| (1)
| | In connection with the VIP acquisition, the Company borrowed $75 million on a term loan, maturing in five years. Future principal and interest payments on the term loan are excluded from the table above. See Note 16 in the accompanying consolidated financial statements for more information.
|
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in the notes to our financial statements appearing in this report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial resultsresults. 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 shippedproduct control is transferred to the customer, which is generally upon delivery or shipment of goods, depending on terms with a customer. For customers with FreeMany customer contracts include some form of variable consideration such as discounts, rebates, and sales returns and allowance. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on Board (“FOB”) destination terms,the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. Revenue for services is recognized over time as the service is delivered, typically over a provisionsingle day. Payment is recorded to exclude shipments determined to be in-transit to these customerstypically rendered at the endtime of service. Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the 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 goodscost of in-store product displays, feature pricing in retailers' advertisements and other items. The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties. Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and in-store displays. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as other current assets or accounts payable in other accrued expenses.the Consolidated Balance Sheet. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Inventories Inventories are stated at the lower of cost or net realizable value. Approximate costs areCost is determined on the first-in first-out (“FIFO”) basis.method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Purchase Accounting The purchase method of accounting requires companies to assign values to assets and liabilities acquired based upon their fair values at the acquisition date. In most instances, there are not readily defined or listed market prices for individual assets and liabilities acquired in connection with a business, including intangible assets. The determination of fair value for assets and liabilities in many instances requires a high degree of estimation. The valuation of intangible assets, in particular, is very subjective. We generally obtain third-party valuations to assist us in estimating fair values. The use of different valuation techniques and assumptions could change the amounts and useful lives assigned to the assets and liabilities acquired and the related amortization expense. Accounting for Income Taxes The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company’s annual tax rate and evaluate its tax positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are subject to challenge, and the Company may not be successful in defending these challenges. Estimation is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities. Related to the IPO and recapitalization transactions, the calculation and allocation of the original basis adjustments used in determining the initial deferred tax assets and liabilities requires management judgement. Deferred income taxes are recognized for the expected future tax consequences attributable toarise from temporary differences between the carrying amounttax basis of the existing tax assets and liabilities and their respective tax basis. Deferredreported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, are measured using enactedprojected future taxable income, tax-planning strategies, and results of recent operations. In the event that it is determined that an asset is not more likely than not to be realized, a valuation allowance is recorded against the asset. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates expectedand future taxable income levels. In the event the Company were to determine that it would not be appliedable to realize all or a portion of its deferred tax assets in the years in which temporary differences are expectedfuture, the unrealizable amount would be charged to be recovered or settled. The principal items giving rise to temporary differences are certain basis differences resulting from IPO and the recapitalization transactions.
In addition, on December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including the requirement for the Company to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The Tax Act also established new tax laws that will affect 2018, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35 to 21 percent; (ii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iii) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (iii) creating a new limitation on deductible interest expense; and (iv) allowing all net operating losses generated in tax years after December 31, 2017, to be carried forward indefinitely.
The Tax Act requires complex computations to be performed, significant judgments to be made in interpretation of the provisions of the Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered, with a possible retroactive effect, which is different from our interpretation. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which that determination is made. Conversely, if the adjustments are made.
In certain cases, tax law requires itemsCompany were to determine that it would be included in the Company’s income tax returns at a different time than when these items are recognized on the consolidated financial statements or at a different amount than that which is recognized on the consolidated financial statements. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, while other differences are temporary and will reverse over time, such as depreciation expense. These differences that will reverse over time are recorded asable to realize deferred tax assets and liabilities onin the consolidated balance sheets. Valuation allowances are established againstfuture in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period that the determination was made. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to the extent thatdetermine whether it is determinedmore likely than not that some portion or all of the deferred income tax assets will not be realized. The Company believes it is more likely than not that the Companybenefit from the recorded deferred tax assets will not be realized and has recorded a valuation allowance.
In future periods, if we conclude we have insufficientfuture taxable income sufficient to fully realizerecognize the deferred tax asset.assets, we may reduce or eliminate the valuation allowance. ItemItem 7A – Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes. Interest Rate Risk We are exposed to changes in interest rates because the indebtedness incurred under our NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of December 31, 2017,2020, we had variable rate debt of approximately $15.3$232.3 million under our New Credit Agreement.Revolver and Term Loan. An increase of 1% would have increased our interest expense for the year ended December 31, 20172020 by approximately $0.2$2.6 million. ItemItem 8 – Financial Statements and Supplementary Data
Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of PetIQ, Inc. and subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive income (loss), members’/loss, stockholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Update No. 2016-02 Leases (Topic 842), and related amendments. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
46 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of deferred tax assets recorded for exchange transactions As discussed in Note 7 to the consolidated financial statements, as a result of the IPO and related reorganization transactions completed in July 2017, the Company held an economic interest of approximately 62% in PetIQ Holdings, LLC (“Holdco”) and consolidates the financial position and results of Holdco. The Company is the sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $53.1 million of deferred tax assets associated with these exchanges. We identified the evaluation of deferred tax assets recorded for exchange transactions as a critical audit matter. Complex auditor judgment, including specialized skills and knowledge, was required to evaluate the calculation of the deferred tax assets generated in exchange transactions as a result of the Company’s tax basis in the interest in the Holdco partnership acquired from the LLC Owners. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the deferred tax calculation. This included the internal control over the Company’s calculation of the deferred tax assets generated in exchange transactions. We involved tax professionals with specialized skills and knowledge who assisted in assessing the Company’s application of the relevant tax law for the exchanges, including: | ● | evaluating the Company’s application of income tax law related to the tax basis in the interest acquired from the LLC Owners in exchange transactions |
| ● | performing an independent calculation of the tax basis in the interest acquired from the LLC Owners in exchange transactions and comparing it to the Company’s calculation |
Fair value estimate of convertible notes As discussed in Notes 1 and 5 to the consolidated financial statements, the Company issued $143.8 million in aggregate principal amount of Convertible Senior Notes due 2026 (the Notes). In accounting for the Notes, the Company separated the Notes into liability and equity components whose carrying values were calculated using a fair value estimate of similar debt instruments without an associated conversion feature. We identified the evaluation of the fair value estimate of the Notes as a critical audit matter. A high degree of auditor judgment was required in assessing the interest rate that would be available to the Company for a similar debt instrument that does not have an associated conversion feature. Additionally, minor changes to the interest rate could have a significant effect on the amounts allocated to the liability and equity components. The audit effort associated with the evaluation of the fair value estimate required specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls over the interest rate used in the fair value measurement of the Notes. We involved valuation professionals with specialized skills and knowledge who assisted in the following: | ● | performing an independent analysis of interest rate yields for similar debt instruments that do not have an associated conversion feature using publicly available market data. |
| ● | developing an independent estimate of the fair value of the Notes using an independent interest rate yield and information from the debt agreement, and comparing it to the Company’s estimate. |
We have served as the Company’s auditor since 2014. Boise, Idaho
March 13, 2018February 26, 2021 PetIQ, Inc. Consolidated Balance Sheets ($’s inIn 000’s except for per share amounts) | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | Current assets | | | | | | | | Cash and cash equivalents | | $ | 33,456 | | $ | 27,272 | | Accounts receivable, net | | | 102,755 | | | 71,377 | | Inventories | | | 97,773 | | | 79,703 | | Other current assets | | | 8,312 | | | 7,071 | | Total current assets | | | 242,296 | | | 185,423 | | Property, plant and equipment, net | | | 63,146 | | | 52,525 | | Operating lease right of use assets | | | 20,122 | | | 20,785 | | Deferred tax assets | | | — | | | 59,780 | | Other non-current assets | | | 1,870 | | | 3,214 | | Intangible assets, net | | | 213,000 | | | 119,956 | | Goodwill | | | 231,158 | | | 231,045 | | Total assets | | $ | 771,592 | | $ | 672,728 | | Liabilities and equity | | | | | | | | Current liabilities | | | | | | | | Accounts payable | | $ | 68,131 | | $ | 51,538 | | Accrued wages payable | | | 10,540 | | | 9,082 | | Accrued interest payable | | | 903 | | | 83 | | Other accrued expenses | | | 8,815 | | | 3,871 | | Current portion of operating leases | | | 4,915 | | | 4,619 | | Current portion of long-term debt and finance leases | | | 7,763 | | | 3,821 | | Total current liabilities | | | 101,067 | | | 73,014 | | Operating leases, less current installments | | | 15,789 | | | 16,580 | | Long-term debt, less current installments | | | 355,979 | | | 251,376 | | Finance leases, less current installments | | | 3,338 | | | 3,331 | | Other non-current liabilities | | | 1,397 | | | 117 | | Total non-current liabilities | | | 376,503 | | | 271,404 | | Commitments and contingencies (Note 13) | | | | | | | | Equity | | | | | | | | Additional paid-in capital | | | 356,442 | | | 300,120 | | Class A common stock, par value $0.001 per share, 125,000 shares authorized; 25,711 and 23,554 shares issued and outstanding, respectively | | | 26 | | | 23 | | Class B common stock, par value $0.001 per share, 100,000 shares authorized; 3,040 and 4,752 shares issued and outstanding, respectively | | | 3 | | | 5 | | Accumulated deficit | | | (93,377) | | | (15,903) | | Accumulated other comprehensive loss | | | (686) | | | (1,131) | | Total stockholders' equity | | | 262,408 | | | 283,114 | | Non-controlling interest | | | 31,614 | | | 45,196 | | Total equity | | | 294,022 | | | 328,310 | | Total liabilities and equity | | $ | 771,592 | | $ | 672,728 | |
See accompanying notes to the consolidated financialstatements. | | | | | | | | | December 31, 2017 | | December 31, 2016 | Current assets | | | | | | | Cash and cash equivalents | | $ | 37,896 | | $ | 767 | Accounts receivable, net of allowance for doubtful accounts | | | 21,759 | | | 17,195 | Inventories | | | 44,056 | | | 34,232 | Supplier prepayments | | | 3,173 | | | 2,985 | Other current assets | | | 1,991 | | | 1,358 | Total current assets | | | 108,875 | | | 56,537 | Property, plant and equipment, net | | | 15,000 | | | 13,044 | Restricted deposits | | | 200 | | | 250 | Deferred tax assets | | | 5,994 | | | — | Other non-current assets | | | 2,446 | | | 2,826 | Intangible assets, net of accumulated amortization | | | 3,266 | | | 4,054 | Goodwill | | | 5,064 | | | 4,619 | Total assets | | $ | 140,845 | | $ | 81,330 | Liabilities and member's equity | | | | | | | Current liabilities | | | | | | | Accounts payable | | $ | 14,234 | | $ | 9,333 | Accrued wages payable | | | 1,811 | | | 1,100 | Accrued interest payable | | | 115 | | | 44 | Other accrued expenses | | | 305 | | | 27 | Current portion of deferred acquisition liability | | | 1,575 | | | 250 | Current portion of long-term debt and capital leases | | | 151 | | | 2,321 | Total current liabilities | | | 18,191 | | | 13,075 | Non-current liabilities | | | | | | | Long-term debt | | | 17,183 | | | 25,158 | Obligations under capital leases, less current installments | | | 389 | | | 434 | Deferred acquisition liability | | | — | | | 1,303 | Other non-current liabilities | | | 238 | | | 378 | Total non-current liabilities | | | 17,810 | | | 27,273 | Commitments and contingencies | | | | | | | Equity | | | | | | | Members equity | | | — | | | 42,941 | Additional Paid-in capital | | | 70,873 | | | — | Class A common stock, par value $.001 per share, 125,000,000 shares authorized, 13,222,583 shares issued and outstanding December 31, 2017 | | | 13 | | | — | Class B common stock, par value $.001 per share, 8,401,521 shares authorized, 8,268,188 shares issued and outstanding at December 31, 2017 | | | 8 | | | — | Accumulated deficit | | | (3,493) | | | — | Accumulated other comprehensive loss | | | (687) | | | (1,940) | Total stockholders' / member's equity | | | 66,714 | | | 41,001 | Non-controlling interest | | | 38,130 | | | (19) | Total equity | | | 104,844 | | | 40,982 | Total liabilities and equity | | $ | 140,845 | | $ | 81,330 |
48 PetIQ, Inc. Consolidated Statements of Operations (In 000’s except for per share amounts) | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | | | | | | | | | | | Product sales | | $ | 725,705 | | $ | 617,118 | | $ | 450,229 | Services revenue | | | 54,346 | | | 92,313 | | | 78,385 | Total net sales | | | 780,051 | | | 709,431 | | | 528,614 | Cost of products sold | | | 584,401 | | | 530,031 | | | 383,501 | Cost of services | | | 60,462 | | | 72,017 | | | 61,825 | Total cost of sales | | | 644,863 | | | 602,048 | | | 445,326 | Gross profit | | | 135,188 | | | 107,383 | | | 83,288 | Operating expenses | | | | | | | | | | General and administrative expenses | | | 138,375 | | | 103,200 | | | 72,260 | Contingent note revaluation loss | | | — | | | 7,320 | | | 3,280 | Operating (loss) income | | | (3,187) | | | (3,137) | | | 7,748 | Interest expense, net | | | (26,299) | | | (14,495) | | | (8,022) | Foreign currency gain (loss), net | | | 109 | | | (151) | | | 45 | Other income (expense), net | | | 571 | | | 172 | | | (345) | Total other expense, net | | | (25,619) | | | (14,474) | | | (8,322) | Pretax net (loss) income | | | (28,806) | | | (17,611) | | | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | | (81,022) | | | (14,302) | | | 87 | Net (loss) income attributable to non-controlling interest | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. | | $ | (77,474) | | $ | (11,453) | | $ | (782) | | | | | | | | | | | Net loss per share attributable to PetIQ, Inc. Class A common stock | | | | | | | | | | Basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Weighted average shares of Class A common stock outstanding | | | | | | | | | | Basic | | | 24,629 | | | 22,652 | | | 17,216 | Diluted | | | 24,629 | | | 22,652 | | | 17,216 |
See accompanying notes to the consolidated financialstatements. PetIQ, Inc. Consolidated Statements of Comprehensive Loss ($’s in 000’s) | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Foreign currency translation adjustment | | | 363 | | | 366 | | | (613) | Comprehensive (loss) income | | | (80,659) | | | (13,936) | | | (526) | Comprehensive (loss) income attributable to non-controlling interest | | | (3,525) | | | (2,777) | | | 697 | Comprehensive loss attributable to PetIQ | | $ | (77,134) | | $ | (11,159) | | $ | (1,223) |
See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc. Consolidated Statements of OperationsCash Flows ($($’s in 000’s, except for per share amounts)000’s)
| | | | | | | | | | | | | For the year ended December 31, | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | | Net sales | | $ | 266,687 | | $ | 200,162 | | $ | 205,687 | | Cost of sales | | | 215,493 | | | 167,615 | | | 166,529 | | Gross profit | | | 51,194 | | | 32,547 | | | 39,158 | | Operating expenses | | | | | | | | | | | General and administrative expenses | | | 37,905 | | | 31,845 | | | 35,588 | | Operating income | | | 13,289 | | | 702 | | | 3,570 | | Interest expense, net | | | (1,563) | | | (3,058) | | | (3,545) | | Foreign currency gain (loss), net | | | (140) | | | (24) | | | 75 | | Loss on debt extinguishment | | | — | | | (1,681) | | | (1,449) | | Other income, net | | | 201 | | | 666 | | | — | | Total other expense, net | | | (1,502) | | | (4,097) | | | (4,919) | | Pretax net income (loss) | | | 11,787 | | | (3,395) | | | (1,349) | | Income tax expense | | | (3,970) | | | — | | | — | | Net income (loss) | | | 7,817 | | | (3,395) | | | (1,349) | | Net income (loss) attributable to non-controlling interest | | | 11,310 | | | (3,395) | | | (1,349) | | Net loss attributable to PetIQ, Inc. | | $ | (3,493) | | $ | — | | $ | — | | | | | | | | | | | | | Net loss per share attributable to PetIQ, Inc. Class A common stock(1) | | | | | | | | | | | Basic | | $ | (0.26) | | | — | | $ | - | | Diluted | | $ | (0.26) | | | — | | $ | - | | Weighted Average shares of Class A common stock outstanding | | | | | | | | | | | Basic | | | 13,222,583 | | | — | | | - | | Diluted | | | 13,222,583 | | | — | | | - | |
| (1)
| | Basic and Diluted earnings per share is applicable only for periods after the Company’s IPO. See Note 7 – Earnings per share.
|
| | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Cash flows from operating activities | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | | | | | | Depreciation and amortization of intangible assets and loan fees | | | 30,975 | | | 16,509 | | | 12,467 | Termination of supply agreement | | | 7,801 | | | — | | | 16 | Gain on disposition of property, plant, and equipment | | | (238) | | | (189) | | | (90) | Stock based compensation expense | | | 9,170 | | | 7,355 | | | 3,812 | Deferred tax adjustment | | | 51,511 | | | (3,458) | | | (843) | Contingent note revaluation | | | — | | | 7,320 | | | 3,280 | Other non-cash activity | | | 164 | | | 405 | | | (334) | Changes in assets and liabilities | | | | | | | | | | Accounts receivable | | | (31,652) | | | (14,123) | | | (14,209) | Inventories | | | (17,846) | | | 30,448 | | | (36,610) | Other assets | | | 556 | | | (1,619) | | | 1,423 | Accounts payable | | | 17,435 | | | (7,595) | | | 15,701 | Accrued wages payable | | | 1,424 | | | 2,800 | | | 1,979 | Other accrued expenses | | | 7,121 | | | (2,718) | | | 908 | Net cash (used in) provided by operating activities | | | (4,601) | | | 20,833 | | | (12,413) | Cash flows from investing activities | | | | | | | | | | Proceeds from disposition of property, plant, and equipment | | | 442 | | | 340 | | | 229 | Purchase of property, plant, and equipment | | | (22,392) | | | (10,276) | | | (7,178) | Purchase of Capstar and related intangibles | | | (96,072) | | | — | | | — | Business acquisitions (net of cash acquired) | | | — | | | (185,090) | | | (93,052) | Net cash used in investing activities | | | (118,022) | | | (195,026) | | | (100,001) | Cash flows from financing activities | | | | | | | | | | Proceeds from issuance of convertible notes - liability component | | | 90,465 | | | — | | | — | Proceeds from issuance of convertible notes - equity component | | | 53,285 | | | — | | | — | Payment for Capped Call options | | | (14,821) | | | — | | | — | Proceeds from issuance of long-term debt | | | 837,675 | | | 818,387 | | | 538,028 | Principal payments on long-term debt | | | (838,073) | | | (676,509) | | | (466,912) | Payment of financing fees on Convertible Notes | | | (5,884) | | | — | | | — | Proceeds from public offering of class A common stock, net of underwriting discounts and offering costs | | | — | | | — | | | 73,914 | Tax distributions to LLC Owners | | | (47) | | | (1,686) | | | (1,485) | Principal payments on finance lease obligations | | | (1,965) | | | (1,547) | | | (1,254) | Payment of deferred financing fees and debt discount | | | (550) | | | (5,790) | | | (2,750) | Tax withholding payments on Restricted Stock Units | | | (595) | | | (114) | | | — | Exercise of options to purchase class A common stock | | | 9,274 | | | 2,318 | | | 1,429 | Net cash provided by financing activities | | | 128,764 | | | 135,059 | | | 140,970 | Net change in cash and cash equivalents | | | 6,141 | | | (39,134) | | | 28,556 | Effect of exchange rate changes on cash and cash equivalents | | | 43 | | | 46 | | | (92) | Cash and cash equivalents, beginning of period | | | 27,272 | | | 66,360 | | | 37,896 | Cash and cash equivalents, end of period | | $ | 33,456 | | $ | 27,272 | | $ | 66,360 |
See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc. Consolidated Statements of Comprehensive Income (Loss)Cash Flows ($($’s in 000’s)
| | | | | | | | | | | | For the Year Ended December 31, | Supplemental cash flow information | | 2020 | | 2019 | | 2018 | Interest paid | | $ | 19,402 | | $ | 13,632 | | $ | 7,220 | Net change in property, plant, and equipment acquired through accounts payable | | | 279 | | | (1,814) | | | 25 | Finance lease additions | | | 2,019 | | | (3,006) | | | 656 | Deferred tax liability created by convertible debt issuance | | | (8,197) | | | — | | | — | Net change of deferred tax asset from step-up in basis | | | — | | | 12,381 | | | 36,882 | Income taxes paid, net of refunds | | | 130 | | | 249 | | | 640 | Accrued tax distribution | | | (434) | | | 786 | | | 2,097 | Issuance of note for termination, settlement, and asset acquisition agreement | | | 17,487 | | | — | | | — | Purchase of intangible assets from note issuance | | | (9,686) | | | — | | | — | Non cash consideration - Issuance of Contingent Notes | | | — | | | — | | | 6,900 | Non cash consideration - Issuance of Guarantee Notes | | | — | | | — | | | 10,000 | Non cash consideration - Issuance of Class B common stock and LLC Interests | | | — | | | — | | | 103,004 | | | | | | | | | | | See accompanying notes to the consolidated financial statements. |
| | | | | | | | | | | | | | For the year ended December 31, | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | Net income (loss) | | $ | 7,817 | | $ | (3,395) | | $ | (1,349) | Other comprehensive income (loss), net: | | | | | | | | | | Foreign currency translation adjustment | | | 823 | | | (1,898) | | | (515) | Total other comprehensive income/(loss) | | | 8,640 | | | (5,293) | | | (1,864) | Comprehensive income (loss) attributable to non-controlling interest | | | 11,943 | | | (5,293) | | | (1,864) | Comprehensive loss attributable to PetIQ, Inc. | | $ | (3,303) | | $ | — | | $ | — |
54 PetIQ, Inc. Consolidated Statements of Stockholders’ Equity (In 000’s) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | Additional | | | | | | | | Accumulated | | Comprehensive | | | | | | | | | | Paid-in | | Non-controlling | | Total | | | Deficit | | Loss | | Class A Common | | Class B Common | | Capital | | Interest | | Equity | | | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | Balance - January 1, 2018 | | $ | (3,493) | | $ | (687) | | | 13,223 | | $ | 13 | | | 8,268 | | $ | 8 | | $ | 70,873 | | $ | 38,130 | | $ | 104,844 | ASC 606 adoption, net of tax | | | (175) | | | — | | | — | | | — | | | — | | | — | | | — | | | (110) | | | (285) | Issuance of equity for business combination | | | — | | | 128 | | | — | | | — | | | 4,600 | | | 5 | | | 43,075 | | | 59,796 | | | 103,004 | Exchange of LLC Interests held by LLC Owners | | | — | | | (290) | | | 6,321 | | | 6 | | | (6,321) | | | (6) | | | 47,458 | | | (47,168) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 36,882 | | | — | | | 36,882 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,097) | | | (2,097) | Other comprehensive income | | | — | | | (441) | | | — | | | — | | | — | | | — | | | — | | | (172) | | | (613) | Public offering | | | — | | | — | | | 2,000 | | | 2 | | | — | | | — | | | 73,912 | | | — | | | 73,914 | Equity shift as a result of the public offering | | | — | | | (26) | | | — | | | — | | | — | | | — | | | (13,914) | | | 13,940 | | | — | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,504 | | | 1,308 | | | 3,812 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 76 | | | — | | | — | | | — | | | 1,429 | | | — | | | 1,429 | Net (loss) income | | | (782) | | | — | | | — | | | — | | | — | | | — | | | — | | | 869 | | | 87 | Balance - December 31, 2018 | | $ | (4,450) | | $ | (1,316) | | | 21,620 | | $ | 22 | | | 6,547 | | $ | 7 | | $ | 262,219 | | $ | 64,496 | | $ | 320,977 | Exchange of LLC Interests held by LLC Owners | | | — | | | (109) | | | 1,794 | | | 1 | | | (1,794) | | | (1) | | | 17,299 | | | (17,190) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,381 | | | — | | | 12,381 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (786) | | | (786) | Other comprehensive income | | | — | | | 294 | | | — | | | — | | | — | | | — | | | — | | | 72 | | | 366 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,902 | | | 1,453 | | | 7,355 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 119 | | | — | | | — | | | — | | | 2,318 | | | — | | | 2,318 | Issuance of stock vesting of RSU's | | | — | | | — | | | 21 | | | — | | | — | | | — | | | — | | | — | | | — | Net (loss) | | | (11,453) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,849) | | | (14,302) | Balance - December 31, 2019 | | $ | (15,903) | | $ | (1,131) | | | 23,554 | | $ | 23 | | | 4,752 | | $ | 5 | | $ | 300,120 | | $ | 45,196 | | $ | 328,310 | Exchange of LLC Interests held by LLC Owners | | | — | | | 105 | | | 1,712 | | | 2 | | | (1,712) | | | (2) | | | 15,461 | | | (15,566) | | | — | Equity component of Convertible Notes, net of offering costs and tax | | | — | | | — | | | — | | | — | | | — | | | — | | | 37,064 | | | 5,843 | | | 42,907 | Payment for capped call share options | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,803) | | | (2,018) | | | (14,821) | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 434 | | | 434 | Other comprehensive income | | | — | | | 340 | | | — | | | — | | | — | | | — | | | — | | | 23 | | | 363 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,921 | | | 1,249 | | | 9,170 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 395 | | | — | | | — | | | — | | | 9,274 | | | — | | | 9,274 | Issuance of stock vesting of RSU's, net of tax withholdings | | | — | | | — | | | 50 | | | — | | | — | | | — | | | (595) | | | — | | | (595) | Net (loss) | | | (77,474) | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,548) | | | (81,022) | Balance - December 31, 2020 | | $ | (93,377) | | $ | (686) | | | 25,711 | | $ | 26 | | | 3,040 | | $ | 3 | | $ | 356,442 | | $ | 31,614 | | $ | 294,022 |
Note that certain figures shown in the table above may not recalculate due to rounding. See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | | | | | For the year ended December 31, | | | 2017 | | 2016 | | 2015 | | Cash flows from operating activities | | | | | | | | | | | Net income (loss) | | $ | 7,817 | | $ | (3,395) | | $ | (1,349) | | Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | | | | | | | | Depreciation and amortization of intangible assets and loan fees | | | 3,614 | | | 4,074 | | | 3,140 | | Loss on disposition of property | | | 20 | | | 42 | | | 28 | | Foreign exchange (gain) loss on liabilities | | | 228 | | | (28) | | | (300) | | Stock based compensation expense | | | 447 | | | — | | | — | | Deferred tax adjustment | | | 3,690 | | | — | | | — | | Warranty settlement gain | | | — | | | (645) | | | 1,449 | | Changes in assets and liabilities | | | | | | | | | | | Accounts receivable | | | (4,313) | | | (2,216) | | | (1,907) | | Inventories | | | (9,718) | | | (542) | | | (10,399) | | Prepaid expenses and other assets | | | (721) | | | 2,037 | | | (3,789) | | Accounts payable | | | 4,152 | | | 104 | | | 6,114 | | Accrued wages payable | | | 694 | | | (128) | | | 827 | | Other accrued expenses | | | (28) | | | (229) | | | (229) | | Net cash provided by (used in) operating activities | | | 5,882 | | | (926) | | | (6,415) | | Cash flows from investing activities | | | | | | | | | | | Proceeds from disposition of property, plant, and equipment | | | — | | | 1 | | | 12 | | Purchase of property, plant, and equipment and intangibles | | | (4,131) | | | (2,041) | | | (1,550) | | Net cash used in investing activities | | | (4,131) | | | (2,040) | | | (1,538) | | Cash flows from financing activities | | | | | | | | | | | Proceeds from issuance of long-term debt | | | 260,020 | | | 238,252 | | | 236,981 | | Principal payments on long-term debt | | | (270,458) | | | (243,852) | | | (218,532) | | 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 | | | — | | | — | | Purchase of LLC units from Continuing LLC Owners | | | (2,133) | | | 6,894 | | | (6,944) | | Principal payments on capital lease obligations | | | (116) | | | (93) | | | (382) | | Payment of deferred financing fees and debt discount | | | (42) | | | (509) | | | (1,316) | | Net cash provided by financing activities | | | 35,371 | | | 692 | | | 9,807 | | Net change in cash and cash equivalents | | | 37,122 | | | (2,274) | | | 1,854 | | Effect of exchange rate changes on cash and cash equivalents | | | 7 | | | (209) | | | 26 | | Cash and cash equivalents, beginning of period | | | 767 | | | 3,250 | | | 1,370 | | Cash and cash equivalents, end of period | | $ | 37,896 | | $ | 767 | | $ | 3,250 | | | | | | | | | | | | |
Seeaccompanying notesNotes to the consolidated financial statements
PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | | | | | For the year ended December 31, | Supplemental cash flow information | | 2017 | | 2016 | | 2015 | | Interest paid | | $ | 1,353 | | $ | 2,911 | | $ | 2,997 | | Property, plant, and equipment acquired through accounts payable | | | (80) | | | 125 | | | 24 | | Capital lease additions | | | 35 | | | 188 | | | — | | Issuance of preference notes for LLC Interests | | | 55,960 | | | — | | | — | | Non cash acquisition of intangibles | | | — | | | — | | | 350 | | Establishment of deferred tax asset from step-up in basis | | | 9,441 | | | — | | | — | | Taxes paid | | | 323 | | | — | | | — | | Accrued tax distribution | | | 597 | | | — | | | — | |
PetIQ, Inc.
Consolidated Statements of Members’/Stockholders’ Equity
($’s in 000’s, except for per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Retained | | Other | | | | | | | | | | | | | | Total | | | | | Earnings/ | | Comprehensive | | | | | | | | | | Additional | | | | Stockholders | | | Members | | (Accumulated | | (Loss) | | | | | | | | | | Paid-in | | Non-controlling | | Equity/ | | | Equity | | Deficit) | | Income | | Class A Common | | Class B Common | | Capital | | Interest | | Members Equity | | | | | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | Balance - January 1, 2015 | | $ | 47,681 | | $ | — | | $ | 473 | | | — | | $ | — | | | — | | $ | — | | $ | — | | $ | (15) | | $ | 48,139 | Net loss | | | (1,342) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | (1,349) | Other comprehensive income | | | — | | | — | | | (515) | | | — | | | — | | | — | | | — | | | — | | | — | | | (515) | Balance - December 31, 2015 | | $ | 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 | | | 11,165 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | 11,161 | Other comprehensive income prior to IPO | | | — | | | — | | | 515 | | | — | | | — | | | — | | | — | | | — | | | — | | | 515 | Accrued tax distribution prior to recapitalization | | | (591) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (591) | 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 | | | (53,515) | | | — | | | 668 | | | — | | | — | | | — | | | — | | | 28,459 | | | 24,388 | | | — | 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 | Issuance of preference notes to affiliates | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (55,960) | | | — | | | (55,960) | Increase in deferred tax asset from step-up in tax basis | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,441 | | | — | | | 9,441 | Purchase of non-controlling interests | | | — | | | — | | | (120) | | | — | | | — | | | (133,334) | | | (0) | | | (15,345) | | | 13,332 | | | (2,133) | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 275 | | | 172 | | | 447 | Other comprehensive income post IPO | | | — | | | — | | | 190 | | | — | | | — | | | — | | | — | | | — | | | 119 | | | 308 | Net (loss) income post IPO | | | — | | | (3,493) | | | — | | | — | | | — | | | — | | | — | | | — | | | 149 | | | (3,344) | Balance - December 31, 2017 | | $ | — | | $ | (3,493) | | $ | (687) | | | 13,222,583 | | $ | 13 | | | 8,268,188 | | $ | 8 | | $ | 70,873 | | $ | 38,130 | | $ | 104,844 |
See accompanying notes to the consolidated financial statements
Note 1 – Principal Business Activity and Significant Accounting Policies Principal Business Activity and Principals of Consolidation PetIQ Inc and Subsidiaries (the Company) is a manufacturerleading pet medication and wholesale distributorwellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. The company engages with customers through points of over-the-counterdistribution across retail channels with its branded distributed medications, which is further supported by its own world-class medications manufacturing facility in Omaha, Nebraska. The Company’s national service platform, VIP Petcare, operates retail partner locations providing cost effective and prescription pet medicationsconvenient veterinary wellness services. PetIQ has 2 reporting segments: (i) Products; and pet wellness products(ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segments consists of veterinary services, and related product sales, provided by the Company directly to various retail customersconsumers. PetIQ is the managing member of PetIQ Holdings, LLC (“Holdco”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, distributors throughoutthrough Holdco, operate and control all the United Statesbusiness and Europe. The Company is headquartered in Eagle, Idaho and manufactures and distributes products from facilities in Florida, Texas, Utah, and Europe.affairs of Opco. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAPGenerally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and equipment; allowance for doubtful accounts;equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, inventoriesthe valuation of assets and notes receivable;liabilities in connection with acquisitions, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies. Fair Value of Financial Instruments Foreign CurrenciesFair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are at cost, which approximates fair value due to their relatively short maturities. The guarantee note is carried at cost, which approximates fair value due to the recent issuance of the note. Our term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amounts approximate fair value. A portion of the purchase price for the acquisition of Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP” and such acquisition, the “VIP Acquisition”) was structured in the form of Contingent Notes (the “Contingent Notes”) that vest based on the combined Company operates subsidiaries in foreign countries who useEBITDA targets for the local currencyyears ending December 31, 2018 and 2019 (“Measurement Dates”). See Note 2 – “Business Combinations” for more information regarding the VIP Acquisition. The liabilities related to the 2018 and 2019 Contingent Notes became fixed as of December 31, 2018 and 2019, respectively, and are carried at cost, which approximates fair value as the functional currency. stated interest rate is consistent with current market rates. The Company translates its foreign subsidiaries’ assets and liabilities denominatedContingent Notes are included in foreign currencies into U.S. dollarslong-term debt in the accompanying consolidated balance sheets. The Contingent Notes began bearing interest at current ratesa fixed rate of exchange as of6.75%, with the balance sheet date and income and expense items atpayable July 17, 2023. The following table summarizes the average exchange rateLevel 3 activity related to the Contingent Notes 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 (loss) for each period.twelve months ended December 31, 2019: | | | $'s in 000's | | Balance at beginning of the period | $ | 2,680 | Change in fair value of contingent consideration | | 7,320 | Transfer out of level 3 | | (10,000) | Balance at the end of the period | $ | — |
Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with an original maturity of three months or less excluding amounts restricted for various state licensing regulations. Restricted depositsat the date of acquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are not consideredclassified as cash and cash equivalents. The Company maintains its cash accounts in various deposit accounts, the balances of which at times exceeded federal deposit insurance limits during the periods presented. Receivables and Credit Policy Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within a set number45 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for doubtful accountscredit losses equal to estimated uncollectible amounts.expected losses. The Company’s estimate is based on historical collection experience, and a review of the current status of trade accounts receivable.receivable and known current economic conditions including the current and expected impact of COVID-19. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice. The Company also hasOther receivables consists of various receivables due from vendors, banking partners, and notes receivable due from various suppliers included in accounts receivable. The notes bear interest at 0% to 4% and are repaid based on either amortization schedules or from certain sales to third parties.suppliers. Non-current portions of these notes receivableother receivables are included in other non-current assets on the consolidated balance sheet. Interest income is included in interest expense, net on the consolidated statement of operations.
sheets. Accounts receivable consists of the following as of: | | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Trade receivables | | $ | 96,381 | | $ | 67,551 | Other receivables | | | 7,094 | | | 4,257 | | | | 103,475 | | | 71,808 | Less: Allowance for doubtful accounts | | | (720) | | | (431) | Total accounts receivable, net | | $ | 102,755 | | $ | 71,377 |
| | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Trade receivables | | $ | 22,189 | | $ | 18,086 | Notes receivable | | | 297 | | | 440 | | | | 22,486 | | | 18,526 | Less: Allowance for doubtful accounts | | | (343) | | | (498) | Non-current portion of receivables | | | (384) | | | (833) | Total accounts receivable, net | | $ | 21,759 | | $ | 17,195 |
57 Inventories Inventories are stated at the lower of cost or net realizable value, which approximatevalue. Cost is determined on the first-in first-out (“FIFO”) basis.method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Major components of inventories wereconsist of the following as follows as of December 31, 2017 and 2016:of: | | | | | | | | | | | | | | | | Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation and amortization is provided using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and capitalfinance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales orand general and administrative expenses in the consolidated statements of comprehensive income,operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows: | | | | Computer equipment and software | | | 3 years | Vehicle and vehicle accessories | | | 3-5 years | Buildings | | | 33 years | Equipment | | | 3-152-15 years
| Leasehold improvements | | | 3-92-15 years
| Furniture and fixtures | | | 8-105-10 years
|
Goodwill and Intangible Assets Indefinite lived intangible assets consist primarily of trademarks. Trademarks represent costs paid to legally register phrases and graphic designs that identify and distinguish products sold by the Company. Trademarks are not amortized, rather potential impairment is considered on an annual basis in the fourth quarter, or more frequently upon the occurrence of an event, when circumstances indicate that the book value of trademarks are greater than their fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the indefinite lived intangible asset is less than the carrying value as a basis to determine whether further impairment testing under ASC 350 is necessary. No impairment charge was recorded for the years ended December 31, 2017, 2016, and 2015.
Definite-lived intangible assets consist of a distribution agreement, production certifications, patents and processes, customer relationships, and brand names. The assets are amortized on a straight-line basis over their expected useful lives. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to the company’s future cash flows. Useful lives range from 2 to 15 years.
Goodwill
Goodwill is the excess of the consideration paid over the fair value of specifically identifiable assets, liabilities and contingent liabilities in a business combinationcombination. Intangible assets acquired are recorded at estimated fair value. Goodwill and relatesintangible assets deemed to the future economic benefits arising from assets, whichhave indefinite lives are not capable of being individually identified and separately recognized. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized, but is reviewedare tested for impairment annually induring the Company’s fourth quarter, or more frequently ifand at any time when events or changes in circumstances indicate that the carrying value may be impaired.
The goodwillsuggest an impairment test consists of a two-step process, if necessary. However, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basisoccurred.
To assess goodwill for determining whether it is necessary to perform the two-step goodwill impairment, test described in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, the Company, determines that it is not more likely than not that the fair value ofdepending on relevant facts and circumstances, performs either a reporting unit is less than its carrying amount, thenqualitative assessment or a quantitative analysis utilizing a discounted cash flow valuation model. In performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if based on the qualitative assessment, the Company concludesevaluates relevant factors such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the faircarrying value of the reporting unit is less than its carrying amount, the two-step process will be carried out. fair value, then no further testing is required. In step one,performing a quantitative analysis, the Company determines the fair value of eacha reporting unit using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including discount rates and future growth rates. In the event the carrying amount of a reporting unit exceeded its fair value, an impairment loss would be recognized. Indefinite-lived intangible assets are tested for impairment utilizing either a qualitative assessment or a quantitative analysis. For a qualitative assessment, the Company identifies and considers relevant key factors, events, and circumstances to determine whether it is necessary to perform a quantitative impairment test. The key factors considered include macroeconomic, industry, and market conditions, as well as the asset's actual and forecasted results. For the quantitative impairment tests, the Company compares itthe carrying amounts to its carrying value. Ifthe current fair market values. Intangible assets with definite lives are amortized over their estimated useful lives to reflect the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. NaN impairment charge was recorded for the years ended December 31, 2020, 2019, and 2018. Convertible Debt On May 19, 2020, we issued $143.8 million aggregate principal amount of Convertible Notes due 2026 (the “Notes”). See Note 5 – “Debt”. We separately account for the liability and equity components of convertible debt instruments that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the reporting unit exceedsliability component, using the carrying valueinterest rate of a similar liability that does not have a conversion feature, as of the net assets assigned to that unit, goodwillissuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. We recognize amortization of the resulting discount using the effective interest method as interest expense in our consolidated statements of operations. The equity component is not impairedremeasured as long as it continues to meet the conditions for equity classification. We have allocated issuance costs to the liability and no further testing is performed. Ifequity components. Issuance costs attributable to the carrying valueliability component are being amortized to expense over the respective term of the net assets assignedNotes, and issuance costs attributable to the reportingequity component were netted with the respective equity component in additional paid-in capital. Revenue Recognition When Performance Obligations Are Satisfied A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit exceedsof account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the fair valueperformance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of veterinary services. Revenue is generally recognized for product sales on a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the reporting unit, thenremaining benefits from the Company must perform the second step of the impairment testasset at this point in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. time. The Company performeddetermined that certain products manufactured to a customer’s specifications do not have an alternative future use at a reasonable profit margin due to costs associated with reworking, transporting and repackaging these products. These products are produced subject to purchase orders that include an enforceable right to payment. Therefore the Company determined that revenue on these products would be recognized over time, as the products are produced. This represents a minor subset of the products the Company manufactures. Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered at the time of service. Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its qualitative assessment during the fourth fiscal quarterrelative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data. The qualitative factors that were considered included, but were not limited to, general economic conditions, outlook for the pet sector, market capitalization, consolidated company stock price, and recent and forecasted financial performance. Goodwill impairment analysis and measurement is a process that requires significant judgment. If there are significant changes in market conditions or a future downturnperformance obligations in our business, or a future annual goodwill impairment test indicates an impairment of our goodwill,contracts are satisfied within one year. As such, we have not disclosed the Company may havetransaction price allocated to recognize impairment of its goodwill.
