PetIQ, Inc.

Condensed Consolidated Statements of Cash Flows, Continued

(Unaudited, in 000’s)


	For the Six Months Ended June 30,
Supplemental cash flow information	2021		2020
Interest paid	$	8,051	$	8,106
Net change in property, plant, and equipment acquired through accounts payable		(358)		(160)
Finance lease additions		141		381
Net change of deferred tax asset from step-up in basis		—		5,786
Income taxes paid, net of refunds		214		(46)
Accrued tax distribution		7		310
See accompanying notes to the consolidated financial statements.

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PetIQ, Inc.

Condensed Consolidated Statements of Equity

(Unaudited, in 000’s)


	Three months ended June 30, 2021
			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 - March 31, 2021	$	(96,525)	$	(500)		28,102	$	28		941	$	1	$	345,386	$	8,298	$	256,688
Exchange of LLC Interests held by LLC Owners		—		13		516		1		(516)		(1)		4,793		(4,806)		—
Accrued tax distributions		—		—		—		—		—		—		—		141		141
Other comprehensive income		—		361		—		—		—		—		—		2		363
Stock based compensation expense		—		—		—		—		—		—		2,369		70		2,439
Exercise of Options to purchase Common Stock		—		—		289		—		—		—		6,008		—		6,008
Issuance of stock vesting of RSU's, net of tax withholdings		—		—		2		—		—		—		(50)		—		(50)
Net income		4,026		—		—		—		—		—		—		8		4,034
Balance - June 30, 2021	$	(92,499)	$	(126)		28,909	$	29		425	$	—	$	358,506	$	3,714	$	269,624


	Six months ended June 30, 2021
			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, 2021 As adjusted (Note 1)	$	(98,558)	$	(686)		25,711	$	26		3,040	$	3	$	319,642	$	25,983	$	246,410
Exchange of LLC Interests held by LLC Owners		—		63		2,615		3		(2,615)		(3)		22,824		(22,887)		—
Accrued tax distributions		—		—		—		—		—		—		—		(7)		(7)
Other comprehensive income		—		497		—		—		—		—		—		7		504
Stock based compensation expense		—		—		—		—		—		—		4,304		257		4,561
Exercise of Options to purchase Common Stock		—		—		531		—		—		—		12,588		—		12,588
Issuance of stock vesting of RSU's, net of tax withholdings		—		—		52		—		—		—		(852)		—		(852)
Net income		6,059		—		—		—		—		—		—		361		6,420
Balance - June 30, 2021	$	(92,499)	$	(126)		28,909	$	29		425	$	—	$	358,506	$	3,714	$	269,624


	Three months ended June 30, 2020
			Accumulated
			Other										Additional
	Accumulated		Comprehensive		Class A Common				Class B Common				Paid-in		Non-controlling		Total
	Deficit		Loss		Shares		Dollars		Shares		Dollars		Capital		Interest		Equity
Balance - March 31, 2020	$	(18,006)	$	(1,655)		24,318	$	24		4,049	$	4	$	312,874	$	38,262	$	331,503
Exchange of LLC Interests held by Continuing LLC Owners		—		(17)		279		—		(279)		—		2,067		(2,050)		—
Payment for capped call share options		—		—		—		—		—		—		(12,580)		(2,241)		(14,821)
Net increase in deferred tax asset from LLC Interest transactions		—		—		—		—		—		—		2,585		—		2,585
Accrued tax distributions		—		—		—		—		—		—		—		(206)		(206)
Other comprehensive loss		—		(102)		—		—		—		—		—		(2)		(104)
Stock based compensation expense		—		—		—		—		—		—		1,594		250		1,844
Exercise of Options to purchase Common Stock		—		—		54		—		—		—		1,169		—		1,169
Issuance of stock for vesting of RSU's		—		—		7		—		—		—		(37)		—		(37)
Net loss		(1,476)		—		—		—		—		—		—		27		(1,449)
Adjusted Balance - June 30, 2020	$	(19,482)	$	(1,774)		24,658	$	24		3,770	$	4	$	307,672	$	34,041	$	320,484

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	Six months ended June 30, 2020
		Retained	Accumulated
		Earnings/	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, 2020	$	(15,903)	$	(1,131)		23,554	$	23		4,752	$	5	$	300,120	$	45,196	$	328,310
Exchange of LLC Interests held by Continuing LLC Owners		—		(60)		982		1		(982)		(1)		8,732		(8,672)		—
Payment for capped call share options		—		—		—		—		—		—		(12,580)		(2,241)		(14,821)
Net increase in deferred tax asset from LLC Interest transactions		—		—		—		—		—		—		5,786		—		5,786
Accrued tax distributions		—		—		—		—		—		—		—		(310)		(310)
Other comprehensive loss		—		(583)		—		—		—		—		—		(95)		(678)
Stock based compensation expense		—		—		—		—		—		—		3,736		666		4,402
Exercise of Options to purchase Common Stock		—		—		100		—		—		—		2,171		—		2,171
Issuance of stock for vesting of RSU's		—		—		22		—		—		—		(292)		—		(292)
Net loss		(3,579)		—		—		—		—		—		—		(503)		(4,082)
Adjusted Balance - June 30, 2020	$	(19,482)	$	(1,774)		24,658	$	24		3,770	$	4	$	307,672	$	34,041	$	320,484

Note that certain figures shown in the tables above may not recalculate due to rounding.

See accompanying notes to the condensed consolidated financial statements.

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PetIQ Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

~~$’s in 000’s, except for per share amounts~~

Note 1 - – Principal Business Activity and Significant Accounting Policies

Principal Business Activity and Principles of Consolidation

PetIQ, Inc. ~~(the “Company”~~(“PetIQ,” the “Company,” “we” or “us”) 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, channels with our branded distributed medications, which is further supported by our own world-class medication manufacturing facility in Omaha, Nebraska. Our national service platform, VIP Petcare (“VIP”), ~~or “PetIQ”) was formed as a Delaware corporation on February 29, 2016.~~operates in over 2,900 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.

We have 2 reporting segments: (i) Products; and (ii) Services. The ~~Company was formed for the purpose~~Products segment consists of ~~completing a public offering~~our manufacturing and distribution business. The Services segment consists of veterinary services and related ~~transactions in order~~product sales provided by the Company directly to ~~carry on the business of PetIQ, LLC, an Idaho limited liability company. The Company is~~consumers.

We are the sole 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, ~~will~~ operate and control all of the business and affairs of ~~Opco and continue to conduct the business now conducted by Opco and its subsidiaries. The Company’s fiscal year end is December 31.~~Opco.

The Company’s principal asset is the Holdco LLC Interests that it holds. As the sole managing member of Holdco, the Company operates and controls all of the business and affairs of Holdco and, through Holdco and its subsidiaries, conducts the Company’s business. In addition, the Company controls the management of, and has a controlling interest in, Holdco and, therefore, is the primary beneficiary of Holdco. As a result, the Company consolidates the financial results of Holdco pursuant to the variable-interest entity (“VIE”) accounting model, and a portion of the Company’s net income (loss) will be allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners (as defined in Note 7) to a portion of Holdco’s net income (loss). Holdco’s assets may be used only to settle Holdco’s obligations and Holdco’s beneficial interest holders have no recourse to the general credit to the Company. Through Holdco and its subsidiaries, the Company is a manufacturer and wholesale distributor of over-the-counter and prescription pet medications and pet wellness products to various retail customers and distributors throughout the United States and Europe. The Company is headquartered in Eagle, Idaho and manufactures and distributes products from facilities in Florida, Texas, Utah, and Europe.

As discussed in Note 7, as a result of the recapitalization transactions, PetIQ, Inc. consolidates Holdco and Opco; Opco is considered to be the predecessor to PetIQ, Inc. for accounting and reporting purposes. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. ~~generally~~ accepted accounting principles (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. All intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 are unaudited. The condensed consolidated balance sheet as of December 31, ~~2016~~2020 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, ~~2016~~2020 and related notes thereto included in the ~~final prospectus for PetIQ, Inc. dated July 20, 2017 and~~most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on ~~July 21, 2017.~~March 1, 2021. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. 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; allowance for doubtful accounts;~~equipment and intangible assets; the valuation of

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property, plant, and equipment, intangible assets and goodwill, ~~inventories,~~the valuation of assets and ~~notes receivable;~~liabilities in connection with acquisitions, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies.

~~Foreign Currencies~~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.

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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 Company operates subsidiaries in foreign countries who use the local currency as the functional currency. The Company translates its foreign subsidiaries’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange ascarrying amounts of the ~~balance sheet date~~Company’s financial instruments, including cash and ~~income~~cash equivalents, accounts receivable, accounts payable and ~~expense items~~accrued liabilities, are at ~~the average exchange~~cost, which approximates fair value due to their relatively short maturities. Our term loan and revolving credit facility bear interest at a variable interest rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of accumulated other comprehensive income. The Company records gainsplus an applicable margin and, ~~losses from changes in exchange rates on transactions denominated in currencies other than each reporting location's functional currency in net income for each period.~~therefore, carrying amounts approximate fair value.

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, excluding amounts restricted for various state licensing regulations. Restricted deposits~~acquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are ~~not considered~~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 ~~generally~~ requiring payment within 3045 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 ~~doubtful accounts~~credit losses equal to ~~estimated uncollectible amounts.~~expected losses. The Company’s estimate is based on historical collection experience, ~~and~~ a review of the current status of trade accounts ~~receivable.~~receivable and known current economic conditions including the current and expected impact of COVID-19. Payments of trade receivables are allocated to the specific invoices identified on the ~~customer's~~customer’s remittance advice.

~~The Company also has notes receivable~~Other receivables consists of various receivables due from ~~various suppliers included in accounts receivable. The notes typically bear interest at 4%~~vendors, banking partners, and ~~are repaid based on amortization schedules. Non-current portions of these notes~~other receivable ~~are included in other non-current assets on the consolidated balance sheets.~~from business partners.

Accounts receivable consists of the following as of:

September 30, 2017

December 31, 2016

Trade receivables

$
25,981

$
18,086
Notes receivable

324

440

26,305

18,526
Less: Allowance for doubtful accounts

(911)

(498)
Non-current portion of receivables

(553)

(833)
Total accounts receivable, net

$
24,841

$
17,195

~~Inventories~~


$'s in 000's	June 30, 2021		December 31, 2020
Trade receivables	$	148,906	$	96,381
Other receivables		11,284		7,094
		160,190		103,475
Less: Allowance for doubtful accounts		(390)		(720)
Total accounts receivable, net	$	159,800	$	102,755

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is ~~typically~~ determined ~~using~~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

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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	June 30, 2021		December 31, 2020
Raw materials	$	13,408	$	15,761
Work in progress		1,482		2,273
Finished goods		103,499		79,739
Total inventories	$	118,389	$	97,773

September 30, 2017

December 31, 2016
Raw materials and work in progress

$
5,227

$
5,924
Finished goods

29,427

28,308
Total inventories

$
34,654

$
34,232

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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.

Depreciation and amortization is provided using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and ~~capital~~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 general and administrative expenses in the condensed 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		3-5 years
Buildings		33 years
Equipment	~~3-15~~	2-15 years
Leasehold improvements	~~3-9~~	2-15 years
Furniture and fixtures	~~8-10~~	5-10 years

Convertible Debt

On May 19, 2020, we issued $143.8 million aggregate principal amount of Convertible Notes due 2026 (the “Notes”). See Note 5 – “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 capped call options was recorded as additional paid-in capital in our condensed consolidated balance sheets as the options are settleable in our Class A common stock.

Effective January 1, 2021, we adopted ASU 2020-06 using the full retrospective approach. As a result of this adoption, we have de-recognized the debt discount on the Notes and therefore no longer recognize any amortization of debt discount on the Notes as interest expense (see below, Adopted Accounting Standard Update).

Revenue Recognition

When Performance Obligations Are Satisfied

~~Depreciation~~ ~~expense~~ ~~was $684~~ ~~and $375 for the three months ended September 30, 2017, and 2016, respectively, and $1,795 and $1,350~~ ~~for the nine months ended September 30, 2017 and 2016, respectively.~~

~~Restricted Deposits~~

~~Restricted deposits are amounts required~~A performance obligation is a promise in a contract to ~~be held by the Company in segregated accounts for various state licensing regulations in~~ ~~relation~~transfer a distinct good or service to the ~~sale~~customer and is the unit of ~~regulated prescription pet medications. Restricted deposits~~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 ~~September 30, 2017,~~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 ~~December 31, 2016 were $200 and $250, respectively. Interest earned on restricted deposits is included~~obtain substantially all of the remaining benefits from the asset at this point in ~~other income when earned.~~

~~Deferred Acquisition Liability~~time.

The Company ~~has~~determined that certain products manufactured to a ~~deferred acquisition liability related~~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 ~~acquisition~~enforceable right to payment. Therefore, the Company determined that ~~occurred in 2013. The liability~~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.

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Revenue for services is ~~denominated in Euros and requires annual payments~~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 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 June 30, 2021.

Variable Consideration

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 ~~percentage~~reduction in revenue when product revenue is recognized. Depending on the specific type of ~~gross profit from~~variable consideration, we use either the ~~sales~~expected value or most likely amount method to determine the variable consideration. We believe there will not be significant changes to our estimates of ~~certain products,~~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 ~~amounts not repaid by~~recent changes in the ~~annual payments will be~~market. Any uncertainties in the ultimate resolution of variable consideration due in June 2018. The current balance recorded as of September 30, 2017, and December 31, 2016 was $1,745 and $250, respectively, and is included in other accrued expenses. The non-current portion recorded as of December 31, 2016 was $1,303, and is included in deferred acquisition liability.

~~Revenue Recognition~~

The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shipped to ~~the customer. For customers with Free on Board ("FOB") destination terms, a provision is recorded to exclude shipments determined to be in-transit to these customers at the end~~factors outside of the ~~reporting period. A sales return allowance is recorded~~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 ~~accounts receivable~~merchandising funds are ~~reduced as revenues~~offered through various programs to customers and are ~~recognized for estimated losses on credit sales due~~designed to ~~customer claims for discounts, returned goods~~promote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other ~~items.~~

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~~The Company offers a~~ ~~variety~~ ~~of trade promotions and incentives~~temporary price reductions. These programs are offered to our customers ~~such~~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 ~~cooperative advertising programs and store placement. Sales are recorded net~~reductions of ~~trade promotion spending, which is recognized~~revenue at the ~~later~~time the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.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 ~~other accrued expenses.~~the condensed consolidated balance sheets.

~~Shipping~~Significant Payment Terms

Our customer contracts identify the product, quantity, price, payment and ~~Handling Costs~~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 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 be one year or less.

Shipping

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.

Warranties & Returns

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.

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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 ~~cost of~~a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience.

Contract balances

Contract asset and liability balances as of June 30, 2021 and 2020 are immaterial. The Company does not ~~billed~~have significant deferred revenue or unbilled receivable balances.

Cost of Services

Cost of Services are comprised of all service and product costs related to ~~customers.~~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 general and administrative expenses. Research and development costs amounted to ~~$11~~4$0.9 million and ~~$82~~$0.9 million for the three months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively, and $~~427~~$2.0 million and $~~248~~$1.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively. Advertising costs were ~~$436~~$5.1 million and ~~$273~~$3.3 million for the three months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively, and ~~$2,028~~$7.5 million and $~~883~~$5.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively.

Collaboration Agreements

Through our acquisition of Perrigo Animal Health, 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 six months ended June 30, 2021, the Company opted out of the arrangement for 2 of the product formulations, which reduced the amount of any potential payments under the agreement. The Company may make up to $5.8 million of payments over the course of the next several years contingent on achievement of certain development and regulatory approval milestones. Product development costs are expensed as incurred or as milestone payments become probable. There can be no assurance that these products will be approved by the U.S. Food and Drug Administration (“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 General and Administrative expenses on the condensed consolidated statements of operations. There were no expenses incurred under the agreement for the six months ended June 30, 2021 or 2020.

Accounting for Income ~~taxes~~Taxes

The Company ~~records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using~~uses the asset and liability ~~method, under~~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 ~~are~~is recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxablein income in ~~effect for~~ the ~~years in which those tax assets are expected to be realized or settled. The Company may record a valuation allowance, if conditions are applicable, to reduce~~period that includes the enactment date.

We recognize deferred tax assets to the ~~amount~~extent that ~~is believed~~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.

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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.

Non-controlling interest

The non-controlling interests on the condensed consolidated statements of ~~income~~operations represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, ~~PetIQ Holdings, LLC,~~Holdco, held by the non-controlling ~~Continuing LLC Owners.~~holders of Class B common stock and limited liability company interests in Holdco. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling ~~Continuing LLC Owners, based on the portion~~holders of the LLC Interests owned by such LLC interest holders. There was no significant non-controlling interest for the nine months ended September 30, 2016 as well as the period prior to the IPO on July 20, 2017 because theClass B common stock and Limited Liability Company ~~operated as Opco during those periods.~~interests in Holdco. As of ~~September~~June 30, ~~2017~~2021 and December 31, 2020 the non-controlling interest was approximately ~~38.5%.~~1.5% and 10.6%, respectively of ownership of LLC Interests.

Litigation

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.~~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~~Company consults with both internal and external legal counsel related to litigation.

