Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20172021

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)

PetIQ,  Inc.

(Exact name of registrant as specified in its charter)

Delaware

35‑255431235-2554312

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

500230 E. Shore Drive, Suite 120Riverside Dr.

83616

Eagle, Idaho

(Zip Code)

(Address of principal executive offices)

208-939-8900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading
Symbol

Name of Each Exchange on Which Registered

208‑939‑8900Class 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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes       No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes       No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer ☒   (Do not check if a smaller reporting company)

Smaller reporting company☐company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation of its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes No

As of November 8, 2017,August 5, 2021, we had 13,222,58328,919,941 shares of Class A common stock and 8,268,188415,829 shares of Class B common stock outstanding.


Table of Contents

PetIQ, Inc.

Table of Contents

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 EquityCash 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 ProceedsExhibits

31

47

Item 5.

Other Information

32

Item 6.

Exhibits

32

Signatures

33

48

2


Table of Contents

PetIQ,

PetIQ, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, in 000’s except for per share amounts)

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

See accompanying notes to the condensed consolidated financial statements.

3

Table of Contents

PetIQ, Inc.

Condensed Consolidated Statements of Operations

(DollarsUnaudited, in thousands)000’s except for per share amounts)

 

 

 

 

 

 

 

 

    

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

As adjusted (Note1)

As adjusted (Note1)

For the Three Months Ended

For the Six Months Ended

    

June 30, 2021

    

June 30, 2020

    

June 30, 2021

    

June 30, 2020

Product sales

$

242,857

$

264,307

$

472,891

$

430,587

Services revenue

28,154

2,675

52,467

23,173

Total net sales

271,011

266,982

525,358

453,760

Cost of products sold

 

185,837

 

217,469

 

368,664

 

352,248

Cost of services

25,546

7,329

49,267

27,174

Total cost of sales

211,383

224,798

417,931

379,422

Gross profit

 

59,628

 

42,184

 

107,427

 

74,338

Operating expenses

 

  

 

  

 

  

 

  

General and administrative expenses

 

43,142

 

38,492

 

83,814

 

70,182

Operating income

 

16,486

 

3,692

 

23,613

 

4,156

Interest expense, net

 

(7,655)

 

(5,329)

 

(12,525)

 

(10,033)

Foreign currency (loss) income, net

 

9

 

52

 

(104)

 

125

Loss on debt extinguishment

 

(5,453)

 

 

(5,453)

 

Other income, net

 

442

 

324

 

759

 

689

Total other expense, net

 

(12,657)

 

(4,953)

 

(17,323)

 

(9,219)

Pretax net income (loss)

3,829

(1,261)

6,290

(5,063)

Income tax (expense) benefit

205

(188)

130

981

Net income (loss)

 

4,034

 

(1,449)

 

6,420

 

(4,082)

Net income (loss) attributable to non-controlling interest

8

27

361

(503)

Net income (loss) attributable to PetIQ, Inc.

$

4,026

$

(1,476)

$

6,059

$

(3,579)

Net income (loss) per share attributable to PetIQ, Inc. Class A common stock

Basic

$

0.14

$

(0.06)

$

0.22

$

(0.15)

Diluted

$

0.14

$

(0.06)

$

0.22

$

(0.15)

Weighted Average shares of Class A common stock outstanding

Basic

28,491

24,425

27,444

24,077

Diluted

29,156

24,425

28,059

24,077

See accompanying notes to the condensed consolidated financial statementsstatements.

