QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 Delaware 35-2554312 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 230 E. Riverside Dr. 83616 Eagle, Idaho (Zip Code) (Address of principal executive offices) Title of Each Class Trading Name of Each Exchange on Which Registered Class A Common Stock, $0.001 par value 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 ¨ Non-accelerated filer ¨ Emerging growth company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes PetIQ, Inc. Condensed Consolidated Statements of ComprehensiveIncome PetIQ, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2022 December 31, 2021 Current assets Cash and cash equivalents $ 51,104 $ 79,406 Accounts receivable, net 179,058 113,947 Inventories 167,714 96,440 Other current assets 10,148 8,896 Total current assets 408,024 298,689 Property, plant and equipment, net 78,194 76,613 Operating lease right of use assets 19,162 20,489 Other non-current assets 1,970 2,024 Intangible assets, net 186,111 190,662 Goodwill 230,973 231,110 Total assets $ 924,434 $ 819,587 Liabilities and equity Current liabilities Accounts payable $ 128,913 $ 55,057 Accrued wages payable 11,236 12,704 Accrued interest payable 5,099 3,811 Other accrued expenses 13,709 11,680 Current portion of operating leases 6,047 6,500 Current portion of long-term debt and finance leases 8,411 8,350 Total current liabilities 173,415 98,102 Operating leases, less current installments 14,300 14,843 Long-term debt, less current installments 472,945 448,470 Finance leases, less current installments 2,164 2,493 Other non-current liabilities 451 459 Total non-current liabilities 489,860 466,265 Equity Additional paid-in capital 371,398 368,006 Class A common stock, par value $0.001 per share, 125,000 shares authorized; 29,272 and 29,139 shares issued and outstanding, respectively 29 29 Class B common stock, par value $0.001 per share, 100,000 shares authorized; 252 and 272 shares issued and outstanding, respectively — — Accumulated deficit (111,394) (114,525) Accumulated other comprehensive loss (1,136) (684) Total stockholders' equity 258,897 252,826 Non-controlling interest 2,262 2,394 Total equity 261,159 255,220 Total liabilities and equity $ 924,434 $ 819,587 For the Three Months Ended March 31, 2022 March 31, 2021 Product sales $ 247,750 $ 230,034 Services revenue 27,945 24,313 Total net sales 275,695 254,347 Cost of products sold 190,851 182,827 Cost of services 27,209 23,721 Total cost of sales 218,060 206,548 Gross profit 57,635 47,799 Operating expenses Selling, general and administrative expenses 48,236 40,672 Operating income 9,399 7,127 Interest expense, net 6,121 4,870 Other income, net (3) (204) Total other expense, net 6,118 4,666 Pretax net income 3,281 2,461 Income tax expense (121) (75) Net income 3,160 2,386 Net income attributable to non-controlling interest 29 353 Net income attributable to PetIQ, Inc. $ 3,131 $ 2,033 Net income per share attributable to PetIQ, Inc. Class A common stock Basic $ 0.11 $ 0.08 Diluted $ 0.11 $ 0.08 Weighted Average shares of Class A common stock outstanding Basic 29,164 26,386 Diluted 29,290 27,004 See accompanying notes to the condensed consolidated financial statements. For the Three Months Ended March 31, 2022 March 31, 2021 Net income $ 3,160 $ 2,386 Foreign currency translation adjustment (456) 141 Comprehensive income 2,704 2,527 Comprehensive income attributable to non-controlling interest 25 358 Comprehensive income attributable to PetIQ $ 2,679 $ 2,169 For the Three Months Ended March 31, 2022 2021 Cash flows from operating activities Net income $ 3,160 $ 2,386 Adjustments to reconcile net income to net cash used in operating activities Depreciation, amortization of intangible assets and loan fees 8,966 12,351 Loss on disposition of property, plant, and equipment 148 30 Stock based compensation expense 3,823 2,122 Other non-cash activity 316 145 Changes in assets and liabilities Accounts receivable (65,026) (72,423) Inventories (71,417) (32,767) Other assets (1,273) (726) Accounts payable 74,094 32,182 Accrued wages payable (1,496) (2,184) Other accrued expenses 3,325 1,531 Net cash used in operating activities (45,380) (57,353) Cash flows from investing activities Purchase of property, plant, and equipment (5,678) (8,325) Net cash used in investing activities (5,678) (8,325) Cash flows from financing activities Proceeds from issuance of long-term debt 40,000 242,500 Principal payments on long-term debt (16,150) (204,641) Principal payments on finance lease obligations (399) (468) Tax withholding payments on Restricted Stock Units (688) (802) Exercise of options to purchase class A common stock 100 6,580 Net cash provided by financing activities 22,863 43,169 Net change in cash and cash equivalents (28,195) (22,509) Effect of exchange rate changes on cash and cash equivalents (107) 117 Cash and cash equivalents, beginning of period 79,406 33,456 Cash and cash equivalents, end of period $ 51,104 $ 11,064 For the Three Months Ended March 31, Supplemental cash flow information 2022 2021 Interest paid $ 4,072 $ 4,441 Net change in property, plant, and equipment acquired through accounts payable 290 (622) Finance lease additions 59 — Income taxes paid, net of refunds (5) 17 Accrued tax distribution — 149 See accompanying notes to the condensed consolidated financial statements. Three months ended March 31, 2022 Accumulated Other Additional Accumulated Comprehensive Paid-in Non-controlling Total Deficit Loss Class A Common Class B Common Capital Interest Equity Shares Dollars Shares Dollars Balance - January 1, 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 income (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 income 3,131 — — — — — — 29 3,160 Balance - March 31, 2022 $ (111,394) $ (1,136) 29,272 $ 29 252 $ — $ 371,398 $ 2,262 $ 261,159 Three months ended March 31, 2021 Accumulated Other Additional Accumulated Comprehensive Class A Common Class B Common Paid-in Non-controlling Total Deficit Loss Shares Dollars Shares Dollars Capital Interest Equity Balance - January 1, 2021 $ (98,558) $ (686) 25,711 $ 26 3,040 $ 3 $ 319,642 $ 25,983 $ 246,410 Exchange of LLC Interests held by LLC Owners — 50 2,099 2 (2,099) (2) 18,031 (18,081) — Accrued tax distributions — — — — — — — (149) (149) Other comprehensive income — 136 — — — — — 5 141 Stock based compensation expense — — — — — — 1,935 187 2,122 Exercise of Options to purchase Common Stock — — 242 — — — 6,580 — 6,580 Issuance of stock vesting of RSU's, net of tax withholdings — — 50 — — — (802) — (802) Net income 2,033 — — — — — — 353 2,386 Balance - March 31, 2021 $ (96,525) $ (500) 28,102 $ 28 941 $ 1 $ 345,386 $ 8,298 $ 256,688 OpCo. Rocco & Roxie March 31, 2023, no amounts were outstanding. - Term Loan B occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. $'s in 000's March 31, 2022 December 31, 2021 Convertible Notes $ 143,750 $ 143,750 Term loans 298,500 298,500 Revolving credit facility 25,000 — Other Debt 22,582 23,518 Net discount on debt and deferred financing fees (9,946) (10,418) $ 479,886 $ 455,350 Less current maturities of long-term debt (6,941) (6,880) Total long-term debt $ 