acquisition was accounted for as an asset acquisition and certain transaction related costs of approximately $1.0 million were included in the cost of the acquired assets. The fair value assigned to trade names was based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The estimated fair value of customer relationship was determined using an income approach, specifically a discounted cash flow analysis. The rate utilized to discount net cash flows to their present values was approximately 15% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The fair value assigned to patents and processes was determined based on the income approach. The purchased assets are identified below: | | | | | | | $'s in 000's | Fair Value | | Amortizable intangibles | | | Customer relationships | $ | 70,901 | | | Patents and processes | 9,895 | | Total amortizable intangibles | 80,796 | | Non-amortizable intangibles | | | Trademarks and other | 15,276 | | Total purchased intangible assets | $ | 96,072 | |
Table of Contents | | | $'s in 000's | Fair Value | Amortizable intangibles | | | Customer relationships | $ | 70,901 | Patents and processes | | 9,895 | Total amortizable intangibles | | 80,796 | Non-amortizable intangibles | | | Trademarks and other | | 15,276 | Total purchased intangible assets | $ | 96,072 |
The weighted average amortization period of the amortizable intangible assets is approximately 11.8 years.
Supplier Termination, Settlement and Asset Purchase Agreement:
During July 2020, the Company entered into a Termination, Settlement and Asset Purchase Agreement (“Agreement”(the “Agreement”) with a supplier who alleged PetIQ had breached its supply agreement due to the acquisition of Perrigo Animal Health. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter. The Agreement terminated the supply agreement that was previously in place, settled all outstanding claims and operations, and allowed PetIQ to purchase certain intellectual property related assets. The Company has estimated the fair value of the payment obligation as $17.5 million, and determined the fair value of the acquired assets to be $9.7 million. The assets acquired are included within the patents and processes intangible assets category and will be amortized over 10 years. The assets were valued using the relief from royalty method. The remainder of the obligation is considered to be a payment to settle the alleged breach of the supply agreement, the termination expense is included in selling, general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2020. The obligation is considered debt and is included in debt on the condensed consolidated balance sheet. See Note 5 – “Debt” for additional information. No
Notete 3 – Property, Plant, and Equipment
Property, plant, and equipment consists of the following at:
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Leasehold improvements | | $ | 19,709 | | $ | 15,517 | Equipment | | | 25,664 | | | 23,138 | Vehicles and accessories | | | 7,110 | | | 6,007 | Computer equipment and software | | | 10,858 | | | 8,070 | Buildings | | | 10,168 | | | 10,050 | Furniture and fixtures | | | 2,347 | | | 1,836 | Land | | | 7,067 | | | 4,557 | Construction in progress | | | 11,331 | | | 3,392 | | | | 94,254 | | | 72,567 | Less accumulated depreciation | | | (31,108) | | | (20,042) | Total property, plant, and equipment | | $ | 63,146 | | $ | 52,525 |
| | | | | | | | | | | | | $'s in 000's | December 31, 2022 | | December 31, 2021 | | Leasehold improvements | $ | 27,694 | | | $ | 26,341 | | | Equipment | 27,187 | | | 26,414 | | | Buildings | 26,176 | | | 23,302 | | | Computer equipment and software | 17,501 | | | 15,418 | | | Land | 8,934 | | | 8,934 | | | Vehicles and accessories | 6,771 | | | 7,339 | | | Furniture and fixtures | 3,499 | | | 3,877 | | | Construction in progress | 4,797 | | | 5,077 | | | 122,559 | | | 116,702 | | | Less accumulated depreciation | (49,164) | | | (40,089) | | | Total property, plant, and equipment | $ | 73,395 | | | $ | 76,613 | |
Depreciation and amortization expense related to these assets total $12.1$14.5 million, $9.1$14.4 million, and $6.7$12.1 million for the years ended December 31, 2022, 2021, and 2020, 2019,respectively. Depreciation for the year ended December 31, 2022, 2021, and 2018,2020 includes approximately $0.0 million, $2.0 million, and $0.0 million of accelerated depreciation related to assets with shortened useful lives, respectively.
Note 4 – Intangible Assets and Goodwill Intangible assets consist of the following at:
| | | | | | | | | | | | | | | $'s in 000's | | | | | | Useful Lives | | | | December 31, 2020 | | December 31, 2019 | Amortizable intangibles | | | | | | | | | | | | | | | Certification | | | | | | 7 years | | | | $ | 350 | | $ | 350 | Customer relationships | | | | | | 12-20 years | | | | | 160,178 | | | 89,232 | Patents and processes | | | | | | 5-10 years | | | | | 14,905 | | | 4,928 | Brand names | | | | | | 5-15 years | | | | | 24,740 | | | 15,019 | Total amortizable intangibles | | | | | | | | | | | 200,173 | | | 109,529 | Less accumulated amortization | | | | | | | | | | | (25,984) | | | (13,058) | Total net amortizable intangibles | | | | | | | | | | | 174,189 | | | 96,471 | Non-amortizable intangibles | | | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | | 33,341 | | | 18,016 | In-process research and development | | | | | | | | | | | 5,470 | | | 5,469 | Intangible assets, net of accumulated amortization | | | | | | | | | | $ | 213,000 | | $ | 119,956 |
| | | | | | | | | | | | | | | | | | | | | | $'s in 000's | | Useful Lives | | December 31, 2022 | | December 31, 2021 | | Amortizable intangibles | | | | | | | | Certification | | 7 years | | $ | 350 | | | $ | 350 | | | Customer relationships | | 12-20 years | | 160,040 | | | 160,167 | | | Patents and processes | | 5-10 years | | 14,634 | | | 14,843 | | | Brand names | | 5-15 years | | 24,633 | | | 24,731 | | | Total amortizable intangibles | | | | 199,657 | | | 200,091 | | | Less accumulated amortization | | | | (62,085) | | | (44,438) | | | Total net amortizable intangibles | | | | 137,572 | | | 155,653 | | | Non-amortizable intangibles | | | | | | | | Trademarks and other | | | | 33,239 | | | 33,341 | | | In-process research and development | | | | 1,668 | | | 1,668 | | | Intangible assets, net of accumulated amortization | | | | $ | 172,479 | | | $ | 190,662 | |
Certain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currency movements. Amortization expense for the years ended December 31, 2022, 2021, and 2020 2019,was $18.1 million, $22.3 million, and 2018 was $12.8 million, $6.0 million, and $5.2 million, respectively. The in-process research and development (“IPRD”), intangible assets represent the value assigned to 3 acquired R&D projects that principally represent rights to develop and sell products that the Company has acquired which has not yet been completed or approved. The IPRD acquired as part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and regulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development. In the event that the efforts are not successful, the Company will write off the relevant IPRD in the period in which it is no longer considered feasible. During the year ended December 31, 2021, the Company opted out of two of the acquired projects, effectively abandoning the associated research and development efforts. Accordingly, the Company wrote off the associated IPRD assets of $3.8 million, with the expense recorded as amortization expense included in selling, general, and administrative expenses on the consolidated statement of operations. Estimated future amortization expense for each of the following years is as follows: | | | | | | Years ending December 31, ($'s in 000's) | | | 2023 | 16,893 | | | 2024 | 14,537 | | | 2025 | 13,881 | | | 2026 | 13,297 | | | 2027 | 12,810 | | | Thereafter | 66,155 | |
Table of Contents | | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | 2021 | | | | | $ | 18,504 | 2022 | | | | | | 18,310 | 2023 | | | | | | 17,481 | 2024 | | | | | | 15,078 | 2025 | | | | | | 14,369 | Thereafter | | | | | | 90,447 |
The following is a summary of the changes in the carrying value of goodwill for the years ended December 31, 20202022 and 2019.
| | | | | | | | | | | | Reporting Unit | | | | ($'s in 000's) | | Products | | Services | | Total | Goodwill as of January 1, 2019 | | | 77,765 | | | 47,264 | | | 125,029 | Foreign currency translation | | | 178 | | | — | | | 178 | Acquisitions | | | 105,838 | | | — | | | 105,838 | Goodwill as of December 31, 2019 | | | 183,781 | | | 47,264 | | | 231,045 | Foreign currency translation | | | 113 | | | — | | | 113 | Goodwill as of December 31, 2020 | | $ | 183,894 | | $ | 47,264 | | $ | 231,158 |
2021. | | | | | | | | | | | | | | | | | | | | | | | Reporting Unit | | Total | | ($'s in 000's) | | Products | | Services | | | Goodwill as of January 1, 2021 | | $ | 183,894 | | | $ | 47,264 | | | $ | 231,158 | | | Foreign currency translation | | (48) | | | — | | | (48) | | | Goodwill as of December 31, 2021 | | 183,846 | | | 47,264 | | | 231,110 | | | Foreign currency translation | | (540) | | | — | | | (540) | | | Impairment | | — | | | $ | (47,264) | | | (47,264) | | | Goodwill as of December 31, 2022 | | $ | 183,306 | | | $ | — | | | $ | 183,306 | |
On April 13, 2021, the Company entered into the ABL Facility and the Term Loan B (each as defined below), which replaced both the Amended Revolving Credit Agreement (as defined below) and A&R Term Loan Agreement as well as fully repaid $27.5 million of the Notes Payable – VIP Acquisition (as defined below). As part of the termination of the Amended Revolving Credit Agreement and the A&R Term Loan Credit agreement, and the repayment in full of the Notes Payable – VIP Acquisition, the Company wrote off $5.5 million in deferred financing fees to loss on debt extinguishment and incurred an additional $0.9 million in costs related to the transaction which are included in selling, general and administrative expenses for the year ended December 31, 2021. Senior Secured Asset-Based Revolving Credit Facility – ABL On April 13, 2021, Opco entered into an asset-based revolving credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides revolving credit commitments of $125.0 million, subject to a borrowing base limitation (the “ABL Facility”). The borrowing base for the ABL Facility at any time equals the sum of: (i) 90% of eligible investment-grade accounts; plus (ii) 85% of eligible other accounts; plus, (iii) 85% of the net orderly liquidation value of the cost of certain eligible on-hand and in-transit inventory; plus, (iv) at the option of Opco, 100% of qualified cash; minus (v) reserves. The ABL Facility bears interest at a variable rate plus a margin, with the variable rate being based on a base rate or London Interbank Offered Rate, ("LIBOR") at the option of the Company. The rate at December 31, 2022 was 4.39%. The Company also pays a commitment fee on unused borrowings at a rate of 0.35%. On February 3, 2023, Opco entered into the First Amendment Agreement to the ABL Facility to replace the interest rate benchmark from LIBOR to the Secured Overnight Financing Rate (“SOFR”). For more information on the First Amendment, please see Note 17 – “Subsequent Events.” The ABL Facility is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts (such collateral subject to such first-priority security interest, “ABL Priority Collateral”), and a second-priority security interest in all other personal and real property of HoldCo and its wholly-owned domestic subsidiaries (such collateral subject to such second-priority security interest, “Term Priority Collateral”), in each case, subject to customary exceptions. The ABL contains customary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions. Senior Secured Term Loan Facility – Term Loan B On April 13, 2021, Opco entered into a term credit agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $300 million (the “Term Loan B”). The Term Loan B bears interest at a variable rate (with the variable rate being based on a base rate or LIBOR at the option of the Company) plus a margin of 3.25% in the case of base rate loans, or 4.25% in the case of LIBOR loans. LIBOR rates are subject to a 0.50% floor. The interest rate at December 31, 2022 was 8.57%. The Term Loan B requires quarterly amortization payments of 0.25% of the original principal amount, with the balance due on the seventh anniversary of the closing date.
