Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

10-Q

(Mark One)

x

☒

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

For the quarterly period ended September 30, 2017

March 31, 2023

☐

¨

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		35-2554312

Delaware

35‑2554312

(State or other jurisdiction of incorporation or organization)

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

230 E. Riverside Dr.

83616

500 E. Shore Drive, Suite 120

Eagle, Idaho

83616

(Zip Code)

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:

208‑939‑8900

Title of Each Class		Trading
Symbol		Name of Each Exchange on Which Registered

(Registrant’s telephone number, including area code)

Class A Common Stock, $0.001 par value

(Former name, former address and former fiscal year, if changed since last report)

PETQ		The Nasdaq Global Select Market

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

¨

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 ☒x 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 ☐

x

Non-accelerated filer

¨		Smaller reporting company¨

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

Smaller reporting 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 is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). ☐Yes ☒xNo

As of November 8, 2017,May 10, 2023, we had 13,222,58329,137,754 shares of Class A common stock and 8,268,188244,540 shares of Class B common stock outstanding.


Table of Contents


PetIQ, Inc.

Table of Contents

Page

3
3

3

4
3

PetIQ, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss)

4

PetIQ, Inc. Condensed Consolidated Statements of Cash Flows

5

PetIQ, Inc. Condensed Consolidated Statements of Members/Stockholders EquityOperations

5
6

6
7
9

10
7

21
21

25
29

26
29

26
31

26
31

Unregistered Sales of Equity Securities and Use of ProceedsProce

eds
27
31

27
27

27
32

27
32

28
33

2

2

Table of Contents


PetIQ, Inc.

Condensed Consolidated Balance Sheets

(Dollars

PART I —FINANCIAL INFORMATION
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,” “believe,” “continuing,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “project,” “should,” “will,” 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 thousands)

or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q; general economic or market conditions, including the impacts of the ongoing COVID-19 pandemic, global economic slowdown, increased inflation, rising interest rates and recent and potential bank failures; our ability to successfully grow our business through acquisitions and our ability to integrate acquisitions, including Rocco & Roxie; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, and other reports filed from time to time with the Securities and Exchange Commission.

 

 

 

 

 

 

 

 

    

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

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.

3
Table of Contents

PetIQ, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, in 000’s except for per share amounts)
March 31, 2023December 31, 2022
Current assets
Cash and cash equivalents$25,410 $101,265 
Accounts receivable, net203,325 118,004 
Inventories158,087 142,605 
Other current assets10,330 8,238 
Total current assets397,152 370,112 
Property, plant and equipment, net71,667 73,395 
Operating lease right of use assets16,651 18,231 
Other non-current assets2,527 1,373 
Intangible assets, net176,145 172,479 
Goodwill203,573 183,306 
Total assets$867,715 $818,896 
Liabilities and equity  
Current liabilities  
Accounts payable$150,012 $112,995 
Accrued wages payable9,547 11,512 
Accrued interest payable3,155 1,912 
Other accrued expenses8,388 7,725 
Current portion of operating leases6,410 6,595 
Current portion of long-term debt and finance leases8,675 8,751 
Total current liabilities186,187 149,490 
Operating leases, less current installments10,956 12,405 
Long-term debt, less current installments441,938 443,276 
Finance leases, less current installments703 907 
Other non-current liabilities4,782 1,025 
Total non-current liabilities458,379 457,613 
Equity  
Additional paid-in capital380,429 378,709 
Class A common stock, par value $0.001 per share, 125,000 shares authorized; 29,499 and 29,348 shares issued, respectively29 29 
Class B common stock, par value $0.001 per share, 8,402 shares authorized; 244 and 252 shares issued and outstanding, respectively— — 
Class A treasury stock, at cost, 373 shares(3,857)(3,857)
Accumulated deficit(153,034)(162,733)
Accumulated other comprehensive loss(2,275)(2,224)
Total stockholders' equity221,292 209,924 
Non-controlling interest1,857 1,869 
Total equity223,149 211,793 
Total liabilities and equity$867,715 $818,896 
See accompanying notes to the condensed consolidated financial statements

statements.

3

4

Table of Contents


PetIQ, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three and nine months ended September 30,

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

(1)

Basic and Diluted earningsPetIQ, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in 000’s except for per share is applicable only for periods after the Company’s IPO.  See Note 5 – Earnings per share.

amounts)

For the Three Months Ended
March 31, 2023March 31, 2022
Product sales$258,993 $247,750 
Services revenue31,478 27,945 
Total net sales290,471 275,695 
Cost of products sold200,902 190,851 
Cost of services27,308 27,209 
Total cost of sales228,210 218,060 
Gross profit62,261 57,635 
Operating expenses
Selling, general and administrative expenses43,326 48,236 
Operating income18,935 9,399 
Interest expense, net8,732 6,121 
Other income, net(26)(3)
Total other expense, net8,706 6,118 
Pretax net income10,229 3,281 
Income tax expense(448)(121)
Net income9,781 3,160 
Net income attributable to non-controlling interest82 29 
Net income attributable to PetIQ, Inc.$9,699 $3,131 
Net income per share attributable to PetIQ, Inc. Class A common stock
Basic$0.33 $0.11 
Diluted$0.32 $0.11 
Weighted Average shares of Class A common stock outstanding
Basic29,125 29,164 
Diluted35,230 29,290 
See accompanying notes to the condensed consolidated financial statements

statements.

4

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PetIQ, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

PetIQ, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in 000’s)

 

 

 

 

 

 

 

 

    

 

    

 

 

 

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

 

 

 —

For the Three Months Ended
March 31, 2023March 31, 2022
Net income$9,781 $3,160 
Foreign currency translation adjustment(51)(456)
Comprehensive income9,730 2,704 
Comprehensive income attributable to non-controlling interest82 25 
Comprehensive income attributable to PetIQ, Inc.$9,648 $2,679 

See accompanying notes to the condensed consolidated financial statements

statements.

5

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Table of Contents


PetIQ, Inc.

Condensed Consolidated Statements of Members/Stockholders Equity

(Unaudited, dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in 000’s)

6

For the Three Months Ended March 31,
20232022
Cash flows from operating activities
Net income$9,781 $3,160 
Adjustments to reconcile net income to net cash used in operating activities  
Depreciation and amortization of intangible assets and loan fees8,463 8,966 
Loss on disposition of property, plant, and equipment— 148 
Stock based compensation expense2,466 3,823 
Other non-cash activity(52)316 
Changes in assets and liabilities, net of business acquisition
Accounts receivable(84,250)(65,026)
Inventories(13,567)(71,417)
Other assets(2,065)(1,273)
Accounts payable36,019 74,094 
Accrued wages payable(1,988)(1,496)
Other accrued expenses1,866 3,325 
Net cash used in operating activities(43,327)(45,380)
Cash flows from investing activities  
Business acquisition (net of cash acquired)(27,634)— 
Purchase of property, plant, and equipment(1,910)(5,678)
Net cash used in investing activities(29,544)(5,678)
Cash flows from financing activities  
Proceeds from issuance of long-term debt15,000 40,000 
Principal payments on long-term debt(16,900)(16,150)
Principal payments on finance lease obligations(346)(399)
Tax withholding payments on Restricted Stock Units(840)(688)
Exercise of options to purchase Class A common stock— 100 
Net cash (used in) provided by financing activities(3,086)22,863 
Net change in cash and cash equivalents(75,957)(28,195)
Effect of exchange rate changes on cash and cash equivalents102 (107)
Cash and cash equivalents, beginning of period101,265 79,406 
Cash and cash equivalents, end of period$25,410 $51,104 

See accompanying notes to the condensed consolidated financial statements.

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PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited, in 000’s)

For the Three Months Ended March 31,
Supplemental cash flow information20232022
Interest paid$6,808 $4,072 
Net change in property, plant, and equipment acquired through accounts payable(34)290 
Finance lease additions— 59 
Income taxes paid, net of refunds3 (5)
See accompanying notes to the condensed consolidated financial statements.
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PetIQ, Inc.
Condensed Consolidated Statements of Equity
(Unaudited, in 000’s)
Three months ended March 31, 2023
Accumulated
Deficit		Accumulated
Other
Comprehensive
Loss		Class A CommonClass A Treasury StockClass B CommonAdditional
Paid-in
Capital		Non-controlling
Interest		Total
Equity
SharesDollarsSharesDollarsSharesDollars
Balance - January 1, 2023$(162,733)$(2,224)29,348 $29 373 $(3,857)252 $— $378,709 $1,869 $211,793 
Exchange of LLC Interests held by LLC Owners— — 8 — — — (8)— 115 (115)— 
Other comprehensive income— (51)— — — — — — — — (51)
Stock based compensation expense— — — — — — — — 2,445 21 2,466 
Issuance of stock vesting of RSU's, net of tax withholdings— — 143 — — — — — (840)— (840)
Net income9,699 — — — — — — — — 82 9,781 
Balance - March 31, 2023$(153,034)$(2,275)29,499 $29 373 $(3,857)244 $— $380,429 $1,857 $223,149 
Three months ended March 31, 2022
Accumulated
Deficit		Accumulated
Other
Comprehensive
Loss		Class A CommonClass A Treasury StockClass B CommonAdditional
Paid-in
Capital		Non-controlling
Interest		Total
Equity
SharesDollarsSharesDollarsSharesDollars
Balance - January 1, 2022$(114,525)$(684)29,139 $29 — $— 272 $— $368,006 $2,394 $255,220 
Exchange of LLC Interests held by LLC Owners— — 20 — — — (20)— 192 (192)— 
Other comprehensive loss— (452)— — — — — — — (4)(456)
Stock based compensation expense— — — — — — — — 3,788 35 3,823 
Exercise of options to purchase common stock— — 2 — — — — — 100 — 100 
Issuance of stock vesting of RSU's, net of tax withholdings— — 110 — — — — — (688)— (688)
Net income3,131 — — — — — — — — 29 3,160 
Balance - March 31, 2022$(111,394)$(1,136)29,272 $29 — $— 252 $— $371,398 $2,262 $261,159 

Note that certain figures shown in the tables above may not recalculate due to rounding.
See accompanying notes to the condensed consolidated financial statements.
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PetIQ Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

Note 1 -— Principal Business Activity and Significant Accounting Policies

Principal Business Activity and Principles of Consolidation

PetIQ, Inc. (the “Company”("PetIQ", the "Company", "we", or “PetIQ”"us") was formedis a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail and e-commerce channels with our branded and distributed medications as a Delaware corporation on February 29, 2016.well as health and wellness items, which are further supported by our world-class medications manufacturing facility in Omaha, Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national service platform operates in over 2,600 retail partner locations in 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care that we can give them.
PetIQ has two 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 and wellness services and related transactions in orderproduct sales provided by the Company directly to carry on the business of consumers.
PetIQ LLC, an Idaho limited liability company. The Company is the sole managing member of PetIQ Holdings, LLC (“Holdco”HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”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.

The Company’s principal asset is the Holdco LLC Interests that it holds. As the sole managing member of Holdco, the CompanyHoldCo, 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.

OpCo.

The condensed consolidated financial statements as of September 30, 2017March 31, 2023 and December 31, 20162022 and for the three and nine months ended September 30, 2017March 31, 2023 and 20162022 are unaudited. The condensed consolidated balance sheet as of December 31, 20162022 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, 20162022 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.February 28, 2023 (the "Annual Report"). 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 condensed 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

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property, plant, and equipment, intangible assets and goodwill, the valuation of deferred tax assets, the valuation of inventories, and notes receivable; and reserves for legal contingencies.

Foreign Currencies

Significant Accounting Policies
The Company's significant accounting policies are discussed in Note 1 – Principal Business Activity and Significant Accounting Policies in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company's unaudited condensed financial statements and related notes during the three months ended March 31, 2023.
Note 2 — Business Combination
Rocco & Roxie
The Company operates subsidiariescompleted the acquisition of all of the membership units of Rocco & Roxie Supply Co, LLC ("R&R") on January 13, 2023, (the "R&R Acquisition"), which resulted in foreign countries who useR&R becoming a wholly owned subsidiary of the local currency asCompany. The R&R Acquisition expands the functional currency.Company's brand and product portfolio to include stain and odor products and enables the Company to extend its offerings into premium dog supplements and jerky treats. The Company translates its foreign subsidiaries’paid $26.5 million for
10
Table of Contents

the membership interests of R&R using cash on hand, resulting in R&R becoming a wholly owned subsidiary of PetIQ. The purchase is subject to normal working capital adjustments.
The following table summarizes the preliminary allocations of the consideration paid, which included $26.5 million price plus $1.1 million of preliminary working capital, of the purchase price to the assets acquired and liabilities denominated in foreign currencies into U.S. dollars atassumed, based on our current rates of exchange asestimates of the balance sheet date and income and expense items at the average exchange 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 gains 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.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with an original maturity of three months or lessfair value at the date of acquisition, excluding amounts restricted for various state licensing regulations. Restricted deposits are not considered 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 duringR&R Acquisition:

$'s in 000'sFair Value
Current assets$3,020 
Other assets1,208 
Amortizable intangibles
Trade name7,600 
Customer relationships320 
Total amortizable intangibles$7,920 
Goodwill20,266 
Total assets$32,414 
Current liabilities1,000 
Other tax liabilities3,780 
Total liabilities4,780 
Purchase price, net of cash acquired$27,634 
Intangible assets will be amortized over 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 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of  discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for doubtful accounts equal to estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  Payments of trade receivables are allocated to the specific invoices identified on the customer's remittance advice.

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

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

Inventories are stated at the lower of cost or net realizable value.  Cost is typically determined using the first-in first-out (“FIFO”) method  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

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considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions.  Changes in these conditions may result in additional reserves.  Major components of inventories consist of the following as of:

 

 

 

 

 

 

 

 

    

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

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.

Depreciation and amortization is provided using the straight-line method, based on useful lives of the assets except for leasehold improvements and capital leased assets which are depreciated over the shorterthrough January 2043. The weighted average amortization period of the amortizable intangible assets is approximately 19.4 years. The identifiable intangible assets are measured at fair value as Level III in accordance with the fair value hierarchy.

Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales and general and administrative expenses in the consolidated statements of operations, depending on the usefuture synergies. Approximately $19.0 million of the asset.  The estimated useful lives$20.3 million of property, plant,Goodwill will not be tax deductible, and equipment are as follows:

Computer equipment and software

3 years

Buildings

33 years

Equipment

3-15 years

Leasehold improvements

3-9 years

Furniture and fixtures

8-10 years

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 requiredremaining balance is expected to be held by the Company in segregated accountsdeductible for various state licensing regulations in relationtax purposes. Goodwill was allocated to the saleProducts segment. Transaction costs of regulated prescription pet medications. Restricted deposits as of September 30, 2017, and December 31, 2016$0.5 million were $200 and $250, respectively.  Interest earned on restricted deposits is included in other income when earned.

Deferred Acquisition Liability

The Company has a deferred acquisition liability related to an acquisition that occurred in 2013.  The liability is denominated in Euros and requires annual payments based on a percentage of gross profit from the sales of certain products, and any amounts not repaid by the annual payments will be due in June 2018.  The current balance recorded as of September 30, 2017, and December 31, 2016 was $1,745 and $250, respectively, and is included in other accrued expenses.  The non-current portion recorded as of December 31, 2016 was $1,303, and is included in deferred acquisition liability.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shipped to the customer. For customers with Free on Board ("FOB") destination terms, a provision is recorded to exclude shipments determined to be in-transit to these customers at the end of the reporting period.  A sales return allowance is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, returned goods and other items.

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The Company offers a variety of trade promotions and incentives to our customers, such as cooperative advertising programs and store placement.  Sales are recorded net of trade promotion spending, which is recognized at the later 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. Accruals for expected payouts under these programs are included in other accrued expenses.

Shipping and Handling Costs

Shipping and handling costs are recorded as cost of sales, and are not billed to customers.

Research and Development and Advertising Costs

Research and development and advertising costs are expensed as incurred and are includedrecorded in generalSelling, General, and administrative expenses. Research and developmentAdministrative costs amounted to $114 and $82 for the three months ended September 30, 2017 and 2016, respectively and $427 and $248 for the nine months ended September 30, 2017 and 2016, respectively.  Advertising costs were $436 and $273 for the three months ended September 30, 2017 and 2016, respectively and $2,028 and $883 for the nine months ended September 30, 2017 and 2016, respectively.

Income taxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are 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 taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company may record a valuation allowance, if conditions are applicable, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

Non-controlling interest

The non-controlling interests on the condensed consolidated statementsstatement of income representsoperations.

The estimate of fair value and purchase price allocation were based on information available at the portiontime of earningsclosing the R&R Acquisition. These preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of closing the R&R Acquisition.

Note 3 — Debt
Senior Secured Asset-Based Revolving Credit Facility
On April 13, 2021, OpCo entered into an asset-based revolving credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides revolving credit commitments of $125.0 million, subject to a borrowing base limitation (the "ABL"). The borrowing base for the ABL at any time equals the sum of: (i) 90% of eligible investment-grade accounts receivable; plus (ii) 85% of eligible other accounts receivable; 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 bears interest at a variable rate plus a margin, with the variable rate being based on a base rate or loss attributableLIBOR at the option of the Company. On February 3, 2023, HoldCo and Opco, entered into the First Amendment Agreement to the economicABL Facility to replace the interest in the Company’s subsidiary, PetIQ Holdings, LLC, held by the non-controlling Continuing LLC Owners. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributablerate benchmark from LIBOR to the non-controlling Continuing LLC Owners, based on the portion of the LLC Interests owned by such LLCSOFR. The interest holders. Thererate at March 31, 2023 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 the Company operated as Opco during those periods. As of September 30, 2017 the non-controlling interest was approximately 38.5%5.90%.