472,945 $ 448,470 ($'s in 000's) Remainder of 2022 5,992 2023 7,124 2024 7,426 2025 4,600 2026 172,350 Thereafter 292,340 For the Three Months Ended $'s in 000's March 31, 2022 March 31, 2021 Finance lease cost Amortization of right-of-use assets $ 525 $ 566 Interest on lease liabilities 64 91 Operating lease cost 1,577 1,292 Variable lease cost(1) 515 306 Short-term lease cost 5 4 Sublease income (65) (43) Total lease cost $ 2,621 $ 2,216 March 31, 2022 March 31, 2021 Weighted-average remaining lease term (years) Operating leases 3.75 4.26 Finance leases 2.40 2.78 Weighted-average discount rate Operating leases 4.5% 5.3% Finance leases 4.6% 4.9% Lease Obligations $'s in 000's Operating Leases Finance Leases Remainder of 2022 $ 5,052 $ 1,203 2023 6,336 1,702 2024 4,781 622 2025 3,745 239 2026 2,147 79 Thereafter 124 — Total minimum future obligations $ 22,185 $ 3,845 Less interest (1,838) (211) Present value of net future minimum obligations 20,347 3,634 Less current lease obligations (6,047) (1,470) Long-term lease obligations $ 14,300 $ 2,164 For the Year Ended $'s in 000's March 31, 2022 March 31, 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from finance leases $ 64 $ 91 Operating cash flows from operating leases 1,583 1,224 Financing cash flows from finance leases 399 468 (Noncash) right-of-use assets obtained in exchange for lease obligations Operating leases 572 1,418 Finance leases 81 — Note rate differential. Three months ended March 31, (in 000's, except for per share amounts) 2022 2021 Numerator: Net income $ 3,160 $ 2,386 Less: net income attributable to non-controlling interests 29 353 Net income attributable to PetIQ, Inc. — basic and diluted 3,131 2,033 Denominator: Weighted-average shares of Class A common stock outstanding — basic 29,164 26,386 Dilutive effects of stock options that are convertible into Class A common stock 60 470 Dilutive effect of RSUs 66 148 Dilutive effect for conversion of Notes — — Weighted-average shares of Class A common stock outstanding — diluted 29,290 27,004 Earnings per share of Class A common stock — basic $ 0.11 $ 0.08 Earnings per share of Class A common stock — diluted $ 0.11 $ 0.08 March 31, 2022 March 31, 2021 Expected term (years) (1) 6.25 6.25 Expected volatility (2) 37.21 % 33.91 % Risk-free interest rate (3) 1.44 % 0.90 % Dividend yield (4) 0.00 % 0.00 % Weighted Average Weighted Aggregate Remaining Stock Average Intrinsic Contractual Options Exercise Value Life (in 000's) Price (in 000's) (years) Outstanding at January 1, 2021 2,086 $ 23.93 $ 30,302 7.2 Granted 354 35.66 Exercised (583) 23.05 $ 8,499 Forfeited (64) 24.84 Cancelled (25) 25.70 Outstanding at December 31, 2021 1,768 26.51 $ 2,897 7.3 Granted 37 21.91 Exercised (2) 19.49 $ 5 Forfeited (2) 35.66 Outstanding at March 31, 2022 1,801 $ 26.41 $ 4,132 7.1 Options exercisable at March 31, 2022 1,155 Weighted Number of Average Shares Grant Date (in 000's) Fair Value Outstanding at January 1, 2021 317 $ 22.91 Granted 268 37.91 Settled (103) 24.81 Forfeited (23) 26.02 Outstanding at December 31, 2021 459 31.08 Granted 712 20.85 Settled (143) 26.10 Forfeited (1) 35.66 Nonvested RSUs at March 31, 2022 1,027 $ 24.68 LLC Interests held % of Total LLC LLC $'s in 000's Owners PetIQ, Inc. Total Owners PetIQ, Inc. As of January 1, 2021 3,040 25,711 28,751 10.6% 89.4% Stock based compensation transactions — 660 660 Exchange transactions (2,768) 2,768 — As of December 31, 2021 272 29,139 29,411 0.9% 99.1% Stock based compensation transactions — 113 113 Exchange transactions (20) 20 — As of March 31, 2022 252 29,272 29,524 0.9% 99.1% We have commitments for leases and long-term debt that are discussed further in Note sales. The segments are based on the discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to make resource allocation decisions and to evaluate performance. We measure and evaluate our reportable segments based on Operations. $'s in 000's Unallocated March 31, 2022 Products Services Corporate Consolidated Net Sales $ 247,750 $ 27,945 $ — $ 275,695 Adjusted EBITDA 47,909 3,084 (19,398) 31,595 Depreciation expense 1,010 1,650 1,022 3,682 Capital expenditures 3,002 1,644 1,032 5,678 $'s in 000's Unallocated March 31, 2021 Products Services Corporate Consolidated Net Sales $ 230,034 $ 24,313 $ — $ 254,347 Adjusted EBITDA 38,792 2,096 (14,027) 26,861 Depreciation expense 940 1,182 1,009 3,131 Capital expenditures 270 2,379 5,676 8,325 For the three months ended $'s in 000's March 31, 2022 March 31, 2021 Adjusted EBITDA: Product $ 47,909 $ 38,792 Services 3,084 2,096 Unallocated Corporate (19,398) (14,027) Total Consolidated 31,595 26,861 Adjustments: Depreciation 3,682 3,131 Amortization 4,523 8,428 Interest 6,121 4,870 Acquisition costs(1) — 6 Stock based compensation expense 3,823 2,122 Non same-store adjustment(2) 7,165 5,648 Integration costs and costs of discontinued clinics(3) 339 (48) Litigation expenses 2,661 243 Pretax net income $ 3,281 $ 2,461 Income tax expense (121) (75) Net income $ 3,160 $ 2,386x☒2022☐¨
SymbolSecurities registered pursuant to Section 12(g) of the Act: None⌧x No ◻¨⌧x No ◻¨Large accelerated filer ⌧Accelerated filer ◻x◻Smaller reporting company ☐¨☐¨☐¨Indicate by check mark whether the registrant has filed a report on and attestation of its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒⌧x No4, 2022,10, 2023, we had 29,270,19029,137,754 shares of Class A common stock and 252,540244,540 shares of Class B common stock outstanding.Page 3Page33435465769810921182525262526272627272727 000’sor 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.for per share amounts)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.PetIQ, Inc. Condensed Consolidated Balance Sheets (Unaudited, in 000’s except for per share amounts) March 31, 2023 December 31, 2022 Current assets Cash and cash equivalents $ 25,410 $ 101,265 Accounts receivable, net 203,325 118,004 Inventories 158,087 142,605 Other current assets 10,330 8,238 Total current assets 397,152 370,112 Property, plant and equipment, net 71,667 73,395 Operating lease right of use assets 16,651 18,231 Other non-current assets 2,527 1,373 Intangible assets, net 176,145 172,479 Goodwill 203,573 183,306 Total assets $ 867,715 $ 818,896 Liabilities and equity Current liabilities Accounts payable $ 150,012 $ 112,995 Accrued wages payable 9,547 11,512 Accrued interest payable 3,155 1,912 Other accrued expenses 8,388 7,725 Current portion of operating leases 6,410 6,595 Current portion of long-term debt and finance leases 8,675 8,751 Total current liabilities 186,187 149,490 Operating leases, less current installments 10,956 12,405 Long-term debt, less current installments 441,938 443,276 Finance leases, less current installments 703 907 Other non-current liabilities 4,782 1,025 Total non-current liabilities 458,379 457,613 Equity Additional paid-in capital 380,429 378,709 Class A common stock, par value $0.001 per share, 125,000 shares authorized; 29,499 and 29,348 shares issued, respectively 29 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' equity 221,292 209,924 Non-controlling interest 1,857 1,869 Total equity 223,149 211,793 Total liabilities and equity $ 867,715 $ 818,896 3PetIQ, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in 000’s except for per share amounts)For the Three Months Ended March 31, 2023 March 31, 2022 Product sales $ 258,993 $ 247,750 Services revenue 31,478 27,945 Total net sales 290,471 275,695 Cost of products sold 200,902 190,851 Cost of services 27,308 27,209 Total cost of sales 228,210 218,060 Gross profit 62,261 57,635 Operating expenses Selling, general and administrative expenses 43,326 48,236 Operating income 18,935 9,399 Interest expense, net 8,732 6,121 Other income, net (26) (3) Total other expense, net 8,706 6,118 Pretax net income 10,229 3,281 Income tax expense (448) (121) Net income 9,781 3,160 Net income attributable to non-controlling interest 82 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 Basic 29,125 29,164 Diluted 35,230 29,290 PetIQ, Inc.Condensed Consolidated Statements of Operations(Unaudited, in 000’s except for per share amounts)4PetIQ, Inc.Condensed Consolidated Statements of Comprehensive Income(Unaudited, in 000’s)PetIQ, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in 000’s)For the Three Months Ended March 31, 2023 March 31, 2022 Net income $ 9,781 $ 3,160 Foreign currency translation adjustment (51) (456) Comprehensive income 9,730 2,704 Comprehensive income attributable to non-controlling interest 82 25 Comprehensive income attributable to PetIQ, Inc. $ 9,648 $ 2,679 5PetIQ, Inc.Condensed Consolidated Statements of Cash Flows(Unaudited, in 000’s)PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in 000’s)For the Three Months Ended March 31, 2023 2022 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 fees 8,463 8,966 Loss on disposition of property, plant, and equipment — 148 Stock based compensation expense 2,466 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 payable 36,019 74,094 Accrued wages payable (1,988) (1,496) Other accrued expenses 1,866 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 debt 15,000 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 equivalents 102 (107) Cash and cash equivalents, beginning of period 101,265 79,406 Cash and cash equivalents, end of period $ 25,410 $ 51,104 6PetIQ, Inc.Condensed Consolidated Statements of Cash Flows, Continued(Unaudited, in 000’s)7PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited, in 000’s)For the Three Months Ended March 31, Supplemental cash flow information 2023 2022 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 refunds 3 (5) PetIQ, Inc.Condensed Consolidated Statements of Equity(Unaudited, in 000’s)PetIQ, Inc.
Condensed Consolidated Statements of Equity
(Unaudited, in 000’s)Three months ended March 31, 2023 Accumulated
DeficitAccumulated
Other
Comprehensive
LossClass A Common Class A Treasury Stock Class B Common Additional
Paid-in
CapitalNon-controlling
InterestTotal
EquityShares Dollars Shares Dollars Shares Dollars 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 income 9,699 — — — — — — — — 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
DeficitAccumulated
Other
Comprehensive
LossClass A Common Class A Treasury Stock Class B Common Additional
Paid-in
CapitalNon-controlling
InterestTotal
EquityShares Dollars Shares Dollars Shares Dollars 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 income 3,131 — — — — — — — — 29 3,160 Balance - March 31, 2022 $ (111,394) $ (1,136) 29,272 $ 29 — $ — 252 $ — $ 371,398 $ 2,262 $ 261,159 8– — Principal Business Activity and Significant Accounting Policies(“PetIQ,”("PetIQ", the “Company,” “we”"Company", "we", or “us”"us") is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail including veterinary,and e-commerce channels with our branded and distributed medications as well as health and wellness items, which isare further supported by our own world-class medicationmedications manufacturing facility in Omaha, Nebraska.Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national service platform VIP Petcare (“VIP”), operates in over 2,9002,600 retail partner locations in 4241 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.We have 2We are sole managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”OpCo”) and, through HoldCo, operateoperates and controlcontrols all of the business and affairs of Opco.20222023 and December 31, 20212022 and for the three three months ended March 31, 20222023 and 20212022 are unaudited. The condensed consolidated balance sheet as of December 31, 20212022 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, 20212022 and related notes thereto included in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2022.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.122022.2023.9$'s in 000's Fair Value Current assets $ 3,020 Other assets 1,208 Amortizable intangibles Trade name 7,600 Customer relationships 320 Total amortizable intangibles $ 7,920 Goodwill 20,266 Total assets $ 32,414 Current liabilities 1,000 Other tax liabilities 3,780 Total liabilities 4,780 Purchase price, net of cash acquired $ 27,634 2 –3 — DebtOpcoOpCo 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 senior secured financingrevolving credit commitments of $125.0 million, (which may be increased by up to $50.0 million in certain circumstances), subject to a borrowing base limitation (the “ABL”"ABL"). The borrowing base for the ABL Facility at any time equals the sum of: (i) 90% of eligible investment-grade accounts;accounts receivable; plus (ii) 85% of eligible other accounts;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,OpCo, 100% of qualified cash; minus (v) reserves. The ABL Facility bears interest at a variable rate plus a margin, with the variable rate being based on a base rate or LIBOR at the option of the Company. On February 3, 2023, HoldCo and Opco, entered into the First Amendment Agreement to the ABL Facility to replace the interest rate benchmark from LIBOR to SOFR. The interest rate at March 31, 20222023 was 1.48%5.90%. The Company also pays a commitment fee on unused borrowings at a rate of 0.35%.the CompanyHoldCo and its wholly-owned domestic subsidiaries including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts.accounts (such collateral subject to first-priority security interest, "ABL Priority Collateral"), and a second-priority security interest in all other personal and real property of HoldCo and its wholly-owned domestic subsidiaries (such collateral subject to such second-priority security interest, “Term Priority Collateral”), in each case, subject to customary exceptions. The ABL contains certaincustomary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the Company’s ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions. The ABL is due on the fifth anniversaryAs of the agreement.OpcoOpCo entered into a term credit and guaranty agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $300.0 million (which may be increased in certain circumstances) (“Term(the "Term Loan B”B"). The Term Loan B bears interest at a variable rate of either prime, federal funds effective rate or LIBOR, plus an applicable margin of between 3.25% and 4.25% depending on the underlying base rate. LIBOR rates are subject to a 0.50% floor. The interest rate at