~~Recently Issued~~

Adopted Accounting ~~Pronouncements~~Standard Updates

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases. This ASU is a comprehensive new leases standard that was issued 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. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the

10

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financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in an increase in the assets and liabilities on our consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

~~In May 2014,~~August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards ~~Codification~~Update (“~~ASC”~~ASU”) ~~Topic 606, Revenue from~~ 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts ~~with Customers~~,in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and subsequently issued several related Accounting Standards Updates (“ASUs”) (“Topic 606”), which provide guidance for recognizing revenue from contracts with customers. The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customersContracts in an ~~amount that reflects consideration~~Entity’s Own Equity. Under ASU 2020-06, embedded conversion features are no longer separated from the host contract for ~~which entitlement is expected in exchange for those goods or services. Topic 606 will be effective commencing~~convertible instruments with our quarter ending March 31, 2018. We currently anticipate adopting Topic 606 using the modified retrospective transition approach that may result in a cumulative adjustment to beginning retained earnings as of January 1, 2018. Based on the analysis to date, the Company expects the new standard will require accelerated recognition of trade promotions and customer incentives. These transactions are currently recognized at the later of ~~the~~ sale of goods or agreement, however under the new standard the Company will estimate incentives to be offered to customers as part of the sales price. The Company does not expect the change to be material. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification~~ ~~issues~~conversion features that are not ~~currently addressed by current U.S. GAAP. This ASU~~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 ~~effective commencing with our quarter ending March 31, 2018.~~accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The ~~Company does not expect~~ASU made amendments to the ~~adoption~~EPS guidance in Topic 260 for convertible debt instruments, the most significant of ~~this~~which is requiring the use of the if-converted method for diluted EPS calculation. ASU ~~to have a material impact on our consolidated financial statements.~~

~~In July 2015, the FASB issued ASU 2015-11,~~ ~~Inventory (Topic 330): Simplifying the Measurement of Inventory~~. This ASU requires entities to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard2020-06 is ~~effective for annual and interim~~ ~~reporting~~ ~~periods beginning after December 15, 2016. The adoption of this standard in first quarter of 2017 did not have a material effect on our financial statements.~~

~~In March 2016, the FASB issued ASU” No. 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718).” ASU No. 2016-09 simplifies the accounting for share-based payment transactions, including~~ ~~accounting~~ ~~for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. The amendments in this update are~~ effective for fiscal years beginning after December ~~31, 2016, and interim periods beginning in the first interim period within the year of adoption. Any adjustments should be reflected as~~15, 2021, with early adoption permitted. Adoption of the ~~beginning of the fiscal year that includes that interim period. The Company~~ASU can either be on a modified retrospective or full retrospective basis.

On January 1, 2021, we adopted the ~~provisions of this standard effective January 1, 2017. The Company elected~~ASU using the full retrospective method. Under the full retrospective method, the prior period condensed consolidated financial statements have been retrospectively adjusted to ~~continue to recognize estimated forfeitures over~~reflect the ~~term of the awards. The~~ adoption of the accounting standard ~~did not have~~in those periods The following tables show the impact of the adoption on our condensed consolidated balance sheet and condensed consolidated statement of operations.


			December 31, 2020		ASU 2020-06		December 31, 2020
			As reported		Adjustment		As adjusted
Liabilities
	Long-term debt, less current installments	$	355,979	$	47,612	$	403,591
Stockholders' Equity
	Additional Paid-in Capital		356,442		(36,800)		319,642
	Non-controlling Interest		31,614		(5,631)		25,983
	Accumulated Deficit		(93,377)		(5,181)		(98,558)

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			For the Three Months Ended
			June 30, 2020		ASU 2020-06		June 30, 2020
			As reported		Adjustment		As adjusted

	Interest expense, net	$	(5,967)	$	638	$	(5,329)
	Tax (expense) benefit		(61)		(127)		(188)

Net Income (Loss)			(1,960)		511		(1,449)


			For the Six Months Ended
			June 30, 2020		ASU 2020-06		June 30, 2020
			As reported		Adjustment		As adjusted

	Interest expense, net	$	(10,671)	$	638	$	(10,033)
	Tax (expense) benefit		1,108		(127)		981

Net Income (Loss)			(4,593)		511		(4,082)

Note 2 –Asset Acquisitions

Capstar 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 ~~material impact~~result of the issuance of the Notes in May 2020.

The Capstar Acquisition was accounted for as an asset acquisition and certain transaction related costs of approximately $1.1 million were included in the cost of the acquired assets. The fair value assigned to trade names was based on the ~~Company’s financial condition, results~~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 relationships 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

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 (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

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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 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 are amortized over 10 years. The assets were valued using the relief from royalty method. The remainder of the obligation was considered to be a payment to settle the alleged breach of the supply agreement, the termination expense is included in general and administrative expenses on the condensed consolidated statement of operations for the three months ended June 30, 2020. The obligation is considered debt and is included in debt on the condensed consolidated balance sheet. See Note 5 – “Debt” for additional information.

Note 3 – Property, Plant, and Equipment

Property, plant, and equipment consists of the following at:


$'s in 000's	June 30, 2021		December 31, 2020
Leasehold improvements	$	22,844	$	19,709
Equipment		25,943		25,664
Vehicles and accessories		6,978		7,110
Computer equipment and software		10,994		10,858
Buildings		8,653		10,168
Furniture and fixtures		2,396		2,347
Land		6,407		7,067
Construction in progress		22,510		11,331
		106,725		94,254
Less accumulated depreciation		(34,500)		(31,108)
Total property, plant, and equipment	$	72,225	$	63,146

Depreciation expense related to these assets was $3.1 million and $6.3 million for the three and six months ended June 30, 2021 and $3.0 million and $5.9 million for the three and six months ended June 30, 2020, respectively.

During the three months ended June 30, 2021, the Company entered into an agreement to sell its previous headquarters property. The related assets with a carrying value of $3.2 million have been reclassified to other current assets as held for sale.

Note 4 – Intangible Assets and Goodwill

Intangible assets consist of the following at:


$'s in 000's	Useful Lives	June 30, 2021		December 31, 2020
Amortizable intangibles
Certification	7 years	$	350	$	350
Customer relationships	12-20 years		160,228		160,178
Patents and processes	5-10 years		14,993		14,905
Brand names	5-15 years		24,778		24,740
Total amortizable intangibles			200,349		200,173
Less accumulated amortization			(35,352)		(25,984)
Total net amortizable intangibles			164,997		174,189
Non-amortizable intangibles
Trademarks and other			33,341		33,341
In-process research and development			1,668		5,470
Intangible assets, net of accumulated amortization		$	200,006	$	213,000

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 three months ended June 30, 2021 and

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2020 was $4.6 million and $2.3 million, respectively, and $13.1 million and $4.5 million for the six months ended June 30, 2021 and 2020, 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 ~~disclosures.~~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 six months ended June 30, 2021, the Company opted out of 2 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, the expense for which is included as amortization expense in General and administrative expenses on the condensed consolidated statement of operations for the six months ended June 30, 2021.

Estimated future amortization expense for each of the following years is as follows:


Years ending December 31, ($'s in 000's)
Remainder of 2021	$	9,261
2022		17,984
2023		16,933
2024		14,562
2025		13,899
Thereafter		92,358

The following is a summary of the changes in the carrying value of goodwill for the period from January 1, 2020 to June 30, 2021:


	Reporting Unit
($'s in 000's)	Products		Services		Total
Goodwill as of January 1, 2020		183,781		47,264		231,045
Foreign currency translation		113		—		113
Goodwill as of December 31, 2020		183,894		47,264		231,158
Foreign currency translation		209		—		209
Goodwill as of June 30, 2021	$	184,103	$	47,264	$	231,367

Note 5 – Debt

On April 13, 2021, the Company entered into a new $300 million term loan (“Term Loan B”) and a $125 million new asset-based revolving line of credit (“ABL”), collectively referred to as the (“credit facilities”).

The credit facilities replace both the Amended Revolving Credit Agreement and A&R Term Loan Agreement as well as fully repay $27.5 million of the unsecured VIP Seller Notes.

As part of the termination of the Amended Revolving Credit Agreement, the A&R Term Loan Credit agreement, and the VIP Notes, 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 General and Administrative expenses

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Senior Secured Asset-Based Revolving Credit Facility

On April 13, 2021, Opco entered into an asset-based credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured financing of $125.0 million (which may be increased by up to $50.0 million in certain circumstances), subject to a borrowing base limitation. 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 LIBOR at the option of the Company. The rate at June 30, 2021 was 1.59%. The Company also pays a commitment fee on unused borrowings at a rate of 0.35%.

The ABL is secured by the assets of the Company including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts. The ABL contains certain negative covenants that restrict the Company’s ability to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.

Senior Secured Term Loan Facility

On April 13, 2021, Opco entered into a term credit and guaranty agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $300.0 million (which may be increased in certain circumstances). The Term Loan B bears interest at a variable rate of either prime, federal funds effective rate or LIBOR, plus an applicable margin of between 3.25% and 4.25% depending on the underlying base rate. LIBOR rates are subject to a 0.50% floor. The interest rate at June 30, 2021 was 4.75%. The Term Loan B requires quarterly payments of 0.25% of the original principal amount, with the balance due on the seventh anniversary of the closing date.

The credit agreement governing the Term Loan B does not require Opco to comply with any financial maintenance covenants but additionally contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.

Convertible Notes

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.

~~Note~~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) the trading day immediately before the date the Company sends such notice. In addition, calling

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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.

The fair value of the Notes was $217.1 million as of June 30, 2021. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of June 30, 2021 and is classified as Level 2 ~~- Debt~~in the fair value hierarchy.

~~The Company entered~~ ~~into~~ ~~a new credit agreement (“New Credit Agreement”) on December 21, 2016. This agreement fully repaid and terminated the A&R~~

Amended & Restated Credit Agreement ~~described below.~~

The ~~New~~Amended Revolving Credit Agreement provides for a secured ~~financing of $50,000 in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:~~

~~(i) $45,000~~ revolving credit facility ~~(“Revolver”) maturing~~of $125 million that matures on ~~December 16, 2019;~~July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur 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.

~~(ii) $5,000 term~~All obligations under the Amended Revolving Credit Agreement are 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, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.

As of June 30, 2021 Amended Revolving Credit Agreement was fully repaid and terminated.

Amended & Restated Term Loan Credit Agreement

OpCo entered into an Amended and Restated Term Loan Credit Agreement on July 8, 2019 (the “A&R Term Loan Credit Agreement”). The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls 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 ~~Loans”), requiring equal amortizing payments for 24 months.~~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.

As of June 30, 2021 the A&R Term Loan Credit Agreement was fully repaid and terminated.

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General Other Debt

~~As of December 31, 2016, the Company had $5,000 outstanding as Term Loans and $22,473 outstanding under the Revolver. The interest~~ ~~rate~~ ~~on the Term Loans was 4.25% and the interest rate on the Revolver was also 4.25%, both were Base Rate loans.~~

~~As of September 30, 2017, the Company had fully repaid the Term Loans and had $18,05~~9 ~~outstanding under the Revolver. The interest rate on the Revolver was 4.75% as a Base Rate loan. The Revolver contains a lockbox mechanism.~~

~~The New Credit~~ ~~Agreement~~ contains certain covenants and restrictions including a fixed charge coverage ratio and a minimum EBITDA target and is secured by collateral consisting of a percentage of eligible accounts receivable, inventories, and machinery and equipment. As of September 30, 2017, the Company was in compliance with these covenants.

The Company entered into a mortgage with a local bank to finance ~~$1,920 of the purchase price of~~ a commercial building in Eagle, ~~ID,~~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. As described in Note 3, 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, and has reclassified the mortgage to current maturities of long-term debt as of June 30, 2021.

~~On March 16, 2015,~~

In July 2020, the Company entered into the Agreement. See Note 2 – “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 at the time it was entered into.

In connection with the acquisition of Community Veterinary Clinics, LLC d/b/a, VIP Petcare (the “VIP Acquisition”), the Company entered into a ~~$40,000 credit facility (“Credit Agreement”), comprised~~guarantee note of ~~a $33,000 in aggregate principal amount~~$10.0 million and contingent Notes that were subsequently earned. As of ~~term loans and $7,000 revolving credit facility. Borrowings under the agreement were subject to certain~~ ~~covenants~~ and restrictions including a fixed charge coverage ratio and a minimum EBITDA target, both measured on a quarterly basis beginning in the first quarter of 2016. The Company remained in compliance with these covenants for the duration of the agreement.

The Company refinanced its credit facility in March 2016 with an amended and restated credit agreement (“A&R Credit Agreement”). The A&R Credit Agreement provided for secured financing of $48,000 in the aggregate, consisting of:

~~(i) $3,000 in aggregate principal amount of term loans maturing on~~ December 31, ~~2016;~~2020 $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, “Notes Payable – VIP Acquisition” of $27.5 million required quarterly interest payments of 6.75% with the balance payable July 17, 2023. These Notes Payable – VIP Acquisition were fully repaid in April 2021.

~~(ii) $20,000 in aggregate principal amount of term loans maturing on March 16, 2018; and~~

~~(iii) a $25,000 revolving credit facility maturing on March 16, 2018.~~

The following represents the Company’s ~~long term~~long-term debt as of:


$'s in 000's	June 30, 2021		December 31, 2020
Convertible Notes	$	143,750	$	143,750
Term loans		300,000		217,250
Revolving credit facility		15,000		15,000
Notes Payable - VIP Acquisition		—		27,500
Other Debt		14,761		16,257
Net discount on debt and deferred financing fees ⁽¹⁾		(11,091)		(9,947)
	$	462,420	$	409,810
Less current maturities of long-term debt		(7,832)		(6,219)
Total long-term debt	$	454,588	$	403,591

(1)

– The net discount on debt and deferred financing fees were adjusted retrospectively for the adoption of ASU 2020-06 as discussed further in Note 1.

September 30, 2017

December 31, 2016
Term Loans

$
—

$
5,000
Revolving credit facility

18,059

22,473
Mortgage

1,913

—
Net discount on debt and deferred financing fees

—

(92)

$
19,972

$
27,381
Less current maturities of long-term debt

(44)

(2,223)
Total long-term debt

$
19,928

$
25,158

Future maturities of ~~long term~~long-term debt, excluding the ~~net~~ discount on debt and deferred financing fees, as of ~~September~~June 30, ~~2017,~~2021, are as follows:

Remainder of 2017

$
15
2018

44
2019

18,105
2020

48
2021

50
Thereafter

1,710


($'s in 000's)
Remainder of 2021	$	5,665
2022		6,246
2023		6,524
2024		6,827
2025		3,000
Thereafter		445,249

~~The Company incurred debt issuance costs of $248 related to the A&R Credit Agreement during the first nine months of 2016. The debt~~ ~~transaction~~ ~~resulted in a loss on debt extinguishment of $993, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs.~~

12

~~Table of Contents~~

Note ~~3 -~~6 – Leases

The Company leases certain real estate ~~both office~~for commercial, production, and ~~production facilities,~~retail purposes, as well as equipment from third parties. Lease expiration dates are between ~~2018~~2021 and ~~2025.~~2026. A portion of ~~capital~~ leases are denominated in foreign currencies. ~~Many~~

21

Table of ~~these~~Contents

For both operating and finance leases, ~~include renewal options~~the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and ~~in some cases~~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 ~~purchase.~~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 following:


	For the Three Months Ended				For the Six Months Ended
$'s in 000's	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Finance lease cost
Amortization of right-of-use assets	$	803	$	391	$	1,369	$	782
Interest on lease liabilities		123		77		214		159
Operating lease cost		1,332		1,279		2,624		3,110
Variable lease cost⁽¹⁾		309		78		615		253
Short-term lease cost		2		14		6		19
Sublease income		(65)		(226)		(108)		(452)
Total lease cost	$	2,504	$	1,613	$	4,720	$	3,871

(1)

Variable lease cost primarily relates to percentage rent, common area maintenance, property taxes and insurance on leased real estate.

Other information related to leases was as follows as of:


	June 30, 2021	June 30, 2020
Weighted-average remaining lease term (years)
Operating leases	4.13	4.65
Finance leases	2.62	2.59
Weighted-average discount rate
Operating leases	5.2%	5.3%
Finance leases	4.8%	5.8%

22

Table of Contents

Annual future commitments under non-cancelable leases as of ~~September~~June 30, ~~2017,~~2021, consist of the following:

Lease Obligation


Operating Leases

Capital Leases
Reminder of 2017

$
436

$
27
2018

1,716

108
2019

597

104
2020

46

90
2021

29

88
Thereafter

85

103
Total minimum future obligations

$
2,909

$
520
Less Interest



(16)
Present value of net future minimum obligations

504
Less current capital lease obligations

(101)
Long-term capital lease obligations



$
403


	Lease Obligations
$'s in 000's	Operating Leases		Finance Leases
Remainder of 2021	$	3,221	$	807
2022		6,336		1,528
2023		5,535		1,321
2024		3,981		445
2025		3,031		51
Thereafter		1,639		—
Total minimum future obligations	$	23,743	$	4,152
Less interest		(2,717)		(286)
Present value of net future minimum obligations		21,026		3,866
Less current lease obligations		(5,431)		(1,311)
Long-term lease obligations	$	15,595	$	2,555

~~The net book value of assets under capital lease was $8~~83 and $775 as of September 30, 2017 and December 31, 2016, respectively. Total operating lease expense for the three and nine months ended September 30, 2017 and 2016 totaled $449 and $472, and $1,357 and $1,250, respectively.Supplemental cash flow information:



	Six Months Ended		Six Months Ended
$'s in 000's	June 30, 2021		June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	214	$	159
Operating cash flows from operating leases		2,525		3,058
Financing cash flows from finance leases		1,226		761
(Noncash) right-of-use assets obtained in exchange for lease obligations
Operating leases		2,810		2,106
Finance leases		141		381

Note ~~4 -~~ 7 – Income ~~Taxes~~Tax

As a result of the ~~IPO~~Company’s initial public offering and related reorganization transactions completed in July 2017, the Company ~~holds an~~held a majority of the economic interest ~~of approximately 62%~~ in Holdco and consolidates the financial position and results of Holdco. The ~~approximate 38%~~remaining ownership of Holdco not held by the Company is considered ~~noncontrolling~~a non-controlling interest. Holdco is treated as a partnership for income tax reporting. Holdco’s members, including the Company, are liable for federal, state, and local income taxes based on their share of Holdco’s taxable income.