Litigation

The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising outalso pays a commitment fee on unused borrowings at a rate 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.  The company consults with both internal and external legal counsel related to litigation.

Recently Issued Accounting Pronouncements

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

0.35%.

11
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financial statements, with optional practical expedients.   Based onThe ABL Facility is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries including a preliminary assessment, the Company expects that mostfirst-priority security interest in personal property consisting of its operating lease commitments will beaccounts receivable, inventory, cash, and deposit accounts (such collateral 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, the Financial Accounting Standards Board (“FASB”first-priority security interest, "ABL Priority Collateral") issued Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several related Accounting Standards Updates (“ASUs”) (“Topic 606”a second-priority security interest in all other personal and real property of HoldCo and its wholly-owned domestic subsidiaries (such collateral subject to such second-priority security interest, “Term Priority Collateral”), which provide guidance for recognizing revenue from contracts with customers.in each case, subject to customary exceptions. The core principleABL contains customary representations and warranties, affirmative and negative covenants and events of Topic 606 isdefault, including negative covenants that revenue will be recognized when promised goods or services are transferredrestrict the ability of HoldCo and its restricted subsidiaries to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. Topic 606 will be effective commencing with our quarter endingincur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions. As of March 31, 2018. We currently anticipate adopting Topic 606 using2023, no amounts were outstanding.

Senior Secured Term Loan Facility - Term Loan B
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 modified retrospective transition approachlenders’ party thereto, that provides senior secured term loans of $300.0 million (which may resultbe increased 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 Paymentscertain circumstances) (the "Term Loan B"). The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will beTerm Loan B bears interest at a variable rate of either prime, federal funds effective commencing with our quarter ending March 31, 2018. The Company does not expect the adoption of this 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 costrate 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 standard is effective for annual and interim reporting periods beginning after December 15, 2016. The adoption of this standard in first quarter of 2017 did not have a material effect on our financial statements.

In March 2016, the FASB issued ASU” No. 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718).” ASU No. 2016-09 simplifies the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interim periods beginning in the first interim period within the year of adoption. Any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted the provisions of this standard effective January 1, 2017.  The Company elected to continue to recognize estimated forfeitures over the term of the awards. The adoption of the standard did not have a material impact on the Company’s financial condition, results of operations, cash flows and disclosures.

Note 2 -     Debt

The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016.  This agreement fully repaid and terminated the A&R Credit Agreement described below. The New Credit Agreement provides for secured financing of $50,000 in aggregate at either LIBOR, or Base (prime) interest rates plus an applicable margin consisting of:

(i) $45,000 revolving credit facility (“Revolver”) maturing on December 16, 2019;of between 3.25% and

(ii) $5,000 term loan (“Term Loans”), requiring equal amortizing payments for 24 months.

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As of December 31, 2016, the Company had $5,000 outstanding as Term Loans and $22,473 outstanding under the Revolver. The interest rate 4.25% depending 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.underlying base rate. LIBOR rates are subject to a 0.50% floor. The interest rate at March 31, 2023 was 8.96%. The Term Loan B requires quarterly payments of 0.25% of the original principal amount, with the balance due on the Revolver was 4.75% as a Base Rate loan.  seventh anniversary of the closing date.

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 andTerm Loan B is secured by collateral consistingsubstantially all the assets of HoldCo and its wholly-owned domestic subsidiaries, including a percentagefirst-priority security interest in Term Priority Collateral and a second-priority security interest in ABL Priority Collateral, in each case, subject to customary exceptions. The Term Loan B contains customary representations and warranties, affirmative and negative covenants and events of eligible accounts receivable, inventories,default, including negative covenants that restrict the ability of HoldCo and machineryits restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and equipment. As of September 30, 2017,acquisitions, among other restrictions.


Convertible Notes

On May 19, 2020, 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, 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. 

On March 16, 2015, the Company entered into a $40,000 credit facility (“Credit Agreement”), comprised of a $33,000issued $143.8 million in aggregate principal amount of term loans4.00% Convertible Senior Notes due 2026 (the “Notes”) pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and $7,000 revolving credit facility. Borrowings underDecember 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 agreement were subjectright to convert their Notes only upon the occurrence of certain covenantsevents. From and restrictions including a fixed charge coverage ratio and a minimum EBITDA target, both measuredafter January 15, 2026, holders may convert their Notes at any time at their election until the close of business on a quarterly basis beginning in the first quarter of 2016.scheduled trading day immediately before the maturity date. The Company remained in compliance with these covenants for the durationwill settle conversions by paying or delivering, as applicable, cash, shares of the agreement.

its Class A common stock, or a combination of cash and shares of its Class A common stock, at its election. 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 financinginitial conversion rate is 33.7268 shares of $48,000 in the aggregate, consisting of:

(i) $3,000 in aggregateClass A common stock per $1,000 principal amount of term loans maturing on December 31, 2016;

(ii) $20,000Notes. 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 aggregate principal amountthe Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of term loans maturing on March 16, 2018; and

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

time.

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

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

Term Loans

 

$

 —

 

$

5,000

12

Future maturities of long termlong-term debt, excluding the net discount on debt and deferred financing fees, as of September 30, 2017,March 31, 2023, 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 2023$5,326 
20247,426 
20254,600 
2026147,350 
20273,600 
Thereafter288,891 

The Company incurred debt issuance costs


Note 4 — Intangible Assets and Goodwill
Goodwill and non-amortizable intangible assets
Intangible assets consist 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.

following at:

12

$'s in 000'sUseful LivesMarch 31, 2023December 31, 2022
Amortizable intangibles
Certification7 years$350 $350 
Customer relationships12-20 years160,360 160,040 
Patents and processes5-10 years14,634 14,634 
Brand names5-15 years32,233 24,633 
Total amortizable intangibles207,577 199,657 
Less accumulated amortization(66,339)(62,085)
Total net amortizable intangibles141,238 137,572 
Non-amortizable intangibles
Trademarks and other33,239 33,239 
In-process research and development1,668 1,668 
Intangible assets, net of accumulated amortization$176,145 $172,479 

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Note 3 -     Leases

The Company leases certain real estate, both office and production facilities, as well as equipment from third parties. Lease expiration dates are between 2018 and 2025.  A portion of capital leasesCertain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currencies.  Many of these leases include renewal options and in some cases options to purchase.

Annual future commitments under non-cancelable leases as of September 30, 2017, 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

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 leasecurrency movements. Amortization expense for the three and nine months ended September 30, 2017March 31, 2023 and 2016 totaled $4492022 was $4.3 million and $472, and $1,357 and $1,250,$4.5 million, respectively.

Note 4 -     Income Taxes

As a result

Estimated future amortization expense for each of the IPO and related reorganization transactions completedfollowing years is as follows:
Years ending December 31, ($'s in 000's)
Remainder of 2023$13,731 
202415,686 
202515,011 
202614,356 
202713,685 
Thereafter68,769 
13

The following is a summary of the changes in July 2017, the Company holds an economic interestcarrying value of approximately 62% in Holdco and consolidatesgoodwill for the financial position and results of Holdco.  The approximate 38% of Holdco not held by the Company is considered noncontrolling 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’speriod from January 1, 2021 to March 31, 2023:

Reporting Unit
($'s in 000's)ProductsServicesTotal
Goodwill as of January 1, 2022183,846 47,264 231,110 
Foreign currency translation(540)— (540)
Impairment— (47,264)(47,264)
Goodwill as of December 31, 2022183,306 — 183,306 
R&R Acquisition20,226 — 20,226 
Foreign currency translation41 — 41 
Goodwill as of March 31, 2023$203,573 $— $203,573 
Note 5 — Income Tax
Our effective tax rate is significantly lessfrom continuing operations was 4.4% and 3.7% for the three months ended March 31, 2023 and 2022, respectively, including discrete items. Income tax expense for the three months ended March 31, 2023 and 2022 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.  The effective tax rate for 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 resulteffects of the IPOchange in valuation allowance, state taxes, and reorganization transactions, the foreign rate differential.

The Company has assessed the realizability of the net deferred tax assets as of March 31, 2023 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from recorded deferred tax assets and liabilities based onwill not be realized. In future periods, if we conclude we have future taxable income sufficient to recognize the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes.  Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco.

Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation.  Opco makes cash distributions to permit the member 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 distributions to Continuing LLC Owners. This liability is included in accounts payable on the condensed consolidated balance sheet. 

Opco’s income tax provision prior to the IPO generally consisted of income taxes payable by our separate subsidiaries that are taxed as corporations.  As of December 31, 2016, the taxable foreign subsidiaries had $482 of deferred tax

13

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assets.  The deferred tax assets, resulted primarily from net operating losses and were fully offset by awe may reduce or eliminate the valuation allowance.

Note 5 –6 — Earnings per Share

Basic and Diluted Earnings per Share

Basic 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 during the period. Diluted earnings per share of Class A common stock is computed by dividing net income 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, the PetIQ Holdings, LLC Agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class

14
Table of common membership interests, 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 IPO for the purposes of calculating earnings per share would not be appropriate.

Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users 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.

Contents


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

 

 

 

 

Three months ended

Three months ended March 31,

 

September 30, 2017

(in 000's, except for per share amounts)(in 000's, except for per share amounts)20232022

Numerator:

 

 

 

Numerator:

Net income

 

$

859

Net income$9,781 $3,160 

Less: net income attributable to non-controlling interests

 

 

(1,085)

Less: net income attributable to non-controlling interests82 29 

Net income attributable to PetIQ, Inc. — basic

 

 

(226)

Net income attributable to PetIQ, Inc. — basic9,699 3,131 
Plus: interest expense on Convertible NotesPlus: interest expense on Convertible Notes1,676 — 
Net income attributable to PetIQ, Inc. — dilutedNet income attributable to PetIQ, Inc. — diluted11,375 3,131 

Denominator:

 

 

 

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

Weighted-average shares of Class A common stock outstanding — basicWeighted-average shares of Class A common stock outstanding — basic29,125 29,164 
Dilutive effects of stock options that are convertible into Class A common stockDilutive effects of stock options that are convertible into Class A common stock— 60 
Dilutive effect of RSUsDilutive effect of RSUs45 66 
Dilutive effect of conversion of Convertible NotesDilutive effect of conversion of Convertible Notes6,060 — 
Weighted-average shares of Class A common stock outstanding — dilutedWeighted-average shares of Class A common stock outstanding — diluted35,230 29,290 

 

 

 

Earnings per share of Class A common stock — basic

 

$

(0.02)

Earnings per share of Class A common stock — diluted

 

$

(0.02)

Income per share of Class A common stock — basicIncome per share of Class A common stock — basic$0.33 $0.11 
Income per share of Class A common stock — dilutedIncome per share of Class A common stock — diluted$0.32 $0.11 

Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

Shares

The computation of the Company’s Class Bdilutive effect of other potential common shares includes 0 and 60 for stock options as well as 45 and 66 restricted stock units for the three months ended March 31, 2023 and 2022, respectively. All stock options and 693 thousand restricted stock units have been excluded from the computation of dilutive effect as they are antidilutive for the three months ended March 31, 2023. For the three months ended March 31, 2022 stock awards of 1,797 thousand shares were excluded from the computation of dilutive effect as they were antidilutive.
The dilutive impact of the Notes has been included in the dilutive earnings per share calculation for the three months ended March 31, 2023. The dilutive impact of the Notes have not been included in the diluteddilutive earnings per share calculation for the three months ended March 31, 2022 as they would have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively.

antidilutive.

14

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Note 6 –7 — Stock Based Compensation

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


PetIQ, Inc. Omnibus Incentive Plan


The Amended and Restated PetIQ, Inc. Omnibus Incentive Plan, (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 registeredawards, up to a total of 5,804,000 shares of Class A common stock for issuanceissuable under the Plan. As of September 30, 2017, 1,109,998March 31, 2023 and 2022, 1,167,937 and 26,000 shares were available for issuance under the Plan.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”) provided for the grant of stock options to employees hired in connection with an acquisition in 2018 as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800,000 shares of Class A common stock of
15

the Company, of which 760,000 were granted. No further grants may be made under the Inducement Plan. All awards issued under the Inducement Plan may only be settled in shares of Class A common stock.
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 beare typically 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$0.3 million and $1.3 million for the three and nine months ended September 30, 2017.March 31, 2023 and 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended September 30:

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:

15

Table of Contents

The following table summarizes the activity of the Company’s unvested stockMarch 31, 2022. No options were issued for the period ended September 30, 2017:

March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 

 

 

 

 

 

 

March 31, 2022
Expected term (years) (1)
6.25
Expected volatility (2)
37.21 %
Risk-free interest rate (3)
1.44 %
Dividend yield (4)
0.00 %

(1)The grant date fair valueCompany 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 options granted duringprice volatility with a look back period consistent with the period ended September 30, 2017expected option term.
(3)The risk-free interest rate was $6.08 per option. At September 30, 2017,based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.
(4)The Company has not paid and does not anticipate paying a cash dividend on our common stock.
As of March 31, 2023, total unrecognized compensation cost related to unvested stock options was $4.4$3.1 million and is expected to be recognized over a weighted-average period of 3.81.6 years.

Note 7 - Stockholders’ Equity

Reorganization Transactions

In connection with the IPO on July 20, 2017, the Company completed 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 carrying value, as the contribution was considered to be a transaction between entities under common control;

·

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

·

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

·

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

Following the completion of the Reorganization Transactions and IPO, PetIQ owned 61.5% of HoldCo. The remaining 38.5% of Holdco was held by the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ.  As a result of the Reorganization Transactions, PetIQ became 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.

16

Stock
Options
(in 000's)		Weighted
Average
Exercise
Price		Aggregate
Intrinsic
Value
(in 000's)		Weighted
Average
Remaining
Contractual
Life
(years)
Outstanding at January 1, 20221,768 $26.51 $2,897 7.3
Granted83 14.16 
Exercised(2)19.49 $10 
Forfeited(110)29.24 
Cancelled(86)31.12 
Outstanding at December 31, 20221,652 $25.48 $53 6.2
Forfeited(52)11.17 
Cancelled(37)30.85 
Outstanding at March 31, 20231,563 $25.81 $— 5.6
Options exercisable at March 31, 20231,296 

16

AsRestricted Stock Units

The Company awards RSUs to certain employees and directors under the Reorganization TransactionsPlan, which are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.

Amendment and Restatementsubject to time-based vesting conditions. Typically, upon a termination of Certificate of Incorporation

On July 20, 2017,service relationship by the Company, amendedall unvested RSUs will be forfeited 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 parunderlying such awards will become available for issuance under the Plan. The fair value of $0.001 per share; (ii) authorization of 8,401,521 shares of Class B common stock with a parRSUs are measured based on the closing fair market value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.

Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one vote per share on all matters presented to the Company’s stockholders generally.

Holders of the Company’s Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC interests of Holdco held by Continuing LLC Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be canceled on a one-for-one basis upon the redemption or exchange any of the outstanding LLC Interests held by the Continuing LLC Owners.

The Company must, at all times, maintain a one-to-one ratio between the number of outstanding shares of Class A common stock 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 corresponding Class B common shares from entities affiliated with the Company’s CEO and President.

Immediately following the completion of the IPO and the underwriters’ exercise of their option to purchase additional shares of 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.

The LLC Agreement also provides that the Continuing LLC Owners may from time to time at 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 equalthe date of grant. At March 31, 2023, total unrecognized compensation cost related to unvested RSUs was $26.7 million and is expected to vest over a volume weighted average market priceperiod of one share3.4 years.

The fair value of Class A commonthese equity awards is amortized to equity based compensation expense over the vesting period, which totaled $1.4 million for the three months ended March 31, 2023, and $2.5 million for the three months ended March 31, 2022, respectively. All stock for each LLC interest exchanged,based compensation expense is included in each case in accordance withselling, general and administrative expenses based on the termsrole of recipients.
The following table summarizes the activity of the Company’s RSUs for the period ended March 31, 2023.
Number of
Shares
(in 000's)		Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2022459 $31.08 
Granted802 20.30 
Settled(231)27.81 
Forfeited(177)25.53 
Outstanding at December 31, 2022853 $23.06 
Granted1,033 10.80 
Settled(168)23.02 
Forfeited(24)18.55 
Nonvested RSUs at March 31, 20231,694 $15.39 
Note 8 — Non-Controlling Interests
The following table presents the outstanding membership interests in HoldCo ("LLC Agreement; providedInterests") and changes in LLC Interests for the periods presented.
LLC Interests held% of Total
$'s in 000'sLLC
Owners		PetIQ, Inc.TotalLLC
Owners		PetIQ, Inc.
As of January 1, 2022272 29,139 29,411 0.9 %99.1 %
Stock based compensation transactions— 188 188 
Exchange transactions(20)20 — 
Unit redemption— (373)(373)
As of December 31, 2022252 28,974 29,226 0.9 %99.1 %
Stock based compensation transactions— 143 143 
Exchange transactions(8)8 — 
As of March 31, 2023244 29,125 29,369 0.8 %99.2 %
Note that atcertain figures shown in the Company’s election (determined solely bytable above may not recalculate due to rounding.
For the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests),three months ended March 31, 2023 and 2022 the Company may effectowned a direct exchangeweighted average of such

99.2% and 99.1%, respectively, of HoldCo.