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 recordedremaining performance obligations as of December 31, 20172020.
Variable Consideration In addition to fixed contract consideration, most contracts include some form of variable consideration. The most common forms of variable consideration include discounts, rebates, and December 31, 2016 was $1,575 thousandsales returns and $250 thousand, respectively,allowances. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We believe there will not be significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. The Company reviews and is includedupdates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in other accrued expenses. The non-current portion recorded asthe market. Any uncertainties in the ultimate resolution of December 31, 2017 and December 31, 2016 was zero and $1,303 thousand, respectively, and is included in deferred acquisition liability. As discussed in Note 16, subsequent to December 31, 2017, the Company completed the VIP Acquisition, which included guarantee and contingent notesvariable consideration due to the sellers. See Note 16 for more information.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shipped to the customer. For customers with Free on Board (“FOB”) destination terms, a provision is recorded to exclude shipments determined to be in-transit to these customers at the endfactors outside of the reportingCompany’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.
period. A sales return allowance is recordedcustomer pricing allowances and accounts receivablemerchandising funds are reduced as revenuesoffered through various programs to customers and are recognized for estimated losses on credit sales duedesigned to customer claims for discounts, returned goodspromote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other items.
The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties. Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and in-store displays. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in other accrued expenses.the Consolidated Balance Sheets. Significant Payment Terms ShippingOur customer contracts identify the product, quantity, price, payment and Handling Costsfinal delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.
Shipping All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales. This includes shipping and handling costs after control over a product has transferred to a customer. Warranties & Returns PetIQ provides all customers with a standard or assurance type warranty. Either stated or implied, the Company provides assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No significant services beyond an assurance warranty are provided to customers. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as cost ofa reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Contract balances Contract asset and liability balances as of December 31, 2020 and 2019 are immaterial. The Company does not typically billedhave significant deferred revenue or unbilled receivable balances. Cost of Services Cost of Services are comprised of all service and product costs related to customers.the delivery of veterinary services, including but not limited to, salaries and contract costs of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold. Research and Development and Advertising Costs Research and development and advertising costs are expensed as incurred and are included in general and administrative expenses. Research and development costs amounted to $514 thousand, $310 thousand,$2.3 million, $1.3 million, and $380 thousand$0.2 million and advertising costs were $2,229 thousand, $1,179 thousand,$10.1 million, $4.5 million, and $6,077 thousand$2.9 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Collaboration Agreements Through the Perrigo Animal Health Acquisition, we entered into a product development and asset purchase agreement with a third party for certain product formulations in development by the third party. The Company may make up to $20.5 million of payments over the course of the next several years contingent on achievement of certain development and regulatory approval milestones. Product development costs are expensed as incurred or as milestone payments become probable. There can be no assurance that these products will be approved by the U.S. Food and Drug Administration (“FDA”) on the anticipated schedule or at all. Consideration paid after FDA approval will be capitalized and amortized to cost of goods sold over the economic life of each product. The expenses paid prior to FDA approval will be included in General and Administrative expenses on the Consolidated Statements of Operations. There were no expenses incurred under the agreement for the periods ended December 31, 2020 and 2019. Litigation The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If the likelihood of an adverse legal outcome is determined to be probable and the amount of loss is estimable, then a liability is accrued in accordance with accounting guidance for Contingencies. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. The Company consults with both internal and external legal counsel related to litigation. See Note 13 for more information. Stock based compensation The Company expenses employee share-based awards under ASC Topic 718, Compensation—Stock Compensation, which requires compensation cost for the grant-date fair value of share-based awards to be recognized over the requisite service period. Stock options granted to executives and other employees are valued using the Black-Scholes option pricing model. See Note 89 for more information. Accounting for Income Taxes The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense. Interest expense, net Interest expense, net, is comprised primarily of interest expense related to (i) our debt agreements, (ii) unused line fees, (iii) amortization of deferred loan fees and (iii) capitaldiscounts, (iv) finance lease obligations and the mortgage note outstanding, offset by interest income earned on our demand deposits and other assets. Interest expense was $1,638 thousand, $3,078 thousand,$26.3 million, $14.9 million, and $3,567 thousand$8.3 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, offset by $75 thousand, $20 thousand,$0.0 million, $0.4 million, and $22 thousand$0.3 million of interstinterest income, respectively. Non-controlling interest The non-controlling interests on the consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, Holdco, held by the non-controlling holders of Class B common stock and limited liability company interests in Holdco. Non-controlling interests on the consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling holders of Class B common stock and Limited Liability Company interests in Holdco. Earnings Per Share Basic earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc. by the weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc., adjusted as necessary for the impact of potentially dilutive securities, by the weighted-average shares outstanding during the period and the impact of securities that would have a dilutive effect on earnings per share. See Note 78 for further discussion. Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial statemetns to conform to current year presentation. These reclassifications had no impact on net income, shareholders’ equity, or cash flows as previously reported.
Recently Issued Accounting Pronouncements / Adopted Accounting Standard Updates In May 2014,From time to time, the Financial Accounting Standards Board (“FASB”) issuedor other standards setting bodies issue new accounting pronouncements. Updates to the Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several relatedare communicated through issuance of an Accounting Standards UpdatesUpdate (“ASUs”ASU”).
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) (“Topic 606”), which provide guidanceNo. 2016-13, "Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for recognizing revenue from contracts with customers.financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable information. Organizations will now use forward-looking information to better estimate their credit losses. The core principle of Topic 606 is that revenue is recognized when promised goods or services are transferred 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 ending March 31, 2018. We will adopt Topic 606Company adopted this ASU using thea modified retrospective transition approachapproach. Under this method of adoption, the Company determined that there was no cumulative-effect adjustment to beginning Retained earnings on the consolidated balance sheet. Adoption of this standard did not impact the Company’s net loss and expect the impact to be immaterial, with an estimated reduction of beginning accumulated deficit of $0.3 million. During 2017, we completed our evaluation of Topic 606, including thehad no impact on our business processes, systems and controls, and differences in the timing and/or methodconsolidated statement of revenue recognition. As a result of our evaluation, we identified changes to and modified certain of our accounting policies and practices. We also designed and implemented specific controls over our evaluation of the impact of Topic 606, including our calculation of the cumulative effect of adopting Topic 606. Although there were no significant changes to our accounting systems or controls upon adoption of Topic 606, we modified certain of our existing controls to incorporate the revisions we made to our accounting policies and practices. cash flows.
Based on our evaluation of Topic 606, we will make the following changes:
| ·
| | Revenue is recognized as control transfers to the customer. As such, under the new standard, revenue for our contracts is general recognized at a point in time when goods are transferred to the customer, which can be upon shipment or upon delivery, depending on the terms of the specific contract. This is generally consistent with our current recognition policy and practice for most contracts based on the transfer of title and risk of loss, however, we do anticipate a change in timing of recognition for certain contracts based on our analysis of the timing of transfer of control of products to our customers;
|
| ·
| | Make a change in performance obligation in certain of our contracts, specifically the treatment of certain merchandising products and services we provide to our customers. Prior to the adoption of Topic 606, the Company treated certain merchandising activities as selling expenses within general and administrative expenses, with the expense recognized over the time period the activities occurred. Under Topic 606 those products and services are considered a separate performance obligation and allocated revenue, with the costs included in cost of sales at the time control transfers to the customer;
|
| ·
| | Alter the accounting for certain reductions in revenue. Previously the Company accounted for certain reductions in sales at the later of sale of goods or agreement with the customer. Under Topic 606, the Company will estimate all elements of variable consideration, without consideration as to the timing of the agreement with customers;
|
| ·
| | Adjust the manner in which we present our allowance for sales returns in our Consolidated Balance Sheets, to reflect a refund liability and a returns asset;and
|
| ·
| | Topic 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when we satisfy our performance obligations and the relationship between revenue recognized and changes in contract balances during a reporting period. We have evaluated these disclosure requirements and incorporated the collection of relevant data into our reporting process.
|
In February 2016, the FASB issued ASU 2016-02,, Leases “Leases (Topic 842). This” The purpose of ASU 2016-02 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 thisIn addition, ASU are2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requiresthe year of adoption. Originally under ASU 2016-02, an organization was required upon adoption based uponto recognize and measure leases beginning in the earliest period presented using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented inand restate the financial statements with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption. The Company is currently making over $1,700 per year in operating lease payments, and the Company expects the majority of these leases to be classified as operating lease liabilities and right-of-use assets upon adoption. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. for all periods presented. In July 2015,2018, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying2018-11, which amends ASU 2016-02 to provide organizations with an additional (and optional) transition method whereby it may elect to recognize and measure leases by applying the Measurementcumulative impact of Inventory. Thisadopting ASU requires entities2016-02 to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new 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 August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will be 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 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 classificationopening retained earnings balance in the statementperiod of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interimadoption, thereby removing the requirement that the financial statements of prior 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.by restated. The Company adopted the provisions of this standardguidance effective January 1, 2017.2019, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2019 and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. The Company elected the package of practical expedients and implemented internal controls and system functionality to continueenable the preparation of financial information upon adoption. In addition, the Company has elected to recognize estimated forfeitures overapply the termpractical expedient to not separate the lease and non-lease components for all of the awards. Company’s leases.
The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company’s consolidated balance sheet related to operating leases. Accounting for finance leases remained substantially unchanged. In addition, the adoption of the standard did not have a material impact on the Company’s financial condition, results of operations or cash flows and disclosures.flows. In January 2017, August 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2017-04, GoodwillAccounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other (Topic 350) (“Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2017-04”): Simplifying2020-06, the Testembedded conversion features are no longer separated from the host contract for Goodwill Impairment.convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The amendednew guidance simplifiesalso requires the accounting for goodwill impairmentif-converted method to be applied for all entities by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. Theconvertible instruments. ASU 2020-06 is effective for interim and annual periods for the Company on January 1, 2020. fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, we intend to adopt ASU 2020-06 using the full retrospective approach. We expect the adoption of the new standard to result in a decrease to stockholders equity of $51.4 million and a corresponding increase to convertible senior notes. Interest expense, net for the year ending December 31, 2020 will decrease approximately $4.0 million. Interest expense, net, recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. Additionally we expect that the change will result in significantly more dilutive shares outstanding. Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements. Note 2 – Business Combination and Asset Acquisition Perrigo Animal Health Acquisition On July 8, 2019, PetIQ, Inc., through its subsidiary PetIQ, LLC, completed the acquisition of all the outstanding stock of Sergeant’s Pet Care Products, Inc. (“Sergeant’s”), d/b/a Perrigo Animal Health, including any assets related to Perrigo Company plc’s animal health business (the “Perrigo Animal Health Acquisition”). Sergeant’s is now an indirect wholly-owned subsidiary of the Company. The fair value of the consideration is summarized as follows: $'s in 000's | Fair Value | Inventories | $ | 17,998 | Property, plant and equipment | | 19,568 | Other current assets | | 13,048 | Other assets | | 9,680 | Indefinite-lived intangible assets | | 23,040 | Definite-lived intangible assets – 13 year weighted average life | | 14,480 | Goodwill | | 105,838 | Total assets | | 203,652 | | | | Liabilities assumed | | 19,259 | | | | Purchase price | $ | 184,393 | | | | Cash paid, net of cash acquired | $ | (185,090) | Post-closing working capital adjustment | | 697 | | | | Fair value of total consideration transferred | $ | (184,393) |
The definite-lived intangibles primarily relate to trademarks, customer relationships, and developed technology and know-how. The $14.6 million represents the fair value and will be amortized over the estimated useful lives of the assets through June 2039. The indefinite-lived intangibles primarily relate to trademarks and in-process research and development. Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. Approximately $105.8 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment. Transaction costs of $6.1 million were incurred in the year ended December 31, 2019, and are included in General and Administrative expenses on the Consolidated Statements of Operations. Capstar ® (nitenpyram) Acquisition On July 31, 2020 the Company completed the acquisition of Capstar® and CapAction® and related assets (the “Capstar Acquisition”) from Elanco US Inc. for $95 million, plus the cost of certain outstanding finished goods inventory in saleable condition, using cash on hand as a result of the issuance of the Notes in May 2020. The Capstar Acquisition was accounted for as an asset acquisition and certain transaction related costs of approximately $1.0 million were included in the cost of the acquired assets. The fair value assigned to trade names was based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The estimated fair value of customer relationship was determined using an income approach, specifically a discounted cash flow analysis. The rate utilized to discount net cash flows to their present values was approximately 15% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The fair value assigned to patents and processes was determined based on the income approach. The purchased assets are identified below: | | | $'s in 000's | Fair Value | Amortizable intangibles | | | Customer relationships | $ | 70,901 | Patents and processes | | 9,895 | Total amortizable intangibles | | 80,796 | Non-amortizable intangibles | | | Trademarks and other | | 15,276 | Total purchased intangible assets | $ | 96,072 |
The weighted average amortization period of the amortizable intangible assets is approximately 11.8 years. Supplier Termination, Settlement and Asset Purchase Agreement: During July 2020, the Company entered into a Termination, Settlement and Asset Purchase Agreement (“Agreement”) with a supplier who alleged PetIQ had breached its supply agreement due to the acquisition of Perrigo Animal Health. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter. The Agreement terminated the supply agreement that was previously in place, settled all outstanding claims and operations, and allowed PetIQ to purchase certain intellectual property related assets. The Company expectshas estimated the fair value of the payment obligation as $17.5 million, and determined the fair value of the acquired assets to early adoptbe $9.7 million. The assets acquired are included within the patents and processes intangible assets category and will be amortized over 10 years. The assets were valued using the standard beginning with its annual goodwill impairment testrelief from royalty method. The remainder of the obligation is considered to be a payment to settle the alleged breach of the supply agreement, the termination expense is included in 2018. general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2020. The obligation is considered debt and is included in debt on the condensed consolidated balance sheet. See Note 5 – “Debt” for additional information. Note 23 – Property, Plant, and Equipment Property, plant, and equipment consists of the following at December 31:at: | | | | | | | $'s in 000's | | | 2017 | | | 2016 | Leasehold improvements | | $ | 6,616 | | $ | 6,587 | Equipment | | | 10,665 | | | 9,512 | Computer equipment ans software | | | 927 | | | 896 | Buildings | | | 771 | | | 668 | Furniture and fixtures | | | 407 | | | 377 | Land | | | 660 | | | - | Construction in progress | | | 2,344 | | | 150 | | | | 22,390 | | | 18,190 | Less accumulated depreciation | | | (7,390) | | | (5,146) | Total property, plant, and equipment | | | 15,000 | | | 13,044 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Leasehold improvements | | $ | 19,709 | | $ | 15,517 | Equipment | | | 25,664 | | | 23,138 | Vehicles and accessories | | | 7,110 | | | 6,007 | Computer equipment and software | | | 10,858 | | | 8,070 | Buildings | | | 10,168 | | | 10,050 | Furniture and fixtures | | | 2,347 | | | 1,836 | Land | | | 7,067 | | | 4,557 | Construction in progress | | | 11,331 | | | 3,392 | | | | 94,254 | | | 72,567 | Less accumulated depreciation | | | (31,108) | | | (20,042) | Total property, plant, and equipment | | $ | 63,146 | | $ | 52,525 |
Depreciation and amortization expense related to these assets total $2,348 thousand, $1,915 thousand,$12.1 million, $9.1 million, and $1,842 thousand$6.7 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Note 34 – Intangible Assets and Goodwill Intangible assets consist of the following at December 31:at: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Useful Lives | | 2017 | | 2016 | Amortizable Intangibles | | | | | | | | | | | | | Distribution agreement | | | | | | | | 2 years | $ | 3,021 | $ | 3,021 | Certification | | | | | | | | 7 years | | 350 | | 350 | Customer relationships | | | | | | | | 12 years | | 1,191 | | 1,086 | Patents and processes | | | | | | | | 10 years | | 1,998 | | 1,797 | Brand names | | | | | | | | 15 years | | 923 | | 841 | Total amortizable intangibles | | | | | | | | | | 7,483 | | 7,095 | Less accumulated amortization | | | | | | | | | $ | (4,733) | $ | (3,557) | Total net amortizable intangibles | | | | | | | | | | 2,750 | | 3,538 | Non-amortizable intangibles | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | 516 | | 516 | Intangible assets, net of accumulated amortization | | | | | | | | | $ | 3,266 | $ | 4,054 |
| | | | | | | | | | | | | | | $'s in 000's | | | | | | Useful Lives | | | | December 31, 2020 | | December 31, 2019 | Amortizable intangibles | | | | | | | | | | | | | | | Certification | | | | | | 7 years | | | | $ | 350 | | $ | 350 | Customer relationships | | | | | | 12-20 years | | | | | 160,178 | | | 89,232 | Patents and processes | | | | | | 5-10 years | | | | | 14,905 | | | 4,928 | Brand names | | | | | | 5-15 years | | | | | 24,740 | | | 15,019 | Total amortizable intangibles | | | | | | | | | | | 200,173 | | | 109,529 | Less accumulated amortization | | | | | | | | | | | (25,984) | | | (13,058) | Total net amortizable intangibles | | | | | | | | | | | 174,189 | | | 96,471 | Non-amortizable intangibles | | | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | | 33,341 | | | 18,016 | In-process research and development | | | | | | | | | | | 5,470 | | | 5,469 | Intangible assets, net of accumulated amortization | | | | | | | | | | $ | 213,000 | | $ | 119,956 |
Certain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currency movements. Amortization expense for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was $1,052 thousand, $1,067 thousand,$12.8 million, $6.0 million, and $735 thousand,$5.2 million, respectively. The in-process research and development (“IPRD”), intangible assets represent the value assigned to 3 acquired R&D projects that principally represent rights to develop and sell products that the Company has acquired which has not yet been completed or approved. The IPRD acquired as part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and regulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development. In the event that the efforts are not successful, the Company will write off the relevant IPRD in the period in which it is no longer considered feasible. Estimated future amortization expense for each of the following years is as follows: | | | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | | 2018 | | | | | | $ | 407 | 2019 | | | | | | | 407 | 2020 | | | | | | | 407 | 2021 | | | | | | | 406 | 2022 | | | | | | | 402 | Thereafter | | | | | | | 721 |
| | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | 2021 | | | | | $ | 18,504 | 2022 | | | | | | 18,310 | 2023 | | | | | | 17,481 | 2024 | | | | | | 15,078 | 2025 | | | | | | 14,369 | Thereafter | | | | | | 90,447 |
The following is a summary of the changes in the carrying value of goodwill for the years ended December 31, 20172020 and 2016.2019. | | | | | | | | | | | | Reporting Unit | | | | ($'s in 000's) | | Products | | Services | | Total | Goodwill as of January 1, 2019 | | | 77,765 | | | 47,264 | | | 125,029 | Foreign currency translation | | | 178 | | | — | | | 178 | Acquisitions | | | 105,838 | | | — | | | 105,838 | Goodwill as of December 31, 2019 | | | 183,781 | | | 47,264 | | | 231,045 | Foreign currency translation | | | 113 | | | — | | | 113 | Goodwill as of December 31, 2020 | | $ | 183,894 | | $ | 47,264 | | $ | 231,158 |
| | | | | | | | ($’s in 000’s) | | | Reporting Unit | | | | | | Domestic | | International | | Total | Goodwill as of January 1, 2016 | | $ | 5,221 | $ | 359 | $ | 5,580 | Foreign currency translation | | | (900) | | (61) | | (961) | Goodwill as of December 31, 2016 | | | 4,321 | | 298 | | 4,619 | Foreign currency translation | | | 416 | | 29 | | 445 | Goodwill as of December 31, 2017 | | $ | 4,737 | $ | 327 | $ | 5,064 |
66 Note 45 – Debt The Company entered into a credit agreement (the “Credit Agreement”) on December 21, 2016. The Credit Agreement provided for secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting ofConvertible Notes
(i) $45 million revolving credit facility (“Revolver”) maturing on December 21, 2019; and
(ii) $5 million term loan (“Term Loans”), requiring equal amortizing payments for 24 months.
As of December 31, 2017,On May 19, 2020, the Company had $0 outstanding as Term Loans and $15.3 million outstanding under the Revolver. The interest rate on the revolving credit facility was 5.00%, as a Base Rate loan. The Revolver contains a lockbox mechanism.
As of December 31, 2016, the Company had $5 million outstanding as Term Loans and $22.5 million outstanding under the Revolver. The interest rate on the Term Loans was 4.25% and the interest rate on the revolving credit facility was also 4.25%, both were Base Rate loans.
The Company refinanced its credit facility in March 2016 with an amended and restated credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provided for secured financing of $48,000 in the aggregate, consisting of
(i) $3issued $143.8 million in aggregate principal amount of term loans maturing4.00% Convertible Senior Notes due 2026 pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $137.9 million. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 31, 2016 (the “Term B Loans”);
(ii) $20 million in aggregate1, 2020. The Notes will mature on June 1, 2026, unless earlier repurchased, redeemed or converted. Before January 15, 2026, holders will have the right to convert their Notes only upon the occurrence of certain events. From and after January 15, 2026, holders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of term loans maturingNotes. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on March 16, 2018or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption. If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock. The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 13%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The amount of the equity component representing the conversion option was $53.3 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual terms of the Notes. The Company has early adopted ASU 2020-06 as of January 1, 2021, which will impact the accounting for the Notes. The fair value of the Notes was $218.1 million as of December 31, 2020. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of December 31, 2020 and is classified as Level 2 in the fair value hierarchy. As of December 31, 2020 the if-converted value of the Notes did not exceed the principal amount. The net carrying amount of the liability component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Par value of the Notes | | $ | 143,750 | Unamortized debt discount | | | (49,526) | Unamortized debt issuance costs | | | (3,441) | Net carrying amount | | $ | 90,783 |
The net carrying amount of the equity component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Proceeds allocated to the conversion option | | $ | 53,285 | Deferred tax affect | | | (8,197) | Issuance costs | | | (2,181) | Net carrying amount | | $ | 42,907 |
The following table sets forth the interest expense recognized related to the Notes: | | | | | | | | | | | | For the Year Ended | | | | | | December 31, 2020 | ($'s in 000's) | | | | | | | Contractual interest expense | | | | | $ | 3,546 | Amortization of debt discount | | | | | | 3,759 | Amortization of debt issuance costs | | | | | | 261 | Total | | | | | $ | 7,566 | Effective interest rate of the liability component | | | | | | 13.0% |
Capped Call Transactions On May 14, 2020 and May 19, 2020, the Company entered into capped call transactions (the “Term“Capped Call Transactions”) with 2 counterparties (the “Option Counterparties”). The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to the Notes, the underlying shares of Class A Loans”);common stock and are intended to reduce, subject to a limit, the potential dilution with respect to the Class A common stock upon conversion of the Notes. The cap price of the Capped Call Transactions is $41.51 per share of Class A common stock, and is subject to certain adjustments under the terms of the Capped Call Transactions. (iii)
The Company paid approximately $14.8 million for the Capped Call Transactions, which was recorded as additional paid-in capital, using a $25portion of the gross proceeds from the sale of the Notes. The capped call is expected to be tax deductible as the Company elected to integrate the capped call into the Notes for tax purposes. The tax effect on the equity component of the Convertible Notes of $8.2 million was recorded through additional paid-in capital. The Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2020, as a result, the $8.2 million deferred tax liability associated with the Capped Call Transactions will be offset by a reduction to the valuation allowance adjustment through continuing operations. A&R Credit Agreement The Company amended the existing revolving credit agreement of Opco and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”) on July 8, 2019. The Amended Revolving Credit Agreement provides for a secured revolving credit facility maturingof $125 million that matures on March 16, 2018.July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur fees between 0.375% and 0.50% as unused facility fees, dependent on the aggregate amount borrowed. On May 14, 2020, the Company amended the Amended Revolving Credit Agreement to allow for the Notes described above. Additionally the amendment instituted a Eurodollar floor of 1% to the agreement. OnAll obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.
The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowers and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of December 31, 2020, the borrowers and guarantors thereunder were in compliance with these covenants. Although the Company currently expects continued compliance with debt covenants, the impact COVID-19 may negatively affect the Company’s ability to comply with these covenants. The Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $15.0 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 2.3% at December 31, 2020. A&R Term Loan Credit Agreement The Company amended and restated the existing term loan credit agreement of Opco (the “A&R Term Loan Credit Agreement”) on July 24, 2017,8, 2019. The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls for 1% of the original loan balance to be paid annually via equal quarterly payments, with the balance of the loan due on the sixth anniversary of the agreement. All obligations under the A&R Term Loan Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of PetIQ, LLC and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions. The A&R Term Loan Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2019, the borrower and guarantors thereunder were in compliance with these covenants. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $217.3 million was outstanding under the A&R Term Loan Credit Agreement. General Other Debt The Company entered into a mortgage with a local bank to provide financing forfinance $1.9 million of the purchase price of a commercial building.building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and requires monthly principalutilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time. In July 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset Acquisitions”. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest payments,rate of 8.3%, resulting in an obligation of $17.5 million. In connection with the balanceVIP Acquisition, the Company entered into a guarantee note of the loan due on July 25, 2027. The Credit Agreement and Amended Credit Agreement both contained 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.$10.0 million. As of December 31, 2017,2019, $7.5 million was payable pursuant to the Company2018 Contingent Note and $10.0 million was in compliancepayable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million require quarterly interest payments of 6.75% with these covenants.the balance payable July 17, 2023.
The following represents the Company’s long-term debt as of December 31, 2017 and December 31, 2016:of: | | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Term loans | | $ | — | | $ | 5,000 | Revolving credit facility | | | 15,325 | | | 22,473 | Mortgage | | | 1,902 | | | — | Net discount on debt and deferred financing fees | | | — | | | (92) | | | $ | 17,227 | | $ | 27,381 | Less current maturities of long-term debt | | | (44) | | | (2,223) | Total long-term debt | | $ | 17,183 | | $ | 25,158 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Convertible Notes | | $ | 143,750 | | $ | — | Term loans | | | 217,250 | | | 220,000 | Revolving credit facility | | | 15,000 | | | 10,000 | Notes Payable - VIP Acquisition | | | 27,500 | | | 27,500 | Other Debt | | | 16,257 | | | 1,812 | Net discount on debt and deferred financing fees | | | (57,559) | | | (5,688) | | | $ | 362,198 | | $ | 253,624 | Less current maturities of long-term debt | | | (6,219) | | | (2,248) | Total long-term debt | | $ | 355,979 | | $ | 251,376 |
Future maturities of long-term debt, excluding the net discount on debt and deferred financing fees, as of December 31, 20172020, are as follows: | | | | | | | | | | ( The Company incurred debt issuance costs of $218$0.6 million related to the AmendedA&R Credit Agreement during the first quarter of 2016. The debt transaction resulted in a loss on debt extinguishment of $993 thousand, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs. year ended December 31, 2020. The Company incurred debt issuance costs of $261 thousand$0.7 million during the year ended December 31, 2019 related to the NewA&R Credit Agreement during 2016. This second refinancing transaction resulted in a loss on extinguishment of $688 thousand, which includedand $5.1 million related to the write off of unamortizedA&R Term Loan Credit Agreement. The Company incurred debt issuance costs of $5.9 million in May 2020 in connection with the Notes. In accordance with FASB ASC 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. $2.2 million of issuance costs were recorded as additional paid-in capital and such amounts are not subject to amortization. The remaining issuance costs of $3.7 million are recorded as debt issuance costs in the net carrying value of the Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Notes and is included in interest expense, net on the condensed consolidated statements of operations. Future amortization of our debt discount and debt discount, early termination fees, and legal costs.issuance costs for the term of the Convertible Notes is as follows: | | | | | | | ($'s in 000's) | | Debt Discounts | | Debt Issuance Costs | 2021 | | $ | 6,761 | | $ | 470 | 2022 | | | 7,684 | | | 534 | 2023 | | | 8,733 | | | 607 | 2024 | | | 9,925 | | | 690 | 2025 | | | 11,280 | | | 784 | Thereafter | | | 5,143 | | | 356 |
Note 5 -6 – Leases The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182021 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term. We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease. The Company’s leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms. The components of lease expense consists of the follow: | | | | | | | | | For the Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Finance lease cost | | | | | | | Amortization of right-of-use assets | | $ | 1,681 | | $ | 1,441 | Interest on lease liabilities | | | 315 | | | 308 | Operating lease cost | | | 5,831 | | | 4,833 | Variable lease cost(1) | | | 1,130 | | | 629 | Short-term lease cost | | | 34 | | | 41 | Sublease income | | | (528) | | | (452) | Total lease cost | | $ | 8,463 | | $ | 6,800 |
| (1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
Other information related to leases was as follows as of: | | | | | | | | | | December 31, 2020 | | | December 31, 2019 | Weighted-average remaining lease term (years) | | | | | | | Operating leases | | | 4.41 | | | 5.15 | Finance leases | | | 2.38 | | | 2.73 | Weighted-average discount rate | | | | | | | Operating leases | | | 5.3% | | | 5.3% | Finance leases | | | 5.7% | | | 5.7% |
Annual future commitments under non-cancelable leases as of December 31, 2017,2020, consist of the following: | | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Capital Leases | 2018 | | $ | 2,053 | | $ | 113 | 2019 | | | 937 | | | 110 | 2020 | | | 353 | | | 96 | 2021 | | | 176 | | | 93 | 2022 | | | 176 | | | 72 | Thereafter | | | 127 | | | 27 | Total minimum future obligations | | $ | 3,822 | | $ | 511 | Less interest | | | | | | (15) | Present value of net future minimum obligations | | | | | | 496 | Less current capital lease obligations | | | | | | (107) | Long-term capital lease obligations | | | | | $ | 389 | | | | | | | |
The net book value of assets under capital lease was $850 thousand and $775 thousand as of December 31, 2017 and 2016, respectively.
| | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Finance Leases | 2021 | | $ | 5,861 | | $ | 1,757 | 2022 | | | 5,591 | | | 1,584 | 2023 | | | 4,789 | | | 1,580 | 2024 | | | 3,280 | | | 330 | 2025 | | | 2,357 | | | 20 | Thereafter | | | 1,365 | | | — | Total minimum future obligations | | $ | 23,243 | | $ | 5,271 | Less interest | | | (2,539) | | | (367) | Present value of net future minimum obligations | | | 20,704 | | | 4,904 | Less current lease obligations | | | (4,915) | | | (1,566) | Long-term lease obligations | | $ | 15,789 | | $ | 3,338 | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | Year Ended | | Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | Operating cash flows from finance leases | | $ | 315 | | $ | 308 | Operating cash flows from operating leases | | | 5,668 | | | 4,568 | Financing cash flows from finance leases | | | 1,965 | | | 1,547 | (Noncash) right-of-use assets obtained in exchange for lease obligations | | | | | | | Operating leases | | | 5,105 | | | 5,368 | Finance leases | | | 2,019 | | | (3,006) |
Total operating lease expense for the yearsyear ended December 31, 2017, 2016, and 20152018, totaled $1,716 thousand, $1,718 thousand, and $1,627 thousand, respectively.$6.0 million. Note 67 - Income TaxesAs a result of the IPO and related reorganization transactions completed in July 2017, the Company holds an economic interest of approximately 62% in HoldCo and consolidates the financial position and results of HoldCo. The approximate 38% of HoldCo not held by the Company is considered non-controlling interest. HoldCothe sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax reporting. purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $67.6M of deferred tax assets associated with these exchanges, which currently have a full valuation allowance against the deferred tax asset. The non-controlling interests totaled approximately 11% of the ownership of Holdco as of December 31, 2020. See Note 11 – Non-controlling interests for more information.
HoldCo’s members, including the Company, are liable for federal, state, and local income taxes based on their share of HoldCo’s taxable income. Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. OpcoHoldco makes cash distributions to permit the membermembers to pay these taxes as needed by the member’s tax situation.attributable to their allocable share of income earned. In the years ended December 31, 20172020 and 2016,2019, the Company did not make anymade cash distributions. Indistributions of $0.05 million and $1.7 million, respectively. Additionally, Holdco accrues for distributions required to be made related to estimated income taxes. During the yearyears ended December 31, 2017 Opco2020 and 2019, the Company relieved previously accrued $597 thousand for anticipated tax distributions to Continuing LLC Owners.of $(0.4)million and accrued distributions of $0.8 million, respectively. This liability is included in accounts payable on the consolidated balance sheet.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 to 21 percent and requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. Staff Accounting Bulletin (SAB) 118 establishes a one-year measurement period to complete the accounting for the ASC 740 income tax effects of the Tax Act. An entity recognizes the impact of those amounts for which the accounting is complete. For matters that have not been completed, provisional amounts are recorded to the extent they can be reasonably estimated. For amounts for which a reasonable estimate cannot be determined, no adjustment is made until such estimate can be completed.
The Company was able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the deemed repatriation tax, and the remeasurement of deferred taxes. We recorded a provisional net tax expense of $3.6 million in the period ended December 31, 2017 attributable to the Tax Act. This net expense consists of an expense of $0.2 million for the Company’s allocated share of the one-time transition tax on unrepatriated earnings of foreign subsidiaries and a net expense of $3.4 million primarily due to the remeasurement of deferred tax assets associated with the corporate rate reduction.
These estimates may be impacted as we further analyze available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and guidance issued by standard-setting bodies that provide interpretative guidance of the Tax Act.
The components of earnings before incomenet loss taxes, determined by tax jurisdiction, are as follows: | | | | | | | | | | | | | | Years Ended December 31 | | | | | | | | | | | | | | | | Years Ended December 31 | The provision for income taxes for 2017, 2016,2020, 2019, and 20152018 consisted of the following: | | | | | | | | | | | | | | Years Ended December 31 | | | | | | | | | | | | | | | | Years Ended December 31 | Reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Income tax expense (benefit) at federal statutory rate | | | 35.0 | % | | 35.0 | % | | 35.0 | State and local income taxes net of federal tax benefit | | | - | | | - | | | (43) | Non-controlling interest and nontaxable income | | | (33.2) | | | (37.4) | | | - | Tax Cuts and Jobs Act of 2017 | | | 30.7 | | | - | | | - | Nondeductible/nontaxable items | | | 1.2 | | | 2.4 | | | 8 | Income tax expense (benefit) | | | 33.7 | % | | - | | | - |
| | | | | | | | | | | | | Years Ended December 31 | | | | | 2020 | | | 2019 | | | 2018 | | Income tax expense (benefit) at federal statutory rate | | | 21.0 | % | | 21.0 | % | | 21.0 | % | State and local income taxes net of federal tax benefit | | | 2.4 | | | 1.3 | | | (5.7) | | Non-controlling interest and nontaxable income | | | (2.9) | | | (4.0) | | | 54.7 | | Deferred tax rate changes | | | (1.3) | | | (0.4) | | | 37.2 | | Share-based compensation | | | 0.6 | | | 0.1 | | | 18.3 | | Tax Cuts and Jobs Act of 2017 | | | - | | | - | | | (13.1) | | Return-to-Provision | | | (2.0) | | | 0.8 | | | 13.4 | | Valuation Allowance | | | (198.4) | | | 0.4 | | | 0.7 | | Other | | | (0.7) | | | (0.4) | | | (11.3) | | Effective income tax rate | | | (181.3) | % | | 18.8 | % | | 115.2 | % |
Our effective income tax rate differsis affected primarily by the recognition of a valuation allowance during the year ended December 31, 2020 and the portion of income and expense allocated to the noncontrolling interest. It is also affected by discrete items that may occur in any given year such as stock based compensation, but are not consistent from statutory rates primarily dueyear to our pass-through entity structure for U.S. income tax purposes.year. As a result of the IPO and reorganization transactions, the Company has recorded deferred tax assets and liabilities based on the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 20172020 and 20162019 are as follows: | | | | | | | $'s in 000's | | 2020 | | 2019 | Deferred tax assets | | | | | | | Investment in partnership | | $ | 53,294 | | $ | 53,303 | Fixed assets | | | 32 | | | 29 | Net operating loss carryforwards and tax credits | | | 18,001 | | | 6,775 | Other accruals and reversals | | | 9 | | | 5 | Subtotal | | | 71,336 | | | 60,112 | Less: valuation allowance | | | (71,161) | | | (143) | Net deferred tax assets | | | 175 | | | 59,969 | | | | | | | | Deferred tax liabilities | | | | | | | Intangible assets | | $ | (447) | | $ | (293) | Other | | | (6) | | | (5) | Net deferred tax liabilities | | $ | (453) | | $ | (298) |
$'s in 000's | | | 2017 | | | 2016 | Investment in partnership | | $ | 5,855 | | $ | - | Net operating loss carryforwards and tax credits | | | 536 | | | 520 | Other | | | 66 | | | 47 | Subtotal | | | 6,457 | | | 567 | Less: valuation allowance | | $ | (237) | | $ | (91) | Total net deferred tax assets | | | 6,220 | | | 476 | Intangible assets | | | (412) | | | (476) | Other | | | (5) | | | - | Total deferred tax liabilities | | | (417) | | | - | Net deferred tax asset | | $ | 5,803 | | $ | - |
$66.0 million, of which $1.9 million, generated in 2017 and prior, will expire in 2037, the remaining NOLs do not expire. The NOL generated in 2018 and after of $64.1 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company has a federal business interest expense carryover totaling $6.1 million as of December 31, 2020, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. As of December 31, 2020, the Company has charitable contribution carryforwards of $1.0 million, which if unused will expire between 2021 and 2025. The Company has state NOL carryforwards of $384.7 million (tax effected $2.8 million) as of December 31, 2020 which expire between 2022 and 2038 and others that have an indefinite carryforward period. At December 31, 2020 the Company had foreign NOL carryforwards of $0.8 million which do not expire. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from the recorded deferred tax assets will not be realized. The Company has recorded a valuation allowance for certain deferred tax assets of $237 thousand$71.2 million and $91 thousand,$0.1 million as of December 31, 20172020 and December 31, 2016,2019, respectively. The valuation allowance pertains to certain international loss carryforwards, some of whichIn future periods, if we conclude we have no expiration and others that would expire beginning in 2018. The Tax Act contains a new law that requires a current inclusion in U.S. federalfuture taxable income of certain earnings of controlled foreign corporations, also known as the tax on global intangible low taxed income (GILTI), beginning in 2018. The FASB has provided that companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, orsufficient to recognize the deferred taxes for temporary differences, including outside basis differences, expected to reverse as GILTI. Due totax assets, we may reduce or eliminate the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act. We have not recorded any provisional amounts as of December 31, 2017 nor have we made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into our measurement of deferred taxes.
valuation allowance. The Company has not recognized any uncertain tax positions, penalties or interest as we have concluded that no such positions exist. Accordingly, no0 unrecognized tax benefit would impact the effective tax rate. If interest and penalties were accrued, we would recognize interest and penalties as income tax expense. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017,2020, tax years for 2014, 2015, and 2016from 2017 to present are subject to examination by the tax authorities. With few exceptions, as On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes temporary changes regarding the prior and future utilization of December 31, 2017, we are no longer subjectnet operating losses, temporary changes to U.S. federal, state, local, or foreign examinations bythe prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax authoritieslegislation for years before 2014.tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company will benefit from the Employee Retention Credits and the payroll tax deferral. Note 7Note 8 – Earnings (loss)Loss per Share Basic and Diluted Earnings (loss)Loss per Share share Basic earnings (loss)loss per share of Class A common stock is computed by dividing net income (loss)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 incomeloss 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 9 — 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 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 (loss) per share would not be appropriate.
Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit 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 (loss) per share information has not been presented for periods
prior to the IPO on July 20, 2017. The basic and diluted earnings (loss) per share represent only the the period July 20, 2017 to December 31, 2017.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock: | | | | | | | ($'s in 000's, except for per share amounts) | | December 31, 2017 | Numerator: | | | | Net income | | $ | 7,817 | Less: net income attributable to non-controlling interests | | | (11,310) | Net loss attributable to PetIQ, Inc. — basic | | | (3,493) | 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 (in 000's)-- diluted | | | 13,223 | | | | | Earnings per share of Class A common stock — basic | | $ | (0.26) | Earnings per share of Class A common stock — diluted | | $ | (0.26) |
| | | | | | | | | | | | Year ended December 31, | (in 000's, except for per share amounts) | | | 2020 | | 2019 | | 2018 | Numerator: | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Less: net (loss) income attributable to non-controlling interests | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. — basic and diluted | | | (77,474) | | | (11,453) | | | (782) | Denominator: | | | | | | | | | | Weighted-average shares of Class A common stock outstanding -- basic | | | 24,629 | | | 22,652 | | | 17,216 | Dilutive effects of stock options that are convertible into Class A common stock | | | — | | | — | | | — | Dilutive effect of RSUs | | | — | | | — | | | — | Dilutive effect for conversion of Notes | | | — | | | — | | | — | Weighted-average shares of Class A common stock outstanding -- diluted | | | 24,629 | | | 22,652 | | | 17,216 | | | | | | | | | | | Loss per share of Class A common stock — basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Loss per share of Class A common stock — diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock as well as all stock options and restricted stock units have not been included in the diluted earnings (loss)loss per share calculation as they have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively. Additionally, all stock options and restricted stock units and convertible Notes have not been included in the diluted earnings per share calculation for the years ended December 31, 2020, 2019 and 2018, as they have been determined to be anti-dilutive under the treasury stock method. Note 89 – Stock Based Compensation Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of December 31, 2017, 1,315,4032020 and 2019, 1,293 thousand and 2,017 thousand shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares. PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provides for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800thousand shares of Class A Common Stock of the Company. As of December 31, 2020, 0 shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock. Stock Options The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, whichperiod. Expense recognized totaled $447 thousand$6.5 million and $6.2 million for the yearyears ended December 31, 2017.2020, and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended December 31:periods ended: | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Expected term (years) (1) | | | 6.25 | | | | 6.25 | | Expected volatility (2) | | | 33.91 | % | | | 35.00 | % | Risk-free interest rate (3) | | | 0.37 | % | | | 2.37 | % | Dividend yield (4) | | | 0.00 | % | | | 0.00 | % |
| (1) | | | | | | | 2017
| Expected term (years) (1)
| | | 6.25 | | Expected volatility (2)
| | | 35.00 | %
| Risk-free interest rate (3)
| | | 1.98 | %
| Dividend yield (4)
| | | 0.00 | %
|
| (1)
| | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
| (2) | (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) | (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) | (4)
| | The Company has not paid and does not anticipate paying a cash dividend on our common stock. |
The weighted average grant date fair value of stock options granted during the period ended December 31, 2020 and 2019 was $11.88 and $10.63, respectively, per option. The following table summarizes the activity of the Company’s unvested stock options for the period ended December 31, 2017: The grant date fair value of stock options granted during the period ended December 31, 2017 was $6.08 per option.2020: | | | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | | Average | | | | | | Weighted | | | | Remaining | | | | | | Average | | Aggregate | | Contractual | | | | Stock | | Exercise | | Intrinsic | | Life | | | | Options | | Price | | Value | | (years) | | Outstanding at December 31, 2016 | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | | Average | | | | | | Weighted | | Aggregate | | Remaining | | | | Stock | | Average | | Intrinsic | | Contractual | | | | Options | | Exercise | | Value | | Life | | | | (in 000's) | | Price | | (in 000's) | | (years) | Outstanding at December 31, 2017 | | | | 599 | | $ | 16.00 | | $ | 3,496 | | | 9.5 | Granted | | | 804,049 | | $ | 16 | | | | | | | | | 1,617 | | | 25.74 | | | | | | | Exercised | | | — | | | | | | | | | | | | (76) | | | 18.83 | | | | | | | Forfeited | | | (205,405) | | | 16 | | | | | | | | | (195) | | | 21.37 | | | | | | | Cancelled | | | — | | | | | | | | | | | Outstanding at December 31, 2017 | | | 598,644 | | $ | 16 | | $ | 3,496 | | | 9.5 | | Options exercisable at December 31, 2017 | | | — | | | | | | | | | | | Cancelled/Expired | | | | — | | | — | | | | | | | Outstanding at December 31, 2018 | | | | 1,945 | | $ | 23.45 | | $ | 5,527 | | | 9.1 | Granted | | | | 423 | | | 27.54 | | | | | | | Exercised | | | | (119) | | | 19.51 | | | | | | | Forfeited | | | | (168) | | | 21.92 | | | | | | | Cancelled/Expired | | | | (9) | | | 25.70 | | | | | | | Outstanding at December 31, 2019 | | | | 2,072 | | $ | 24.63 | | $ | 6,266 | | | 8.0 | Granted | | | | 505 | | | 20.22 | | | | | | | Exercised | | | | (395) | | | 23.48 | | $ | 4,468 | | | | Forfeited | | | | (96) | | | 21.42 | | | | | | | Outstanding at December 31, 2020 | | | | 2,086 | | $ | 23.93 | | $ | 30,302 | | | 7.2 | Options exercisable at December 31, 2020 | | | | 831 | | | | | $ | 11,778 | | | 5.9 |
At December 31, 2017,2020, total unrecognized compensation cost related to unvested stock options was $3.2$8.4 million and is expected to be recognized over a weighted-average period of approximately 3.52.2 years. Restricted Stock Units The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will generally be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At December 31, 2020, total unrecognized compensation cost related to unvested RSUs was $5.8 million and is expected to vest over a weighted average of 2.8 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.6 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The following table summarizes the activity of the Company’s RSUs for the period ended December 31, 2020: | | | | | | | | | | | Weighted | | | Number of | | Average | | | Shares | | Grant Date | | | (in 000's) | | Fair Value | Outstanding at December 31, 2018 | | | 51 | | $ | 33.16 | Granted | | | 123 | | | 27.61 | Settled | | | (25) | | | 30.43 | Forfeited | | | (15) | | | 30.58 | Outstanding at December 31, 2019 | | | 133 | | $ | 28.85 | Granted | | | 271 | | | 20.73 | Settled | | | (70) | | | 25.65 | Forfeited | | | (17) | | | 23.34 | Nonvested RSUs at December 31, 2020 | | | 317 | | $ | 22.91 |
The total equity based compensation expense for these plans over the vesting period totaled $9.2 million, $7.4 million, and $3.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.0 million, $1.4 million and $0.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Note 910 - 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 $30.5 million 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 $25.4 million in preference notes;
|
| ·
| | The Company purchased from Continuing LLC Owners 133,334 LLC Interests in exchange for $2.1 million.
|
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. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.
Immediately following the Reclassification, PetIQ became a holding company and our principal asset is the LLC interests. As the sole managing member of HoldCo, PetIQ operates and controls all of the business and affairs of HoldCo and, through HoldCo and its subsidiaries, conducts business. In addition, PetIQ controls the management of, and has a controlling interest in, HoldCo and, therefore, PetIQ 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 net income (loss) is allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners to a portion of Holdco’s net income (loss).
Other than its purchase of LLC Interests with the net proceeds the IPO, PetIQ has not provided any financial or other support to HoldCo. PetIQ is not required to provide financial or other support for HoldCo, though it will control HoldCo’s business and other activities through its managing member interest in HoldCo. Because PetIQ is not a guarantor or obligor with respect to any of the liabilities of HoldCo, absent any such arrangement, the creditors of HoldCo will not have any recourse to the general credit of PetIQ. Nevertheless, because PetIQ will have no material assets other than its interests in HoldCo, any change in HoldCo’s financial condition could result in PetIQ recognizing a loss.
Amendment and Restatement of Certificate of Incorporation
On July 20, 2017, the CompanyThe Company’s amended and restated its certificate of incorporation, to, among other things, provideprovides for the (i) authorization of 125,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) authorization of 8,401,521100,000,000 shares of Class B common stock with a par value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.
Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one1 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-one1-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-one1-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). Initial2018 Public Offering
On July 20, 2017,October 1, 2018, the Company completedclosed an IPOunderwritten public offering of 7,187,5005,750 thousand 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.stock. The Company received $104.0 million in proceeds, net of underwriting discounts, commissions and offering costs, which were used repay $56.0 million 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 sharesold 2,000 thousand newly issued shares of Class A common stock in the IPO lessand received net proceeds of approximately $73.9 million after deducting underwriting discounts and commissions and to purchase 133,334offering expenses. The remaining 3,750 thousand shares of Class A common stock were sold by selling stockholders and the Company did not receive any proceeds with respect hereto. In conjunction with the 2018 Public Offering, a number of holders of Class B common stock exchanged 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 offor Class A common stock, there were 13,222,583 sharesstock. The
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, HoldCo amended and restatedimpact on non-controlling interest is shown along with other exchanges during the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interestsyear 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.Note 11 – Non-Controlling Interests.
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 equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of such 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 1011 - Non-Controlling Interests In connection with the Reorganization Transactions described in Note 9 — 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 non-controlling 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 December 31, 2017,2020, there were 21,490,77128,751 thousand LLC Interests outstanding, of which PetIQ owned 13,222,583,25,711thousand, representing a 61.5%an 89.4% ownership interest in HoldCo. Exchange and other equity activity during the years ended December 31, 2020 and 2019 resulted in weighted average ownership of HoldCo by PetIQ of 86.4% and 80.2%, respectively. | | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | Continuing LLC | | | | | | | | | Continuing LLC | | | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of December 31, 2017 | | | 8,268,188 | | | 13,222,583 | | | 21,490,771 | | | 38.5% | 61.5% |
| | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | LLC | | | | | | | | | LLC | | $'s in 000's | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of January 1, 2019 | | | 6,547 | | | 21,620 | | | 28,167 | | | 23.2% | 76.8% | Stock based compensation adjustments | | | — | | | 140 | | | 140 | | | | | Exchange transactions | | | (1,794) | | | 1,794 | | | — | | | | | As of December 31, 2019 | | | 4,752 | | | 23,554 | | | 28,306 | | | 16.8% | 83.2% | Stock based compensation adjustments | | | — | | | 445 | | | 445 | | | | | Exchange transactions | | | (1,712) | | | 1,712 | | | — | | | | | As of December 31, 2020 | | | 3,040 | | | 25,711 | | | 28,751 | | | 10.6% | 89.4% |
Note 11Note 12 - Customer Concentration The Company has significant exposure to customer concentration. During each of the years ended December 31, 2017, 2016,2020, 2019, and 2015, three2018, 2, 2, and 1 customers, respectively, accounted for more than 10% of sales individually. In total for the years ended December 31, 2017, 2016,individually and 2015, the three customersin aggregate accounted for 61%42%, 70%35%, and 74%18% of net sales, respectively. At December 31, 2017 and December 31, 2016, three and four customers, respectively,2020, 1 Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 48% and 60%, respectively, 52% of outstanding trade receivables, net. TheAt December 31, 2019 2 Products segment customers are customersindividually accounted for more than 10% of outstanding trade receivables, and accounted for 61% of outstanding trade receivables, net. All of our Domesticcustomer concentration exists in our Products segment. Note 1213 - Commitments and Contingencies Litigation Contingencies In May 2017, Bayer Healthcare LLCDuring the years ended December 31, 2020 and its affiliates2019, the Company recorded liabilities of $7.8 million and $1.0 million, respectively, for contract termination costs, related to settlements for alleged breach of contract. The expense is included within General and Administrative expenses for the years ended December 31, 2020 and 2019.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplierfor alleged unlawful merger and other antitrust violations. On June 29, 2020, the 9th Circuit Court of Advecta 3 and PetLock MAX,Appeals issued an opinion affirming the dismissal of Med Vets’ merger challenge. On July 13, 2020, the Plaintiffs filed for an en banc hearing in the 9th Circuit Court of Appeals which we beganwas unanimously denied on August 7, 2020. The Plaintiffs time period to sell in 2017 as our value-branded alternatives to Bayer’s K9 Advantix II. Bayer alleges that 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 MAXpetition the Supreme Court for certiorari has passed, therefore the matter is considered resolved. As no impact to the Company. BayerCompany is considered probable or estimable, 0 litigation reserve has filed a motion for preliminary injunction, which motion was argued in February 2018. 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 paymentaccrued. 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 December 31, 2017 and December 31, 2016,2020 as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations. Commitments We have commitments for leases and long-term debt that are discussed further in Note 5, Debt, and Note 6, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business. Note 1314 - Segments The Company has two2 operating segments,segments: Products and thus two reportable segments, which areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers. The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas. a segment as defined in the accounting guidance related to segment reporting. Financial information relating to the Company’s operating segments for the years ended December 31: | | | | | | | | | | $'s in 000's | | Domestic | | International | | Consolidated | 2017 | | | | | | | | | | Net Sales | | $ | 261,526 | | $ | 5,161 | | $ | 266,687 | Gross profit | | | 48,997 | | | 2,197 | | | 51,194 | General and administrative expenses | | | 36,053 | | | 1,852 | | | 37,905 | Operating income | | | 12,944 | | | 345 | | | 13,289 | Interest expense | | | — | | | — | | | (1,563) | Other income, net | | | — | | | — | | | 201 | Foreign currency loss, net | | | — | | | — | | | (140) | Identifiable assets | | $ | 134,841 | | $ | 6,004 | | $ | 140,845 | Depreciation expense | | $ | 2,209 | | $ | 139 | | $ | 2,348 | Amortization expense | | $ | 797 | | $ | 255 | | $ | 1,052 | Capital expenditures | | $ | 4,011 | | $ | 120 | | $ | 4,131 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2016 | | | | | | | | | | Net Sales | | $ | 195,698 | | $ | 4,464 | | $ | 200,162 | Gross profit | | | 30,683 | | | 1,864 | | | 32,547 | General and administrative expenses | | | 30,127 | | | 1,718 | | | 31,845 | Operating income | | | 556 | | | 146 | | | 702 | Interest expense | | | — | | | — | | | (3,058) | Other income, net | | | — | | | — | | | 666 | Loss on debt extinguishment | | | — | | | — | | | (1,681) | Foreign currency loss, net | | | — | | | — | | | (24) | Identifiable assets | | $ | 76,270 | | $ | 5,060 | | $ | 81,330 | Depreciation expense | | $ | 1,877 | | $ | 38 | | $ | 1,915 | Amortization expense | | $ | 798 | | $ | 269 | | $ | 1,067 | Capital expenditures | | $ | 1,892 | | $ | 149 | | $ | 2,041 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2015 | | | | | | | | | | Net Sales | | $ | 202,092 | | $ | 3,595 | | $ | 205,687 | Gross profit | | | 37,582 | | | 1,576 | | | 39,158 | General and administrative expenses | | | 33,926 | | | 1,662 | | | 35,588 | Operating income (loss) | | | 3,656 | | | (86) | | | 3,570 | Interest expense | | | — | | | — | | | (3,545) | Loss on debt extinguishment | | | — | | | — | | | (1,449) | Foreign currency gain, net | | | — | | | — | | | 75 | Identifiable assets | | $ | 86,531 | | $ | 5,804 | | $ | 92,335 | Depreciation expense | | $ | 1,800 | | $ | 42 | | $ | 1,842 | Amortization expense | | $ | 330 | | $ | 405 | | $ | 735 | Capital expenditures | | $ | 1,479 | | $ | 71 | | $ | 1,550 |
ended: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2020 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 725,705 | | $ | 54,346 | | $ | — | | $ | 780,051 | Adjusted EBITDA | | | 117,216 | | | 3,387 | | | (52,811) | | | 67,792 | Depreciation expense | | | 4,810 | | | 3,775 | | | 3,497 | | | 12,082 | Capital expenditures | | | 13,394 | | | 7,373 | | | 1,625 | | | 22,392 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2019 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 617,118 | | $ | 92,313 | | $ | — | | $ | 709,431 | Adjusted EBITDA | | | 73,537 | | | 20,045 | | | (32,907) | | | 60,675 | Depreciation expense | | | 3,552 | | | 3,170 | | | 2,417 | | | 9,139 | Capital expenditures | | | 1,297 | | | 6,409 | | | 2,570 | | | 10,276 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2018 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 450,229 | | $ | 78,385 | | $ | — | | $ | 528,614 | Adjusted EBITDA | | | 52,185 | | | 15,246 | | | (25,892) | | | 41,539 | Depreciation expense | | | 2,343 | | | 2,326 | | | 1,988 | | | 6,657 | Capital expenditures | | | 1,339 | | | 3,440 | | | 2,399 | | | 7,178 |
The following table reconciles Segment Adjusted EBITDA to Net (Loss) income for the periods presented. | | | | | | | | | | | | For the years ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | Adjusted EBITDA: | | | | | | | | | | Product | | $ | 117,216 | | $ | 73,537 | | $ | 52,185 | Services | | | 3,387 | | | 20,045 | | | 15,246 | Unallocated Corporate | | | (52,811) | | | (32,907) | | | (25,892) | Total Consolidated | | | 67,792 | | | 60,675 | | | 41,539 | Adjustments: | | | | | | | | | | Depreciation | | | (12,082) | | | (9,139) | | | (6,657) | Amortization | | | (12,815) | | | (5,994) | | | (5,210) | Interest | | | (26,299) | | | (14,495) | | | (8,022) | Acquisition costs(1) | | | (2,620) | | | (6,147) | | | (3,787) | Stock based compensation expense | | | (9,170) | | | (7,355) | | | (3,812) | Purchase accounting adjustment to inventory(2) | | | — | | | (4,805) | | | (2,149) | Non same-store revenue(3) | | | 8,987 | | | 8,088 | | | 3,967 | Non same-store costs(3) | | | (22,256) | | | (19,553) | | | (10,345) | Fair value adjustment of contingent note | | | — | | | (7,320) | | | (3,280) | Integration costs and costs of discontinued clinics(4) | | | (9,776) | | | (3,788) | | | (998) | Clinic launch expenses(5) | | | (3,085) | | | (767) | | | (1,380) | Non-recurring royalty settlement(6) | | | — | | | — | | | (440) | SKU Rationalization(7) | | | — | | | (6,482) | | | — | Litigation expenses | | | (1,006) | | | (529) | | | — | COVID-19 related costs(8) | | | (6,476) | | | — | | | — | Pretax net loss | | $ | (28,806) | | $ | (17,611) | | $ | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Purchase accounting adjustment to inventory represents the portion of costs of sales related to the fair value of inventory adjusted as part of the purchase price allocation. During 2019 the amounts relate to the Perrigo Animal Health Acquisition and are part of the Products segment. During 2018 the costs relate to the VIP Acquisition which are part of the Services Segment and the HBH Acquisition, which is part of the Products Segment. |
| (3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
| (6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
| (7) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
| (8) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
Supplemental geographic disclosures are below. | | | | | | | | | | | Year ended December 31, 2020 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 719,282 | $ | 6,423 | $ | 725,705 | Service revenue | | | 54,346 | | — | | 54,346 | Total net sales | | $ | 773,628 | $ | 6,423 | $ | 780,051 |
| | | | | | | | | | | Year ended December 31, 2019 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 610,986 | $ | 6,132 | $ | 617,118 | Service revenue | | | 92,313 | | — | | 92,313 | Total net sales | | $ | 703,299 | $ | 6,132 | $ | 709,431 |
| | | | | | | | | | | Year ended December 31, 2018 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 444,364 | $ | 5,865 | $ | 450,229 | Service revenue | | | 78,385 | | — | | 78,385 | Total net sales | | $ | 522,749 | $ | 5,865 | $ | 528,614 |
The net book value of property plant and equipment, by geographic location was as follows as of: | | | | | | | | | December 31, 2020 | | December 31, 2019 | United States | | $ | 61,807 | | $ | 51,397 | Europe | | | 1,339 | | | 1,128 | Total | | $ | 63,146 | | $ | 52,525 |
Note 1415 - Related Parties Opco had entered into management consulting services agreements with members of HoldCo. The services were related to financial transactions and other senior management matters related to business administration. Those agreements provided for the Company to pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded in general and administrative expenses in the consolidated statement of operations. The Company recorded $610 thousand, $864 thousand and $462 thousand for the year ended December 31, 2017, 2016, and 2015, respectively. Upon consummation of the recapitalization and IPO transactions, these agreements were terminated.
As discussed in Note 6–7– Income taxes, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At December 31, 2017,2020 and 2019, the Company had paid $0.03 million in advance on required tax distributions and accrued $597 thousand$0.4 million, respectively, for estimated tax distributions, which are included in accounts payable on the consolidated balance sheets. As discussed in Note 5– Debt, the Company has notes payable to the Sellers of VIP, who are significant shareholders of the Company, of $27.5 million. The Company had $0.5 million and $0.3 million of accrued interest on these notes as of December 31, 2020, and 2019, respectively. The Company paid $1.7 million and $1.3 million of interest for the years ended December 31, 2020 and 2019, respectively, and paid 0 interest for the year ended December 31, 2018. Will Santana, a former owner of VIP and board member of PetIQ until July 1, 2020, was one of the main beneficiaries of the VIP Notes. Mr. Santana has sold a sizable portion of his ownership in PetIQ and resigned from the board during 2020, as such he will no longer be considered a related party. The Company leases office and warehouse space from a company under common control of the sellers of VIP, commencing on January 17, 2018. The Company incurred rent expenses of $0.4 million in each of the years ending December 31, 2020, 2019, and 2018, respectively. The lease ended January 5, 2021. Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s annual premium expense, paid to Moreton and subsequently transferred to insurance providers, was $1.1$2.8 million, $2.3 million and $1.5 million in 2017.2020, 2019 and 2018, respectively. Mr. Christensen was paid a commission of approximately $60 thousand$0.1 million in each of the years ending December 31, 2020, 2019, and 2018, respectively, by Moreton for the sale of such insurance policies to the Company. In April 2020, the Company purchased a parcel of land for $2.5 million. The broker for the Company was Colliers International, and the agent was Mike Christensen, the brother of CEO McCord Christensen. Total commission paid to Colliers was approximately $75 thousand. Note 15 – Quarterly information (unaudited)
| | | | | | | | | | | | | ($’s in 000’s except per share amounts) | | | Quarter 1 | | | Quarter 2 | | | Quarter 3 | | | Quarter 4 | 2017: | | | | | | | | | | | | | Net sales | | $ | 67,029 | | $ | 87,178 | | $ | 60,554 | | $ | 51,926 | Gross profit | | | 12,200 | | | 15,951 | | | 12,517 | | | 10,526 | Selling, general, and administrative expenses | | | 7,405 | | | 9,277 | | | 10,739 | | | 10,484 | Operating income | | | 4,795 | | | 6,674 | | | 1,778 | | | 42 | Net income | | | 4,279 | | | 6,070 | | | 859 | | | (3,391) | Basic net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Diluted net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Basic weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | Diluted weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | | | | March 31, 2016 | | | June 30, 2016 | | | September 30, 2016 | | | December 31, 2016 | 2016: | | | | | | | | | | | | | Net sales | | $ | 52,298 | | $ | 61,280 | | $ | 41,671 | | $ | 44,913 | Gross profit | | | 9,772 | | | 8,961 | | | 6,160 | | | 7,654 | Selling, general, and administrative expenses | | | 8,063 | | | 8,302 | | | 7,942 | | | 7,538 | Operating income | | | 1,709 | | | 659 | | | (1,782) | | | 116 | Net income | | | (304) | | | 598 | | | (2,512) | | | (1,177) | Basic net income per common share(1) | | | - | | | - | | | - | | | - | Diluted net income per common share(1) | | | - | | | - | | | - | | | - | Basic weighted average shares(1) | | | - | | | - | | | - | | | - | Diluted weighted average shares(1) | | | - | | | - | | | - | | | - |
| (1)
| | Number of shares out standing and earnings per share prior to our IPO on July 26, 2017 are not reported, see Note 7 in the accompanying consolidated financial statements.
|
Note 16 – Subsequent EventsEmployee Benefit Plans On January 17, 2018, we acquired Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP”). The aggregate consideration, comprisedCompany sponsors 401(k) defined contribution plans at certain subsidiaries. Participants may elect to defer up to 100% of (i) $100compensation. The Company makes matching contributions of 100% of the employee deferrals up to 3% of compensation. The Company may also make discretionary profit sharing contributions each year, which are allocated to each eligible participant based on compensation. The Company made matching contributions of $0.9 million, of cash, (ii) 4,200,000 LLC Interests of PetIQ Holdings, LLC, 4,200,000 shares of Class B common stock, (iii) promissory notes consisting of (A) a $10.0$0.6 million, note payable 5 years and 6 months after the closing, which shall accrue interest quarterly in arrears at a rate of 6.75% per annum, (B) a $10.0$0.3 million, note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $40.0 millionrespectively, for the year endingyears ended December 31, 2018, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the first anniversary of the closing,2020, 2019 and (C) a $10.0 million note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2019, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the second anniversary of the closing; provided that such note shall also become payable if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2018.
In connection with the VIP Acquisition, the Company amended and restated their existing revolving credit agreement (the “A&R Credit Agreement”) on January 17, 2018. The A&R Credit Agreement provides for a secured revolving credit facility of $50 million in the aggregate, at either LIBOR or Base (prime) interest rates plus an applicable margin.
All obligations under the A&R Credit Agreement are unconditionally guaranteed by HoldCo and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the A&R Credit Agreement, subject to certain exceptions.
Also in connection with the closing of the VIP Acquisition, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”). The Term Loan Credit Agreement provides for a secured term loan credit facility of $75 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin.
In connection with execution of the Unit Purchase Agreement to acquire VIP, options to purchase an aggregate 800,000 shares of Class A Common Stock of the Company (the “Inducement Awards”) were issued to 30 employees hired in connection with the transaction as employment inducement awards. The awards vest quarterly on each of the first four anniversaries of the closing date of the acquisition, generally subject to continued employment through each vesting date.
ItemItem 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None. ItemItem 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information that we are required to disclose in reports that we file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting We are responsible for establishing and maintaining internal control over Financing Reportingfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include a reportOur management, under the supervision and with the participation of management’sour Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, regardingour management used the Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
The Company’s registered independent accounting firm, KPMG LLP, has audited the effectiveness of our internal controls over financial reporting as of December 31, 2020, as stated in their report which appears on the next page. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended, December 31, 2020 that has materially affected, or an attestation reportis reasonably likely to materially affect, our internal control over financial reporting. | | 
| | | KPMG LLP Suite 600 205 North 10th Street Boise, ID 83702-5798 |
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on Internal Control Over Financial Reporting We have audited PetIQ, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, consolidated stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s registeredmanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm dueregistered with the PCAOB and are required to a transition period established bybe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SECSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for newly public companies.our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Boise, Idaho
February 26, 2021 Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation: | ·
● | | statements regarding our strategies, results of operations or liquidity; |
| ·
● | | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
| ·
● | | statements of management’s goals and objectives; and |
| ·
● | | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy and our ability to successfully grow our business through acquisitions; our ability to integrate, manage and expand VIP’s business; and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others in our industry; 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’ section of this annual report on Form 10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements. Item 9B - Other Information None. PART III Item 10 – Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 11 – Executive Compensation The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 13 – Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 14 – Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
PART IV Item 15. Exhibits, Financial Statement Schedules See "Index to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notesnotes. | | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Unit Purchase Agreement dated January 5, 2018 | 8-K | 001-38163 | 2.1 | 8-Jan-18 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 11-Jul-17 | 3.2 | Bylaws of PetIQ, Inc. | S-1/A | 333-218955 | 3.2 | 6-Jul-17 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 17-Jul-17 | 10.1 | Registration Rights Agreement | S-1/A | 333-218955 | 10.2 | 6-Jul-17 | 10.2 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 23-Jan-18 | 10.3 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 23-Jan-18 | 10.4 | Term Loan Credit Agreement, dated January 17, 2018 by and among PetIQ, LLC, Ares Capital Corporation and the other Lenders party there, and Ares Capital Corporation, as Administrative Agent | 8-K | 001-38163 | 10.3 | 23-Jan-18 | 10.5 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 6-Jul-17 | 10.6* | Employment Agreement, dated as of January 17, 2018, by and between PetIQ, LLC and Will Santana | 8-K | 001-38163 | 10.4 | 23-Jan-18 | 10.7 | Form of Contribution Agreement | S-1/A | 333-218955 | 10.5 | 6-Jul-17 | 10.8 | Form of Preference Note | S-1/A | 333-218955 | 10.6 | 6-Jul-17 | 10.9 | Amended and Restated Credit Agreement, dated March 24, 2016, among PetIQ, LLC, the other credit parties thereto, Crystal Financial LLC and the other lenders party thereto | DRS/A | | 10.14 | 13-May-16 | 10.10 | Form of Recapitalization Agreement | S-1/A | 333-218955 | 10.7 | 6-Jul-17 | 10.11* | Employment and Non-Competition Agreement between True Science Holdings, LLC, and Scott Adcock | DRS/A | | 10.8 | 13-May-16 | 10.12* | Chief Financial Officer Employment Offer | DRS/A | | 10.10 | 13-May-16 | 10.13* | PetIQ Inc. 2017 Omnibus Incentive Plan | S-1/A | 333-218955 | 10.11 | 6-Jul-17 |
| | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Purchase and Sale Agreement, dated May 8, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc and PetIQ, Inc. | 8-K | 001-38163 | 2.1 | 5/8/2019 | 2.2 | Amended and Restated Asset Purchase Agreement, dated June 21, 2020, by and between Elanco US Inc., PetIQ, LLC and PetIQ, Inc. | 10-Q | 001-38163 | 2.1 | 8/10/2020 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 7/11/2017 | 3.2 | Amended and Restated Bylaws of PetIQ, Inc. | 8-K | 001-38163 | 3.1 | 2/23/2021 | 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | 8-K | 001-38163 | 3.1 | 6/1/2018 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 7/17/2017 | 4.2 | Registration Rights Agreement, dated July 20, 2017, among PetIQ, Inc. the Continuing LLC owners and the C-Corp LLC Parents | S-3 | 333-227186 | 4.1 | 9/4/2018 | 4.3 | Registration Rights Agreement, dated January 17, 2018, between PetIQ, Inc. and each VIP Petcare Owner | S-3 | 333-227186 | 4.2 | 9/4/2018 | 4.4 | Description of PetIQ, Inc.’s Securities | 10-K | 001-38163 | 4.4 | 3/11/2020 | 4.5 | Indenture, dated May 14, 2020, among PetIQ, Inc. and Wells Fargo, National Association, as trustee | 8-K | 001-38163 | 4.1 | 5/20/2020 | 10.1 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 7/6/2017 | 10.2 | First Amendment to PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | 10-K | 001-38163 | 10.1 | 3/12/2019 | 10.3 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party thereto, East West Bank and the other lenders party thereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 1/23/2018 | 10.4 | First Amendment and Joinder, dated as of August 9, 2018, to Credit Agreement dated as January 17, 2018 | 10-Q | 001-38163 | 10.1 | 8/14/2018 | 10.5 | Second Amendment to Amended and Restated Credit Agreement, dated March 25, 2019, by and among PetIQ, LLC, the other credit parties party thereto, the lenders party thereto and East West Bank | 10-Q | 001-38163 | 10.1 | 8/8/2019 | 10.6 | Third Amendment to Amended and Restated Revolving Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 7/9/2019 | 10.7 | Third Amendment to Amended and Restated Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 10-Q | 001-38163 | 10.2 | 8/10/2020 | 10.8 | Fourth Amendment to Amended and Restated Credit Agreement, dated May 14, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 5/14/2020 |
10.9 | Sixth Amendment to Amended and Restated Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 8/3/2020 | 10.10 | Amended and Restructured Term Loan Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.3 | 7/9/2019 | 10.11 | Second Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.1 | 5/14/2020 | 10.12 | Third Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.2 | 8/10/2020 | 10.13 | Fourth Amendment to Term Loan Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.1 | 8/3/2020 | 10.14 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 1/23/2018 | 10.15* | PetIQ Inc. Amended and Restated 2017 Omnibus Incentive Plan | 8-K | 333-218955 | 10.1 | 5/31/2019 | 10.16* | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 7/20/2017 | 10.17* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | 10-Q | 001-38163 | 10.2 | 11/14/2018 | 10.18* | Amended and Restated Employment and Non-Competition Agreement between PetIQ, LLC and McCord Christensen | 10-Q | 001-38163 | 10.1 | 5/9/2019 | 10.19* | Employment and Non-Competition Agreement, dated September 17, 2018, between PetIQ, LLC and Susan Sholtis | 8-K | 001-38163 | 10.1 | 9/20/2018 | 10.20* | Employment and Non-Competition Agreement, dated as of May 28, 2019, between PetIQ, LLC and Michael Smith | 8-K | 001-38163 | 10.5 | 7/9/2019 | 10.21* | Employment and Non-Competition Agreement between PetIQ, LLC and John Newland | 10-Q | 001-38163 | 10.2 | 5/9/2019 | 10.22* | Employment and Non-Competition Agreement between PetIQ, LLC and R. Michael Herrman | 10-Q | 001-38163 | 10.3 | 5/9/2019 | 10.23* | PetIQ, Inc. 2017 Omnibus Incentive Plan Restricted Stock Unit Agreement | 10-Q | 001-38163 | 10.3 | 11/14/2018 | 10.24* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors | 10-Q | 333-218955 | 10.4 | 11/14/2018 | 10.25* | PetIQ, Inc. Amended and Restated 2018 Inducement and Retention Stock Plan for CVC Employees | S-8 | 333-223635 | 4.3 | 3/13/2018 | 10.26 | First Amendment to Purchase and Sale Agreement, dated July 7, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc, and PetIQ, Inc. | 8-K | 001-38163 | 10.1 | 7/9/2019 | 10.27 | Transition Services Agreement, dated July 8, 2019, by and between PetIQ, LLC and L. Perrigo Company | 8-K | 001-38163 | 10.4 | 7/9/2019 | 10.28 | Form of Base Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.1 | 5/20/2020 | 10.29 | Form of Additional Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.2 | 5/20/2020 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
10.14* | PetIQ Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | S-1/A | 333-218955 | 10.12 | 6-Jul-17 | 10.15 | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 20-Jul-17 | 10.16 | Credit Agreement, Dated as of December 21, 2016 among PetIQ, LLC, as a Borrower and as Borrower Representative, The Other Credit Parties Part Hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | S-1 | 333-218955 | 10.14 | 23-Jun-17 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 32.1** | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 32.2** | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 101.INS | XBRL Instance Document | | | | | 101.SCH | XBRL Schema Documents | | | | | 101.CAL | XBRL Calculation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | | 101.LAB | XBRL Labels Linkbase Document | | | | | 101.PRE | XBRL Presentation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | |
* Indicates management contract or compensatory plan or arrangement. ** Filed herewith Item 16. Form 10-K Summary None. 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.
| | | March 13, 2018
| /s/ John Newland
| | John Newland
| | Chief Financial Officer
|
POWER OF ATTORNEY KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint McCord Christensen and John Newland, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 13, 2018.February 26, 2021. | | | SIGNATURE | | TITLE | | | | /s/ McCord Christensen | | Chief Executive Officer, President (principal executive officer) | McCord Christensen | | Officer and Chairman of the Board | | | | /s/ John Newland | | Chief Financial Officer (principal financial and accounting officer) | John Newland | | Officer | | | | /s/ Mark First | | Director | Mark First | | | | | | /s/ James Clarke
| | Director
| James Clarke
| | | | | | /s/ Ronald Kennedy | | Director | Ronald Kennedy | | | | | | /s/ Gary MichaelScott Huff | | Director | Gary MichaelScott Huff
| | | | | | /s/ Will SantanaLarry Bird | | Director | Will SantanaLarry Bird
| | Executive Vice President
| | | |
s in 000's | | | | Total | | | 2018 | | | 2019-2020 | | | 2021-2022 | | | Thereafter | | | Total | | | 2021 | | | 2022-2023 | | | 2024-2025 | | | Thereafter | Long-term debt (1) | | | $ | 17,227 | | $ | 44 | | $ | 15,420 | | $ | 102 | | $ | 1,661 | | | $ | 419,757 | | $ | 6,219 | | $ | 38,731 | | $ | 8,316 | | $ | 366,491 | Interest on debt | | | | 2,383 | | | 930 | | | 996 | | | 152 | | | 305 | | | | 86,381 | | | 21,319 | | | 41,223 | | | 21,348 | | | 2,491 | Operating lease obligations | | | | 3,822 | | | 2,053 | | | 1,290 | | | 352 | | | 127 | | | | 23,243 | | | 5,861 | | | 10,380 | | | 5,637 | | | 1,365 | Capital lease obligations | | | | 511 | | | 113 | | | 206 | | | 165 | | | 27 | | Finance lease obligations | | | | | 5,271 | | | 1,757 | | | 3,164 | | | 350 | | | — | Product purchase obligations | | | | 16,377 | | | 16,377 | | | | | | | | | | | | | 67,057 | | | 49,245 | | | 7,662 | | | 7,964 | | | 2,186 | Deferred acquisition liability | | | | 1,575 | | | 1,575 | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | R&D arrangement | | | | | 20,100 | | | 6,000 | | | 14,100 | | | — | | | — | Total contractual obligations | | | $ | 41,895 | | $ | 21,092 | | $ | 17,912 | | $ | 771 | | $ | 2,120 | | | $ | 621,809 | | $ | 90,401 | | $ | 115,260 | | $ | 43,615 | | $ | 372,533 |
| (1)
| | In connection with the VIP acquisition, the Company borrowed $75 million on a term loan, maturing in five years. Future principal and interest payments on the term loan are excluded from the table above. See Note 16 in the accompanying consolidated financial statements for more information.
|
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in the notes to our financial statements appearing in this report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial resultsresults. 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 shippedproduct control is transferred to the customer, which is generally upon delivery or shipment of goods, depending on terms with a customer. For customers with FreeMany customer contracts include some form of variable consideration such as discounts, rebates, and sales returns and allowance. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on Board (“FOB”) destination terms,the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. Revenue for services is recognized over time as the service is delivered, typically over a provisionsingle day. Payment is recorded to exclude shipments determined to be in-transit to these customerstypically rendered at the endtime of service. Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the 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 goodscost of in-store product displays, feature pricing in retailers' advertisements and other items. The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties. Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and in-store displays. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as other current assets or accounts payable in other accrued expenses.the Consolidated Balance Sheet. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Inventories Inventories are stated at the lower of cost or net realizable value. Approximate costs areCost is determined on the first-in first-out (“FIFO”) basis.method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Purchase Accounting The purchase method of accounting requires companies to assign values to assets and liabilities acquired based upon their fair values at the acquisition date. In most instances, there are not readily defined or listed market prices for individual assets and liabilities acquired in connection with a business, including intangible assets. The determination of fair value for assets and liabilities in many instances requires a high degree of estimation. The valuation of intangible assets, in particular, is very subjective. We generally obtain third-party valuations to assist us in estimating fair values. The use of different valuation techniques and assumptions could change the amounts and useful lives assigned to the assets and liabilities acquired and the related amortization expense. Accounting for Income Taxes The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company’s annual tax rate and evaluate its tax positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are subject to challenge, and the Company may not be successful in defending these challenges. Estimation is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities. Related to the IPO and recapitalization transactions, the calculation and allocation of the original basis adjustments used in determining the initial deferred tax assets and liabilities requires management judgement. Deferred income taxes are recognized for the expected future tax consequences attributable toarise from temporary differences between the carrying amounttax basis of the existing tax assets and liabilities and their respective tax basis. Deferredreported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, are measured using enactedprojected future taxable income, tax-planning strategies, and results of recent operations. In the event that it is determined that an asset is not more likely than not to be realized, a valuation allowance is recorded against the asset. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates expectedand future taxable income levels. In the event the Company were to determine that it would not be appliedable to realize all or a portion of its deferred tax assets in the years in which temporary differences are expectedfuture, the unrealizable amount would be charged to be recovered or settled. The principal items giving rise to temporary differences are certain basis differences resulting from IPO and the recapitalization transactions.
In addition, on December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including the requirement for the Company to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The Tax Act also established new tax laws that will affect 2018, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35 to 21 percent; (ii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iii) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (iii) creating a new limitation on deductible interest expense; and (iv) allowing all net operating losses generated in tax years after December 31, 2017, to be carried forward indefinitely.
The Tax Act requires complex computations to be performed, significant judgments to be made in interpretation of the provisions of the Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered, with a possible retroactive effect, which is different from our interpretation. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which that determination is made. Conversely, if the adjustments are made.
In certain cases, tax law requires itemsCompany were to determine that it would be included in the Company’s income tax returns at a different time than when these items are recognized on the consolidated financial statements or at a different amount than that which is recognized on the consolidated financial statements. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, while other differences are temporary and will reverse over time, such as depreciation expense. These differences that will reverse over time are recorded asable to realize deferred tax assets and liabilities onin the consolidated balance sheets. Valuation allowances are established againstfuture in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period that the determination was made. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to the extent thatdetermine whether it is determinedmore likely than not that some portion or all of the deferred income tax assets will not be realized. The Company believes it is more likely than not that the Companybenefit from the recorded deferred tax assets will not be realized and has recorded a valuation allowance.