The Term Loan B is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries, including a first-priority security interest in Term Priority Collateral and a second-priority security interest in ABL Priority Collateral, in each case, subject to customary exceptions. The Term Loan B contains customary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions. The fair value of the the Term Loan B was $268.9 million as of December 31, 2022. The estimated fair value of the Notes is based on market rates at the closing trading price as of December 31, 2022 and is classified as Level 2 in the fair value hierarchy. On May 19, 2020, the Company issued $143.8 million in aggregate principal amount of 4.00% Convertible Senior Notes due 2026 (the “Notes”) pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $137.9 million. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes will mature on June 1, 2026, unless earlier repurchased, redeemed or converted. Before January 15, 2026, holders will have the right to convert their Notes only upon the occurrence of certain events. From and after January 15, 2026, holders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of Notes. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2)(ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock.
The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 13%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The amount of the equity component representing the conversion option was $53.3 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual terms of the Notes. The Company has early adopted ASU 2020-06 as of January 1, 2021, which will impact the accounting for the Notes.
The fair value of the Notes was $218.1$120.5 million as of December 31, 2020.2022. The estimated fair value of the Notes is based on market rates andat the closing trading price of the Convertible Notes as of December 31, 20202022 and is classified as Level 2 in the fair value hierarchy. As
Table of December 31, 2020 the if-converted value of the Notes did not exceed the principal amount.Contents
The net carrying amount of the liability component of the Notes was as follows:
| | | | ($'s in 000's) | | December 31, 2020 | Par value of the Notes | | $ | 143,750 | Unamortized debt discount | | | (49,526) | Unamortized debt issuance costs | | | (3,441) | Net carrying amount | | $ | 90,783 |
The net carrying amount of the equity component of the Notes was as follows:
| | | | ($'s in 000's) | | December 31, 2020 | Proceeds allocated to the conversion option | | $ | 53,285 | Deferred tax affect | | | (8,197) | Issuance costs | | | (2,181) | Net carrying amount | | $ | 42,907 |
The following table sets forth the interest expense recognized related to the Notes:
| | | | | | | | | | | | For the Year Ended | | | | | | December 31, 2020 | ($'s in 000's) | | | | | | | Contractual interest expense | | | | | $ | 3,546 | Amortization of debt discount | | | | | | 3,759 | Amortization of debt issuance costs | | | | | | 261 | Total | | | | | $ | 7,566 | Effective interest rate of the liability component | | | | | | 13.0% |
On May 14, 2020 and May 19, 2020, the Company entered into capped call transactions (the “Capped Call Transactions”) with 2 counterparties (the “Option Counterparties”).two counterparties. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to the Notes, the underlying shares of Class A common stock and are intended to reduce, subject to a limit, the potential dilution with respect to the Class A common stock upon conversion of the Notes. The cap price of the Capped Call Transactions is $41.51 per share of Class A common stock, and is subject to certain adjustments under the terms of the Capped Call Transactions.
The Company paid approximately $14.8 million for the Capped Call Transactions, which was recorded as additional paid-in capital, using a portion of the gross proceeds from the sale of the Notes. The capped call is expected to be tax deductible as the Company elected to integrate the capped call into the Notes for tax purposes. The tax effect Amended & Restated Credit Agreement OpCo entered into an Amended Revolving Credit Agreement on the equity component of the Convertible Notes of $8.2 million was recorded through additional paid-in capital. The Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2020, as a result, the $8.2 million deferred tax liability associated with the Capped Call Transactions will be offset by a reduction to the valuation allowance adjustment through continuing operations.
A&R Credit Agreement
The Company amended the existing revolving credit agreement of Opco and each of its domestic wholly-owned subsidiariesJuly 8, 2019 (the “Amended Revolving Credit Agreement”) on July 8, 2019. .
The Amended Revolving Credit Agreement providesprovided for a secured revolving credit facility of $125 million that maturesmatured on July 8, 2024. The borrowers under the Amended Revolving Credit Facility incurincurred fees between 0.375% and 0.50% as unused facility fees, dependent on the aggregate amount borrowed. On May 14, 2020, the Company amended the Amended Revolving Credit Agreement to allow for the Notes described above. Additionally the amendment instituted a Eurodollar floor of 1% to the agreement. All obligations under the Amended Revolving Credit Agreement arewere unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, arewere secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions. The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowerswas fully repaid and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engageterminated in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of December 31, 2020, the borrowers and guarantors thereunder were in compliance with these covenants. Although the Company currently expects continued compliance with debt covenants, the impact COVID-19 may negatively affect the Company’s ability to comply with these covenants. The April 2021. Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.As of December 31, 2020, $15.0 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 2.3% at December 31, 2020.
A&R& Restated Term Loan Credit Agreement
The Company amended
OpCo entered into an Amended and restated the existing term loan credit agreement of OpcoRestated Term Loan Credit Agreement on July 8, 2019 (the “A&R Term Loan Credit Agreement”) on July 8, 2019.. The $220.0 million A&R Term Loan Credit Agreement hashad an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement callscalled for 1% of the original loan balance to be paid annually via equal quarterly payments, with the balance of the loan due on the sixth anniversary of the agreement.
All obligations under the A&R Term Loan Credit Agreement arewere unconditionally guaranteed by PetIQ Holdings, LLCHoldCo and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, arewere secured by substantially all of the assets of PetIQ, LLCOpCo and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions.
The A&R Term Loan Credit Agreement containswas fully repaid and terminated in April 2021. General Other Debt The Company entered into a numbermortgage with Huntington Bank to finance a commercial building in Eagle, Idaho, in December 2021. The mortgage bears interest at a fixed rate of covenants that, among other things, restrict the ability2.0% plus LIBOR and utilizes a 10 year amortization schedule with a balloon payment of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type.balance due at that time. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As ofrate at December 31, 2019, the borrower and guarantors thereunder were in compliance with these covenants.The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.
As of December 31, 2020, $217.3 million2022 was outstanding under the A&R Term Loan Credit Agreement.6.39%.
General Other Debt
The Company entered into a mortgage with a local bank to finance $1.9 million of the purchase price of a commercial building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and utilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time.
The Company entered into an agreement to sell the commercial building in Eagle, Idaho, which closed in the third quarter of 2021. The Company used the proceeds from the sale to repay the mortgage on August 2, 2021. In July 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset“Asset Acquisitions”. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest rate of 8.3%, resulting in an obligation of $17.5 million.million at the time it was entered into.
In connection with the acquisition of Community Veterinary Clinics, LLC d/b/a, VIP Acquisition,Petcare (the “VIP Acquisition”), the Company entered into a guarantee note of $10.0 million.million and contingent Notes that were subsequently earned. As of December 31, 2019,2021 $7.5 million was payable pursuant to the 2018 Contingent Note and $10.0 million was payable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes collectively,(collectively, “Notes Payable – VIP Acquisition” ) of $27.5 million requirerequired quarterly interest payments of 6.75% with the balance payable July 17, 2023. These Notes Payable – VIP Acquisition were fully repaid in April 2021. The following represents the Company’s long-term debt as of:
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Convertible Notes | | $ | 143,750 | | $ | — | Term loans | | | 217,250 | | | 220,000 | Revolving credit facility | | | 15,000 | | | 10,000 | Notes Payable - VIP Acquisition | | | 27,500 | | | 27,500 | Other Debt | | | 16,257 | | | 1,812 | Net discount on debt and deferred financing fees | | | (57,559) | | | (5,688) | | | $ | 362,198 | | $ | 253,624 | Less current maturities of long-term debt | | | (6,219) | | | (2,248) | Total long-term debt | | $ | 355,979 | | $ | 251,376 |
| | | | | | | | | | | | | | | | | $'s in 000's | December 31, 2022 | | December 31, 2021 | | Convertible Notes | $ | 143,750 | | | $ | 143,750 | | | Term loans | 295,500 | | | 298,500 | | | Revolving credit facility | — | | | — | | | Other Debt | 19,690 | | | 23,518 | | | Net discount on debt and deferred financing fees | (8,531) | | | (10,418) | | | $ | 450,409 | | | $ | 455,350 | | | Less current maturities of long-term debt | (7,133) | | | (6,880) | | | Total long-term debt | $ | 443,276 | | | $ | 448,470 | |
Future maturities of long-term debt, excluding net discount on debt and deferred financing fees, as of December 31, 2020,2022, are as follows:
| | | | ($'s in 000's) | | | | 2021 | | $ | 6,219 | 2022 | | | 5,476 | 2023 | | | 33,255 | 2024 | | | 6,057 | 2025 | | | 2,259 | Thereafter | | | 366,491 |
| | | | | | | ($'s in 000's) | | | 2023 | 7,064 | | 2024 | 7,426 | | 2025 | 4,600 | | 2026 | 147,350 | | 2027 | 3,600 | | Thereafter | 288,900 |
The Company incurred $6.4 million in debt issuance costs of $0.6related to the Term Loan B, $1.0 million related to the A&R Credit AgreementABL, and $0.2 million related to the new mortgage during the year ended December 31, 2020. The Company incurred debt issuance costs of $0.7 million during the year ended December 31, 2019 related to the A&R Credit Agreement and $5.1 million related to the A&R Term Loan Credit Agreement.The Company incurred debt issuance costs of $5.9 million in May 2020 in connection with the Notes. In accordance with FASB ASC 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. $2.2 million of issuance costs were recorded as additional paid-in capital and such amounts are not subject to amortization. The remaining issuance costs of $3.7 million are recorded as debt issuance costs in the net carrying value of the Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Notes and is included in interest expense, net on the condensed consolidated statements of operations. Future amortization of our debt discount and debt issuance costs for the term of the Convertible Notes is as follows:
| | | | | | | ($'s in 000's) | | Debt Discounts | | Debt Issuance Costs | 2021 | | $ | 6,761 | | $ | 470 | 2022 | | | 7,684 | | | 534 | 2023 | | | 8,733 | | | 607 | 2024 | | | 9,925 | | | 690 | 2025 | | | 11,280 | | | 784 | Thereafter | | | 5,143 | | | 356 |
Note 6 – Leases
The Company leases certain real estate for commercial, production, and retail purposes, as well as equipment from third parties. Lease expiration dates are between 20212023 and 2026. A portion of leases are denominated in foreign currencies.2028. For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term.