March 31, 20222023 was 4.75%8.96%. The Term Loan B requires quarterly payments of 0.25% of the original principal amount, with the balance due on the seventhseventh anniversary of the closing date. credit agreement governing the Term Loan B does not require Opcois secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries, including a first-priority security interest in Term Priority Collateral and a second-priority security interest in ABL Priority Collateral, in each case, subject to comply with any financial maintenance covenants butcustomary exceptions. The Term Loan B contains certain customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. Any unpaid balance isdefault, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.seventh anniversaryscheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of Notes. The conversion rate and conversion price will be subject to customary adjustments upon the agreement.10$'s in 000's March 31, 2023 December 31, 2022 Convertible Notes $ 143,750 $ 143,750 Term Loan B 294,750 295,500 Revolving credit facility — — Other debt 18,693 19,690 Net discount on debt and deferred financing fees (8,055) (8,531) $ 449,138 $ 450,409 Less current maturities of long-term debt (7,200) (7,133) Total long-term debt $ 441,938 $ 443,276 2022,2023, are as follows:($'s in 000's) Remainder of 2023 $ 5,326 2024 7,426 2025 4,600 2026 147,350 2027 3,600 Thereafter 288,891 3 – LeasesThe Company leases certain real estate for commercial, production,4 — Intangible Assets and retail purposes, as well as equipment from third parties. Lease expiration dates are between 2022Goodwill2027. A portionnon-amortizable intangible assetsleasesthe following at:$'s in 000's Useful Lives March 31, 2023 December 31, 2022 Amortizable intangibles Certification 7 years $ 350 $ 350 Customer relationships 12-20 years 160,360 160,040 Patents and processes 5-10 years 14,634 14,634 Brand names 5-15 years 32,233 24,633 Total amortizable intangibles 207,577 199,657 Less accumulated amortization (66,339) (62,085) Total net amortizable intangibles 141,238 137,572 Non-amortizable intangibles Trademarks and other 33,239 33,239 In-process research and development 1,668 1,668 Intangible assets, net of accumulated amortization $ 176,145 $ 172,479 currencies.For both operating and finance leases, the Company recognizes a right-of-use (“ROU”) asset, which represents the right to use the underlying assetcurrency movements. Amortization expense for the lease term,three months ended March 31, 2023 and 2022 was $4.3 million and $4.5 million, respectively.Remainder of 2023 $ 13,731 2024 15,686 2025 15,011 2026 14,356 2027 13,685 Thereafter 68,769 lease liability, which representssummary of the presentchanges in the carrying value of our obligationgoodwill for the period from January 1, 2021 to make payments arising over the lease term.We elected the short-term lease exemption for all leases that qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease.The Company’s leases may include options to extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms.The components of lease expense consists of the following:(1)Variable lease cost primarily relates to percentage rent, common area maintenance, property taxes and insurance on leased real estate.11Reporting Unit ($'s in 000's) Products Services Total Goodwill as of January 1, 2022 183,846 47,264 231,110 Foreign currency translation (540) — (540) Impairment — (47,264) (47,264) Goodwill as of December 31, 2022 183,306 — 183,306 R&R Acquisition 20,226 — 20,226 Foreign currency translation 41 — 41 Goodwill as of March 31, 2023 $ 203,573 $ — $ 203,573 Other information related to leases was as follows as of:Annual future commitments under non-cancelable leases as of March 31, 2022, consist of the following:Supplemental cash flow information:4 –5 — Income Tax(ETR) from continuing operations was 4.4% and 3.7% for the three months ended March 31, 2023 and 2022, and 3.06% for the three months ended March 31, 2021,respectively, including discrete items. Income tax expense for the three months ended March 31, 20222023 and 20212022 was different than the U.S federal statutory income tax rate of 21% primarily due to the effects of athe change in valuation allowance, state taxes, and the foreign GILTI income inclusion.20222023 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 will not be realized. The Company has recorded a valuation allowance for deferred tax assets of $106.3 million as of March 31, 2022 and12December 31, 2021. In future periods, if we conclude we have future taxable income sufficient to recognize the deferred tax assets, we may reduce or eliminate the valuation allowance.5 –6 — Earnings per ShareThree months ended March 31, (in 000's, except for per share amounts) 2023 2022 Numerator: Net income $ 9,781 $ 3,160 Less: net income attributable to non-controlling interests 82 29 Net income attributable to PetIQ, Inc. — basic 9,699 3,131 Plus: interest expense on Convertible Notes 1,676 — Net income attributable to PetIQ, Inc. — diluted 11,375 3,131 Denominator: Weighted-average shares of Class A common stock outstanding — basic 29,125 29,164 Dilutive effects of stock options that are convertible into Class A common stock — 60 Dilutive effect of RSUs 45 66 Dilutive effect of conversion of Convertible Notes 6,060 — Weighted-average shares of Class A common stock outstanding — diluted 35,230 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 or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. the dilutive effect of other potential common shares excludesincludes 0 and 60 for stock awards of 1,797 thousandoptions as well as 45 and 652 thousand shares66 restricted stock units for the three months ended March 31, 2023 and 2022, respectively. All stock options and 2021, respectively, as the inclusion under the treasury693 thousand restricted stock method wouldunits 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.and three months ended March 31, 2022 and 2021 as they would behave been antidilutive.6 –7 — Stock Based Compensation as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (“SARs”)(SARs), restricted stock, restricted stock units (“RSUs”)(RSUs), and other stock-based awards. The Company has 3,914 thousand authorizedawards, up to a total of 5,804,000 shares of Class A common stock issuable under the Plan. As of March 31, 2023 and 2022, 1,167,937 and 2021, 26 thousand and 767 thousand26,000 shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares.13providesprovided 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 800thousand800,000 shares of Class A common stock ofCompany. AsCompany, of March 31, 2022, 0 shareswhich 760,000 were available for issuancegranted. No further grants may be made under the Inducement Plan. All awards issued under the Inducement Plan may only be settled in shares of Class A common stock.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.$1.3$0.3 million and $1.4$1.3 million for the three months ended March 31, 20222023 and 2021,2022, 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 dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periodsperiod ended March 31, 2022 and 2021:(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 stock.14The weighted average grant date fair value of stock2022. No options granted duringwere issued for the period ended March 31, 2022 was $9.14 per option. At 2023:March 31, 2022 6.25 37.21 % 1.44 % 0.00 % $5.9$3.1 million and is expected to be recognized over a weighted-average period of 2.31.6 years. years.Stock