34


PetIQ, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)(Loss)

Three and nine months ended September 30,

(Unaudited, dollars in thousands, except for per share amounts)000’s)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

    

September 30, 2017

    

September 30, 2016

    

September 30, 2017

    

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

60,554

 

$

41,671

 

$

214,761

 

$

155,249

Cost of sales

 

 

48,037

 

 

35,511

 

 

174,093

 

 

130,356

Gross profit

 

 

12,517

 

 

6,160

 

 

40,668

 

 

24,893

Operating expenses

 

 

  

 

 

  

 

 

  

 

 

  

General and administrative expenses

 

 

10,739

 

 

7,942

 

 

27,421

 

 

24,307

Operating income (loss)

 

 

1,778

 

 

(1,782)

 

 

13,247

 

 

586

Interest expense, net

 

 

(352)

 

 

(737)

 

 

(1,351)

 

 

(2,389)

Foreign currency gain/(loss), net

 

 

(31)

 

 

 2

 

 

(152)

 

 

(83)

Loss on debt extinguishment

 

 

 —

 

 

 —

 

 

 —

 

 

(993)

Other income, net

 

 

14

 

 

 5

 

 

14

 

 

661

Total other expense, net

 

 

(369)

 

 

(730)

 

 

(1,489)

 

 

(2,804)

Pretax net income (loss)

 

 

1,409

 

 

(2,512)

 

 

11,758

 

 

(2,218)

Income tax expense

 

 

(550)

 

 

 —

 

 

(550)

 

 

 —

Net income (loss)

 

 

859

 

 

(2,512)

 

 

11,208

 

 

(2,218)

Net income (loss) attributable to noncontrolling interest

 

 

1,085

 

 

(2,512)

 

 

11,434

 

 

(2,218)

Net loss attributable to PetIQ, Inc.

 

$

(226)

 

$

 —

 

$

(226)

 

$

 —

Comprehensive income/(loss)

 

 

  

 

 

  

 

 

  

 

 

  

Net income (loss)

 

$

859

 

$

(2,512)

 

$

11,208

 

$

(2,218)

Foreign currency translation adjustment

 

 

314

 

 

(351)

 

 

829

 

 

(1,407)

Comprehensive income/(loss)

 

 

1,173

 

 

(2,863)

 

 

12,037

 

 

(3,625)

Comprehensive income attributable to noncontrolling interest

 

 

1,206

 

 

(2,863)

 

 

12,070

 

 

(3,625)

Comprehensive loss attributable to member/PetIQ, Inc.

 

$

(33)

 

$

 —

 

$

(33)

 

$

 —

Net loss per share attributable to PetIQ, Inc. Class A common stock(1)

 

 

 

 

 

 

 

 

 

 

 

 

-Basic

 

$

(0.02)

 

 

 —

 

$

(0.02)

 

 

 —

-Diluted

 

$

(0.02)

 

 

 —

 

$

(0.02)

 

 

 —

Weighted Average shares of Class A common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

 

-Basic

 

 

13,222,583

 

 

 —

 

 

13,222,583

 

 

 —

-Diluted

 

 

13,222,583

 

 

 —

 

 

13,222,583

 

 

 —

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)

Foreign currency translation adjustment

 

363

 

(104)

504

(678)

Comprehensive income (loss)

 

4,397

 

(1,553)

6,924

 

(4,760)

Comprehensive income (loss) attributable to non-controlling interest

 

10

 

25

368

(598)

Comprehensive income (loss) attributable to PetIQ

$

4,387

$

(1,578)

$

6,556

$

(4,162)

(1)

Basic and Diluted earnings per share is applicable only for periods after the Company’s IPO.  See Note 5 – Earnings per share.

See accompanying notes to the condensed consolidated financial statements

4


PetIQ, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

 

 

 

 

 

 

 

 

    

 

    

 

 

 

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

 

 

 —

See accompanying notes to the condensed consolidated financial statementsstatements.

5


PetIQ, Inc.