We elected the short-term lease exemption for all leases that qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. The Company’s leases may include options to extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and
maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms. The components of lease expense consists of the follow:following: | | | | | | | | | | | | | | | | | | | Year Ended | | $'s in 000's | December 31, 2022 | | December 31, 2021 | | December 31, 2020 | | Finance lease cost | | | | | | | Amortization of right-of-use assets | $ | 1,185 | | | $ | 2,215 | | | $ | 1,681 | | | Interest on lease liabilities | 243 | | | 338 | | | 315 | | | Operating lease cost | 6,603 | | | 5,556 | | | 5,831 | | Variable lease cost(1) | 1,318 | | | 1,283 | | | 1,130 | | | Short-term lease cost | 17 | | | 13 | | | 34 | | | Sublease income | (269) | | | (238) | | | (528) | | | Total lease cost | $ | 9,097 | | | $ | 9,167 | | | $ | 8,463 | |
(1) | | | | | | | | | For the Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Finance lease cost | | | | | | | Amortization of right-of-use assets | | $ | 1,681 | | $ | 1,441 | Interest on lease liabilities | | | 315 | | | 308 | Operating lease cost | | | 5,831 | | | 4,833 | Variable lease cost(1) | | | 1,130 | | | 629 | Short-term lease cost | | | 34 | | | 41 | Sublease income | | | (528) | | | (452) | Total lease cost | | $ | 8,463 | | $ | 6,800 |
Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate.
(1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
Other information related to leases was as follows as of:
| | | | | | | | | | | | | December 31, 2022 | | December 31, 2021 | | Weighted-average remaining lease term (years) | | | | | Operating leases | 3.19 | | 3.86 | | Finance leases | 1.82 | | 2.59 | | Weighted-average discount rate | | | | | Operating leases | 4.4% | | 4.9% | | Finance leases | 4.5% | | 4.6% |
| | | | | | | | | | December 31, 2020 | | | December 31, 2019 | Weighted-average remaining lease term (years) | | | | | | | Operating leases | | | 4.41 | | | 5.15 | Finance leases | | | 2.38 | | | 2.73 | Weighted-average discount rate | | | | | | | Operating leases | | | 5.3% | | | 5.3% | Finance leases | | | 5.7% | | | 5.7% |
Annual future commitments under non-cancelable leases as of December 31, 2020,2022, consist of the following: | | | | | | | | | | | | | Lease Obligations | | $'s in 000's | Operating Leases | | Finance Leases | | 2023 | $ | 7,271 | | | $ | 1,265 | | | 2024 | 5,759 | | | 1,045 | | | 2025 | 4,749 | | | 238 | | | 2026 | 2,338 | | | 95 | | | 2027 | 213 | | | — | | | | | | | Total minimum future obligations | $ | 20,330 | | | $ | 2,642 | | | Less interest | (1,330) | | | (117) | | | Present value of net future minimum obligations | 19,000 | | | 2,525 | | | Less current lease obligations | (6,595) | | | (1,618) | | | Long-term lease obligations | $ | 12,405 | | | $ | 907 | |
Table of Contents | | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Finance Leases | 2021 | | $ | 5,861 | | $ | 1,757 | 2022 | | | 5,591 | | | 1,584 | 2023 | | | 4,789 | | | 1,580 | 2024 | | | 3,280 | | | 330 | 2025 | | | 2,357 | | | 20 | Thereafter | | | 1,365 | | | — | Total minimum future obligations | | $ | 23,243 | | $ | 5,271 | Less interest | | | (2,539) | | | (367) | Present value of net future minimum obligations | | | 20,704 | | | 4,904 | Less current lease obligations | | | (4,915) | | | (1,566) | Long-term lease obligations | | $ | 15,789 | | $ | 3,338 | | | | | | | |
Supplemental cash flow information:
| | | | | | | | | | | | | | | | Year Ended | | Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | Operating cash flows from finance leases | | $ | 315 | | $ | 308 | Operating cash flows from operating leases | | | 5,668 | | | 4,568 | Financing cash flows from finance leases | | | 1,965 | | | 1,547 | (Noncash) right-of-use assets obtained in exchange for lease obligations | | | | | | | Operating leases | | | 5,105 | | | 5,368 | Finance leases | | | 2,019 | | | (3,006) |
Total operating lease expense for the year ended December 31, 2018, totaled $6.0 million.
| | | | | | | | | | | | | | | | | | | Year Ended | | $'s in 000's | December 31, 2022 | | December 31, 2021 | | December 31, 2020 | | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | Operating cash flows from finance leases | $ | 243 | | | $ | 338 | | | $ | 315 | | | Operating cash flows from operating leases | 6,730 | | | 3,928 | | | 5,668 | | | Financing cash flows from finance leases | 1,493 | | | 1,926 | | | 1,965 | | | Non-cash right-of-use assets obtained in exchange for lease obligations | | | | | | | Operating leases | 4,087 | | | 5,212 | | | 5,105 | | | Finance leases | 59 | | | 1,191 | | | 2,019 | |
The Company is the sole managing member of Holdco. HoldcoHoldCo. HoldCo is treated as a partnership for U.S. federal income tax purposes with the remaining partners of HoldcoHoldCo (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a HoldcoHoldCo partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in HoldcoHoldCo from the continuing LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020,2022, the Company had $67.6M$75.6 million of deferred tax assets associated with these exchanges, which currently have a full valuation allowance against the deferred tax asset. The non-controlling interests totaled approximately 11%0.9% of the ownership of HoldcoHoldCo as of December 31, 2020.2022. See Note 11 – Non-controlling interests for more information. HoldCo’s members, including the Company, are liable for federal, state, and local income taxes based on their share of HoldCo’s taxable income. Holdco makes cash distributions to members to pay taxes attributable to their allocable share of income earned. In the years ended December 31, 2020 and 2019, the Company made cash distributions of $0.05 million and $1.7 million, respectively. Additionally, Holdco accrues for distributions required to be made related to estimated income taxes. During the years ended December 31, 2020 and 2019, the Company relieved previously accrued distributions of $(0.4)million and accrued distributions of $0.8 million, respectively. This liability is included in accounts payable on the consolidated balance sheet.
The components of earnings beforepretax net loss, taxes, determined by tax jurisdiction, are as follows: | | | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | | | | $'s in 000's | 2022 | | 2021 | | 2020 | | United States | $ | (47,767) | | | $ | (12,816) | | | $ | (25,747) | | | Foreign | 361 | | | 302 | | | 433 | | | Total | $ | (47,406) | | | $ | (12,514) | | | $ | (25,314) | |
Table of Contents | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | United States | | $ | (29,239) | | $ | (17,953) | | $ | (1,116) | Foreign | | | 433 | | | 342 | | | 542 | Total | | $ | (28,806) | | $ | (17,611) | | $ | (574) |
The provision for income taxes for 2020, 2019,2022, 2021, and 20182020 consisted of the following:
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | Current: | | | | | | | | | | Federal | | $ | — | | $ | — | | $ | — | State | | | 327 | | | 317 | | | 148 | Foreign | | | 137 | | | 17 | | | — | | | $ | 464 | | $ | 334 | | $ | 148 | Deferred and other: | | | | | | | | | | Federal | | | 40,598 | | | (2,146) | | | (751) | State | | | 11,175 | | | (1,336) | | | (135) | Foreign | | | (21) | | | (161) | | | 77 | | | | 51,752 | | | (3,643) | | | (809) | Total income tax expense (benefit) | | $ | 52,216 | | $ | (3,309) | | $ | (661) |
| | | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | | | | $'s in 000's | 2022 | | 2021 | | 2020 | | Current: | | | | | | | Federal | $ | — | | | $ | — | | | $ | — | | | State | 498 | | | 323 | | | 327 | | | Foreign | 117 | | | 26 | | | 137 | | | $ | 615 | | | $ | 349 | | | $ | 464 | | | Deferred and other: | | | | | | | Federal | 574 | | | 2,661 | | | 47,048 | | | State | 154 | | | 717 | | | 12,922 | | | Foreign | (129) | | | 142 | | | (21) | | | 599 | | | 3,520 | | | 59,949 | | | Total income tax expense | $ | 1,214 | | | $ | 3,869 | | | $ | 60,413 | |
Reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows:
| | | | | | | | | | | | | Years Ended December 31 | | | | | 2020 | | | 2019 | | | 2018 | | Income tax expense (benefit) at federal statutory rate | | | 21.0 | % | | 21.0 | % | | 21.0 | % | State and local income taxes net of federal tax benefit | | | 2.4 | | | 1.3 | | | (5.7) | | Non-controlling interest and nontaxable income | | | (2.9) | | | (4.0) | | | 54.7 | | Deferred tax rate changes | | | (1.3) | | | (0.4) | | | 37.2 | | Share-based compensation | | | 0.6 | | | 0.1 | | | 18.3 | | Tax Cuts and Jobs Act of 2017 | | | - | | | - | | | (13.1) | | Return-to-Provision | | | (2.0) | | | 0.8 | | | 13.4 | | Valuation Allowance | | | (198.4) | | | 0.4 | | | 0.7 | | Other | | | (0.7) | | | (0.4) | | | (11.3) | | Effective income tax rate | | | (181.3) | % | | 18.8 | % | | 115.2 | % |
| | | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | | | | 2022 | | 2021 | | 2020 | | Income tax expense at federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | State and local income taxes net of federal tax benefit | 3.6 | | | (0.2) | | | 0.6 | | | Non-controlling interest and nontaxable income | (0.2) | | | (0.1) | | | (2.4) | | | Deferred tax rate changes | — | | | 1.0 | | | (0.6) | | | Share-based compensation | (1.6) | | | 6.8 | | | 0.6 | | | Goodwill impairment | (9.2) | | | — | | | — | | | Return-to-provision | (6.8) | | | (15.7) | | | (2.3) | | | Valuation allowance | (9.4) | | | (42.9) | | | (255.2) | | | Other | — | | | (0.8) | | | (0.4) | | | Effective income tax rate | (2.6) | % | | (30.9) | % | | (238.7) | % |
Our tax rate is affected primarily by the recognition of achanges in valuation allowance, goodwill impairment charge, return to provision adjustments, and state and local taxes during the year ended December 31, 2020 and the portion of income and expense allocated to the noncontrolling interest.2022. It is also affected by discrete items that may occur in any given year such as stock based compensation, but are not consistent from year to year.