In future periods, if we conclude we have insufficientfuture taxable income sufficient to fully realizerecognize the deferred tax asset.assets, we may reduce or eliminate the valuation allowance. ItemItem 7A – Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes. Interest Rate Risk We are exposed to changes in interest rates because the indebtedness incurred under our NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of December 31, 2017,2020, we had variable rate debt of approximately $15.3$232.3 million under our New Credit Agreement.Revolver and Term Loan. An increase of 1% would have increased our interest expense for the year ended December 31, 20172020 by approximately $0.2$2.6 million. ItemItem 8 – Financial Statements and Supplementary Data
Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of PetIQ, Inc. and subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive income (loss), members’/loss, stockholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Update No. 2016-02 Leases (Topic 842), and related amendments. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
46 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of deferred tax assets recorded for exchange transactions As discussed in Note 7 to the consolidated financial statements, as a result of the IPO and related reorganization transactions completed in July 2017, the Company held an economic interest of approximately 62% in PetIQ Holdings, LLC (“Holdco”) and consolidates the financial position and results of Holdco. The Company is the sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $53.1 million of deferred tax assets associated with these exchanges. We identified the evaluation of deferred tax assets recorded for exchange transactions as a critical audit matter. Complex auditor judgment, including specialized skills and knowledge, was required to evaluate the calculation of the deferred tax assets generated in exchange transactions as a result of the Company’s tax basis in the interest in the Holdco partnership acquired from the LLC Owners. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the deferred tax calculation. This included the internal control over the Company’s calculation of the deferred tax assets generated in exchange transactions. We involved tax professionals with specialized skills and knowledge who assisted in assessing the Company’s application of the relevant tax law for the exchanges, including: | ● | evaluating the Company’s application of income tax law related to the tax basis in the interest acquired from the LLC Owners in exchange transactions |
| ● | performing an independent calculation of the tax basis in the interest acquired from the LLC Owners in exchange transactions and comparing it to the Company’s calculation |
Fair value estimate of convertible notes As discussed in Notes 1 and 5 to the consolidated financial statements, the Company issued $143.8 million in aggregate principal amount of Convertible Senior Notes due 2026 (the Notes). In accounting for the Notes, the Company separated the Notes into liability and equity components whose carrying values were calculated using a fair value estimate of similar debt instruments without an associated conversion feature. We identified the evaluation of the fair value estimate of the Notes as a critical audit matter. A high degree of auditor judgment was required in assessing the interest rate that would be available to the Company for a similar debt instrument that does not have an associated conversion feature. Additionally, minor changes to the interest rate could have a significant effect on the amounts allocated to the liability and equity components. The audit effort associated with the evaluation of the fair value estimate required specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls over the interest rate used in the fair value measurement of the Notes. We involved valuation professionals with specialized skills and knowledge who assisted in the following: | ● | performing an independent analysis of interest rate yields for similar debt instruments that do not have an associated conversion feature using publicly available market data. |
| ● | developing an independent estimate of the fair value of the Notes using an independent interest rate yield and information from the debt agreement, and comparing it to the Company’s estimate. |
We have served as the Company’s auditor since 2014. Boise, Idaho
March 13, 2018February 26, 2021 PetIQ, Inc. Consolidated Balance Sheets ($’s inIn 000’s except for per share amounts) | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | Current assets | | | | | | | | Cash and cash equivalents | | $ | 33,456 | | $ | 27,272 | | Accounts receivable, net | | | 102,755 | | | 71,377 | | Inventories | | | 97,773 | | | 79,703 | | Other current assets | | | 8,312 | | | 7,071 | | Total current assets | | | 242,296 | | | 185,423 | | Property, plant and equipment, net | | | 63,146 | | | 52,525 | | Operating lease right of use assets | | | 20,122 | | | 20,785 | | Deferred tax assets | | | — | | | 59,780 | | Other non-current assets | | | 1,870 | | | 3,214 | | Intangible assets, net | | | 213,000 | | | 119,956 | | Goodwill | | | 231,158 | | | 231,045 | | Total assets | | $ | 771,592 | | $ | 672,728 | | Liabilities and equity | | | | | | | | Current liabilities | | | | | | | | Accounts payable | | $ | 68,131 | | $ | 51,538 | | Accrued wages payable | | | 10,540 | | | 9,082 | | Accrued interest payable | | | 903 | | | 83 | | Other accrued expenses | | | 8,815 | | | 3,871 | | Current portion of operating leases | | | 4,915 | | | 4,619 | | Current portion of long-term debt and finance leases | | | 7,763 | | | 3,821 | | Total current liabilities | | | 101,067 | | | 73,014 | | Operating leases, less current installments | | | 15,789 | | | 16,580 | | Long-term debt, less current installments | | | 355,979 | | | 251,376 | | Finance leases, less current installments | | | 3,338 | | | 3,331 | | Other non-current liabilities | | | 1,397 | | | 117 | | Total non-current liabilities | | | 376,503 | | | 271,404 | | Commitments and contingencies (Note 13) | | | | | | | | Equity | | | | | | | | Additional paid-in capital | | | 356,442 | | | 300,120 | | Class A common stock, par value $0.001 per share, 125,000 shares authorized; 25,711 and 23,554 shares issued and outstanding, respectively | | | 26 | | | 23 | | Class B common stock, par value $0.001 per share, 100,000 shares authorized; 3,040 and 4,752 shares issued and outstanding, respectively | | | 3 | | | 5 | | Accumulated deficit | | | (93,377) | | | (15,903) | | Accumulated other comprehensive loss | | | (686) | | | (1,131) | | Total stockholders' equity | | | 262,408 | | | 283,114 | | Non-controlling interest | | | 31,614 | | | 45,196 | | Total equity | | | 294,022 | | | 328,310 | | Total liabilities and equity | | $ | 771,592 | | $ | 672,728 | |
See accompanying notes to the consolidated financialstatements. | | | | | | | | | December 31, 2017 | | December 31, 2016 | Current assets | | | | | | | Cash and cash equivalents | | $ | 37,896 | | $ | 767 | Accounts receivable, net of allowance for doubtful accounts | | | 21,759 | | | 17,195 | Inventories | | | 44,056 | | | 34,232 | Supplier prepayments | | | 3,173 | | | 2,985 | Other current assets | | | 1,991 | | | 1,358 | Total current assets | | | 108,875 | | | 56,537 | Property, plant and equipment, net | | | 15,000 | | | 13,044 | Restricted deposits | | | 200 | | | 250 | Deferred tax assets | | | 5,994 | | | — | Other non-current assets | | | 2,446 | | | 2,826 | Intangible assets, net of accumulated amortization | | | 3,266 | | | 4,054 | Goodwill | | | 5,064 | | | 4,619 | Total assets | | $ | 140,845 | | $ | 81,330 | Liabilities and member's equity | | | | | | | Current liabilities | | | | | | | Accounts payable | | $ | 14,234 | | $ | 9,333 | Accrued wages payable | | | 1,811 | | | 1,100 | Accrued interest payable | | | 115 | | | 44 | Other accrued expenses | | | 305 | | | 27 | Current portion of deferred acquisition liability | | | 1,575 | | | 250 | Current portion of long-term debt and capital leases | | | 151 | | | 2,321 | Total current liabilities | | | 18,191 | | | 13,075 | Non-current liabilities | | | | | | | Long-term debt | | | 17,183 | | | 25,158 | Obligations under capital leases, less current installments | | | 389 | | | 434 | Deferred acquisition liability | | | — | | | 1,303 | Other non-current liabilities | | | 238 | | | 378 | Total non-current liabilities | | | 17,810 | | | 27,273 | Commitments and contingencies | | | | | | | Equity | | | | | | | Members equity | | | — | | | 42,941 | Additional Paid-in capital | | | 70,873 | | | — | Class A common stock, par value $.001 per share, 125,000,000 shares authorized, 13,222,583 shares issued and outstanding December 31, 2017 | | | 13 | | | — | Class B common stock, par value $.001 per share, 8,401,521 shares authorized, 8,268,188 shares issued and outstanding at December 31, 2017 | | | 8 | | | — | Accumulated deficit | | | (3,493) | | | — | Accumulated other comprehensive loss | | | (687) | | | (1,940) | Total stockholders' / member's equity | | | 66,714 | | | 41,001 | Non-controlling interest | | | 38,130 | | | (19) | Total equity | | | 104,844 | | | 40,982 | Total liabilities and equity | | $ | 140,845 | | $ | 81,330 |
48 PetIQ, Inc. Consolidated Statements of Operations (In 000’s except for per share amounts) | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | | | | | | | | | | | Product sales | | $ | 725,705 | | $ | 617,118 | | $ | 450,229 | Services revenue | | | 54,346 | | | 92,313 | | | 78,385 | Total net sales | | | 780,051 | | | 709,431 | | | 528,614 | Cost of products sold | | | 584,401 | | | 530,031 | | | 383,501 | Cost of services | | | 60,462 | | | 72,017 | | | 61,825 | Total cost of sales | | | 644,863 | | | 602,048 | | | 445,326 | Gross profit | | | 135,188 | | | 107,383 | | | 83,288 | Operating expenses | | | | | | | | | | General and administrative expenses | | | 138,375 | | | 103,200 | | | 72,260 | Contingent note revaluation loss | | | — | | | 7,320 | | | 3,280 | Operating (loss) income | | | (3,187) | | | (3,137) | | | 7,748 | Interest expense, net | | | (26,299) | | | (14,495) | | | (8,022) | Foreign currency gain (loss), net | | | 109 | | | (151) | | | 45 | Other income (expense), net | | | 571 | | | 172 | | | (345) | Total other expense, net | | | (25,619) | | | (14,474) | | | (8,322) | Pretax net (loss) income | | | (28,806) | | | (17,611) | | | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | | (81,022) | | | (14,302) | | | 87 | Net (loss) income attributable to non-controlling interest | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. | | $ | (77,474) | | $ | (11,453) | | $ | (782) | | | | | | | | | | | Net loss per share attributable to PetIQ, Inc. Class A common stock | | | | | | | | | | Basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Weighted average shares of Class A common stock outstanding | | | | | | | | | | Basic | | | 24,629 | | | 22,652 | | | 17,216 | Diluted | | | 24,629 | | | 22,652 | | | 17,216 |
See accompanying notes to the consolidated financialstatements. PetIQ, Inc. Consolidated Statements of Comprehensive Loss ($’s in 000’s) | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Foreign currency translation adjustment | | | 363 | | | 366 | | | (613) | Comprehensive (loss) income | | | (80,659) | | | (13,936) | | | (526) | Comprehensive (loss) income attributable to non-controlling interest | | | (3,525) | | | (2,777) | | | 697 | Comprehensive loss attributable to PetIQ | | $ | (77,134) | | $ | (11,159) | | $ | (1,223) |
See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc. Consolidated Statements of OperationsCash Flows ($($’s in 000’s, except for per share amounts)000’s)
| | | | | | | | | | | | | For the year ended December 31, | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | | Net sales | | $ | 266,687 | | $ | 200,162 | | $ | 205,687 | | Cost of sales | | | 215,493 | | | 167,615 | | | 166,529 | | Gross profit | | | 51,194 | | | 32,547 | | | 39,158 | | Operating expenses | | | | | | | | | | | General and administrative expenses | | | 37,905 | | | 31,845 | | | 35,588 | | Operating income | | | 13,289 | | | 702 | | | 3,570 | | Interest expense, net | | | (1,563) | | | (3,058) | | | (3,545) | | Foreign currency gain (loss), net | | | (140) | | | (24) | | | 75 | | Loss on debt extinguishment | | | — | | | (1,681) | | | (1,449) | | Other income, net | | | 201 | | | 666 | | | — | | Total other expense, net | | | (1,502) | | | (4,097) | | | (4,919) | | Pretax net income (loss) | | | 11,787 | | | (3,395) | | | (1,349) | | Income tax expense | | | (3,970) | | | — | | | — | | Net income (loss) | | | 7,817 | | | (3,395) | | | (1,349) | | Net income (loss) attributable to non-controlling interest | | | 11,310 | | | (3,395) | | | (1,349) | | Net loss attributable to PetIQ, Inc. | | $ | (3,493) | | $ | — | | $ | — | | | | | | | | | | | | | Net loss per share attributable to PetIQ, Inc. Class A common stock(1) | | | | | | | | | | | Basic | | $ | (0.26) | | | — | | $ | - | | Diluted | | $ | (0.26) | | | — | | $ | - | | Weighted Average shares of Class A common stock outstanding | | | | | | | | | | | Basic | | | 13,222,583 | | | — | | | - | | Diluted | | | 13,222,583 | | | — | | | - | |
| (1)
| | Basic and Diluted earnings per share is applicable only for periods after the Company’s IPO. See Note 7 – Earnings per share.
|
| | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Cash flows from operating activities | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | | | | | | Depreciation and amortization of intangible assets and loan fees | | | 30,975 | | | 16,509 | | | 12,467 | Termination of supply agreement | | | 7,801 | | | — | | | 16 | Gain on disposition of property, plant, and equipment | | | (238) | | | (189) | | | (90) | Stock based compensation expense | | | 9,170 | | | 7,355 | | | 3,812 | Deferred tax adjustment | | | 51,511 | | | (3,458) | | | (843) | Contingent note revaluation | | | — | | | 7,320 | | | 3,280 | Other non-cash activity | | | 164 | | | 405 | | | (334) | Changes in assets and liabilities | | | | | | | | | | Accounts receivable | | | (31,652) | | | (14,123) | | | (14,209) | Inventories | | | (17,846) | | | 30,448 | | | (36,610) | Other assets | | | 556 | | | (1,619) | | | 1,423 | Accounts payable | | | 17,435 | | | (7,595) | | | 15,701 | Accrued wages payable | | | 1,424 | | | 2,800 | | | 1,979 | Other accrued expenses | | | 7,121 | | | (2,718) | | | 908 | Net cash (used in) provided by operating activities | | | (4,601) | | | 20,833 | | | (12,413) | Cash flows from investing activities | | | | | | | | | | Proceeds from disposition of property, plant, and equipment | | | 442 | | | 340 | | | 229 | Purchase of property, plant, and equipment | | | (22,392) | | | (10,276) | | | (7,178) | Purchase of Capstar and related intangibles | | | (96,072) | | | — | | | — | Business acquisitions (net of cash acquired) | | | — | | | (185,090) | | | (93,052) | Net cash used in investing activities | | | (118,022) | | | (195,026) | | | (100,001) | Cash flows from financing activities | | | | | | | | | | Proceeds from issuance of convertible notes - liability component | | | 90,465 | | | — | | | — | Proceeds from issuance of convertible notes - equity component | | | 53,285 | | | — | | | — | Payment for Capped Call options | | | (14,821) | | | — | | | — | Proceeds from issuance of long-term debt | | | 837,675 | | | 818,387 | | | 538,028 | Principal payments on long-term debt | | | (838,073) | | | (676,509) | | | (466,912) | Payment of financing fees on Convertible Notes | | | (5,884) | | | — | | | — | Proceeds from public offering of class A common stock, net of underwriting discounts and offering costs | | | — | | | — | | | 73,914 | Tax distributions to LLC Owners | | | (47) | | | (1,686) | | | (1,485) | Principal payments on finance lease obligations | | | (1,965) | | | (1,547) | | | (1,254) | Payment of deferred financing fees and debt discount | | | (550) | | | (5,790) | | | (2,750) | Tax withholding payments on Restricted Stock Units | | | (595) | | | (114) | | | — | Exercise of options to purchase class A common stock | | | 9,274 | | | 2,318 | | | 1,429 | Net cash provided by financing activities | | | 128,764 | | | 135,059 | | | 140,970 | Net change in cash and cash equivalents | | | 6,141 | | | (39,134) | | | 28,556 | Effect of exchange rate changes on cash and cash equivalents | | | 43 | | | 46 | | | (92) | Cash and cash equivalents, beginning of period | | | 27,272 | | | 66,360 | | | 37,896 | Cash and cash equivalents, end of period | | $ | 33,456 | | $ | 27,272 | | $ | 66,360 |
See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc. Consolidated Statements of Comprehensive Income (Loss)Cash Flows ($($’s in 000’s)
| | | | | | | | | | | | For the Year Ended December 31, | Supplemental cash flow information | | 2020 | | 2019 | | 2018 | Interest paid | | $ | 19,402 | | $ | 13,632 | | $ | 7,220 | Net change in property, plant, and equipment acquired through accounts payable | | | 279 | | | (1,814) | | | 25 | Finance lease additions | | | 2,019 | | | (3,006) | | | 656 | Deferred tax liability created by convertible debt issuance | | | (8,197) | | | — | | | — | Net change of deferred tax asset from step-up in basis | | | — | | | 12,381 | | | 36,882 | Income taxes paid, net of refunds | | | 130 | | | 249 | | | 640 | Accrued tax distribution | | | (434) | | | 786 | | | 2,097 | Issuance of note for termination, settlement, and asset acquisition agreement | | | 17,487 | | | — | | | — | Purchase of intangible assets from note issuance | | | (9,686) | | | — | | | — | Non cash consideration - Issuance of Contingent Notes | | | — | | | — | | | 6,900 | Non cash consideration - Issuance of Guarantee Notes | | | — | | | — | | | 10,000 | Non cash consideration - Issuance of Class B common stock and LLC Interests | | | — | | | — | | | 103,004 | | | | | | | | | | | See accompanying notes to the consolidated financial statements. |
| | | | | | | | | | | | | | For the year ended December 31, | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | Net income (loss) | | $ | 7,817 | | $ | (3,395) | | $ | (1,349) | Other comprehensive income (loss), net: | | | | | | | | | | Foreign currency translation adjustment | | | 823 | | | (1,898) | | | (515) | Total other comprehensive income/(loss) | | | 8,640 | | | (5,293) | | | (1,864) | Comprehensive income (loss) attributable to non-controlling interest | | | 11,943 | | | (5,293) | | | (1,864) | Comprehensive loss attributable to PetIQ, Inc. | | $ | (3,303) | | $ | — | | $ | — |
54 PetIQ, Inc. Consolidated Statements of Stockholders’ Equity (In 000’s) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | Additional | | | | | | | | Accumulated | | Comprehensive | | | | | | | | | | Paid-in | | Non-controlling | | Total | | | Deficit | | Loss | | Class A Common | | Class B Common | | Capital | | Interest | | Equity | | | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | Balance - January 1, 2018 | | $ | (3,493) | | $ | (687) | | | 13,223 | | $ | 13 | | | 8,268 | | $ | 8 | | $ | 70,873 | | $ | 38,130 | | $ | 104,844 | ASC 606 adoption, net of tax | | | (175) | | | — | | | — | | | — | | | — | | | — | | | — | | | (110) | | | (285) | Issuance of equity for business combination | | | — | | | 128 | | | — | | | — | | | 4,600 | | | 5 | | | 43,075 | | | 59,796 | | | 103,004 | Exchange of LLC Interests held by LLC Owners | | | — | | | (290) | | | 6,321 | | | 6 | | | (6,321) | | | (6) | | | 47,458 | | | (47,168) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 36,882 | | | — | | | 36,882 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,097) | | | (2,097) | Other comprehensive income | | | — | | | (441) | | | — | | | — | | | — | | | — | | | — | | | (172) | | | (613) | Public offering | | | — | | | — | | | 2,000 | | | 2 | | | — | | | — | | | 73,912 | | | — | | | 73,914 | Equity shift as a result of the public offering | | | — | | | (26) | | | — | | | — | | | — | | | — | | | (13,914) | | | 13,940 | | | — | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,504 | | | 1,308 | | | 3,812 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 76 | | | — | | | — | | | — | | | 1,429 | | | — | | | 1,429 | Net (loss) income | | | (782) | | | — | | | — | | | — | | | — | | | — | | | — | | | 869 | | | 87 | Balance - December 31, 2018 | | $ | (4,450) | | $ | (1,316) | | | 21,620 | | $ | 22 | | | 6,547 | | $ | 7 | | $ | 262,219 | | $ | 64,496 | | $ | 320,977 | Exchange of LLC Interests held by LLC Owners | | | — | | | (109) | | | 1,794 | | | 1 | | | (1,794) | | | (1) | | | 17,299 | | | (17,190) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,381 | | | — | | | 12,381 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (786) | | | (786) | Other comprehensive income | | | — | | | 294 | | | — | | | — | | | — | | | — | | | — | | | 72 | | | 366 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,902 | | | 1,453 | | | 7,355 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 119 | | | — | | | — | | | — | | | 2,318 | | | — | | | 2,318 | Issuance of stock vesting of RSU's | | | — | | | — | | | 21 | | | — | | | — | | | — | | | — | | | — | | | — | Net (loss) | | | (11,453) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,849) | | | (14,302) | Balance - December 31, 2019 | | $ | (15,903) | | $ | (1,131) | | | 23,554 | | $ | 23 | | | 4,752 | | $ | 5 | | $ | 300,120 | | $ | 45,196 | | $ | 328,310 | Exchange of LLC Interests held by LLC Owners | | | — | | | 105 | | | 1,712 | | | 2 | | | (1,712) | | | (2) | | | 15,461 | | | (15,566) | | | — | Equity component of Convertible Notes, net of offering costs and tax | | | — | | | — | | | — | | | — | | | — | | | — | | | 37,064 | | | 5,843 | | | 42,907 | Payment for capped call share options | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,803) | | | (2,018) | | | (14,821) | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 434 | | | 434 | Other comprehensive income | | | — | | | 340 | | | — | | | — | | | — | | | — | | | — | | | 23 | | | 363 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,921 | | | 1,249 | | | 9,170 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 395 | | | — | | | — | | | — | | | 9,274 | | | — | | | 9,274 | Issuance of stock vesting of RSU's, net of tax withholdings | | | — | | | — | | | 50 | | | — | | | — | | | — | | | (595) | | | — | | | (595) | Net (loss) | | | (77,474) | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,548) | | | (81,022) | Balance - December 31, 2020 | | $ | (93,377) | | $ | (686) | | | 25,711 | | $ | 26 | | | 3,040 | | $ | 3 | | $ | 356,442 | | $ | 31,614 | | $ | 294,022 |
Note that certain figures shown in the table above may not recalculate due to rounding. See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | | | | | For the year ended December 31, | | | 2017 | | 2016 | | 2015 | | Cash flows from operating activities | | | | | | | | | | | Net income (loss) | | $ | 7,817 | | $ | (3,395) | | $ | (1,349) | | Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | | | | | | | | Depreciation and amortization of intangible assets and loan fees | | | 3,614 | | | 4,074 | | | 3,140 | | Loss on disposition of property | | | 20 | | | 42 | | | 28 | | Foreign exchange (gain) loss on liabilities | | | 228 | | | (28) | | | (300) | | Stock based compensation expense | | | 447 | | | — | | | — | | Deferred tax adjustment | | | 3,690 | | | — | | | — | | Warranty settlement gain | | | — | | | (645) | | | 1,449 | | Changes in assets and liabilities | | | | | | | | | | | Accounts receivable | | | (4,313) | | | (2,216) | | | (1,907) | | Inventories | | | (9,718) | | | (542) | | | (10,399) | | Prepaid expenses and other assets | | | (721) | | | 2,037 | | | (3,789) | | Accounts payable | | | 4,152 | | | 104 | | | 6,114 | | Accrued wages payable | | | 694 | | | (128) | | | 827 | | Other accrued expenses | | | (28) | | | (229) | | | (229) | | Net cash provided by (used in) operating activities | | | 5,882 | | | (926) | | | (6,415) | | Cash flows from investing activities | | | | | | | | | | | Proceeds from disposition of property, plant, and equipment | | | — | | | 1 | | | 12 | | Purchase of property, plant, and equipment and intangibles | | | (4,131) | | | (2,041) | | | (1,550) | | Net cash used in investing activities | | | (4,131) | | | (2,040) | | | (1,538) | | Cash flows from financing activities | | | | | | | | | | | Proceeds from issuance of long-term debt | | | 260,020 | | | 238,252 | | | 236,981 | | Principal payments on long-term debt | | | (270,458) | | | (243,852) | | | (218,532) | | 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 | | | — | | | — | | Purchase of LLC units from Continuing LLC Owners | | | (2,133) | | | 6,894 | | | (6,944) | | Principal payments on capital lease obligations | | | (116) | | | (93) | | | (382) | | Payment of deferred financing fees and debt discount | | | (42) | | | (509) | | | (1,316) | | Net cash provided by financing activities | | | 35,371 | | | 692 | | | 9,807 | | Net change in cash and cash equivalents | | | 37,122 | | | (2,274) | | | 1,854 | | Effect of exchange rate changes on cash and cash equivalents | | | 7 | | | (209) | | | 26 | | Cash and cash equivalents, beginning of period | | | 767 | | | 3,250 | | | 1,370 | | Cash and cash equivalents, end of period | | $ | 37,896 | | $ | 767 | | $ | 3,250 | | | | | | | | | | | | |
Seeaccompanying notesNotes to the consolidated financial statements
PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | | | | | For the year ended December 31, | Supplemental cash flow information | | 2017 | | 2016 | | 2015 | | Interest paid | | $ | 1,353 | | $ | 2,911 | | $ | 2,997 | | Property, plant, and equipment acquired through accounts payable | | | (80) | | | 125 | | | 24 | | Capital lease additions | | | 35 | | | 188 | | | — | | Issuance of preference notes for LLC Interests | | | 55,960 | | | — | | | — | | Non cash acquisition of intangibles | | | — | | | — | | | 350 | | Establishment of deferred tax asset from step-up in basis | | | 9,441 | | | — | | | — | | Taxes paid | | | 323 | | | — | | | — | | Accrued tax distribution | | | 597 | | | — | | | — | |
PetIQ, Inc.
Consolidated Statements of Members’/Stockholders’ Equity
($’s in 000’s, except for per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Retained | | Other | | | | | | | | | | | | | | Total | | | | | Earnings/ | | Comprehensive | | | | | | | | | | Additional | | | | Stockholders | | | Members | | (Accumulated | | (Loss) | | | | | | | | | | Paid-in | | Non-controlling | | Equity/ | | | Equity | | Deficit) | | Income | | Class A Common | | Class B Common | | Capital | | Interest | | Members Equity | | | | | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | Balance - January 1, 2015 | | $ | 47,681 | | $ | — | | $ | 473 | | | — | | $ | — | | | — | | $ | — | | $ | — | | $ | (15) | | $ | 48,139 | Net loss | | | (1,342) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | (1,349) | Other comprehensive income | | | — | | | — | | | (515) | | | — | | | — | | | — | | | — | | | — | | | — | | | (515) | Balance - December 31, 2015 | | $ | 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 | | | 11,165 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | 11,161 | Other comprehensive income prior to IPO | | | — | | | — | | | 515 | | | — | | | — | | | — | | | — | | | — | | | — | | | 515 | Accrued tax distribution prior to recapitalization | | | (591) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (591) | 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 | | | (53,515) | | | — | | | 668 | | | — | | | — | | | — | | | — | | | 28,459 | | | 24,388 | | | — | 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 | Issuance of preference notes to affiliates | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (55,960) | | | — | | | (55,960) | Increase in deferred tax asset from step-up in tax basis | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,441 | | | — | | | 9,441 | Purchase of non-controlling interests | | | — | | | — | | | (120) | | | — | | | — | | | (133,334) | | | (0) | | | (15,345) | | | 13,332 | | | (2,133) | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 275 | | | 172 | | | 447 | Other comprehensive income post IPO | | | — | | | — | | | 190 | | | — | | | — | | | — | | | — | | | — | | | 119 | | | 308 | Net (loss) income post IPO | | | — | | | (3,493) | | | — | | | — | | | — | | | — | | | — | | | — | | | 149 | | | (3,344) | Balance - December 31, 2017 | | $ | — | | $ | (3,493) | | $ | (687) | | | 13,222,583 | | $ | 13 | | | 8,268,188 | | $ | 8 | | $ | 70,873 | | $ | 38,130 | | $ | 104,844 |
See accompanying notes to the consolidated financial statements
Note 1 – Principal Business Activity and Significant Accounting Policies Principal Business Activity and Principals of Consolidation PetIQ Inc and Subsidiaries (the Company) is a manufacturerleading pet medication and wholesale distributorwellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. The company engages with customers through points of over-the-counterdistribution across retail channels with its branded distributed medications, which is further supported by its own world-class medications manufacturing facility in Omaha, Nebraska. The Company’s national service platform, VIP Petcare, operates retail partner locations providing cost effective and prescription pet medicationsconvenient veterinary wellness services. PetIQ has 2 reporting segments: (i) Products; and pet wellness products(ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segments consists of veterinary services, and related product sales, provided by the Company directly to various retail customersconsumers. PetIQ is the managing member of PetIQ Holdings, LLC (“Holdco”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, distributors throughoutthrough Holdco, operate and control all the United Statesbusiness and Europe. The Company is headquartered in Eagle, Idaho and manufactures and distributes products from facilities in Florida, Texas, Utah, and Europe.affairs of Opco. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAPGenerally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and equipment; allowance for doubtful accounts;equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, inventoriesthe valuation of assets and notes receivable;liabilities in connection with acquisitions, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies. Fair Value of Financial Instruments Foreign CurrenciesFair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are at cost, which approximates fair value due to their relatively short maturities. The guarantee note is carried at cost, which approximates fair value due to the recent issuance of the note. Our term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amounts approximate fair value. A portion of the purchase price for the acquisition of Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP” and such acquisition, the “VIP Acquisition”) was structured in the form of Contingent Notes (the “Contingent Notes”) that vest based on the combined Company operates subsidiaries in foreign countries who useEBITDA targets for the local currencyyears ending December 31, 2018 and 2019 (“Measurement Dates”). See Note 2 – “Business Combinations” for more information regarding the VIP Acquisition. The liabilities related to the 2018 and 2019 Contingent Notes became fixed as of December 31, 2018 and 2019, respectively, and are carried at cost, which approximates fair value as the functional currency. stated interest rate is consistent with current market rates. The Company translates its foreign subsidiaries’ assets and liabilities denominatedContingent Notes are included in foreign currencies into U.S. dollarslong-term debt in the accompanying consolidated balance sheets. The Contingent Notes began bearing interest at current ratesa fixed rate of exchange as of6.75%, with the balance sheet date and income and expense items atpayable July 17, 2023. The following table summarizes the average exchange rateLevel 3 activity related to the Contingent Notes 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 (loss) for each period.twelve months ended December 31, 2019: | | | $'s in 000's | | Balance at beginning of the period | $ | 2,680 | Change in fair value of contingent consideration | | 7,320 | Transfer out of level 3 | | (10,000) | Balance at the end of the period | $ | — |
Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with an original maturity of three months or less excluding amounts restricted for various state licensing regulations. Restricted depositsat the date of acquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are not consideredclassified as cash and cash equivalents. The Company maintains its cash accounts in various deposit accounts, the balances of which at times exceeded federal deposit insurance limits during the periods presented. Receivables and Credit Policy Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within a set number45 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for doubtful accountscredit losses equal to estimated uncollectible amounts.expected losses. The Company’s estimate is based on historical collection experience, and a review of the current status of trade accounts receivable.receivable and known current economic conditions including the current and expected impact of COVID-19. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice. The Company also hasOther receivables consists of various receivables due from vendors, banking partners, and notes receivable due from various suppliers included in accounts receivable. The notes bear interest at 0% to 4% and are repaid based on either amortization schedules or from certain sales to third parties.suppliers. Non-current portions of these notes receivableother receivables are included in other non-current assets on the consolidated balance sheet. Interest income is included in interest expense, net on the consolidated statement of operations.
sheets. Accounts receivable consists of the following as of: | | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Trade receivables | | $ | 96,381 | | $ | 67,551 | Other receivables | | | 7,094 | | | 4,257 | | | | 103,475 | | | 71,808 | Less: Allowance for doubtful accounts | | | (720) | | | (431) | Total accounts receivable, net | | $ | 102,755 | | $ | 71,377 |
| | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Trade receivables | | $ | 22,189 | | $ | 18,086 | Notes receivable | | | 297 | | | 440 | | | | 22,486 | | | 18,526 | Less: Allowance for doubtful accounts | | | (343) | | | (498) | Non-current portion of receivables | | | (384) | | | (833) | Total accounts receivable, net | | $ | 21,759 | | $ | 17,195 |
57 Inventories Inventories are stated at the lower of cost or net realizable value, which approximatevalue. Cost is determined on the first-in first-out (“FIFO”) basis.method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Major components of inventories wereconsist of the following as follows as of December 31, 2017 and 2016:of: | | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Raw materials and work in progress | | $ | 4,004 | | $ | 5,924 | Finished goods | | | 40,052 | | | 28,308 | Total inventories | | $ | 44,056 | | $ | 34,232 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Raw materials | | $ | 15,761 | | $ | 10,675 | Work in progress | | | 2,273 | | | 1,717 | Finished goods | | | 79,739 | | | 67,311 | Total inventories | | $ | 97,773 | | $ | 79,703 |
Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation and amortization is provided using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and capitalfinance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales orand general and administrative expenses in the consolidated statements of comprehensive income,operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows: | | | | Computer equipment and software | | | 3 years | Vehicle and vehicle accessories | | | 3-5 years | Buildings | | | 33 years | Equipment | | | 3-152-15 years
| Leasehold improvements | | | 3-92-15 years
| Furniture and fixtures | | | 8-105-10 years
|
Goodwill and Intangible Assets Indefinite lived intangible assets consist primarily of trademarks. Trademarks represent costs paid to legally register phrases and graphic designs that identify and distinguish products sold by the Company. Trademarks are not amortized, rather potential impairment is considered on an annual basis in the fourth quarter, or more frequently upon the occurrence of an event, when circumstances indicate that the book value of trademarks are greater than their fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the indefinite lived intangible asset is less than the carrying value as a basis to determine whether further impairment testing under ASC 350 is necessary. No impairment charge was recorded for the years ended December 31, 2017, 2016, and 2015.
Definite-lived intangible assets consist of a distribution agreement, production certifications, patents and processes, customer relationships, and brand names. The assets are amortized on a straight-line basis over their expected useful lives. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to the company’s future cash flows. Useful lives range from 2 to 15 years.
Goodwill
Goodwill is the excess of the consideration paid over the fair value of specifically identifiable assets, liabilities and contingent liabilities in a business combinationcombination. Intangible assets acquired are recorded at estimated fair value. Goodwill and relatesintangible assets deemed to the future economic benefits arising from assets, whichhave indefinite lives are not capable of being individually identified and separately recognized. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized, but is reviewedare tested for impairment annually induring the Company’s fourth quarter, or more frequently ifand at any time when events or changes in circumstances indicate that the carrying value may be impaired.
The goodwillsuggest an impairment test consists of a two-step process, if necessary. However, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basisoccurred.
To assess goodwill for determining whether it is necessary to perform the two-step goodwill impairment, test described in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, the Company, determines that it is not more likely than not that the fair value ofdepending on relevant facts and circumstances, performs either a reporting unit is less than its carrying amount, thenqualitative assessment or a quantitative analysis utilizing a discounted cash flow valuation model. In performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if based on the qualitative assessment, the Company concludesevaluates relevant factors such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the faircarrying value of the reporting unit is less than its carrying amount, the two-step process will be carried out. fair value, then no further testing is required. In step one,performing a quantitative analysis, the Company determines the fair value of eacha reporting unit using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including discount rates and future growth rates. In the event the carrying amount of a reporting unit exceeded its fair value, an impairment loss would be recognized. Indefinite-lived intangible assets are tested for impairment utilizing either a qualitative assessment or a quantitative analysis. For a qualitative assessment, the Company identifies and considers relevant key factors, events, and circumstances to determine whether it is necessary to perform a quantitative impairment test. The key factors considered include macroeconomic, industry, and market conditions, as well as the asset's actual and forecasted results. For the quantitative impairment tests, the Company compares itthe carrying amounts to its carrying value. Ifthe current fair market values. Intangible assets with definite lives are amortized over their estimated useful lives to reflect the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. NaN impairment charge was recorded for the years ended December 31, 2020, 2019, and 2018. Convertible Debt On May 19, 2020, we issued $143.8 million aggregate principal amount of Convertible Notes due 2026 (the “Notes”). See Note 5 – “Debt”. We separately account for the liability and equity components of convertible debt instruments that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the reporting unit exceedsliability component, using the carrying valueinterest rate of a similar liability that does not have a conversion feature, as of the net assets assigned to that unit, goodwillissuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. We recognize amortization of the resulting discount using the effective interest method as interest expense in our consolidated statements of operations. The equity component is not impairedremeasured as long as it continues to meet the conditions for equity classification. We have allocated issuance costs to the liability and no further testing is performed. Ifequity components. Issuance costs attributable to the carrying valueliability component are being amortized to expense over the respective term of the net assets assignedNotes, and issuance costs attributable to the reportingequity component were netted with the respective equity component in additional paid-in capital. Revenue Recognition When Performance Obligations Are Satisfied A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit exceedsof account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the fair valueperformance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of veterinary services. Revenue is generally recognized for product sales on a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the reporting unit, thenremaining benefits from the Company must perform the second step of the impairment testasset at this point in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. time. The Company performeddetermined that certain products manufactured to a customer’s specifications do not have an alternative future use at a reasonable profit margin due to costs associated with reworking, transporting and repackaging these products. These products are produced subject to purchase orders that include an enforceable right to payment. Therefore the Company determined that revenue on these products would be recognized over time, as the products are produced. This represents a minor subset of the products the Company manufactures. Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered at the time of service. Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its qualitative assessment during the fourth fiscal quarterrelative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data. The qualitative factors that were considered included, but were not limited to, general economic conditions, outlook for the pet sector, market capitalization, consolidated company stock price, and recent and forecasted financial performance. Goodwill impairment analysis and measurement is a process that requires significant judgment. If there are significant changes in market conditions or a future downturnperformance obligations in our business, or a future annual goodwill impairment test indicates an impairment of our goodwill,contracts are satisfied within one year. As such, we have not disclosed the Company may havetransaction price allocated to recognize impairment of its goodwill.
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 recordedremaining performance obligations as of December 31, 20172020.
Variable Consideration In addition to fixed contract consideration, most contracts include some form of variable consideration. The most common forms of variable consideration include discounts, rebates, and December 31, 2016 was $1,575 thousandsales returns and $250 thousand, respectively,allowances. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We believe there will not be significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. The Company reviews and is includedupdates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in other accrued expenses. The non-current portion recorded asthe market. Any uncertainties in the ultimate resolution of December 31, 2017 and December 31, 2016 was zero and $1,303 thousand, respectively, and is included in deferred acquisition liability. As discussed in Note 16, subsequent to December 31, 2017, the Company completed the VIP Acquisition, which included guarantee and contingent notesvariable consideration due to the sellers. See Note 16 for more information.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shipped to the customer. For customers with Free on Board (“FOB”) destination terms, a provision is recorded to exclude shipments determined to be in-transit to these customers at the endfactors outside of the reportingCompany’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.
period. A sales return allowance is recordedcustomer pricing allowances and accounts receivablemerchandising funds are reduced as revenuesoffered through various programs to customers and are recognized for estimated losses on credit sales duedesigned to customer claims for discounts, returned goodspromote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other items.
The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties. Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and in-store displays. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in other accrued expenses.the Consolidated Balance Sheets. Significant Payment Terms ShippingOur customer contracts identify the product, quantity, price, payment and Handling Costsfinal delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.
Shipping All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales. This includes shipping and handling costs after control over a product has transferred to a customer. Warranties & Returns PetIQ provides all customers with a standard or assurance type warranty. Either stated or implied, the Company provides assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No significant services beyond an assurance warranty are provided to customers. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as cost ofa reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Contract balances Contract asset and liability balances as of December 31, 2020 and 2019 are immaterial. The Company does not typically billedhave significant deferred revenue or unbilled receivable balances. Cost of Services Cost of Services are comprised of all service and product costs related to customers.the delivery of veterinary services, including but not limited to, salaries and contract costs of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold. Research and Development and Advertising Costs Research and development and advertising costs are expensed as incurred and are included in general and administrative expenses. Research and development costs amounted to $514 thousand, $310 thousand,$2.3 million, $1.3 million, and $380 thousand$0.2 million and advertising costs were $2,229 thousand, $1,179 thousand,$10.1 million, $4.5 million, and $6,077 thousand$2.9 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Collaboration Agreements Through the Perrigo Animal Health Acquisition, we entered into a product development and asset purchase agreement with a third party for certain product formulations in development by the third party. The Company may make up to $20.5 million of payments over the course of the next several years contingent on achievement of certain development and regulatory approval milestones. Product development costs are expensed as incurred or as milestone payments become probable. There can be no assurance that these products will be approved by the U.S. Food and Drug Administration (“FDA”) on the anticipated schedule or at all. Consideration paid after FDA approval will be capitalized and amortized to cost of goods sold over the economic life of each product. The expenses paid prior to FDA approval will be included in General and Administrative expenses on the Consolidated Statements of Operations. There were no expenses incurred under the agreement for the periods ended December 31, 2020 and 2019. Litigation The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If the likelihood of an adverse legal outcome is determined to be probable and the amount of loss is estimable, then a liability is accrued in accordance with accounting guidance for Contingencies. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. The Company consults with both internal and external legal counsel related to litigation. See Note 13 for more information. Stock based compensation The Company expenses employee share-based awards under ASC Topic 718, Compensation—Stock Compensation, which requires compensation cost for the grant-date fair value of share-based awards to be recognized over the requisite service period. Stock options granted to executives and other employees are valued using the Black-Scholes option pricing model. See Note 89 for more information. Accounting for Income Taxes The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense. Interest expense, net Interest expense, net, is comprised primarily of interest expense related to (i) our debt agreements, (ii) unused line fees, (iii) amortization of deferred loan fees and (iii) capitaldiscounts, (iv) finance lease obligations and the mortgage note outstanding, offset by interest income earned on our demand deposits and other assets. Interest expense was $1,638 thousand, $3,078 thousand,$26.3 million, $14.9 million, and $3,567 thousand$8.3 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, offset by $75 thousand, $20 thousand,$0.0 million, $0.4 million, and $22 thousand$0.3 million of interstinterest income, respectively. Non-controlling interest The non-controlling interests on the consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, Holdco, held by the non-controlling holders of Class B common stock and limited liability company interests in Holdco. Non-controlling interests on the consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling holders of Class B common stock and Limited Liability Company interests in Holdco. Earnings Per Share Basic earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc. by the weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc., adjusted as necessary for the impact of potentially dilutive securities, by the weighted-average shares outstanding during the period and the impact of securities that would have a dilutive effect on earnings per share. See Note 78 for further discussion. Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial statemetns to conform to current year presentation. These reclassifications had no impact on net income, shareholders’ equity, or cash flows as previously reported.