Options
(in 000's)Weighted
Average
Exercise
PriceAggregate
Intrinsic
Value
(in 000's)Weighted
Average
Remaining
Contractual
Life
(years)Outstanding at January 1, 2022 1,768 $ 26.51 $ 2,897 7.3 Granted 83 14.16 Exercised (2) 19.49 $ 10 Forfeited (110) 29.24 Cancelled (86) 31.12 Outstanding at December 31, 2022 1,652 $ 25.48 $ 53 6.2 Forfeited (52) 11.17 Cancelled (37) 30.85 Outstanding at March 31, 2023 1,563 $ 25.81 $ — 5.6 Options exercisable at March 31, 2023 1,296 Table of ContentsUponTypically, upon a termination of service relationship by the Company, all unvested RSUs will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s Class A common stock on the date of grant. At March 31, 2022,2023, total unrecognized compensation cost related to unvested RSUs was $23.5$26.7 million and is expected to vest over a weighted average period of 3.4 years.$2.5 million and $0.8$1.4 million for the three months ended March 31, 20222023, and 2021,$2.5 million for the three months ended March 31, 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients.2022.15Number of
Shares
(in 000's)Weighted
Average
Grant Date
Fair ValueOutstanding at January 1, 2022 459 $ 31.08 Granted 802 20.30 Settled (231) 27.81 Forfeited (177) 25.53 Outstanding at December 31, 2022 853 $ 23.06 Granted 1,033 10.80 Settled (168) 23.02 Forfeited (24) 18.55 Nonvested RSUs at March 31, 2023 1,694 $ 15.39 InterestsInterests") and changes in LLC Interests for the periods presented.LLC Interests held % of Total $'s in 000's LLC
OwnersPetIQ, Inc. Total LLC
OwnersPetIQ, Inc. As of January 1, 2022 272 29,139 29,411 0.9 % 99.1 % Stock based compensation transactions — 188 188 Exchange transactions (20) 20 — Unit redemption — (373) (373) As of December 31, 2022 252 28,974 29,226 0.9 % 99.1 % Stock based compensation transactions — 143 143 Exchange transactions (8) 8 — As of March 31, 2023 244 29,125 29,369 0.8 % 99.2 % 20222023 and 20212022 the Company owned a weighted average of 99.1%99.2% and 91.2%99.1%, respectively, of HoldCo.8 –9 — Customer Concentration20222023 and 2021, 22022, three and two customers individually accounted for more than 10% of sales, comprising 36%50% and 42%36% of net sales in aggregate, respectively for such periods.2022 2 Products segment customers individually accounted for more than 10% of outstanding trade receivables, and accounted for 49% of outstanding trade receivables, net. At December 31, 2021 12023 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and accounted for 47% 41% of outstanding trade receivables, net. At December 31, 2022 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and accounted for 46% of outstanding trade receivables, net.9 –10 — Commitments and Contingenciesexpenses legal costshas not accrued for any contingency as incurred within selling, general and administrative expenses on the condensed consolidated statements of operations. As of March 31, 20222023 and December 31, 20212022 as the Company had does not consider any contingency to be probable or estimable.$6.0 million and $3.5 million in liabilities accrued on the condensed consolidated balance sheet, respectively.During 2021, the Company entered into mediation with a third party who had filed a class action lawsuit against the Company. As a result of that mediation, the Company accrued the expected settlement of $1.4 million in the period ended September 30, 2021. expects final settlement and payment to occurrecorded $2.5 million of expense in 2022.Additionally, during the three months ended March 31, 2022 the Company has continuedrelated to evaluate a lawsuit brought by a former supplier to the Company related to the redemption of ownership interest.interest, which is included within selling, general and administrative expenses on the condensed consolidated statements of operations. The plaintiff has alleged actual damages of approximately $3 million plus interestmatter was settled and attorney’s fees and has claimed additional punitive damages that could result in treble damages. The Company believes the range of outcomes is between $4.5 million and the amount alleged by the plaintiff, and as no amount within the range is more likely than any other, the Company has accrued an obligation of $4.5 million as of March 31, 2022, of which $2.5 million of expense was recorded in the three months ended March 31,paid during 2022. There is no assurance that the Company’s defense will be successful, and as such, the Company will continue to monitor the expected outcome of the matter.16Commitments2 - Debt, and Note 3, - Leases.Debt. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.10 –11 — Segments2two operating segments: Products and Services. The Products segment consists of the Company’s manufacturing and distribution business. The Services segment consists of the Company’s veterinary services and related product sales, provided by the Company directly to consumers.net sales and segmenttheir respective Segment Adjusted EBITDA. We exclude fromEBITDA performance. Beginning in the fourth quarter of 2022, we allocate to our segments capital expenditures and certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses, ason a pro rata basis based on net sales to better align with the discrete financial information reviewed by our corporate functions doCODM. Such expenses previously were not meetallocated to segments. The Company has recast prior periods to give effect to this change. This change in presentation had no impact on the definitionCondensed Consolidated Statements of a segment as defined in the accounting guidance related to segment reporting.$'s in 000's Products Services March 31, 2023 Net sales $ 258,993 $ 31,478 Segment Adjusted EBITDA 32,196 850 Depreciation expense 1,816 1,705 Capital expenditures 1,565 345 Table of Contents$'s in 000's Products Services March 31, 2022 Net sales $ 247,750 $ 27,945 Segment Adjusted EBITDA 30,477 1,118 Depreciation expense 1,928 1,754 Capital expenditures 3,929 1,749 segmentSegment Adjusted EBITDA to Net income:17For the three months ended $'s in 000's March 31, 2023 March 31, 2022 Segment Adjusted EBITDA: $ 32,196 $ 30,477 850 1,118 Total 33,046 31,595 Adjustments: Depreciation (3,521) (3,682) Amortization (4,262) (4,523) Interest (8,732) (6,121) (538) — Stock based compensation expense (2,466) (3,823) (2,322) (7,165) (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)Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.(2)Non same-store adjustment includes revenue and costs 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.(3)Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. Depending on the type of costs, the costs are primarily in the Products segment and the corporate segment. Costs of discontinued clinics represent costs to close Service segment locations.