~~The Company’s~~

Our effective tax rate ~~is significantly less~~(ETR) from continuing operations was (5.4)% and (2.1)% for the three and six months ended June 30, 2021, respectively, and (14.9)% and 19.4% for the three and six months ended June 30, 2020, respectively, including discrete items. Income tax expense for three and six months ended June 30, 2021 and 2020 was different than the U.S federal statutory income tax rate of ~~35%,~~21% primarily ~~because no taxes are payable by the Company for the noncontrolling interests’ share of Holdco’s taxable income~~ due to the ~~pass through structure.~~ effects of a change in valuation allowance, state taxes, foreign rate changes and foreign GILTI income inclusion.

The ~~effective tax rate for~~Company has assessed the nine months ended September 30, 2017 is also lower than statutory rates because income for the period prior to the IPO was not taxable to the Company as it did not yet hold an equity interest in Holdco.

~~As a result~~realizability of the ~~IPO~~net deferred tax assets as of June 30, 2021 and ~~reorganization transactions,~~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 ~~has~~believes it is more likely than not that the benefit from recorded deferred tax assets ~~and liabilities based on the differences between the book value of assets and liabilities~~will not be realized. The Company has recorded a valuation allowance for ~~financial reporting purposes and those amounts applicable for income tax purposes. Deferred~~deferred tax assets of $94.0 million and $71.2 million as of June 30, 2021 and December 31, 2020, respectively. In future periods, if we conclude we have ~~been recorded for~~future taxable income sufficient to recognize the ~~basis differences resulting from~~deferred tax assets, we may reduce or eliminate the ~~purchase~~valuation allowance.

23

Table of ~~LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco.~~Contents

Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability ~~companies, which are not subject to entity-level federal or state income taxation. Opco~~HoldCo makes cash distributions to ~~permit the member~~members to pay ~~these~~ taxes as needed by the member’s tax situation. In the three and nine months ended September 30, 2017 and 2016, the Company did not make any cash distributions. In the three and nine months ended September 30, 2017 Opco accrued $709 for anticipated tax distributionsattributable to ~~Continuing LLC Owners. This liability is included in accounts payable on the condensed consolidated balance sheet.~~

~~Opco’s income tax provision prior to the IPO generally consisted~~their allocable share of income ~~taxes payable by our separate subsidiaries that are taxed as~~ ~~corporations. As of December 31, 2016,~~earned. Additionally, HoldCo accrues for distributions required to be made related to estimated income taxes. Tax distributions and accruals were immaterial for the ~~taxable foreign subsidiaries had $482 of deferred tax~~periods presented.

13

~~Table of Contents~~

~~assets. The deferred tax assets resulted primarily from net operating losses and were fully offset by a valuation allowance.~~

Note 58 – Earnings per Share

Basic and Diluted Earnings (Loss) per Share

Basic earnings (loss) per share of Class A common stock is computed by dividing net income (loss) available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income (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.

~~As described in Note 7 — Stockholders’ Equity, on July 20, 2017,~~On January 1, 2021, we adopted ASU 2020-06 using the ~~PetIQ Holdings, LLC Agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class of common membership interests,~~full retrospective method. Following this adoption, we utilize the LLC Interests of Holdco, and (ii) exchange all of the then-existing membership interests of the Continuing LLC Owners for common units of Holdco. This Recapitalization changed the relative membership rights of the Continuing LLC Owners such that retroactive application of the Recapitalization to periods prior to the IPOif-converted method for the ~~purposes of calculating earnings~~diluted net income (loss) per share ~~would not be appropriate.~~

~~Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the~~ calculation of ~~earnings per unit~~our convertible Notes (see Note 1 for ~~periods prior to~~more information on the ~~IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users~~adoption of these consolidated financial statements. Therefore, earnings per share information has not been presented for periods prior to the IPO on July 20, 2017. The basic and diluted earnings per share for the three and nine months ended September 30, 2017 represents only the period of July 20, 2017 to September 30, 2017.

ASU 2020-06).

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock:

Three months ended

September 30, 2017
Numerator:

Net income

$
859
Less: net income attributable to non-controlling interests

(1,085)
Net income attributable to PetIQ, Inc. — basic

(226)
Denominator:

Weighted-average shares of Class A common stock outstanding (in 000's)-- basic

13,223
Dilutive stock options that are convertible into Class A common stock

—
Weighted-average shares of Class A common stock outstanding -- diluted

13,223

Earnings per share of Class A common stock — basic

$
(0.02)
Earnings per share of Class A common stock — diluted

$
(0.02)


	Three months ended June 30,				Six months ended June 30,
(in 000's, except for per share amounts)		2021	2020			2021	2020
Numerator:
Net income (loss)	$	4,034	$	(1,449)	$	6,420	$	(4,082)
Less: net income (loss) attributable to non-controlling interests		8		27		361		(503)
Net income (loss) attributable to PetIQ, Inc. — basic and diluted		4,026		(1,476)		6,059		(3,579)
Denominator:
Weighted-average shares of Class A common stock outstanding -- basic		28,491		24,425		27,444		24,077
Dilutive effects of stock options that are convertible into Class A common stock		518		—		470		—
Dilutive effect of RSUs		147		—		145		—
Dilutive effect for conversion of Notes		—		—		—		—
Weighted-average shares of Class A common stock outstanding -- diluted		29,156		24,425		28,059		24,077

Earnings (loss) per share of Class A common stock — basic	$	0.14	$	(0.06)	$	0.22	$	(0.15)
Earnings (loss) per share of Class A common stock — diluted	$	0.14	$	(0.06)	$	0.22	$	(0.15)

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.

The computation of dilutive effect of other potential common shares excludes stock options of 480 thousand shares and 88 thousand restricted stock units for the three months ended June 30, 2021, as the inclusion under the treasury stock method would have been antidilutive.

~~Shares~~

The computation of dilutive effect of other potential common shares excludes stock options of 652 thousand shares and 88 thousand restricted stock units for the six months ended June 30, 2021, as the inclusion under the treasury stock method would have been antidilutive. The dilutive impact of the ~~Company’s Class B common~~Notes have not been included in the dilutive earnings per share calculation for the three and six months ended June 30, 2021 as they would be antidilutive.

Additionally, all stock ~~as well as~~options and restricted stock ~~options~~units and convertible Notes have not been included in the diluted earnings per share calculation for the three and six months ended June 30, 2020, as they would have been ~~determined to be anti-dilutive under the if-converted method and treasury stock method, respectively.~~anti-dilutive.

1424

Table of Contents

Note 69 – Stock Based Compensation

~~Stock based compensation expense is recorded within general and administrative expenses.~~

PetIQ, Inc. Omnibus Incentive Plan

The 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 ~~initially reserved 1,914,047 registered~~has 3,914 thousand authorized shares ~~of Class A common stock for issuance~~ under the Plan. As of ~~September~~June 30, ~~2017, 1,109,998~~2021 and 2020, 698 thousand and 1,294 thousand 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”) provides for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800thousand shares of Class A Common Stock of the Company. As of June 30, 2021, 0 shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.

Stock Options

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~~

years.

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled ~~$246~~$1.4 million and $2.7 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2021, respectively, and $1.3 million and $3.5 million for the three and six months ended June 30, 2020, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant ~~date~~dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the ~~period~~periods ended ~~September 30:~~June 30, 2021 and 2020:


	June 30, 2021			June 30, 2020
Expected term (years) ⁽¹⁾		6.25			6.25
Expected volatility ⁽²⁾		33.91	%		33.91	%
Risk-free interest rate ⁽³⁾		0.90	%		0.72	%
Dividend yield ⁽⁴⁾		0.00	%		0.00	%

	(1)
		~~2017~~
~~Expected term (years)~~ ~~(1)~~			~~6.25~~
~~Expected volatility~~ ~~(2)~~			~~35.00~~	%
~~Risk-free interest rate~~ ~~(3)~~			~~1.98~~	%
~~Dividend yield~~ ~~(4)~~			~~0.00~~	%

⁽¹⁾

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.

⁽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 ~~stockThe following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2017:~~

stock.

1525

Table of Contents

The ~~following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2017:~~

Weighted

Average

Weighted

Remaining

Average

Aggregate

Contractual

Stock

Exercise

Intrinsic

Life

Options

Price

Value

(years)
Outstanding at December 31, 2016


—






Granted

804,049

$
16

Exercised

—

Forfeited

—

Cancelled

—

Outstanding at September 30, 2017

804,049

$
16

$
8,909

9.8
Options exercisable at September 30, 2017

—

~~The~~weighted average grant date fair value of stock options granted during the period ended ~~September~~June 30, ~~2017~~2021 was ~~$6.08~~$12.39 per option. At ~~September~~June 30, ~~2017,~~2021, total unrecognized compensation cost related to unvested stock options was ~~$4.4~~$9.8 million and is expected to be recognized over a weighted-average period of ~~3.8~~2.3 years.


							Weighted
							Average
			Weighted		Aggregate		Remaining
	Stock		Average		Intrinsic		Contractual
	Options		Exercise		Value		Life
	(in 000's)		Price		(in 000's)		(years)
Outstanding at January 1, 2020		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
Granted		354		35.66
Exercised		(531)		23.72	$	8,025
Forfeited		(24)		22.61
Cancelled		(1)		27.73
Outstanding at June 30, 2021		1,884	$	26.21	$	23,369		7.8
Options exercisable at June 30, 2021		646

~~Note 7 - Stockho~~l~~ders’ Equity~~Restricted Stock Units

~~Reorganization Transactions~~

~~In connection with~~The Company awards RSUs to certain employees and directors under the ~~IPO on July 20, 2017,~~Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, ~~completed~~all unvested RSUs will be forfeited and the ~~following Reorganization Transactions:~~

·

~~The Company amended and restated its certificate of incorporation (see “Amendment and Restatement of Certificate of Incorporation” below);~~

·

~~PetIQ Holdings, LLC (“Holdco”) amended and restated its limited liability company agreement (the “LLC Agreement”) (see “Holdco Recapitalization” below);~~

·

The Company acquired, by the contribution by certain sponsors, three entities (“Sponsor Corps”) that were owned by former indirect members of Holdco (the “Sponsors”), for which the Company issued 5,615,981 shares of Class A common stock and Preference Notes equal to $30,526 as merger consideration (the “Merger”). The only significant asset held by the Sponsor Corps prior to the Merger was 7,523,839 LLC Interests. Upon consummation of the Merger, the Company recognized the 7,523,839 LLC Interests at carryingshares 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 ~~as the contribution was considered to be a transaction between entities under common control;~~

·

~~The Company acquired 419,102 LLC interests in exchange for an equal number of Class A common stock from certain employee owners;~~

·

~~The Company purchased from Continuing LLC Owners 1,589,642 LLC Interests in exchange for $25,434 in preference notes;~~

·

~~The Company purchased from Continuing LLC Owners 133,334 LLC Interests in exchange for $2,133.~~

~~Following the completion~~ of the ~~Reorganization Transactions~~Company’s common stock on the date of grant. At June 30, 2021, total unrecognized compensation cost related to unvested RSUs was $13.9 million and ~~IPO, PetIQ owned 61.5%~~is expected to vest over a weighted average 3.2 years.

The fair value of ~~HoldCo.~~ these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $1.0 million and $1.8 million for the three and six months ended June 30, 2021, respectively, and $0.5 million and $0.9 million for the three and six months ended June 30, 2020, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.

The ~~remaining 38.5% of Holdco was held by~~following table summarizes the ~~“Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ. As a result~~activity of the ~~Reorganization Transactions, PetIQ became~~Company’s RSUs for the sole managing member of Holdco and has the sole voting power in, and controls the management of, Holdco. Accordingly, the Company consolidated the financial results of Holdco and reported a non-controlling interest in its consolidated financial statements.period ended June 30, 2021.


			Weighted
	Number of		Average
	Shares		Grant Date
	(in 000's)		Fair Value
Outstanding at January 1, 2020		133	$	28.85
Granted		271		20.73
Settled		(70)		25.65
Forfeited		(17)		23.34
Outstanding at December 31, 2020		317	$	22.91
Granted		268		37.92
Settled		(75)		21.87
Forfeited		(9)		23.09
Nonvested RSUs at June 30, 2021		501	$	31.08

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Table of Contents

Note 10 – Stockholders’ Equity

AsExchanges

During the Reorganization Transactions are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.

~~Amendment and Restatement of Certificate of Incorporation~~

On July 20, 2017, the Company amended and restated its certificate of incorporation to, among other things, provide 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 8,401,521 sharessix months ended June 30, 2021 holders 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 one 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 one-to-one ratio between the number of LLC interests of Holdco held by Continuing 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 one-for-one basis upon the redemption or exchange any of the outstanding LLC Interests ~~held by the Continuing 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~~exercised exchange rights and ~~the number of LLC Interests owned by PetIQ (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).~~

~~Initial Public Offering~~

On July 20, 2017, the Company completed an IPO of 7,187,500 shares of the Company’s Class A common stock at a public offering price of $16.00 per share, inclusive of the contemporaneous exercise of the underwriters option to purchase additional shares. The Company received $106,950 in proceeds, net of underwriting discounts and commissions, which were used repay $55,960 in preference notes, to purchase 3,556,666 newly-issued LLC Interests from Holdco at a price per unit equal to the initial public offering price per share of Class A common stock in the IPO less underwriting discounts and commissions, and to purchase 133,334 LLC Interests and correspondingexchanged 2,615 thousand Class B common shares ~~from entities affiliated with the Company’s CEO~~ and ~~President.~~

~~Immediately following the completion of the IPO and the underwriters’ exercise of their option to purchase additional shares of~~corresponding LLC Interests for newly issued Class A ~~common stock, there were 13,222,583 shares of Class A common stock outstanding and 8,268,188 shares of Class B common stock outstanding.~~

~~PetIQ Holdings, LLC Recapitalization~~

On July 20, 2017, Holdco amended and restated the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interests in Holdco, the LLC Interests, (ii) exchange all of the then-existing membership interests for LLC Interests of Holdco and (iii) appoint the Company as the sole managing member of Holdco.

Common Stock. The LLC Agreement ~~also provides that~~generally allows for exchanges on the ~~Continuing LLC Owners may from time to time at~~last day of each of their options require Holdco to exchange all or a portion of their LLC Interests in exchange for, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC interests), shares of the Company’s Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of suchcalendar month.

17

~~Table of Contents~~

Class A common stock or such cash, as applicable, for such LLC interests. The Continuing LLC Owners may exercise such redemption right for as long as their LLC interests remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC interests pursuant to the terms of the LLC Agreement, a number of shares of the Company’s Class B common stock will be cancelled for no consideration on a one-for-one basis with the number of LLC interests so redeemed or exchanged.

The amendment also requires that Holdco, at all times, maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC interests of Holdco owned by PetIQ, Inc. and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by Continuing LLC Owners and the number of LLC Interests of Holdco owned by the Continuing LLC Owners.

Note 11 – Non-Controlling Interests

The following table presents the outstanding LLC Interests and changes in LLC Interests for the periods presented.


	LLC Interests held					% of Total
		LLC				LLC
$'s in 000's	Owners		PetIQ, Inc.		Total	Owners	PetIQ, Inc.
As of January 1, 2020		4,752		23,554	28,306	16.8%	83.2%
Stock based compensation transactions		—		445	445
Exchange transactions		(1,712)		1,712	—
As of December 31, 2020		3,040		25,711	28,751	10.6%	89.4%
Stock based compensation transactions				583	583
Exchange transactions		(2,615)		2,615	—
As of June 30, 2021		425		28,909	29,334	1.5%	98.5%

Note ~~8 - Non-Controlling Interests~~that certain figures shown in the table above may not recalculate due to rounding.

~~In connection with~~For the ~~Reorganization Transactions described in Note 7 — Stockholders’ Equity, PetIQ became~~three and six months ended June 30, 2021 the ~~sole managing member~~Company owned a weighted average of ~~Holdco~~97.5% and ~~as a result, consolidates~~94.4%, respectively, and 86.0% and 84.9% for the ~~financial results~~three and six months ended June 30, 2020, respectively, of Holdco.