As a result of the IPO and reorganization transactions, the Company has recorded deferred tax assets and liabilities based on the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco.HoldCo. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 20202022 and 20192021 are as follows:
Table of Contents | | | | | | | $'s in 000's | | 2020 | | 2019 | Deferred tax assets | | | | | | | Investment in partnership | | $ | 53,294 | | $ | 53,303 | Fixed assets | | | 32 | | | 29 | Net operating loss carryforwards and tax credits | | | 18,001 | | | 6,775 | Other accruals and reversals | | | 9 | | | 5 | Subtotal | | | 71,336 | | | 60,112 | Less: valuation allowance | | | (71,161) | | | (143) | Net deferred tax assets | | | 175 | | | 59,969 | | | | | | | | Deferred tax liabilities | | | | | | | Intangible assets | | $ | (447) | | $ | (293) | Other | | | (6) | | | (5) | Net deferred tax liabilities | | $ | (453) | | $ | (298) |
| | | | | | | | | | | | | $'s in 000's | 2022 | | 2021 | | Deferred tax assets | | | | | Investment in partnership | $ | 69,656 | | | $ | 77,306 | | | Fixed assets | 62 | | | 43 | | | Net operating loss carryforwards and tax credits | 33,271 | | | 25,888 | | | Disallowed business interest carryforward | 8,389 | | | 3,169 | | | Other accruals and reversals | 5 | | | 5 | | | Subtotal | 111,383 | | | 106,411 | | | Less: valuation allowance | (111,218) | | | (106,258) | | | Net deferred tax assets | 165 | | | 153 | | | | | | | Deferred tax liabilities | | | | | Fixed Assets | $ | (112) | | | $ | (151) | | | Intangible assets | (1,069) | | | (454) | | | Other | (9) | | | (7) | | | Net deferred tax liabilities | $ | (1,190) | | | $ | (612) | |
At December 31, 2020,2022, the Company has federal net operating loss (“NOL”) carryforwards of $66.0$121.3 million, of which $1.9 million, generated in 2017 and prior, will expire in 2037, the2037. The remaining NOLs do not expire. The NOL generated insince 2018 and after of $64.1$119.4 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company has a federal business interest expense carryover totaling $6.1$39.9 million as of December 31, 2020,2022, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. As of December 31, 2020,2022, the Company has charitable contribution carryforwards of $1.0$0.7 million, which if unused will expire between 20212023 and 2025.2028. The Company has state NOL carryforwards of $384.7$82.1 million (tax effected $2.8 million) as of December 31, 20202022 which expire between 20222023 and 20382040 and others that have an indefinite carryforward period. At December 31, 20202022 the Company has state business tax credits related to tax incentive arrangements of $1.9 million which if unused will expire between 2036 and 2037. At December 31, 2022 the Company had foreign NOL carryforwards of $0.8$0.6 million which do not expire. The Company has assessed the realizability of the net deferred tax assets as of December 31, 20202022 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from the recorded deferred tax assets in the United States and Ireland will not be realized. The Company has recorded a valuation allowance for these deferred tax assets of $71.2$111.2 million and $0.1$106.3 million as of December 31, 20202022 and 2019,2021, respectively. Additionally, the Company has recorded a net deferred tax liability related to its indefinite lived intangible assets in the United States. In future periods, if we conclude we have future taxable income sufficient to recognize the deferred tax assets, we may reduce or eliminate the valuation allowance. The Company operates in certain jurisdictions where we have tax incentive arrangements. These incentives are conditional upon certain business operations and employment thresholds. The effect of these tax incentive arrangements are recognized in the Company's tax provision as the appropriate conditions are met and credits are earned. The Company has not recognized any uncertain tax positions, penalties or interest as we have concluded that no such positions exist. Accordingly, 0no unrecognized tax benefit would impact the effective tax rate. If interest and penalties were accrued, we would recognize interest and penalties as income tax expense. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2020,2022, tax years from 2017 to present are subject to examination by the tax authorities.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company will benefit from the Employee Retention Credits and the payroll tax deferral.
NoteNote 8 – Loss per Share
Basic and Diluted Loss per share Basic loss per share of Class A common stock is computed by dividing net loss available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earningsloss per share of Class A common stock is computed by dividing net loss available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss)loss per share of Class A common stock:
| | | | | | | | | | | | Year ended December 31, | (in 000's, except for per share amounts) | | | 2020 | | 2019 | | 2018 | Numerator: | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Less: net (loss) income attributable to non-controlling interests | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. — basic and diluted | | | (77,474) | | | (11,453) | | | (782) | Denominator: | | | | | | | | | | Weighted-average shares of Class A common stock outstanding -- basic | | | 24,629 | | | 22,652 | | | 17,216 | Dilutive effects of stock options that are convertible into Class A common stock | | | — | | | — | | | — | Dilutive effect of RSUs | | | — | | | — | | | — | Dilutive effect for conversion of Notes | | | — | | | — | | | — | Weighted-average shares of Class A common stock outstanding -- diluted | | | 24,629 | | | 22,652 | | | 17,216 | | | | | | | | | | | Loss per share of Class A common stock — basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Loss per share of Class A common stock — diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | | (in 000's, except for per share amounts) | 2022 | | 2021 | | 2020 | | Numerator: | | | | | | | Net loss | (48,620) | | | (16,383) | | | (85,727) | | | Less: net loss attributable to non-controlling interests | (412) | | | (416) | | | (3,072) | | | Net loss attributable to PetIQ, Inc. — basic and diluted | (48,208) | | | (15,967) | | | (82,655) | | | Denominator: | | | | | | | Weighted-average shares of Class A common stock outstanding — basic | 29,159 | | 28,242 | | 24,629 | | Dilutive effects of stock options that are convertible into Class A common stock | — | | | — | | | — | | | Dilutive effect of RSUs | — | | | — | | | — | | | Dilutive effect for conversion of Notes | — | | | — | | | — | | | Weighted-average shares of Class A common stock outstanding — diluted | 29,159 | | | 28,242 | | | 24,629 | | | | | | | | | Loss per share of Class A common stock — basic | $ | (1.65) | | | $ | (0.57) | | | $ | (3.36) | | | Loss per share of Class A common stock — diluted | $ | (1.65) | | | $ | (0.57) | | | $ | (3.36) | |
Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock as well as all stock options and restricted stock units have not been included in the diluted loss per share calculation as they have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively.
method. Additionally, all stock options and restricted stock units and convertible Notes have not been included in the diluted earnings per share calculation for the years ended December 31, 2020, 20192022, 2021 and 2018,2020, as they have been determined to be anti-dilutive under the treasury stock method.
method and if-converted method, as applicable.Note 9 – Stock Based Compensation
PetIQ, Inc. Omnibus Incentive Plan
The Amended and Restated PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company has 3,914 thousand authorizedOn June 22, 2022, the Company's stockholders approved an amendment and restatement of the Plan to, among other things, increase the total number of shares of the Company's Class A common stock reserved and available for issuance thereunder by 1,890,000 shares resulting in a total of 5,804,000 shares of Class A common stock issuable under the Plan. As of December 31, 20202022 and 2019, 1,293 thousand2021, 2,143,955 and 2,017 thousand771,000 shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares.
PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) providesprovided for the grant of stock options to employees hired in connection with the VIP Acquisitionan acquisition in 2018 as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800thousand800,000 shares of Class A Common Stock of the Company. AsCompany, of December 31, 2020, 0 shareswhich 760,000 were available for issuancegranted. No further grants may be made under the Inducement Plan. All awards issued under the Inducement Plan may only be settled in shares of Class A common stock.