Supplemental geographic disclosures are below:
| | | | | | |
| | Three months ended March 31, 2022 | ||||
$'s in 000's | | U.S. | | Foreign | | Total |
Product sales | $ | 245,572 | $ | 2,178 | $ | 247,750 |
Service revenue | | 27,945 | | — | | 27,945 |
Total net sales | $ | 273,517 | $ | 2,178 | $ | 275,695 |
| | | | | | |
| | Three months ended March 31, 2021 | ||||
$'s in 000's | | U.S. | | Foreign | | Total |
Product sales | $ | 228,575 | $ | 1,459 | $ | 230,034 |
Service revenue | | 24,313 | | — | | 24,313 |
Total net sales | $ | 252,888 | $ | 1,459 | $ | 254,347 |
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Property, plant, and equipment by geographic location is below:
| | | | | | |
| | March 31, 2022 |
| December 31, 2021 | ||
United States | | $ | 74,878 | | $ | 75,315 |
Europe | | | 3,316 | | | 1,298 |
Total | | $ | 78,194 | | $ | 76,613 |
below. 2023 and 2022, respectively. forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” 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. For the Three Months Ended % of Net Sales $'s in 000's March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 Product sales $ 247,750 $ 230,034 89.9 % 90.4 % Services revenue 27,945 24,313 10.1 % 9.6 % Total net sales 275,695 254,347 100.0 % 100.0 % Cost of products sold 190,851 182,827 69.2 % 71.9 % Cost of services 27,209 23,721 9.9 % 9.3 % Total cost of sales 218,060 206,548 79.1 % 81.2 % Gross profit 57,635 47,799 20.9 % 18.8 % Selling, general and administrative expenses 48,236 40,672 17.5 % 16.0 % Operating income 9,399 7,127 3.4 % 2.8 % Interest expense, net 6,121 4,870 2.2 % 1.9 % Other income, net (3) (204) (0.0) % (0.1) % Total other expense, net 6,118 4,666 2.2 % 1.8 % Pretax net income 3,281 2,461 1.2 % 1.0 % Income tax expense (121) (75) (0.0) % (0.0) % Net income $ 3,160 $ 2,386 1.1 % 0.9 % For the three months ended $'s in 000's March 31, 2022 March 31, 2021 Products segment sales $ 247,750 $ 230,034 Services segment revenue: Same-store sales 20,725 19,918 Non same-store sales 7,220 4,395 Total services segment revenue 27,945 24,313 Total net sales 275,695 254,347 Adjusted EBITDA Products 47,909 38,792 Services 3,084 2,096 Unallocated Corporate (19,398) (14,027) Total Adjusted EBITDA $ 31,595 $ 26,861 Three Months Ended March 31, 2022 2023, compared to $275.7 million for the three months ended March 31, 2022. Net sales growth of $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 increased pet counts and increased average dollar per pet served during the first quarter of 2023. Three months ended March 31, 2022 $'s in 000's Products Services Unallocated Corporate Consolidated Pretax net income (loss) $ 46,899 $ (5,731) $ (37,887) $ 3,281 Adjustments: Depreciation 1,010 1,650 1,022 3,682 Interest — — 6,121 6,121 Amortization — — 4,523 4,523 Stock based compensation expense — — 3,823 3,823 Non same-store adjustment(2) — 7,165 — 7,165 Integration costs and costs of discontinued clinics(3) — — 339 339 Litigation expenses — — 2,661 2,661 Adjusted EBITDA $ 47,909 $ 3,084 $ (19,398) $ 31,595 Three months ended March 31, 2021 $'s in 000's Products Services Unallocated Corporate Consolidated Pretax net income (loss) $ 37,852 $ (4,734) $ (30,657) $ 2,461 Adjustments: Depreciation 940 1,182 1,009 3,131 Interest, net — — 4,870 4,870 Amortization — — 8,428 8,428 Acquisition costs(1) — — 6 6 Stock based compensation expense — — 2,122 2,122 Non same-store adjustment(2) — 5,648 — 5,648 Integration costs and costs of discontinued clinics(3) — — (48) (48) Litigation expenses — — 243 243 Adjusted EBITDA $ 38,792 $ 2,096 $ (14,027) $ 26,861 Consolidated Non-GAAP Financial Measures 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. For the three months ended March 31, 2022 March 31, 2021 Net income $ 3,160 $ 2,386 Plus: Tax expense 121 75 Depreciation 3,682 3,131 Amortization 4,523 8,428 Interest 6,121 4,870 EBITDA $ 17,607 $ 18,890 Acquisition costs(1) — 6 Stock based compensation expense 3,823 2,122 Non same-store adjustment (2) 7,165 5,648 Integration costs and costs of discontinued clinics(3) 339 (48) Litigation expenses 2,661 243 Adjusted EBITDA $ 31,595 $ 26,861 Financial Condition, Liquidity, and Capital Resources See “Note 3 – Debt” to our condensed consolidated financial statements included herein for a description of each of our debt arrangements. The Company has not historically made significant non-contractual debt pay downs, but may choose to do so in the future as part of its capital allocation strategy. terms or at all. As in the past, we will continue to explore opportunities to optimize our capital structure. Exchange Act), as of the end of the period covered by this Quarterly Report on Form 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. 2023. As of March 31, 2023, $26.1 million in aggregate dollar value of shares remained available for purchase under the stock repurchase program. 31.1* 31.2* 32.1* 32.2* 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document. Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.) ** Furnished herewith PETIQ, INC. May /s/ Zvi Glasman Zvi Glasman Chief Financial OfficerMarch 31, 2023 December 31, 2022 United States $ 67,707 $ 69,376 Europe 3,960 4,019 Total $ 71,667 $ 73,395 11 –12 — Related Parties (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s premium expense, which is paid at a variety of times throughout the year, 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, 2022.2023 and 2022, respectively. Mr. Chris Christensen earns various forms of compensation based on the specifics of each policy.has beenwas paid $0.06 million and $0.06 million for the three months ended March 31, 2022.20212022 and related notes included in the annual reportAnnual Report on Form 10-K for PetIQ, Inc.,the year ended December 31 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K for the year ended December 31, 2021.February 28, 2023. This discussion contains18 –including veterinary,and e-commerce channels with our branded and distributed medications as well as health and wellness items, which isare further supported by our own world-class medicationmedications manufacturing facility in Omaha, Nebraska.Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national service platform, VIP Petcare (“VIP”), operates in over 2,9002,600 retail partner locations in 4241 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.segmentsegments consists of veterinary and wellness services and related product salesproducts provided by the Company directly to consumers. sole managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”OpCo”) and, through HoldCo, operateoperates and controlcontrols all of the business and affairs of Opco.OpCo.19For the Three Months Ended % of Net Sales $'s in 000's March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022 Product sales $ 258,993 $ 247,750 89.2% 89.9% Services revenue 31,478 27,945 10.8% 10.1% Total net sales 290,471 275,695 100.0% 100.0% Cost of products sold 200,902 190,851 69.2% 69.2% Cost of services 27,308 27,209 9.4% 9.9% Total cost of sales 228,210 218,060 78.6% 79.1% Gross profit 62,261 57,635 21.4% 20.9% Selling, general and administrative expenses 43,326 48,236 14.9% 17.5% Operating income 18,935 9,399 6.5% 3.4% Interest expense, net 8,732 6,121 3.0% 2.2% Other income, net (26) (3) —% —% Total other expense, net 8,706 6,118 3.0% 2.2% Pretax net income 10,229 3,281 3.5% 1.2% Income tax expense (448) (121) (0.2)% —% Net income 9,781 3,160 3.4% 1.1% The following tables set forth financial information relating to the Company’s operating segments for the periods presented:20222023 Compared With Three Months Ended March 31, 2021$21.3$14.8 million or 8.4%5.4%, to $275.7 for the three months ended March 31, 2022, compared to $254.3$290.5 million for the three months ended March 31, 2021.