The Company reports a non-controlling interest representing the LLC interests of Holdco held by Continuing 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 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 Continuing LLC Members on a regular basis, these distributions will reduce the noncontrolling interest.

The Company used the net proceeds from its IPO to purchase 3,556,666 newly-issued LLC Interests of Holdco and 133,334 LLC Interests from Continuing LLC Owners. Additionally, in connection with the Reorganization Transactions, the Company acquired 9,532,583 ~~LLC Interests of Holdco.~~

~~As of September 30, 2017, there were 21,490,771 LLC Interests outstanding, of which PetIQ owned 13,222,583, representing a 61.5% ownership interest in Holdco.~~

-0

LLC Interests held

% of Total

Continuing LLC

Continuing LLC

Owners

PetIQ, Inc.

Total

Owners
PetIQ, Inc.
As of September 30, 2017

8,268,188

13,222,583

21,490,771

38.5%
61.5%

Note ~~9 -~~12 – Customer Concentration

The Company has significant exposure to customer concentration. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021, 2 and ~~2016, three and~~ ~~three~~1 customers ~~respectively,~~individually accounted for more than 10% of sales, ~~individually. In total for the three months ended September 30, 2017~~comprising 33% and ~~2016, the three customers accounted for 61% and 68%~~26% of net sales, ~~respectively. In total~~respectively for such periods. During the ~~nine~~three and six months ended ~~September~~June 30, ~~2017 and 2016, the three~~2020 3 customers individually accounted for ~~61%~~more than 10% of sales, comprising 54% and ~~71%~~51% of net sales ~~respectively.~~ in both such periods.

At ~~September~~June 30, ~~2017 and December 31, 2016 four and four customers, respectively,~~2021 1 Products segment customer individually accounted for more than 10% of outstanding trade receivables, and ~~in aggregate~~ accounted for ~~53%~~ ~~and 60%, respectively,~~ 38% of outstanding trade receivables, net. ~~The~~At December 31, 2020 1 Products segment customers ~~are customers~~individually accounted for more than 10% of ~~the domestic segment.~~outstanding trade receivables, and accounted for 52% of outstanding trade receivables, net.

Note ~~10 -~~13 – Commitments and Contingencies

Litigation Contingencies

In May 2017, Bayer Healthcare LLC and its affiliates (collectively “Bayer”) filed suit in the United States District Court for the District of Delaware, against CAP IM Supply, Inc. (“CAP IM”), our supplier of Advecta 3 and PetLock MAX, which we began to sell in 2017 as our value-branded alternatives to Bayer’s K9 Advantix II. Bayer alleges that

18

~~Table of Contents~~

Advecta 3 and PetLock MAX infringe a patent relating to K9 Advantix II. Bayer seeks unspecified monetary damages and an injunction against future sales by CAP IM of Advecta 3 and PetLock MAX to the Company. Bayer has filed a motion for preliminary injunction, though no hearing has been set on that motion. Although we have not been named in the suit, our license and supply agreement with CAP IM requires us to share with CAP IM the payment of defense and settlement costs of such litigation and allows us to control the defense of the proceeding. CAP IM intends to vigorously defend this case and we believe that CAP IM has meritorious defenses. However, because of the inherent uncertainties of litigation, we can provide no assurance of an outcome favorable to CAP IM and to us. The case is presently scheduled for trial in February 2019.

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 at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020 as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the condensed consolidated ~~condensed~~ statements of operations.

Commitments

We have commitments for leases and long-term debt that are discussed further in Note ~~11 -~~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.

27

Table of Contents

Note 14 – Segments

The Company has ~~two~~2 operating ~~segments,~~segments: Products and ~~thus two reportable segments, which are~~Services. The Products segment consists of the ~~procurement, packaging,~~Company’s manufacturing and distribution ~~of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).~~business. The ~~determination~~Services segment consists of the ~~operating~~Company’s veterinary services, and related product sales, provided by the Company directly to consumers.

The segments isare based on the ~~level at which the chief operating decision maker reviews~~ discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to ~~assess performance and~~ make resource allocation decisions ~~which is done~~and to evaluate performance. We measure and evaluate our reportable segments based on ~~these two geographic areas.~~net sales and segment Adjusted EBITDA. We exclude from our segments certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses as our corporate functions do not meet the definition of a segment as defined in the accounting guidance related to segment reporting.

Financial information relating to the Company’s operating segments for the three ~~and nine~~ months ended:

Three months ended

Nine months ended


September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net Sales








Domestic

$
59,328

$
40,513

$
211,095

$
151,792
International

1,226

1,158

3,666

3,457
Net Sales

60,554

41,671

214,761

155,249
Gross Profit








Domestic

$
11,974

$
5,665

$
39,074

$
23,424
International

543

495

1,594

1,469
Gross Profit

12,517

6,160

40,668

24,893
General and administrative expenses








Domestic

$
10,207

$
7,522

$
25,977

$
22,991
International

532

420

1,444

1,316
General and administrative expenses

10,739

7,942

27,421

24,307
Operating income








Domestic

$
1,767

$
(1,857)

$
13,097

$
433
International

11

75

150

153
Operating income

1,778

(1,782)

13,247

586


$'s in 000's					Unallocated
June 30, 2021	Products		Services		Corporate		Consolidated
Net Sales	$	242,857	$	28,154	$	—	$	271,011
Adjusted EBITDA		48,187		3,028		(16,856)		34,359
Depreciation expense		991		1,288		864		3,143
Capital expenditures		685		4,254		5,038		9,977


$'s in 000's					Unallocated
June 30, 2020	Products		Services		Corporate		Consolidated
Net Sales	$	264,307	$	2,675	$	—	$	266,982
Adjusted EBITDA		41,851		1,112		(14,657)		28,306
Depreciation expense		1,167		890		926		2,983
Capital expenditures		3,593		940		817		5,350

Financial information relating to the Company’s operating segments for the six months ended:


$'s in 000's					Unallocated
June 30, 2021	Products		Services		Corporate		Consolidated
Net Sales	$	472,891	$	52,467	$	—	$	525,358
Adjusted EBITDA		86,979		5,124		(30,883)		61,220
Depreciation expense		1,931		2,470		1,873		6,274
Capital expenditures		955		6,633		10,714		18,302


$'s in 000's					Unallocated
June 30, 2020	Products		Services		Corporate		Consolidated
Net Sales	$	430,587	$	23,173	$	—	$	453,760
Adjusted EBITDA		66,130		3,101		(26,467)		42,764
Depreciation expense		2,484		1,737		1,635		5,856
Capital expenditures		5,266		3,773		1,386		10,425

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Table of Contents

The following table reconciles Segment Adjusted EBITDA to Net income (loss) for the periods presented.


	For the three months ended				For the six months ended
$'s in 000's	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Adjusted EBITDA:
Product	$	48,187	$	41,851	$	86,979	$	66,130
Services		3,028		1,112		5,124		3,101
Unallocated Corporate		(16,856)		(14,657)		(30,883)		(26,467)
Total Consolidated		34,359		28,306		61,220		42,764
Adjustments:
Depreciation		(3,143)		(2,983)		(6,274)		(5,856)
Amortization		(4,627)		(2,250)		(13,055)		(4,492)
Interest		(7,655)		(5,329)		(12,525)		(10,033)
Acquisition costs⁽¹⁾		(86)		(146)		(92)		(732)
Stock based compensation expense		(2,439)		(1,844)		(4,561)		(4,402)
Integration costs and costs of discontinued clinics⁽²⁾		(735)		(8,850)		(687)		(9,304)
Non same-store revenue⁽³⁾		5,982		953		10,377		3,235
Non same-store costs⁽³⁾		(10,493)		(3,698)		(19,832)		(10,098)
Clinic launch expenses⁽⁴⁾		(576)		(603)		(1,280)		(1,279)
Loss on extinguishment and related costs		(6,438)		—		(6,438)		—
Litigation expenses		(320)		(384)		(563)		(433)
COVID-19 related costs⁽⁵⁾		—		(4,433)		—		(4,433)
Pretax net income (loss)	$	3,829	$	(1,261)	$	6,290	$	(5,063)
Income tax benefit (expense)		205		(188)		130		981
Net loss	$	4,034	$	(1,449)	$	6,420	$	(4,082)

(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)

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)

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 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.


		Six months ended June 30, 2021
$'s in 000's		U.S.		Foreign		Total
Product sales	$	469,473	$	3,418	$	472,891
Service revenue		52,467		—		52,467
Total net sales	$	521,940	$	3,418	$	525,358

29

Table of Contents


		Six months ended June 30, 2020
$'s in 000's		U.S.		Foreign		Total
Product sales	$	428,332	$	2,255	$	430,587
Service revenue		23,173		—		23,173
Total net sales	$	451,505	$	2,255	$	453,760


		Three months ended June 30, 2021
$'s in 000's		U.S.		Foreign		Total
Product sales	$	240,897	$	1,960	$	242,857
Service revenue		28,154		—		28,154
Total net sales	$	269,051	$	1,960	$	271,011


		Three months ended June 30, 2020
$'s in 000's		U.S.		Foreign		Total
Product sales	$	263,260	$	1,047	$	264,307
Service revenue		2,675		—		2,675
Total net sales	$	265,935	$	1,047	$	266,982

Property, plant, and equipment by geographic location is below.


	June 30, 2021		December 31, 2020
United States	$	70,942	$	61,807
Europe		1,283		1,339
Total	$	72,225	$	63,146

Note ~~12 -~~15 – Related Parties

~~Opco had entered into management consulting services agreements with members~~Chris Christensen, the brother of ~~Holdco.~~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 ~~services were~~Company’s premium expense, paid to Moreton and subsequently transferred to insurance providers, was $0.3 million for the three and six months ended June 30, 2021, and $0 million and $0.3 million for the three and six months ended June 30, 2020, respectively. Mr. Chris Christensen was paid a commission of approximately $15 thousand for the three and six months ended June 30, 2021, and $0 thousand and $18 thousand for the three and six months ended June 30, 2020, respectively, for the sale of such insurance policies to the Company.

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 $0.06 million and $0.1 million for the three and six months ended June 30, 2021.

Note 16 – Subsequent Events

On August 2, 2021, the Company closed on the sale of its previous headquarters in Eagle, Idaho. As part of the closing the Company received approximately $4.5 million, net of selling expenses, repaid the mortgage related to ~~financial transactions~~the building, and other senior management matters related to business administration. Those agreements provided for the Company to pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded ~~in general and administrative expenses in the condensed consolidated statement~~a gain of ~~comprehensive income (loss). The Company recorded $545 and $508 for the nine months ended September 30, 2017 and 2016, respectively, and $158 and $208 for~~approximately $1.3 million in the three months ended September 30, ~~2017 and 2016, respectively. Upon consummation of the recapitalization and IPO transactions, these agreements were terminated.~~ 2021.

As discussed in Note 4– 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 September 30, 2017, the Company had accrued $709 for estimated tax distributions, which are included in accounts payable on the condensed consolidated balance sheets.

2030

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form ~~10‑Q~~10-Q and our audited consolidated financial statements for the year ended December 31, ~~2016~~2020 and related notes included in the ~~final prospectus~~annual report for PetIQ, Inc., ~~dated July 20, 2017 and~~ filed with the Securities and Exchange Commission (the “SEC”) on ~~July 21, 2017.~~Form 10-K for the year ended December 31, 2020. 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~~“Cautionary Note Regarding Forward-Looking Statements.”

~~Our~~ Business

Overview

PetIQ is a ~~rapidly growing~~leading pet ~~health~~medication and wellness company ~~providing~~delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and ~~affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leading national retail stores, including~~services. We engage with customers through more than ~~40,000~~60,000 points of distribution across retail, ~~pharmacy locations.~~including veterinary, channels with our branded distributed medications, which is further supported by our own world-class medication manufacturing facility in Omaha, Nebraska. Our national service platform, VIP Petcare (“VIP”), operates in over 2,900 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 ~~pet~~products and care we can give them. ~~Through our retail relationships, we encourage pet owners to regularly visit their veterinarian and educate them about the importance of veterinarian-grade products.~~

Our sales occur predominantly in the U.S. and Canada. Approximately 98% of our nine months ended September 30, 2017 and fiscal 2016 net sales were generated from customers located in the United States and Canada (“Domestic”), with the remaining sales generated from other foreign locations. We have two reporting segments: (i) ~~Domestic;~~Products; and (ii) International. This is based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. In our judgment, because our operations in the U.S. and Canada comprise 98%Services. The Products segment consists of our ~~net~~manufacturing and distribution business. The Services segments consists of veterinary services and related product sales ~~it is appropriate~~provided by the Company directly to ~~view our operations as~~consumers.

We are the sole managing member of PetIQ Holdings, LLC (“HoldCo”), a ~~whole,~~Delaware limited liability company, which is the ~~approach we follow~~sole member of PetIQ, LLC (“Opco”) and, through Holdco, operate and control all of the business and affairs of Opco.

Coronavirus Disease (COVID-19) Considerations

The global COVID-19 pandemic has created significant volatility, disruption and uncertainty. It has resulted in ~~throughout this Management’s Discussion~~government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and ~~Analysis~~the implementation of ~~Financial Condition and Results of Operations.~~

~~Recent Developments~~

As discussed more fully in Note 7 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1, we completed our initial public offering ("IPO") on July 20, 2017, in which we sold 7,187,500 common sharessocial distancing measures, leading to the ~~public at a price~~closure of ~~$16.00 per share. We received proceeds~~businesses and causing weakened economic conditions and an economic slowdown and recession.

With the anticipated gradual receding of ~~$106,950 net~~the pandemic, as well as COVID-19 vaccinations becoming more widespread and various restrictions continuing to ease, consumers have started to resume normal activities, including seeking in person veterinary care for their companion animals, and more businesses have commenced resuming operations. The Company has continued to experience absenteeism in excess of ~~underwriters discounts and commissions, which we utilized to repay preference notes, pay offering costs, and purchase LLC Interests in Holdco.~~

~~Results~~historical averages. There can be no assurance that such positive trends will continue or that there will not be any increases of ~~Operations~~

~~Components of our Results of Operations~~

~~Net Sales~~

Our net sales consist of our total 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 persuasive evidence of an arrangement exists, in accordance with the terms of our contracts, which generally occurs upon shipment of product, when the price is fixed~~new infections or determinable and when collectability is reasonably assured. These 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~~new variants that may ~~affect our future sales growth include: new product introductions; expansion into e-commerce~~impede or reverse recovery and ~~other customer~~ ~~bases; expansion~~such positive trends.

Since the beginning of items sold to existing customers, addition of new retail customers and to maintain pricing levels necessary for profitability; aggressive pricing by our competitors; and whether we can maintain and develop positive relationships with key retail customers, such as Walmart and Sam’s Club.

21

~~Table of Contents~~

~~While most of our products are sold consistently throughout~~ the ~~year, we experience seasonality in the form of increased retailer demand for~~ ~~our~~ ~~flea and tick product offerings~~pandemic in the first ~~two quarters~~quarter of 2020, the ~~year in preparation for increased consumer demand during~~Company has implemented various policies and procedures designed to ensure the ~~summer months.~~

~~Our products are primarily consumables~~safety of our customers and ~~as such, they experience a replenishment cycle.~~

~~Gross Profit~~

~~Gross profit is our net sales less cost of sales. Our cost of sales consists primarily of costs of raw goods, finished goods packaging materials, manufacturing, shipping~~team members. With COVID-19 hospitalizations and ~~handling costs and costs associated with our warehouses and distribution network. 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 manufacturing facilities where we manufacture finished goods,~~deaths declining through the United States, as well as ~~third-party contract manufacturing facilities from which we purchase finished products predominately on a dollar-per-unit basis. Since our inception in 2010,~~expanded access to vaccines, we have ~~worked closely with our contract manufacturers~~begun to ~~negotiate lower~~roll back certain policies that incurred additional costs, through increased volume of purchases and price negotiations. The gross margin on our proprietary value-branded products is higher than on our distributed products. For distributed products, our costs are driven largely by whether we source the product direct from the manufacturer or a licensed distributor. Increasingly, PetIQ sources distributed brands direct from the manufacturer or from licensed distributors.

~~General and Administrative Expenses~~

~~Our general and administrative expenses primarily consist of employee compensation and benefits expenses, sales and merchandizing~~ ~~expenses, advertising and marketing expenses, rent and lease expenses, IT and utilities expenses, professional fees, insurance costs, R&D costs, and consulting fees. General and administrative expenses~~such as a percentage of net sales have decreased from 15.7% in the first nine months of 2016 to 12.8% in the first nine months of 2017, primarily driven by increasing net sales with a high proportion of fixed expenses. In the future, we expect our general and administrative expenses to growincremental team members at a slower rate than our net sales growth as we leverage our past investments. In addition, we expect that as a result of our IPO, there will be an increase in our general and administrative expenses each year as a result of the additional reporting and compliance costs associated with being a public reporting company. Litigation resulted in legal expenses of and $3.2 million in the first nine months of 2016. We have had no material litigation-related expenses in 2017.