Recently Issued Accounting Pronouncements / Adopted Accounting Standard Updates In May 2014,From time to time, the Financial Accounting Standards Board (“FASB”) issuedor other standards setting bodies issue new accounting pronouncements. Updates to the Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several relatedare communicated through issuance of an Accounting Standards UpdatesUpdate (“ASUs”ASU”).
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) (“Topic 606”), which provide guidanceNo. 2016-13, "Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for recognizing revenue from contracts with customers.financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable information. Organizations will now use forward-looking information to better estimate their credit losses. The core principle of Topic 606 is that revenue is recognized when promised goods or services are transferred 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 ending March 31, 2018. We will adopt Topic 606Company adopted this ASU using thea modified retrospective transition approachapproach. Under this method of adoption, the Company determined that there was no cumulative-effect adjustment to beginning Retained earnings on the consolidated balance sheet. Adoption of this standard did not impact the Company’s net loss and expect the impact to be immaterial, with an estimated reduction of beginning accumulated deficit of $0.3 million. During 2017, we completed our evaluation of Topic 606, including thehad no impact on our business processes, systems and controls, and differences in the timing and/or methodconsolidated statement of revenue recognition. As a result of our evaluation, we identified changes to and modified certain of our accounting policies and practices. We also designed and implemented specific controls over our evaluation of the impact of Topic 606, including our calculation of the cumulative effect of adopting Topic 606. Although there were no significant changes to our accounting systems or controls upon adoption of Topic 606, we modified certain of our existing controls to incorporate the revisions we made to our accounting policies and practices. cash flows.
Based on our evaluation of Topic 606, we will make the following changes:
| ·
| | Revenue is recognized as control transfers to the customer. As such, under the new standard, revenue for our contracts is general recognized at a point in time when goods are transferred to the customer, which can be upon shipment or upon delivery, depending on the terms of the specific contract. This is generally consistent with our current recognition policy and practice for most contracts based on the transfer of title and risk of loss, however, we do anticipate a change in timing of recognition for certain contracts based on our analysis of the timing of transfer of control of products to our customers;
|
| ·
| | Make a change in performance obligation in certain of our contracts, specifically the treatment of certain merchandising products and services we provide to our customers. Prior to the adoption of Topic 606, the Company treated certain merchandising activities as selling expenses within general and administrative expenses, with the expense recognized over the time period the activities occurred. Under Topic 606 those products and services are considered a separate performance obligation and allocated revenue, with the costs included in cost of sales at the time control transfers to the customer;
|
| ·
| | Alter the accounting for certain reductions in revenue. Previously the Company accounted for certain reductions in sales at the later of sale of goods or agreement with the customer. Under Topic 606, the Company will estimate all elements of variable consideration, without consideration as to the timing of the agreement with customers;
|
| ·
| | Adjust the manner in which we present our allowance for sales returns in our Consolidated Balance Sheets, to reflect a refund liability and a returns asset;and
|
| ·
| | Topic 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when we satisfy our performance obligations and the relationship between revenue recognized and changes in contract balances during a reporting period. We have evaluated these disclosure requirements and incorporated the collection of relevant data into our reporting process.
|
In February 2016, the FASB issued ASU 2016-02,, Leases “Leases (Topic 842). This” The purpose of ASU 2016-02 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 thisIn addition, ASU are2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requiresthe year of adoption. Originally under ASU 2016-02, an organization was required upon adoption based uponto recognize and measure leases beginning in the earliest period presented using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented inand restate the financial statements with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption. The Company is currently making over $1,700 per year in operating lease payments, and the Company expects the majority of these leases to be classified as operating lease liabilities and right-of-use assets upon adoption. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. for all periods presented. In July 2015,2018, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying2018-11, which amends ASU 2016-02 to provide organizations with an additional (and optional) transition method whereby it may elect to recognize and measure leases by applying the Measurementcumulative impact of Inventory. Thisadopting ASU requires entities2016-02 to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new 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 August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will be 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 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 classificationopening retained earnings balance in the statementperiod of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interimadoption, thereby removing the requirement that the financial statements of prior 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.by restated. The Company adopted the provisions of this standardguidance effective January 1, 2017.2019, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2019 and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. The Company elected the package of practical expedients and implemented internal controls and system functionality to continueenable the preparation of financial information upon adoption. In addition, the Company has elected to recognize estimated forfeitures overapply the termpractical expedient to not separate the lease and non-lease components for all of the awards. Company’s leases.
The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company’s consolidated balance sheet related to operating leases. Accounting for finance leases remained substantially unchanged. In addition, the adoption of the standard did not have a material impact on the Company’s financial condition, results of operations or cash flows and disclosures.flows. In January 2017, August 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2017-04, GoodwillAccounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other (Topic 350) (“Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2017-04”): Simplifying2020-06, the Testembedded conversion features are no longer separated from the host contract for Goodwill Impairment.convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The amendednew guidance simplifiesalso requires the accounting for goodwill impairmentif-converted method to be applied for all entities by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. Theconvertible instruments. ASU 2020-06 is effective for interim and annual periods for the Company on January 1, 2020. fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, we intend to adopt ASU 2020-06 using the full retrospective approach. We expect the adoption of the new standard to result in a decrease to stockholders equity of $51.4 million and a corresponding increase to convertible senior notes. Interest expense, net for the year ending December 31, 2020 will decrease approximately $4.0 million. Interest expense, net, recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. Additionally we expect that the change will result in significantly more dilutive shares outstanding. Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements. Note 2 – Business Combination and Asset Acquisition Perrigo Animal Health Acquisition On July 8, 2019, PetIQ, Inc., through its subsidiary PetIQ, LLC, completed the acquisition of all the outstanding stock of Sergeant’s Pet Care Products, Inc. (“Sergeant’s”), d/b/a Perrigo Animal Health, including any assets related to Perrigo Company plc’s animal health business (the “Perrigo Animal Health Acquisition”). Sergeant’s is now an indirect wholly-owned subsidiary of the Company. The fair value of the consideration is summarized as follows: $'s in 000's | Fair Value | Inventories | $ | 17,998 | Property, plant and equipment | | 19,568 | Other current assets | | 13,048 | Other assets | | 9,680 | Indefinite-lived intangible assets | | 23,040 | Definite-lived intangible assets – 13 year weighted average life | | 14,480 | Goodwill | | 105,838 | Total assets | | 203,652 | | | | Liabilities assumed | | 19,259 | | | | Purchase price | $ | 184,393 | | | | Cash paid, net of cash acquired | $ | (185,090) | Post-closing working capital adjustment | | 697 | | | | Fair value of total consideration transferred | $ | (184,393) |
The definite-lived intangibles primarily relate to trademarks, customer relationships, and developed technology and know-how. The $14.6 million represents the fair value and will be amortized over the estimated useful lives of the assets through June 2039. The indefinite-lived intangibles primarily relate to trademarks and in-process research and development. Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. Approximately $105.8 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment. Transaction costs of $6.1 million were incurred in the year ended December 31, 2019, and are included in General and Administrative expenses on the Consolidated Statements of Operations. Capstar ® (nitenpyram) Acquisition On July 31, 2020 the Company completed the acquisition of Capstar® and CapAction® and related assets (the “Capstar Acquisition”) from Elanco US Inc. for $95 million, plus the cost of certain outstanding finished goods inventory in saleable condition, using cash on hand as a result of the issuance of the Notes in May 2020. The Capstar Acquisition was accounted for as an asset acquisition and certain transaction related costs of approximately $1.0 million were included in the cost of the acquired assets. The fair value assigned to trade names was based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The estimated fair value of customer relationship was determined using an income approach, specifically a discounted cash flow analysis. The rate utilized to discount net cash flows to their present values was approximately 15% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The fair value assigned to patents and processes was determined based on the income approach. The purchased assets are identified below: | | | $'s in 000's | Fair Value | Amortizable intangibles | | | Customer relationships | $ | 70,901 | Patents and processes | | 9,895 | Total amortizable intangibles | | 80,796 | Non-amortizable intangibles | | | Trademarks and other | | 15,276 | Total purchased intangible assets | $ | 96,072 |
The weighted average amortization period of the amortizable intangible assets is approximately 11.8 years. Supplier Termination, Settlement and Asset Purchase Agreement: During July 2020, the Company entered into a Termination, Settlement and Asset Purchase Agreement (“Agreement”) with a supplier who alleged PetIQ had breached its supply agreement due to the acquisition of Perrigo Animal Health. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter. The Agreement terminated the supply agreement that was previously in place, settled all outstanding claims and operations, and allowed PetIQ to purchase certain intellectual property related assets. The Company expectshas estimated the fair value of the payment obligation as $17.5 million, and determined the fair value of the acquired assets to early adoptbe $9.7 million. The assets acquired are included within the patents and processes intangible assets category and will be amortized over 10 years. The assets were valued using the standard beginning with its annual goodwill impairment testrelief from royalty method. The remainder of the obligation is considered to be a payment to settle the alleged breach of the supply agreement, the termination expense is included in 2018. general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2020. The obligation is considered debt and is included in debt on the condensed consolidated balance sheet. See Note 5 – “Debt” for additional information. Note 23 – Property, Plant, and Equipment Property, plant, and equipment consists of the following at December 31:at: | | | | | | | $'s in 000's | | | 2017 | | | 2016 | Leasehold improvements | | $ | 6,616 | | $ | 6,587 | Equipment | | | 10,665 | | | 9,512 | Computer equipment ans software | | | 927 | | | 896 | Buildings | | | 771 | | | 668 | Furniture and fixtures | | | 407 | | | 377 | Land | | | 660 | | | - | Construction in progress | | | 2,344 | | | 150 | | | | 22,390 | | | 18,190 | Less accumulated depreciation | | | (7,390) | | | (5,146) | Total property, plant, and equipment | | | 15,000 | | | 13,044 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Leasehold improvements | | $ | 19,709 | | $ | 15,517 | Equipment | | | 25,664 | | | 23,138 | Vehicles and accessories | | | 7,110 | | | 6,007 | Computer equipment and software | | | 10,858 | | | 8,070 | Buildings | | | 10,168 | | | 10,050 | Furniture and fixtures | | | 2,347 | | | 1,836 | Land | | | 7,067 | | | 4,557 | Construction in progress | | | 11,331 | | | 3,392 | | | | 94,254 | | | 72,567 | Less accumulated depreciation | | | (31,108) | | | (20,042) | Total property, plant, and equipment | | $ | 63,146 | | $ | 52,525 |
Depreciation and amortization expense related to these assets total $2,348 thousand, $1,915 thousand,$12.1 million, $9.1 million, and $1,842 thousand$6.7 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Note 34 – Intangible Assets and Goodwill Intangible assets consist of the following at December 31:at: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Useful Lives | | 2017 | | 2016 | Amortizable Intangibles | | | | | | | | | | | | | Distribution agreement | | | | | | | | 2 years | $ | 3,021 | $ | 3,021 | Certification | | | | | | | | 7 years | | 350 | | 350 | Customer relationships | | | | | | | | 12 years | | 1,191 | | 1,086 | Patents and processes | | | | | | | | 10 years | | 1,998 | | 1,797 | Brand names | | | | | | | | 15 years | | 923 | | 841 | Total amortizable intangibles | | | | | | | | | | 7,483 | | 7,095 | Less accumulated amortization | | | | | | | | | $ | (4,733) | $ | (3,557) | Total net amortizable intangibles | | | | | | | | | | 2,750 | | 3,538 | Non-amortizable intangibles | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | 516 | | 516 | Intangible assets, net of accumulated amortization | | | | | | | | | $ | 3,266 | $ | 4,054 |
| | | | | | | | | | | | | | | $'s in 000's | | | | | | Useful Lives | | | | December 31, 2020 | | December 31, 2019 | Amortizable intangibles | | | | | | | | | | | | | | | Certification | | | | | | 7 years | | | | $ | 350 | | $ | 350 | Customer relationships | | | | | | 12-20 years | | | | | 160,178 | | | 89,232 | Patents and processes | | | | | | 5-10 years | | | | | 14,905 | | | 4,928 | Brand names | | | | | | 5-15 years | | | | | 24,740 | | | 15,019 | Total amortizable intangibles | | | | | | | | | | | 200,173 | | | 109,529 | Less accumulated amortization | | | | | | | | | | | (25,984) | | | (13,058) | Total net amortizable intangibles | | | | | | | | | | | 174,189 | | | 96,471 | Non-amortizable intangibles | | | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | | 33,341 | | | 18,016 | In-process research and development | | | | | | | | | | | 5,470 | | | 5,469 | Intangible assets, net of accumulated amortization | | | | | | | | | | $ | 213,000 | | $ | 119,956 |
Certain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currency movements. Amortization expense for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was $1,052 thousand, $1,067 thousand,$12.8 million, $6.0 million, and $735 thousand,$5.2 million, respectively. The in-process research and development (“IPRD”), intangible assets represent the value assigned to 3 acquired R&D projects that principally represent rights to develop and sell products that the Company has acquired which has not yet been completed or approved. The IPRD acquired as part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and regulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development. In the event that the efforts are not successful, the Company will write off the relevant IPRD in the period in which it is no longer considered feasible. Estimated future amortization expense for each of the following years is as follows: | | | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | | 2018 | | | | | | $ | 407 | 2019 | | | | | | | 407 | 2020 | | | | | | | 407 | 2021 | | | | | | | 406 | 2022 | | | | | | | 402 | Thereafter | | | | | | | 721 |
| | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | 2021 | | | | | $ | 18,504 | 2022 | | | | | | 18,310 | 2023 | | | | | | 17,481 | 2024 | | | | | | 15,078 | 2025 | | | | | | 14,369 | Thereafter | | | | | | 90,447 |
The following is a summary of the changes in the carrying value of goodwill for the years ended December 31, 20172020 and 2016.2019. | | | | | | | | | | | | Reporting Unit | | | | ($'s in 000's) | | Products | | Services | | Total | Goodwill as of January 1, 2019 | | | 77,765 | | | 47,264 | | | 125,029 | Foreign currency translation | | | 178 | | | — | | | 178 | Acquisitions | | | 105,838 | | | — | | | 105,838 | Goodwill as of December 31, 2019 | | | 183,781 | | | 47,264 | | | 231,045 | Foreign currency translation | | | 113 | | | — | | | 113 | Goodwill as of December 31, 2020 | | $ | 183,894 | | $ | 47,264 | | $ | 231,158 |
| | | | | | | | ($’s in 000’s) | | | Reporting Unit | | | | | | Domestic | | International | | Total | Goodwill as of January 1, 2016 | | $ | 5,221 | $ | 359 | $ | 5,580 | Foreign currency translation | | | (900) | | (61) | | (961) | Goodwill as of December 31, 2016 | | | 4,321 | | 298 | | 4,619 | Foreign currency translation | | | 416 | | 29 | | 445 | Goodwill as of December 31, 2017 | | $ | 4,737 | $ | 327 | $ | 5,064 |
66 Note 45 – Debt The Company entered into a credit agreement (the “Credit Agreement”) on December 21, 2016. The Credit Agreement provided for secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting ofConvertible Notes
(i) $45 million revolving credit facility (“Revolver”) maturing on December 21, 2019; and
(ii) $5 million term loan (“Term Loans”), requiring equal amortizing payments for 24 months.
As of December 31, 2017,On May 19, 2020, the Company had $0 outstanding as Term Loans and $15.3 million outstanding under the Revolver. The interest rate on the revolving credit facility was 5.00%, as a Base Rate loan. The Revolver contains a lockbox mechanism.
As of December 31, 2016, the Company had $5 million outstanding as Term Loans and $22.5 million outstanding under the Revolver. The interest rate on the Term Loans was 4.25% and the interest rate on the revolving credit facility was also 4.25%, both were Base Rate loans.
The Company refinanced its credit facility in March 2016 with an amended and restated credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provided for secured financing of $48,000 in the aggregate, consisting of
(i) $3issued $143.8 million in aggregate principal amount of term loans maturing4.00% Convertible Senior Notes due 2026 pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $137.9 million. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 31, 2016 (the “Term B Loans”);
(ii) $20 million in aggregate1, 2020. The Notes will mature on June 1, 2026, unless earlier repurchased, redeemed or converted. Before January 15, 2026, holders will have the right to convert their Notes only upon the occurrence of certain events. From and after January 15, 2026, holders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of term loans maturingNotes. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on March 16, 2018or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption. If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock. The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 13%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The amount of the equity component representing the conversion option was $53.3 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual terms of the Notes. The Company has early adopted ASU 2020-06 as of January 1, 2021, which will impact the accounting for the Notes. The fair value of the Notes was $218.1 million as of December 31, 2020. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of December 31, 2020 and is classified as Level 2 in the fair value hierarchy. As of December 31, 2020 the if-converted value of the Notes did not exceed the principal amount. The net carrying amount of the liability component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Par value of the Notes | | $ | 143,750 | Unamortized debt discount | | | (49,526) | Unamortized debt issuance costs | | | (3,441) | Net carrying amount | | $ | 90,783 |
The net carrying amount of the equity component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Proceeds allocated to the conversion option | | $ | 53,285 | Deferred tax affect | | | (8,197) | Issuance costs | | | (2,181) | Net carrying amount | | $ | 42,907 |
The following table sets forth the interest expense recognized related to the Notes: | | | | | | | | | | | | For the Year Ended | | | | | | December 31, 2020 | ($'s in 000's) | | | | | | | Contractual interest expense | | | | | $ | 3,546 | Amortization of debt discount | | | | | | 3,759 | Amortization of debt issuance costs | | | | | | 261 | Total | | | | | $ | 7,566 | Effective interest rate of the liability component | | | | | | 13.0% |
Capped Call Transactions On May 14, 2020 and May 19, 2020, the Company entered into capped call transactions (the “Term“Capped Call Transactions”) with 2 counterparties (the “Option Counterparties”). The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to the Notes, the underlying shares of Class A Loans”);common stock and are intended to reduce, subject to a limit, the potential dilution with respect to the Class A common stock upon conversion of the Notes. The cap price of the Capped Call Transactions is $41.51 per share of Class A common stock, and is subject to certain adjustments under the terms of the Capped Call Transactions. (iii)
The Company paid approximately $14.8 million for the Capped Call Transactions, which was recorded as additional paid-in capital, using a $25portion of the gross proceeds from the sale of the Notes. The capped call is expected to be tax deductible as the Company elected to integrate the capped call into the Notes for tax purposes. The tax effect on the equity component of the Convertible Notes of $8.2 million was recorded through additional paid-in capital. The Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2020, as a result, the $8.2 million deferred tax liability associated with the Capped Call Transactions will be offset by a reduction to the valuation allowance adjustment through continuing operations. A&R Credit Agreement The Company amended the existing revolving credit agreement of Opco and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”) on July 8, 2019. The Amended Revolving Credit Agreement provides for a secured revolving credit facility maturingof $125 million that matures on March 16, 2018.July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur fees between 0.375% and 0.50% as unused facility fees, dependent on the aggregate amount borrowed. On May 14, 2020, the Company amended the Amended Revolving Credit Agreement to allow for the Notes described above. Additionally the amendment instituted a Eurodollar floor of 1% to the agreement. OnAll obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.
The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowers and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of December 31, 2020, the borrowers and guarantors thereunder were in compliance with these covenants. Although the Company currently expects continued compliance with debt covenants, the impact COVID-19 may negatively affect the Company’s ability to comply with these covenants. The Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $15.0 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 2.3% at December 31, 2020. A&R Term Loan Credit Agreement The Company amended and restated the existing term loan credit agreement of Opco (the “A&R Term Loan Credit Agreement”) on July 24, 2017,8, 2019. The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls for 1% of the original loan balance to be paid annually via equal quarterly payments, with the balance of the loan due on the sixth anniversary of the agreement. All obligations under the A&R Term Loan Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of PetIQ, LLC and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions. The A&R Term Loan Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2019, the borrower and guarantors thereunder were in compliance with these covenants. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $217.3 million was outstanding under the A&R Term Loan Credit Agreement. General Other Debt The Company entered into a mortgage with a local bank to provide financing forfinance $1.9 million of the purchase price of a commercial building.building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and requires monthly principalutilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time. In July 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset Acquisitions”. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest payments,rate of 8.3%, resulting in an obligation of $17.5 million. In connection with the balanceVIP Acquisition, the Company entered into a guarantee note of the loan due on July 25, 2027. The Credit Agreement and Amended Credit Agreement both contained 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.$10.0 million. As of December 31, 2017,2019, $7.5 million was payable pursuant to the Company2018 Contingent Note and $10.0 million was in compliancepayable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million require quarterly interest payments of 6.75% with these covenants.the balance payable July 17, 2023.
The following represents the Company’s long-term debt as of December 31, 2017 and December 31, 2016:of: | | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Term loans | | $ | — | | $ | 5,000 | Revolving credit facility | | | 15,325 | | | 22,473 | Mortgage | | | 1,902 | | | — | Net discount on debt and deferred financing fees | | | — | | | (92) | | | $ | 17,227 | | $ | 27,381 | Less current maturities of long-term debt | | | (44) | | | (2,223) | Total long-term debt | | $ | 17,183 | | $ | 25,158 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Convertible Notes | | $ | 143,750 | | $ | — | Term loans | | | 217,250 | | | 220,000 | Revolving credit facility | | | 15,000 | | | 10,000 | Notes Payable - VIP Acquisition | | | 27,500 | | | 27,500 | Other Debt | | | 16,257 | | | 1,812 | Net discount on debt and deferred financing fees | | | (57,559) | | | (5,688) | | | $ | 362,198 | | $ | 253,624 | Less current maturities of long-term debt | | | (6,219) | | | (2,248) | Total long-term debt | | $ | 355,979 | | $ | 251,376 |
Future maturities of long-term debt, excluding the net discount on debt and deferred financing fees, as of December 31, 20172020, are as follows: | | | | ($'s in 000's) | | | | 2018 | | $ | 44 | 2019 | | | 15,372 | 2020 | | | 48 | 2021 | | | 50 | 2022 | | | 52 | Thereafter | | | 1,661 |
| | | | ($'s in 000's) | | | | 2021 | | $ | 6,219 | 2022 | | | 5,476 | 2023 | | | 33,255 | 2024 | | | 6,057 | 2025 | | | 2,259 | Thereafter | | | 366,491 |
The Company incurred debt issuance costs of $218$0.6 million related to the AmendedA&R Credit Agreement during the first quarter of 2016. The debt transaction resulted in a loss on debt extinguishment of $993 thousand, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs. year ended December 31, 2020. The Company incurred debt issuance costs of $261 thousand$0.7 million during the year ended December 31, 2019 related to the NewA&R Credit Agreement during 2016. This second refinancing transaction resulted in a loss on extinguishment of $688 thousand, which includedand $5.1 million related to the write off of unamortizedA&R Term Loan Credit Agreement. The Company incurred debt issuance costs of $5.9 million in May 2020 in connection with the Notes. In accordance with FASB ASC 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. $2.2 million of issuance costs were recorded as additional paid-in capital and such amounts are not subject to amortization. The remaining issuance costs of $3.7 million are recorded as debt issuance costs in the net carrying value of the Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Notes and is included in interest expense, net on the condensed consolidated statements of operations. Future amortization of our debt discount and debt discount, early termination fees, and legal costs.issuance costs for the term of the Convertible Notes is as follows: | | | | | | | ($'s in 000's) | | Debt Discounts | | Debt Issuance Costs | 2021 | | $ | 6,761 | | $ | 470 | 2022 | | | 7,684 | | | 534 | 2023 | | | 8,733 | | | 607 | 2024 | | | 9,925 | | | 690 | 2025 | | | 11,280 | | | 784 | Thereafter | | | 5,143 | | | 356 |
Note 5 -6 – Leases The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182021 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term. We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease. The Company’s leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms. The components of lease expense consists of the follow: | | | | | | | | | For the Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Finance lease cost | | | | | | | Amortization of right-of-use assets | | $ | 1,681 | | $ | 1,441 | Interest on lease liabilities | | | 315 | | | 308 | Operating lease cost | | | 5,831 | | | 4,833 | Variable lease cost(1) | | | 1,130 | | | 629 | Short-term lease cost | | | 34 | | | 41 | Sublease income | | | (528) | | | (452) | Total lease cost | | $ | 8,463 | | $ | 6,800 |
| (1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
Other information related to leases was as follows as of: | | | | | | | | | | December 31, 2020 | | | December 31, 2019 | Weighted-average remaining lease term (years) | | | | | | | Operating leases | | | 4.41 | | | 5.15 | Finance leases | | | 2.38 | | | 2.73 | Weighted-average discount rate | | | | | | | Operating leases | | | 5.3% | | | 5.3% | Finance leases | | | 5.7% | | | 5.7% |
Annual future commitments under non-cancelable leases as of December 31, 2017,2020, consist of the following: | | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Capital Leases | 2018 | | $ | 2,053 | | $ | 113 | 2019 | | | 937 | | | 110 | 2020 | | | 353 | | | 96 | 2021 | | | 176 | | | 93 | 2022 | | | 176 | | | 72 | Thereafter | | | 127 | | | 27 | Total minimum future obligations | | $ | 3,822 | | $ | 511 | Less interest | | | | | | (15) | Present value of net future minimum obligations | | | | | | 496 | Less current capital lease obligations | | | | | | (107) | Long-term capital lease obligations | | | | | $ | 389 | | | | | | | |
The net book value of assets under capital lease was $850 thousand and $775 thousand as of December 31, 2017 and 2016, respectively.
| | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Finance Leases | 2021 | | $ | 5,861 | | $ | 1,757 | 2022 | | | 5,591 | | | 1,584 | 2023 | | | 4,789 | | | 1,580 | 2024 | | | 3,280 | | | 330 | 2025 | | | 2,357 | | | 20 | Thereafter | | | 1,365 | | | — | Total minimum future obligations | | $ | 23,243 | | $ | 5,271 | Less interest | | | (2,539) | | | (367) | Present value of net future minimum obligations | | | 20,704 | | | 4,904 | Less current lease obligations | | | (4,915) | | | (1,566) | Long-term lease obligations | | $ | 15,789 | | $ | 3,338 | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | Year Ended | | Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | Operating cash flows from finance leases | | $ | 315 | | $ | 308 | Operating cash flows from operating leases | | | 5,668 | | | 4,568 | Financing cash flows from finance leases | | | 1,965 | | | 1,547 | (Noncash) right-of-use assets obtained in exchange for lease obligations | | | | | | | Operating leases | | | 5,105 | | | 5,368 | Finance leases | | | 2,019 | | | (3,006) |
Total operating lease expense for the yearsyear ended December 31, 2017, 2016, and 20152018, totaled $1,716 thousand, $1,718 thousand, and $1,627 thousand, respectively.$6.0 million. Note 67 - Income TaxesAs a result of the IPO and related reorganization transactions completed in July 2017, the Company holds an economic interest of approximately 62% in HoldCo and consolidates the financial position and results of HoldCo. The approximate 38% of HoldCo not held by the Company is considered non-controlling interest. HoldCothe sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax reporting. purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $67.6M of deferred tax assets associated with these exchanges, which currently have a full valuation allowance against the deferred tax asset. The non-controlling interests totaled approximately 11% of the ownership of Holdco as of December 31, 2020. See Note 11 – Non-controlling interests for more information.
HoldCo’s members, including the Company, are liable for federal, state, and local income taxes based on their share of HoldCo’s taxable income. Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. OpcoHoldco makes cash distributions to permit the membermembers to pay these taxes as needed by the member’s tax situation.attributable to their allocable share of income earned. In the years ended December 31, 20172020 and 2016,2019, the Company did not make anymade cash distributions. Indistributions of $0.05 million and $1.7 million, respectively. Additionally, Holdco accrues for distributions required to be made related to estimated income taxes. During the yearyears ended December 31, 2017 Opco2020 and 2019, the Company relieved previously accrued $597 thousand for anticipated tax distributions to Continuing LLC Owners.of $(0.4)million and accrued distributions of $0.8 million, respectively. This liability is included in accounts payable on the consolidated balance sheet.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 to 21 percent and requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. Staff Accounting Bulletin (SAB) 118 establishes a one-year measurement period to complete the accounting for the ASC 740 income tax effects of the Tax Act. An entity recognizes the impact of those amounts for which the accounting is complete. For matters that have not been completed, provisional amounts are recorded to the extent they can be reasonably estimated. For amounts for which a reasonable estimate cannot be determined, no adjustment is made until such estimate can be completed.
The Company was able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the deemed repatriation tax, and the remeasurement of deferred taxes. We recorded a provisional net tax expense of $3.6 million in the period ended December 31, 2017 attributable to the Tax Act. This net expense consists of an expense of $0.2 million for the Company’s allocated share of the one-time transition tax on unrepatriated earnings of foreign subsidiaries and a net expense of $3.4 million primarily due to the remeasurement of deferred tax assets associated with the corporate rate reduction.
These estimates may be impacted as we further analyze available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and guidance issued by standard-setting bodies that provide interpretative guidance of the Tax Act.
The components of earnings before incomenet loss taxes, determined by tax jurisdiction, are as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | United States | | $ | 11,479 | | $ | (3,634) | | $ | (1,209) | Foreign | | | 308 | | | 239 | | | (140) | Total | | $ | 11,787 | | $ | (3,395) | | $ | (1,349) |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | United States | | $ | (29,239) | | $ | (17,953) | | $ | (1,116) | Foreign | | | 433 | | | 342 | | | 542 | Total | | $ | (28,806) | | $ | (17,611) | | $ | (574) |
The provision for income taxes for 2017, 2016,2020, 2019, and 20152018 consisted of the following: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Current: | | | | | | | | | | Federal | | $ | (10) | | $ | - | | $ | - | State | | | 63 | | | - | | | - | Foreign | | | - | | | - | | | - | | | $ | 53 | | $ | - | | $ | - | Deferred and other: | | | | | | | | | | Federal | | | 3,708 | | | - | | | - | State | | | 19 | | | - | | | - | Foreign | | | 190 | | | - | | | - | | | | 3,917 | | | - | | | - | Total tax expense | | $ | 3,970 | | $ | - | | $ | - |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | Current: | | | | | | | | | | Federal | | $ | — | | $ | — | | $ | — | State | | | 327 | | | 317 | | | 148 | Foreign | | | 137 | | | 17 | | | — | | | $ | 464 | | $ | 334 | | $ | 148 | Deferred and other: | | | | | | | | | | Federal | | | 40,598 | | | (2,146) | | | (751) | State | | | 11,175 | | | (1,336) | | | (135) | Foreign | | | (21) | | | (161) | | | 77 | | | | 51,752 | | | (3,643) | | | (809) | Total income tax expense (benefit) | | $ | 52,216 | | $ | (3,309) | | $ | (661) |
Reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Income tax expense (benefit) at federal statutory rate | | | 35.0 | % | | 35.0 | % | | 35.0 | State and local income taxes net of federal tax benefit | | | - | | | - | | | (43) | Non-controlling interest and nontaxable income | | | (33.2) | | | (37.4) | | | - | Tax Cuts and Jobs Act of 2017 | | | 30.7 | | | - | | | - | Nondeductible/nontaxable items | | | 1.2 | | | 2.4 | | | 8 | Income tax expense (benefit) | | | 33.7 | % | | - | | | - |
| | | | | | | | | | | | | Years Ended December 31 | | | | | 2020 | | | 2019 | | | 2018 | | Income tax expense (benefit) at federal statutory rate | | | 21.0 | % | | 21.0 | % | | 21.0 | % | State and local income taxes net of federal tax benefit | | | 2.4 | | | 1.3 | | | (5.7) | | Non-controlling interest and nontaxable income | | | (2.9) | | | (4.0) | | | 54.7 | | Deferred tax rate changes | | | (1.3) | | | (0.4) | | | 37.2 | | Share-based compensation | | | 0.6 | | | 0.1 | | | 18.3 | | Tax Cuts and Jobs Act of 2017 | | | - | | | - | | | (13.1) | | Return-to-Provision | | | (2.0) | | | 0.8 | | | 13.4 | | Valuation Allowance | | | (198.4) | | | 0.4 | | | 0.7 | | Other | | | (0.7) | | | (0.4) | | | (11.3) | | Effective income tax rate | | | (181.3) | % | | 18.8 | % | | 115.2 | % |
Our effective income tax rate differsis affected primarily by the recognition of a valuation allowance during the year ended December 31, 2020 and the portion of income and expense allocated to the noncontrolling interest. It is also affected by discrete items that may occur in any given year such as stock based compensation, but are not consistent from statutory rates primarily dueyear to our pass-through entity structure for U.S. income tax purposes.year. As a result of the IPO and reorganization transactions, the Company has recorded deferred tax assets and liabilities based on the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 20172020 and 20162019 are as follows: | | | | | | | $'s in 000's | | 2020 | | 2019 | Deferred tax assets | | | | | | | Investment in partnership | | $ | 53,294 | | $ | 53,303 | Fixed assets | | | 32 | | | 29 | Net operating loss carryforwards and tax credits | | | 18,001 | | | 6,775 | Other accruals and reversals | | | 9 | | | 5 | Subtotal | | | 71,336 | | | 60,112 | Less: valuation allowance | | | (71,161) | | | (143) | Net deferred tax assets | | | 175 | | | 59,969 | | | | | | | | Deferred tax liabilities | | | | | | | Intangible assets | | $ | (447) | | $ | (293) | Other | | | (6) | | | (5) | Net deferred tax liabilities | | $ | (453) | | $ | (298) |
$'s in 000's | | | 2017 | | | 2016 | Investment in partnership | | $ | 5,855 | | $ | - | Net operating loss carryforwards and tax credits | | | 536 | | | 520 | Other | | | 66 | | | 47 | Subtotal | | | 6,457 | | | 567 | Less: valuation allowance | | $ | (237) | | $ | (91) | Total net deferred tax assets | | | 6,220 | | | 476 | Intangible assets | | | (412) | | | (476) | Other | | | (5) | | | - | Total deferred tax liabilities | | | (417) | | | - | Net deferred tax asset | | $ | 5,803 | | $ | - |
$66.0 million, of which $1.9 million, generated in 2017 and prior, will expire in 2037, the remaining NOLs do not expire. The NOL generated in 2018 and after of $64.1 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company has a federal business interest expense carryover totaling $6.1 million as of December 31, 2020, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. As of December 31, 2020, the Company has charitable contribution carryforwards of $1.0 million, which if unused will expire between 2021 and 2025. The Company has state NOL carryforwards of $384.7 million (tax effected $2.8 million) as of December 31, 2020 which expire between 2022 and 2038 and others that have an indefinite carryforward period. At December 31, 2020 the Company had foreign NOL carryforwards of $0.8 million which do not expire. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from the recorded deferred tax assets will not be realized. The Company has recorded a valuation allowance for certain deferred tax assets of $237 thousand$71.2 million and $91 thousand,$0.1 million as of December 31, 20172020 and December 31, 2016,2019, respectively. The valuation allowance pertains to certain international loss carryforwards, some of whichIn future periods, if we conclude we have no expiration and others that would expire beginning in 2018. The Tax Act contains a new law that requires a current inclusion in U.S. federalfuture taxable income of certain earnings of controlled foreign corporations, also known as the tax on global intangible low taxed income (GILTI), beginning in 2018. The FASB has provided that companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, orsufficient to recognize the deferred taxes for temporary differences, including outside basis differences, expected to reverse as GILTI. Due totax assets, we may reduce or eliminate the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act. We have not recorded any provisional amounts as of December 31, 2017 nor have we made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into our measurement of deferred taxes.
valuation allowance. The Company has not recognized any uncertain tax positions, penalties or interest as we have concluded that no such positions exist. Accordingly, no0 unrecognized tax benefit would impact the effective tax rate. If interest and penalties were accrued, we would recognize interest and penalties as income tax expense. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017,2020, tax years for 2014, 2015, and 2016from 2017 to present are subject to examination by the tax authorities. With few exceptions, as On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes temporary changes regarding the prior and future utilization of December 31, 2017, we are no longer subjectnet operating losses, temporary changes to U.S. federal, state, local, or foreign examinations bythe prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax authoritieslegislation for years before 2014.tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company will benefit from the Employee Retention Credits and the payroll tax deferral. Note 7Note 8 – Earnings (loss)Loss per Share Basic and Diluted Earnings (loss)Loss per Share share Basic earnings (loss)loss per share of Class A common stock is computed by dividing net income (loss)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 incomeloss 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 9 — 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 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 (loss) per share would not be appropriate.
Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit 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 (loss) per share information has not been presented for periods
prior to the IPO on July 20, 2017. The basic and diluted earnings (loss) per share represent only the the period July 20, 2017 to December 31, 2017.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock: | | | | | | | ($'s in 000's, except for per share amounts) | | December 31, 2017 | Numerator: | | | | Net income | | $ | 7,817 | Less: net income attributable to non-controlling interests | | | (11,310) | Net loss attributable to PetIQ, Inc. — basic | | | (3,493) | 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 (in 000's)-- diluted | | | 13,223 | | | | | Earnings per share of Class A common stock — basic | | $ | (0.26) | Earnings per share of Class A common stock — diluted | | $ | (0.26) |
| | | | | | | | | | | | Year ended December 31, | (in 000's, except for per share amounts) | | | 2020 | | 2019 | | 2018 | Numerator: | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Less: net (loss) income attributable to non-controlling interests | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. — basic and diluted | | | (77,474) | | | (11,453) | | | (782) | Denominator: | | | | | | | | | | Weighted-average shares of Class A common stock outstanding -- basic | | | 24,629 | | | 22,652 | | | 17,216 | Dilutive effects of stock options that are convertible into Class A common stock | | | — | | | — | | | — | Dilutive effect of RSUs | | | — | | | — | | | — | Dilutive effect for conversion of Notes | | | — | | | — | | | — | Weighted-average shares of Class A common stock outstanding -- diluted | | | 24,629 | | | 22,652 | | | 17,216 | | | | | | | | | | | Loss per share of Class A common stock — basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Loss per share of Class A common stock — diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock as well as all stock options and restricted stock units have not been included in the diluted earnings (loss)loss per share calculation as they have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively. Additionally, all stock options and restricted stock units and convertible Notes have not been included in the diluted earnings per share calculation for the years ended December 31, 2020, 2019 and 2018, as they have been determined to be anti-dilutive under the treasury stock method. Note 89 – Stock Based Compensation Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of December 31, 2017, 1,315,4032020 and 2019, 1,293 thousand and 2,017 thousand shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares. PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provides for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800thousand shares of Class A Common Stock of the Company. As of December 31, 2020, 0 shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock. Stock Options The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, whichperiod. Expense recognized totaled $447 thousand$6.5 million and $6.2 million for the yearyears ended December 31, 2017.2020, and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended December 31:periods ended: | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Expected term (years) (1) | | | 6.25 | | | | 6.25 | | Expected volatility (2) | | | 33.91 | % | | | 35.00 | % | Risk-free interest rate (3) | | | 0.37 | % | | | 2.37 | % | Dividend yield (4) | | | 0.00 | % | | | 0.00 | % |
| (1) | | | | | | | 2017
| Expected term (years) (1)
| | | 6.25 | | Expected volatility (2)
| | | 35.00 | %
| Risk-free interest rate (3)
| | | 1.98 | %
| Dividend yield (4)
| | | 0.00 | %
|
| (1)
| | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
| (2) | (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) | (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) | (4)
| | The Company has not paid and does not anticipate paying a cash dividend on our common stock. |
The weighted average grant date fair value of stock options granted during the period ended December 31, 2020 and 2019 was $11.88 and $10.63, respectively, per option. The following table summarizes the activity of the Company’s unvested stock options for the period ended December 31, 2017: The grant date fair value of stock options granted during the period ended December 31, 2017 was $6.08 per option.2020: | | | | | | | | | | | | | | | | | | | | | 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 | | | (205,405) | | | 16 | | | | | | | Cancelled | | | — | | | | | | | | | | Outstanding at December 31, 2017 | | | 598,644 | | $ | 16 | | $ | 3,496 | | | 9.5 | Options exercisable at December 31, 2017 | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Average | | | | | Weighted | | Aggregate | | Remaining | | | Stock | | Average | | Intrinsic | | Contractual | | | Options | | Exercise | | Value | | Life | | | (in 000's) | | Price | | (in 000's) | | (years) | Outstanding at December 31, 2017 | | | 599 | | $ | 16.00 | | $ | 3,496 | | | 9.5 | Granted | | | 1,617 | | | 25.74 | | | | | | | Exercised | | | (76) | | | 18.83 | | | | | | | Forfeited | | | (195) | | | 21.37 | | | | | | | Cancelled/Expired | | | — | | | — | | | | | | | Outstanding at December 31, 2018 | | | 1,945 | | $ | 23.45 | | $ | 5,527 | | | 9.1 | Granted | | | 423 | | | 27.54 | | | | | | | Exercised | | | (119) | | | 19.51 | | | | | | | Forfeited | | | (168) | | | 21.92 | | | | | | | Cancelled/Expired | | | (9) | | | 25.70 | | | | | | | Outstanding at December 31, 2019 | | | 2,072 | | $ | 24.63 | | $ | 6,266 | | | 8.0 | Granted | | | 505 | | | 20.22 | | | | | | | Exercised | | | (395) | | | 23.48 | | $ | 4,468 | | | | Forfeited | | | (96) | | | 21.42 | | | | | | | Outstanding at December 31, 2020 | | | 2,086 | | $ | 23.93 | | $ | 30,302 | | | 7.2 | Options exercisable at December 31, 2020 | | | 831 | | | | | $ | 11,778 | | | 5.9 |
At December 31, 2017,2020, total unrecognized compensation cost related to unvested stock options was $3.2$8.4 million and is expected to be recognized over a weighted-average period of approximately 3.52.2 years. Restricted Stock Units The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will generally be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At December 31, 2020, total unrecognized compensation cost related to unvested RSUs was $5.8 million and is expected to vest over a weighted average of 2.8 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.6 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The following table summarizes the activity of the Company’s RSUs for the period ended December 31, 2020: | | | | | | | | | | | Weighted | | | Number of | | Average | | | Shares | | Grant Date | | | (in 000's) | | Fair Value | Outstanding at December 31, 2018 | | | 51 | | $ | 33.16 | Granted | | | 123 | | | 27.61 | Settled | | | (25) | | | 30.43 | Forfeited | | | (15) | | | 30.58 | Outstanding at December 31, 2019 | | | 133 | | $ | 28.85 | Granted | | | 271 | | | 20.73 | Settled | | | (70) | | | 25.65 | Forfeited | | | (17) | | | 23.34 | Nonvested RSUs at December 31, 2020 | | | 317 | | $ | 22.91 |
The total equity based compensation expense for these plans over the vesting period totaled $9.2 million, $7.4 million, and $3.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.0 million, $1.4 million and $0.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Note 910 - 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 $30.5 million 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 $25.4 million in preference notes;
|
| ·
| | The Company purchased from Continuing LLC Owners 133,334 LLC Interests in exchange for $2.1 million.
|
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. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.