Condensed Consolidated Statements of Members/Stockholders EquityCash Flows

(Unaudited, dollars in thousands)000’s)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

    

For the Six Months Ended June 30, 

As adjusted (Note1)

2021

2020

Cash flows from operating activities

 

Net income (loss)

 

$

6,420

$

(4,082)

Adjustments to reconcile net income (loss) to net cash used in operating activities

 

  

  

Depreciation and amortization of intangible assets and loan fees

 

20,405

11,159

Loss on debt extinguishment

 

5,453

Loss (gain) on disposition of property, plant, and equipment

 

167

(369)

Stock based compensation expense

4,561

4,402

Deferred tax adjustment

(982)

Other non-cash activity

 

176

65

Changes in assets and liabilities

 

Accounts receivable

 

(57,011)

(74,138)

Inventories

 

(20,580)

(31,627)

Other assets

 

(2,166)

(1,073)

Accounts payable

 

(6,632)

39,528

Accrued wages payable

 

(482)

1,847

Other accrued expenses

 

3,493

12,766

Net cash used in operating activities

 

(46,196)

(42,504)

Cash flows from investing activities

 

  

  

Proceeds from disposition of property, plant, and equipment

350

429

Purchase of property, plant, and equipment

 

(18,302)

(10,425)

Net cash used in investing activities

 

(17,952)

(9,996)

Cash flows from financing activities

 

  

  

Proceeds from issuance of convertible notes

143,750

Payment for Capped Call options

(14,821)

Proceeds from issuance of long-term debt

 

630,568

457,200

Principal payments on long-term debt

 

(576,843)

(438,874)

Payment of financing fees on Convertible Notes

(5,819)

Tax distributions to LLC Owners

(72)

(46)

Principal payments on finance lease obligations

 

(1,226)

(761)

Payment of deferred financing fees and debt discount

 

(6,360)

(275)

Tax withholding payments on Restricted Stock Units

(852)

(186)

Exercise of options to purchase class A common stock

12,588

2,171

Net cash provided by financing activities

 

57,803

142,339

Net change in cash and cash equivalents

 

(6,345)

89,839

Effect of exchange rate changes on cash and cash equivalents

 

52

(88)

Cash and cash equivalents, beginning of period

 

33,456

27,272

Cash and cash equivalents, end of period

$

27,163

$

117,023

See accompanying notes to the condensed consolidated financial statements.

6


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.

7

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

8

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.

9

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 purposeProducts segment consists of completing a public offeringour manufacturing and distribution business. The Services segment consists of veterinary services and related transactions in orderproduct sales provided by the Company directly to carry on the business of PetIQ, LLC, an Idaho limited liability company. The Company isconsumers.

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 SeptemberJune 30, 20172021 and December 31, 20162020 and for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 are unaudited. The condensed consolidated balance sheet as of December 31, 20162020 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, 20162020 and related notes thereto included in the final prospectus for PetIQ, Inc. dated July 20, 2017 andmost 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

7


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 CurrenciesFair 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.

10

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 dateCompany’s financial instruments, including cash and incomecash equivalents, accounts receivable, accounts payable and expense itemsaccrued liabilities, are at the average exchangecost, 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 depositsacquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are not consideredclassified 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 accountscredit 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'scustomer’s remittance advice.

The Company also has notes receivableOther 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 notesother 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 usingon 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

8


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

11

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 capitalfinance 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 requiredA performance obligation is a promise in a contract to be held by the Company in segregated accounts for various state licensing regulations in relationtransfer a distinct good or service to the salecustomer and is the unit of regulated prescription pet medications. Restricted depositsaccount 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 includedobtain substantially all of the remaining benefits from the asset at this point in other income when earned.

Deferred Acquisition Liabilitytime.

The Company hasdetermined that certain products manufactured to a deferred acquisition liability relatedcustomer’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 acquisitionenforceable right to payment. Therefore, the Company determined that occurred in 2013.  The liabilityrevenue on these products would be recognized over time, as the products are produced. This represents a minor subset of the products the Company manufactures.

12

Revenue for services is denominated in Euros and requires annual paymentsrecognized 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 percentagereduction in revenue when product revenue is recognized. Depending on the specific type of gross profit fromvariable consideration, we use either the salesexpected 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 byrecent changes in the annual payments will bemarket. 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 endfactors outside of the reporting period.  A sales return allowance is recordedCompany’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 receivablemerchandising funds are reduced as revenuesoffered through various programs to customers and are recognized for estimated losses on credit sales duedesigned to customer claims for discounts, returned goodspromote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other items.