The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period. Expense recognized totaled $6.5$3.2 million, $5.2 million, and $6.2$6.5 million for the years ended December 31, 2020,2022, 2021, and 2019,2020, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periods ended: | | | | | | | | | | | | | December 31, 2022 | | December 31, 2021 | Expected term (years) (1) | 6.25 | | 6.17 | Expected volatility (2) | 37.21 | % | | 33.45 | % | Risk-free interest rate (3) | 1.44 | % | | 0.89 | % | Dividend yield (4) | 0.00 | % | | 0.00 | % |
(1) | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Expected term (years) (1) | | | 6.25 | | | | 6.25 | | Expected volatility (2) | | | 33.91 | % | | | 35.00 | % | Risk-free interest rate (3) | | | 0.37 | % | | | 2.37 | % | Dividend yield (4) | | | 0.00 | % | | | 0.00 | % |
The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
(1) | (2)The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period consistent with the expected option term. (3)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options. (4) |
(2) | The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period consistent with the expected option term. |
(3) | The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options. |
(4) | The Company has not paid and does not anticipate paying a cash dividend on our common stock. |
The weighted average grant date fair value of stock options granted during the period ended December 31, 20202022 and 20192021 was $11.88$9.14 and $10.63,$12.39, respectively, per option. The following table summarizes the activity of the Company’s unvested stock options for the period ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Average | | | | | Weighted | | Aggregate | | Remaining | | | Stock | | Average | | Intrinsic | | Contractual | | | Options | | Exercise | | Value | | Life | | | (in 000's) | | Price | | (in 000's) | | (years) | Outstanding at December 31, 2017 | | | 599 | | $ | 16.00 | | $ | 3,496 | | | 9.5 | Granted | | | 1,617 | | | 25.74 | | | | | | | Exercised | | | (76) | | | 18.83 | | | | | | | Forfeited | | | (195) | | | 21.37 | | | | | | | Cancelled/Expired | | | — | | | — | | | | | | | Outstanding at December 31, 2018 | | | 1,945 | | $ | 23.45 | | $ | 5,527 | | | 9.1 | Granted | | | 423 | | | 27.54 | | | | | | | Exercised | | | (119) | | | 19.51 | | | | | | | Forfeited | | | (168) | | | 21.92 | | | | | | | Cancelled/Expired | | | (9) | | | 25.70 | | | | | | | Outstanding at December 31, 2019 | | | 2,072 | | $ | 24.63 | | $ | 6,266 | | | 8.0 | Granted | | | 505 | | | 20.22 | | | | | | | Exercised | | | (395) | | | 23.48 | | $ | 4,468 | | | | Forfeited | | | (96) | | | 21.42 | | | | | | | Outstanding at December 31, 2020 | | | 2,086 | | $ | 23.93 | | $ | 30,302 | | | 7.2 | Options exercisable at December 31, 2020 | | | 831 | | | | | $ | 11,778 | | | 5.9 |
2022: | | | | | | | | | | | | | | | | | | | | | | | | | Stock
Options
(in 000's) | | Weighted
Average
Exercise
Price | | Aggregate
Intrinsic
Value
(in 000's) | | Weighted
Average
Remaining
Contractual
Life
(years) | | Outstanding at January 1, 2021 | 2,086 | | | $ | 23.93 | | | $ | 30,302 | | | 7.2 | | Granted | 354 | | | 35.66 | | | | | | | Exercised | (583) | | | 23.05 | | | $ | 8,499 | | | | | Forfeited | (64) | | | 24.84 | | | | | | | Cancelled | (25) | | | $ | 25.70 | | | | | | | Outstanding at December 31, 2021 | 1,768 | | | $ | 26.51 | | | $ | 2,897 | | | 7.3 | | Granted | 83 | | | 14.16 | | | | | | | Exercised | (2) | | | 19.49 | | | $ | 10 | | | | | Forfeited | (110) | | | 29.24 | | | | | | | Cancelled | (86) | | | 31.12 | | | | | | | Outstanding at December 31, 2022 | 1,652 | | | $ | 25.48 | | | $ | 53 | | | 6.2 | | Options exercisable at December 31, 2022 | 1,149 | | | | | | | |
The aggregate intrinsic values disclosed in the above table were calculated as the excess, if any, between the Company’s closing share price per share on the respective period end date and the strike price of the underlying awards. At December 31, 2020,2022, total unrecognized compensation cost related to unvested stock options was $8.4$3.0 million and is expected to be recognized over a weighted-average period of approximately 2.22.0 years.
The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will generally be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At December 31, 2020,2022, total unrecognized compensation cost related to unvested RSUs was $5.8$14.2 million and is expected to vest over a weighted average of 2.8 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.6$8.1 million, $4.3 million, and $1.1$2.6 million for the years ended December 31, 20202022, 2021, and 2019,2020, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients.
The following table summarizes the activity of the Company’s RSUs for the period ended December 31, 2020:
| | | | | | | | | | | Weighted | | | Number of | | Average | | | Shares | | Grant Date | | | (in 000's) | | Fair Value | Outstanding at December 31, 2018 | | | 51 | | $ | 33.16 | Granted | | | 123 | | | 27.61 | Settled | | | (25) | | | 30.43 | Forfeited | | | (15) | | | 30.58 | Outstanding at December 31, 2019 | | | 133 | | $ | 28.85 | Granted | | | 271 | | | 20.73 | Settled | | | (70) | | | 25.65 | Forfeited | | | (17) | | | 23.34 | Nonvested RSUs at December 31, 2020 | | | 317 | | $ | 22.91 |
The total equity based compensation expense for these plans over the vesting period totaled $9.2 million, $7.4 million, and $3.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. 2022:
| | | | | | | | | | | | | Number of
Shares
(in 000's) | | Weighted
Average
Grant Date
Fair Value | | Outstanding at January 1, 2021 | 317 | | | $ | 22.91 | | | Granted | 268 | | | 37.91 | | | Settled | (103) | | | 24.81 | | | Forfeited | (23) | | | 26.02 | | | Outstanding at December 31, 2021 | 459 | | | $ | 31.08 | | | Granted | 802 | | | 20.30 | | | Settled | (231) | | | 27.81 | | | Forfeited | (177) | | | 25.53 | | | Nonvested RSUs at December 31, 2022 | 853 | | | $ | 23.06 | |
The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.0 million, $1.4 million and $0.5 millionzero for the years ended December 31, 2020, 2019,2022, 2021, and 2018, respectively.
2020.Note 10 - Stockholders’ Equity
Certificate of Incorporation The Company’s amended and restated certificate of incorporation, among other things, provides for the (i) authorization of 125,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) authorization of 100,000,0008,401,521 shares of Class B common stock with a par value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms. Each share of the Company’s Class A common stock and Class B common stock entitles its holders to 1one vote per share on all matters presented to the Company’s stockholders generally. Holders of the Company’s Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B common stock may only be issued to the extent necessary to maintain the 1-to-oneone-to-one ratio between the number of LLC interests of HoldCo held by Continuingcontinuing LLC Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be canceled on a 1-for-oneone-for-one basis upon the redemption or exchange any of the outstanding LLC Interests held by the Continuingcontinuing LLC Owners. The Company must, at all times, maintain a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC Interests owned by PetIQ (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).
Stock repurchase program On October 1, 2018,September 6, 2022, the Company closed an underwritten public offeringCompany's Board of 5,750 thousandDirectors authorized a stock repurchase program for up to $30 million of the Company’s outstanding shares of Class A common stock. The Company sold 2,000 thousand newly issued sharesRepurchases of Class A common stock may be made at management’s discretion from time to time in one or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and received net proceeds of approximately $73.9 million after deducting underwriting discountsin accordance with applicable rules and commissions and offering expenses. The remaining 3,750 thousand shares of Class A common stock were sold by selling stockholders andregulations promulgated under Securities Exchange Act. During the twelve months ended December 31, 2022 the Company did not receive any proceeds with respect hereto. In conjunction with the 2018 Public Offering,repurchased 373,408 shares at a numberweighted average price of holders of Class B common stock exchanged LLC Interests and corresponding Class B common shares for Class A common stock. The $10.33 per share.impact on non-controlling interest is shown along with other exchanges during the year in Note 11 – Non-Controlling Interests.
Note 11 - Non-Controlling Interests
The Company reports a non-controlling interest representing the LLC interests of HoldCo held by Continuingcontinuing LLC Owners. Changes in PetIQ’s ownership interest in HoldCo while PetIQ retains its controlling interest in HoldCo will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC interests of HoldCo by the Continuing continuing
LLC Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when HoldCo has positive or negative net assets, respectively. The Company is also required to make tax distributions based on the LLC Agreement to Continuingcontinuing LLC MembersOwners on a regular basis, these distributions will reduce the non-controlling interest. As of December 31, 2020,2022, there were 28,751 thousand29.2 million LLC Interests outstanding, of which PetIQ owned 25,711thousand,29.0 million, representing an 89.4%a 99.1% ownership interest in HoldCo. Exchange and other equity activity during the years ended December 31, 20202022 and 20192021 resulted in weighted average ownership of HoldCo by PetIQ of 86.4%99.1% and 80.2%96.6%, respectively.
| | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | LLC | | | | | | | | | LLC | | $'s in 000's | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of January 1, 2019 | | | 6,547 | | | 21,620 | | | 28,167 | | | 23.2% | 76.8% | Stock based compensation adjustments | | | — | | | 140 | | | 140 | | | | | Exchange transactions | | | (1,794) | | | 1,794 | | | — | | | | | As of December 31, 2019 | | | 4,752 | | | 23,554 | | | 28,306 | | | 16.8% | 83.2% | Stock based compensation adjustments | | | — | | | 445 | | | 445 | | | | | Exchange transactions | | | (1,712) | | | 1,712 | | | — | | | | | As of December 31, 2020 | | | 3,040 | | | 25,711 | | | 28,751 | | | 10.6% | 89.4% |
Note
| | | | | | | | | | | | | | | | | | | | | | | | | | | | LLC Interests held | | % of Total | | $'s in 000's | LLC
Owners | | PetIQ, Inc. | | Total | | LLC
Owners | PetIQ, Inc. | | As of January 1, 2021 | 3,040 | | | 25,711 | | | 28,751 | | | 10.6 | % | 89.4 | % | | Stock based compensation transactions | — | | | 660 | | | 660 | | | | | | Exchange transactions | (2,768) | | | 2,768 | | | — | | | | | | As of December 31, 2021 | 272 | | | 29,139 | | | 29,411 | | | 0.9 | % | 99.1 | % | | Stock based compensation transactions | — | | | 188 | | | 188 | | | | | | Exchange transactions | (20) | | | 20 | | | — | | | | | | Unit redemption | — | | | (373) | | | (373) | | | | | | As of December 31, 2022 | 252 | | | 28,974 | | | 29,226 | | | 0.9 | % | 99.1 | % |
Note 12 - Customer Concentration
The Company has significant exposure to customer concentration. During each of the years ended December 31, 2022, 2021, and 2020, 2019,two, one, and 2018, 2, 2, and 1two customers, respectively, accounted for more than 10% of sales individually and in aggregate, which accounted for 42%35%, 35%26%, and 18%42% of net sales, respectively.