~~Our advertising and~~ ~~marketing~~ expenses primarily consist of digital marketing (e.g. search engine optimization, pay-per-click, content marketing, etc.), social media, in-store merchandising and trade shows in an effort to promote our brands and build awareness. These expenses may vary from quarter to quarter but typically they are higher in the second and third quarters, during the flea and tick season. We expect our marketing and advertising expenses to decrease as a percentage of net sales as we continue to concentrate campaigns to relevant markets, as well as shift spending towards in-store marketing and customer trade-supported programs.

As noted above, we experience seasonality in the form of increased demand for our flea and tick product offerings in the first two quarters of the year in preparation for the spring and summer seasons and, as a result, the sales and merchandizing ~~expenses~~ ~~component of our general and administrative expenses generally increases in the second and third quarters due to promotional spending relating to our flea and tick product lines.~~

~~To continue to grow our pet Rx medications, OTC medications and health~~veterinary services clinics and wellness ~~products, we invest in R&D on an ongoing basis. In addition~~centers to ~~our own in-house R&D innovation specialists, we have also leveraged our market position to emerge as an attractive partner for outside R&D scientists developing new products~~ensure social distancing and ~~technologies in the pet health and~~ ~~wellness~~ field. As our proprietary value-branded product lines continue to expand, we expect our R&D costs, and therefore our general and administrative expenses, could increase in the immediate future, but not necessarily as an overall percentage of net sales.

enhanced sanitation.

2231

Table of Contents

~~Net Income (Loss)~~

~~Our net income (loss) for future periods will be affected by the various factors described above. In addition, our historical~~ ~~results prior to the IPO~~ benefit from insignificant income taxes due to Opco’s status as a pass-through entity for U.S. federal income tax purposes, and we anticipate future results will not be consistent as our net income will be subject to U.S. federal and state income taxes.

Results of Operations

The following ~~table~~ ~~sets~~tables set forth our consolidated statements of operations in dollars and as a percentage of net sales for the periods presented:

Three months ended

% of Net sales

$'s in 000's

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net sales

$
60,554

$
41,671

100.0
%

100.0
%
Cost of sales

48,037

35,511

79.3
%

85.2
%
Gross profit

12,517

6,160

20.7
%

14.8
%
Operating expenses









General and administrative expenses

10,739

7,942

17.7
%

19.1
%
Operating income

1,778

(1,782)

2.9
%

(4.3)
%
Interest expense

(352)

(737)

(0.6)
%

(1.8)
%
Foreign currency (loss)/gain, net

(31)

2

(0.1)
%

0.0
%
Loss on debt extinguishment

—

—

—
%

—
%
Other income, net

14

5

0.0
%

0.0
%
Total other expense, net

(369)

(730)

(0.6)
%

(1.8)
%
Pretax net income

1,409

(2,512)

2.3
%

(6.0)
%
Provision for income taxes

(550)

—

(0.9)
%

—
%
Net income

859

(2,512)

1.4
%

(6.0)
%


	For the Three Months Ended				% of Net Sales
$'s in 000's	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Product sales	$	242,857	$	264,307	89.6	%	99.0	%
Services revenue		28,154		2,675	10.4	%	1.0	%
Total net sales		271,011		266,982	100.0	%	100.0	%
Cost of products sold		185,837		217,469	68.6	%	81.5	%
Cost of services		25,546		7,329	9.4	%	2.7	%
Total cost of sales		211,383		224,798	78.0	%	84.2	%
Gross profit		59,628		42,184	22.0	%	15.8	%
General and administrative expenses		43,142		38,492	15.9	%	14.4	%
Operating income		16,486		3,692	6.1	%	1.4	%
Interest expense, net		(7,655)		(5,329)	(2.8)	%	(2.0)	%
Foreign currency (loss) income, net		9		52	0.0	%	0.0	%
Loss on debt extinguishment		(5,453)		—	(2.0)	%	—	%
Other income, net		442		324	0.2	%	0.1	%
Total other expense, net		12,657		4,953	4.7	%	1.9	%
Pretax net income (loss)		3,829		(1,261)	1.4	%	(0.5)	%
(Provision) benefit for income taxes		205		(188)	0.1	%	(0.1)	%
Net income (loss)	$	4,034	$	(1,449)	1.5	%	(0.5)	%


	For the Six Months Ended				% of Net Sales
$'s in 000's	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Product sales	$	472,891	$	430,587	90.0	%	94.9	%
Services revenue		52,467		23,173	10.0	%	5.1	%
Total net sales		525,358		453,760	100.0	%	100.0	%
Cost of products sold		368,664		352,248	70.2	%	77.6	%
Cost of services		49,267		27,174	9.4	%	6.0	%
Total cost of sales		417,931		379,422	79.6	%	83.6	%
Gross profit		107,427		74,338	20.4	%	16.4	%
General and administrative expenses		83,814		70,182	16.0	%	15.5	%
Operating income		23,613		4,156	4.5	%	0.9	%
Interest expense, net		(12,525)		(10,033)	(2.4)	%	(2.2)	%
Foreign currency (loss) income, net		(104)		125	(0.0)	%	0.0	%
Loss on debt extinguishment		(5,453)		—	(1.0)	%	—	%
Other income, net		759		689	0.1	%	0.2	%
Total other expense, net		17,323		9,219	3.3	%	2.0	%
Pretax net loss		6,290		(5,063)	1.2	%	(1.1)	%
(Provision) benefit for income taxes		130		981	0.0	%	0.2	%
Net income (loss)	$	6,420	$	(4,082)	1.2	%	(0.9)	%

2332

Table of Contents

Nine months ended

% of Net sales

$'s in 000's

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net sales

$
214,761

$
155,249

100.0
%

100.0
%
Cost of sales

174,093

130,356

81.1
%

84.0
%
Gross profit

40,668

24,893

18.9
%

16.0
%
Operating expenses









General and administrative expenses

27,421

24,307

12.8
%

15.7
%
Operating income

13,247

586

6.2
%

0.4
%
Interest expense

(1,351)

(2,389)

(0.6)
%

(1.5)
%
Foreign currency (loss)/gain, net

(152)

(83)

(0.1)
%

(0.1)
%
Loss on debt extinguishment

—

(993)

—
%

(0.6)
%
Other income, net

14

661

0.0
%

0.4
%
Total other expense, net

(1,489)

(2,804)

(0.7)
%

(1.8)
%
Pretax net income

11,758

(2,218)

5.5
%

(1.4)
%
Provision for income taxes

(550)

—

(0.3)
%

—
%
Net income

11,208

(2,218)

5.2
%

(1.4)
%

The following tables set forth financial information relating to the Company’s operating segments for the periods presented:


	For the three months ended				For the six months ended
$'s in 000's	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Services segment sales:
Same-store sales	$	22,172	$	1,722	$	42,090	$	19,938
Non same-store sales		5,982		953		10,377		3,235
Net services segment sales		28,154		2,675		52,467		23,173
Products segment sales		242,857		264,307		472,891		430,587
Total net sales		271,011		266,982		525,358		453,760

Adjusted EBITDA
Products		48,187		41,851		86,979		66,130
Services		3,028		1,112		5,124		3,101
Unallocated Corporate		(16,856)		(14,657)		(30,883)		(26,467)
Total Adjusted EBITDA	$	34,359	$	28,306	$	61,220	$	42,764

Three Months Ended ~~September~~June 30, ~~2017~~2021 Compared With Three Months Ended ~~September~~June 30, ~~2016~~2020

Net sales

Consolidated Net Sales

Consolidated net sales increased ~~$18.9~~$4.0 million, or ~~45.3%~~1.5%, to ~~$60.6~~$271.0 for the three months ended June 30, 2021, compared to $267.0 million for the three months ended ~~September~~June 30, ~~2017, compared to $41.7 million for the three~~ ~~months~~ ~~ended September 30, 2016.~~2020. This increase was driven by ~~expanding item count at existing customers, both for existing~~reopening and ~~new items.~~ expansion in the Services Segment. Growth in the Services segment is related to more days open and newly opened wellness centers, compared to the closures related to COVID-19 that heavily impacted the comparable periods. This growth was partially offset by lower sales in the Products segment discussed below.

~~Gross profit~~Products Segment

~~Gross profit increased by $6.4~~Product sales decreased $21.4 million, or ~~103.2%~~8.1%, to ~~$12.5~~$242.9 million for the three months ended ~~September~~June 30, ~~2017,~~2021, compared to ~~$6.2 million for the three~~ ~~months~~ ended September 30, 2016. This increase is due to the significant sales growth as well as gross margin increases on improved economies of scale and product mix. Gross margin increased to 20.7% for the three months ended September 30, 2017, from 14.8% for the three months ended September 30, 2016.

~~General and administrative expenses~~

~~General and~~ ~~administrative~~ ~~expenses increased by $2.8 million or 35.2% to $10.7~~$264.3 million for the three months ended ~~September~~June 30, ~~2017 compared~~2020. This decrease was driven by timing of orders as well as an overall softness in the consumer demand for certain flea and tick products at our customers.

Services Segment

Services revenues increased $25.5 million, or 952%, from $2.7 million to ~~$7.9~~$28.2 million for the three months ended ~~September~~June 30, ~~2016. The increase reflects:~~

·

~~increased merchandising expenses related to more products and customers;~~

·

increased compensation expense to support overall growth, the addition of our stock based compensation plan and related grants, as well as improved operations requiring increased incentive compensation accruals; and

·

~~bonus payments and other expenses related to the completion of the IPO.~~

~~Interest expense, net~~

~~Interest expense, net decreased $0.4~~2021, compared to the three months ended June 30, 2020. Same-store sales increased $20.5 million, or ~~52.2%~~1188%, to ~~$0.4~~$22.2 million for the three months ended ~~September~~June 30, ~~2017,~~2021, compared to ~~$0.7~~$1.7 million for the three months ended ~~September~~June 30, ~~2016. This decrease~~2020. The increase in same-store sales was driven by ~~the new debt agreement, entered into in December~~relaxation of ~~2016, which reduced interest rates and provided more flexibility on borrowings, as well as seasonal paydowns of debt, including the full repayment of the Term loan.~~

~~Pre-tax net income~~

As ~~a result of the factors above, pre-tax net income~~COVID-19 related closures. Non same-store sales increased ~~$3.9~~$5.0 million or 527%, to ~~$1.4~~$6.0 million for the three months ended ~~September~~June 30, ~~2017~~2021, compared to $1.0 million for the three months ended June 30, 2020. The increase in non same-store sales was a ~~pre-tax~~result of opening approximately 30 additional wellness centers in 2021, as well as the rollback of COVID protocols.

Gross profit

Gross profit increased by $17.4 million, or 41.4%, to $59.6 million for the three months ended June 30, 2021, compared to $42.2 million for the three months ended June 30, 2020. This increase is due to margin improvement on Capstar products now that it is owned by PetIQ as well as improvements in the Services segment related to relaxation of COVID-19 related restrictions and policies and procedures.

Gross margin increased to 22.0% for the three months ended June 30, 2021, compared to 15.8% for the three months ended June 30, 2020. This increase was driven by growth in manufactured product sales including higher margin items such as Capstar, in addition to improvements in services margin due to reopening operations.

33

Table of Contents

General and administrative expenses

Consolidated general and administrative expenses (“G&A”) increased by $4.7 million, or 12.1%, to $43.1 million for the three months ended June 30, 2021, compared to $38.5 million for the three months ended June 30, 2020. As a percentage of net ~~loss~~sales, G&A increased from 14.4% for the three months ended June 30, 2020 to 15.9% for the second quarter of 2021. The increase was driven by higher selling and marketing costs for both Products and Services segment as well as increased amortization on both the newly acquired assets and the accelerated IPRD assets increased G&A expenses in the current period.

Products Segment

Products segment G&A increased $4.3 million or approximately 61.4% to $11.3 million for the three months ended June 30, 2021, compared to $7.0 million for the three months ended June 30, 2020. This increase was due to higher marketing and selling costs related to the Capstar brand, offset slightly by efficiencies gained through centralizing our OTC distribution to our Omaha, Nebraska distribution facility.

Services Segment

Services segment G&A increased $3.8 million, or 152.0%, to $6.3 million for the three months ended June 30, 2021, compared to $2.5 million for the three months ended ~~September~~June 30, ~~2016.~~

24

~~Table of Contents~~

~~Nine Months Ended September 30, 2017 Compared With Nine Months Ended September 30, 2016~~

~~Net sales~~

~~Net sales increased $59.5 million, or 38.3%, to $214.8 million for the nine months ended September 30, 2017, compared to $155.2 million for the nine months~~ ~~ended~~ ~~September 30, 2016.~~2020. This increase was driven by ~~expanding item count~~increased wages and marketing related to new clinic rollouts, as well as increased variable costs on higher sales driven by reopening.

Unallocated Corporate

Unallocated corporate G&A decreased $3.3 million, or 11.4%, to $25.6 million for the three months ended June 30, 2021, from $28.9 million for the three months ended June 30, 2020. The decrease was related to the following:

◾

Additional corporate compensation (wages/bonus) of approximately $1.5 million, driven by corporate growth in headcount and wage rates;

◾

Increased amortization of $2.4 million resulting from the new acquisitions; and

◾

The lack of the contract termination costs that occurred in the three months ended June 30, 2020 of $7.8 million.

Interest expense, net

Interest expense, net, increased $2.3 million to $7.7 million for the three months ended June 30, 2021, compared to $5.3 million for the three months ended June 30, 2020. This increase was driven by the Notes issued in May 2020 to finance the Capstar Acquisition, as well as the interest on incremental debt.

Provision for income taxes

Our effective tax rate was (5.4)% and (14.9)% for the three months ended June 30, 2021 and 2020, respectively, with a tax benefit of $0.2 million and a tax expense of $0.2 million, respectively. The tax rate is different than the U.S federal statutory income tax rate of 21% primarily due to the effects of a change in valuation allowance, state taxes, and foreign Global Intangible Low-Taxed Income (“GILTI “) income inclusion. The Company’s tax rate is also impacted by the ownership structure of Holdco, which changes over time.

Segment Adjusted EBITDA

Products Segment

Products segment Adjusted EBITDA increased $6.3 million, or 15.1% to $48.2 million for the three months ended June 30, 2021, compared to $41.9 million for the three months ended June 30, 2020. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced by PetIQ, or are distributed for other manufacturers. The significant growth in Products segment Adjusted EBITDA relates primarily to expanded margins related to the purchase of the Capstar branded products.

34

Table of Contents

Services Segment

Services segment Adjusted EBITDA increased $1.9 million, to $3.0 million for the three months ended June 30, 2021, compared to $1.1 million for the three months ended June 30, 2020. Services segment Adjusted EBITDA can fluctuate considerably for the Services segment 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. Services segment Adjusted EBITDA was significantly impacted by the COVID-19, with the impact lessening throughout the three months ended June 30, 2021.

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 the acquisition expenses and integration costs. 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.


	Three months ended June 30, 2021
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	46,462	$	(3,347)	$	(39,286)	$	3,829
Adjustments:
Depreciation		991		1,288		864		3,143
Interest		—		—		7,655		7,655
Amortization		—		—		4,627		4,627
Acquisition costs⁽¹⁾		—		—		86		86
Stock based compensation expense		—		—		2,439		2,439
Non same-store revenue⁽²⁾		—		(5,982)		—		(5,982)
Non same-store costs⁽²⁾		—		10,493		—		10,493
Integration costs and costs of discontinued clinics⁽³⁾		734		—		1		735
Clinic launch expense⁽⁴⁾		—		576		—		576
Litigation expenses		—		—		320		320
Loss on extinguishment and related costs		—		—		6,438		6,438
Adjusted EBITDA	$	48,187	$	3,028	$	(16,856)	$	34,359

35

Table of Contents


	Three months ended June 30, 2020
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	40,305	$	(7,180)	$	(34,386)	$	(1,261)
Adjustments:
Depreciation		1,167		890		926		2,983
Interest, net		—		—		5,329		5,329
Amortization		—		—		2,250		2,250
Acquisition costs⁽¹⁾		—		—		146		146
Stock based compensation expense		—		—		1,844		1,844
Non same-store revenue⁽²⁾		—		(953)		—		(953)
Non same-store costs⁽²⁾		—		3,698		—		3,698
Integration costs and costs of discontinued clinics⁽³⁾		—		—		8,850		8,850
Clinic launch expense⁽⁴⁾		—		603		—		603
Litigation expenses		—		—		384		384
COVID-19 related costs⁽⁵⁾		379		4,054		—		4,433
Adjusted EBITDA	$	41,851	$	1,112	$	(14,657)	$	28,306

(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 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.

Six Months Ended June 30, 2021 Compared With Six Months Ended June 30, 2020

Net sales

Consolidated Net Sales

Consolidated net sales increased $71.6 million, or 15.8%, to $525.4 for the six months ended June 30, 2021, compared to $453.8 million for the six months ended June 30, 2020. This increase was driven by the acceleration of sales of distributed items, both OTC and Rx. Large gains occurred within both the online channel and brick and mortar. Manufactured items as a result of the Capstar acquisition added some sales growth, as well growth of health and wellness items. Growth in the Services segment is related to more days open and newly opened wellness centers, compared to the closures related to COVID-19 that started during the three months ended March 31, 2020.