9


The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth 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 netreductions of trade promotion spending, which is recognizedrevenue at the latertime 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.

ShippingSignificant Payment Terms

Our customer contracts identify the product, quantity, price, payment and Handling Costsfinal 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.

13

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 ofa 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 billedhave 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 $114$0.9 million and $82$0.9 million for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, and $427$2.0 million and $248$1.9 million for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. Advertising costs were $436$5.1 million and $273$3.3 million for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, and $2,028$7.5 million and $883$5.8 million for the ninesix months ended SeptemberJune 30, 20172021 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 taxesTaxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed usinguses the asset and liability method, underapproach 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 areis 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 reduceperiod that includes the enactment date.

We recognize deferred tax assets to the amountextent that is believedwe 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.

14

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 incomeoperations 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 portionholders 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 SeptemberJune 30, 20172021 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 companyCompany consults with both internal and external legal counsel related to litigation.

Recently Issued

Adopted Accounting PronouncementsStandard 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


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 CodificationUpdate (“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 considerationEntity’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 commencingconvertible 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 issuesconversion features that are not currently addressed by current U.S. GAAP. This ASUrequired 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 expectASU made amendments to the adoptionEPS guidance in Topic 260 for convertible debt instruments, the most significant of thiswhich 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 as15, 2021, with early adoption permitted. Adoption of the beginning of the fiscal year that includes that interim period. The CompanyASU 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 electedASU 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 overreflect the term of the awards. The adoption of the accounting standard did not havein 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)

15

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 impactresult 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, resultsincome 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

16

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

17

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

18

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.

 

NoteThe 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

19

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 -     Debtin 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 NewAmended 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”) maturingof $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 termAll 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.

1120


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 $18,059 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”), comprisedguarantee 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 termlong-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 termlong-term debt, excluding the net discount on debt and deferred financing fees, as of SeptemberJune 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


Note 3 -6 – Leases

The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182021 and 2025.2026. A portion of capital leases are denominated in foreign currencies.  Many

21

For both operating and finance leases, include renewal optionsthe Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and in some casesa 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

Annual future commitments under non-cancelable leases as of SeptemberJune 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 $883 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 TaxesTax

As a result of the IPOCompany’s initial public offering and related reorganization transactions completed in July 2017, the Company holds anheld 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 noncontrollinga 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 forCompany 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 resultrealizability of the IPOnet 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 hasbelieves 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 liabilitieswill not be realized. The Company has recorded a valuation allowance for financial reporting purposes and those amounts applicable for income tax purposes.  Deferreddeferred 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 forfuture taxable income sufficient to recognize the basis differences resulting fromdeferred tax assets, we may reduce or eliminate the purchasevaluation allowance.

23

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.  OpcoHoldCo makes cash distributions to permit the membermembers 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 consistedtheir 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 taxperiods presented.

13


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 earningsdiluted 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 unitour convertible Notes (see Note 1 for periods prior tomore information on the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the usersadoption 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 commonNotes 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 asoptions and restricted stock optionsunits 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


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 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of SeptemberJune 30, 2017, 1,109,9982021 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 ninesix months ended SeptemberJune 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 datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periodperiods 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


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

 

 

 —

 

 

 

 

 

 

 

 

 

Theweighted average grant date fair value of stock options granted during the period ended SeptemberJune 30, 20172021 was $6.08$12.39 per option. At SeptemberJune 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 3.82.3 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 - Stockholders’ EquityRestricted Stock Units

Reorganization Transactions

In connection withThe 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, completedall 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 TransactionsCompany’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 byfollowing table summarizes the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ.  As a resultactivity of the Reorganization Transactions, PetIQ becameCompany’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

1626


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 stockexercised 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 ofcorresponding 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 thatgenerally allows for exchanges on the Continuing LLC Owners may from time to time atlast 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


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 Intereststhat certain figures shown in the table above may not recalculate due to rounding.