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 8 - Non-Controlling Interests

In connection with the Reorganization Transactions described in Note 7 — Stockholders’ Equity, PetIQ became the sole managing member of Holdco and, as a result, consolidates the financial results 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 -— Customer Concentration

The Company has significant exposure to customer concentration. During the three months ended March 31, 2023 and 2022, three and nine months ended September 30, 2017 and 2016, three and threetwo customers respectively,individually accounted for more than 10% of sales, individually. In total for the three months ended September 30, 2017comprising 50% and 2016, the three customers accounted for 61% and 68%36% of net sales respectively. In totalin aggregate, respectively for the nine months ended September 30, 2017 and 2016, the three customers accounted for 61% and 71% of net sales, respectively. such periods.
At September 30, 2017 and DecemberMarch 31, 2016 four and four customers, respectively,2023 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 53% and 60%, respectively, 41% of outstanding trade receivables, net. The customers are customersAt December 31, 2022 one Products segment customer individually accounted for more than 10% of the domestic segment.

outstanding trade receivables, and accounted for 46% of outstanding trade receivables, net.

Note 10 -— Commitments and Contingencies

Litigation Contingencies

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

18

Table of Contents

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

The Company records a liability when a particular contingency is probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency at September 30, 2017as of March 31, 2023 and December 31, 2016,2022 as the Company does not consider any contingency to be probable or estimable.

The Company expenses legal costs as incurredrecorded $2.5 million of expense in the three months ended March 31, 2022 related to a lawsuit brought by a former supplier to the Company related to the redemption of ownership interest, which is included within selling, general and administrative expenses on the condensed consolidated condensed statements of operations.

The matter was settled and paid during 2022.

Commitments
We have commitments for leases and long-term debt that are discussed further in Note - 3, Debt. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.
Note 11 -— Segments

The Company has two 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. 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.

their respective Segment Adjusted EBITDA performance. Beginning in the fourth quarter of 2022, we allocate to our segments capital expenditures and certain costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses, on a pro rata basis based on net sales to better align with the discrete financial information reviewed by our CODM. Such expenses previously were not allocated to segments. The Company has recast prior periods to give effect to this change. This change in presentation had no impact on the Condensed Consolidated Statements of Operations.

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

19

$'s in 000'sProductsServices
March 31, 2023
Net sales$258,993 $31,478 
Segment Adjusted EBITDA32,196 850 
Depreciation expense1,816 1,705 
Capital expenditures1,565 345 

18

Note 12 -     Related Parties

Opco had entered into management consulting services agreements with members of Holdco.  
$'s in 000'sProductsServices
March 31, 2022
Net sales$247,750 $27,945 
Segment Adjusted EBITDA30,477 1,118 
Depreciation expense1,928 1,754 
Capital expenditures3,929 1,749 

The services were relatedfollowing table reconciles Segment Adjusted EBITDA to financial transactions and other senior management matters related to business administration.  Those agreements providedNet income for the Company to pay base annual management fees plus expenses, typically paid quarterly.  These expenses were recorded in general and administrative expensesperiods presented.
For the three months ended
$'s in 000'sMarch 31, 2023March 31, 2022
Segment Adjusted EBITDA:
Products(1)
$32,196 $30,477 
Services(1)
850 1,118 
Total33,046 31,595 
Adjustments:
Depreciation(3,521)(3,682)
Amortization(4,262)(4,523)
Interest(8,732)(6,121)
Acquisition costs(2)
(538)— 
Stock based compensation expense(2,466)(3,823)
Non same-store adjustment(3)
(2,322)(7,165)
Integration costs(4)
(976)(339)
Litigation expenses— (2,661)
Pretax net income$10,229 $3,281 
Income tax expense(448)(121)
Net income$9,781 $3,160 
(1)Beginning in the condensed consolidated statementfourth quarter of comprehensive income (loss).2022, the Company is allocating corporate expenses to each segment pro rata based on net sales for each segment. The Company recorded $545presentation of Products Segment Adjusted EBITDA and $508 for the nine months ended September 30, 2017 and 2016, respectively, and $158 and $208Services Segment Adjusted EBITDA for the three months ended September 30, 2017March 31, 2022 has been recast for comparability. For the three months ended March 31, 2022, total corporate expenses were $19.4 million, of which $17.4 million was allocated to Products and 2016, respectively.  Upon consummation$2.0 million was allocated to Services.
(2) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.
(3) Non same-store adjustment includes revenue and costs, and associated gross profit, related to our Services segment wellness centers and host partners with less than six full quarters of operating results, and also include pre-opening expenses.
(4) Integration costs represent costs related to integrating the recapitalizationacquired businesses including personnel costs such as severance and IPO transactions, these agreements were terminated. 

As discussed in Note 4– Income taxes,retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily within 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.

20

Products segment.

19

Supplemental geographic disclosures are below.
Three Months Ended March 31, 2023
$'s in 000'sU.S.ForeignTotal
Product sales$257,977 $1,016 $258,993 
Service revenue31,478 — 31,478 
Total net sales$289,455 $1,016 $290,471 
Three Months Ended March 31, 2022
$'s in 000'sU.S.ForeignTotal
Product sales$245,572 $2,178 $247,750 
Service revenue27,945 — 27,945 
Total net sales$273,517 $2,178 $275,695 
Property, plant, and equipment by geographic location is below.
March 31, 2023December 31, 2022
United States$67,707 $69,376 
Europe3,960 4,019 
Total$71,667 $73,395 
Note 12 — Related Parties
Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance, which acts as a broker for a number of the Company’s insurance policies. The Company’s premium expense, which is generally paid directly to the relevant insurance company, amounted to $6.9 million and $6.9 million for policies that cover the three months ended March 31, 2023 and 2022, respectively. Mr. Chris Christensen earns various forms of compensation based on the specifics of each policy.
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 was paid $0.06 million and $0.06 million for the three months ended March 31, 2023 and 2022, respectively.
Mike Glasman, the brother of CFO, Zvi Glasman, acted as a broker in connection with the Company's entry into a Master Services Agreement with Syndeo, LLC d/b/a Broadvoice ("Broadvoice") in February 2023 for the provision of certain information technology related services. The amount to be paid to Broadvoice over the 39-month agreement is $0.4 million. No payments were made in the three months ended March 31, 2023.

20


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, 20162022 and related notes included in the final prospectusAnnual Report on Form 10-K for PetIQ, Inc., dated July 20, 2017 andthe year ended December 31 filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017.February 28, 2023. 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 Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to PetIQ, Inc. and our consolidated subsidiaries.


Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to PetIQ, Inc. and our consolidated subsidiaries.

Business

Overview

PetIQ is a rapidly growingleading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail and e-commerce channels with our branded and distributed medications as well as health and wellness company providing convenient accessitems, which are further supported by our world-class medications manufacturing facility in Omaha, Nebraska and affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leadingmanufacturing facility in Springville, Utah. Our national service platform, operates in over 2,600 retail stores, including more than 40,000 retail pharmacy locations.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 that 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 and wellness services and products provided by the Company directly to consumers.
On January 13, 2023, the Company completed the acquisition of all of the membership units of Rocco and Roxie Supply Co, LLC ("R&R"), after which R&R became a wholly owned and consolidated subsidiary of the Company. The acquisition expands the Company's product portfolio to include stain and odor products, jerky treats and behavioral products as well as expands sales it is appropriate to view our operations aschannels in e-commerce.
We are the 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, operates and controls all of the business and affairs of OpCo.


Stock Repurchase Program

On September 6, 2022, the Company's Board of Directors authorized a stock repurchase program for up to $30 million of Class A common stock. Repurchases of Class A common stock may be made at management’s discretion from time to time in throughout this Management’s Discussionone or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and Analysis 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 shares to the public at a price of $16.00 per share. We received proceeds of $106,950 net of underwriters discounts and commissions, which we utilized to repay preference notes, pay offering costs, and purchase LLC Interests in Holdco. 

Results 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 applicable rules and regulations promulgated under Securities Exchange Act. The Company did not repurchase any shares during the terms of our contracts, which generally occurs upon shipment of product, when the price is fixed or determinable and when collectability is reasonably assured. These trade promotions are used to increase our aggregate net sales. Our net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.

Key factors that may affect our future sales growth include: new product introductions; expansion into e-commerce and other customer bases; expansion 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.

current period.


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 offerings in the first two quarters of the year in preparation for increased consumer demand during the summer months.

Our products are primarily consumables and, as such, they experience a replenishment cycle.

Gross Profit

Gross profit is our net sales less cost of sales. Our cost of sales consists primarily of costs of raw goods, finished goods packaging materials, manufacturing, shipping 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, 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, we have worked closely with our contract manufacturers to negotiate lower costs through increased volume of purchases and price negotiations. The gross margin on our proprietary value-branded products is higher than on our distributed products. For distributed products, our costs are driven largely by whether we source the product direct from the manufacturer or a licensed distributor. Increasingly, PetIQ sources distributed brands direct from the manufacturer or from licensed distributors.

General and Administrative Expenses

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

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

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

To continue to grow our pet Rx medications, OTC medications and health and wellness products, we invest in R&D on an ongoing basis. In addition to our own in-house R&D innovation specialists, we have also leveraged our market position to emerge as an attractive partner for outside R&D scientists developing new products 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.

22

Table of Contents

Net Income (Loss)

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

Results of Operations

The following table setstables set forth our condensed 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)

%

23

For the Three Months Ended% of Net Sales
$'s in 000'sMarch 31, 2023March 31, 2022March 31, 2023March 31, 2022
Product sales$258,993 $247,750 89.2%89.9%
Services revenue31,478 27,945 10.8%10.1%
Total net sales290,471 275,695 100.0%100.0%
Cost of products sold200,902 190,851 69.2%69.2%
Cost of services27,308 27,209 9.4%9.9%
Total cost of sales228,210 218,060 78.6%79.1%
Gross profit62,261 57,635 21.4%20.9%
Selling, general and administrative expenses43,326 48,236 14.9%17.5%
Operating income18,935 9,399 6.5%3.4%
Interest expense, net8,732 6,121 3.0%2.2%
Other income, net(26)(3)—%—%
Total other expense, net8,706 6,118 3.0%2.2%
Pretax net income10,229 3,281 3.5%1.2%
Income tax expense(448)(121)(0.2)%—%
Net income9,781 3,160 3.4%1.1%

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

% of Net sales

 

$'s in 000's

    

September 30, 2017

    

September 30, 2016

 

September 30, 2017

 

September 30, 2016

Net sales

 

$

214,761

 

$

155,249

 

100.0

%  

 

100.0

%

Cost of sales

 

 

174,093

 

 

130,356

 

81.1

%  

 

84.0

%

Gross profit

 

 

40,668

 

 

24,893

 

18.9

%  

 

16.0

%

Operating expenses

 

 

  

 

 

  

 

  

 

 

  

 

General and administrative expenses

 

 

27,421

 

 

24,307

 

12.8

%  

 

15.7

%

Operating income

 

 

13,247

 

 

586

 

6.2

%  

 

0.4

%

Interest expense

 

 

(1,351)

 

 

(2,389)

 

(0.6)

%  

 

(1.5)

%

Foreign currency (loss)/gain, net

 

 

(152)

 

 

(83)

 

(0.1)

%  

 

(0.1)

%

Loss on debt extinguishment

 

 

 —

 

 

(993)

 

 —

%  

 

(0.6)

%

Other income, net

 

 

14

 

 

661

 

0.0

%  

 

0.4

%

Total other expense, net

 

 

(1,489)

 

 

(2,804)

 

(0.7)

%  

 

(1.8)

%

Pretax net income

 

 

11,758

 

 

(2,218)

 

5.5

%  

 

(1.4)

%

Provision for income taxes

 

 

(550)

 

 

 —

 

(0.3)

%  

 

 —

%

Net income

 

 

11,208

 

 

(2,218)

 

5.2

%  

 

(1.4)

%

Three Months Ended September 30, 2017March 31, 2023 Compared With Three Months Ended September 30, 2016

March 31, 2022

Net sales

Consolidated Net Sales
Consolidated net sales increased $18.9$14.8 million or 45.3%5.4%, to $60.6$290.5 million for the three months ended September 30, 2017,March 31, 2023, compared to $41.7 million for the three months ended September 30, 2016. This increase was driven by expanding item count at existing customers, both for existing and new items. 

Gross profit

Gross profit increased by $6.4 million, or 103.2%, to $12.5$275.7 million for the three months ended September 30, 2017, compared to $6.2 million for the three months ended September 30, 2016.  This increase is due to the significantMarch 31, 2022. Net sales growth as well as gross marginof $11.3 million within the Products segment was driven by increases in distributed Rx medication sales, manufactured treats, and increases in sales from the acquisition of R&R, which occurred in January 2023. The Services segment revenues grew by $3.5 million on improved economiesincreased pet counts and increased average dollar per pet served during the first quarter of scale and product mix.  Gross margin2023.

Products Segment
Product sales 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$11.3 million, or 35.2%4.5%, to $10.7$259.0 million for the three months ended September 30, 2017March 31, 2023, compared to $7.9$247.8 million for the three months ended September 30, 2016.March 31, 2022. The increase reflects:

·

increased merchandising expenses related to morewas driven by increases in distributed products sales of approximately $9.8 million, increased sales from the acquisition of R&R, which occurred in January 2023, partially offset by a decline in other manufactured 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

Services Segment

·

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

Interest expense, net

Interest expense, net decreased $0.4Services revenue increased $3.5 million, or 52.2%12.6%, to $0.4$31.5 million for the three months ended September 30, 2017,March 31, 2023, compared to $0.7$28.0 million for the three months ended September 30, 2016. This decrease was driven by the new debt agreement, entered into in December 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 incomeMarch 31, 2022. Same-store sales increased $3.9$7.8 million, or 37.7%, to $1.4$28.5 million for the three months ended September 30, 2017March 31, 2023, compared to a pre-tax net loss of $2.5$20.7 million for the three months ended September 30, 2016.

March 31, 2022. The increased service revenue was driven by maturation of wellness centers that allowed for an increase in pet counts and an increase in average dollar per pets served during the first quarter of 2023.

24

Gross profit

Gross profit increased by $4.6 million, or 8.0%, to $62.3 million for the three months ended March 31, 2023, compared to $57.6 million for the three months ended March 31, 2022. This increase is driven by the Products segment gross profit

22

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

Netincreasing by $1.2 million due to net sales

Net sales growth, and also due to maturation of wellness centers and operational improvements within the Services segment driving gross profit increase of $3.4 million.

Gross margin increased $59.5to 21.4% for the three months ended March 31, 2023, compared to 20.9% for the three months ended March 31, 2022. The improvement was driven by our Service segment which improved from 2.6% to 12.7% as a result of increased efficiencies and maturation of wellness centers which drove higher pet counts as well as higher average dollar per pets served. Partially offsetting this increase, Products segment gross margin decreased approximately 0.5% due primarily to impact of product mix.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses (“SG&A”) decreased by $4.9 million, or 38.3%10.2%, to $214.8$43.3 million for the ninethree months ended September 30, 2017,March 31, 2023, compared to $155.2$48.2 million for the ninethree months ended September 30, 2016. March 31, 2022. As a percentage of net sales, SG&A decreased from 17.5% for the three months ended March 31, 2022 to 14.9% for the three months ended March 31, 2023. The decrease was driven by legal expense of $2.6 million in 2022 for which no similar expense occurred in 2023 and a $1.4 million decrease in stock compensation due to accelerated vesting that occurred in the prior year and had no comparable event in the current year. Additional items are detailed below.
Products Segment
Products segment SG&A decreased $3.7 million or approximately 9.6% to $35.0 million for the three months ended March 31, 2023, compared to $38.7 million for the three months ended March 31, 2022. This decrease was primarily due to lower legal expense and stock compensation as described above.
Services Segment
Services segment SG&A decreased $1.2 million, or 12.3%, to $8.3 million for the three months ended March 31, 2023, compared to $9.5 million for the three months ended March 31, 2022. This decrease was driven by lower corporate allocations, operational improvements, and lower marketing spend due to fewer new store openings.
Interest expense, net
Interest expense, net, increased $2.6 million to $8.7 million for the three months ended March 31, 2023, compared to $6.1 million for the three months ended March 31, 2022. This increase was driven by expanding item count at existing customers, boththe higher rates on the Company's variable rate debt due to rising interest rates.
Provision for existingincome taxes
Our effective tax rate was 4.4% and new items. 

Gross profit

Gross profit increased by $15.8 million, or 63.4%, to $40.73.7% for the ninethree months ended September 30, 2017, compared to $24.9 forMarch 31, 2023 and 2022, respectively, with a tax expense of $0.4 million and $0.1 million, respectively. The tax rate is different than the nine months ended September 30, 2016.  This increase isU.S federal statutory income tax rate of 21% primarily due to the increase in net sales, as well as improvement in gross margin.  Gross margin increased to 18.9% for the nine months ended September 30, 2017, from 16.0% for the nine months ended September 30, 2016, which was driven by economies of scale in certain products as well as product mix.

General and administrative expenses

General and administrative expenses increased by $3.1 million, or 12.8%, to $27.4 million for the nine months ended September 30, 2017, compared to $24.3 million for the nine months ended September 30, 2016. The increase reflects:

·

increased merchandising costs as part of growing sales;

·

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

·

reduction in legal defense costs due to terminated litigation in 2016.

Interest expense, net

Interest expense, net, decreased $1.0 million, or 43.4%, to $1.4 million for the nine months ended September 30, 2017, compared to $2.4 million for the nine months ended September 30, 2016. This decrease was driven by the new debt agreement, which reduced interest rates and provided more flexibility, offset slightly by increases in the base rate.

Other income, net

Other income, net, decreased $0.6 million to $14 thousand in the nine months ended September 30, 2017 compared to $0.7 million for the nine months ended September 30, 2016.  This is due to a warranty claim settlement entered into with a seller of a business purchased by the Company in previous years.  The settlement called for a reduction in the Company’s deferred acquisition liability.