Products Segment

Product sales increased $42.3 million, or 9.8%, to $472.9 million for the six months ended June 30, 2021, compared to $430.6 million for the six months ended June 30, 2020. This increase was driven by velocity growth within current customers of distributed products, as well as modest sales growth as a result of the Capstar acquisition. This includes a

36

Table of Contents

program change at ~~existing customers, both~~a major partner who moved from a manufactured offering to a distributed offering which increased net sales.

Services Segment

Services revenues increased $29.3 million, or 126.4%, from $23.2 million to $52.5 million for ~~existing~~the six months ended June 30, 2021, compared to the six months ended June 30, 2020. Same-store sales increased $22.2 million, or 111.1%, to $42.1 million for the six months ended June 30, 2021, compared to $19.9 million for the six months ended June 30, 2020. The increase in same-store sales was driven by relaxation of COVID-19 related closures. Non same-store sales increased $7.1 million or 220.8%, to $10.4 million for the six months ended June 30, 2021, compared to $3.2 million for the six months ended June 30, 2020. The increase in non same-store sales was a result of opening approximately 30 additional wellness centers in 2021, as well as the maturation of clinics opened in the past six trailing quarters and ~~new items.~~ operational improvements with the relaxation of COVID-19 restrictions.

Gross profit

Gross profit increased by ~~$15.8~~$33.1 million, or ~~63.4%~~44.5%, to ~~$40.7~~$107.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared to ~~$24.9~~$74.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. This increase is due to ~~the increase in net sales,~~margin improvement on Capstar products now that it is owned by PetIQ as well as ~~improvement~~improvements in ~~gross margin.~~ the Services Segment.

Gross margin increased to ~~18.9%~~20.4% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, from 16.0%~~2021, compared to 16.4% for the ~~nine~~six months ended ~~September~~June 30, ~~2016, which~~2020. This increase was driven by ~~economies of scale~~product sales growth in ~~certain products~~higher margin items such as ~~well as product mix.~~Capstar and the improvements in the Services segment.

General and administrative expenses

~~General~~Consolidated general and administrative expenses (“G&A”) increased by ~~$3.1~~$13.6 million, or ~~12.8%~~19.4%, to ~~$27.4~~$83.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared to ~~$24.3~~$70.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. As a percentage of net sales, G&A increased from 15.5% for the six months ended June 30, 2020 to 16.0% for the second quarter of 2021, primarily on the increase in amortization expense related to acquisitions and costs to support higher operations.

Products Segment

Products segment G&A increased $4.9 million or approximately 31.0% to $20.7 million for the six months ended June 30, 2021, compared to $15.8 million for the six months ended June 30, 2020. This increase was driven due to higher sales resulting in higher selling costs, as well as marketing and selling costs related to the Capstar products.

Services Segment

Services segment G&A increased $4.8 million, or 71.6%, to $11.5 million for the six months ended June 30, 2021, compared to $6.7 million for the six months ended June 30, 2020. This increase was driven by increased wages and marketing related to new clinic rollouts, as well as increased variable costs on higher sales.

37

Table of Contents

Unallocated Corporate

Unallocated corporate G&A increased $3.9 million, or 8.2%, to $51.6 million for the six months ended June 30, 2021, from $47.7 million for the six months ended June 30, 2020. The increase ~~reflects:~~was related to the following:

·

◾

~~increased merchandising costs as part~~Additional corporate compensation (wages/bonus) of ~~growing sales;~~

approximately $1.7 million, driven by corporate growth in headcount and wage rates;

·

◾

~~increased compensation expense to support overall growth,~~Increased amortization of $7.2 million resulting from the ~~addition~~new acquisitions the acceleration of ~~our stock based compensation plan~~in-process research and ~~related grants, as well as improved operations requiring increased incentive compensation accruals; and~~

development assets; offset by

·

◾

~~reduction~~The lack of the contract termination costs that occurred in ~~legal defense costs due to terminated litigation in 2016.~~

the three months ended June 30, 2020 of $7.8 million.

Interest expense, net

Interest expense, net,

~~Interest expense, net, decreased $1.0~~ increased $2.3 million ~~or 43.4%,~~ to ~~$1.4~~$12.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared to ~~$2.4~~$10.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. This ~~decrease~~increase was driven by the ~~new~~Notes issued in May 2020 to finance the Capstar Acquisition and the increase in total debt ~~agreement, which reduced interest rates~~outstanding.

Provision for income taxes

Our effective tax rate was (2.1)% and ~~provided more flexibility, offset slightly by increases in~~19.4% for the ~~base rate.~~

~~Other income, net~~

~~Other income, net, decreased $0.6 million to $14 thousand in the nine~~six months ended ~~September~~June 30, ~~2017 compared~~2021 and 2020, respectively, with a tax benefit of $0.1 million of $1.0 million, respectively. The tax rate is different than the U.S federal statutory income tax rate of 21% primarily due to ~~$0.7~~the effects of a change in valuation allowance, state taxes, and foreign GILTI income inclusion. The Company’s tax rate is also impacted by the ownership structure of Holdco, which changes over time.

Segment Adjusted EBITDA

Products Segment

Products segment Adjusted EBITDA increased $20.9 million, or 31.6% to $87.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016. This is~~2021, compared to $66.1 million for the six months ended June 30, 2020. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced by PetIQ, or are distributed for other manufacturers. The significant growth in Products segment Adjusted EBITDA relates to significant sales growth as well as expanded margins related to the purchase of the Capstar branded products.

Services Segment

Services segment Adjusted EBITDA increased $2.0 million, or 65.2% to $5.1 million for the six months ended June 30, 2021, compared to $3.1 million for the six months ended June 30, 2020. Services segment Adjusted EBITDA can fluctuate considerably for the Services segment based on the volume of pets seen in clinics, due to ~~a warranty claim settlement~~ ~~entered~~ ~~into with a seller~~the relatively fixed cost nature of a ~~business purchased~~clinic. Additionally, Services segment earnings are impacted by the ~~Company in previous years. The settlement called for a reduction~~Company’s growth strategy of opening new wellness centers and the impact of the Company’s same store portfolio, discussed further below. Services segment Adjusted EBITDA was significantly impacted by the COVID-19, with the impact lessening throughout the six months ended June 30, 2021.

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 ~~Company’s deferred acquisition liability.~~

~~Pre-tax net income~~

~~As a result~~size of the ~~factors~~ ~~above,~~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 the acquisition expenses and integration costs. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.

38

Table of Contents

The following tables reconcile Segment pre-tax net income ~~increased $14.0 million,~~ to ~~net income of $11.8 million~~Adjusted EBITDA for the ~~nine months ended September 30, 2017, compared to a pre-tax net loss~~periods presented.


	Six months ended June 30, 2021
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	84,314	$	(8,081)	$	(69,943)	$	6,290
Adjustments:
Depreciation		1,931		2,470		1,873		6,274
Interest, net		—		—		12,525		12,525
Amortization		—		—		13,055		13,055
Acquisition costs⁽¹⁾		—		—		92		92
Stock based compensation expense		—		—		4,561		4,561
Non same-store revenue⁽²⁾		—		(10,377)		—		(10,377)
Non same-store costs⁽²⁾		—		19,832		—		19,832
Integration costs and costs of discontinued clinics⁽³⁾		734		—		(47)		687
Clinic launch expense⁽⁴⁾		—		1,280		—		1,280
Litigation expenses		—		—		563		563
Loss on extinguishment and related costs		—		—		6,438		6,438
Adjusted EBITDA	$	86,979	$	5,124	$	(30,883)	$	61,220


$'s in 000's	Six months ended June 30, 2020
June 30, 2020	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	63,267	$	(10,832)	$	(57,498)	$	(5,063)
Adjustments:
Depreciation		2,484		1,737		1,635		5,856
Interest, net		—		—		10,033		10,033
Amortization		—		—		4,492		4,492
Acquisition costs⁽¹⁾		—		—		732		732
Stock based compensation expense		—		—		4,402		4,402
Non same-store revenue⁽²⁾		—		(3,235)		—		(3,235)
Non same-store costs⁽²⁾		—		10,098		—		10,098
Integration costs and costs of discontinued clinics⁽³⁾		—		—		9,304		9,304
Clinic launch expense⁽⁴⁾		—		1,279		—		1,279
Litigation expenses		—		—		433		433
COVID-19 related costs⁽⁵⁾		379		4,054		—		4,433
Adjusted EBITDA	$	66,130	$	3,101	$	(26,467)	$	42,764

(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.

39

Table of ~~$2.2 million for the nine months ended September 30, 2016.~~Contents

(5)

Costs related to maintaining service segment infrastructure, staffing, and overhead related 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.

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 ~~loss on debt extinguishment,~~ ~~litigation~~ ~~expenses, costs associated with becoming a public company, and a supplier receivable write-off. Adjusted EBITDA adjusts~~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.

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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. 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:

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EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

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·

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~~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

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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. You should review the reconciliations of net ~~loss~~income (loss) to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

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The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented.

Three months ended

Nine months ended

(1)

⁽¹⁾

~~Loss on debt extinguishment reflects~~Acquisition costs ~~relating~~include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to ~~the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees~~completed and ~~termination fees.~~

contemplated acquisitions.

(2)

⁽²⁾

~~Represents annual fees paid pursuant~~Non same-store revenue and costs relate to our ~~management agreements~~Services segment and are from wellness centers, host partners, and regions with ~~Eos, Highland~~less than six full trailing quarters of operating results.

(3)

Integration costs and ~~Labore. The management agreements will terminate~~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 ~~connection with an initial public offering; however, we will pay fees to members of our board of directors following~~ the ~~offering.~~

Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs.

(4)

⁽³⁾

~~These litigation~~Clinic launch expenses relate to ~~cases involving~~our Services segment and represent the ~~Company that were favorably resolved in the second quarter of 2016.~~

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 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~~flows from operations, borrowings, and equity ~~contributions.~~capital. As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, our cash and cash equivalents were ~~$46.5~~$27.2 million and ~~$0.8~~$33.5 million, respectively. As of ~~September~~June 30, ~~2017,~~2021, we had ~~$18.1 million outstanding under the revolving credit facility and $1.9~~$15.0 million outstanding under a ~~mortgage,~~revolving credit facility, $300.0 million under a term loan, $143.8 million of outstanding Notes, and $14.8 million in other debt. Our debt agreements bear interest at ~~4.75%~~rates between 1.6% and ~~4.35%, respectively.~~4.75%.

Our primary cash needs are for working capital. 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 ~~purchase of a commercial building for use as our corporate headquarters for $2.4 million during the quarter ended September 30, 2017.~~investment in additional veterinary clinics. Our primary working capital requirements are to carry inventory and receivable levels necessary to support our increasing net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, we had working capital (current assets less current liabilities) of ~~$93.7~~$218.1 million and ~~$43.5~~$141.2 million, respectively.

~~On July~~ 26, 2017, we closed the initial public offering (the “IPO”) of 7,187,500 Class A common shares at a price of $16.00 per share. Net proceeds of $106.9 Million , prior to underwriting discount and other offering expenses were utilized to immediately repay $56.0 million aggregate principal amount of preference notes, purchase 133,334 shares of Class B common stock from certain executives and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”) from PetIQ Holdings, LLC (“Holdco”). Holdco utilized the proceeds from the sale of the LLC Interest to pay offering costs and expenses with approximately $45.9 million in net proceeds available for general corporate purposes. As a public company, additional future liquidity needs will include public company costs, the payment of any cash dividends declared by our board, tax distributions to certain Continuing LLC Owners as required by the Holdco LLC agreement, and tax payments to Federal and State governments. Our predecessor for financial reporting purposes, PetIQ, LLC, did not make distributions or incur taxes as a pass through entity.

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We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit ~~facility~~facilities will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that

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they will be obtained through the incurrence of 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.

Cash Flows

Cash ~~provided by or~~ used in Operating Activities

Net cash ~~provided by (used in)~~used in operating activities was ~~$11.0~~$46.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared ~~net~~to cash used in operating activities of ~~$1.3~~$42.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. The ~~increase~~change in operating cash flows primarily reflects ~~improved net income,~~higher earnings offset by ~~increased use of cash for~~significant growth in working ~~capital.~~capital items. Working capital ~~uses~~changes are driven primarily by ~~increased~~ accounts receivable ~~resulting from our growing~~ growth on both sales. growth and seasonality. Net changes in assets and liabilities accounted for ~~$3.8~~$83.4 million in cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$1.5~~$52.7 million of cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020.

Cash used in Investing Activities

Net cash used in investing activities was ~~$3.6~~$18.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared to ~~$1.6~~$10.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. The increase in net cash used in investing activities is a result of ~~the Company purchasing an office building~~continued investment in ~~the quarter for use~~new wellness centers as ~~its~~well as construction of a new corporate headquarters.

Cash provided by Financing Activities

Net cash provided by financing activities was ~~$38.3~~$57.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2021, compared to ~~$0.9~~$142.4 million ~~in net cash provided by financing activities~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2016. This increase~~2020. The change in cash provided by financing activities is primarily driven ~~by the Company’s initial public offering offset by operating cash generation facilitating the repayment~~improved profitability allowing for less use of ~~borrowed capital.~~debt financing and no significant asset acquisition related financing taking place.

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Description of Indebtedness

Senior Secured Asset-Based Revolving Credit Facility

On April 13, 2021, Opco entered into an asset-based credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured financing of $125.0 million (which may be increased by up to $50.0 million in certain circumstances), subject to a borrowing base limitation. 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 LIBOR at the option of the Company. The rate at June 30, 2021 was 1.59%. The Company also pays a commitment fee on unused borrowings at a rate of 0.35%.

The ABL is secured by the assets of the Company including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts. The ABL contains certain negative covenants that restrict the Company’s ability to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.

Senior Secured Term Loan Facility

On April 13, 2021, Opco entered into a term credit and guaranty agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $300.0 million (which may be increased in certain circumstances). The Term Loan B bears interest at a variable rate of either prime, federal funds effective rate or LIBOR, plus an applicable margin of between 3.25% and 4.25% depending on the underlying base rate. LIBOR rates are subject to a 0.50% floor. The interest rate at June 30, 2021 was 4.75%. The Term Loan B requires quarterly payments of 0.25% of the original principal amount, with the balance due on the seventh anniversary of the closing date.

The credit agreement governing the Term Loan B does not require Opco to comply with any financial maintenance covenants but additionally contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.

Convertible Notes

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

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trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) 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.

The fair value of the Notes was $217.1 million as of June 30, 2021. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of June 30, 2021 and is classified as Level 2 in the fair value hierarchy.

Amended & Restated Credit Agreement

The Amended Revolving Credit Agreement provides for a secured revolving credit facility of $125 million that matures on July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur 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 are 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, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.

As of June 30, 2021 Amended Revolving Credit Agreement was fully repaid and terminated.

Amended & Restated Term Loan Credit Agreement

OpCo entered into an Amended and Restated Term Loan Credit Agreement on July 8, 2019 (the “A&R Term Loan Credit Agreement”). The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls 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 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.

As of June 30, 2021 the A&R Term Loan Credit Agreement was fully repaid and terminated.

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General Other Debt

The Company entered into a ~~new credit~~mortgage with a local bank to finance 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. As described in Note 3, the Company entered into an agreement ~~(“New Credit 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 ~~December 21, 2016. This agreement fully repaid~~August 2, 2021, and ~~terminated~~has reclassified the ~~A&R Credit~~mortgage to current maturities of long-term debt as of June 30, 2021.

In July 2020, the Company entered into the Agreement. See Note 2 – “Asset Acquisitions”. The Agreement ~~described below.~~called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The ~~New Credit Agreement provides for secured financing~~Company discounted the payment stream using a market interest rate of ~~$50~~8.3%, resulting in an obligation of $17.5 million ~~in aggregate~~ at ~~either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:~~the time it was entered into.

~~(i) $45.0 million revolving credit facility (“Revolver”) maturing on December 16, 2019; and~~

~~(ii) $5.0 million term loan (“Term Loans”~~In connection with the acquisition of Community Veterinary Clinics, LLC d/b/a, VIP Petcare (the “VIP Acquisition”), ~~requiring equal amortizing payments for 24 months.~~

the Company entered into a guarantee note of $10.0 million and contingent Notes that were subsequently earned. As of December 31, ~~2016,~~2020 $7.5 million was payable pursuant to the ~~Company had $5.0~~2018 Contingent Note and $10.0 million ~~outstanding as Term Loans and $22.5 million outstanding under~~was payable pursuant to the ~~Revolver~~.2019 Contingent Note. The ~~interest rate on the Term Loans was 4.25%~~guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million required quarterly interest ~~rate on~~payments of 6.75% with the ~~Revolver was also 4.25%, both~~balance payable July 17, 2023. These Notes Payable – VIP Acquisition were ~~Base Rate loans.~~

~~As of September 30, 2017, the Company had~~ fully repaid ~~the Term Loans and had $18.1 million outstanding under the Revolver. The interest rate on the Revolver was 4.75%, as a Base Rate loan. The Revolver contains a lockbox mechanism.~~in April 2021.

~~The New Credit Agreement contains certain covenants and restrictions including a fixed charge coverage ratio and a minimum EBITDA~~ ~~target~~ and is secured by collateral consisting of a percentage of eligible accounts receivable, inventories, and machinery and equipment. As of September 30, 2017, the Company was in compliance with these covenants.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. 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.