In connection withFor the Reorganization Transactions described in Note 7 — Stockholders’ Equity, PetIQ becamethree and six months ended June 30, 2021 the sole managing memberCompany owned a weighted average of Holdco97.5% and as a result, consolidates94.4%, respectively, and 86.0% and 84.9% for the financial resultsthree 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 ninesix months ended SeptemberJune 30, 20172021, 2 and 2016, three and three1 customers respectively,individually accounted for more than 10% of sales, individually. In total for the three months ended September 30, 2017comprising 33% and 2016, the three customers accounted for 61% and 68%26% of net sales, respectively. In totalrespectively for such periods. During the ninethree and six months ended SeptemberJune 30, 2017 and 2016, the three2020 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 SeptemberJune 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. TheAt December 31, 2020 1 Products segment customers are customersindividually 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


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 SeptemberJune 30, 20172021 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

Note 14 – Segments

The Company has two2 operating segments,segments: Products and thus two reportable segments, which areServices. 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 determinationServices segment consists of the operatingCompany’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 doneand 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

1928


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

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 membersChris 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 wereCompany’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 transactionsthe 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 statementa 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 forapproximately $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


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‑Q10-Q and our audited consolidated financial statements for the year ended December 31, 20162020 and related notes included in the final prospectusannual 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 growingleading pet healthmedication and wellness company providingdelivering 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, includingservices. We engage with customers through more than 40,00060,000 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 petproducts 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 netmanufacturing and distribution business. The Services segments consists of veterinary services and related product sales it is appropriateprovided by the Company directly to view our operations asconsumers.

We are the sole managing member of PetIQ Holdings, LLC (“HoldCo”), a whole,Delaware limited liability company, which is the approach we followsole 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 Discussiongovernment restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and Analysisthe 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 priceclosure of $16.00 per share. We received proceedsbusinesses and causing weakened economic conditions and an economic slowdown and recession.  

With the anticipated gradual receding of $106,950 netthe 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. 

Resultshistorical 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 fixednew 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 factorsnew variants that may affect our future sales growth include: new product introductions; expansion into e-commerceimpede or reverse recovery and other customer bases; expansionsuch 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


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 offeringspandemic in the first two quartersquarter of 2020, the year in preparation for increased consumer demand duringCompany has implemented various policies and procedures designed to ensure the summer months.

Our products are primarily consumablessafety 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, shippingteam 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 manufacturersbegun to negotiate lowerroll 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 expensessuch 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 healthveterinary services clinics and wellness products, we invest in R&D on an ongoing basis. In additioncenters 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 productsensure 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


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 setstables 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


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 SeptemberJune 30, 20172021 Compared With Three Months Ended SeptemberJune 30, 20162020

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 SeptemberJune 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 existingreopening 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 profitProducts Segment

Gross profit increased by $6.4Product sales decreased $21.4 million, or 103.2%8.1%, to $12.5$242.9 million for the three months ended SeptemberJune 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 SeptemberJune 30, 2017 compared2020. 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 SeptemberJune 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 $0.42021, 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 SeptemberJune 30, 2017,2021, compared to $0.7$1.7 million for the three months ended SeptemberJune 30, 2016. This decrease2020. The increase in same-store sales was driven by the new debt agreement, entered into in Decemberrelaxation 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 incomeCOVID-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 SeptemberJune 30, 20172021, compared to $1.0 million for the three months ended June 30, 2020. The increase in non same-store sales was a pre-taxresult 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

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 losssales, 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 SeptemberJune 30, 2016.

24


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 countincreased 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

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

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

program change at existing customers, botha 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 existingthe 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 ninesix months ended SeptemberJune 30, 2017,2021, compared to $24.9$74.3 million for the ninesix months ended SeptemberJune 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 improvementimprovements in gross margin.  the Services Segment.

Gross margin increased to 18.9%20.4% for the ninesix months ended SeptemberJune 30, 2017, from 16.0%2021, compared to 16.4% for the ninesix months ended SeptemberJune 30, 2016, which2020. This increase was driven by economies of scaleproduct sales growth in certain productshigher margin items such as well as product mix.Capstar and the improvements in the Services segment.