Immediately following the Reclassification, PetIQ became a holding company and our principal asset is the LLC interests. As the sole managing member of HoldCo, PetIQ operates and controls all of the business and affairs of HoldCo and, through HoldCo and its subsidiaries, conducts business. In addition, PetIQ controls the management of, and has a controlling interest in, HoldCo and, therefore, PetIQ 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 net income (loss) is allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners to a portion of Holdco’s net income (loss).
Other than its purchase of LLC Interests with the net proceeds the IPO, PetIQ has not provided any financial or other support to HoldCo. PetIQ is not required to provide financial or other support for HoldCo, though it will control HoldCo’s business and other activities through its managing member interest in HoldCo. Because PetIQ is not a guarantor or obligor with respect to any of the liabilities of HoldCo, absent any such arrangement, the creditors of HoldCo will not have any recourse to the general credit of PetIQ. Nevertheless, because PetIQ will have no material assets other than its interests in HoldCo, any change in HoldCo’s financial condition could result in PetIQ recognizing a loss.
Amendment and Restatement of Certificate of Incorporation
On July 20, 2017, the CompanyThe Company’s amended and restated its certificate of incorporation, to, among other things, provideprovides for the (i) authorization of 125,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) authorization of 8,401,521100,000,000 shares of Class B common stock with a par value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.
Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one1 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-one1-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-one1-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). Initial2018 Public Offering
On July 20, 2017,October 1, 2018, the Company completedclosed an IPOunderwritten public offering of 7,187,5005,750 thousand 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.stock. The Company received $104.0 million in proceeds, net of underwriting discounts, commissions and offering costs, which were used repay $56.0 million 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 sharesold 2,000 thousand newly issued shares of Class A common stock in the IPO lessand received net proceeds of approximately $73.9 million after deducting underwriting discounts and commissions and to purchase 133,334offering expenses. The remaining 3,750 thousand shares of Class A common stock were sold by selling stockholders and the Company did not receive any proceeds with respect hereto. In conjunction with the 2018 Public Offering, a number of holders of Class B common stock exchanged 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 offor Class A common stock, there were 13,222,583 sharesstock. The
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, HoldCo amended and restatedimpact on non-controlling interest is shown along with other exchanges during the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interestsyear 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.Note 11 – Non-Controlling Interests.
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 equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of such 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 1011 - Non-Controlling Interests In connection with the Reorganization Transactions described in Note 9 — 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 non-controlling 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 December 31, 2017,2020, there were 21,490,77128,751 thousand LLC Interests outstanding, of which PetIQ owned 13,222,583,25,711thousand, representing a 61.5%an 89.4% ownership interest in HoldCo. Exchange and other equity activity during the years ended December 31, 2020 and 2019 resulted in weighted average ownership of HoldCo by PetIQ of 86.4% and 80.2%, respectively. | | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | Continuing LLC | | | | | | | | | Continuing LLC | | | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of December 31, 2017 | | | 8,268,188 | | | 13,222,583 | | | 21,490,771 | | | 38.5% | 61.5% |
| | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | LLC | | | | | | | | | LLC | | $'s in 000's | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of January 1, 2019 | | | 6,547 | | | 21,620 | | | 28,167 | | | 23.2% | 76.8% | Stock based compensation adjustments | | | — | | | 140 | | | 140 | | | | | Exchange transactions | | | (1,794) | | | 1,794 | | | — | | | | | As of December 31, 2019 | | | 4,752 | | | 23,554 | | | 28,306 | | | 16.8% | 83.2% | Stock based compensation adjustments | | | — | | | 445 | | | 445 | | | | | Exchange transactions | | | (1,712) | | | 1,712 | | | — | | | | | As of December 31, 2020 | | | 3,040 | | | 25,711 | | | 28,751 | | | 10.6% | 89.4% |
Note 11Note 12 - Customer Concentration The Company has significant exposure to customer concentration. During each of the years ended December 31, 2017, 2016,2020, 2019, and 2015, three2018, 2, 2, and 1 customers, respectively, accounted for more than 10% of sales individually. In total for the years ended December 31, 2017, 2016,individually and 2015, the three customersin aggregate accounted for 61%42%, 70%35%, and 74%18% of net sales, respectively. At December 31, 2017 and December 31, 2016, three and four customers, respectively,2020, 1 Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 48% and 60%, respectively, 52% of outstanding trade receivables, net. TheAt December 31, 2019 2 Products segment customers are customersindividually accounted for more than 10% of outstanding trade receivables, and accounted for 61% of outstanding trade receivables, net. All of our Domesticcustomer concentration exists in our Products segment. Note 1213 - Commitments and Contingencies Litigation Contingencies In May 2017, Bayer Healthcare LLCDuring the years ended December 31, 2020 and its affiliates2019, the Company recorded liabilities of $7.8 million and $1.0 million, respectively, for contract termination costs, related to settlements for alleged breach of contract. The expense is included within General and Administrative expenses for the years ended December 31, 2020 and 2019.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplierfor alleged unlawful merger and other antitrust violations. On June 29, 2020, the 9th Circuit Court of Advecta 3 and PetLock MAX,Appeals issued an opinion affirming the dismissal of Med Vets’ merger challenge. On July 13, 2020, the Plaintiffs filed for an en banc hearing in the 9th Circuit Court of Appeals which we beganwas unanimously denied on August 7, 2020. The Plaintiffs time period to sell in 2017 as our value-branded alternatives to Bayer’s K9 Advantix II. Bayer alleges that 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 MAXpetition the Supreme Court for certiorari has passed, therefore the matter is considered resolved. As no impact to the Company. BayerCompany is considered probable or estimable, 0 litigation reserve has filed a motion for preliminary injunction, which motion was argued in February 2018. 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 paymentaccrued. 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 December 31, 2017 and December 31, 2016,2020 as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations. Commitments We have commitments for leases and long-term debt that are discussed further in Note 5, Debt, and Note 6, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business. Note 1314 - Segments The Company has two2 operating segments,segments: Products and thus two reportable segments, which areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers. The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas. a segment as defined in the accounting guidance related to segment reporting. Financial information relating to the Company’s operating segments for the years ended December 31: | | | | | | | | | | $'s in 000's | | Domestic | | International | | Consolidated | 2017 | | | | | | | | | | Net Sales | | $ | 261,526 | | $ | 5,161 | | $ | 266,687 | Gross profit | | | 48,997 | | | 2,197 | | | 51,194 | General and administrative expenses | | | 36,053 | | | 1,852 | | | 37,905 | Operating income | | | 12,944 | | | 345 | | | 13,289 | Interest expense | | | — | | | — | | | (1,563) | Other income, net | | | — | | | — | | | 201 | Foreign currency loss, net | | | — | | | — | | | (140) | Identifiable assets | | $ | 134,841 | | $ | 6,004 | | $ | 140,845 | Depreciation expense | | $ | 2,209 | | $ | 139 | | $ | 2,348 | Amortization expense | | $ | 797 | | $ | 255 | | $ | 1,052 | Capital expenditures | | $ | 4,011 | | $ | 120 | | $ | 4,131 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2016 | | | | | | | | | | Net Sales | | $ | 195,698 | | $ | 4,464 | | $ | 200,162 | Gross profit | | | 30,683 | | | 1,864 | | | 32,547 | General and administrative expenses | | | 30,127 | | | 1,718 | | | 31,845 | Operating income | | | 556 | | | 146 | | | 702 | Interest expense | | | — | | | — | | | (3,058) | Other income, net | | | — | | | — | | | 666 | Loss on debt extinguishment | | | — | | | — | | | (1,681) | Foreign currency loss, net | | | — | | | — | | | (24) | Identifiable assets | | $ | 76,270 | | $ | 5,060 | | $ | 81,330 | Depreciation expense | | $ | 1,877 | | $ | 38 | | $ | 1,915 | Amortization expense | | $ | 798 | | $ | 269 | | $ | 1,067 | Capital expenditures | | $ | 1,892 | | $ | 149 | | $ | 2,041 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2015 | | | | | | | | | | Net Sales | | $ | 202,092 | | $ | 3,595 | | $ | 205,687 | Gross profit | | | 37,582 | | | 1,576 | | | 39,158 | General and administrative expenses | | | 33,926 | | | 1,662 | | | 35,588 | Operating income (loss) | | | 3,656 | | | (86) | | | 3,570 | Interest expense | | | — | | | — | | | (3,545) | Loss on debt extinguishment | | | — | | | — | | | (1,449) | Foreign currency gain, net | | | — | | | — | | | 75 | Identifiable assets | | $ | 86,531 | | $ | 5,804 | | $ | 92,335 | Depreciation expense | | $ | 1,800 | | $ | 42 | | $ | 1,842 | Amortization expense | | $ | 330 | | $ | 405 | | $ | 735 | Capital expenditures | | $ | 1,479 | | $ | 71 | | $ | 1,550 |
ended: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2020 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 725,705 | | $ | 54,346 | | $ | — | | $ | 780,051 | Adjusted EBITDA | | | 117,216 | | | 3,387 | | | (52,811) | | | 67,792 | Depreciation expense | | | 4,810 | | | 3,775 | | | 3,497 | | | 12,082 | Capital expenditures | | | 13,394 | | | 7,373 | | | 1,625 | | | 22,392 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2019 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 617,118 | | $ | 92,313 | | $ | — | | $ | 709,431 | Adjusted EBITDA | | | 73,537 | | | 20,045 | | | (32,907) | | | 60,675 | Depreciation expense | | | 3,552 | | | 3,170 | | | 2,417 | | | 9,139 | Capital expenditures | | | 1,297 | | | 6,409 | | | 2,570 | | | 10,276 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2018 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 450,229 | | $ | 78,385 | | $ | — | | $ | 528,614 | Adjusted EBITDA | | | 52,185 | | | 15,246 | | | (25,892) | | | 41,539 | Depreciation expense | | | 2,343 | | | 2,326 | | | 1,988 | | | 6,657 | Capital expenditures | | | 1,339 | | | 3,440 | | | 2,399 | | | 7,178 |
The following table reconciles Segment Adjusted EBITDA to Net (Loss) income for the periods presented. | | | | | | | | | | | | For the years ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | Adjusted EBITDA: | | | | | | | | | | Product | | $ | 117,216 | | $ | 73,537 | | $ | 52,185 | Services | | | 3,387 | | | 20,045 | | | 15,246 | Unallocated Corporate | | | (52,811) | | | (32,907) | | | (25,892) | Total Consolidated | | | 67,792 | | | 60,675 | | | 41,539 | Adjustments: | | | | | | | | | | Depreciation | | | (12,082) | | | (9,139) | | | (6,657) | Amortization | | | (12,815) | | | (5,994) | | | (5,210) | Interest | | | (26,299) | | | (14,495) | | | (8,022) | Acquisition costs(1) | | | (2,620) | | | (6,147) | | | (3,787) | Stock based compensation expense | | | (9,170) | | | (7,355) | | | (3,812) | Purchase accounting adjustment to inventory(2) | | | — | | | (4,805) | | | (2,149) | Non same-store revenue(3) | | | 8,987 | | | 8,088 | | | 3,967 | Non same-store costs(3) | | | (22,256) | | | (19,553) | | | (10,345) | Fair value adjustment of contingent note | | | — | | | (7,320) | | | (3,280) | Integration costs and costs of discontinued clinics(4) | | | (9,776) | | | (3,788) | | | (998) | Clinic launch expenses(5) | | | (3,085) | | | (767) | | | (1,380) | Non-recurring royalty settlement(6) | | | — | | | — | | | (440) | SKU Rationalization(7) | | | — | | | (6,482) | | | — | Litigation expenses | | | (1,006) | | | (529) | | | — | COVID-19 related costs(8) | | | (6,476) | | | — | | | — | Pretax net loss | | $ | (28,806) | | $ | (17,611) | | $ | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Purchase accounting adjustment to inventory represents the portion of costs of sales related to the fair value of inventory adjusted as part of the purchase price allocation. During 2019 the amounts relate to the Perrigo Animal Health Acquisition and are part of the Products segment. During 2018 the costs relate to the VIP Acquisition which are part of the Services Segment and the HBH Acquisition, which is part of the Products Segment. |
| (3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
| (6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
| (7) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
| (8) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
Supplemental geographic disclosures are below. | | | | | | | | | | | Year ended December 31, 2020 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 719,282 | $ | 6,423 | $ | 725,705 | Service revenue | | | 54,346 | | — | | 54,346 | Total net sales | | $ | 773,628 | $ | 6,423 | $ | 780,051 |
| | | | | | | | | | | Year ended December 31, 2019 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 610,986 | $ | 6,132 | $ | 617,118 | Service revenue | | | 92,313 | | — | | 92,313 | Total net sales | | $ | 703,299 | $ | 6,132 | $ | 709,431 |
| | | | | | | | | | | Year ended December 31, 2018 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 444,364 | $ | 5,865 | $ | 450,229 | Service revenue | | | 78,385 | | — | | 78,385 | Total net sales | | $ | 522,749 | $ | 5,865 | $ | 528,614 |
The net book value of property plant and equipment, by geographic location was as follows as of: | | | | | | | | | December 31, 2020 | | December 31, 2019 | United States | | $ | 61,807 | | $ | 51,397 | Europe | | | 1,339 | | | 1,128 | Total | | $ | 63,146 | | $ | 52,525 |
Note 1415 - Related Parties Opco had entered into management consulting services agreements with members of HoldCo. The services were related to financial transactions and other senior management matters related to business administration. Those agreements provided for the Company to pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded in general and administrative expenses in the consolidated statement of operations. The Company recorded $610 thousand, $864 thousand and $462 thousand for the year ended December 31, 2017, 2016, and 2015, respectively. Upon consummation of the recapitalization and IPO transactions, these agreements were terminated.
As discussed in Note 6–7– Income taxes, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At December 31, 2017,2020 and 2019, the Company had paid $0.03 million in advance on required tax distributions and accrued $597 thousand$0.4 million, respectively, for estimated tax distributions, which are included in accounts payable on the consolidated balance sheets. As discussed in Note 5– Debt, the Company has notes payable to the Sellers of VIP, who are significant shareholders of the Company, of $27.5 million. The Company had $0.5 million and $0.3 million of accrued interest on these notes as of December 31, 2020, and 2019, respectively. The Company paid $1.7 million and $1.3 million of interest for the years ended December 31, 2020 and 2019, respectively, and paid 0 interest for the year ended December 31, 2018. Will Santana, a former owner of VIP and board member of PetIQ until July 1, 2020, was one of the main beneficiaries of the VIP Notes. Mr. Santana has sold a sizable portion of his ownership in PetIQ and resigned from the board during 2020, as such he will no longer be considered a related party. The Company leases office and warehouse space from a company under common control of the sellers of VIP, commencing on January 17, 2018. The Company incurred rent expenses of $0.4 million in each of the years ending December 31, 2020, 2019, and 2018, respectively. The lease ended January 5, 2021. Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s annual premium expense, paid to Moreton and subsequently transferred to insurance providers, was $1.1$2.8 million, $2.3 million and $1.5 million in 2017.2020, 2019 and 2018, respectively. Mr. Christensen was paid a commission of approximately $60 thousand$0.1 million in each of the years ending December 31, 2020, 2019, and 2018, respectively, by Moreton for the sale of such insurance policies to the Company. In April 2020, the Company purchased a parcel of land for $2.5 million. The broker for the Company was Colliers International, and the agent was Mike Christensen, the brother of CEO McCord Christensen. Total commission paid to Colliers was approximately $75 thousand. Note 15 – Quarterly information (unaudited)
| | | | | | | | | | | | | ($’s in 000’s except per share amounts) | | | Quarter 1 | | | Quarter 2 | | | Quarter 3 | | | Quarter 4 | 2017: | | | | | | | | | | | | | Net sales | | $ | 67,029 | | $ | 87,178 | | $ | 60,554 | | $ | 51,926 | Gross profit | | | 12,200 | | | 15,951 | | | 12,517 | | | 10,526 | Selling, general, and administrative expenses | | | 7,405 | | | 9,277 | | | 10,739 | | | 10,484 | Operating income | | | 4,795 | | | 6,674 | | | 1,778 | | | 42 | Net income | | | 4,279 | | | 6,070 | | | 859 | | | (3,391) | Basic net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Diluted net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Basic weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | Diluted weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | | | | March 31, 2016 | | | June 30, 2016 | | | September 30, 2016 | | | December 31, 2016 | 2016: | | | | | | | | | | | | | Net sales | | $ | 52,298 | | $ | 61,280 | | $ | 41,671 | | $ | 44,913 | Gross profit | | | 9,772 | | | 8,961 | | | 6,160 | | | 7,654 | Selling, general, and administrative expenses | | | 8,063 | | | 8,302 | | | 7,942 | | | 7,538 | Operating income | | | 1,709 | | | 659 | | | (1,782) | | | 116 | Net income | | | (304) | | | 598 | | | (2,512) | | | (1,177) | Basic net income per common share(1) | | | - | | | - | | | - | | | - | Diluted net income per common share(1) | | | - | | | - | | | - | | | - | Basic weighted average shares(1) | | | - | | | - | | | - | | | - | Diluted weighted average shares(1) | | | - | | | - | | | - | | | - |
| (1)
| | Number of shares out standing and earnings per share prior to our IPO on July 26, 2017 are not reported, see Note 7 in the accompanying consolidated financial statements.
|
Note 16 – Subsequent EventsEmployee Benefit Plans On January 17, 2018, we acquired Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP”). The aggregate consideration, comprisedCompany sponsors 401(k) defined contribution plans at certain subsidiaries. Participants may elect to defer up to 100% of (i) $100compensation. The Company makes matching contributions of 100% of the employee deferrals up to 3% of compensation. The Company may also make discretionary profit sharing contributions each year, which are allocated to each eligible participant based on compensation. The Company made matching contributions of $0.9 million, of cash, (ii) 4,200,000 LLC Interests of PetIQ Holdings, LLC, 4,200,000 shares of Class B common stock, (iii) promissory notes consisting of (A) a $10.0$0.6 million, note payable 5 years and 6 months after the closing, which shall accrue interest quarterly in arrears at a rate of 6.75% per annum, (B) a $10.0$0.3 million, note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $40.0 millionrespectively, for the year endingyears ended December 31, 2018, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the first anniversary of the closing,2020, 2019 and (C) a $10.0 million note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2019, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the second anniversary of the closing; provided that such note shall also become payable if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2018.
In connection with the VIP Acquisition, the Company amended and restated their existing revolving credit agreement (the “A&R Credit Agreement”) on January 17, 2018. The A&R Credit Agreement provides for a secured revolving credit facility of $50 million in the aggregate, at either LIBOR or Base (prime) interest rates plus an applicable margin.
All obligations under the A&R Credit Agreement are unconditionally guaranteed by HoldCo and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the A&R Credit Agreement, subject to certain exceptions.
Also in connection with the closing of the VIP Acquisition, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”). The Term Loan Credit Agreement provides for a secured term loan credit facility of $75 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin.
In connection with execution of the Unit Purchase Agreement to acquire VIP, options to purchase an aggregate 800,000 shares of Class A Common Stock of the Company (the “Inducement Awards”) were issued to 30 employees hired in connection with the transaction as employment inducement awards. The awards vest quarterly on each of the first four anniversaries of the closing date of the acquisition, generally subject to continued employment through each vesting date.
ItemItem 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None. ItemItem 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information that we are required to disclose in reports that we file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting We are responsible for establishing and maintaining internal control over Financing Reportingfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include a reportOur management, under the supervision and with the participation of management’sour Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, regardingour management used the Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
The Company’s registered independent accounting firm, KPMG LLP, has audited the effectiveness of our internal controls over financial reporting as of December 31, 2020, as stated in their report which appears on the next page. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended, December 31, 2020 that has materially affected, or an attestation reportis reasonably likely to materially affect, our internal control over financial reporting. | |
| | | KPMG LLP Suite 600 205 North 10th Street Boise, ID 83702-5798 |
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on Internal Control Over Financial Reporting We have audited PetIQ, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, consolidated stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s registeredmanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm dueregistered with the PCAOB and are required to a transition period established bybe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SECSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for newly public companies.our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Boise, Idaho
February 26, 2021 Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation: | ·
● | | statements regarding our strategies, results of operations or liquidity; |
| ·
● | | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
| ·
● | | statements of management’s goals and objectives; and |
| ·
● | | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy and our ability to successfully grow our business through acquisitions; our ability to integrate, manage and expand VIP’s business; and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others in our industry; 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’ section of this annual report on Form 10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements. Item 9B - Other Information None. PART III Item 10 – Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 11 – Executive Compensation The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 13 – Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 14 – Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
PART IV Item 15. Exhibits, Financial Statement Schedules See "Index to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notesnotes. | | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Unit Purchase Agreement dated January 5, 2018 | 8-K | 001-38163 | 2.1 | 8-Jan-18 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 11-Jul-17 | 3.2 | Bylaws of PetIQ, Inc. | S-1/A | 333-218955 | 3.2 | 6-Jul-17 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 17-Jul-17 | 10.1 | Registration Rights Agreement | S-1/A | 333-218955 | 10.2 | 6-Jul-17 | 10.2 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 23-Jan-18 | 10.3 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 23-Jan-18 | 10.4 | Term Loan Credit Agreement, dated January 17, 2018 by and among PetIQ, LLC, Ares Capital Corporation and the other Lenders party there, and Ares Capital Corporation, as Administrative Agent | 8-K | 001-38163 | 10.3 | 23-Jan-18 | 10.5 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 6-Jul-17 | 10.6* | Employment Agreement, dated as of January 17, 2018, by and between PetIQ, LLC and Will Santana | 8-K | 001-38163 | 10.4 | 23-Jan-18 | 10.7 | Form of Contribution Agreement | S-1/A | 333-218955 | 10.5 | 6-Jul-17 | 10.8 | Form of Preference Note | S-1/A | 333-218955 | 10.6 | 6-Jul-17 | 10.9 | Amended and Restated Credit Agreement, dated March 24, 2016, among PetIQ, LLC, the other credit parties thereto, Crystal Financial LLC and the other lenders party thereto | DRS/A | | 10.14 | 13-May-16 | 10.10 | Form of Recapitalization Agreement | S-1/A | 333-218955 | 10.7 | 6-Jul-17 | 10.11* | Employment and Non-Competition Agreement between True Science Holdings, LLC, and Scott Adcock | DRS/A | | 10.8 | 13-May-16 | 10.12* | Chief Financial Officer Employment Offer | DRS/A | | 10.10 | 13-May-16 | 10.13* | PetIQ Inc. 2017 Omnibus Incentive Plan | S-1/A | 333-218955 | 10.11 | 6-Jul-17 |
| | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Purchase and Sale Agreement, dated May 8, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc and PetIQ, Inc. | 8-K | 001-38163 | 2.1 | 5/8/2019 | 2.2 | Amended and Restated Asset Purchase Agreement, dated June 21, 2020, by and between Elanco US Inc., PetIQ, LLC and PetIQ, Inc. | 10-Q | 001-38163 | 2.1 | 8/10/2020 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 7/11/2017 | 3.2 | Amended and Restated Bylaws of PetIQ, Inc. | 8-K | 001-38163 | 3.1 | 2/23/2021 | 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | 8-K | 001-38163 | 3.1 | 6/1/2018 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 7/17/2017 | 4.2 | Registration Rights Agreement, dated July 20, 2017, among PetIQ, Inc. the Continuing LLC owners and the C-Corp LLC Parents | S-3 | 333-227186 | 4.1 | 9/4/2018 | 4.3 | Registration Rights Agreement, dated January 17, 2018, between PetIQ, Inc. and each VIP Petcare Owner | S-3 | 333-227186 | 4.2 | 9/4/2018 | 4.4 | Description of PetIQ, Inc.’s Securities | 10-K | 001-38163 | 4.4 | 3/11/2020 | 4.5 | Indenture, dated May 14, 2020, among PetIQ, Inc. and Wells Fargo, National Association, as trustee | 8-K | 001-38163 | 4.1 | 5/20/2020 | 10.1 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 7/6/2017 | 10.2 | First Amendment to PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | 10-K | 001-38163 | 10.1 | 3/12/2019 | 10.3 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party thereto, East West Bank and the other lenders party thereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 1/23/2018 | 10.4 | First Amendment and Joinder, dated as of August 9, 2018, to Credit Agreement dated as January 17, 2018 | 10-Q | 001-38163 | 10.1 | 8/14/2018 | 10.5 | Second Amendment to Amended and Restated Credit Agreement, dated March 25, 2019, by and among PetIQ, LLC, the other credit parties party thereto, the lenders party thereto and East West Bank | 10-Q | 001-38163 | 10.1 | 8/8/2019 | 10.6 | Third Amendment to Amended and Restated Revolving Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 7/9/2019 | 10.7 | Third Amendment to Amended and Restated Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 10-Q | 001-38163 | 10.2 | 8/10/2020 | 10.8 | Fourth Amendment to Amended and Restated Credit Agreement, dated May 14, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 5/14/2020 |
10.9 | Sixth Amendment to Amended and Restated Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 8/3/2020 | 10.10 | Amended and Restructured Term Loan Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.3 | 7/9/2019 | 10.11 | Second Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.1 | 5/14/2020 | 10.12 | Third Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.2 | 8/10/2020 | 10.13 | Fourth Amendment to Term Loan Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.1 | 8/3/2020 | 10.14 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 1/23/2018 | 10.15* | PetIQ Inc. Amended and Restated 2017 Omnibus Incentive Plan | 8-K | 333-218955 | 10.1 | 5/31/2019 | 10.16* | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 7/20/2017 | 10.17* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | 10-Q | 001-38163 | 10.2 | 11/14/2018 | 10.18* | Amended and Restated Employment and Non-Competition Agreement between PetIQ, LLC and McCord Christensen | 10-Q | 001-38163 | 10.1 | 5/9/2019 | 10.19* | Employment and Non-Competition Agreement, dated September 17, 2018, between PetIQ, LLC and Susan Sholtis | 8-K | 001-38163 | 10.1 | 9/20/2018 | 10.20* | Employment and Non-Competition Agreement, dated as of May 28, 2019, between PetIQ, LLC and Michael Smith | 8-K | 001-38163 | 10.5 | 7/9/2019 | 10.21* | Employment and Non-Competition Agreement between PetIQ, LLC and John Newland | 10-Q | 001-38163 | 10.2 | 5/9/2019 | 10.22* | Employment and Non-Competition Agreement between PetIQ, LLC and R. Michael Herrman | 10-Q | 001-38163 | 10.3 | 5/9/2019 | 10.23* | PetIQ, Inc. 2017 Omnibus Incentive Plan Restricted Stock Unit Agreement | 10-Q | 001-38163 | 10.3 | 11/14/2018 | 10.24* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors | 10-Q | 333-218955 | 10.4 | 11/14/2018 | 10.25* | PetIQ, Inc. Amended and Restated 2018 Inducement and Retention Stock Plan for CVC Employees | S-8 | 333-223635 | 4.3 | 3/13/2018 | 10.26 | First Amendment to Purchase and Sale Agreement, dated July 7, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc, and PetIQ, Inc. | 8-K | 001-38163 | 10.1 | 7/9/2019 | 10.27 | Transition Services Agreement, dated July 8, 2019, by and between PetIQ, LLC and L. Perrigo Company | 8-K | 001-38163 | 10.4 | 7/9/2019 | 10.28 | Form of Base Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.1 | 5/20/2020 | 10.29 | Form of Additional Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.2 | 5/20/2020 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
10.14* | PetIQ Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | S-1/A | 333-218955 | 10.12 | 6-Jul-17 | 10.15 | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 20-Jul-17 | 10.16 | Credit Agreement, Dated as of December 21, 2016 among PetIQ, LLC, as a Borrower and as Borrower Representative, The Other Credit Parties Part Hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | S-1 | 333-218955 | 10.14 | 23-Jun-17 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 32.1** | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 32.2** | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 101.INS | XBRL Instance Document | | | | | 101.SCH | XBRL Schema Documents | | | | | 101.CAL | XBRL Calculation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | | 101.LAB | XBRL Labels Linkbase Document | | | | | 101.PRE | XBRL Presentation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | |
* Indicates management contract or compensatory plan or arrangement. ** Filed herewith Item 16. Form 10-K Summary None. 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.
| | | March 13, 2018
| /s/ John Newland
| | John Newland
| | Chief Financial Officer
|
POWER OF ATTORNEY KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint McCord Christensen and John Newland, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 13, 2018.February 26, 2021. | | | SIGNATURE | | TITLE | | | | /s/ McCord Christensen | | Chief Executive Officer, President (principal executive officer) | McCord Christensen | | Officer and Chairman of the Board | | | | /s/ John Newland | | Chief Financial Officer (principal financial and accounting officer) | John Newland | | Officer | | | | /s/ Mark First | | Director | Mark First | | | | | | /s/ James Clarke
| | Director
| James Clarke
| | | | | | /s/ Ronald Kennedy | | Director | Ronald Kennedy | | | | | | /s/ Gary MichaelScott Huff | | Director | Gary MichaelScott Huff
| | | | | | /s/ Will SantanaLarry Bird | | Director | Will SantanaLarry Bird
| | Executive Vice President
| | | |
s in 000's | | December 31, 2017 | | December 31, 2016 | | December 31, 2020 | | December 31, 2019 | Raw materials and work in progress | | $ | 4,004 | | $ | 5,924 | | Raw materials | | | $ | 15,761 | | $ | 10,675 | Work in progress | | | | 2,273 | | | 1,717 | Finished goods | | | 40,052 | | | 28,308 | | | 79,739 | | | 67,311 | Total inventories | | $ | 44,056 | | $ | 34,232 | | $ | 97,773 | | $ | 79,703 |
Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation and amortization is provided using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and capitalfinance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales orand general and administrative expenses in the consolidated statements of comprehensive income,operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows: | | | | Computer equipment and software | | | 3 years | Vehicle and vehicle accessories | | | 3-5 years | Buildings | | | 33 years | Equipment | | | 3-152-15 years
| Leasehold improvements | | | 3-92-15 years
| Furniture and fixtures | | | 8-105-10 years
|
Goodwill and Intangible Assets Indefinite lived intangible assets consist primarily of trademarks. Trademarks represent costs paid to legally register phrases and graphic designs that identify and distinguish products sold by the Company. Trademarks are not amortized, rather potential impairment is considered on an annual basis in the fourth quarter, or more frequently upon the occurrence of an event, when circumstances indicate that the book value of trademarks are greater than their fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the indefinite lived intangible asset is less than the carrying value as a basis to determine whether further impairment testing under ASC 350 is necessary. No impairment charge was recorded for the years ended December 31, 2017, 2016, and 2015.
Definite-lived intangible assets consist of a distribution agreement, production certifications, patents and processes, customer relationships, and brand names. The assets are amortized on a straight-line basis over their expected useful lives. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to the company’s future cash flows. Useful lives range from 2 to 15 years.
Goodwill
Goodwill is the excess of the consideration paid over the fair value of specifically identifiable assets, liabilities and contingent liabilities in a business combinationcombination. Intangible assets acquired are recorded at estimated fair value. Goodwill and relatesintangible assets deemed to the future economic benefits arising from assets, whichhave indefinite lives are not capable of being individually identified and separately recognized. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized, but is reviewedare tested for impairment annually induring the Company’s fourth quarter, or more frequently ifand at any time when events or changes in circumstances indicate that the carrying value may be impaired.
The goodwillsuggest an impairment test consists of a two-step process, if necessary. However, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basisoccurred.
To assess goodwill for determining whether it is necessary to perform the two-step goodwill impairment, test described in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, the Company, determines that it is not more likely than not that the fair value ofdepending on relevant facts and circumstances, performs either a reporting unit is less than its carrying amount, thenqualitative assessment or a quantitative analysis utilizing a discounted cash flow valuation model. In performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if based on the qualitative assessment, the Company concludesevaluates relevant factors such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the faircarrying value of the reporting unit is less than its carrying amount, the two-step process will be carried out. fair value, then no further testing is required. In step one,performing a quantitative analysis, the Company determines the fair value of eacha reporting unit using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including discount rates and future growth rates. In the event the carrying amount of a reporting unit exceeded its fair value, an impairment loss would be recognized. Indefinite-lived intangible assets are tested for impairment utilizing either a qualitative assessment or a quantitative analysis. For a qualitative assessment, the Company identifies and considers relevant key factors, events, and circumstances to determine whether it is necessary to perform a quantitative impairment test. The key factors considered include macroeconomic, industry, and market conditions, as well as the asset's actual and forecasted results. For the quantitative impairment tests, the Company compares itthe carrying amounts to its carrying value. Ifthe current fair market values. Intangible assets with definite lives are amortized over their estimated useful lives to reflect the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. NaN impairment charge was recorded for the years ended December 31, 2020, 2019, and 2018. Convertible Debt On May 19, 2020, we issued $143.8 million aggregate principal amount of Convertible Notes due 2026 (the “Notes”). See Note 5 – “Debt”. We separately account for the liability and equity components of convertible debt instruments that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the reporting unit exceedsliability component, using the carrying valueinterest rate of a similar liability that does not have a conversion feature, as of the net assets assigned to that unit, goodwillissuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. We recognize amortization of the resulting discount using the effective interest method as interest expense in our consolidated statements of operations. The equity component is not impairedremeasured as long as it continues to meet the conditions for equity classification. We have allocated issuance costs to the liability and no further testing is performed. Ifequity components. Issuance costs attributable to the carrying valueliability component are being amortized to expense over the respective term of the net assets assignedNotes, and issuance costs attributable to the reportingequity component were netted with the respective equity component in additional paid-in capital. Revenue Recognition When Performance Obligations Are Satisfied A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit exceedsof account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the fair valueperformance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of veterinary services. Revenue is generally recognized for product sales on a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the reporting unit, thenremaining benefits from the Company must perform the second step of the impairment testasset at this point in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. time. The Company performeddetermined that certain products manufactured to a customer’s specifications do not have an alternative future use at a reasonable profit margin due to costs associated with reworking, transporting and repackaging these products. These products are produced subject to purchase orders that include an enforceable right to payment. Therefore the Company determined that revenue on these products would be recognized over time, as the products are produced. This represents a minor subset of the products the Company manufactures. Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered at the time of service. Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its qualitative assessment during the fourth fiscal quarterrelative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data. The qualitative factors that were considered included, but were not limited to, general economic conditions, outlook for the pet sector, market capitalization, consolidated company stock price, and recent and forecasted financial performance. Goodwill impairment analysis and measurement is a process that requires significant judgment. If there are significant changes in market conditions or a future downturnperformance obligations in our business, or a future annual goodwill impairment test indicates an impairment of our goodwill,contracts are satisfied within one year. As such, we have not disclosed the Company may havetransaction price allocated to recognize impairment of its goodwill.
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 recordedremaining performance obligations as of December 31, 20172020.
Variable Consideration In addition to fixed contract consideration, most contracts include some form of variable consideration. The most common forms of variable consideration include discounts, rebates, and December 31, 2016 was $1,575 thousandsales returns and $250 thousand, respectively,allowances. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We believe there will not be significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. The Company reviews and is includedupdates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in other accrued expenses. The non-current portion recorded asthe market. Any uncertainties in the ultimate resolution of December 31, 2017 and December 31, 2016 was zero and $1,303 thousand, respectively, and is included in deferred acquisition liability. As discussed in Note 16, subsequent to December 31, 2017, the Company completed the VIP Acquisition, which included guarantee and contingent notesvariable consideration due to the sellers. See Note 16 for more information.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shipped to the customer. For customers with Free on Board (“FOB”) destination terms, a provision is recorded to exclude shipments determined to be in-transit to these customers at the endfactors outside of the reportingCompany’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.
period. A sales return allowance is recordedcustomer pricing allowances and accounts receivablemerchandising funds are reduced as revenuesoffered through various programs to customers and are recognized for estimated losses on credit sales duedesigned to customer claims for discounts, returned goodspromote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other items.
The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties. Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and in-store displays. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in other accrued expenses.the Consolidated Balance Sheets. Significant Payment Terms ShippingOur customer contracts identify the product, quantity, price, payment and Handling Costsfinal delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.
Shipping All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales. This includes shipping and handling costs after control over a product has transferred to a customer. Warranties & Returns PetIQ provides all customers with a standard or assurance type warranty. Either stated or implied, the Company provides assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No significant services beyond an assurance warranty are provided to customers. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as cost ofa reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Contract balances Contract asset and liability balances as of December 31, 2020 and 2019 are immaterial. The Company does not typically billedhave significant deferred revenue or unbilled receivable balances. Cost of Services Cost of Services are comprised of all service and product costs related to customers.the delivery of veterinary services, including but not limited to, salaries and contract costs of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold. Research and Development and Advertising Costs Research and development and advertising costs are expensed as incurred and are included in general and administrative expenses. Research and development costs amounted to $514 thousand, $310 thousand,$2.3 million, $1.3 million, and $380 thousand$0.2 million and advertising costs were $2,229 thousand, $1,179 thousand,$10.1 million, $4.5 million, and $6,077 thousand$2.9 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Collaboration Agreements Through the Perrigo Animal Health Acquisition, we entered into a product development and asset purchase agreement with a third party for certain product formulations in development by the third party. The Company may make up to $20.5 million of payments over the course of the next several years contingent on achievement of certain development and regulatory approval milestones. Product development costs are expensed as incurred or as milestone payments become probable. There can be no assurance that these products will be approved by the U.S. Food and Drug Administration (“FDA”) on the anticipated schedule or at all. Consideration paid after FDA approval will be capitalized and amortized to cost of goods sold over the economic life of each product. The expenses paid prior to FDA approval will be included in General and Administrative expenses on the Consolidated Statements of Operations. There were no expenses incurred under the agreement for the periods ended December 31, 2020 and 2019. Litigation The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If the likelihood of an adverse legal outcome is determined to be probable and the amount of loss is estimable, then a liability is accrued in accordance with accounting guidance for Contingencies. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. The Company consults with both internal and external legal counsel related to litigation. See Note 13 for more information. Stock based compensation The Company expenses employee share-based awards under ASC Topic 718, Compensation—Stock Compensation, which requires compensation cost for the grant-date fair value of share-based awards to be recognized over the requisite service period. Stock options granted to executives and other employees are valued using the Black-Scholes option pricing model. See Note 89 for more information. Accounting for Income Taxes The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense. Interest expense, net Interest expense, net, is comprised primarily of interest expense related to (i) our debt agreements, (ii) unused line fees, (iii) amortization of deferred loan fees and (iii) capitaldiscounts, (iv) finance lease obligations and the mortgage note outstanding, offset by interest income earned on our demand deposits and other assets. Interest expense was $1,638 thousand, $3,078 thousand,$26.3 million, $14.9 million, and $3,567 thousand$8.3 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, offset by $75 thousand, $20 thousand,$0.0 million, $0.4 million, and $22 thousand$0.3 million of interstinterest income, respectively. Non-controlling interest The non-controlling interests on the consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, Holdco, held by the non-controlling holders of Class B common stock and limited liability company interests in Holdco. Non-controlling interests on the consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling holders of Class B common stock and Limited Liability Company interests in Holdco. Earnings Per Share Basic earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc. by the weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc., adjusted as necessary for the impact of potentially dilutive securities, by the weighted-average shares outstanding during the period and the impact of securities that would have a dilutive effect on earnings per share. See Note 78 for further discussion. Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial statemetns to conform to current year presentation. These reclassifications had no impact on net income, shareholders’ equity, or cash flows as previously reported.