At December 31, 2020, 12022, one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and accountedaccounting for 52%46% of outstanding trade receivables, net. At December 31, 2019 22021 one Products segment customers individually accountedaccounting for more than 10% of outstanding trade receivables, and accounted for 61%47% of outstanding trade receivables, net. All of our customer concentration exists in our Products segment. Note 13 - Commitments and Contingencies
During the years ended December 31, 20202022, 2021, and 2019,2020, the Company recorded liabilitiesexpense of $7.8$3.5 million, $3.5 million, and $1.0$7.8 million respectively, for contract termination costs and other litigation related to settlements for alleged breach of contract.matters. The expense is included within Generalselling, general and Administrativeadministrative expenses for the years ended December 31, 20202022, 2021, and 2019.On April 4, 2018, Med Vets, Inc.2020.
During the year ended December 31, 2021, the Company entered into mediation with a third party who had filed a class action lawsuit against the Company. As a result of that mediation, the Company accrued the expected settlement of $1.4 million. Final settlement of the mediation and Bay Medical Solutions Inc. (collectively “Plaintiffs”) filed suitpayment of the accrued amount occurred in 2022. Additionally, during the United States District Court foryear ended December 31, 2022, the Northern District of California against PetIQ and VIP Petcare Holdings, Inc. for alleged unlawful merger and other antitrust violations. On June 29, 2020, the 9th Circuit Court of Appeals issued an opinion affirming the dismissal of Med Vets’ merger challenge. On July 13, 2020, the Plaintiffs filed for an en banc hearing in the 9th Circuit Court of Appeals which was unanimously denied on August 7, 2020. The Plaintiffs time period to petition the Supreme Court for certiorari has passed, therefore the matter is considered resolved. As no impactCompany settled a lawsuit brought by a former supplier to the Company is considered probable or estimable, 0 litigation reserve has been accrued.related to the redemption of ownership interests. The Company had accrued an obligation of $2.0 million as of December 31, 2021. The Company recorded an additional $3.5 million of expense in the consolidated statement of operations for the year ended December 31, 2022 and paid $5.5 million in full satisfaction of the lawsuit. The Company records a liability when a particular contingency is probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency other than those noted above, at December 31, 20202022 as the Company does not consider any other contingency to be probable or estimable. The Company expenses legal costs as incurred within selling, general, and administrative expenses on the consolidated statements of operations.
We have commitments for leases and long-term debt that are discussed further in Note 5, Debt, and Note 6, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.
The Company has 2two operating segments: Products and Services. The Products segment consists of the Company’s manufacturing and distribution business. The Services segment consists of the Company’s veterinary services and related product sales, provided by the Company directly to consumers.sales. The segments are based on the discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to make resource allocation decisions and to evaluate performance. We measure and evaluate our reportable segments based on net sales and segmenttheir respective Segment Adjusted EBITDA. We exclude fromEBITDA performance. Beginning in the fourth quarter of 2022, we allocate to our segments capital expenditures and certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses, ason a pro rata basis based on net sales to better align with the discrete financial information reviewed by our corporate functions doCODM. Such expenses previously were not meetallocated to segments. The Company has recast prior periods to give effect to this change. This change in presentation had no impact on the definitionConsolidated Statements of a segment as defined in the accounting guidance related to segment reporting. Operations. Financial information relating to the Company’s operating segments for the years ended:
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2020 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 725,705 | | $ | 54,346 | | $ | — | | $ | 780,051 | Adjusted EBITDA | | | 117,216 | | | 3,387 | | | (52,811) | | | 67,792 | Depreciation expense | | | 4,810 | | | 3,775 | | | 3,497 | | | 12,082 | Capital expenditures | | | 13,394 | | | 7,373 | | | 1,625 | | | 22,392 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2019 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 617,118 | | $ | 92,313 | | $ | — | | $ | 709,431 | Adjusted EBITDA | | | 73,537 | | | 20,045 | | | (32,907) | | | 60,675 | Depreciation expense | | | 3,552 | | | 3,170 | | | 2,417 | | | 9,139 | Capital expenditures | | | 1,297 | | | 6,409 | | | 2,570 | | | 10,276 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2018 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 450,229 | | $ | 78,385 | | $ | — | | $ | 528,614 | Adjusted EBITDA | | | 52,185 | | | 15,246 | | | (25,892) | | | 41,539 | Depreciation expense | | | 2,343 | | | 2,326 | | | 1,988 | | | 6,657 | Capital expenditures | | | 1,339 | | | 3,440 | | | 2,399 | | | 7,178 |
| | | | | | | | | | | | | | | | $'s in 000's | | Products | | Services | | December 31, 2022 | | | | Net Sales | | $ | 800,305 | | | $ | 121,208 | | | Segment Adjusted EBITDA | | 90,333 | | | 3,781 | | | Depreciation expense | | 7,443 | | | 7,077 | | | Capital expenditures | | 8,432 | | | 3,541 | |
| | | | | | | | | | | | | | | | $'s in 000's | | Products | | Services | | December 31, 2021 | | | | Net Sales | | $ | 825,395 | | | $ | 107,133 | | | Segment Adjusted EBITDA | | 88,982 | | | 3,910 | | | Depreciation expense | | 7,397 | | | 6,969 | | | Capital expenditures | | 18,568 | | | 12,702 | |
| | | | | | | | | | | | | | | | $'s in 000's | | Products | | Services | | December 31, 2020 | | | | Net Sales | | $ | 725,705 | | | $ | 54,346 | | | Segment Adjusted EBITDA | | 68,084 | | | (292) | | | Depreciation expense | | 8,063 | | | 4,019 | | | Capital expenditures | | 14,906 | | | 7,486 | |
The following table reconciles Segment Adjusted EBITDA to Net (Loss) incomeLoss for the periods presented. | | | | | | | | | | | | For the years ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | Adjusted EBITDA: | | | | | | | | | | Product | | $ | 117,216 | | $ | 73,537 | | $ | 52,185 | Services | | | 3,387 | | | 20,045 | | | 15,246 | Unallocated Corporate | | | (52,811) | | | (32,907) | | | (25,892) | Total Consolidated | | | 67,792 | | | 60,675 | | | 41,539 | Adjustments: | | | | | | | | | | Depreciation | | | (12,082) | | | (9,139) | | | (6,657) | Amortization | | | (12,815) | | | (5,994) | | | (5,210) | Interest | | | (26,299) | | | (14,495) | | | (8,022) | Acquisition costs(1) | | | (2,620) | | | (6,147) | | | (3,787) | Stock based compensation expense | | | (9,170) | | | (7,355) | | | (3,812) | Purchase accounting adjustment to inventory(2) | | | — | | | (4,805) | | | (2,149) | Non same-store revenue(3) | | | 8,987 | | | 8,088 | | | 3,967 | Non same-store costs(3) | | | (22,256) | | | (19,553) | | | (10,345) | Fair value adjustment of contingent note | | | — | | | (7,320) | | | (3,280) | Integration costs and costs of discontinued clinics(4) | | | (9,776) | | | (3,788) | | | (998) | Clinic launch expenses(5) | | | (3,085) | | | (767) | | | (1,380) | Non-recurring royalty settlement(6) | | | — | | | — | | | (440) | SKU Rationalization(7) | | | — | | | (6,482) | | | — | Litigation expenses | | | (1,006) | | | (529) | | | — | COVID-19 related costs(8) | | | (6,476) | | | — | | | — | Pretax net loss | | $ | (28,806) | | $ | (17,611) | | $ | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
| | | | | | | | | | | | | | | | | | | Year Ended December 31 | | $'s in 000's | 2022 | | 2021 | | 2020 | | Segment Adjusted EBITDA: | | | | | | Product(1) | $ | 90,333 | | | $ | 88,982 | | | 68,084 | | Services(1) | 3,781 | | | 3,910 | | | (292) | | | Total | 94,114 | | | 92,892 | | | 67,792 | | | Adjustments: | | | | | | | Depreciation | (14,520) | | | (14,366) | | | (12,082) | | | Amortization | (18,079) | | | (22,336) | | | (12,815) | | | Interest | (27,374) | | | (24,696) | | | (22,807) | | Loss on debt extinguishment and related costs(2) | — | | | (6,438) | | | — | | Acquisition costs(3) | (1,464) | | | (92) | | | (2,620) | | | Stock based compensation expense | (11,363) | | | (9,428) | | | (9,170) | | Non same-store adjustment(4) | (16,423) | | | (23,159) | | | (16,354) | | Integration costs(5) | (1,171) | | | 142 | | | (9,776) | | | Litigation expenses | (3,862) | | | (4,105) | | | (1,006) | | COVID-19 related costs(6) | — | | | — | | | (6,476) | | | CFO Transition | — | | | (928) | | | — | | Goodwill impairment(7) | (47,264) | | | — | | | — | | | Pretax net loss | $ | (47,406) | | | $ | (12,514) | | | $ | (25,314) | | | Income tax expense | (1,214) | | | (3,869) | | | (60,413) | | | Net loss | $ | (48,620) | | | $ | (16,383) | | | $ | (85,727) | |
(1)(1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
(2) | Purchase accounting adjustment to inventory represents the portion of costs of sales related to the fair value of inventory adjusted as part of the purchase price allocation. During 2019 the amounts relate to the Perrigo Animal Health Acquisition and are part of the Products segment. During 2018 the costs relate to the VIP Acquisition which are partBeginning in the fourth quarter of 2022, the Company is allocating corporate expenses to each segment pro rata based on net sales for each segment. The presentation of Product Adjusted EBITDA and Segment Adjusted EBITDA for the years ended December 31, 2021 and 2020 have been recast for comparability. For the years ended December 31, 2022, 2021 and 2020, total corporate expenses were $75.5 million (of which $65.6 million was allocated to Products and $9.9 million was allocated to Services), $68.2 million (of which $60.4 million was allocated to Products and $7.8 million was allocated to Services) and $52.8 million (of which $49.1 million was allocated to Products and $3.7 million was allocated to Services), respectively.(2) Loss on debt extinguishment and related costs are related to our entering into two new credit facilities, including the write off of deferred financing costs and related costs. (3) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions. (4) Non same-store revenue and costs relate to our Services segment and are from wellness centers with less than six full quarters of operating results. This includes clinic launch expenses. (5) Integration costs represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily within the Products segment. (6) Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment costs related to incremental wages paid to essential workers and sanitation costs due to COVID. (7) Non-cash goodwill impairment due to a significant decline in the Company’s market capitalization, driven primarily by rising interest rates and macroeconomic conditions. Additionally, the Company made the strategic decision to slow expansion plans for the Services Segment and the HBH Acquisition, which is part of the Products Segment. |
(3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
(4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
(5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
(6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
(7) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
(8) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
Supplemental geographic disclosures are below.