General and administrative expenses

GeneralConsolidated 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 ninesix months ended SeptemberJune 30, 2017,2021, compared to $24.3$70.2 million for the ninesix months ended SeptemberJune 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

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 partAdditional 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 additionnew acquisitions the acceleration of our stock based compensation planin-process research and related grants, as well as improved operations requiring increased incentive compensation accruals; and

development assets; offset by

·

reductionThe 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 ninesix months ended SeptemberJune 30, 2017,2021, compared to $2.4$10.7 million for the ninesix months ended SeptemberJune 30, 2016.2020. This decreaseincrease was driven by the newNotes issued in May 2020 to finance the Capstar Acquisition and the increase in total debt agreement, which reduced interest ratesoutstanding.

Provision for income taxes

Our effective tax rate was (2.1)% and provided more flexibility, offset slightly by increases in19.4% for the base rate.

Other income, net

Other income, net, decreased $0.6 million to $14 thousand in the ninesix months ended SeptemberJune 30, 2017 compared2021 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 $0.7the 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 ninesix months ended SeptemberJune 30, 2016.  This is2021, 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 sellerthe relatively fixed cost nature of a business purchasedclinic. Additionally, Services segment earnings are impacted by the Company in previous years.  The settlement called for a reductionCompany’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 resultsize 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

The following tables reconcile Segment pre-tax net income increased $14.0 million, to net income of $11.8 millionAdjusted EBITDA for the nine months ended September 30, 2017, compared to a pre-tax net lossperiods 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

(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 adjustsadjustments 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.

25


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:

·

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

·

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

·

EBITDA does not reflect the interest expenses, or the cash requirements necessary to service interest or principal payments, on our debts;

·

althoughAlthough depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

·

Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing core operations; and

·

Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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 lossincome (loss) to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

2640


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 reflectsAcquisition costs relatinginclude 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 feescompleted and termination fees.

contemplated acquisitions.

(2)

(2)

Represents annual fees paid pursuantNon same-store revenue and costs relate to our management agreementsServices segment and are from wellness centers, host partners, and regions with Eos, Highlandless than six full trailing quarters of operating results.

(3)Integration costs and Labore. The management agreements will terminatecosts 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 litigationClinic launch expenses relate to cases involvingour 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 flowflows from operations, borrowings, and equity contributions.capital. As of SeptemberJune 30, 20172021 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 SeptemberJune 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 SeptemberJune 30, 20172021 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


We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facilityfacilities 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

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 ninesix months ended SeptemberJune 30, 2017,2021, compared netto cash used in operating activities of $1.3$42.4 million for the ninesix months ended SeptemberJune 30, 2016.2020. The increasechange in operating cash flows primarily reflects improved net income,higher earnings offset by increased use of cash forsignificant growth in working capital.capital items. Working capital useschanges 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 ninesix months ended SeptemberJune 30, 20172021 compared to $1.5$52.7 million of cash used in operating activities for the ninesix months ended SeptemberJune 30, 2016.2020.

Cash used in Investing Activities

Net cash used in investing activities was $3.6$18.0 million for the ninesix months ended SeptemberJune 30, 2017,2021, compared to $1.6$10.0 million for the ninesix months ended SeptemberJune 30, 2016.2020. The increase in net cash used in investing activities is a result of the Company purchasing an office buildingcontinued investment in the quarter for usenew wellness centers as itswell 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 ninesix months ended SeptemberJune 30, 2017 2021, compared to $0.9$142.4 million in net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2016.  This increase2020. 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 repaymentimproved profitability allowing for less use of borrowed capital.debt financing and no significant asset acquisition related financing taking place.

42

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

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.