Recently Issued Accounting Pronouncements / Adopted Accounting Standard Updates In May 2014,From time to time, the Financial Accounting Standards Board (“FASB”) issuedor other standards setting bodies issue new accounting pronouncements. Updates to the Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several relatedare communicated through issuance of an Accounting Standards UpdatesUpdate (“ASUs”ASU”).
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) (“Topic 606”), which provide guidanceNo. 2016-13, "Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for recognizing revenue from contracts with customers.financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable information. Organizations will now use forward-looking information to better estimate their credit losses. The core principle of Topic 606 is that revenue is recognized when promised goods or services are transferred 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 ending March 31, 2018. We will adopt Topic 606Company adopted this ASU using thea modified retrospective transition approachapproach. Under this method of adoption, the Company determined that there was no cumulative-effect adjustment to beginning Retained earnings on the consolidated balance sheet. Adoption of this standard did not impact the Company’s net loss and expect the impact to be immaterial, with an estimated reduction of beginning accumulated deficit of $0.3 million. During 2017, we completed our evaluation of Topic 606, including thehad no impact on our business processes, systems and controls, and differences in the timing and/or methodconsolidated statement of revenue recognition. As a result of our evaluation, we identified changes to and modified certain of our accounting policies and practices. We also designed and implemented specific controls over our evaluation of the impact of Topic 606, including our calculation of the cumulative effect of adopting Topic 606. Although there were no significant changes to our accounting systems or controls upon adoption of Topic 606, we modified certain of our existing controls to incorporate the revisions we made to our accounting policies and practices. cash flows.
Based on our evaluation of Topic 606, we will make the following changes:
| ·
| | Revenue is recognized as control transfers to the customer. As such, under the new standard, revenue for our contracts is general recognized at a point in time when goods are transferred to the customer, which can be upon shipment or upon delivery, depending on the terms of the specific contract. This is generally consistent with our current recognition policy and practice for most contracts based on the transfer of title and risk of loss, however, we do anticipate a change in timing of recognition for certain contracts based on our analysis of the timing of transfer of control of products to our customers;
|
| ·
| | Make a change in performance obligation in certain of our contracts, specifically the treatment of certain merchandising products and services we provide to our customers. Prior to the adoption of Topic 606, the Company treated certain merchandising activities as selling expenses within general and administrative expenses, with the expense recognized over the time period the activities occurred. Under Topic 606 those products and services are considered a separate performance obligation and allocated revenue, with the costs included in cost of sales at the time control transfers to the customer;
|
| ·
| | Alter the accounting for certain reductions in revenue. Previously the Company accounted for certain reductions in sales at the later of sale of goods or agreement with the customer. Under Topic 606, the Company will estimate all elements of variable consideration, without consideration as to the timing of the agreement with customers;
|
| ·
| | Adjust the manner in which we present our allowance for sales returns in our Consolidated Balance Sheets, to reflect a refund liability and a returns asset;and
|
| ·
| | Topic 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when we satisfy our performance obligations and the relationship between revenue recognized and changes in contract balances during a reporting period. We have evaluated these disclosure requirements and incorporated the collection of relevant data into our reporting process.
|
In February 2016, the FASB issued ASU 2016-02,, Leases “Leases (Topic 842). This” The purpose of ASU 2016-02 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 thisIn addition, ASU are2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requiresthe year of adoption. Originally under ASU 2016-02, an organization was required upon adoption based uponto recognize and measure leases beginning in the earliest period presented using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented inand restate the financial statements with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption. The Company is currently making over $1,700 per year in operating lease payments, and the Company expects the majority of these leases to be classified as operating lease liabilities and right-of-use assets upon adoption. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. for all periods presented. In July 2015,2018, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying2018-11, which amends ASU 2016-02 to provide organizations with an additional (and optional) transition method whereby it may elect to recognize and measure leases by applying the Measurementcumulative impact of Inventory. Thisadopting ASU requires entities2016-02 to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new 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 August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will be 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 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 classificationopening retained earnings balance in the statementperiod of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interimadoption, thereby removing the requirement that the financial statements of prior 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.by restated. The Company adopted the provisions of this standardguidance effective January 1, 2017.2019, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2019 and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. The Company elected the package of practical expedients and implemented internal controls and system functionality to continueenable the preparation of financial information upon adoption. In addition, the Company has elected to recognize estimated forfeitures overapply the termpractical expedient to not separate the lease and non-lease components for all of the awards. Company’s leases.
The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company’s consolidated balance sheet related to operating leases. Accounting for finance leases remained substantially unchanged. In addition, the adoption of the standard did not have a material impact on the Company’s financial condition, results of operations or cash flows and disclosures.flows. In January 2017, August 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2017-04, GoodwillAccounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other (Topic 350) (“Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2017-04”): Simplifying2020-06, the Testembedded conversion features are no longer separated from the host contract for Goodwill Impairment.convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The amendednew guidance simplifiesalso requires the accounting for goodwill impairmentif-converted method to be applied for all entities by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. Theconvertible instruments. ASU 2020-06 is effective for interim and annual periods for the Company on January 1, 2020. fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, we intend to adopt ASU 2020-06 using the full retrospective approach. We expect the adoption of the new standard to result in a decrease to stockholders equity of $51.4 million and a corresponding increase to convertible senior notes. Interest expense, net for the year ending December 31, 2020 will decrease approximately $4.0 million. Interest expense, net, recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. Additionally we expect that the change will result in significantly more dilutive shares outstanding. Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements. Note 2 – Business Combination and Asset Acquisition Perrigo Animal Health Acquisition On July 8, 2019, PetIQ, Inc., through its subsidiary PetIQ, LLC, completed the acquisition of all the outstanding stock of Sergeant’s Pet Care Products, Inc. (“Sergeant’s”), d/b/a Perrigo Animal Health, including any assets related to Perrigo Company plc’s animal health business (the “Perrigo Animal Health Acquisition”). Sergeant’s is now an indirect wholly-owned subsidiary of the Company. The fair value of the consideration is summarized as follows: $'s in 000's | Fair Value | Inventories | $ | 17,998 | Property, plant and equipment | | 19,568 | Other current assets | | 13,048 | Other assets | | 9,680 | Indefinite-lived intangible assets | | 23,040 | Definite-lived intangible assets – 13 year weighted average life | | 14,480 | Goodwill | | 105,838 | Total assets | | 203,652 | | | | Liabilities assumed | | 19,259 | | | | Purchase price | $ | 184,393 | | | | Cash paid, net of cash acquired | $ | (185,090) | Post-closing working capital adjustment | | 697 | | | | Fair value of total consideration transferred | $ | (184,393) |
The definite-lived intangibles primarily relate to trademarks, customer relationships, and developed technology and know-how. The $14.6 million represents the fair value and will be amortized over the estimated useful lives of the assets through June 2039. The indefinite-lived intangibles primarily relate to trademarks and in-process research and development. Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. Approximately $105.8 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment. Transaction costs of $6.1 million were incurred in the year ended December 31, 2019, and are included in General and Administrative expenses on the Consolidated Statements of Operations. Capstar ® (nitenpyram) Acquisition On July 31, 2020 the Company completed the acquisition of Capstar® and CapAction® and related assets (the “Capstar Acquisition”) from Elanco US Inc. for $95 million, plus the cost of certain outstanding finished goods inventory in saleable condition, using cash on hand as a result of the issuance of the Notes in May 2020. The Capstar Acquisition was accounted for as an asset acquisition and certain transaction related costs of approximately $1.0 million were included in the cost of the acquired assets. The fair value assigned to trade names was based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The estimated fair value of customer relationship was determined using an income approach, specifically a discounted cash flow analysis. The rate utilized to discount net cash flows to their present values was approximately 15% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The fair value assigned to patents and processes was determined based on the income approach. The purchased assets are identified below: | | | $'s in 000's | Fair Value | Amortizable intangibles | | | Customer relationships | $ | 70,901 | Patents and processes | | 9,895 | Total amortizable intangibles | | 80,796 | Non-amortizable intangibles | | | Trademarks and other | | 15,276 | Total purchased intangible assets | $ | 96,072 |
The weighted average amortization period of the amortizable intangible assets is approximately 11.8 years. Supplier Termination, Settlement and Asset Purchase Agreement: During July 2020, the Company entered into a Termination, Settlement and Asset Purchase Agreement (“Agreement”) with a supplier who alleged PetIQ had breached its supply agreement due to the acquisition of Perrigo Animal Health. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter. The Agreement terminated the supply agreement that was previously in place, settled all outstanding claims and operations, and allowed PetIQ to purchase certain intellectual property related assets. The Company expectshas estimated the fair value of the payment obligation as $17.5 million, and determined the fair value of the acquired assets to early adoptbe $9.7 million. The assets acquired are included within the patents and processes intangible assets category and will be amortized over 10 years. The assets were valued using the standard beginning with its annual goodwill impairment testrelief from royalty method. The remainder of the obligation is considered to be a payment to settle the alleged breach of the supply agreement, the termination expense is included in 2018. general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2020. The obligation is considered debt and is included in debt on the condensed consolidated balance sheet. See Note 5 – “Debt” for additional information. Note 23 – Property, Plant, and Equipment Property, plant, and equipment consists of the following at December 31:at: | | | | | | | $'s in 000's | | | 2017 | | | 2016 | Leasehold improvements | | $ | 6,616 | | $ | 6,587 | Equipment | | | 10,665 | | | 9,512 | Computer equipment ans software | | | 927 | | | 896 | Buildings | | | 771 | | | 668 | Furniture and fixtures | | | 407 | | | 377 | Land | | | 660 | | | - | Construction in progress | | | 2,344 | | | 150 | | | | 22,390 | | | 18,190 | Less accumulated depreciation | | | (7,390) | | | (5,146) | Total property, plant, and equipment | | | 15,000 | | | 13,044 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Leasehold improvements | | $ | 19,709 | | $ | 15,517 | Equipment | | | 25,664 | | | 23,138 | Vehicles and accessories | | | 7,110 | | | 6,007 | Computer equipment and software | | | 10,858 | | | 8,070 | Buildings | | | 10,168 | | | 10,050 | Furniture and fixtures | | | 2,347 | | | 1,836 | Land | | | 7,067 | | | 4,557 | Construction in progress | | | 11,331 | | | 3,392 | | | | 94,254 | | | 72,567 | Less accumulated depreciation | | | (31,108) | | | (20,042) | Total property, plant, and equipment | | $ | 63,146 | | $ | 52,525 |
Depreciation and amortization expense related to these assets total $2,348 thousand, $1,915 thousand,$12.1 million, $9.1 million, and $1,842 thousand$6.7 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Note 34 – Intangible Assets and Goodwill Intangible assets consist of the following at December 31:at: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Useful Lives | | 2017 | | 2016 | Amortizable Intangibles | | | | | | | | | | | | | Distribution agreement | | | | | | | | 2 years | $ | 3,021 | $ | 3,021 | Certification | | | | | | | | 7 years | | 350 | | 350 | Customer relationships | | | | | | | | 12 years | | 1,191 | | 1,086 | Patents and processes | | | | | | | | 10 years | | 1,998 | | 1,797 | Brand names | | | | | | | | 15 years | | 923 | | 841 | Total amortizable intangibles | | | | | | | | | | 7,483 | | 7,095 | Less accumulated amortization | | | | | | | | | $ | (4,733) | $ | (3,557) | Total net amortizable intangibles | | | | | | | | | | 2,750 | | 3,538 | Non-amortizable intangibles | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | 516 | | 516 | Intangible assets, net of accumulated amortization | | | | | | | | | $ | 3,266 | $ | 4,054 |
| | | | | | | | | | | | | | | $'s in 000's | | | | | | Useful Lives | | | | December 31, 2020 | | December 31, 2019 | Amortizable intangibles | | | | | | | | | | | | | | | Certification | | | | | | 7 years | | | | $ | 350 | | $ | 350 | Customer relationships | | | | | | 12-20 years | | | | | 160,178 | | | 89,232 | Patents and processes | | | | | | 5-10 years | | | | | 14,905 | | | 4,928 | Brand names | | | | | | 5-15 years | | | | | 24,740 | | | 15,019 | Total amortizable intangibles | | | | | | | | | | | 200,173 | | | 109,529 | Less accumulated amortization | | | | | | | | | | | (25,984) | | | (13,058) | Total net amortizable intangibles | | | | | | | | | | | 174,189 | | | 96,471 | Non-amortizable intangibles | | | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | | 33,341 | | | 18,016 | In-process research and development | | | | | | | | | | | 5,470 | | | 5,469 | Intangible assets, net of accumulated amortization | | | | | | | | | | $ | 213,000 | | $ | 119,956 |
Certain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currency movements. Amortization expense for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was $1,052 thousand, $1,067 thousand,$12.8 million, $6.0 million, and $735 thousand,$5.2 million, respectively. The in-process research and development (“IPRD”), intangible assets represent the value assigned to 3 acquired R&D projects that principally represent rights to develop and sell products that the Company has acquired which has not yet been completed or approved. The IPRD acquired as part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and regulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development. In the event that the efforts are not successful, the Company will write off the relevant IPRD in the period in which it is no longer considered feasible. Estimated future amortization expense for each of the following years is as follows: | | | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | | 2018 | | | | | | $ | 407 | 2019 | | | | | | | 407 | 2020 | | | | | | | 407 | 2021 | | | | | | | 406 | 2022 | | | | | | | 402 | Thereafter | | | | | | | 721 |
| | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | 2021 | | | | | $ | 18,504 | 2022 | | | | | | 18,310 | 2023 | | | | | | 17,481 | 2024 | | | | | | 15,078 | 2025 | | | | | | 14,369 | Thereafter | | | | | | 90,447 |
The following is a summary of the changes in the carrying value of goodwill for the years ended December 31, 20172020 and 2016.2019. | | | | | | | | | | | | Reporting Unit | | | | ($'s in 000's) | | Products | | Services | | Total | Goodwill as of January 1, 2019 | | | 77,765 | | | 47,264 | | | 125,029 | Foreign currency translation | | | 178 | | | — | | | 178 | Acquisitions | | | 105,838 | | | — | | | 105,838 | Goodwill as of December 31, 2019 | | | 183,781 | | | 47,264 | | | 231,045 | Foreign currency translation | | | 113 | | | — | | | 113 | Goodwill as of December 31, 2020 | | $ | 183,894 | | $ | 47,264 | | $ | 231,158 |
| | | | | | | | ($’s in 000’s) | | | Reporting Unit | | | | | | Domestic | | International | | Total | Goodwill as of January 1, 2016 | | $ | 5,221 | $ | 359 | $ | 5,580 | Foreign currency translation | | | (900) | | (61) | | (961) | Goodwill as of December 31, 2016 | | | 4,321 | | 298 | | 4,619 | Foreign currency translation | | | 416 | | 29 | | 445 | Goodwill as of December 31, 2017 | | $ | 4,737 | $ | 327 | $ | 5,064 |
66 Note 45 – Debt The Company entered into a credit agreement (the “Credit Agreement”) on December 21, 2016. The Credit Agreement provided for secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting ofConvertible Notes
(i) $45 million revolving credit facility (“Revolver”) maturing on December 21, 2019; and
(ii) $5 million term loan (“Term Loans”), requiring equal amortizing payments for 24 months.
As of December 31, 2017,On May 19, 2020, the Company had $0 outstanding as Term Loans and $15.3 million outstanding under the Revolver. The interest rate on the revolving credit facility was 5.00%, as a Base Rate loan. The Revolver contains a lockbox mechanism.
As of December 31, 2016, the Company had $5 million outstanding as Term Loans and $22.5 million outstanding under the Revolver. The interest rate on the Term Loans was 4.25% and the interest rate on the revolving credit facility was also 4.25%, both were Base Rate loans.
The Company refinanced its credit facility in March 2016 with an amended and restated credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provided for secured financing of $48,000 in the aggregate, consisting of
(i) $3issued $143.8 million in aggregate principal amount of term loans maturing4.00% Convertible Senior Notes due 2026 pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $137.9 million. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 31, 2016 (the “Term B Loans”);
(ii) $20 million in aggregate1, 2020. The Notes will mature on June 1, 2026, unless earlier repurchased, redeemed or converted. Before January 15, 2026, holders will have the right to convert their Notes only upon the occurrence of certain events. From and after January 15, 2026, holders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of term loans maturingNotes. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on March 16, 2018or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption. If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock. The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 13%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The amount of the equity component representing the conversion option was $53.3 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual terms of the Notes. The Company has early adopted ASU 2020-06 as of January 1, 2021, which will impact the accounting for the Notes. The fair value of the Notes was $218.1 million as of December 31, 2020. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of December 31, 2020 and is classified as Level 2 in the fair value hierarchy. As of December 31, 2020 the if-converted value of the Notes did not exceed the principal amount. The net carrying amount of the liability component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Par value of the Notes | | $ | 143,750 | Unamortized debt discount | | | (49,526) | Unamortized debt issuance costs | | | (3,441) | Net carrying amount | | $ | 90,783 |
The net carrying amount of the equity component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Proceeds allocated to the conversion option | | $ | 53,285 | Deferred tax affect | | | (8,197) | Issuance costs | | | (2,181) | Net carrying amount | | $ | 42,907 |
The following table sets forth the interest expense recognized related to the Notes: | | | | | | | | | | | | For the Year Ended | | | | | | December 31, 2020 | ($'s in 000's) | | | | | | | Contractual interest expense | | | | | $ | 3,546 | Amortization of debt discount | | | | | | 3,759 | Amortization of debt issuance costs | | | | | | 261 | Total | | | | | $ | 7,566 | Effective interest rate of the liability component | | | | | | 13.0% |
Capped Call Transactions On May 14, 2020 and May 19, 2020, the Company entered into capped call transactions (the “Term“Capped Call Transactions”) with 2 counterparties (the “Option Counterparties”). The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to the Notes, the underlying shares of Class A Loans”);common stock and are intended to reduce, subject to a limit, the potential dilution with respect to the Class A common stock upon conversion of the Notes. The cap price of the Capped Call Transactions is $41.51 per share of Class A common stock, and is subject to certain adjustments under the terms of the Capped Call Transactions. (iii)
The Company paid approximately $14.8 million for the Capped Call Transactions, which was recorded as additional paid-in capital, using a $25portion of the gross proceeds from the sale of the Notes. The capped call is expected to be tax deductible as the Company elected to integrate the capped call into the Notes for tax purposes. The tax effect on the equity component of the Convertible Notes of $8.2 million was recorded through additional paid-in capital. The Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2020, as a result, the $8.2 million deferred tax liability associated with the Capped Call Transactions will be offset by a reduction to the valuation allowance adjustment through continuing operations. A&R Credit Agreement The Company amended the existing revolving credit agreement of Opco and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”) on July 8, 2019. The Amended Revolving Credit Agreement provides for a secured revolving credit facility maturingof $125 million that matures on March 16, 2018.July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur fees between 0.375% and 0.50% as unused facility fees, dependent on the aggregate amount borrowed. On May 14, 2020, the Company amended the Amended Revolving Credit Agreement to allow for the Notes described above. Additionally the amendment instituted a Eurodollar floor of 1% to the agreement. OnAll obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.
The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowers and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of December 31, 2020, the borrowers and guarantors thereunder were in compliance with these covenants. Although the Company currently expects continued compliance with debt covenants, the impact COVID-19 may negatively affect the Company’s ability to comply with these covenants. The Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $15.0 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 2.3% at December 31, 2020. A&R Term Loan Credit Agreement The Company amended and restated the existing term loan credit agreement of Opco (the “A&R Term Loan Credit Agreement”) on July 24, 2017,8, 2019. The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls for 1% of the original loan balance to be paid annually via equal quarterly payments, with the balance of the loan due on the sixth anniversary of the agreement. All obligations under the A&R Term Loan Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of PetIQ, LLC and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions. The A&R Term Loan Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2019, the borrower and guarantors thereunder were in compliance with these covenants. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $217.3 million was outstanding under the A&R Term Loan Credit Agreement. General Other Debt The Company entered into a mortgage with a local bank to provide financing forfinance $1.9 million of the purchase price of a commercial building.building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and requires monthly principalutilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time. In July 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset Acquisitions”. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest payments,rate of 8.3%, resulting in an obligation of $17.5 million. In connection with the balanceVIP Acquisition, the Company entered into a guarantee note of the loan due on July 25, 2027. The Credit Agreement and Amended Credit Agreement both contained 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.$10.0 million. As of December 31, 2017,2019, $7.5 million was payable pursuant to the Company2018 Contingent Note and $10.0 million was in compliancepayable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million require quarterly interest payments of 6.75% with these covenants.the balance payable July 17, 2023.
The following represents the Company’s long-term debt as of December 31, 2017 and December 31, 2016:of: | | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Term loans | | $ | — | | $ | 5,000 | Revolving credit facility | | | 15,325 | | | 22,473 | Mortgage | | | 1,902 | | | — | Net discount on debt and deferred financing fees | | | — | | | (92) | | | $ | 17,227 | | $ | 27,381 | Less current maturities of long-term debt | | | (44) | | | (2,223) | Total long-term debt | | $ | 17,183 | | $ | 25,158 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Convertible Notes | | $ | 143,750 | | $ | — | Term loans | | | 217,250 | | | 220,000 | Revolving credit facility | | | 15,000 | | | 10,000 | Notes Payable - VIP Acquisition | | | 27,500 | | | 27,500 | Other Debt | | | 16,257 | | | 1,812 | Net discount on debt and deferred financing fees | | | (57,559) | | | (5,688) | | | $ | 362,198 | | $ | 253,624 | Less current maturities of long-term debt | | | (6,219) | | | (2,248) | Total long-term debt | | $ | 355,979 | | $ | 251,376 |
Future maturities of long-term debt, excluding the net discount on debt and deferred financing fees, as of December 31, 20172020, are as follows: | | | | ($'s in 000's) | | | | 2018 | | $ | 44 | 2019 | | | 15,372 | 2020 | | | 48 | 2021 | | | 50 | 2022 | | | 52 | Thereafter | | | 1,661 |
| | | | ($'s in 000's) | | | | 2021 | | $ | 6,219 | 2022 | | | 5,476 | 2023 | | | 33,255 | 2024 | | | 6,057 | 2025 | | | 2,259 | Thereafter | | | 366,491 |
The Company incurred debt issuance costs of $218$0.6 million related to the AmendedA&R Credit Agreement during the first quarter of 2016. The debt transaction resulted in a loss on debt extinguishment of $993 thousand, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs. year ended December 31, 2020. The Company incurred debt issuance costs of $261 thousand$0.7 million during the year ended December 31, 2019 related to the NewA&R Credit Agreement during 2016. This second refinancing transaction resulted in a loss on extinguishment of $688 thousand, which includedand $5.1 million related to the write off of unamortizedA&R Term Loan Credit Agreement. The Company incurred debt issuance costs of $5.9 million in May 2020 in connection with the Notes. In accordance with FASB ASC 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. $2.2 million of issuance costs were recorded as additional paid-in capital and such amounts are not subject to amortization. The remaining issuance costs of $3.7 million are recorded as debt issuance costs in the net carrying value of the Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Notes and is included in interest expense, net on the condensed consolidated statements of operations. Future amortization of our debt discount and debt discount, early termination fees, and legal costs.issuance costs for the term of the Convertible Notes is as follows: | | | | | | | ($'s in 000's) | | Debt Discounts | | Debt Issuance Costs | 2021 | | $ | 6,761 | | $ | 470 | 2022 | | | 7,684 | | | 534 | 2023 | | | 8,733 | | | 607 | 2024 | | | 9,925 | | | 690 | 2025 | | | 11,280 | | | 784 | Thereafter | | | 5,143 | | | 356 |
Note 5 -6 – Leases The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182021 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term. We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease. The Company’s leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms. The components of lease expense consists of the follow: | | | | | | | | | For the Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Finance lease cost | | | | | | | Amortization of right-of-use assets | | $ | 1,681 | | $ | 1,441 | Interest on lease liabilities | | | 315 | | | 308 | Operating lease cost | | | 5,831 | | | 4,833 | Variable lease cost(1) | | | 1,130 | | | 629 | Short-term lease cost | | | 34 | | | 41 | Sublease income | | | (528) | | | (452) | Total lease cost | | $ | 8,463 | | $ | 6,800 |
| (1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
Other information related to leases was as follows as of: | | | | | | | | | | December 31, 2020 | | | December 31, 2019 | Weighted-average remaining lease term (years) | | | | | | | Operating leases | | | 4.41 | | | 5.15 | Finance leases | | | 2.38 | | | 2.73 | Weighted-average discount rate | | | | | | | Operating leases | | | 5.3% | | | 5.3% | Finance leases | | | 5.7% | | | 5.7% |
Annual future commitments under non-cancelable leases as of December 31, 2017,2020, consist of the following: | | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Capital Leases | 2018 | | $ | 2,053 | | $ | 113 | 2019 | | | 937 | | | 110 | 2020 | | | 353 | | | 96 | 2021 | | | 176 | | | 93 | 2022 | | | 176 | | | 72 | Thereafter | | | 127 | | | 27 | Total minimum future obligations | | $ | 3,822 | | $ | 511 | Less interest | | | | | | (15) | Present value of net future minimum obligations | | | | | | 496 | Less current capital lease obligations | | | | | | (107) | Long-term capital lease obligations | | | | | $ | 389 | | | | | | | |
The net book value of assets under capital lease was $850 thousand and $775 thousand as of December 31, 2017 and 2016, respectively.
| | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Finance Leases | 2021 | | $ | 5,861 | | $ | 1,757 | 2022 | | | 5,591 | | | 1,584 | 2023 | | | 4,789 | | | 1,580 | 2024 | | | 3,280 | | | 330 | 2025 | | | 2,357 | | | 20 | Thereafter | | | 1,365 | | | — | Total minimum future obligations | | $ | 23,243 | | $ | 5,271 | Less interest | | | (2,539) | | | (367) | Present value of net future minimum obligations | | | 20,704 | | | 4,904 | Less current lease obligations | | | (4,915) | | | (1,566) | Long-term lease obligations | | $ | 15,789 | | $ | 3,338 | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | Year Ended | | Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | Operating cash flows from finance leases | | $ | 315 | | $ | 308 | Operating cash flows from operating leases | | | 5,668 | | | 4,568 | Financing cash flows from finance leases | | | 1,965 | | | 1,547 | (Noncash) right-of-use assets obtained in exchange for lease obligations | | | | | | | Operating leases | | | 5,105 | | | 5,368 | Finance leases | | | 2,019 | | | (3,006) |
Total operating lease expense for the yearsyear ended December 31, 2017, 2016, and 20152018, totaled $1,716 thousand, $1,718 thousand, and $1,627 thousand, respectively.$6.0 million. Note 67 - Income TaxesAs a result of the IPO and related reorganization transactions completed in July 2017, the Company holds an economic interest of approximately 62% in HoldCo and consolidates the financial position and results of HoldCo. The approximate 38% of HoldCo not held by the Company is considered non-controlling interest. HoldCothe sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax reporting. purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $67.6M of deferred tax assets associated with these exchanges, which currently have a full valuation allowance against the deferred tax asset. The non-controlling interests totaled approximately 11% of the ownership of Holdco as of December 31, 2020. See Note 11 – Non-controlling interests for more information.
HoldCo’s members, including the Company, are liable for federal, state, and local income taxes based on their share of HoldCo’s taxable income. Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. OpcoHoldco makes cash distributions to permit the membermembers to pay these taxes as needed by the member’s tax situation.attributable to their allocable share of income earned. In the years ended December 31, 20172020 and 2016,2019, the Company did not make anymade cash distributions. Indistributions of $0.05 million and $1.7 million, respectively. Additionally, Holdco accrues for distributions required to be made related to estimated income taxes. During the yearyears ended December 31, 2017 Opco2020 and 2019, the Company relieved previously accrued $597 thousand for anticipated tax distributions to Continuing LLC Owners.of $(0.4)million and accrued distributions of $0.8 million, respectively. This liability is included in accounts payable on the consolidated balance sheet.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 to 21 percent and requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. Staff Accounting Bulletin (SAB) 118 establishes a one-year measurement period to complete the accounting for the ASC 740 income tax effects of the Tax Act. An entity recognizes the impact of those amounts for which the accounting is complete. For matters that have not been completed, provisional amounts are recorded to the extent they can be reasonably estimated. For amounts for which a reasonable estimate cannot be determined, no adjustment is made until such estimate can be completed.
The Company was able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the deemed repatriation tax, and the remeasurement of deferred taxes. We recorded a provisional net tax expense of $3.6 million in the period ended December 31, 2017 attributable to the Tax Act. This net expense consists of an expense of $0.2 million for the Company’s allocated share of the one-time transition tax on unrepatriated earnings of foreign subsidiaries and a net expense of $3.4 million primarily due to the remeasurement of deferred tax assets associated with the corporate rate reduction.
These estimates may be impacted as we further analyze available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and guidance issued by standard-setting bodies that provide interpretative guidance of the Tax Act.
The components of earnings before incomenet loss taxes, determined by tax jurisdiction, are as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | United States | | $ | 11,479 | | $ | (3,634) | | $ | (1,209) | Foreign | | | 308 | | | 239 | | | (140) | Total | | $ | 11,787 | | $ | (3,395) | | $ | (1,349) |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | United States | | $ | (29,239) | | $ | (17,953) | | $ | (1,116) | Foreign | | | 433 | | | 342 | | | 542 | Total | | $ | (28,806) | | $ | (17,611) | | $ | (574) |
The provision for income taxes for 2017, 2016,2020, 2019, and 20152018 consisted of the following: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Current: | | | | | | | | | | Federal | | $ | (10) | | $ | - | | $ | - | State | | | 63 | | | - | | | - | Foreign | | | - | | | - | | | - | | | $ | 53 | | $ | - | | $ | - | Deferred and other: | | | | | | | | | | Federal | | | 3,708 | | | - | | | - | State | | | 19 | | | - | | | - | Foreign | | | 190 | | | - | | | - | | | | 3,917 | | | - | | | - | Total tax expense | | $ | 3,970 | | $ | - | | $ | - |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | Current: | | | | | | | | | | Federal | | $ | — | | $ | — | | $ | — | State | | | 327 | | | 317 | | | 148 | Foreign | | | 137 | | | 17 | | | — | | | $ | 464 | | $ | 334 | | $ | 148 | Deferred and other: | | | | | | | | | | Federal | | | 40,598 | | | (2,146) | | | (751) | State | | | 11,175 | | | (1,336) | | | (135) | Foreign | | | (21) | | | (161) | | | 77 | | | | 51,752 | | | (3,643) | | | (809) | Total income tax expense (benefit) | | $ | 52,216 | | $ | (3,309) | | $ | (661) |
Reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Income tax expense (benefit) at federal statutory rate | | | 35.0 | % | | 35.0 | % | | 35.0 | State and local income taxes net of federal tax benefit | | | - | | | - | | | (43) | Non-controlling interest and nontaxable income | | | (33.2) | | | (37.4) | | | - | Tax Cuts and Jobs Act of 2017 | | | 30.7 | | | - | | | - | Nondeductible/nontaxable items | | | 1.2 | | | 2.4 | | | 8 | Income tax expense (benefit) | | | 33.7 | % | | - | | | - |
| | | | | | | | | | | | | Years Ended December 31 | | | | | 2020 | | | 2019 | | | 2018 | | Income tax expense (benefit) at federal statutory rate | | | 21.0 | % | | 21.0 | % | | 21.0 | % | State and local income taxes net of federal tax benefit | | | 2.4 | | | 1.3 | | | (5.7) | | Non-controlling interest and nontaxable income | | | (2.9) | | | (4.0) | | | 54.7 | | Deferred tax rate changes | | | (1.3) | | | (0.4) | | | 37.2 | | Share-based compensation | | | 0.6 | | | 0.1 | | | 18.3 | | Tax Cuts and Jobs Act of 2017 | | | - | | | - | | | (13.1) | | Return-to-Provision | | | (2.0) | | | 0.8 | | | 13.4 | | Valuation Allowance | | | (198.4) | | | 0.4 | | | 0.7 | | Other | | | (0.7) | | | (0.4) | | | (11.3) | | Effective income tax rate | | | (181.3) | % | | 18.8 | % | | 115.2 | % |
Our effective income tax rate differsis affected primarily by the recognition of a valuation allowance during the year ended December 31, 2020 and the portion of income and expense allocated to the noncontrolling interest. It is also affected by discrete items that may occur in any given year such as stock based compensation, but are not consistent from statutory rates primarily dueyear to our pass-through entity structure for U.S. income tax purposes.year. As a result of the IPO and reorganization transactions, the Company has recorded deferred tax assets and liabilities based on the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 20172020 and 20162019 are as follows: | | | | | | | $'s in 000's | | 2020 | | 2019 | Deferred tax assets | | | | | | | Investment in partnership | | $ | 53,294 | | $ | 53,303 | Fixed assets | | | 32 | | | 29 | Net operating loss carryforwards and tax credits | | | 18,001 | | | 6,775 | Other accruals and reversals | | | 9 | | | 5 | Subtotal | | | 71,336 | | | 60,112 | Less: valuation allowance | | | (71,161) | | | (143) | Net deferred tax assets | | | 175 | | | 59,969 | | | | | | | | Deferred tax liabilities | | | | | | | Intangible assets | | $ | (447) | | $ | (293) | Other | | | (6) | | | (5) | Net deferred tax liabilities | | $ | (453) | | $ | (298) |
$'s in 000's | | | 2017 | | | 2016 | Investment in partnership | | $ | 5,855 | | $ | - | Net operating loss carryforwards and tax credits | | | 536 | | | 520 | Other | | | 66 | | | 47 | Subtotal | | | 6,457 | | | 567 | Less: valuation allowance | | $ | (237) | | $ | (91) | Total net deferred tax assets | | | 6,220 | | | 476 | Intangible assets | | | (412) | | | (476) | Other | | | (5) | | | - | Total deferred tax liabilities | | | (417) | | | - | Net deferred tax asset | | $ | 5,803 | | $ | - |
$66.0 million, of which $1.9 million, generated in 2017 and prior, will expire in 2037, the remaining NOLs do not expire. The NOL generated in 2018 and after of $64.1 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company has a federal business interest expense carryover totaling $6.1 million as of December 31, 2020, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. As of December 31, 2020, the Company has charitable contribution carryforwards of $1.0 million, which if unused will expire between 2021 and 2025. The Company has state NOL carryforwards of $384.7 million (tax effected $2.8 million) as of December 31, 2020 which expire between 2022 and 2038 and others that have an indefinite carryforward period. At December 31, 2020 the Company had foreign NOL carryforwards of $0.8 million which do not expire. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from the recorded deferred tax assets will not be realized. The Company has recorded a valuation allowance for certain deferred tax assets of $237 thousand$71.2 million and $91 thousand,$0.1 million as of December 31, 20172020 and December 31, 2016,2019, respectively. The valuation allowance pertains to certain international loss carryforwards, some of whichIn future periods, if we conclude we have no expiration and others that would expire beginning in 2018. The Tax Act contains a new law that requires a current inclusion in U.S. federalfuture taxable income of certain earnings of controlled foreign corporations, also known as the tax on global intangible low taxed income (GILTI), beginning in 2018. The FASB has provided that companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, orsufficient to recognize the deferred taxes for temporary differences, including outside basis differences, expected to reverse as GILTI. Due totax assets, we may reduce or eliminate the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act. We have not recorded any provisional amounts as of December 31, 2017 nor have we made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into our measurement of deferred taxes.
valuation allowance. The Company has not recognized any uncertain tax positions, penalties or interest as we have concluded that no such positions exist. Accordingly, no0 unrecognized tax benefit would impact the effective tax rate. If interest and penalties were accrued, we would recognize interest and penalties as income tax expense. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017,2020, tax years for 2014, 2015, and 2016from 2017 to present are subject to examination by the tax authorities. With few exceptions, as On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes temporary changes regarding the prior and future utilization of December 31, 2017, we are no longer subjectnet operating losses, temporary changes to U.S. federal, state, local, or foreign examinations bythe prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax authoritieslegislation for years before 2014.tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company will benefit from the Employee Retention Credits and the payroll tax deferral. Note 7Note 8 – Earnings (loss)Loss per Share Basic and Diluted Earnings (loss)Loss per Share share Basic earnings (loss)loss per share of Class A common stock is computed by dividing net income (loss)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 incomeloss 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 9 — 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 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 (loss) per share would not be appropriate.
Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit 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 (loss) per share information has not been presented for periods
prior to the IPO on July 20, 2017. The basic and diluted earnings (loss) per share represent only the the period July 20, 2017 to December 31, 2017.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock: | | | | | | | ($'s in 000's, except for per share amounts) | | December 31, 2017 | Numerator: | | | | Net income | | $ | 7,817 | Less: net income attributable to non-controlling interests | | | (11,310) | Net loss attributable to PetIQ, Inc. — basic | | | (3,493) | 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 (in 000's)-- diluted | | | 13,223 | | | | | Earnings per share of Class A common stock — basic | | $ | (0.26) | Earnings per share of Class A common stock — diluted | | $ | (0.26) |
| | | | | | | | | | | | Year ended December 31, | (in 000's, except for per share amounts) | | | 2020 | | 2019 | | 2018 | Numerator: | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Less: net (loss) income attributable to non-controlling interests | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. — basic and diluted | | | (77,474) | | | (11,453) | | | (782) | Denominator: | | | | | | | | | | Weighted-average shares of Class A common stock outstanding -- basic | | | 24,629 | | | 22,652 | | | 17,216 | Dilutive effects of stock options that are convertible into Class A common stock | | | — | | | — | | | — | Dilutive effect of RSUs | | | — | | | — | | | — | Dilutive effect for conversion of Notes | | | — | | | — | | | — | Weighted-average shares of Class A common stock outstanding -- diluted | | | 24,629 | | | 22,652 | | | 17,216 | | | | | | | | | | | Loss per share of Class A common stock — basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Loss per share of Class A common stock — diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock as well as all stock options and restricted stock units have not been included in the diluted earnings (loss)loss per share calculation as they have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively. Additionally, all stock options and restricted stock units and convertible Notes have not been included in the diluted earnings per share calculation for the years ended December 31, 2020, 2019 and 2018, as they have been determined to be anti-dilutive under the treasury stock method. Note 89 – Stock Based Compensation Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of December 31, 2017, 1,315,4032020 and 2019, 1,293 thousand and 2,017 thousand shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares. PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provides for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800thousand shares of Class A Common Stock of the Company. As of December 31, 2020, 0 shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock. Stock Options The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, whichperiod. Expense recognized totaled $447 thousand$6.5 million and $6.2 million for the yearyears ended December 31, 2017.2020, and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended December 31:periods ended: | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Expected term (years) (1) | | | 6.25 | | | | 6.25 | | Expected volatility (2) | | | 33.91 | % | | | 35.00 | % | Risk-free interest rate (3) | | | 0.37 | % | | | 2.37 | % | Dividend yield (4) | | | 0.00 | % | | | 0.00 | % |
| (1) | | | | | | | 2017
| Expected term (years) (1)
| | | 6.25 | | Expected volatility (2)
| | | 35.00 | %
| Risk-free interest rate (3)
| | | 1.98 | %
| Dividend yield (4)
| | | 0.00 | %
|
| (1)
| | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
| (2) | (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) | (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) | (4)
| | The Company has not paid and does not anticipate paying a cash dividend on our common stock. |
The weighted average grant date fair value of stock options granted during the period ended December 31, 2020 and 2019 was $11.88 and $10.63, respectively, per option. The following table summarizes the activity of the Company’s unvested stock options for the period ended December 31, 2017: The grant date fair value of stock options granted during the period ended December 31, 2017 was $6.08 per option.2020: | | | | | | | | | | | | | | | | | | | | | 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 | | | (205,405) | | | 16 | | | | | | | Cancelled | | | — | | | | | | | | | | Outstanding at December 31, 2017 | | | 598,644 | | $ | 16 | | $ | 3,496 | | | 9.5 | Options exercisable at December 31, 2017 | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Average | | | | | Weighted | | Aggregate | | Remaining | | | Stock | | Average | | Intrinsic | | Contractual | | | Options | | Exercise | | Value | | Life | | | (in 000's) | | Price | | (in 000's) | | (years) | Outstanding at December 31, 2017 | | | 599 | | $ | 16.00 | | $ | 3,496 | | | 9.5 | Granted | | | 1,617 | | | 25.74 | | | | | | | Exercised | | | (76) | | | 18.83 | | | | | | | Forfeited | | | (195) | | | 21.37 | | | | | | | Cancelled/Expired | | | — | | | — | | | | | | | Outstanding at December 31, 2018 | | | 1,945 | | $ | 23.45 | | $ | 5,527 | | | 9.1 | Granted | | | 423 | | | 27.54 | | | | | | | Exercised | | | (119) | | | 19.51 | | | | | | | Forfeited | | | (168) | | | 21.92 | | | | | | | Cancelled/Expired | | | (9) | | | 25.70 | | | | | | | Outstanding at December 31, 2019 | | | 2,072 | | $ | 24.63 | | $ | 6,266 | | | 8.0 | Granted | | | 505 | | | 20.22 | | | | | | | Exercised | | | (395) | | | 23.48 | | $ | 4,468 | | | | Forfeited | | | (96) | | | 21.42 | | | | | | | Outstanding at December 31, 2020 | | | 2,086 | | $ | 23.93 | | $ | 30,302 | | | 7.2 | Options exercisable at December 31, 2020 | | | 831 | | | | | $ | 11,778 | | | 5.9 |
At December 31, 2017,2020, total unrecognized compensation cost related to unvested stock options was $3.2$8.4 million and is expected to be recognized over a weighted-average period of approximately 3.52.2 years. Restricted Stock Units The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will generally be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At December 31, 2020, total unrecognized compensation cost related to unvested RSUs was $5.8 million and is expected to vest over a weighted average of 2.8 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.6 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The following table summarizes the activity of the Company’s RSUs for the period ended December 31, 2020: | | | | | | | | | | | Weighted | | | Number of | | Average | | | Shares | | Grant Date | | | (in 000's) | | Fair Value | Outstanding at December 31, 2018 | | | 51 | | $ | 33.16 | Granted | | | 123 | | | 27.61 | Settled | | | (25) | | | 30.43 | Forfeited | | | (15) | | | 30.58 | Outstanding at December 31, 2019 | | | 133 | | $ | 28.85 | Granted | | | 271 | | | 20.73 | Settled | | | (70) | | | 25.65 | Forfeited | | | (17) | | | 23.34 | Nonvested RSUs at December 31, 2020 | | | 317 | | $ | 22.91 |
The total equity based compensation expense for these plans over the vesting period totaled $9.2 million, $7.4 million, and $3.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.0 million, $1.4 million and $0.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Note 910 - 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 $30.5 million 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 $25.4 million in preference notes;
|
| ·
| | The Company purchased from Continuing LLC Owners 133,334 LLC Interests in exchange for $2.1 million.
|
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. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.