| | | | | | | | | | | Year ended December 31, 2020 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 719,282 | $ | 6,423 | $ | 725,705 | Service revenue | | | 54,346 | | — | | 54,346 | Total net sales | | $ | 773,628 | $ | 6,423 | $ | 780,051 |
| | | | | | | | | | | Year ended December 31, 2019 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 610,986 | $ | 6,132 | $ | 617,118 | Service revenue | | | 92,313 | | — | | 92,313 | Total net sales | | $ | 703,299 | $ | 6,132 | $ | 709,431 |
| | | | | | | | | | | Year ended December 31, 2018 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 444,364 | $ | 5,865 | $ | 450,229 | Service revenue | | | 78,385 | | — | | 78,385 | Total net sales | | $ | 522,749 | $ | 5,865 | $ | 528,614 |
| | | | | | | | | | | | | | | | | | | Year ended December 31, 2022 | | $'s in 000's | U.S. | | Foreign | | Total | | Product sales | $ | 793,427 | | | $ | 6,878 | | | $ | 800,305 | | | Service revenue | 121,208 | | | — | | | 121,208 | | | Total net sales | $ | 914,635 | | | $ | 6,878 | | | $ | 921,513 | |
| | | | | | | | | | | | | | | | | | | Year ended December 31, 2021 | | $'s in 000's | U.S. | | Foreign | | Total | | Product sales | $ | 818,593 | | | $ | 6,802 | | | $ | 825,395 | | | Service revenue | 107,133 | | | — | | | 107,133 | | | Total net sales | $ | 925,726 | | | $ | 6,802 | | | $ | 932,528 | |
| | | | | | | | | | | | | | | | | | | Year ended December 31, 2020 | | $'s in 000's | U.S. | | Foreign | | Total | | Product sales | $ | 719,282 | | | $ | 6,423 | | | $ | 725,705 | | | Service revenue | 54,346 | | | — | | | 54,346 | | | Total net sales | $ | 773,628 | | | $ | 6,423 | | | $ | 780,051 | |
The net book value of property plant and equipment, by geographic location was as follows as of: | | | | | | | | | December 31, 2020 | | December 31, 2019 | United States | | $ | 61,807 | | $ | 51,397 | Europe | | | 1,339 | | | 1,128 | Total | | $ | 63,146 | | $ | 52,525 |
| | | | | | | | | | | | | December 31, 2022 | | December 31, 2021 | | United States | $ | 69,376 | | | $ | 75,315 | | | Europe | 4,019 | | | 1,298 | | | Total | $ | 73,395 | | | $ | 76,613 | |
Note 15 - Related Parties As discussed in Note 7– Income taxes, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At December 31, 2020 and 2019, the Company had paid $0.03 million in advance on required tax distributions and accrued $0.4 million, respectively, for estimated tax distributions, which are included in accounts payable on the consolidated balance sheets.
As discussed in Note 5– Debt, the Company has notes payable to the Sellers of VIP, who are significant shareholders of the Company, of $27.5 million. The Company had $0.5 million and $0.3 million of accrued interest on these notes as of December 31, 2020, and 2019, respectively. The Company paid $1.7 million and $1.3 million of interest for the years ended December 31, 2020 and 2019, respectively, and paid 0 interest for the year ended December 31, 2018. Will Santana, a former owner of VIP and board member of PetIQ until July 1, 2020, was one of the main beneficiaries of the VIP Notes. Mr. Santana has sold a sizable portion of his ownership in PetIQ and resigned from the board during 2020, as such he will no longer be considered a related party.
The Company leases office and warehouse space from a company under common control of the sellers of VIP, commencing on January 17, 2018. The Company incurred rent expenses of $0.4 million in each of the years ending December 31, 2020, 2019, and 2018, respectively. The lease ended January 5, 2021.
Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s annual premium expense,times throughout the year, and is generally paid directly to the relevant insurance company, amounted to $6.6 million and $6.9 million in 2022 and 2021 respectively. Amounts paid to Moreton and subsequently transferred to insurance providers, was $2.8 million $2.3 million and $1.5 million in 2020, 2019 and 2018, respectively.2020. Mr. Chris Christensen wasearns various forms of compensation based on the specifics of each policy.
In August 2021, the Company sold its prior corporate office in Eagle, Idaho for $4.8 million. The Company utilized Colliers International (“Colliers”) as a broker with Mike Christensen, the brother of CEO, McCord Christensen, as agent. The Company paid a commission of approximately $0.1 million in eachcommissions to Colliers as a result of the years endingsale. In December 31, 2020, 2019, and 2018, respectively, by Moreton2021, the Company purchased a parcel of land for the sale$2.5 million. Total commission paid to Colliers was approximately $0.1 million as a result of such insurance policies to the Company.this purchase. In April 2020, the Company purchased a parcel of land for $2.5 million. The broker for the Company was Colliers International, and the agent was Mike Christensen, the brother of CEO McCord Christensen. Total commission paid to Colliers was approximately $75 thousand.
$0.1 million as a result of this purchase. Katie Turner, the spouse of CEO, McCord Christensen, is the owner of Acadia Investor Relations LLC, (“Acadia”) which acts as the Company’s investor relations consultant. Acadia has been paid $0.2 million for the year ending December 31, 2022 and 2021, respectively. Note 16 – Employee Benefit Plans
The Company sponsors 401(k) defined contribution plans at certain subsidiaries. Participants may elect to defer up to 100% of compensation. The Company makes matching contributions of 100% of the employee deferrals up to 3%4% of
compensation. The Company may also make discretionary profit sharing contributions each year, which are allocated to each eligible participant based on compensation. The Company made matching contributions of $0.9$1.7 million, $0.6$1.1 million, and $0.3$0.9 million, respectively, for the years ended December 31, 2020, 20192022, 2021 and 2018.Item2020.
Note 17 – Subsequent Events The Company completed the acquisition of all of the membership units of Rocco & Roxie LLC("R&R") on January 13, 2023. The acquisition expands the Company's brand and product portfolio to include stain and odor products. The Company paid $26.5 million for the membership interests of R&R using cash on hand, resulting in R&R becoming a wholly owned subsidiary of PetIQ. The purchase is subject to normal working capital adjustments.
As of the date of this filing, the initial accounting for the business combination, including the allocation of the purchase price to the identifiable assets acquired and the liabilities assumed, is incomplete. We expect to disclose a preliminary allocation of the purchase price in our Form 10-Q for the three months ended March 31, 2023.
On February 3, 2023, HoldCo and Opco, entered into the First Amendment Agreement to the ABL Facility to replace the interest rate benchmark from LIBOR to SOFR. Item 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report.December 31, 2022. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures (a) were effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting We are responsible for establishing and maintaining internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020.2022. In making this assessment, our management used the Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.2022. The Company’s registered independent accounting firm, KPMG LLP, has audited the effectiveness of our internal controls over financial reporting as of December 31, 2020,2022, as stated in their report which appears on the next page.
Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended, December 31, 20202022 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
KPMG LLP Suite 600 205 North 10th Street Boise, ID 83702-5798 | | 
|
|
| KPMG LLP
Suite 600
205 North 10th Street
Boise, ID 83702-5798
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Opinion on Internal Control Over Financial Reporting
We have audited PetIQ, Inc. and subsidiaries’subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20202022 and 2019,2021, the related consolidated statements of operations, comprehensive loss, consolidated stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020,2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 202128, 2023 expressed an unqualified opinion on those consolidated financial statements.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP | |
| /s/ KPMG LLP
|
Boise, Idaho
February 26, 2021Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
| ● | statements regarding our strategies, results of operations or liquidity; |
| ● | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
| ● | statements of management’s goals and objectives; and |
| ● | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy and our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade
28, 2023
promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors’ section of this annual report on Form 10-K.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.
Item 9B - Other Information
Item 9C - Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not Applicable. Item 10 – Directors and Executive Officers of the Registrant We intend to file with the Securities and Exchange Commission,SEC, not later than 120 days after the close of our fiscal year ended December 31, 2020,2022, a definitive proxy statement containing the information required by this Item, which is incorporated by reference herein, or an amendment to this reportAnnual Report filed under cover of Form 10-K/A containing the information required by this Item.
Our Code of Ethics for Senior Financial Officers applies to our principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions (the “Code of Ethics”). The Code of Ethics is available on our website at http://ir.petiq.com.If we make any substantive amendments to our Code of Ethics or grant any of principal executive officer, principal financial officer and principal accounting officer or controller or person performing similar functions any waiver, including any implicit waiver, from a provision of our Code of Ethics, we will disclose the nature of the amendment or waiver on our website or in a Current Report on Form 8-K. Item 11 – Executive Compensation We intend to file with the Securities and Exchange Commission,SEC, not later than 120 days after the close of our fiscal year ended December 31, 2020,2022, a definitive proxy statement containing the information required by this Item, which is incorporated by reference herein, or an amendment to this reportAnnual Report filed under cover of Form 10-K/A containing the information required by this Item.ItemItem .
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters We intend to file with the Securities and Exchange Commission,SEC, not later than 120 days after the close of our fiscal year ended December 31, 2020,2022, a definitive proxy statement containing the information required by this Item, which is incorporated by reference herein, or an amendment to this reportAnnual Report filed under cover of Form 10-K/A containing the information required by this Item. Item
Item 13 – Certain Relationships and Related Transactions We intend to file with the Securities and Exchange Commission,SEC, not later than 120 days after the close of our fiscal year ended December 31, 2020,2022, a definitive proxy statement containing the information required by this Item, which is incorporated by reference herein, or an amendment to this reportAnnual Report filed under cover of Form 10-K/A containing the information required by this Item. Item
Item 14 – Principal Accountant Fees and Services Our independent registered public accounting firm is KPMG LLP, Boise, ID, Auditor Firm ID: 185. We intend to file with the Securities and Exchange Commission,SEC, not later than 120 days after the close of our fiscal year ended December 31, 2020,2022, a definitive proxy statement containing the information required by this Item, which is incorporated by reference herein, or an amendment to this reportAnnual Report filed under cover of Form 10-K/A containing the information required by this Item.