Pre-tax net income

As a resulteffects of the factors above, pre-tax net income increased $14.0 million, to net income of $11.8 million forchange in valuation allowance, state taxes, and the nine months ended September 30, 2017, compared to a pre-tax net loss of  $2.2 million for the nine months ended September 30, 2016.

foreign rate differential.

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.

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The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.

23

Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP.Generally Accepted Accounting Principles ("GAAP"). The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:

·

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

·

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

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

·

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

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

·

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

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

·

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

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

·

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

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

•Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally.supplementary. You should review the reconciliations of net lossincome to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

26

Three Months Ended March 31,
$'s in 000's20232022
Net income$9,781 $3,160 
Plus:
Tax expense448 121
Depreciation3,5213,682
Amortization4,2614,523
Interest8,7326,121
EBITDA$26,743 $17,607 
Acquisition costs(1)
538— 
Stock based compensation expense2,4663,823
Integration costs(2)
976339
Litigation expenses— 2,661
Adjusted EBITDA$30,722 $24,430 

(1) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.

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(2) Integration costs represent costs related to integrating the acquired businesses including personnel costs such as severance and retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily in the Products segment.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

$'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)

Plus:

 

 

  

 

 

  

 

 

  

 

 

  

Tax expense

 

 

550

 

 

 —

 

 

550

 

 

 —

Depreciation

 

$

684

 

$

375

 

$

1,795

 

$

1,350

Amortization

 

 

261

 

 

264

 

 

782

 

 

808

Interest

 

 

352

 

 

737

 

 

1,351

 

 

2,389

EBITDA

 

$

2,706

 

$

(1,136)

 

$

15,686

 

$

2,329

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

Stock based compensation expense

 

 

246

 

 

 —

 

 

246

 

 

 —

Adjusted EBITDA

 

$

5,385

 

$

1,155

 

$

18,752

 

$

9,098


(1)

Loss on debt extinguishment reflects costs relating to the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees and termination fees.

(2)

Represents annual fees paid pursuant to our management agreements with Eos, Highland and Labore. The management agreements will terminate in connection with an initial public offering; however, we will pay fees to members of our board of directors following the offering.

(3)

These litigation expenses relate to cases involving the Company that were favorably resolved in the second quarter of 2016.

Financial Condition, Liquidity, and Capital Resources


Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.financing. As of September 30, 2017March 31, 2023 and December 31, 2016,2022, our cash and cash equivalents were $46.5$25.4 million and $0.8$101.3 million, respectively. As of September 30, 2017,March 31, 2023, we had $18.1 million outstanding under thean unused revolving credit facility with availability of $125.0 million, $294.8 million under our term loan, $143.8 million of outstanding convertible notes, and $1.9$18.7 million outstanding underin other debt. Our debt
24

agreements bear interest at rates between 4.0% and 8.96%. See “Note 3 – Debt” to our condensed consolidated financial statements included herein for a mortgage, at 4.75% and 4.35%, respectively.

description of each of our debt arrangements.

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 carryfund inventory and accounts receivable levels necessary to support our increasing net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of September 30, 2017March 31, 2023 and December 31, 2016,2022, we had working capital (current assets less current liabilities) of $93.7$211.0 million and $43.5$220.6 million, respectively.

On July 26, 2017, we closed The Company has not historically made significant non-contractual debt pay downs, but may choose to do so in the initial public offering (the “IPO”)future as part 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.

its capital allocation strategy.

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We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facilitydebt facilities will be adequate to meet our operating, investing, and financing needs for at least the foreseeable future. next 12 months. We believe we will meet our longer-term expected future cash requirements primarily from a combination of cash flow from operating activities, borrowings under our debt facilities and available cash and cash equivalents.To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence 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.

terms or at all. As in the past, we will continue to explore opportunities to optimize our capital structure.


Cash Flows

Cash provided by or used in Operating Activities

Net cash provided by (used in) operating activities was $11.0 million for the nine months ended September 30, 2017, compared net cash used in operating activities of $1.3was $43.3 million for the ninethree months ended September 30, 2016.March 31, 2023, compared to $45.4 million used in operating activities for the three months ended March 31, 2022. The increasechange in operating cash flows primarily reflects improved net income,higher earning partially offset by increased use of cash usage for working capital.capital of $2.2 million. Working capital useschanges are driven primarily by increasedgrowth in accounts receivable resulting from our growing and inventory on higher sales,.  Net changes while accounts payable growth provided working capital benefit driven by increase in assetsinventory and liabilities accounted for $3.8 million in cash used in operating activities for the nine months ended September 30, 2017 compared to $1.5 milliontiming of cash used in operating activities for the nine months ended September 30, 2016.

inventory purchases.


Cash used in Investing Activities

Net cash used in investing activities was $3.6$29.5 million for the ninethree months ended September 30, 2017,March 31, 2023, compared to $1.6$5.7 million for the ninethree months ended September 30, 2016.March 31, 2022. The increase in net cash used in investing activities is awas primarily the result of $27.6 million of the Company purchasing an office buildingcash utilized in the quarter for use as its corporate headquarters.

acquisition of R&R.

Cash (used in) provided by Financing Activities

Net cash provided byused in financing activities was $38.3$3.1 million for the ninethree months ended September 30, 2017March 31, 2023, compared to $0.9 million in net cash provided by financing activities of $22.9 million for the ninethree months ended September 30, 2016.  This increaseMarch 31, 2022. The change in cash (used in) provided by financing activities is primarily driven by the Company’s initial public offering offset by operating cash generation facilitating the repayment of borrowed capital.

Description of Indebtedness

The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016.  This agreement fully repaid and terminated the A&R Credit Agreement described below. The New Credit Agreement provides for secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:

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

(ii) $5.0 million term loan (“Term Loans”), requiring equal amortizing payments for 24 months.

As of December 31, 2016, the Company had $5.0 million outstanding as Term Loans and $22.5 million outstanding under the Revolver. The interest ratereduced borrowing on the Term Loans was 4.25% and the interest rateCompany's ABL on the Revolver was also 4.25%, both were Base Rate loans.

As of September 30, 2017, theimproved 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.

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.

cash flows.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk

We are exposed to changes in interest rates because the indebtedness incurred under our New Credit Agreement isABL and our Term Loan B 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 September 30, 2017,March 31, 2023, we had variable rate debt of approximately $18.1$294.8 million under our New Credit Agreement.Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three and nine months ended September 30, 2017March 31, 2023 by approximately $52 thousand$0.7 million.
25

Inflation
Inflation is a factor in our business and $235 thousand, respectively.

we continue to seek ways to mitigate its effect. Inflation has affected our performance in terms of higher costs for employees compensation and benefits, products that we distribute, and components of products we manufacture. We believe the effects of inflation, if any, on our historical results of operations and financial condition have not been material as we have been able to effectively implement price adjustments to pass-through the additional costs. However, in the future, we may not be able to increase prices to our customers sufficiently to offset these increased costs.

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.

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

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Table of Contents

Changes in Internal Control over Financial Reporting

As a result of our July 2017 IPO and resulting

There was no change in tax structure, the Company implementedour internal controls over significant processes specific to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems, control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, there have been no changes in the Company’s internal controls over financial reporting that occurred during the thirdour fiscal quarter of fiscal 2017ended March 31, 2023, that havehas materially affected, or areis reasonably likely to materially affect, the Company’sour internal control over financial reporting.

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” and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; our ability to achieve or sustain profitability; 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; and the risks set forth under the “Risk Factors’ section of the final prospectus for PetIQ, Inc., dated July 20, 2017, and filed with the SEC on July 21, 2017.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.  The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.

30

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements, 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 both probable and estimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and the reasons to the effect that it cannot be reasonably estimated are disclosed. If a loss is reasonably possible, the Company will provide disclosure to that affect. The Company expenses legal costs as incurred within selling, general and administrative expenses on the condensed consolidated statements of operations. For information on legal proceedings, please refer to "Note 10 — Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements included in Part I Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

There have been no material changes

Factors that could cause our actual results to differ materially from those in this report are any of the risk factorsrisks disclosed in the final prospectus for PetIQ, Inc., dated July 20, 2017, andour Annual Report on Form 10-K, which was filed with the SEC on July 21, 2017.

February 28, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.


26


Item 2.Unregistered Sales of Equity Securities and UseResults of Proceeds.

Recent SaleOperations

On September 6, 2022, the Company's Board of Unregistered Securities

Simultaneously withDirectors authorized a stock repurchase program for up to $30 million of the consummation of our IPO, we issued to the Continuing LLC Owners 8,268,188Company’s outstanding shares of Class BA common stock. The issuancesRepurchases of the Class BA common stock described in this paragraph weremay be 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,at management’s discretion 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 stockin one or more transactions on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassificationsthe open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions 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 applicable rules and regulations promulgated under Securities Exchange Act. The Company did not purchase any shares during the termsquarter ended March 31, 2023. As of March 31, 2023, $26.1 million in aggregate dollar value of shares remained available for purchase under 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. 

repurchase program.

31


Table of Contents

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None

Information

Not applicable.

Item 6. Exhibits.

31.1*

31.1*

31.2*

31.2*

32.1**

32.1*

32.2**

32.2*

101.INS*

Inline XBRL Instance Document

101.INS*

101.SCH*

XBRL Instance Document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

Document

101.CAL*

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Document

101.LAB*

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF*

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

** Furnished herewith

32

27


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.

November 8, 2017

May 10, 2023

/s/ John Newland

Zvi Glasman

John Newland

Zvi Glasman

Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

33

28
s in 000's

12

Future maturities of long termlong-term debt, excluding the net discount on debt and deferred financing fees, as of September 30, 2017,March 31, 2023, 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 2023$5,326 
20247,426 
20254,600 
2026147,350 
20273,600 
Thereafter288,891 

The Company incurred debt issuance costs


Note 4 — Intangible Assets and Goodwill
Goodwill and non-amortizable intangible assets
Intangible assets consist 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.

following at:

12

$'s in 000'sUseful LivesMarch 31, 2023December 31, 2022
Amortizable intangibles
Certification7 years$350 $350 
Customer relationships12-20 years160,360 160,040 
Patents and processes5-10 years14,634 14,634 
Brand names5-15 years32,233 24,633 
Total amortizable intangibles207,577 199,657 
Less accumulated amortization(66,339)(62,085)
Total net amortizable intangibles141,238 137,572 
Non-amortizable intangibles
Trademarks and other33,239 33,239 
In-process research and development1,668 1,668 
Intangible assets, net of accumulated amortization$176,145 $172,479 

Table of Contents

Note 3 -     Leases

The Company leases certain real estate, both office and production facilities, as well as equipment from third parties. Lease expiration dates are between 2018 and 2025.  A portion of capital leasesCertain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currencies.  Many of these leases include renewal options and in some cases options to purchase.

Annual future commitments under non-cancelable leases as of September 30, 2017, 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

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 leasecurrency movements. Amortization expense for the three and nine months ended September 30, 2017March 31, 2023 and 2016 totaled $4492022 was $4.3 million and $472, and $1,357 and $1,250,$4.5 million, respectively.

Note 4 -     Income Taxes

As a result

Estimated future amortization expense for each of the IPO and related reorganization transactions completedfollowing years is as follows:
Years ending December 31, ($'s in 000's)
Remainder of 2023$13,731 
202415,686 
202515,011 
202614,356 
202713,685 
Thereafter68,769 
13

The following is a summary of the changes in July 2017, the Company holds an economic interestcarrying value of approximately 62% in Holdco and consolidatesgoodwill for the financial position and results of Holdco.  The approximate 38% of Holdco not held by the Company is considered noncontrolling 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’speriod from January 1, 2021 to March 31, 2023:

Reporting Unit
($'s in 000's)ProductsServicesTotal
Goodwill as of January 1, 2022183,846 47,264 231,110 
Foreign currency translation(540)— (540)
Impairment— (47,264)(47,264)
Goodwill as of December 31, 2022183,306 — 183,306 
R&R Acquisition20,226 — 20,226 
Foreign currency translation41 — 41 
Goodwill as of March 31, 2023$203,573 $— $203,573 
Note 5 — Income Tax
Our effective tax rate is significantly lessfrom continuing operations was 4.4% and 3.7% for the three months ended March 31, 2023 and 2022, respectively, including discrete items. Income tax expense for the three months ended March 31, 2023 and 2022 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.  The effective tax rate for 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 resulteffects of the IPOchange in valuation allowance, state taxes, and reorganization transactions, the foreign rate differential.

The Company has assessed the realizability of the net deferred tax assets as of March 31, 2023 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from recorded deferred tax assets and liabilities based onwill not be realized. In future periods, if we conclude we have future taxable income sufficient to recognize the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes.  Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco.

Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation.  Opco makes cash distributions to permit the member 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 distributions to Continuing LLC Owners. This liability is included in accounts payable on the condensed consolidated balance sheet. 

Opco’s income tax provision prior to the IPO generally consisted of income taxes payable by our separate subsidiaries that are taxed as corporations.  As of December 31, 2016, the taxable foreign subsidiaries had $482 of deferred tax

13

Table of Contents

assets.  The deferred tax assets, resulted primarily from net operating losses and were fully offset by awe may reduce or eliminate the valuation allowance.

Note 5 –6 — Earnings per Share

Basic and Diluted Earnings per Share

Basic 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 during the period. Diluted earnings per share of Class A common stock is computed by dividing net income 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, the PetIQ Holdings, LLC Agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class

14
Table of common membership interests, 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 IPO for the purposes of calculating earnings per share would not be appropriate.

Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users 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.

Contents


The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings 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 March 31,
(in 000's, except for per share amounts)20232022
Numerator:
Net income$9,781 $3,160 
Less: net income attributable to non-controlling interests82 29 
Net income attributable to PetIQ, Inc. — basic9,699 3,131 
Plus: interest expense on Convertible Notes1,676 — 
Net income attributable to PetIQ, Inc. — diluted11,375 3,131 
Denominator:
Weighted-average shares of Class A common stock outstanding — basic29,125 29,164 
Dilutive effects of stock options that are convertible into Class A common stock— 60 
Dilutive effect of RSUs45 66 
Dilutive effect of conversion of Convertible Notes6,060 — 
Weighted-average shares of Class A common stock outstanding — diluted35,230 29,290 
Income per share of Class A common stock — basic$0.33 $0.11 
Income per share of Class A common stock — diluted$0.32 $0.11 

Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

Shares

The computation of the Company’s Class Bdilutive effect of other potential common shares includes 0 and 60 for stock options as well as 45 and 66 restricted stock units for the three months ended March 31, 2023 and 2022, respectively. All stock options and 693 thousand restricted stock units have been excluded from the computation of dilutive effect as they are antidilutive for the three months ended March 31, 2023. For the three months ended March 31, 2022 stock awards of 1,797 thousand shares were excluded from the computation of dilutive effect as they were antidilutive.
The dilutive impact of the Notes has been included in the dilutive earnings per share calculation for the three months ended March 31, 2023. The dilutive impact of the Notes have not been included in the diluteddilutive earnings per share calculation for the three months ended March 31, 2022 as they would have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively.

antidilutive.

14

Table of Contents

Note 6 –7 — Stock Based Compensation

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


PetIQ, Inc. Omnibus Incentive Plan


The Amended and Restated PetIQ, Inc. Omnibus Incentive Plan, (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 registeredawards, up to a total of 5,804,000 shares of Class A common stock for issuanceissuable under the Plan. As of September 30, 2017, 1,109,998March 31, 2023 and 2022, 1,167,937 and 26,000 shares were available for issuance under the Plan.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”) provided for the grant of stock options to employees hired in connection with an acquisition in 2018 as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800,000 shares of Class A common stock of
15

the Company, of which 760,000 were granted. No further grants may be made under the Inducement Plan. All awards issued under the Inducement Plan may only be settled in shares of Class A common stock.
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 beare typically 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$0.3 million and $1.3 million for the three and nine months ended September 30, 2017.March 31, 2023 and 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended September 30:

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:

15

Table of Contents

The following table summarizes the activity of the Company’s unvested stockMarch 31, 2022. No options were issued for the period ended September 30, 2017:

March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 

 

 

 

 

 

 

March 31, 2022
Expected term (years) (1)
6.25
Expected volatility (2)
37.21 %
Risk-free interest rate (3)
1.44 %
Dividend yield (4)
0.00 %

(1)The grant date fair valueCompany 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 options granted duringprice volatility with a look back period consistent with the period ended September 30, 2017expected option term.
(3)The risk-free interest rate was $6.08 per option. At September 30, 2017,based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.
(4)The Company has not paid and does not anticipate paying a cash dividend on our common stock.
As of March 31, 2023, total unrecognized compensation cost related to unvested stock options was $4.4$3.1 million and is expected to be recognized over a weighted-average period of 3.81.6 years.

Note 7 - Stockholders’ Equity

Reorganization Transactions

In connection with the IPO on July 20, 2017, the Company completed 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 carrying value, as the contribution was considered to be a transaction between entities under common control;

·

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

·

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

·

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

Following the completion of the Reorganization Transactions and IPO, PetIQ owned 61.5% of HoldCo. The remaining 38.5% of Holdco was held by the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ.  As a result of the Reorganization Transactions, PetIQ became 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.

16

Stock
Options
(in 000's)		Weighted
Average
Exercise
Price		Aggregate
Intrinsic
Value
(in 000's)		Weighted
Average
Remaining
Contractual
Life
(years)
Outstanding at January 1, 20221,768 $26.51 $2,897 7.3
Granted83 14.16 
Exercised(2)19.49 $10 
Forfeited(110)29.24 
Cancelled(86)31.12 
Outstanding at December 31, 20221,652 $25.48 $53 6.2
Forfeited(52)11.17 
Cancelled(37)30.85 
Outstanding at March 31, 20231,563 $25.81 $— 5.6
Options exercisable at March 31, 20231,296 

16

AsRestricted Stock Units

The Company awards RSUs to certain employees and directors under the Reorganization TransactionsPlan, which are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.