Interest Rate Risk

We are exposed to changes in interest rates because the indebtedness incurred under our ~~New~~A&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the ~~market~~recorded value of our credit ~~agreement~~agreements but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of ~~September~~June 30, ~~2017,~~2021, we had variable rate debt of approximately ~~$18.1~~$315.0 million under our ~~New Credit Agreement.~~Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2021 by approximately ~~$52 thousand and $235 thousand, respectively.~~$0.8 million.

Item 4. Controls and Procedures.

Internal Control over Financing Reporting

As we are an emerging growth company and a newly public company, we have not prepared a formal management’s report on internal control over financial reporting, as would otherwise be required by Section 404 of the Sarbanes-Oxley Act of 2002, nor have we engaged an independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date in our condensed consolidated financial statements. Our compliance with Section 404 of the Sarbanes-Oxley Act will first be subject to management’s assessment regarding internal control over financial reporting in connection with the filing of our Annual Report on Form 10-K for the fiscal year ending December 31, 2018 and we will not be required to have an independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting until the filing of our first Annual Report on Form 10-K after we lose emerging growth company status. We will remain an emerging growth company until the earliest to occur of: the last day of the year in which we have $1.07 billion or more in annual net sales, the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates as of the last day of our most recently completed second quarter; the issuance, in any three-year period, by us of more than $1 billion in non-convertible debt securities; or December 31, 2022. Accordingly, this Quarterly Report on Form 10-Q does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form ~~10‑Q.~~10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.

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Changes in Internal Control over Financial Reporting

~~As a result of our July 2017 IPO and resulting~~There was no change in ~~tax structure, the Company implemented~~our internal ~~controls~~control over ~~significant processes specific~~financial reporting that occurred during our fiscal quarter ended June 30, 2021, that has materially affected, or is reasonably likely to ~~the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,~~materially affect, our internal control ~~activities, and accounting for the IPO and tax structure related transactions. Except as previously described, there~~over financial reporting. We have ~~been no changes in the Company’s~~not experienced any material impact to our internal controls over financial reporting ~~during~~despite the ~~third quarter~~fact that some of ~~fiscal 2017 that have materially affected, or~~our corporate employees are ~~reasonably likely~~working remotely due to ~~materially affect,~~ the ~~Company’s~~COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal ~~control over financial reporting.~~controls to minimize the impact on their design and operating effectiveness.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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:

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statements regarding our strategies, results of operations or liquidity;

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statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;

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statements of management’s goals and objectives; and

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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; 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 ~~ability to achieve or sustain profitability;~~manufacturing and distribution chains; competition from veterinarians and others in our industry; ~~failure of the Fairness to Pet Owners Act of 2017 to become law;~~ 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 successfully grow our business through acquisitions;~~ our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; ~~risks related to our international operations;~~ our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk ~~Factors’ section~~Factors” of our Annual Report on Form 10-K for the ~~final prospectus for PetIQ, Inc., dated July 20, 2017,~~year ended December 31, 2020, and other reports filed from time to time with the ~~SEC on July 21, 2017.~~Securities and Exchange Commission.

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

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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.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to, and are presently involved in, litigation and other proceedings. ~~Other than the litigation described in Note 8 of the previous financial statements, we~~We believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.

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 at June 30, 2021, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the condensed consolidated statements of operations.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the ~~final prospectus for PetIQ, Inc., dated July 20, 2017, and filed with the SEC on July 21, 2017.~~year ended December 31, 2020,

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~.

~~Recent Sale of Unregistered Securities~~

~~Simultaneously with the consummation of our IPO, we issued to the Continuing LLC Owners~~ ~~8,268,188~~ shares of Class B common stock. The issuances of the Class B common stock described in this paragraph were made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.

The Continuing LLC Owners have the right, from time to time, to exchange their LLC Interests, along with a corresponding number of shares of our Class B common stock, for newly issued shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and similar transactions. Our board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC Interests may, at its option, instead cause Holdco to make a cash payment equal to the volume weighted average market price of one share of our Class A common stock for each LLC Interest exchanged (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Holdco Agreement.

~~Use of Proceeds~~

On July 26, 2017 we completed the initial public offering of our Class A common stock pursuant to a Registration Statement (File No. 333-218955) which was declared effective on July 20, 2017. Under the Registration Statement, we sold 7,187,500 shares of our Class A common stock at a price of $16.00 per share. This included 937,500 shares issued and sold by us pursuant to the over-allotment option granted to the underwriters. We received gross proceeds of approximately $115.0 million, which were used to (i) pay off preference notes in the aggregate amount of $56.0 million and (ii) purchase 3,556,666 newly issued LLC Interests from Holdco at a purchase price per interest equal to $16.00 per unit. We caused Holdco to use the proceeds from the sale of the LLC interests to (i) pay the underwriting discounts and commissions in connection with the offering, (ii) pay fees and expenses connection with the offering and (iii) to utilize $45.9 million for general corporate purposes.

~~There has been no material change in the use of proceeds as described in the final prospectus filed with the SEC on July 21, 2017.~~

31

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~~Item 5. Other Information.~~

~~None~~

Item 6. Exhibits. –


10.1	ABL Credit and Guaranty Agreement, dated as of April 13, 2021, among PetIQ Holdings, LLC, PetIQ, the guarantor subsidiaries party thereto, the lenders party thereto and Keybank National Association, as administrative and collateral agent (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-k filed April 19, 2021).
10.2	Term Credit and Guaranty Agreement, dated as of April 13, 2021, among PetIQ Holdings, LLC, PetIQ, LLC, the guarantor subsidiaries party thereto, the lenders party thereto and Jefferies Finance LLC, as administrative and collateral agent (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-k filed April 19, 2021).
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

101.INS*	Inline XBRL Instance ~~Document.~~
	Document
101.SCH*	Inline XBRL Taxonomy Extension Schema ~~Document.~~
	Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document.~~
	Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.)

* Filed herewith

3247

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~~SIGNATURES~~

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.
	~~PETIQ, INC.~~

~~November 8, 2017~~August 5, 2021	/s/ John Newland
	John Newland
	Chief Financial Officer

3348

s in 000's

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Net income

$

859

$

(2,512)

$

11,208

$

(2,218)

For the three months ended

For the six months ended

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Net income (loss)

$

4,034

$

(1,449)

$

6,420

$

(4,082)

Plus:

Tax expense

550

—

550

—

Tax expense (benefit)

(205)

188

(130)

(981)

Depreciation

$

684

$

375

$

1,795

$

1,350

3,143

2,983

6,274

5,856

Amortization

261

264

782

808

4,627

2,250

13,055

4,492

Interest

352

737

1,351

2,389

7,655

5,329

12,525

10,033

EBITDA

$

2,706

$

(1,136)

$

15,686

$

2,329

$

19,254

$

9,301

$

38,144

$

15,318

Loss on extinguishment and related costs(1)

—

993

Management fees(2)

158

208

545

508

Litigation expenses(3)

—

41

—

3,226

Costs associated with becoming a public company

2,275

2,042

2,275

2,042

Acquisition costs⁽¹⁾

86

146

92

732

Loss on extinguishment and related costs⁽²⁾

6,438

—

6,438

—

Stock based compensation expense

246

—

246

—

2,439

1,844

4,561

4,402

Non same-store revenue⁽³⁾

(5,982)

(953)

(10,377)

(3,235)

Non same-store costs⁽³⁾

10,493

3,698

19,832

10,098

Integration costs⁽⁴⁾

735

8,850

687

9,304

Clinic launch expenses⁽⁵⁾

576

603

1,280

1,279

Litigation expenses

320

384

563

433

COVID-19 related costs⁽⁶⁾

—

4,433

—

4,433

Adjusted EBITDA

$

5,385

$

1,155

$

18,752

$

9,098

$

34,359

$

28,306

$

61,220

$

42,764

Adjusted EBITDA Margin

12.7%

10.6%

11.9%

9.5%

(1)

⁽¹⁾

~~Loss on debt extinguishment reflects~~Acquisition costs ~~relating~~include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to ~~the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees~~completed and ~~termination fees.~~

contemplated acquisitions.

(2)

⁽²⁾

~~Represents annual fees paid pursuant~~Non same-store revenue and costs relate to our ~~management agreements~~Services segment and are from wellness centers, host partners, and regions with ~~Eos, Highland~~less than six full trailing quarters of operating results.

(3)

Integration costs and ~~Labore. The management agreements will terminate~~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 ~~connection with an initial public offering; however, we will pay fees to members of our board of directors following~~ the ~~offering.~~

Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs.

(4)

⁽³⁾

~~These litigation~~Clinic launch expenses relate to ~~cases involving~~our Services segment and represent the ~~Company that were favorably resolved in the second quarter of 2016.~~

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 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~~flows from operations, borrowings, and equity ~~contributions.~~capital. As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, our cash and cash equivalents were ~~$46.5~~$27.2 million and ~~$0.8~~$33.5 million, respectively. As of ~~September~~June 30, ~~2017,~~2021, we had ~~$18.1 million outstanding under the revolving credit facility and $1.9~~$15.0 million outstanding under a ~~mortgage,~~revolving credit facility, $300.0 million under a term loan, $143.8 million of outstanding Notes, and $14.8 million in other debt. Our debt agreements bear interest at ~~4.75%~~rates between 1.6% and ~~4.35%, respectively.~~4.75%.

Our primary cash needs are for working capital. 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 ~~purchase of a commercial building for use as our corporate headquarters for $2.4 million during the quarter ended September 30, 2017.~~investment in additional veterinary clinics. Our primary working capital requirements are to carry inventory and receivable levels necessary to support our increasing net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, we had working capital (current assets less current liabilities) of ~~$93.7~~$218.1 million and ~~$43.5~~$141.2 million, respectively.

~~On July~~ 26, 2017, we closed the initial public offering (the “IPO”) of 7,187,500 Class A common shares at a price of $16.00 per share. Net proceeds of $106.9 Million , prior to underwriting discount and other offering expenses were utilized to immediately repay $56.0 million aggregate principal amount of preference notes, purchase 133,334 shares of Class B common stock from certain executives and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”) from PetIQ Holdings, LLC (“Holdco”). Holdco utilized the proceeds from the sale of the LLC Interest to pay offering costs and expenses with approximately $45.9 million in net proceeds available for general corporate purposes. As a public company, additional future liquidity needs will include public company costs, the payment of any cash dividends declared by our board, tax distributions to certain Continuing LLC Owners as required by the Holdco LLC agreement, and tax payments to Federal and State governments. Our predecessor for financial reporting purposes, PetIQ, LLC, did not make distributions or incur taxes as a pass through entity.

27

~~Table of Contents~~

We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit ~~facility~~facilities will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that

41

Table of Contents

they will be obtained through the incurrence of 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.

Cash Flows

Cash ~~provided by or~~ used in Operating Activities

Net cash ~~provided by (used in)~~used in operating activities was ~~$11.0~~$46.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared ~~net~~to cash used in operating activities of ~~$1.3~~$42.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. The ~~increase~~change in operating cash flows primarily reflects ~~improved net income,~~higher earnings offset by ~~increased use of cash for~~significant growth in working ~~capital.~~capital items. Working capital ~~uses~~changes are driven primarily by ~~increased~~ accounts receivable ~~resulting from our growing~~ growth on both sales. growth and seasonality. Net changes in assets and liabilities accounted for ~~$3.8~~$83.4 million in cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$1.5~~$52.7 million of cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020.

Cash used in Investing Activities

Net cash used in investing activities was ~~$3.6~~$18.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared to ~~$1.6~~$10.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020. The increase in net cash used in investing activities is a result of ~~the Company purchasing an office building~~continued investment in ~~the quarter for use~~new wellness centers as ~~its~~well as construction of a new corporate headquarters.

Cash provided by Financing Activities

Net cash provided by financing activities was ~~$38.3~~$57.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2021, compared to ~~$0.9~~$142.4 million ~~in net cash provided by financing activities~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2016. This increase~~2020. The change in cash provided by financing activities is primarily driven ~~by the Company’s initial public offering offset by operating cash generation facilitating the repayment~~improved profitability allowing for less use of ~~borrowed capital.~~debt financing and no significant asset acquisition related financing taking place.

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Table of Contents

Description of Indebtedness

Senior Secured Asset-Based Revolving Credit Facility

On April 13, 2021, Opco entered into an asset-based credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured financing of $125.0 million (which may be increased by up to $50.0 million in certain circumstances), subject to a borrowing base limitation. 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 LIBOR at the option of the Company. The rate at June 30, 2021 was 1.59%. The Company also pays a commitment fee on unused borrowings at a rate of 0.35%.

The ABL is secured by the assets of the Company including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts. The ABL contains certain negative covenants that restrict the Company’s ability to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.

Senior Secured Term Loan Facility

On April 13, 2021, Opco entered into a term credit and guaranty agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $300.0 million (which may be increased in certain circumstances). The Term Loan B bears interest at a variable rate of either prime, federal funds effective rate or LIBOR, plus an applicable margin of between 3.25% and 4.25% depending on the underlying base rate. LIBOR rates are subject to a 0.50% floor. The interest rate at June 30, 2021 was 4.75%. The Term Loan B requires quarterly payments of 0.25% of the original principal amount, with the balance due on the seventh anniversary of the closing date.

The credit agreement governing the Term Loan B does not require Opco to comply with any financial maintenance covenants but additionally contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.

Convertible Notes

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

43

Table of Contents

trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) 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.

The fair value of the Notes was $217.1 million as of June 30, 2021. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of June 30, 2021 and is classified as Level 2 in the fair value hierarchy.

Amended & Restated Credit Agreement

The Amended Revolving Credit Agreement provides for a secured revolving credit facility of $125 million that matures on July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur 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 are 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, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.

As of June 30, 2021 Amended Revolving Credit Agreement was fully repaid and terminated.

Amended & Restated Term Loan Credit Agreement

OpCo entered into an Amended and Restated Term Loan Credit Agreement on July 8, 2019 (the “A&R Term Loan Credit Agreement”). The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls 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 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.

As of June 30, 2021 the A&R Term Loan Credit Agreement was fully repaid and terminated.

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Table of Contents

General Other Debt

The Company entered into a ~~new credit~~mortgage with a local bank to finance 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. As described in Note 3, the Company entered into an agreement ~~(“New Credit 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 ~~December 21, 2016. This agreement fully repaid~~August 2, 2021, and ~~terminated~~has reclassified the ~~A&R Credit~~mortgage to current maturities of long-term debt as of June 30, 2021.

In July 2020, the Company entered into the Agreement. See Note 2 – “Asset Acquisitions”. The Agreement ~~described below.~~called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The ~~New Credit Agreement provides for secured financing~~Company discounted the payment stream using a market interest rate of ~~$50~~8.3%, resulting in an obligation of $17.5 million ~~in aggregate~~ at ~~either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:~~the time it was entered into.

~~(i) $45.0 million revolving credit facility (“Revolver”) maturing on December 16, 2019; and~~

~~(ii) $5.0 million term loan (“Term Loans”~~In connection with the acquisition of Community Veterinary Clinics, LLC d/b/a, VIP Petcare (the “VIP Acquisition”), ~~requiring equal amortizing payments for 24 months.~~

the Company entered into a guarantee note of $10.0 million and contingent Notes that were subsequently earned. As of December 31, ~~2016,~~2020 $7.5 million was payable pursuant to the ~~Company had $5.0~~2018 Contingent Note and $10.0 million ~~outstanding as Term Loans and $22.5 million outstanding under~~was payable pursuant to the ~~Revolver~~.2019 Contingent Note. The ~~interest rate on the Term Loans was 4.25%~~guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million required quarterly interest ~~rate on~~payments of 6.75% with the ~~Revolver was also 4.25%, both~~balance payable July 17, 2023. These Notes Payable – VIP Acquisition were ~~Base Rate loans.~~

~~As of September 30, 2017, the Company had~~ fully repaid ~~the Term Loans and had $18.1 million outstanding under the Revolver. The interest rate on the Revolver was 4.75%, as a Base Rate loan. The Revolver contains a lockbox mechanism.~~in April 2021.

~~The New Credit Agreement contains certain covenants and restrictions including a fixed charge coverage ratio and a minimum EBITDA~~ ~~target~~ and is secured by collateral consisting of a percentage of eligible accounts receivable, inventories, and machinery and equipment. As of September 30, 2017, the Company was in compliance with these covenants.

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~~Table of Contents~~

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. 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.

Interest Rate Risk

We are exposed to changes in interest rates because the indebtedness incurred under our ~~New~~A&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the ~~market~~recorded value of our credit ~~agreement~~agreements but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of ~~September~~June 30, ~~2017,~~2021, we had variable rate debt of approximately ~~$18.1~~$315.0 million under our ~~New Credit Agreement.~~Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2021 by approximately ~~$52 thousand and $235 thousand, respectively.~~$0.8 million.

Item 4. Controls and Procedures.