44

General Other Debt

The Company entered into a new creditmortgage 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 repaidAugust 2, 2021, and terminatedhas reclassified the A&R Creditmortgage 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 financingCompany discounted the payment stream using a market interest rate of $508.3%, 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 $5.02018 Contingent Note and $10.0 million outstanding as Term Loans and $22.5 million outstanding underwas 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 onpayments of 6.75% with the Revolver was also 4.25%, bothbalance 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.

28


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 NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the marketrecorded value of our credit agreementagreements but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of SeptemberJune 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 SeptemberJune 30, 20172021 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.

45

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.

29


Changes in Internal Control over Financial Reporting

As a result of our July 2017 IPO and resultingThere was no change in tax structure, the Company implementedour internal controlscontrol over significant processes specificfinancial 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, thereover financial reporting. We have been no changes in the Company’snot experienced any material impact to our internal controls over financial reporting duringdespite the third quarterfact that some of fiscal 2017 that have materially affected, orour corporate employees are reasonably likelyworking remotely due to materially affect, the Company’sCOVID-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’ sectionFactors” 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

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


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, weWe 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


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


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, 2017August 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 reflectsAcquisition costs relatinginclude 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 feescompleted and termination fees.

contemplated acquisitions.

(2)

(2)

Represents annual fees paid pursuantNon same-store revenue and costs relate to our management agreementsServices segment and are from wellness centers, host partners, and regions with Eos, Highlandless than six full trailing quarters of operating results.

(3)Integration costs and Labore. The management agreements will terminatecosts 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 litigationClinic launch expenses relate to cases involvingour 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 flowflows from operations, borrowings, and equity contributions.capital. As of SeptemberJune 30, 20172021 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 SeptemberJune 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 SeptemberJune 30, 20172021 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


We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facilityfacilities 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

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 ninesix months ended SeptemberJune 30, 2017,2021, compared netto cash used in operating activities of $1.3$42.4 million for the ninesix months ended SeptemberJune 30, 2016.2020. The increasechange in operating cash flows primarily reflects improved net income,higher earnings offset by increased use of cash forsignificant growth in working capital.capital items. Working capital useschanges 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 ninesix months ended SeptemberJune 30, 20172021 compared to $1.5$52.7 million of cash used in operating activities for the ninesix months ended SeptemberJune 30, 2016.2020.

Cash used in Investing Activities

Net cash used in investing activities was $3.6$18.0 million for the ninesix months ended SeptemberJune 30, 2017,2021, compared to $1.6$10.0 million for the ninesix months ended SeptemberJune 30, 2016.2020. The increase in net cash used in investing activities is a result of the Company purchasing an office buildingcontinued investment in the quarter for usenew wellness centers as itswell 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 ninesix months ended SeptemberJune 30, 2017 2021, compared to $0.9$142.4 million in net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2016.  This increase2020. 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 repaymentimproved profitability allowing for less use of borrowed capital.debt financing and no significant asset acquisition related financing taking place.

42

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

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.

44

General Other Debt

The Company entered into a new creditmortgage 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 repaidAugust 2, 2021, and terminatedhas reclassified the A&R Creditmortgage 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 financingCompany discounted the payment stream using a market interest rate of $508.3%, 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 $5.02018 Contingent Note and $10.0 million outstanding as Term Loans and $22.5 million outstanding underwas 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 onpayments of 6.75% with the Revolver was also 4.25%, bothbalance 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.

28


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 NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the marketrecorded value of our credit agreementagreements but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of SeptemberJune 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 SeptemberJune 30, 20172021 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.

45

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.

29


Changes in Internal Control over Financial Reporting

As a result of our July 2017 IPO and resultingThere was no change in tax structure, the Company implementedour internal controlscontrol over significant processes specificfinancial 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, thereover financial reporting. We have been no changes in the Company’snot experienced any material impact to our internal controls over financial reporting duringdespite the third quarterfact that some of fiscal 2017 that have materially affected, orour corporate employees are reasonably likelyworking remotely due to materially affect, the Company’sCOVID-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’ sectionFactors” 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

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


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, weWe 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


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


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, 2017August 5, 2021

/s/ John Newland

John Newland

Chief Financial Officer

3348