Amendment and Restatementsubject to time-based vesting conditions. Typically, upon a termination of Certificate of Incorporation

On July 20, 2017,service relationship by the Company, amendedall unvested RSUs will be forfeited 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 parunderlying such awards will become available for issuance under the Plan. The fair value of $0.001 per share; (ii) authorization of 8,401,521 shares of Class B common stock with a parRSUs are measured based on the closing fair market value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.

Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one vote per share on all matters presented to the Company’s stockholders generally.

Holders of the Company’s Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC interests of Holdco held by Continuing LLC Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be canceled on a one-for-one basis upon the redemption or exchange any of the outstanding LLC Interests held by the Continuing LLC Owners.

The Company must, at all times, maintain a one-to-one ratio between the number of outstanding shares of Class A common stock 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 corresponding Class B common shares from entities affiliated with the Company’s CEO and President.

Immediately following the completion of the IPO and the underwriters’ exercise of their option to purchase additional shares of 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.

The LLC Agreement also provides that the Continuing LLC Owners may from time to time at 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 equalthe date of grant. At March 31, 2023, total unrecognized compensation cost related to unvested RSUs was $26.7 million and is expected to vest over a volume weighted average market priceperiod of one share3.4 years.

The fair value of Class A commonthese equity awards is amortized to equity based compensation expense over the vesting period, which totaled $1.4 million for the three months ended March 31, 2023, and $2.5 million for the three months ended March 31, 2022, respectively. All stock for each LLC interest exchanged,based compensation expense is included in each case in accordance withselling, general and administrative expenses based on the termsrole of recipients.
The following table summarizes the activity of the Company’s RSUs for the period ended March 31, 2023.
Number of
Shares
(in 000's)		Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2022459 $31.08 
Granted802 20.30 
Settled(231)27.81 
Forfeited(177)25.53 
Outstanding at December 31, 2022853 $23.06 
Granted1,033 10.80 
Settled(168)23.02 
Forfeited(24)18.55 
Nonvested RSUs at March 31, 20231,694 $15.39 
Note 8 — Non-Controlling Interests
The following table presents the outstanding membership interests in HoldCo ("LLC Agreement; providedInterests") and changes in LLC Interests for the periods presented.
LLC Interests held% of Total
$'s in 000'sLLC
Owners		PetIQ, Inc.TotalLLC
Owners		PetIQ, Inc.
As of January 1, 2022272 29,139 29,411 0.9 %99.1 %
Stock based compensation transactions— 188 188 
Exchange transactions(20)20 — 
Unit redemption— (373)(373)
As of December 31, 2022252 28,974 29,226 0.9 %99.1 %
Stock based compensation transactions— 143 143 
Exchange transactions(8)8 — 
As of March 31, 2023244 29,125 29,369 0.8 %99.2 %
Note that atcertain figures shown in the Company’s election (determined solely bytable above may not recalculate due to rounding.
For the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests),three months ended March 31, 2023 and 2022 the Company may effectowned a direct exchangeweighted average of such

99.2% and 99.1%, respectively, of HoldCo.

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 8 - Non-Controlling Interests

In connection with the Reorganization Transactions described in Note 7 — Stockholders’ Equity, PetIQ became the sole managing member of Holdco and, as a result, consolidates the financial results 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 -— Customer Concentration

The Company has significant exposure to customer concentration. During the three months ended March 31, 2023 and 2022, three and nine months ended September 30, 2017 and 2016, three and threetwo customers respectively,individually accounted for more than 10% of sales, individually. In total for the three months ended September 30, 2017comprising 50% and 2016, the three customers accounted for 61% and 68%36% of net sales respectively. In totalin aggregate, respectively for the nine months ended September 30, 2017 and 2016, the three customers accounted for 61% and 71% of net sales, respectively. such periods.
At September 30, 2017 and DecemberMarch 31, 2016 four and four customers, respectively,2023 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 53% and 60%, respectively, 41% of outstanding trade receivables, net. The customers are customersAt December 31, 2022 one Products segment customer individually accounted for more than 10% of the domestic segment.

outstanding trade receivables, and accounted for 46% of outstanding trade receivables, net.

Note 10 -— Commitments and Contingencies

Litigation Contingencies

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

18

Table of Contents

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

The Company records a liability when a particular contingency is probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency at September 30, 2017as of March 31, 2023 and December 31, 2016,2022 as the Company does not consider any contingency to be probable or estimable.

The Company expenses legal costs as incurredrecorded $2.5 million of expense in the three months ended March 31, 2022 related to a lawsuit brought by a former supplier to the Company related to the redemption of ownership interest, which is included within selling, general and administrative expenses on the condensed consolidated condensed statements of operations.

The matter was settled and paid during 2022.

Commitments
We have commitments for leases and long-term debt that are discussed further in Note - 3, Debt. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.
Note 11 -— Segments

The Company has two 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. 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.

their respective Segment Adjusted EBITDA performance. Beginning in the fourth quarter of 2022, we allocate to our segments capital expenditures and certain costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses, on a pro rata basis based on net sales to better align with the discrete financial information reviewed by our CODM. Such expenses previously were not allocated to segments. The Company has recast prior periods to give effect to this change. This change in presentation had no impact on the Condensed Consolidated Statements of Operations.

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

19

$'s in 000'sProductsServices
March 31, 2023
Net sales$258,993 $31,478 
Segment Adjusted EBITDA32,196 850 
Depreciation expense1,816 1,705 
Capital expenditures1,565 345 

18

Note 12 -     Related Parties

Opco had entered into management consulting services agreements with members of Holdco.  
$'s in 000'sProductsServices
March 31, 2022
Net sales$247,750 $27,945 
Segment Adjusted EBITDA30,477 1,118 
Depreciation expense1,928 1,754 
Capital expenditures3,929 1,749 

The services were relatedfollowing table reconciles Segment Adjusted EBITDA to financial transactions and other senior management matters related to business administration.  Those agreements providedNet income for the Company to pay base annual management fees plus expenses, typically paid quarterly.  These expenses were recorded in general and administrative expensesperiods presented.
For the three months ended
$'s in 000'sMarch 31, 2023March 31, 2022
Segment Adjusted EBITDA:
Products(1)
$32,196 $30,477 
Services(1)
850 1,118 
Total33,046 31,595 
Adjustments:
Depreciation(3,521)(3,682)
Amortization(4,262)(4,523)
Interest(8,732)(6,121)
Acquisition costs(2)
(538)— 
Stock based compensation expense(2,466)(3,823)
Non same-store adjustment(3)
(2,322)(7,165)
Integration costs(4)
(976)(339)
Litigation expenses— (2,661)
Pretax net income$10,229 $3,281 
Income tax expense(448)(121)
Net income$9,781 $3,160 
(1)Beginning in the condensed consolidated statementfourth quarter of comprehensive income (loss).2022, the Company is allocating corporate expenses to each segment pro rata based on net sales for each segment. The Company recorded $545presentation of Products Segment Adjusted EBITDA and $508 for the nine months ended September 30, 2017 and 2016, respectively, and $158 and $208Services Segment Adjusted EBITDA for the three months ended September 30, 2017March 31, 2022 has been recast for comparability. For the three months ended March 31, 2022, total corporate expenses were $19.4 million, of which $17.4 million was allocated to Products and 2016, respectively.  Upon consummation$2.0 million was allocated to Services.
(2) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.
(3) Non same-store adjustment includes revenue and costs, and associated gross profit, related to our Services segment wellness centers and host partners with less than six full quarters of operating results, and also include pre-opening expenses.
(4) Integration costs represent costs related to integrating the recapitalizationacquired businesses including personnel costs such as severance and IPO transactions, these agreements were terminated. 

As discussed in Note 4– Income taxes,retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily within 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.

20

Products segment.

19

Supplemental geographic disclosures are below.
Three Months Ended March 31, 2023
$'s in 000'sU.S.ForeignTotal
Product sales$257,977 $1,016 $258,993 
Service revenue31,478 — 31,478 
Total net sales$289,455 $1,016 $290,471 
Three Months Ended March 31, 2022
$'s in 000'sU.S.ForeignTotal
Product sales$245,572 $2,178 $247,750 
Service revenue27,945 — 27,945 
Total net sales$273,517 $2,178 $275,695 
Property, plant, and equipment by geographic location is below.
March 31, 2023December 31, 2022
United States$67,707 $69,376 
Europe3,960 4,019 
Total$71,667 $73,395 
Note 12 — Related Parties
Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance, which acts as a broker for a number of the Company’s insurance policies. The Company’s premium expense, which is generally paid directly to the relevant insurance company, amounted to $6.9 million and $6.9 million for policies that cover the three months ended March 31, 2023 and 2022, respectively. Mr. Chris Christensen earns various forms of compensation based on the specifics of each policy.
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 was paid $0.06 million and $0.06 million for the three months ended March 31, 2023 and 2022, respectively.
Mike Glasman, the brother of CFO, Zvi Glasman, acted as a broker in connection with the Company's entry into a Master Services Agreement with Syndeo, LLC d/b/a Broadvoice ("Broadvoice") in February 2023 for the provision of certain information technology related services. The amount to be paid to Broadvoice over the 39-month agreement is $0.4 million. No payments were made in the three months ended March 31, 2023.

20


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, 20162022 and related notes included in the final prospectusAnnual Report on Form 10-K for PetIQ, Inc., dated July 20, 2017 andthe year ended December 31 filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017.February 28, 2023. 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 Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to PetIQ, Inc. and our consolidated subsidiaries.


Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to PetIQ, Inc. and our consolidated subsidiaries.

Business

Overview

PetIQ is a rapidly growingleading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail and e-commerce channels with our branded and distributed medications as well as health and wellness company providing convenient accessitems, which are further supported by our world-class medications manufacturing facility in Omaha, Nebraska and affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leadingmanufacturing facility in Springville, Utah. Our national service platform, operates in over 2,600 retail stores, including more than 40,000 retail pharmacy locations.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 that 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 and wellness services and products provided by the Company directly to consumers.
On January 13, 2023, the Company completed the acquisition of all of the membership units of Rocco and Roxie Supply Co, LLC ("R&R"), after which R&R became a wholly owned and consolidated subsidiary of the Company. The acquisition expands the Company's product portfolio to include stain and odor products, jerky treats and behavioral products as well as expands sales it is appropriate to view our operations aschannels in e-commerce.
We are the 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, operates and controls all of the business and affairs of OpCo.


Stock Repurchase Program

On September 6, 2022, the Company's Board of Directors authorized a stock repurchase program for up to $30 million of Class A common stock. Repurchases of Class A common stock may be made at management’s discretion from time to time in throughout this Management’s Discussionone or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and Analysis 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 shares to the public at a price of $16.00 per share. We received proceeds of $106,950 net of underwriters discounts and commissions, which we utilized to repay preference notes, pay offering costs, and purchase LLC Interests in Holdco. 

Results 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 applicable rules and regulations promulgated under Securities Exchange Act. The Company did not repurchase any shares during the terms of our contracts, which generally occurs upon shipment of product, when the price is fixed or determinable and when collectability is reasonably assured. These trade promotions are used to increase our aggregate net sales. Our net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.

Key factors that may affect our future sales growth include: new product introductions; expansion into e-commerce and other customer bases; expansion 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.

current period.


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 offerings in the first two quarters of the year in preparation for increased consumer demand during the summer months.

Our products are primarily consumables and, as such, they experience a replenishment cycle.

Gross Profit

Gross profit is our net sales less cost of sales. Our cost of sales consists primarily of costs of raw goods, finished goods packaging materials, manufacturing, shipping 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, 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, we have worked closely with our contract manufacturers to negotiate lower costs through increased volume of purchases and price negotiations. The gross margin on our proprietary value-branded products is higher than on our distributed products. For distributed products, our costs are driven largely by whether we source the product direct from the manufacturer or a licensed distributor. Increasingly, PetIQ sources distributed brands direct from the manufacturer or from licensed distributors.

General and Administrative Expenses

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

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

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

To continue to grow our pet Rx medications, OTC medications and health and wellness products, we invest in R&D on an ongoing basis. In addition to our own in-house R&D innovation specialists, we have also leveraged our market position to emerge as an attractive partner for outside R&D scientists developing new products 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.

22

Table of Contents

Net Income (Loss)

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

Results of Operations

The following table setstables set forth our condensed 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)

%

23

For the Three Months Ended% of Net Sales
$'s in 000'sMarch 31, 2023March 31, 2022March 31, 2023March 31, 2022
Product sales$258,993 $247,750 89.2%89.9%
Services revenue31,478 27,945 10.8%10.1%
Total net sales290,471 275,695 100.0%100.0%
Cost of products sold200,902 190,851 69.2%69.2%
Cost of services27,308 27,209 9.4%9.9%
Total cost of sales228,210 218,060 78.6%79.1%
Gross profit62,261 57,635 21.4%20.9%
Selling, general and administrative expenses43,326 48,236 14.9%17.5%
Operating income18,935 9,399 6.5%3.4%
Interest expense, net8,732 6,121 3.0%2.2%
Other income, net(26)(3)—%—%
Total other expense, net8,706 6,118 3.0%2.2%
Pretax net income10,229 3,281 3.5%1.2%
Income tax expense(448)(121)(0.2)%—%
Net income9,781 3,160 3.4%1.1%

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

% of Net sales

 

$'s in 000's

    

September 30, 2017

    

September 30, 2016

 

September 30, 2017

 

September 30, 2016

Net sales

 

$

214,761

 

$

155,249

 

100.0

%  

 

100.0

%

Cost of sales

 

 

174,093

 

 

130,356

 

81.1

%  

 

84.0

%

Gross profit

 

 

40,668

 

 

24,893

 

18.9

%  

 

16.0

%

Operating expenses

 

 

  

 

 

  

 

  

 

 

  

 

General and administrative expenses

 

 

27,421

 

 

24,307

 

12.8

%  

 

15.7

%

Operating income

 

 

13,247

 

 

586

 

6.2

%  

 

0.4

%

Interest expense

 

 

(1,351)

 

 

(2,389)

 

(0.6)

%  

 

(1.5)

%

Foreign currency (loss)/gain, net

 

 

(152)

 

 

(83)

 

(0.1)

%  

 

(0.1)

%

Loss on debt extinguishment

 

 

 —

 

 

(993)

 

 —

%  

 

(0.6)

%

Other income, net

 

 

14

 

 

661

 

0.0

%  

 

0.4

%

Total other expense, net

 

 

(1,489)

 

 

(2,804)

 

(0.7)

%  

 

(1.8)

%

Pretax net income

 

 

11,758

 

 

(2,218)

 

5.5

%  

 

(1.4)

%

Provision for income taxes

 

 

(550)

 

 

 —

 

(0.3)

%  

 

 —

%

Net income

 

 

11,208

 

 

(2,218)

 

5.2

%  

 

(1.4)

%

Three Months Ended September 30, 2017March 31, 2023 Compared With Three Months Ended September 30, 2016

March 31, 2022

Net sales

Consolidated Net Sales
Consolidated net sales increased $18.9$14.8 million or 45.3%5.4%, to $60.6$290.5 million for the three months ended September 30, 2017,March 31, 2023, compared to $41.7 million for the three months ended September 30, 2016. This increase was driven by expanding item count at existing customers, both for existing and new items. 

Gross profit

Gross profit increased by $6.4 million, or 103.2%, to $12.5$275.7 million for the three months ended September 30, 2017, compared to $6.2 million for the three months ended September 30, 2016.  This increase is due to the significantMarch 31, 2022. Net sales growth as well as gross marginof $11.3 million within the Products segment was driven by increases in distributed Rx medication sales, manufactured treats, and increases in sales from the acquisition of R&R, which occurred in January 2023. The Services segment revenues grew by $3.5 million on improved economiesincreased pet counts and increased average dollar per pet served during the first quarter of scale and product mix.  Gross margin2023.

Products Segment
Product sales 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$11.3 million, or 35.2%4.5%, to $10.7$259.0 million for the three months ended September 30, 2017March 31, 2023, compared to $7.9$247.8 million for the three months ended September 30, 2016.March 31, 2022. The increase reflects:

·

increased merchandising expenses related to morewas driven by increases in distributed products sales of approximately $9.8 million, increased sales from the acquisition of R&R, which occurred in January 2023, partially offset by a decline in other manufactured 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

Services Segment

·

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

Interest expense, net

Interest expense, net decreased $0.4Services revenue increased $3.5 million, or 52.2%12.6%, to $0.4$31.5 million for the three months ended September 30, 2017,March 31, 2023, compared to $0.7$28.0 million for the three months ended September 30, 2016. This decrease was driven by the new debt agreement, entered into in December 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 incomeMarch 31, 2022. Same-store sales increased $3.9$7.8 million, or 37.7%, to $1.4$28.5 million for the three months ended September 30, 2017March 31, 2023, compared to a pre-tax net loss of $2.5$20.7 million for the three months ended September 30, 2016.

March 31, 2022. The increased service revenue was driven by maturation of wellness centers that allowed for an increase in pet counts and an increase in average dollar per pets served during the first quarter of 2023.

24

Gross profit

Gross profit increased by $4.6 million, or 8.0%, to $62.3 million for the three months ended March 31, 2023, compared to $57.6 million for the three months ended March 31, 2022. This increase is driven by the Products segment gross profit

22

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

Netincreasing by $1.2 million due to net sales

Net sales growth, and also due to maturation of wellness centers and operational improvements within the Services segment driving gross profit increase of $3.4 million.