$17.7$11.3 million, or 7.7%4.5%, to $259.0 million for the three months ended March 31, 2023, compared to $247.8 million for the three months ended March 31, 2022, compared2022. The increase was 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$230.0$31.5 million for the three months ended March 31, 2021. This increase was driven by sales of new manufactured product as well as growth within existing manufactured and distributed products.Services segmentServices revenues increased $3.6 million, or 14.9%, from $24.3 million2023, compared to $28.0 million for the three months ended March 31, 2022, compared2022. Same-store sales increased $7.8 million, or 37.7%, to $28.5 million for the three months ended March 31, 2021. Same-store sales increased $0.8 million, or 4.1%,2023, compared to $20.7 million for the three months ended March 31, 2022, compared2022. 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.$19.9$62.3 million for the three months ended March 31, 2021. The increase in same-store sales was driven by higher pet traffic, as the Company optimized schedules of community clinics. Non same-store sales increased $2.8 million or 64.3%, to $7.2 million for the three months ended March 31, 2022,2023, compared to $4.4 million for the three months ended March 31, 2021. The increase in non same-store sales was a result of opening approximately 98 additional wellness centers in 2021.Gross profitGross profit increased by $9.8 million, or 20.6%, to $57.6 million for the three months ended March 31, 2022, compared2022. This increase is driven by the Products segment gross profit$47.8 millionnet 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.2021. This increase is due to margin improvements in the Products segment, primarily driven by new product launches, as well as growth within existing products at higher margins.Gross margin increased2023, compared to 20.9% for the three months ended March 31, 2022, compared2022. The improvement was driven by our Service segment which improved from 2.6% to 18.8%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.2021. This increase was driven by improvements in Product segment sales previously noted as well as the loss of some low margin distributed sales.20Selling, General and administrative expensesConsolidated selling, general and administrative expenses (“SG&A”) increased by $7.6 million, or 18.6%,2023, compared to $48.2 million for the three months ended March 31, 2022. As a percentage of net sales, SG&A decreased from 17.5% for the three months ended March 31, 2022 compared to $40.614.9% 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.2021. As a percentage of net sales, SG&A increased from 16.0% for the three months ended March 31, 20212023, compared to 17.5% for the first quarter of 2022. The Company had higher selling and marketing costs for both the Products and Services segments to support the growth in sales, growth in compensation as a result of the growth of the Company, and increased litigation reserves.Products segmentProducts segment SG&A increased $1.3 million or approximately 13.8% to $10.7$38.7 million for the three months ended March 31, 2022, compared2022. This decrease was primarily due to $9.4lower legal expense and stock compensation as described above.2021. This increase was due2023, compared to higher marketing and selling costs related to the new product launches.Services segmentServices segment SG&A increased $1.0 million, or 16.7%, to $6.3$9.5 million for the three months ended March 31, 2022, compared2022. This decrease was driven by lower corporate allocations, operational improvements, and lower marketing spend due to $5.3fewer new store openings.2021. This increase was driven by increased wages and marketing related to new clinic rollouts, as well as increased variable costs on higher sales.Unallocated CorporateUnallocated corporate SG&A increased $5.2 million, or 20.0%, to $31.2 million for the three months ended March 31, 2022, from $26.0 million for the three months ended March 31, 2021. The increase was primarily related to the following:◾Additional corporate compensation of approximately $3.7 million, driven by corporate growth in headcount and wage rates; and◾Increased stock based compensation expense of $1.7 million as a result of additional grants as well as the acceleration of vesting for the Company’s CFO transition; and◾Increased marketing and selling expenses of $2.8 million to support the growth of both segments; and◾Increased legal contingency accruals totaling approximately $2.5 million; and◾Increases above were offset by a reduction in amortization expense due to the $3.8 million in accelerated amortization recorded in the prior period related to the in-process research and development asset, with no comparable event in the current year.Interest expense, netInterest expense, net, increased $1.3 million2023, compared to $6.1 million for the three months ended March 31, 2022, compared2022. This increase was driven by the higher rates on the Company's variable rate debt due to $4.9 millionrising interest rates.2021. This increase was driven by additional debt outstanding, as2023 and 2022, respectively, with a tax expense of $0.4 million and $0.1 million, respectively. The tax rate is different than the Company refinanced a majorityU.S federal statutory income tax rate of its debt in the second quarter of 2021, but expanded its facilities at that time.Segment Adjusted EBITDAProducts segmentProducts segment Adjusted EBITDA increased $9.1 million, or 23.5% to $47.9 million for the three months ended March 31, 2022, compared to $38.8 million for the three months ended March 31, 2021. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced by PetIQ, or are distributed for other manufacturers. The significant growth in Products segment Adjusted EBITDA relates21% primarily to increased sales, driven by new manufactured product launches, which typically generate higher EBITDA than sales of distributed products.Services segment21Services segment Adjusted EBITDA increased $1.0 million, to $3.1 million for the three months ended March 31, 2022, compared to $2.1 million for the three months ended March 31, 2021. Services segment Adjusted EBITDA can fluctuate considerably based on the volume of pets seen in clinics, due to the relatively fixed cost natureeffects of a clinic. Services segment Adjusted EBITDA benefited from the scheduling optimizationchange in valuation allowance, state taxes, and the Company undertook during the fourth quarter of 2021, which resulted in higher pet traffic at community clinics.Unallocated CorporateUnallocated corporate expenses consist of expenses incurred by centrally-managed departments, including accounting, legal, human resources, information technology and headquarters expenses, as well as executive and incentive compensation expenses, and other miscellaneous costs. Unallocated corporate costs have primarily grown to support the Company’s growth. Adjustments to unallocated corporate include expenses related acquisition expenses and integration costs. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.The following tables reconcile Segment pre-tax net income to Adjusted EBITDA for the periods presented.(1)Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.(2)Non same-store adjustment includes revenue and costs 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.