Internal Control over Financing Reporting

As we are an emerging growth company and a newly public company, we have not prepared a formal management’s report on internal control over financial reporting, as would otherwise be required by Section 404 of the Sarbanes-Oxley Act of 2002, nor have we engaged an independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date in our condensed consolidated financial statements. Our compliance with Section 404 of the Sarbanes-Oxley Act will first be subject to management’s assessment regarding internal control over financial reporting in connection with the filing of our Annual Report on Form 10-K for the fiscal year ending December 31, 2018 and we will not be required to have an independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting until the filing of our first Annual Report on Form 10-K after we lose emerging growth company status. We will remain an emerging growth company until the earliest to occur of: the last day of the year in which we have $1.07 billion or more in annual net sales, the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates as of the last day of our most recently completed second quarter; the issuance, in any three-year period, by us of more than $1 billion in non-convertible debt securities; or December 31, 2022. Accordingly, this Quarterly Report on Form 10-Q does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form ~~10‑Q.~~10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.

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~~Table of Contents~~

Changes in Internal Control over Financial Reporting

~~As a result of our July 2017 IPO and resulting~~There was no change in ~~tax structure, the Company implemented~~our internal ~~controls~~control over ~~significant processes specific~~financial reporting that occurred during our fiscal quarter ended June 30, 2021, that has materially affected, or is reasonably likely to ~~the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,~~materially affect, our internal control ~~activities, and accounting for the IPO and tax structure related transactions. Except as previously described, there~~over financial reporting. We have ~~been no changes in the Company’s~~not experienced any material impact to our internal controls over financial reporting ~~during~~despite the ~~third quarter~~fact that some of ~~fiscal 2017 that have materially affected, or~~our corporate employees are ~~reasonably likely~~working remotely due to ~~materially affect,~~ the ~~Company’s~~COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal ~~control over financial reporting.~~controls to minimize the impact on their design and operating effectiveness.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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; 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 ~~ability to achieve or sustain profitability;~~manufacturing and distribution chains; competition from veterinarians and others in our industry; ~~failure of the Fairness to Pet Owners Act of 2017 to become law;~~ 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 successfully grow our business through acquisitions;~~ our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; ~~risks related to our international operations;~~ our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk ~~Factors’ section~~Factors” of our Annual Report on Form 10-K for the ~~final prospectus for PetIQ, Inc., dated July 20, 2017,~~year ended December 31, 2020, and other reports filed from time to time with the ~~SEC on July 21, 2017.~~Securities and Exchange Commission.

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

46

Table of Contents

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.

30

~~Table of Contents~~

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to, and are presently involved in, litigation and other proceedings. ~~Other than the litigation described in Note 8 of the previous financial statements, we~~We believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.

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 at June 30, 2021, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the condensed consolidated statements of operations.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the ~~final prospectus for PetIQ, Inc., dated July 20, 2017, and filed with the SEC on July 21, 2017.~~year ended December 31, 2020,

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~.

~~Recent Sale of Unregistered Securities~~

~~Simultaneously with the consummation of our IPO, we issued to the Continuing LLC Owners~~ ~~8,268,188~~ shares of Class B common stock. The issuances of the Class B common stock described in this paragraph were made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.

The Continuing LLC Owners have the right, from time to time, to exchange their LLC Interests, along with a corresponding number of shares of our Class B common stock, for newly issued shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and similar transactions. Our board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC Interests may, at its option, instead cause Holdco to make a cash payment equal to the volume weighted average market price of one share of our Class A common stock for each LLC Interest exchanged (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Holdco Agreement.

~~Use of Proceeds~~

On July 26, 2017 we completed the initial public offering of our Class A common stock pursuant to a Registration Statement (File No. 333-218955) which was declared effective on July 20, 2017. Under the Registration Statement, we sold 7,187,500 shares of our Class A common stock at a price of $16.00 per share. This included 937,500 shares issued and sold by us pursuant to the over-allotment option granted to the underwriters. We received gross proceeds of approximately $115.0 million, which were used to (i) pay off preference notes in the aggregate amount of $56.0 million and (ii) purchase 3,556,666 newly issued LLC Interests from Holdco at a purchase price per interest equal to $16.00 per unit. We caused Holdco to use the proceeds from the sale of the LLC interests to (i) pay the underwriting discounts and commissions in connection with the offering, (ii) pay fees and expenses connection with the offering and (iii) to utilize $45.9 million for general corporate purposes.

~~There has been no material change in the use of proceeds as described in the final prospectus filed with the SEC on July 21, 2017.~~

31

~~Table of Contents~~

~~Item 5. Other Information.~~

~~None~~

Item 6. Exhibits. –


10.1	ABL Credit and Guaranty Agreement, dated as of April 13, 2021, among PetIQ Holdings, LLC, PetIQ, the guarantor subsidiaries party thereto, the lenders party thereto and Keybank National Association, as administrative and collateral agent (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-k filed April 19, 2021).
10.2	Term Credit and Guaranty Agreement, dated as of April 13, 2021, among PetIQ Holdings, LLC, PetIQ, LLC, the guarantor subsidiaries party thereto, the lenders party thereto and Jefferies Finance LLC, as administrative and collateral agent (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-k filed April 19, 2021).
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

101.INS*	Inline XBRL Instance ~~Document.~~
	Document
101.SCH*	Inline XBRL Taxonomy Extension Schema ~~Document.~~
	Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document.~~
	Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.)

* Filed herewith

3247

Table of Contents

~~SIGNATURES~~

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.
	~~PETIQ, INC.~~

~~November 8, 2017~~August 5, 2021	/s/ John Newland
	John Newland
	Chief Financial Officer

3348


(~~Mark One)~~
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ~~September~~June 30, ~~2017~~2021
☐	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~~35-2554312
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

~~500~~230 E. ~~Shore Drive, Suite 120~~Riverside Dr.	83616
Eagle, Idaho	(Zip Code)
(Address of principal executive offices)



Title of Each Class		Trading Symbol	Name of Each Exchange on Which Registered
~~208‑939‑8900~~Class A Common Stock, $0.001 par value
~~(Registrant’s telephone number, including area code)~~
PETQ
~~(Former name, former address and former fiscal year, if changed since last report)~~	The Nasdaq Global Select Market

Large accelerated filer ☐⌧	Accelerated filer ☐◻

Non-accelerated filer ~~☒ (Do not check if a smaller reporting company)~~◻	Smaller reporting ~~company☐~~company☐

Emerging growth company ☒☐


					Page
				~~Page~~

Part I.	Financial Information			3
				3

	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		PetIQ, Inc. Condensed Consolidated Balance Sheets		3
				3
		PetIQ, Inc. Condensed Consolidated Statements of Operations		4
		PetIQ, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss)		4
				5
		~~PetIQ, Inc.~~ ~~Condensed Consolidated Statements of Cash Flows~~		5
		PetIQ, Inc. Condensed Consolidated Statements of ~~Members/Stockholders Equity~~Cash Flows		6
		PetIQ, Inc. Condensed Consolidated Statements of Equity		8
		PetIQ, Inc. Notes to Condensed Consolidated Financial Statements		7 10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21 31
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29 45
	Item 4.	Controls and Procedures		29 45

Part II.	Other Information

	Item 1.	Legal Proceedings		31 47
	Item 1A.	Risk Factors		31 47
	Item 2.6.	~~Unregistered Sales of Equity Securities and Use of Proceeds~~Exhibits		31 47
	~~Item 5.~~		~~Other Information~~		32
	~~Item 6.~~	~~Exhibits~~		32

Signatures				33 48



				As adjusted (Note1)
	June 30, 2021		December 31, 2020
Current assets
Cash and cash equivalents	$	27,163	$	33,456
Accounts receivable, net		159,800		102,755
Inventories		118,389		97,773
Other current assets		11,893		8,312
Total current assets		317,245		242,296
Property, plant and equipment, net		72,225		63,146
Operating lease right of use assets		20,231		20,122
Other non-current assets		2,181		1,870
Intangible assets, net		200,006		213,000
Goodwill		231,367		231,158
Total assets	$	843,255	$	771,592
Liabilities and equity
Current liabilities
Accounts payable	$	61,653	$	68,131
Accrued wages payable		10,045		10,540
Accrued interest payable		3,798		903
Other accrued expenses		9,105		8,815
Current portion of operating leases		5,431		4,915
Current portion of long-term debt and finance leases		9,143		7,763
Total current liabilities		99,175		101,067
Operating leases, less current installments		15,595		15,789
Long-term debt, less current installments		454,588		403,591
Finance leases, less current installments		2,555		3,338
Other non-current liabilities		1,718		1,397
Total non-current liabilities		474,456		424,115
Commitments and contingencies (Note 13)
Equity
Additional paid-in capital		358,506		319,642
Class A common stock, par value $0.001 per share, 125,000 shares authorized; 28,909 and 25,711 shares issued and outstanding, respectively		29		26
Class B common stock, par value $0.001 per share, 100,000 shares authorized; 425 and 3,040 shares issued and outstanding, respectively		—		3
Accumulated deficit		(92,499)		(98,558)
Accumulated other comprehensive loss		(126)		(686)
Total stockholders' equity		265,910		220,427
Non-controlling interest		3,714		25,983
Total equity		269,624		246,410
Total liabilities and equity	$	843,255	$	771,592


	September 30, 2017		December 31, 2016
Current assets
Cash and cash equivalents	$	46,536	$	767
Accounts receivable, net of allowance for doubtful accounts		24,841		17,195
Inventories		34,654		34,232
Supplier prepayments		2,251		2,985
Other current assets		1,471		1,358
Total current assets		109,753		56,537
Property, plant and equipment, net		14,865		13,044
Restricted deposits		200		250
Deferred tax assets		9,707		—
Other non-current assets		1,932		2,826
Intangible assets, net of accumulated amortization		3,522		4,054
Goodwill		5,063		4,619
Total assets	$	145,042	$	81,330
Liabilities and member's equity
Current liabilities
Accounts payable	$	11,860	$	9,333
Accrued wages payable		1,691		1,100
Accrued interest payable		112		44
Other accrued expenses		2,266		277
Current portion of long-term debt and capital leases		145		2,321
Total current liabilities		16,074		13,075
Non-current liabilities
Long-term debt		19,928		25,158
Obligations under capital leases, less current installments		403		434
Deferred acquisition liability		—		1,303
Other non-current liabilities		336		378
Total non-current liabilities		20,667		27,273
Commitments and contingencies
Equity
Members equity		—		42,941
Additional Paid-in capital		71,192		—
Class A common stock, par value $.001 per share, 125,000,000 shares authorized, 13,222,583 shares issued and outstanding September 30, 2017		13		—
Class B common stock, par value $.001 per share, 8,401,000 shares authorized, 8,268,188 shares issued and outstanding at September 30, 2017		8		—
Accumulated deficit		(226)		—
Accumulated other comprehensive loss		(684)		(1,940)
Total stockholders' / member's equity		70,303		41,001
Non-controlling interest		37,998		(19)
Total equity		108,301		40,982
Total liabilities and equity	$	145,042	$	81,330



	September 30, 2017		September 30, 2016
Cash flows from operating activities
Net income	$	11,208	$	(2,218)
Adjustments to reconcile net income to net cash used for operating activities
Depreciation and amortization of intangible assets and loan fees		2,725		2,885
Loss on disposition of property		14		52
Foreign exchange loss on liabilities		204		52
Stock based compensation expense		246		—
Deferred tax adjustment		351		—
Warranty settlement gain		—		(645)
Changes in assets and liabilities
Accounts receivable		(7,257)		(882)
Inventories		(316)		(2,015)
Prepaid expenses and other assets		1,137		3,663
Accounts payable		1,797		(1,125)
Accrued wages payable		570		(940)
Other accrued expenses		287		(163)
Net cash provided by (used in) operating activities		10,966		(1,336)
Cash flows from investing activities
Purchase of property, plant, and equipment and intangibles		(3,558)		(1,604)
Net cash used in investing activities		(3,558)		(1,604)
Cash flows from financing activities:
Proceeds from issuance of long term debt		206,020		167,052
Principal payments on long term debt		(213,522)		(172,785)
Proceeds from Initial Public Offering (IPO) of Class A Shares, net of underwriting discounts and offering costs		104,010		—
Repayment of Preference notes		(55,960)		—
Change in restricted cash and deposits		50		6,894
Purchase of LLC units from Continuing LLC Owners		(2,133)		—
Principal payments on capital lease obligations		(86)		(62)
Payment of deferred financing fees and debt discount		(42)		(248)
Net cash provided by financing activities		38,337		851
Net change in cash and cash equivalents		45,745		(2,089)
Effect of exchange rate changes on cash and cash equivalents		24		(206)
Cash and cash equivalents, beginning of period		767		3,250
Cash and cash equivalents, end of period	$	46,536	$	955
Supplemental cash flow information
Interest paid	$	1,116	$	2,150
Property, plant, and equipment acquired through accounts payable		(53)		(46)
Capital lease additions		17		127
Issuance of preference notes for LLC Interests		55,960		—
Establishment of deferred tax asset from step-up in basis		9,814		—
Accrued tax distribution		709		—


					Accumulated
			Retained		Other														Total
			Earnings/		Comprehensive										Additional				Stockholders
	Members		(Accumulated		(Loss)										Paid-in		Noncontrolling		Equity/
	Equity		Deficit)		Income		Class A Common				Class B Common				Capital		Interest		Members Equity
							Shares		Dollars		Shares		Dollars
Balance - January 1, 2016	$	46,339	$	—	$	(42)		—	$	—		—	$	—	$	—	$	(22)	$	46,275
Net loss		(3,398)		—		—		—		—		—		—		—		3		(3,395)
Other comprehensive income		—		—		(1,898)		—		—		—		—		—		—		(1,898)
Balance - December 31, 2016	$	42,941	$	—	$	(1,940)		—	$	—		—	$	—	$	—	$	(19)	$	40,982
Net Income prior to IPO		11,161		—		—		—		—		—		—		—		(4)		11,157
Other comprehensive income prior to IPO		—		—		515		—		—		—		—		—		—		515
Accrued tax distribution prior to recapitalization		(511)		—		—		—		—		—		—		—		—		(511)
Recapitalization transaction:																				—
Issuance of Class A common stock for merger		—		—		—		6,035,083		6		—		—		—		—		6
Exchange of LLC Interests held by Continuing LLC owners and certain employees for Class A common stock		(53,591)		—		668		—		—		—		—		28,497		24,426		—
Issuance of Class B Shares		—		—		—		—		—		8,401,522		8		—		—		8
Initial Public Offering transactions
Issuance of Class A Shares for IPO net of under writing discounts and offering costs		—		—		—		7,187,500		7		—		—		104,003		—		104,010
Payment of preference notes to affiliates		—		—		—		—		—		—		—		(55,960)		—		(55,960)
Increase in deferred tax asset from step-up in tax basis		—		—		—		—		—		—		—		9,814		—		9,814
Purchase of noncontrolling interests		—		—		(120)		—		—		(133,334)		(0)		(15,313)		13,300		(2,133)
Accrued Tax Distributions		—		—		—		—		—		—		—		—		(198)		(198)
Stock based compensation expense		—		—		—		—		—		—		—		151		95		246
Other comprehensive income post IPO		—		—		193		—		—		—		—		—		121		314
Net (loss) Income post IPO		—		(226)		—		—		—		—		—		—		277		51
Balance - September 30, 2017	$	—	$	(226)	$	(684)		13,222,583	$	13		8,268,188	$	8	$	71,192	$	37,998	$	108,301


	September 30, 2017		December 31, 2016
Raw materials and work in progress	$	5,227	$	5,924
Finished goods		29,427		28,308
Total inventories	$	34,654	$	34,232


Remainder of 2017	$	15
2018		44
2019		18,105
2020		48
2021		50
Thereafter		1,710


	Lease Obligation
	Operating Leases		Capital Leases
Reminder of 2017	$	436	$	27
2018		1,716		108
2019		597		104
2020		46		90
2021		29		88
Thereafter		85		103
Total minimum future obligations	$	2,909	$	520
Less Interest				(16)
Present value of net future minimum obligations				504
Less current capital lease obligations				(101)
Long-term capital lease obligations			$	403


	Three months ended
	September 30, 2017
Numerator:
Net income	$	859
Less: net income attributable to non-controlling interests		(1,085)
Net income attributable to PetIQ, Inc. — basic		(226)
Denominator:
Weighted-average shares of Class A common stock outstanding (in 000's)-- basic		13,223
Dilutive stock options that are convertible into Class A common stock		—
Weighted-average shares of Class A common stock outstanding -- diluted		13,223

Earnings per share of Class A common stock — basic	$	(0.02)
Earnings per share of Class A common stock — diluted	$	(0.02)


	Three months ended				% of Net sales
$'s in 000's	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Net sales	$	60,554	$	41,671	100.0	%	100.0	%
Cost of sales		48,037		35,511	79.3	%	85.2	%
Gross profit		12,517		6,160	20.7	%	14.8	%
Operating expenses
General and administrative expenses		10,739		7,942	17.7	%	19.1	%
Operating income		1,778		(1,782)	2.9	%	(4.3)	%
Interest expense		(352)		(737)	(0.6)	%	(1.8)	%
Foreign currency (loss)/gain, net		(31)		2	(0.1)	%	0.0	%
Loss on debt extinguishment		—		—	—	%	—	%
Other income, net		14		5	0.0	%	0.0	%
Total other expense, net		(369)		(730)	(0.6)	%	(1.8)	%
Pretax net income		1,409		(2,512)	2.3	%	(6.0)	%
Provision for income taxes		(550)		—	(0.9)	%	—	%
Net income		859		(2,512)	1.4	%	(6.0)	%