Gross margin increased $59.5to 21.4% for the three months ended March 31, 2023, compared to 20.9% for the three months ended March 31, 2022. The improvement was driven by our Service segment which improved from 2.6% to 12.7% as a result of increased efficiencies and maturation of wellness centers which drove higher pet counts as well as higher average dollar per pets served. Partially offsetting this increase, Products segment gross margin decreased approximately 0.5% due primarily to impact of product mix.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses (“SG&A”) decreased by $4.9 million, or 38.3%10.2%, to $214.8$43.3 million for the ninethree months ended September 30, 2017,March 31, 2023, compared to $155.2$48.2 million for the ninethree months ended September 30, 2016. March 31, 2022. As a percentage of net sales, SG&A decreased from 17.5% for the three months ended March 31, 2022 to 14.9% for the three months ended March 31, 2023. The decrease was driven by legal expense of $2.6 million in 2022 for which no similar expense occurred in 2023 and a $1.4 million decrease in stock compensation due to accelerated vesting that occurred in the prior year and had no comparable event in the current year. Additional items are detailed below.
Products Segment
Products segment SG&A decreased $3.7 million or approximately 9.6% to $35.0 million for the three months ended March 31, 2023, compared to $38.7 million for the three months ended March 31, 2022. This decrease was primarily due to lower legal expense and stock compensation as described above.
Services Segment
Services segment SG&A decreased $1.2 million, or 12.3%, to $8.3 million for the three months ended March 31, 2023, compared to $9.5 million for the three months ended March 31, 2022. This decrease was driven by lower corporate allocations, operational improvements, and lower marketing spend due to fewer new store openings.
Interest expense, net
Interest expense, net, increased $2.6 million to $8.7 million for the three months ended March 31, 2023, compared to $6.1 million for the three months ended March 31, 2022. This increase was driven by expanding item count at existing customers, boththe higher rates on the Company's variable rate debt due to rising interest rates.
Provision for existingincome taxes
Our effective tax rate was 4.4% and new items. 

Gross profit

Gross profit increased by $15.8 million, or 63.4%, to $40.73.7% for the ninethree months ended September 30, 2017, compared to $24.9 forMarch 31, 2023 and 2022, respectively, with a tax expense of $0.4 million and $0.1 million, respectively. The tax rate is different than the nine months ended September 30, 2016.  This increase isU.S federal statutory income tax rate of 21% primarily due to the increase in net sales, as well as improvement in gross margin.  Gross margin increased to 18.9% for the nine months ended September 30, 2017, from 16.0% for the nine months ended September 30, 2016, which was driven by economies of scale in certain products as well as product mix.

General and administrative expenses

General and administrative expenses increased by $3.1 million, or 12.8%, to $27.4 million for the nine months ended September 30, 2017, compared to $24.3 million for the nine months ended September 30, 2016. The increase reflects:

·

increased merchandising costs as part of growing sales;

·

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

·

reduction in legal defense costs due to terminated litigation in 2016.

Interest expense, net

Interest expense, net, decreased $1.0 million, or 43.4%, to $1.4 million for the nine months ended September 30, 2017, compared to $2.4 million for the nine months ended September 30, 2016. This decrease was driven by the new debt agreement, which reduced interest rates and provided more flexibility, offset slightly by increases in the base rate.

Other income, net

Other income, net, decreased $0.6 million to $14 thousand in the nine months ended September 30, 2017 compared to $0.7 million for the nine months ended September 30, 2016.  This is due to a warranty claim settlement entered into with a seller of a business purchased by the Company in previous years.  The settlement called for a reduction in the Company’s deferred acquisition liability.

Pre-tax net income

As a resulteffects of the factors above, pre-tax net income increased $14.0 million, to net income of $11.8 million forchange in valuation allowance, state taxes, and the nine months ended September 30, 2017, compared to a pre-tax net loss of  $2.2 million for the nine months ended September 30, 2016.

foreign rate differential.

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.

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The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.

23

Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP.Generally Accepted Accounting Principles ("GAAP"). The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:

·

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

·

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

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

·

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

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

·

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

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

·

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

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

·

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

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

•Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally.supplementary. You should review the reconciliations of net lossincome to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

26

Three Months Ended March 31,
$'s in 000's20232022
Net income$9,781 $3,160 
Plus:
Tax expense448 121
Depreciation3,5213,682
Amortization4,2614,523
Interest8,7326,121
EBITDA$26,743 $17,607 
Acquisition costs(1)
538— 
Stock based compensation expense2,4663,823
Integration costs(2)
976339
Litigation expenses— 2,661
Adjusted EBITDA$30,722 $24,430 

(1) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.

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(2) Integration costs represent costs related to integrating the acquired businesses including personnel costs such as severance and retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily in the Products segment.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

$'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)

Plus:

 

 

  

 

 

  

 

 

  

 

 

  

Tax expense

 

 

550

 

 

 —

 

 

550

 

 

 —

Depreciation

 

$

684

 

$

375

 

$

1,795

 

$

1,350

Amortization

 

 

261

 

 

264

 

 

782

 

 

808

Interest

 

 

352

 

 

737

 

 

1,351

 

 

2,389

EBITDA

 

$

2,706

 

$

(1,136)

 

$

15,686

 

$

2,329

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

Stock based compensation expense

 

 

246

 

 

 —

 

 

246

 

 

 —

Adjusted EBITDA

 

$

5,385

 

$

1,155

 

$

18,752

 

$

9,098


(1)

Loss on debt extinguishment reflects costs relating to the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees and termination fees.

(2)

Represents annual fees paid pursuant to our management agreements with Eos, Highland and Labore. The management agreements will terminate in connection with an initial public offering; however, we will pay fees to members of our board of directors following the offering.

(3)

These litigation expenses relate to cases involving the Company that were favorably resolved in the second quarter of 2016.

Financial Condition, Liquidity, and Capital Resources


Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.financing. As of September 30, 2017March 31, 2023 and December 31, 2016,2022, our cash and cash equivalents were $46.5$25.4 million and $0.8$101.3 million, respectively. As of September 30, 2017,March 31, 2023, we had $18.1 million outstanding under thean unused revolving credit facility with availability of $125.0 million, $294.8 million under our term loan, $143.8 million of outstanding convertible notes, and $1.9$18.7 million outstanding underin other debt. Our debt
24

agreements bear interest at rates between 4.0% and 8.96%. See “Note 3 – Debt” to our condensed consolidated financial statements included herein for a mortgage, at 4.75% and 4.35%, respectively.

description of each of our debt arrangements.

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 carryfund inventory and accounts receivable levels necessary to support our increasing net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of September 30, 2017March 31, 2023 and December 31, 2016,2022, we had working capital (current assets less current liabilities) of $93.7$211.0 million and $43.5$220.6 million, respectively.

On July 26, 2017, we closed The Company has not historically made significant non-contractual debt pay downs, but may choose to do so in the initial public offering (the “IPO”)future as part 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.

its capital allocation strategy.

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We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facilitydebt facilities will be adequate to meet our operating, investing, and financing needs for at least the foreseeable future. next 12 months. We believe we will meet our longer-term expected future cash requirements primarily from a combination of cash flow from operating activities, borrowings under our debt facilities and available cash and cash equivalents.To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence 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.

terms or at all. As in the past, we will continue to explore opportunities to optimize our capital structure.


Cash Flows

Cash provided by or used in Operating Activities

Net cash provided by (used in) operating activities was $11.0 million for the nine months ended September 30, 2017, compared net cash used in operating activities of $1.3was $43.3 million for the ninethree months ended September 30, 2016.March 31, 2023, compared to $45.4 million used in operating activities for the three months ended March 31, 2022. The increasechange in operating cash flows primarily reflects improved net income,higher earning partially offset by increased use of cash usage for working capital.capital of $2.2 million. Working capital useschanges are driven primarily by increasedgrowth in accounts receivable resulting from our growing and inventory on higher sales,.  Net changes while accounts payable growth provided working capital benefit driven by increase in assetsinventory and liabilities accounted for $3.8 million in cash used in operating activities for the nine months ended September 30, 2017 compared to $1.5 milliontiming of cash used in operating activities for the nine months ended September 30, 2016.

inventory purchases.


Cash used in Investing Activities

Net cash used in investing activities was $3.6$29.5 million for the ninethree months ended September 30, 2017,March 31, 2023, compared to $1.6$5.7 million for the ninethree months ended September 30, 2016.March 31, 2022. The increase in net cash used in investing activities is awas primarily the result of $27.6 million of the Company purchasing an office buildingcash utilized in the quarter for use as its corporate headquarters.

acquisition of R&R.

Cash (used in) provided by Financing Activities

Net cash provided byused in financing activities was $38.3$3.1 million for the ninethree months ended September 30, 2017March 31, 2023, compared to $0.9 million in net cash provided by financing activities of $22.9 million for the ninethree months ended September 30, 2016.  This increaseMarch 31, 2022. The change in cash (used in) provided by financing activities is primarily driven by the Company’s initial public offering offset by operating cash generation facilitating the repayment of borrowed capital.

Description of Indebtedness

The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016.  This agreement fully repaid and terminated the A&R Credit Agreement described below. The New Credit Agreement provides for secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:

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

(ii) $5.0 million term loan (“Term Loans”), requiring equal amortizing payments for 24 months.

As of December 31, 2016, the Company had $5.0 million outstanding as Term Loans and $22.5 million outstanding under the Revolver. The interest ratereduced borrowing on the Term Loans was 4.25% and the interest rateCompany's ABL on the Revolver was also 4.25%, both were Base Rate loans.

As of September 30, 2017, theimproved 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.

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.

cash flows.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk

We are exposed to changes in interest rates because the indebtedness incurred under our New Credit Agreement isABL and our Term Loan B 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 September 30, 2017,March 31, 2023, we had variable rate debt of approximately $18.1$294.8 million under our New Credit Agreement.Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three and nine months ended September 30, 2017March 31, 2023 by approximately $52 thousand$0.7 million.
25

Inflation
Inflation is a factor in our business and $235 thousand, respectively.

we continue to seek ways to mitigate its effect. Inflation has affected our performance in terms of higher costs for employees compensation and benefits, products that we distribute, and components of products we manufacture. We believe the effects of inflation, if any, on our historical results of operations and financial condition have not been material as we have been able to effectively implement price adjustments to pass-through the additional costs. However, in the future, we may not be able to increase prices to our customers sufficiently to offset these increased costs.

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.

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

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Table of Contents

Changes in Internal Control over Financial Reporting

As a result of our July 2017 IPO and resulting

There was no change in tax structure, the Company implementedour internal controls over significant processes specific to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems, control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, there have been no changes in the Company’s internal controls over financial reporting that occurred during the thirdour fiscal quarter of fiscal 2017ended March 31, 2023, that havehas materially affected, or areis reasonably likely to materially affect, the Company’sour internal control over financial reporting.

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” and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; our ability to achieve or sustain profitability; 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; and the risks set forth under the “Risk Factors’ section of the final prospectus for PetIQ, Inc., dated July 20, 2017, and filed with the SEC on July 21, 2017.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.  The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.

30

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements, 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 both probable and estimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and the reasons to the effect that it cannot be reasonably estimated are disclosed. If a loss is reasonably possible, the Company will provide disclosure to that affect. The Company expenses legal costs as incurred within selling, general and administrative expenses on the condensed consolidated statements of operations. For information on legal proceedings, please refer to "Note 10 — Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements included in Part I Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

There have been no material changes

Factors that could cause our actual results to differ materially from those in this report are any of the risk factorsrisks disclosed in the final prospectus for PetIQ, Inc., dated July 20, 2017, andour Annual Report on Form 10-K, which was filed with the SEC on July 21, 2017.

February 28, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.


26


Item 2.Unregistered Sales of Equity Securities and UseResults of Proceeds.

Recent SaleOperations

On September 6, 2022, the Company's Board of Unregistered Securities

Simultaneously withDirectors authorized a stock repurchase program for up to $30 million of the consummation of our IPO, we issued to the Continuing LLC Owners 8,268,188Company’s outstanding shares of Class BA common stock. The issuancesRepurchases of the Class BA common stock described in this paragraph weremay be 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,at management’s discretion 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 stockin one or more transactions on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassificationsthe open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions 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 applicable rules and regulations promulgated under Securities Exchange Act. The Company did not purchase any shares during the termsquarter ended March 31, 2023. As of March 31, 2023, $26.1 million in aggregate dollar value of shares remained available for purchase under 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. 

repurchase program.

31


Table of Contents

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None

Information

Not applicable.

Item 6. Exhibits.

31.1*

31.1*

31.2*

31.2*

32.1**

32.1*

32.2**

32.2*

101.INS*

Inline XBRL Instance Document

101.INS*

101.SCH*

XBRL Instance Document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

Document

101.CAL*

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Document

101.LAB*

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF*

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

** Furnished herewith

32

27


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.

November 8, 2017

May 10, 2023

/s/ John Newland

Zvi Glasman

John Newland

Zvi Glasman

Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

33

28
s in 000's
March 31, 2023December 31, 2022
Convertible NotesConvertible Notes$143,750 $143,750 
Term Loan BTerm Loan B294,750 295,500 

Revolving credit facility

 

 

18,059

 

 

22,473

Revolving credit facility— — 

Mortgage

 

 

1,913

 

 

 —

Other debtOther debt18,693 19,690 

Net discount on debt and deferred financing fees

 

 

 —

 

 

(92)

Net discount on debt and deferred financing fees(8,055)(8,531)

 

$

19,972

 

$

27,381

$449,138 $450,409 

Less current maturities of long-term debt

 

 

(44)

 

 

(2,223)

Less current maturities of long-term debt(7,200)(7,133)

Total long-term debt

 

$

19,928

 

$

25,158

Total long-term debt$441,938 $443,276 

12
Table of Contents

Future maturities of long termlong-term debt, excluding the net discount on debt and deferred financing fees, as of September 30, 2017,March 31, 2023, 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 2023$5,326 
20247,426 
20254,600 
2026147,350 
20273,600 
Thereafter288,891 

The Company incurred debt issuance costs


Note 4 — Intangible Assets and Goodwill
Goodwill and non-amortizable intangible assets
Intangible assets consist 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.

following at:

12

$'s in 000'sUseful LivesMarch 31, 2023December 31, 2022
Amortizable intangibles
Certification7 years$350 $350 
Customer relationships12-20 years160,360 160,040 
Patents and processes5-10 years14,634 14,634 
Brand names5-15 years32,233 24,633 
Total amortizable intangibles207,577 199,657 
Less accumulated amortization(66,339)(62,085)
Total net amortizable intangibles141,238 137,572 
Non-amortizable intangibles
Trademarks and other33,239 33,239 
In-process research and development1,668 1,668 
Intangible assets, net of accumulated amortization$176,145 $172,479 

Table of Contents

Note 3 -     Leases

The Company leases certain real estate, both office and production facilities, as well as equipment from third parties. Lease expiration dates are between 2018 and 2025.  A portion of capital leasesCertain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currencies.  Many of these leases include renewal options and in some cases options to purchase.

Annual future commitments under non-cancelable leases as of September 30, 2017, 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

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 leasecurrency movements. Amortization expense for the three and nine months ended September 30, 2017March 31, 2023 and 2016 totaled $4492022 was $4.3 million and $472, and $1,357 and $1,250,$4.5 million, respectively.

Note 4 -     Income Taxes

As a result

Estimated future amortization expense for each of the IPO and related reorganization transactions completedfollowing years is as follows:
Years ending December 31, ($'s in 000's)
Remainder of 2023$13,731 
202415,686 
202515,011 
202614,356 
202713,685 
Thereafter68,769 
13
Table of Contents

The following is a summary of the changes in July 2017, the Company holds an economic interestcarrying value of approximately 62% in Holdco and consolidatesgoodwill for the financial position and results of Holdco.  The approximate 38% of Holdco not held by the Company is considered noncontrolling 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’speriod from January 1, 2021 to March 31, 2023:

Reporting Unit
($'s in 000's)ProductsServicesTotal
Goodwill as of January 1, 2022183,846 47,264 231,110 
Foreign currency translation(540)— (540)
Impairment— (47,264)(47,264)
Goodwill as of December 31, 2022183,306 — 183,306 
R&R Acquisition20,226 — 20,226 
Foreign currency translation41 — 41 
Goodwill as of March 31, 2023$203,573 $— $203,573 
Note 5 — Income Tax
Our effective tax rate is significantly lessfrom continuing operations was 4.4% and 3.7% for the three months ended March 31, 2023 and 2022, respectively, including discrete items. Income tax expense for the three months ended March 31, 2023 and 2022 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.  The effective tax rate for 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 resulteffects of the IPOchange in valuation allowance, state taxes, and reorganization transactions, the foreign rate differential.

The Company has assessed the realizability of the net deferred tax assets as of March 31, 2023 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from recorded deferred tax assets and liabilities based onwill not be realized. In future periods, if we conclude we have future taxable income sufficient to recognize the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes.  Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco.

Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation.  Opco makes cash distributions to permit the member 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 distributions to Continuing LLC Owners. This liability is included in accounts payable on the condensed consolidated balance sheet. 

Opco’s income tax provision prior to the IPO generally consisted of income taxes payable by our separate subsidiaries that are taxed as corporations.  As of December 31, 2016, the taxable foreign subsidiaries had $482 of deferred tax

13

Table of Contents

assets.  The deferred tax assets, resulted primarily from net operating losses and were fully offset by awe may reduce or eliminate the valuation allowance.