Item 15. Exhibits, Financial Statement Schedules
See "Index to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notes. | | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Purchase and Sale Agreement, dated May 8, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc and PetIQ, Inc. | 8-K | 001-38163 | 2.1 | 5/8/2019 | 2.2 | Amended and Restated Asset Purchase Agreement, dated June 21, 2020, by and between Elanco US Inc., PetIQ, LLC and PetIQ, Inc. | 10-Q | 001-38163 | 2.1 | 8/10/2020 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 7/11/2017 | 3.2 | Amended and Restated Bylaws of PetIQ, Inc. | 8-K | 001-38163 | 3.1 | 2/23/2021 | 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | 8-K | 001-38163 | 3.1 | 6/1/2018 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 7/17/2017 | 4.2 | Registration Rights Agreement, dated July 20, 2017, among PetIQ, Inc. the Continuing LLC owners and the C-Corp LLC Parents | S-3 | 333-227186 | 4.1 | 9/4/2018 | 4.3 | Registration Rights Agreement, dated January 17, 2018, between PetIQ, Inc. and each VIP Petcare Owner | S-3 | 333-227186 | 4.2 | 9/4/2018 | 4.4 | Description of PetIQ, Inc.’s Securities | 10-K | 001-38163 | 4.4 | 3/11/2020 | 4.5 | Indenture, dated May 14, 2020, among PetIQ, Inc. and Wells Fargo, National Association, as trustee | 8-K | 001-38163 | 4.1 | 5/20/2020 | 10.1 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 7/6/2017 | 10.2 | First Amendment to PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | 10-K | 001-38163 | 10.1 | 3/12/2019 | 10.3 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party thereto, East West Bank and the other lenders party thereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 1/23/2018 | 10.4 | First Amendment and Joinder, dated as of August 9, 2018, to Credit Agreement dated as January 17, 2018 | 10-Q | 001-38163 | 10.1 | 8/14/2018 | 10.5 | Second Amendment to Amended and Restated Credit Agreement, dated March 25, 2019, by and among PetIQ, LLC, the other credit parties party thereto, the lenders party thereto and East West Bank | 10-Q | 001-38163 | 10.1 | 8/8/2019 | 10.6 | Third Amendment to Amended and Restated Revolving Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 7/9/2019 | 10.7 | Third Amendment to Amended and Restated Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 10-Q | 001-38163 | 10.2 | 8/10/2020 | 10.8 | Fourth Amendment to Amended and Restated Credit Agreement, dated May 14, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 5/14/2020 |
| | | | | | | | | | | | | | | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | | 2.3 | | 10-Q | 001-38163 | 2.1 | 8/10/2020 | | 3.1 | | 8-K | 000-38163 | 3.1 | 6/23/2022 | | 3.3 | | 8-K | 001-38163 | 3.1 | 10/31/2022 | | 4.1 | | S-1/A | 333-218955 | 4.1 | 7/17/2017 | | 4.2 | | S-3 | 333-227186 | 4.1 | 9/4/2018 | | 4.3 | | S-3 | 333-227186 | 4.2 | 9/4/2018 | | 4.4 | | 8-K | 001-38163 | 4.1 | 5/20/2020 | | 4.5 | | 10-K | 001-38163 | 4.4 | 3/11/2020 | | 10.1 | | S-1/A | 333-218955 | 10.4 | 7/6/2017 | | 10.2 | | 10-K | 001-38163 | 10.1 | 3/12/2019 | | 10.3 | | 8-K | 001-38163 | 10.1 | 4/19/2021 | | 10.4 | | 8-K | 001-38163 | 10.2 | 4/19/2021 | | 10.5* | | S-1/A | 333-218955 | 10.13 | 7/20/2017 | | 10.6* | | 8-K | 333-218955 | 10.1 | 5/31/2019 | | 10.7* | | 10-Q | 001-38163 | 10.2 | 11/14/2018 | | 10.8* | | 10-Q | 001-38163 | 10.3 | 11/14/2018 | | 10.9* | | 10-Q | 001-38163 | 10.4 | 11/14/2018 | | 10.10* | | S-8 | 333-223635 | 4.3 | 3/13/2018 | | 10.11* | | 10-Q | 001-38163 | 10.1 | 5/9/2019 | | 10.12* | | 8-K | 001-38163 | 10.1 | 1/5/2022 | | 10.13* | | 8-K | 001-38163 | 10.5 | 7/9/2019 | | 10.14* | | 10-Q | 001-38163 | 10.3 | 5/9/2019 | | 10.15 | | 8-K | 001-38163 | 10.1 | 5/20/2020 | | 10.16 | | 8-K | 001-38163 | 10.2 | 5/20/2020 |
10.9 | Sixth Amendment to Amended and Restated Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 8/3/2020 | 10.10 | Amended and Restructured Term Loan Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.3 | 7/9/2019 | 10.11 | Second Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.1 | 5/14/2020 | 10.12 | Third Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.2 | 8/10/2020 | 10.13 | Fourth Amendment to Term Loan Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.1 | 8/3/2020 | 10.14 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 1/23/2018 | 10.15* | PetIQ Inc. Amended and Restated 2017 Omnibus Incentive Plan | 8-K | 333-218955 | 10.1 | 5/31/2019 | 10.16* | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 7/20/2017 | 10.17* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | 10-Q | 001-38163 | 10.2 | 11/14/2018 | 10.18* | Amended and Restated Employment and Non-Competition Agreement between PetIQ, LLC and McCord Christensen | 10-Q | 001-38163 | 10.1 | 5/9/2019 | 10.19* | Employment and Non-Competition Agreement, dated September 17, 2018, between PetIQ, LLC and Susan Sholtis | 8-K | 001-38163 | 10.1 | 9/20/2018 | 10.20* | Employment and Non-Competition Agreement, dated as of May 28, 2019, between PetIQ, LLC and Michael Smith | 8-K | 001-38163 | 10.5 | 7/9/2019 | 10.21* | Employment and Non-Competition Agreement between PetIQ, LLC and John Newland | 10-Q | 001-38163 | 10.2 | 5/9/2019 | 10.22* | Employment and Non-Competition Agreement between PetIQ, LLC and R. Michael Herrman | 10-Q | 001-38163 | 10.3 | 5/9/2019 | 10.23* | PetIQ, Inc. 2017 Omnibus Incentive Plan Restricted Stock Unit Agreement | 10-Q | 001-38163 | 10.3 | 11/14/2018 | 10.24* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors | 10-Q | 333-218955 | 10.4 | 11/14/2018 | 10.25* | PetIQ, Inc. Amended and Restated 2018 Inducement and Retention Stock Plan for CVC Employees | S-8 | 333-223635 | 4.3 | 3/13/2018 | 10.26 | First Amendment to Purchase and Sale Agreement, dated July 7, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc, and PetIQ, Inc. | 8-K | 001-38163 | 10.1 | 7/9/2019 | 10.27 | Transition Services Agreement, dated July 8, 2019, by and between PetIQ, LLC and L. Perrigo Company | 8-K | 001-38163 | 10.4 | 7/9/2019 | 10.28 | Form of Base Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.1 | 5/20/2020 | 10.29 | Form of Additional Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.2 | 5/20/2020 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
| | | | | | | | | | | | | | | | | | | 10.17** | | | | | | | 10.18** | | | | | | | 10.19** | | | | | | | 21.1** | | | | | | | 23.1** | | | | | | | 31.1** | | | | | | | 31.2** | | | | | | | 32.1*** | |
|
|
|
| 32.2** * | |
|
|
|
| 101.INS | XBRL Instance Document |
|
|
|
| 101.SCH | XBRL Schema Documents |
|
|
|
| 101.CAL | XBRL Calculation Linkbase Document |
|
|
|
| 101.DEF | XBRL Definition Linkbase Document |
|
|
|
| 101.LAB | XBRL Labels Linkbase Document |
|
|
|
| 101.PRE | XBRL Presentation Linkbase Document |
|
|
|
| 101.DEF | XBRL Definition Linkbase Document |
|
|
|
|
* Indicates management contract or compensatory plan or arrangement.
*** Furnished herewith. This exhibit should not be deemed to be "filed" for purposes of Section 18 of the Exchange Act. Item 16. Form 10-K Summary
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | PETIQ, INC. | | | | | February 28, 2023 | /s/ Zvi Glasman | | | Zvi Glasman | | | Chief Financial Officer |
KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint McCord Christensen and John Newland,Zvi Glasman, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 26, 2021.
| | | | | | | | | | | | SIGNATURE |
| TITLE | Date |
|
|
| |
/s/ McCord Christensen |
| Chief Executive Officer, President
(principal executive officer)
| McCord Christensen
|
|
Officer and Chairman of the Board
| February 28, 2023 | McCord Christensen
|
|
| | | | | /s/ John NewlandZvi Glasman |
| Chief Financial Officer
(principal financial and accounting officer)
Officer | February 28, 2023 | John Newland
Zvi Glasman |
| Officer
|
|
|
| | /s/ Mark First |
| Director | February 28, 2023 | Mark First |
|
|
|
|
| | /s/ Ronald Kennedy Allan Hall |
| Director | February 28, 2023 | Ronald Kennedy
Allan Hall |
|
|
|
|
| | /s/ Scott Huff |
| Director | February 28, 2023 | Scott Huff |
|
|
|
|
| | /s/ Larry Bird Sheryl Oloughlin |
| Director | February 28, 2023 | Larry Bird
Sheryl Oloughlin |
|
|
|
| | | /s/ Kim Lefko | | Director | February 28, 2023 | | Kim Lefko | | | | | | | | /s/ Kenneth Walker | | Director | February 28, 2023 | | Kenneth Walker | | |
|