foreign rate differential.(3)Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT22conversion costs. Depending on the type of costs, the costs are primarily in the Products segment and the corporate segment. Costs of discontinued clinics represent costs to close service segment locations.GAAP.Generally Accepted Accounting Principles ("GAAP"). The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:●EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;●EBITDA does not reflect changes in, or cash requirements for, our working capital needs;●EBITDA does not reflect the interest expenses, or the cash requirements necessary to service interest or principal payments, on our debts;●Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;●Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing core operations; and●Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.supplementally.supplementary. You should review the reconciliations of net income to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.23Three Months Ended March 31, $'s in 000's 2023 2022 Net income $ 9,781 $ 3,160 Plus: Tax expense 448 121 Depreciation 3,521 3,682 Amortization 4,261 4,523 Interest 8,732 6,121 EBITDA $ 26,743 $ 17,607 538 — Stock based compensation expense 2,466 3,823 976 339 Litigation expenses — 2,661 Adjusted EBITDA $ 30,722 $ 24,430 The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented.(1)Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.(2)Non same-store adjustment includes revenue and costs 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. (3)Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. Depending on the type of costs, the costs are primarily in the Products segment and the corporate segment. Costs of discontinued clinics represent costs to close service segment locations.capital.financing. As of March 31, 20222023 and December 31, 2021,2022, our cash and cash equivalents were $51.1$25.4 million and $79.4$101.3 million, respectively. As of March 31, 2022,2023, we had the following amounts outstanding; $298.5an unused revolving credit facility with availability of $125.0 million, $294.8 million under aour term loan, $143.8 million of outstanding Notes, $25 million drawn on our ABL,convertible notes, and $22.6$18.7 million in other debt. Our debt1.5%4.0% and 4.75%8.96%.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 March 31, 20222023 and December 31, 2021,2022, we had working capital (current assets less current liabilities) of $234.6$211.0 million and $200.6$220.6 million, respectively.creditdebt 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.$45.4$43.3 million for the three months ended March 31, 2022,2023, compared to $57.4$45.4 million for the three months ended March 31, 2021. The change in operating cash flows primarily reflects lower cash24usage for working capital. Working capital changes are driven primarily by higher inventory offset by higher accounts payable. Net changes in assets and liabilities accounted for $61.8 million in cash used in operating activities for the three months ended March 31, 2022 compared to $74.4 million2022. The change in operating cash flows primarily reflects higher earning partially offset by increased cash usage for working capital of $2.2 million. Working capital changes are driven primarily by growth in accounts receivable and inventory on higher sales, while accounts payable growth provided working capital benefit driven by increase in inventory and timing of inventory purchases.operatinginvesting activities was $29.5 million for the three months ended March 31, 2021.Cash used in Investing ActivitiesNet cash used in investing activities was2023, compared to $5.7 million for the three months ended March 31, 2022, compared to $8.32022. The increase in net cash used in investing activities was primarily the result of $27.6 million of the cash utilized in the acquisition of R&R.2021. The decrease in2023, compared to net cash used in investing activities is a result of slower pace of investment in new wellness centers as well as construction of a new corporate headquarters being completed in the prior period with no comparable construction occurring in the current period.Cash provided by Financing ActivitiesNet cash provided by financing activities wasof $22.9 million for the three months ended March 31, 2022, compared to $43.2 million for the three months ended March 31, 2021.2022. The change in cash (used in) provided by financing activities is primarily driven by lessreduced borrowing on the Company's ABL on improved Company cash used in operations and the new larger Term Loan B entered into in Q2 2021 allowing for less usage of the ABL.Description of IndebtednessRefer to Note 2 – Debt in the attached condensed consolidated financial statements for further information.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements.A&R Credit AgreementABL and A&Rour Term Loan Credit AgreementB are variable rate debt. Interest rate changes generally do not affect the recorded value of our credit agreements but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of March 31, 2022,2023, we had variable rate debt of approximately $323.5$294.8 million under our Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three months ended March 31, 20222023 by approximately $0.8$0.7 million.252022,2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Cautionary Note Regarding Forward-Looking StatementsThis Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:●statements regarding our strategies, results of operations or liquidity;●statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;●statements of management’s goals and objectives; and●assumptions underlying statements regarding us or our business.Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; our ability to keep and retain key employees; our ability to 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, 2021, and other reports filed from time to time with the Securities and Exchange Commission.Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the 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.26estimableestimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and provides disclosure for contingenciesthe reasons to the effect that it cannot be reasonably estimated are at leastdisclosed. If a loss is reasonably possible, of resulting in a loss including an estimate which we currently cannot make.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 9, “Contingencies"Note 10 — Commitments and Other Matters,”Contingencies" in the Notes to the Condensed Consolidated Financial statementsStatements included in Part I Item 1 of this quarterly reportQuarterly Report on Form 10-Q.There have been no material changesrisk factorsrisks disclosed in our annual reportAnnual Report on Form 10-K, which was filed with the SEC on 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.yearCompany’s outstanding shares of Class A common stock. Repurchases of Class A common stock may be made at management’s discretion from time to time in one or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations promulgated under Securities Exchange Act. The Company did not purchase any shares during the quarter ended DecemberMarch 31, 2021. –1044, 2022