Note 5 –6 — Earnings per Share

Basic and Diluted Earnings per Share

Basic 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 during the period. Diluted earnings per share of Class A common stock is computed by dividing net income 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, the PetIQ Holdings, LLC Agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class

14
Table of common membership interests, 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 IPO for the purposes of calculating earnings per share would not be appropriate.

Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users 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.

Contents


The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings 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 March 31,
(in 000's, except for per share amounts)20232022
Numerator:
Net income$9,781 $3,160 
Less: net income attributable to non-controlling interests82 29 
Net income attributable to PetIQ, Inc. — basic9,699 3,131 
Plus: interest expense on Convertible Notes1,676 — 
Net income attributable to PetIQ, Inc. — diluted11,375 3,131 
Denominator:
Weighted-average shares of Class A common stock outstanding — basic29,125 29,164 
Dilutive effects of stock options that are convertible into Class A common stock— 60 
Dilutive effect of RSUs45 66 
Dilutive effect of conversion of Convertible Notes6,060 — 
Weighted-average shares of Class A common stock outstanding — diluted35,230 29,290 
Income per share of Class A common stock — basic$0.33 $0.11 
Income per share of Class A common stock — diluted$0.32 $0.11 

Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

Shares

The computation of the Company’s Class Bdilutive effect of other potential common shares includes 0 and 60 for stock options as well as 45 and 66 restricted stock units for the three months ended March 31, 2023 and 2022, respectively. All stock options and 693 thousand restricted stock units have been excluded from the computation of dilutive effect as they are antidilutive for the three months ended March 31, 2023. For the three months ended March 31, 2022 stock awards of 1,797 thousand shares were excluded from the computation of dilutive effect as they were antidilutive.
The dilutive impact of the Notes has been included in the dilutive earnings per share calculation for the three months ended March 31, 2023. The dilutive impact of the Notes have not been included in the diluteddilutive earnings per share calculation for the three months ended March 31, 2022 as they would have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively.

antidilutive.

14

Table of Contents

Note 6 –7 — Stock Based Compensation

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


PetIQ, Inc. Omnibus Incentive Plan


The Amended and Restated PetIQ, Inc. Omnibus Incentive Plan, (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 registeredawards, up to a total of 5,804,000 shares of Class A common stock for issuanceissuable under the Plan. As of September 30, 2017, 1,109,998March 31, 2023 and 2022, 1,167,937 and 26,000 shares were available for issuance under the Plan.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”) provided for the grant of stock options to employees hired in connection with an acquisition in 2018 as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800,000 shares of Class A common stock of
15
Table of Contents

the Company, of which 760,000 were granted. No further grants may be made under the Inducement Plan. All awards issued under the Inducement Plan may only be settled in shares of Class A common stock.
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 beare typically 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$0.3 million and $1.3 million for the three and nine months ended September 30, 2017.March 31, 2023 and 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended September 30:

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:

15

Table of Contents

The following table summarizes the activity of the Company’s unvested stockMarch 31, 2022. No options were issued for the period ended September 30, 2017:

March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 

 

 

 

 

 

 

March 31, 2022
Expected term (years) (1)
6.25
Expected volatility (2)
37.21 %
Risk-free interest rate (3)
1.44 %
Dividend yield (4)
0.00 %

(1)The grant date fair valueCompany 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 options granted duringprice volatility with a look back period consistent with the period ended September 30, 2017expected option term.
(3)The risk-free interest rate was $6.08 per option. At September 30, 2017,based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.
(4)The Company has not paid and does not anticipate paying a cash dividend on our common stock.
As of March 31, 2023, total unrecognized compensation cost related to unvested stock options was $4.4$3.1 million and is expected to be recognized over a weighted-average period of 3.81.6 years.

Note 7 - Stockholders’ Equity

Reorganization Transactions

In connection with the IPO on July 20, 2017, the Company completed 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 carrying value, as the contribution was considered to be a transaction between entities under common control;

·

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

·

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

·

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

Following the completion of the Reorganization Transactions and IPO, PetIQ owned 61.5% of HoldCo. The remaining 38.5% of Holdco was held by the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ.  As a result of the Reorganization Transactions, PetIQ became 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.

16

Stock
Options
(in 000's)		Weighted
Average
Exercise
Price		Aggregate
Intrinsic
Value
(in 000's)		Weighted
Average
Remaining
Contractual
Life
(years)
Outstanding at January 1, 20221,768 $26.51 $2,897 7.3
Granted83 14.16 
Exercised(2)19.49 $10 
Forfeited(110)29.24 
Cancelled(86)31.12 
Outstanding at December 31, 20221,652 $25.48 $53 6.2
Forfeited(52)11.17 
Cancelled(37)30.85 
Outstanding at March 31, 20231,563 $25.81 $— 5.6
Options exercisable at March 31, 20231,296 

16
Table of Contents


AsRestricted Stock Units

The Company awards RSUs to certain employees and directors under the Reorganization TransactionsPlan, which are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.

Amendment and Restatementsubject to time-based vesting conditions. Typically, upon a termination of Certificate of Incorporation

On July 20, 2017,service relationship by the Company, amendedall unvested RSUs will be forfeited 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 parunderlying such awards will become available for issuance under the Plan. The fair value of $0.001 per share; (ii) authorization of 8,401,521 shares of Class B common stock with a parRSUs are measured based on the closing fair market value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.

Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one vote per share on all matters presented to the Company’s stockholders generally.

Holders of the Company’s Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC interests of Holdco held by Continuing LLC Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be canceled on a one-for-one basis upon the redemption or exchange any of the outstanding LLC Interests held by the Continuing LLC Owners.

The Company must, at all times, maintain a one-to-one ratio between the number of outstanding shares of Class A common stock 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 corresponding Class B common shares from entities affiliated with the Company’s CEO and President.

Immediately following the completion of the IPO and the underwriters’ exercise of their option to purchase additional shares of 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.

The LLC Agreement also provides that the Continuing LLC Owners may from time to time at 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 equalthe date of grant. At March 31, 2023, total unrecognized compensation cost related to unvested RSUs was $26.7 million and is expected to vest over a volume weighted average market priceperiod of one share3.4 years.

The fair value of Class A commonthese equity awards is amortized to equity based compensation expense over the vesting period, which totaled $1.4 million for the three months ended March 31, 2023, and $2.5 million for the three months ended March 31, 2022, respectively. All stock for each LLC interest exchanged,based compensation expense is included in each case in accordance withselling, general and administrative expenses based on the termsrole of recipients.
The following table summarizes the activity of the Company’s RSUs for the period ended March 31, 2023.
Number of
Shares
(in 000's)		Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2022459 $31.08 
Granted802 20.30 
Settled(231)27.81 
Forfeited(177)25.53 
Outstanding at December 31, 2022853 $23.06 
Granted1,033 10.80 
Settled(168)23.02 
Forfeited(24)18.55 
Nonvested RSUs at March 31, 20231,694 $15.39 
Note 8 — Non-Controlling Interests
The following table presents the outstanding membership interests in HoldCo ("LLC Agreement; providedInterests") and changes in LLC Interests for the periods presented.
LLC Interests held% of Total
$'s in 000'sLLC
Owners		PetIQ, Inc.TotalLLC
Owners		PetIQ, Inc.
As of January 1, 2022272 29,139 29,411 0.9 %99.1 %
Stock based compensation transactions— 188 188 
Exchange transactions(20)20 — 
Unit redemption— (373)(373)
As of December 31, 2022252 28,974 29,226 0.9 %99.1 %
Stock based compensation transactions— 143 143 
Exchange transactions(8)8 — 
As of March 31, 2023244 29,125 29,369 0.8 %99.2 %
Note that atcertain figures shown in the Company’s election (determined solely bytable above may not recalculate due to rounding.
For the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests),three months ended March 31, 2023 and 2022 the Company may effectowned a direct exchangeweighted average of such

99.2% and 99.1%, respectively, of HoldCo.

17

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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 8 - Non-Controlling Interests

In connection with the Reorganization Transactions described in Note 7 — Stockholders’ Equity, PetIQ became the sole managing member of Holdco and, as a result, consolidates the financial results 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 -— Customer Concentration

The Company has significant exposure to customer concentration. During the three months ended March 31, 2023 and 2022, three and nine months ended September 30, 2017 and 2016, three and threetwo customers respectively,individually accounted for more than 10% of sales, individually. In total for the three months ended September 30, 2017comprising 50% and 2016, the three customers accounted for 61% and 68%36% of net sales respectively. In totalin aggregate, respectively for the nine months ended September 30, 2017 and 2016, the three customers accounted for 61% and 71% of net sales, respectively. such periods.
At September 30, 2017 and DecemberMarch 31, 2016 four and four customers, respectively,2023 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 53% and 60%, respectively, 41% of outstanding trade receivables, net. The customers are customersAt December 31, 2022 one Products segment customer individually accounted for more than 10% of the domestic segment.

outstanding trade receivables, and accounted for 46% of outstanding trade receivables, net.

Note 10 -— 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

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

The Company records a liability when a particular contingency is probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency at September 30, 2017as of March 31, 2023 and December 31, 2016,2022 as the Company does not consider any contingency to be probable or estimable.

The Company expenses legal costs as incurredrecorded $2.5 million of expense in the three months ended March 31, 2022 related to a lawsuit brought by a former supplier to the Company related to the redemption of ownership interest, which is included within selling, general and administrative expenses on the condensed consolidated condensed statements of operations.

The matter was settled and paid during 2022.

Commitments
We have commitments for leases and long-term debt that are discussed further in Note - 3, Debt. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.
Note 11 -— Segments

The Company has two 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. 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.

their respective Segment Adjusted EBITDA performance. Beginning in the fourth quarter of 2022, we allocate to our segments capital expenditures and certain costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses, on a pro rata basis based on net sales to better align with the discrete financial information reviewed by our CODM. Such expenses previously were not allocated to segments. The Company has recast prior periods to give effect to this change. This change in presentation had no impact on the Condensed Consolidated Statements of Operations.

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

19

$'s in 000'sProductsServices
March 31, 2023
Net sales$258,993 $31,478 
Segment Adjusted EBITDA32,196 850 
Depreciation expense1,816 1,705 
Capital expenditures1,565 345 

18
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Note 12 -     Related Parties

Opco had entered into management consulting services agreements with members of Holdco.  
$'s in 000'sProductsServices
March 31, 2022
Net sales$247,750 $27,945 
Segment Adjusted EBITDA30,477 1,118 
Depreciation expense1,928 1,754 
Capital expenditures3,929 1,749 

The services were relatedfollowing table reconciles Segment Adjusted EBITDA to financial transactions and other senior management matters related to business administration.  Those agreements providedNet income for the Company to pay base annual management fees plus expenses, typically paid quarterly.  These expenses were recorded in general and administrative expensesperiods presented.
For the three months ended
$'s in 000'sMarch 31, 2023March 31, 2022
Segment Adjusted EBITDA:
Products(1)
$32,196 $30,477 
Services(1)
850 1,118 
Total33,046 31,595 
Adjustments:
Depreciation(3,521)(3,682)
Amortization(4,262)(4,523)
Interest(8,732)(6,121)
Acquisition costs(2)
(538)— 
Stock based compensation expense(2,466)(3,823)
Non same-store adjustment(3)
(2,322)(7,165)
Integration costs(4)
(976)(339)
Litigation expenses— (2,661)
Pretax net income$10,229 $3,281 
Income tax expense(448)(121)
Net income$9,781 $3,160 
(1)Beginning in the condensed consolidated statementfourth quarter of comprehensive income (loss).2022, the Company is allocating corporate expenses to each segment pro rata based on net sales for each segment. The Company recorded $545presentation of Products Segment Adjusted EBITDA and $508 for the nine months ended September 30, 2017 and 2016, respectively, and $158 and $208Services Segment Adjusted EBITDA for the three months ended September 30, 2017March 31, 2022 has been recast for comparability. For the three months ended March 31, 2022, total corporate expenses were $19.4 million, of which $17.4 million was allocated to Products and 2016, respectively.  Upon consummation$2.0 million was allocated to Services.
(2) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.
(3) Non same-store adjustment includes revenue and costs, and associated gross profit, related to our Services segment wellness centers and host partners with less than six full quarters of operating results, and also include pre-opening expenses.
(4) Integration costs represent costs related to integrating the recapitalizationacquired businesses including personnel costs such as severance and IPO transactions, these agreements were terminated. 

As discussed in Note 4– Income taxes,retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily within 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.

20

Products segment.

19
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Supplemental geographic disclosures are below.
Three Months Ended March 31, 2023
$'s in 000'sU.S.ForeignTotal
Product sales$257,977 $1,016 $258,993 
Service revenue31,478 — 31,478 
Total net sales$289,455 $1,016 $290,471 
Three Months Ended March 31, 2022
$'s in 000'sU.S.ForeignTotal
Product sales$245,572 $2,178 $247,750 
Service revenue27,945 — 27,945 
Total net sales$273,517 $2,178 $275,695 
Property, plant, and equipment by geographic location is below.
March 31, 2023December 31, 2022
United States$67,707 $69,376 
Europe3,960 4,019 
Total$71,667 $73,395 
Note 12 — Related Parties
Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance, which acts as a broker for a number of the Company’s insurance policies. The Company’s premium expense, which is generally paid directly to the relevant insurance company, amounted to $6.9 million and $6.9 million for policies that cover the three months ended March 31, 2023 and 2022, respectively. Mr. Chris Christensen earns various forms of compensation based on the specifics of each policy.
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 was paid $0.06 million and $0.06 million for the three months ended March 31, 2023 and 2022, respectively.
Mike Glasman, the brother of CFO, Zvi Glasman, acted as a broker in connection with the Company's entry into a Master Services Agreement with Syndeo, LLC d/b/a Broadvoice ("Broadvoice") in February 2023 for the provision of certain information technology related services. The amount to be paid to Broadvoice over the 39-month agreement is $0.4 million. No payments were made in the three months ended March 31, 2023.

20
Table of Contents


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

The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10‑Q10-Q and our audited consolidated financial statements for the year ended December 31, 20162022 and related notes included in the final prospectusAnnual Report on Form 10-K for PetIQ, Inc., dated July 20, 2017 andthe year ended December 31 filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017.February 28, 2023. 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 Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to PetIQ, Inc. and our consolidated subsidiaries.


Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to PetIQ, Inc. and our consolidated subsidiaries.

Business

Overview

PetIQ is a rapidly growingleading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail and e-commerce channels with our branded and distributed medications as well as health and wellness company providing convenient accessitems, which are further supported by our world-class medications manufacturing facility in Omaha, Nebraska and affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leadingmanufacturing facility in Springville, Utah. Our national service platform, operates in over 2,600 retail stores, including more than 40,000 retail pharmacy locations.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 that 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 and wellness services and products provided by the Company directly to consumers.
On January 13, 2023, the Company completed the acquisition of all of the membership units of Rocco and Roxie Supply Co, LLC ("R&R"), after which R&R became a wholly owned and consolidated subsidiary of the Company. The acquisition expands the Company's product portfolio to include stain and odor products, jerky treats and behavioral products as well as expands sales it is appropriate to view our operations aschannels in e-commerce.
We are the 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, operates and controls all of the business and affairs of OpCo.


Stock Repurchase Program

On September 6, 2022, the Company's Board of Directors authorized a stock repurchase program for up to $30 million of Class A common stock. Repurchases of Class A common stock may be made at management’s discretion from time to time in throughout this Management’s Discussionone or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and Analysis 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 shares to the public at a price of $16.00 per share. We received proceeds of $106,950 net of underwriters discounts and commissions, which we utilized to repay preference notes, pay offering costs, and purchase LLC Interests in Holdco. 

Results 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 applicable rules and regulations promulgated under Securities Exchange Act. The Company did not repurchase any shares during the terms of our contracts, which generally occurs upon shipment of product, when the price is fixed or determinable and when collectability is reasonably assured. These trade promotions are used to increase our aggregate net sales. Our net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.

Key factors that may affect our future sales growth include: new product introductions; expansion into e-commerce and other customer bases; expansion 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.

current period.


21

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While most of our products are sold consistently throughout the year, we experience seasonality in the form of increased retailer demand for our flea and tick product offerings in the first two quarters of the year in preparation for increased consumer demand during the summer months.

Our products are primarily consumables and, as such, they experience a replenishment cycle.

Gross Profit

Gross profit is our net sales less cost of sales. Our cost of sales consists primarily of costs of raw goods, finished goods packaging materials, manufacturing, shipping 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, 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, we have worked closely with our contract manufacturers to negotiate lower costs through increased volume of purchases and price negotiations. The gross margin on our proprietary value-branded products is higher than on our distributed products. For distributed products, our costs are driven largely by whether we source the product direct from the manufacturer or a licensed distributor. Increasingly, PetIQ sources distributed brands direct from the manufacturer or from licensed distributors.

General and Administrative Expenses

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

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

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

To continue to grow our pet Rx medications, OTC medications and health and wellness products, we invest in R&D on an ongoing basis. In addition to our own in-house R&D innovation specialists, we have also leveraged our market position to emerge as an attractive partner for outside R&D scientists developing new products 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.

22

Table of Contents

Net Income (Loss)

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

Results of Operations

The following table setstables set forth our condensed 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)

%

23

For the Three Months Ended% of Net Sales
$'s in 000'sMarch 31, 2023March 31, 2022March 31, 2023March 31, 2022
Product sales$258,993 $247,750 89.2%89.9%
Services revenue31,478 27,945 10.8%10.1%
Total net sales290,471 275,695 100.0%100.0%
Cost of products sold200,902 190,851 69.2%69.2%
Cost of services27,308 27,209 9.4%9.9%
Total cost of sales228,210 218,060 78.6%79.1%
Gross profit62,261 57,635 21.4%20.9%
Selling, general and administrative expenses43,326 48,236 14.9%17.5%
Operating income18,935 9,399 6.5%3.4%
Interest expense, net8,732 6,121 3.0%2.2%
Other income, net(26)(3)—%—%
Total other expense, net8,706 6,118 3.0%2.2%
Pretax net income10,229 3,281 3.5%1.2%
Income tax expense(448)(121)(0.2)%—%
Net income9,781 3,160 3.4%1.1%

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

% of Net sales

 

$'s in 000's

    

September 30, 2017

    

September 30, 2016

 

September 30, 2017

 

September 30, 2016

Net sales

 

$

214,761

 

$

155,249

 

100.0

%  

 

100.0

%

Cost of sales

 

 

174,093

 

 

130,356

 

81.1

%  

 

84.0

%

Gross profit

 

 

40,668

 

 

24,893

 

18.9

%  

 

16.0

%

Operating expenses

 

 

  

 

 

  

 

  

 

 

  

 

General and administrative expenses

 

 

27,421

 

 

24,307

 

12.8

%  

 

15.7

%

Operating income

 

 

13,247

 

 

586

 

6.2

%  

 

0.4

%

Interest expense

 

 

(1,351)

 

 

(2,389)

 

(0.6)

%  

 

(1.5)

%

Foreign currency (loss)/gain, net

 

 

(152)

 

 

(83)

 

(0.1)

%  

 

(0.1)

%

Loss on debt extinguishment

 

 

 —

 

 

(993)

 

 —

%  

 

(0.6)

%

Other income, net

 

 

14

 

 

661

 

0.0

%  

 

0.4

%

Total other expense, net

 

 

(1,489)

 

 

(2,804)

 

(0.7)

%  

 

(1.8)

%

Pretax net income

 

 

11,758

 

 

(2,218)

 

5.5

%  

 

(1.4)

%

Provision for income taxes

 

 

(550)

 

 

 —

 

(0.3)

%  

 

 —

%

Net income

 

 

11,208

 

 

(2,218)

 

5.2

%  

 

(1.4)

%

Three Months Ended September 30, 2017March 31, 2023 Compared With Three Months Ended September 30, 2016

March 31, 2022

Net sales

Consolidated Net Sales
Consolidated net sales increased $18.9$14.8 million or 45.3%5.4%, to $60.6$290.5 million for the three months ended September 30, 2017,March 31, 2023, compared to $41.7 million for the three months ended September 30, 2016. This increase was driven by expanding item count at existing customers, both for existing and new items. 

Gross profit

Gross profit increased by $6.4 million, or 103.2%, to $12.5$275.7 million for the three months ended September 30, 2017, compared to $6.2 million for the three months ended September 30, 2016.  This increase is due to the significantMarch 31, 2022. Net sales growth as well as gross marginof $11.3 million within the Products segment was driven by increases in distributed Rx medication sales, manufactured treats, and increases in sales from the acquisition of R&R, which occurred in January 2023. The Services segment revenues grew by $3.5 million on improved economiesincreased pet counts and increased average dollar per pet served during the first quarter of scale and product mix.  Gross margin2023.

Products Segment
Product sales 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$11.3 million, or 35.2%4.5%, to $10.7$259.0 million for the three months ended September 30, 2017March 31, 2023, compared to $7.9$247.8 million for the three months ended September 30, 2016.March 31, 2022. The increase reflects:

·

increased merchandising expenses related to morewas driven by increases in distributed products sales of approximately $9.8 million, increased sales from the acquisition of R&R, which occurred in January 2023, partially offset by a decline in other manufactured 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

Services Segment

·

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

Interest expense, net

Interest expense, net decreased $0.4Services revenue increased $3.5 million, or 52.2%12.6%, to $0.4$31.5 million for the three months ended September 30, 2017,March 31, 2023, compared to $0.7$28.0 million for the three months ended September 30, 2016. This decrease was driven by the new debt agreement, entered into in December 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 incomeMarch 31, 2022. Same-store sales increased $3.9$7.8 million, or 37.7%, to $1.4$28.5 million for the three months ended September 30, 2017March 31, 2023, compared to a pre-tax net loss of $2.5$20.7 million for the three months ended September 30, 2016.

March 31, 2022. The increased service revenue was driven by maturation of wellness centers that allowed for an increase in pet counts and an increase in average dollar per pets served during the first quarter of 2023.

24

Gross profit

Gross profit increased by $4.6 million, or 8.0%, to $62.3 million for the three months ended March 31, 2023, compared to $57.6 million for the three months ended March 31, 2022. This increase is driven by the Products segment gross profit

22
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Nine Months Ended September 30, 2017 Compared With Nine Months Ended September 30, 2016

Netincreasing by $1.2 million due to net sales

Net sales growth, and also due to maturation of wellness centers and operational improvements within the Services segment driving gross profit increase of $3.4 million.

Gross margin increased $59.5to 21.4% for the three months ended March 31, 2023, compared to 20.9% for the three months ended March 31, 2022. The improvement was driven by our Service segment which improved from 2.6% to 12.7% as a result of increased efficiencies and maturation of wellness centers which drove higher pet counts as well as higher average dollar per pets served. Partially offsetting this increase, Products segment gross margin decreased approximately 0.5% due primarily to impact of product mix.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses (“SG&A”) decreased by $4.9 million, or 38.3%10.2%, to $214.8$43.3 million for the ninethree months ended September 30, 2017,March 31, 2023, compared to $155.2$48.2 million for the ninethree months ended September 30, 2016. March 31, 2022. As a percentage of net sales, SG&A decreased from 17.5% for the three months ended March 31, 2022 to 14.9% for the three months ended March 31, 2023. The decrease was driven by legal expense of $2.6 million in 2022 for which no similar expense occurred in 2023 and a $1.4 million decrease in stock compensation due to accelerated vesting that occurred in the prior year and had no comparable event in the current year. Additional items are detailed below.
Products Segment
Products segment SG&A decreased $3.7 million or approximately 9.6% to $35.0 million for the three months ended March 31, 2023, compared to $38.7 million for the three months ended March 31, 2022. This decrease was primarily due to lower legal expense and stock compensation as described above.
Services Segment
Services segment SG&A decreased $1.2 million, or 12.3%, to $8.3 million for the three months ended March 31, 2023, compared to $9.5 million for the three months ended March 31, 2022. This decrease was driven by lower corporate allocations, operational improvements, and lower marketing spend due to fewer new store openings.
Interest expense, net
Interest expense, net, increased $2.6 million to $8.7 million for the three months ended March 31, 2023, compared to $6.1 million for the three months ended March 31, 2022. This increase was driven by expanding item count at existing customers, boththe higher rates on the Company's variable rate debt due to rising interest rates.
Provision for existingincome taxes
Our effective tax rate was 4.4% and new items. 

Gross profit

Gross profit increased by $15.8 million, or 63.4%, to $40.73.7% for the ninethree months ended September 30, 2017, compared to $24.9 forMarch 31, 2023 and 2022, respectively, with a tax expense of $0.4 million and $0.1 million, respectively. The tax rate is different than the nine months ended September 30, 2016.  This increase isU.S federal statutory income tax rate of 21% primarily due to the increase in net sales, as well as improvement in gross margin.  Gross margin increased to 18.9% for the nine months ended September 30, 2017, from 16.0% for the nine months ended September 30, 2016, which was driven by economies of scale in certain products as well as product mix.

General and administrative expenses

General and administrative expenses increased by $3.1 million, or 12.8%, to $27.4 million for the nine months ended September 30, 2017, compared to $24.3 million for the nine months ended September 30, 2016. The increase reflects:

·

increased merchandising costs as part of growing sales;

·

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

·

reduction in legal defense costs due to terminated litigation in 2016.

Interest expense, net

Interest expense, net, decreased $1.0 million, or 43.4%, to $1.4 million for the nine months ended September 30, 2017, compared to $2.4 million for the nine months ended September 30, 2016. This decrease was driven by the new debt agreement, which reduced interest rates and provided more flexibility, offset slightly by increases in the base rate.

Other income, net

Other income, net, decreased $0.6 million to $14 thousand in the nine months ended September 30, 2017 compared to $0.7 million for the nine months ended September 30, 2016.  This is due to a warranty claim settlement entered into with a seller of a business purchased by the Company in previous years.  The settlement called for a reduction in the Company’s deferred acquisition liability.

Pre-tax net income

As a resulteffects of the factors above, pre-tax net income increased $14.0 million, to net income of $11.8 million forchange in valuation allowance, state taxes, and the nine months ended September 30, 2017, compared to a pre-tax net loss of  $2.2 million for the nine months ended September 30, 2016.

foreign rate differential.

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.

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The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.

23
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Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP.Generally Accepted Accounting Principles ("GAAP"). The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:

·

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

·

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

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

·

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

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

·

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

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

·

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

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

·

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

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

•Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally.supplementary. You should review the reconciliations of net lossincome to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

26

Three Months Ended March 31,
$'s in 000's20232022
Net income$9,781 $3,160 
Plus:
Tax expense448 121
Depreciation3,5213,682
Amortization4,2614,523
Interest8,7326,121
EBITDA$26,743 $17,607 
Acquisition costs(1)
538— 
Stock based compensation expense2,4663,823
Integration costs(2)
976339
Litigation expenses— 2,661
Adjusted EBITDA$30,722 $24,430 

(1) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.

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(2) Integration costs represent costs related to integrating the acquired businesses including personnel costs such as severance and retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily in the Products segment.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

$'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)

Plus:

 

 

  

 

 

  

 

 

  

 

 

  

Tax expense

 

 

550

 

 

 —

 

 

550

 

 

 —

Depreciation

 

$

684

 

$

375

 

$

1,795

 

$

1,350

Amortization

 

 

261

 

 

264

 

 

782

 

 

808

Interest

 

 

352

 

 

737

 

 

1,351

 

 

2,389

EBITDA

 

$

2,706

 

$

(1,136)

 

$

15,686

 

$

2,329

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

Stock based compensation expense

 

 

246

 

 

 —

 

 

246

 

 

 —

Adjusted EBITDA

 

$

5,385

 

$

1,155

 

$

18,752

 

$

9,098


(1)

Loss on debt extinguishment reflects costs relating to the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees and termination fees.

(2)

Represents annual fees paid pursuant to our management agreements with Eos, Highland and Labore. The management agreements will terminate in connection with an initial public offering; however, we will pay fees to members of our board of directors following the offering.

(3)

These litigation expenses relate to cases involving the Company that were favorably resolved in the second quarter of 2016.

Financial Condition, Liquidity, and Capital Resources


Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.financing. As of September 30, 2017March 31, 2023 and December 31, 2016,2022, our cash and cash equivalents were $46.5$25.4 million and $0.8$101.3 million, respectively. As of September 30, 2017,March 31, 2023, we had $18.1 million outstanding under thean unused revolving credit facility with availability of $125.0 million, $294.8 million under our term loan, $143.8 million of outstanding convertible notes, and $1.9$18.7 million outstanding underin other debt. Our debt
24
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agreements bear interest at rates between 4.0% and 8.96%. See “Note 3 – Debt” to our condensed consolidated financial statements included herein for a mortgage, at 4.75% and 4.35%, respectively.

description of each of our debt arrangements.

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 carryfund inventory and accounts receivable levels necessary to support our increasing net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of September 30, 2017March 31, 2023 and December 31, 2016,2022, we had working capital (current assets less current liabilities) of $93.7$211.0 million and $43.5$220.6 million, respectively.

On July 26, 2017, we closed The Company has not historically made significant non-contractual debt pay downs, but may choose to do so in the initial public offering (the “IPO”)future as part 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.

its capital allocation strategy.

27


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We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facilitydebt facilities will be adequate to meet our operating, investing, and financing needs for at least the foreseeable future. next 12 months. We believe we will meet our longer-term expected future cash requirements primarily from a combination of cash flow from operating activities, borrowings under our debt facilities and available cash and cash equivalents.To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence 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.

terms or at all. As in the past, we will continue to explore opportunities to optimize our capital structure.


Cash Flows

Cash provided by or used in Operating Activities

Net cash provided by (used in) operating activities was $11.0 million for the nine months ended September 30, 2017, compared net cash used in operating activities of $1.3was $43.3 million for the ninethree months ended September 30, 2016.March 31, 2023, compared to $45.4 million used in operating activities for the three months ended March 31, 2022. The increasechange in operating cash flows primarily reflects improved net income,higher earning partially offset by increased use of cash usage for working capital.capital of $2.2 million. Working capital useschanges are driven primarily by increasedgrowth in accounts receivable resulting from our growing and inventory on higher sales,.  Net changes while accounts payable growth provided working capital benefit driven by increase in assetsinventory and liabilities accounted for $3.8 million in cash used in operating activities for the nine months ended September 30, 2017 compared to $1.5 milliontiming of cash used in operating activities for the nine months ended September 30, 2016.

inventory purchases.


Cash used in Investing Activities

Net cash used in investing activities was $3.6$29.5 million for the ninethree months ended September 30, 2017,March 31, 2023, compared to $1.6$5.7 million for the ninethree months ended September 30, 2016.March 31, 2022. The increase in net cash used in investing activities is awas primarily the result of $27.6 million of the Company purchasing an office buildingcash utilized in the quarter for use as its corporate headquarters.

acquisition of R&R.

Cash (used in) provided by Financing Activities

Net cash provided byused in financing activities was $38.3$3.1 million for the ninethree months ended September 30, 2017March 31, 2023, compared to $0.9 million in net cash provided by financing activities of $22.9 million for the ninethree months ended September 30, 2016.  This increaseMarch 31, 2022. The change in cash (used in) provided by financing activities is primarily driven by the Company’s initial public offering offset by operating cash generation facilitating the repayment of borrowed capital.

Description of Indebtedness

The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016.  This agreement fully repaid and terminated the A&R Credit Agreement described below. The New Credit Agreement provides for secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:

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

(ii) $5.0 million term loan (“Term Loans”), requiring equal amortizing payments for 24 months.

As of December 31, 2016, the Company had $5.0 million outstanding as Term Loans and $22.5 million outstanding under the Revolver. The interest ratereduced borrowing on the Term Loans was 4.25% and the interest rateCompany's ABL on the Revolver was also 4.25%, both were Base Rate loans.

As of September 30, 2017, theimproved 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.

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.

cash flows.

28

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk

We are exposed to changes in interest rates because the indebtedness incurred under our New Credit Agreement isABL and our Term Loan B 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 September 30, 2017,March 31, 2023, we had variable rate debt of approximately $18.1$294.8 million under our New Credit Agreement.Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three and nine months ended September 30, 2017March 31, 2023 by approximately $52 thousand$0.7 million.
25
Table of Contents

Inflation
Inflation is a factor in our business and $235 thousand, respectively.

we continue to seek ways to mitigate its effect. Inflation has affected our performance in terms of higher costs for employees compensation and benefits, products that we distribute, and components of products we manufacture. We believe the effects of inflation, if any, on our historical results of operations and financial condition have not been material as we have been able to effectively implement price adjustments to pass-through the additional costs. However, in the future, we may not be able to increase prices to our customers sufficiently to offset these increased costs.

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.

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

Table of Contents

Changes in Internal Control over Financial Reporting

As a result of our July 2017 IPO and resulting

There was no change in tax structure, the Company implementedour internal controls over significant processes specific to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems, control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, there have been no changes in the Company’s internal controls over financial reporting that occurred during the thirdour fiscal quarter of fiscal 2017ended March 31, 2023, that havehas materially affected, or areis reasonably likely to materially affect, the Company’sour internal control over financial reporting.

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” and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; our ability to achieve or sustain profitability; 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; and the risks set forth under the “Risk Factors’ section of the final prospectus for PetIQ, Inc., dated July 20, 2017, and filed with the SEC on July 21, 2017.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.  The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements, 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 both probable and estimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and the reasons to the effect that it cannot be reasonably estimated are disclosed. If a loss is reasonably possible, the Company will provide disclosure to that affect. The Company expenses legal costs as incurred within selling, general and administrative expenses on the condensed consolidated statements of operations. For information on legal proceedings, please refer to "Note 10 — Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements included in Part I Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

There have been no material changes

Factors that could cause our actual results to differ materially from those in this report are any of the risk factorsrisks disclosed in the final prospectus for PetIQ, Inc., dated July 20, 2017, andour Annual Report on Form 10-K, which was filed with the SEC on July 21, 2017.

February 28, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.


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Item 2.Unregistered Sales of Equity Securities and UseResults of Proceeds.

Recent SaleOperations

On September 6, 2022, the Company's Board of Unregistered Securities

Simultaneously withDirectors authorized a stock repurchase program for up to $30 million of the consummation of our IPO, we issued to the Continuing LLC Owners 8,268,188Company’s outstanding shares of Class BA common stock. The issuancesRepurchases of the Class BA common stock described in this paragraph weremay be 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,at management’s discretion 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 stockin one or more transactions on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassificationsthe open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions 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 applicable rules and regulations promulgated under Securities Exchange Act. The Company did not purchase any shares during the termsquarter ended March 31, 2023. As of March 31, 2023, $26.1 million in aggregate dollar value of shares remained available for purchase under 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. 

repurchase program.

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Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None

Information

Not applicable.

Item 6. Exhibits.

31.1*

31.1*

31.2*

31.2*

32.1**

32.1*

32.2**

32.2*

101.INS*

Inline XBRL Instance Document

101.INS*

101.SCH*

XBRL Instance Document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

Document

101.CAL*

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Document

101.LAB*

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF*

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

** Furnished herewith

32

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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.

November 8, 2017

May 10, 2023

/s/ John Newland

Zvi Glasman

John Newland

Zvi Glasman

Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

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