Immediately following the Reclassification, PetIQ became a holding company and our principal asset is the LLC interests. As the sole managing member of HoldCo, PetIQ operates and controls all of the business and affairs of HoldCo and, through HoldCo and its subsidiaries, conducts business. In addition, PetIQ controls the management of, and has a controlling interest in, HoldCo and, therefore, PetIQ 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 net income (loss) is allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners to a portion of Holdco’s net income (loss).
Other than its purchase of LLC Interests with the net proceeds the IPO, PetIQ has not provided any financial or other support to HoldCo. PetIQ is not required to provide financial or other support for HoldCo, though it will control HoldCo’s business and other activities through its managing member interest in HoldCo. Because PetIQ is not a guarantor or obligor with respect to any of the liabilities of HoldCo, absent any such arrangement, the creditors of HoldCo will not have any recourse to the general credit of PetIQ. Nevertheless, because PetIQ will have no material assets other than its interests in HoldCo, any change in HoldCo’s financial condition could result in PetIQ recognizing a loss.
Amendment and Restatement of Certificate of Incorporation
On July 20, 2017, the CompanyThe Company’s amended and restated its certificate of incorporation, to, among other things, provideprovides for the (i) authorization of 125,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) authorization of 8,401,521100,000,000 shares of Class B common stock with a par value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.
Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one1 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-one1-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-one1-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). Initial2018 Public Offering
On July 20, 2017,October 1, 2018, the Company completedclosed an IPOunderwritten public offering of 7,187,5005,750 thousand 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.stock. The Company received $104.0 million in proceeds, net of underwriting discounts, commissions and offering costs, which were used repay $56.0 million 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 sharesold 2,000 thousand newly issued shares of Class A common stock in the IPO lessand received net proceeds of approximately $73.9 million after deducting underwriting discounts and commissions and to purchase 133,334offering expenses. The remaining 3,750 thousand shares of Class A common stock were sold by selling stockholders and the Company did not receive any proceeds with respect hereto. In conjunction with the 2018 Public Offering, a number of holders of Class B common stock exchanged 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 offor Class A common stock, there were 13,222,583 sharesstock. The
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, HoldCo amended and restatedimpact on non-controlling interest is shown along with other exchanges during the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interestsyear 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.Note 11 – Non-Controlling Interests.
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 equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of such 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 1011 - Non-Controlling Interests In connection with the Reorganization Transactions described in Note 9 — 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 non-controlling 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 December 31, 2017,2020, there were 21,490,77128,751 thousand LLC Interests outstanding, of which PetIQ owned 13,222,583,25,711thousand, representing a 61.5%an 89.4% ownership interest in HoldCo. Exchange and other equity activity during the years ended December 31, 2020 and 2019 resulted in weighted average ownership of HoldCo by PetIQ of 86.4% and 80.2%, respectively. | | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | Continuing LLC | | | | | | | | | Continuing LLC | | | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of December 31, 2017 | | | 8,268,188 | | | 13,222,583 | | | 21,490,771 | | | 38.5% | 61.5% |
| | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | LLC | | | | | | | | | LLC | | $'s in 000's | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of January 1, 2019 | | | 6,547 | | | 21,620 | | | 28,167 | | | 23.2% | 76.8% | Stock based compensation adjustments | | | — | | | 140 | | | 140 | | | | | Exchange transactions | | | (1,794) | | | 1,794 | | | — | | | | | As of December 31, 2019 | | | 4,752 | | | 23,554 | | | 28,306 | | | 16.8% | 83.2% | Stock based compensation adjustments | | | — | | | 445 | | | 445 | | | | | Exchange transactions | | | (1,712) | | | 1,712 | | | — | | | | | As of December 31, 2020 | | | 3,040 | | | 25,711 | | | 28,751 | | | 10.6% | 89.4% |
Note 11Note 12 - Customer Concentration The Company has significant exposure to customer concentration. During each of the years ended December 31, 2017, 2016,2020, 2019, and 2015, three2018, 2, 2, and 1 customers, respectively, accounted for more than 10% of sales individually. In total for the years ended December 31, 2017, 2016,individually and 2015, the three customersin aggregate accounted for 61%42%, 70%35%, and 74%18% of net sales, respectively. At December 31, 2017 and December 31, 2016, three and four customers, respectively,2020, 1 Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 48% and 60%, respectively, 52% of outstanding trade receivables, net. TheAt December 31, 2019 2 Products segment customers are customersindividually accounted for more than 10% of outstanding trade receivables, and accounted for 61% of outstanding trade receivables, net. All of our Domesticcustomer concentration exists in our Products segment. Note 1213 - Commitments and Contingencies Litigation Contingencies In May 2017, Bayer Healthcare LLCDuring the years ended December 31, 2020 and its affiliates2019, the Company recorded liabilities of $7.8 million and $1.0 million, respectively, for contract termination costs, related to settlements for alleged breach of contract. The expense is included within General and Administrative expenses for the years ended December 31, 2020 and 2019.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplierfor alleged unlawful merger and other antitrust violations. On June 29, 2020, the 9th Circuit Court of Advecta 3 and PetLock MAX,Appeals issued an opinion affirming the dismissal of Med Vets’ merger challenge. On July 13, 2020, the Plaintiffs filed for an en banc hearing in the 9th Circuit Court of Appeals which we beganwas unanimously denied on August 7, 2020. The Plaintiffs time period to sell in 2017 as our value-branded alternatives to Bayer’s K9 Advantix II. Bayer alleges that 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 MAXpetition the Supreme Court for certiorari has passed, therefore the matter is considered resolved. As no impact to the Company. BayerCompany is considered probable or estimable, 0 litigation reserve has filed a motion for preliminary injunction, which motion was argued in February 2018. 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 paymentaccrued. 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 December 31, 2017 and December 31, 2016,2020 as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations. Commitments We have commitments for leases and long-term debt that are discussed further in Note 5, Debt, and Note 6, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business. Note 1314 - Segments The Company has two2 operating segments,segments: Products and thus two reportable segments, which areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers. The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas. a segment as defined in the accounting guidance related to segment reporting. Financial information relating to the Company’s operating segments for the years ended December 31: | | | | | | | | | | $'s in 000's | | Domestic | | International | | Consolidated | 2017 | | | | | | | | | | Net Sales | | $ | 261,526 | | $ | 5,161 | | $ | 266,687 | Gross profit | | | 48,997 | | | 2,197 | | | 51,194 | General and administrative expenses | | | 36,053 | | | 1,852 | | | 37,905 | Operating income | | | 12,944 | | | 345 | | | 13,289 | Interest expense | | | — | | | — | | | (1,563) | Other income, net | | | — | | | — | | | 201 | Foreign currency loss, net | | | — | | | — | | | (140) | Identifiable assets | | $ | 134,841 | | $ | 6,004 | | $ | 140,845 | Depreciation expense | | $ | 2,209 | | $ | 139 | | $ | 2,348 | Amortization expense | | $ | 797 | | $ | 255 | | $ | 1,052 | Capital expenditures | | $ | 4,011 | | $ | 120 | | $ | 4,131 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2016 | | | | | | | | | | Net Sales | | $ | 195,698 | | $ | 4,464 | | $ | 200,162 | Gross profit | | | 30,683 | | | 1,864 | | | 32,547 | General and administrative expenses | | | 30,127 | | | 1,718 | | | 31,845 | Operating income | | | 556 | | | 146 | | | 702 | Interest expense | | | — | | | — | | | (3,058) | Other income, net | | | — | | | — | | | 666 | Loss on debt extinguishment | | | — | | | — | | | (1,681) | Foreign currency loss, net | | | — | | | — | | | (24) | Identifiable assets | | $ | 76,270 | | $ | 5,060 | | $ | 81,330 | Depreciation expense | | $ | 1,877 | | $ | 38 | | $ | 1,915 | Amortization expense | | $ | 798 | | $ | 269 | | $ | 1,067 | Capital expenditures | | $ | 1,892 | | $ | 149 | | $ | 2,041 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2015 | | | | | | | | | | Net Sales | | $ | 202,092 | | $ | 3,595 | | $ | 205,687 | Gross profit | | | 37,582 | | | 1,576 | | | 39,158 | General and administrative expenses | | | 33,926 | | | 1,662 | | | 35,588 | Operating income (loss) | | | 3,656 | | | (86) | | | 3,570 | Interest expense | | | — | | | — | | | (3,545) | Loss on debt extinguishment | | | — | | | — | | | (1,449) | Foreign currency gain, net | | | — | | | — | | | 75 | Identifiable assets | | $ | 86,531 | | $ | 5,804 | | $ | 92,335 | Depreciation expense | | $ | 1,800 | | $ | 42 | | $ | 1,842 | Amortization expense | | $ | 330 | | $ | 405 | | $ | 735 | Capital expenditures | | $ | 1,479 | | $ | 71 | | $ | 1,550 |
ended: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2020 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 725,705 | | $ | 54,346 | | $ | — | | $ | 780,051 | Adjusted EBITDA | | | 117,216 | | | 3,387 | | | (52,811) | | | 67,792 | Depreciation expense | | | 4,810 | | | 3,775 | | | 3,497 | | | 12,082 | Capital expenditures | | | 13,394 | | | 7,373 | | | 1,625 | | | 22,392 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2019 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 617,118 | | $ | 92,313 | | $ | — | | $ | 709,431 | Adjusted EBITDA | | | 73,537 | | | 20,045 | | | (32,907) | | | 60,675 | Depreciation expense | | | 3,552 | | | 3,170 | | | 2,417 | | | 9,139 | Capital expenditures | | | 1,297 | | | 6,409 | | | 2,570 | | | 10,276 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2018 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 450,229 | | $ | 78,385 | | $ | — | | $ | 528,614 | Adjusted EBITDA | | | 52,185 | | | 15,246 | | | (25,892) | | | 41,539 | Depreciation expense | | | 2,343 | | | 2,326 | | | 1,988 | | | 6,657 | Capital expenditures | | | 1,339 | | | 3,440 | | | 2,399 | | | 7,178 |
The following table reconciles Segment Adjusted EBITDA to Net (Loss) income for the periods presented. | | | | | | | | | | | | For the years ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | Adjusted EBITDA: | | | | | | | | | | Product | | $ | 117,216 | | $ | 73,537 | | $ | 52,185 | Services | | | 3,387 | | | 20,045 | | | 15,246 | Unallocated Corporate | | | (52,811) | | | (32,907) | | | (25,892) | Total Consolidated | | | 67,792 | | | 60,675 | | | 41,539 | Adjustments: | | | | | | | | | | Depreciation | | | (12,082) | | | (9,139) | | | (6,657) | Amortization | | | (12,815) | | | (5,994) | | | (5,210) | Interest | | | (26,299) | | | (14,495) | | | (8,022) | Acquisition costs(1) | | | (2,620) | | | (6,147) | | | (3,787) | Stock based compensation expense | | | (9,170) | | | (7,355) | | | (3,812) | Purchase accounting adjustment to inventory(2) | | | — | | | (4,805) | | | (2,149) | Non same-store revenue(3) | | | 8,987 | | | 8,088 | | | 3,967 | Non same-store costs(3) | | | (22,256) | | | (19,553) | | | (10,345) | Fair value adjustment of contingent note | | | — | | | (7,320) | | | (3,280) | Integration costs and costs of discontinued clinics(4) | | | (9,776) | | | (3,788) | | | (998) | Clinic launch expenses(5) | | | (3,085) | | | (767) | | | (1,380) | Non-recurring royalty settlement(6) | | | — | | | — | | | (440) | SKU Rationalization(7) | | | — | | | (6,482) | | | — | Litigation expenses | | | (1,006) | | | (529) | | | — | COVID-19 related costs(8) | | | (6,476) | | | — | | | — | Pretax net loss | | $ | (28,806) | | $ | (17,611) | | $ | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Purchase accounting adjustment to inventory represents the portion of costs of sales related to the fair value of inventory adjusted as part of the purchase price allocation. During 2019 the amounts relate to the Perrigo Animal Health Acquisition and are part of the Products segment. During 2018 the costs relate to the VIP Acquisition which are part of the Services Segment and the HBH Acquisition, which is part of the Products Segment. |
| (3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
| (6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
| (7) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
| (8) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
Supplemental geographic disclosures are below. | | | | | | | | | | | Year ended December 31, 2020 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 719,282 | $ | 6,423 | $ | 725,705 | Service revenue | | | 54,346 | | — | | 54,346 | Total net sales | | $ | 773,628 | $ | 6,423 | $ | 780,051 |
| | | | | | | | | | | Year ended December 31, 2019 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 610,986 | $ | 6,132 | $ | 617,118 | Service revenue | | | 92,313 | | — | | 92,313 | Total net sales | | $ | 703,299 | $ | 6,132 | $ | 709,431 |
| | | | | | | | | | | Year ended December 31, 2018 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 444,364 | $ | 5,865 | $ | 450,229 | Service revenue | | | 78,385 | | — | | 78,385 | Total net sales | | $ | 522,749 | $ | 5,865 | $ | 528,614 |
The net book value of property plant and equipment, by geographic location was as follows as of: | | | | | | | | | December 31, 2020 | | December 31, 2019 | United States | | $ | 61,807 | | $ | 51,397 | Europe | | | 1,339 | | | 1,128 | Total | | $ | 63,146 | | $ | 52,525 |
Note 1415 - Related Parties Opco had entered into management consulting services agreements with members of HoldCo. The services were related to financial transactions and other senior management matters related to business administration. Those agreements provided for the Company to pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded in general and administrative expenses in the consolidated statement of operations. The Company recorded $610 thousand, $864 thousand and $462 thousand for the year ended December 31, 2017, 2016, and 2015, respectively. Upon consummation of the recapitalization and IPO transactions, these agreements were terminated.
As discussed in Note 6–7– Income taxes, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At December 31, 2017,2020 and 2019, the Company had paid $0.03 million in advance on required tax distributions and accrued $597 thousand$0.4 million, respectively, for estimated tax distributions, which are included in accounts payable on the consolidated balance sheets. As discussed in Note 5– Debt, the Company has notes payable to the Sellers of VIP, who are significant shareholders of the Company, of $27.5 million. The Company had $0.5 million and $0.3 million of accrued interest on these notes as of December 31, 2020, and 2019, respectively. The Company paid $1.7 million and $1.3 million of interest for the years ended December 31, 2020 and 2019, respectively, and paid 0 interest for the year ended December 31, 2018. Will Santana, a former owner of VIP and board member of PetIQ until July 1, 2020, was one of the main beneficiaries of the VIP Notes. Mr. Santana has sold a sizable portion of his ownership in PetIQ and resigned from the board during 2020, as such he will no longer be considered a related party. The Company leases office and warehouse space from a company under common control of the sellers of VIP, commencing on January 17, 2018. The Company incurred rent expenses of $0.4 million in each of the years ending December 31, 2020, 2019, and 2018, respectively. The lease ended January 5, 2021. Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s annual premium expense, paid to Moreton and subsequently transferred to insurance providers, was $1.1$2.8 million, $2.3 million and $1.5 million in 2017.2020, 2019 and 2018, respectively. Mr. Christensen was paid a commission of approximately $60 thousand$0.1 million in each of the years ending December 31, 2020, 2019, and 2018, respectively, by Moreton for the sale of such insurance policies to the Company. In April 2020, the Company purchased a parcel of land for $2.5 million. The broker for the Company was Colliers International, and the agent was Mike Christensen, the brother of CEO McCord Christensen. Total commission paid to Colliers was approximately $75 thousand. Note 15 – Quarterly information (unaudited)
| | | | | | | | | | | | | ($’s in 000’s except per share amounts) | | | Quarter 1 | | | Quarter 2 | | | Quarter 3 | | | Quarter 4 | 2017: | | | | | | | | | | | | | Net sales | | $ | 67,029 | | $ | 87,178 | | $ | 60,554 | | $ | 51,926 | Gross profit | | | 12,200 | | | 15,951 | | | 12,517 | | | 10,526 | Selling, general, and administrative expenses | | | 7,405 | | | 9,277 | | | 10,739 | | | 10,484 | Operating income | | | 4,795 | | | 6,674 | | | 1,778 | | | 42 | Net income | | | 4,279 | | | 6,070 | | | 859 | | | (3,391) | Basic net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Diluted net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Basic weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | Diluted weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | | | | March 31, 2016 | | | June 30, 2016 | | | September 30, 2016 | | | December 31, 2016 | 2016: | | | | | | | | | | | | | Net sales | | $ | 52,298 | | $ | 61,280 | | $ | 41,671 | | $ | 44,913 | Gross profit | | | 9,772 | | | 8,961 | | | 6,160 | | | 7,654 | Selling, general, and administrative expenses | | | 8,063 | | | 8,302 | | | 7,942 | | | 7,538 | Operating income | | | 1,709 | | | 659 | | | (1,782) | | | 116 | Net income | | | (304) | | | 598 | | | (2,512) | | | (1,177) | Basic net income per common share(1) | | | - | | | - | | | - | | | - | Diluted net income per common share(1) | | | - | | | - | | | - | | | - | Basic weighted average shares(1) | | | - | | | - | | | - | | | - | Diluted weighted average shares(1) | | | - | | | - | | | - | | | - |
| (1)
| | Number of shares out standing and earnings per share prior to our IPO on July 26, 2017 are not reported, see Note 7 in the accompanying consolidated financial statements.
|
Note 16 – Subsequent EventsEmployee Benefit Plans On January 17, 2018, we acquired Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP”). The aggregate consideration, comprisedCompany sponsors 401(k) defined contribution plans at certain subsidiaries. Participants may elect to defer up to 100% of (i) $100compensation. The Company makes matching contributions of 100% of the employee deferrals up to 3% of compensation. The Company may also make discretionary profit sharing contributions each year, which are allocated to each eligible participant based on compensation. The Company made matching contributions of $0.9 million, of cash, (ii) 4,200,000 LLC Interests of PetIQ Holdings, LLC, 4,200,000 shares of Class B common stock, (iii) promissory notes consisting of (A) a $10.0$0.6 million, note payable 5 years and 6 months after the closing, which shall accrue interest quarterly in arrears at a rate of 6.75% per annum, (B) a $10.0$0.3 million, note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $40.0 millionrespectively, for the year endingyears ended December 31, 2018, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the first anniversary of the closing,2020, 2019 and (C) a $10.0 million note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2019, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the second anniversary of the closing; provided that such note shall also become payable if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2018.
In connection with the VIP Acquisition, the Company amended and restated their existing revolving credit agreement (the “A&R Credit Agreement”) on January 17, 2018. The A&R Credit Agreement provides for a secured revolving credit facility of $50 million in the aggregate, at either LIBOR or Base (prime) interest rates plus an applicable margin.
All obligations under the A&R Credit Agreement are unconditionally guaranteed by HoldCo and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the A&R Credit Agreement, subject to certain exceptions.
Also in connection with the closing of the VIP Acquisition, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”). The Term Loan Credit Agreement provides for a secured term loan credit facility of $75 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin.
In connection with execution of the Unit Purchase Agreement to acquire VIP, options to purchase an aggregate 800,000 shares of Class A Common Stock of the Company (the “Inducement Awards”) were issued to 30 employees hired in connection with the transaction as employment inducement awards. The awards vest quarterly on each of the first four anniversaries of the closing date of the acquisition, generally subject to continued employment through each vesting date.
ItemItem 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None. ItemItem 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information that we are required to disclose in reports that we file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting We are responsible for establishing and maintaining internal control over Financing Reportingfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include a reportOur management, under the supervision and with the participation of management’sour Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, regardingour management used the Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
The Company’s registered independent accounting firm, KPMG LLP, has audited the effectiveness of our internal controls over financial reporting as of December 31, 2020, as stated in their report which appears on the next page. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended, December 31, 2020 that has materially affected, or an attestation reportis reasonably likely to materially affect, our internal control over financial reporting. | |
| | | KPMG LLP Suite 600 205 North 10th Street Boise, ID 83702-5798 |
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on Internal Control Over Financial Reporting We have audited PetIQ, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, consolidated stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s registeredmanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm dueregistered with the PCAOB and are required to a transition period established bybe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SECSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for newly public companies.our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Boise, Idaho
February 26, 2021 Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation: | ·
● | | statements regarding our strategies, results of operations or liquidity; |
| ·
● | | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
| ·
● | | statements of management’s goals and objectives; and |
| ·
● | | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy and our ability to successfully grow our business through acquisitions; our ability to integrate, manage and expand VIP’s business; and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others in our industry; 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’ section of this annual report on Form 10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements. Item 9B - Other Information None. PART III Item 10 – Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 11 – Executive Compensation The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 13 – Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 14 – Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
PART IV Item 15. Exhibits, Financial Statement Schedules See "Index to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notesnotes. | | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Unit Purchase Agreement dated January 5, 2018 | 8-K | 001-38163 | 2.1 | 8-Jan-18 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 11-Jul-17 | 3.2 | Bylaws of PetIQ, Inc. | S-1/A | 333-218955 | 3.2 | 6-Jul-17 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 17-Jul-17 | 10.1 | Registration Rights Agreement | S-1/A | 333-218955 | 10.2 | 6-Jul-17 | 10.2 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 23-Jan-18 | 10.3 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 23-Jan-18 | 10.4 | Term Loan Credit Agreement, dated January 17, 2018 by and among PetIQ, LLC, Ares Capital Corporation and the other Lenders party there, and Ares Capital Corporation, as Administrative Agent | 8-K | 001-38163 | 10.3 | 23-Jan-18 | 10.5 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 6-Jul-17 | 10.6* | Employment Agreement, dated as of January 17, 2018, by and between PetIQ, LLC and Will Santana | 8-K | 001-38163 | 10.4 | 23-Jan-18 | 10.7 | Form of Contribution Agreement | S-1/A | 333-218955 | 10.5 | 6-Jul-17 | 10.8 | Form of Preference Note | S-1/A | 333-218955 | 10.6 | 6-Jul-17 | 10.9 | Amended and Restated Credit Agreement, dated March 24, 2016, among PetIQ, LLC, the other credit parties thereto, Crystal Financial LLC and the other lenders party thereto | DRS/A | | 10.14 | 13-May-16 | 10.10 | Form of Recapitalization Agreement | S-1/A | 333-218955 | 10.7 | 6-Jul-17 | 10.11* | Employment and Non-Competition Agreement between True Science Holdings, LLC, and Scott Adcock | DRS/A | | 10.8 | 13-May-16 | 10.12* | Chief Financial Officer Employment Offer | DRS/A | | 10.10 | 13-May-16 | 10.13* | PetIQ Inc. 2017 Omnibus Incentive Plan | S-1/A | 333-218955 | 10.11 | 6-Jul-17 |
| | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Purchase and Sale Agreement, dated May 8, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc and PetIQ, Inc. | 8-K | 001-38163 | 2.1 | 5/8/2019 | 2.2 | Amended and Restated Asset Purchase Agreement, dated June 21, 2020, by and between Elanco US Inc., PetIQ, LLC and PetIQ, Inc. | 10-Q | 001-38163 | 2.1 | 8/10/2020 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 7/11/2017 | 3.2 | Amended and Restated Bylaws of PetIQ, Inc. | 8-K | 001-38163 | 3.1 | 2/23/2021 | 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | 8-K | 001-38163 | 3.1 | 6/1/2018 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 7/17/2017 | 4.2 | Registration Rights Agreement, dated July 20, 2017, among PetIQ, Inc. the Continuing LLC owners and the C-Corp LLC Parents | S-3 | 333-227186 | 4.1 | 9/4/2018 | 4.3 | Registration Rights Agreement, dated January 17, 2018, between PetIQ, Inc. and each VIP Petcare Owner | S-3 | 333-227186 | 4.2 | 9/4/2018 | 4.4 | Description of PetIQ, Inc.’s Securities | 10-K | 001-38163 | 4.4 | 3/11/2020 | 4.5 | Indenture, dated May 14, 2020, among PetIQ, Inc. and Wells Fargo, National Association, as trustee | 8-K | 001-38163 | 4.1 | 5/20/2020 | 10.1 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 7/6/2017 | 10.2 | First Amendment to PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | 10-K | 001-38163 | 10.1 | 3/12/2019 | 10.3 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party thereto, East West Bank and the other lenders party thereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 1/23/2018 | 10.4 | First Amendment and Joinder, dated as of August 9, 2018, to Credit Agreement dated as January 17, 2018 | 10-Q | 001-38163 | 10.1 | 8/14/2018 | 10.5 | Second Amendment to Amended and Restated Credit Agreement, dated March 25, 2019, by and among PetIQ, LLC, the other credit parties party thereto, the lenders party thereto and East West Bank | 10-Q | 001-38163 | 10.1 | 8/8/2019 | 10.6 | Third Amendment to Amended and Restated Revolving Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 7/9/2019 | 10.7 | Third Amendment to Amended and Restated Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 10-Q | 001-38163 | 10.2 | 8/10/2020 | 10.8 | Fourth Amendment to Amended and Restated Credit Agreement, dated May 14, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 5/14/2020 |
10.9 | Sixth Amendment to Amended and Restated Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 8/3/2020 | 10.10 | Amended and Restructured Term Loan Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.3 | 7/9/2019 | 10.11 | Second Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.1 | 5/14/2020 | 10.12 | Third Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.2 | 8/10/2020 | 10.13 | Fourth Amendment to Term Loan Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.1 | 8/3/2020 | 10.14 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 1/23/2018 | 10.15* | PetIQ Inc. Amended and Restated 2017 Omnibus Incentive Plan | 8-K | 333-218955 | 10.1 | 5/31/2019 | 10.16* | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 7/20/2017 | 10.17* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | 10-Q | 001-38163 | 10.2 | 11/14/2018 | 10.18* | Amended and Restated Employment and Non-Competition Agreement between PetIQ, LLC and McCord Christensen | 10-Q | 001-38163 | 10.1 | 5/9/2019 | 10.19* | Employment and Non-Competition Agreement, dated September 17, 2018, between PetIQ, LLC and Susan Sholtis | 8-K | 001-38163 | 10.1 | 9/20/2018 | 10.20* | Employment and Non-Competition Agreement, dated as of May 28, 2019, between PetIQ, LLC and Michael Smith | 8-K | 001-38163 | 10.5 | 7/9/2019 | 10.21* | Employment and Non-Competition Agreement between PetIQ, LLC and John Newland | 10-Q | 001-38163 | 10.2 | 5/9/2019 | 10.22* | Employment and Non-Competition Agreement between PetIQ, LLC and R. Michael Herrman | 10-Q | 001-38163 | 10.3 | 5/9/2019 | 10.23* | PetIQ, Inc. 2017 Omnibus Incentive Plan Restricted Stock Unit Agreement | 10-Q | 001-38163 | 10.3 | 11/14/2018 | 10.24* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors | 10-Q | 333-218955 | 10.4 | 11/14/2018 | 10.25* | PetIQ, Inc. Amended and Restated 2018 Inducement and Retention Stock Plan for CVC Employees | S-8 | 333-223635 | 4.3 | 3/13/2018 | 10.26 | First Amendment to Purchase and Sale Agreement, dated July 7, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc, and PetIQ, Inc. | 8-K | 001-38163 | 10.1 | 7/9/2019 | 10.27 | Transition Services Agreement, dated July 8, 2019, by and between PetIQ, LLC and L. Perrigo Company | 8-K | 001-38163 | 10.4 | 7/9/2019 | 10.28 | Form of Base Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.1 | 5/20/2020 | 10.29 | Form of Additional Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.2 | 5/20/2020 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
10.14* | PetIQ Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | S-1/A | 333-218955 | 10.12 | 6-Jul-17 | 10.15 | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 20-Jul-17 | 10.16 | Credit Agreement, Dated as of December 21, 2016 among PetIQ, LLC, as a Borrower and as Borrower Representative, The Other Credit Parties Part Hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | S-1 | 333-218955 | 10.14 | 23-Jun-17 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 32.1** | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 32.2** | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 101.INS | XBRL Instance Document | | | | | 101.SCH | XBRL Schema Documents | | | | | 101.CAL | XBRL Calculation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | | 101.LAB | XBRL Labels Linkbase Document | | | | | 101.PRE | XBRL Presentation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | |
* Indicates management contract or compensatory plan or arrangement. ** Filed herewith Item 16. Form 10-K Summary None. 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.
| | | March 13, 2018
| /s/ John Newland
| | John Newland
| | Chief Financial Officer
|
POWER OF ATTORNEY KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint McCord Christensen and John Newland, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 13, 2018.February 26, 2021. | | | SIGNATURE | | TITLE | | | | /s/ McCord Christensen | | Chief Executive Officer, President (principal executive officer) | McCord Christensen | | Officer and Chairman of the Board | | | | /s/ John Newland | | Chief Financial Officer (principal financial and accounting officer) | John Newland | | Officer | | | | /s/ Mark First | | Director | Mark First | | | | | | /s/ James Clarke
| | Director
| James Clarke
| | | | | | /s/ Ronald Kennedy | | Director | Ronald Kennedy | | | | | | /s/ Gary MichaelScott Huff | | Director | Gary MichaelScott Huff
| | | | | | /s/ Will SantanaLarry Bird | | Director | Will SantanaLarry Bird
| | Executive Vice President
| | | |
s in 000's | | | | Total | | | 2018 | | | 2019-2020 | | | 2021-2022 | | | Thereafter | | | Total | | | 2021 | | | 2022-2023 | | | 2024-2025 | | | Thereafter | Long-term debt (1) | | | $ | 17,227 | | $ | 44 | | $ | 15,420 | | $ | 102 | | $ | 1,661 | | | $ | 419,757 | | $ | 6,219 | | $ | 38,731 | | $ | 8,316 | | $ | 366,491 | Interest on debt | | | | 2,383 | | | 930 | | | 996 | | | 152 | | | 305 | | | | 86,381 | | | 21,319 | | | 41,223 | | | 21,348 | | | 2,491 | Operating lease obligations | | | | 3,822 | | | 2,053 | | | 1,290 | | | 352 | | | 127 | | | | 23,243 | | | 5,861 | | | 10,380 | | | 5,637 | | | 1,365 | Capital lease obligations | | | | 511 | | | 113 | | | 206 | | | 165 | | | 27 | | Finance lease obligations | | | | | 5,271 | | | 1,757 | | | 3,164 | | | 350 | | | — | Product purchase obligations | | | | 16,377 | | | 16,377 | | | | | | | | | | | | | 67,057 | | | 49,245 | | | 7,662 | | | 7,964 | | | 2,186 | Deferred acquisition liability | | | | 1,575 | | | 1,575 | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | R&D arrangement | | | | | 20,100 | | | 6,000 | | | 14,100 | | | — | | | — | Total contractual obligations | | | $ | 41,895 | | $ | 21,092 | | $ | 17,912 | | $ | 771 | | $ | 2,120 | | | $ | 621,809 | | $ | 90,401 | | $ | 115,260 | | $ | 43,615 | | $ | 372,533 |
| (1)
| | In connection with the VIP acquisition, the Company borrowed $75 million on a term loan, maturing in five years. Future principal and interest payments on the term loan are excluded from the table above. See Note 16 in the accompanying consolidated financial statements for more information.
|
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in the notes to our financial statements appearing in this report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial resultsresults. 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 shippedproduct control is transferred to the customer, which is generally upon delivery or shipment of goods, depending on terms with a customer. For customers with FreeMany customer contracts include some form of variable consideration such as discounts, rebates, and sales returns and allowance. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on Board (“FOB”) destination terms,the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. Revenue for services is recognized over time as the service is delivered, typically over a provisionsingle day. Payment is recorded to exclude shipments determined to be in-transit to these customerstypically rendered at the endtime of service. Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the 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 goodscost of in-store product displays, feature pricing in retailers' advertisements and other items. The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties. Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and in-store displays. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as other current assets or accounts payable in other accrued expenses.the Consolidated Balance Sheet. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Inventories Inventories are stated at the lower of cost or net realizable value. Approximate costs areCost is determined on the first-in first-out (“FIFO”) basis.method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Purchase Accounting The purchase method of accounting requires companies to assign values to assets and liabilities acquired based upon their fair values at the acquisition date. In most instances, there are not readily defined or listed market prices for individual assets and liabilities acquired in connection with a business, including intangible assets. The determination of fair value for assets and liabilities in many instances requires a high degree of estimation. The valuation of intangible assets, in particular, is very subjective. We generally obtain third-party valuations to assist us in estimating fair values. The use of different valuation techniques and assumptions could change the amounts and useful lives assigned to the assets and liabilities acquired and the related amortization expense. Accounting for Income Taxes The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company’s annual tax rate and evaluate its tax positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are subject to challenge, and the Company may not be successful in defending these challenges. Estimation is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities. Related to the IPO and recapitalization transactions, the calculation and allocation of the original basis adjustments used in determining the initial deferred tax assets and liabilities requires management judgement. Deferred income taxes are recognized for the expected future tax consequences attributable toarise from temporary differences between the carrying amounttax basis of the existing tax assets and liabilities and their respective tax basis. Deferredreported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, are measured using enactedprojected future taxable income, tax-planning strategies, and results of recent operations. In the event that it is determined that an asset is not more likely than not to be realized, a valuation allowance is recorded against the asset. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates expectedand future taxable income levels. In the event the Company were to determine that it would not be appliedable to realize all or a portion of its deferred tax assets in the years in which temporary differences are expectedfuture, the unrealizable amount would be charged to be recovered or settled. The principal items giving rise to temporary differences are certain basis differences resulting from IPO and the recapitalization transactions.
In addition, on December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including the requirement for the Company to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The Tax Act also established new tax laws that will affect 2018, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35 to 21 percent; (ii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iii) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (iii) creating a new limitation on deductible interest expense; and (iv) allowing all net operating losses generated in tax years after December 31, 2017, to be carried forward indefinitely.
The Tax Act requires complex computations to be performed, significant judgments to be made in interpretation of the provisions of the Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered, with a possible retroactive effect, which is different from our interpretation. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which that determination is made. Conversely, if the adjustments are made.
In certain cases, tax law requires itemsCompany were to determine that it would be included in the Company’s income tax returns at a different time than when these items are recognized on the consolidated financial statements or at a different amount than that which is recognized on the consolidated financial statements. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, while other differences are temporary and will reverse over time, such as depreciation expense. These differences that will reverse over time are recorded asable to realize deferred tax assets and liabilities onin the consolidated balance sheets. Valuation allowances are established againstfuture in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period that the determination was made. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to the extent thatdetermine whether it is determinedmore likely than not that some portion or all of the deferred income tax assets will not be realized. The Company believes it is more likely than not that the Companybenefit from the recorded deferred tax assets will not be realized and has recorded a valuation allowance.
In future periods, if we conclude we have insufficientfuture taxable income sufficient to fully realizerecognize the deferred tax asset.assets, we may reduce or eliminate the valuation allowance. ItemItem 7A – Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes. Interest Rate Risk We are exposed to changes in interest rates because the indebtedness incurred under our NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of December 31, 2017,2020, we had variable rate debt of approximately $15.3$232.3 million under our New Credit Agreement.Revolver and Term Loan. An increase of 1% would have increased our interest expense for the year ended December 31, 20172020 by approximately $0.2$2.6 million. ItemItem 8 – Financial Statements and Supplementary Data
Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of PetIQ, Inc. and subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive income (loss), members’/loss, stockholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Update No. 2016-02 Leases (Topic 842), and related amendments. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
46 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of deferred tax assets recorded for exchange transactions As discussed in Note 7 to the consolidated financial statements, as a result of the IPO and related reorganization transactions completed in July 2017, the Company held an economic interest of approximately 62% in PetIQ Holdings, LLC (“Holdco”) and consolidates the financial position and results of Holdco. The Company is the sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $53.1 million of deferred tax assets associated with these exchanges. We identified the evaluation of deferred tax assets recorded for exchange transactions as a critical audit matter. Complex auditor judgment, including specialized skills and knowledge, was required to evaluate the calculation of the deferred tax assets generated in exchange transactions as a result of the Company’s tax basis in the interest in the Holdco partnership acquired from the LLC Owners. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the deferred tax calculation. This included the internal control over the Company’s calculation of the deferred tax assets generated in exchange transactions. We involved tax professionals with specialized skills and knowledge who assisted in assessing the Company’s application of the relevant tax law for the exchanges, including: | ● | evaluating the Company’s application of income tax law related to the tax basis in the interest acquired from the LLC Owners in exchange transactions |
| ● | performing an independent calculation of the tax basis in the interest acquired from the LLC Owners in exchange transactions and comparing it to the Company’s calculation |
Fair value estimate of convertible notes As discussed in Notes 1 and 5 to the consolidated financial statements, the Company issued $143.8 million in aggregate principal amount of Convertible Senior Notes due 2026 (the Notes). In accounting for the Notes, the Company separated the Notes into liability and equity components whose carrying values were calculated using a fair value estimate of similar debt instruments without an associated conversion feature. We identified the evaluation of the fair value estimate of the Notes as a critical audit matter. A high degree of auditor judgment was required in assessing the interest rate that would be available to the Company for a similar debt instrument that does not have an associated conversion feature. Additionally, minor changes to the interest rate could have a significant effect on the amounts allocated to the liability and equity components. The audit effort associated with the evaluation of the fair value estimate required specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls over the interest rate used in the fair value measurement of the Notes. We involved valuation professionals with specialized skills and knowledge who assisted in the following: | ● | performing an independent analysis of interest rate yields for similar debt instruments that do not have an associated conversion feature using publicly available market data. |
| ● | developing an independent estimate of the fair value of the Notes using an independent interest rate yield and information from the debt agreement, and comparing it to the Company’s estimate. |
We have served as the Company’s auditor since 2014. Boise, Idaho
March 13, 2018February 26, 2021 PetIQ, Inc. Consolidated Balance Sheets ($’s inIn 000’s except for per share amounts) | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | Current assets | | | | | | | | Cash and cash equivalents | | $ | 33,456 | | $ | 27,272 | | Accounts receivable, net | | | 102,755 | | | 71,377 | | Inventories | | | 97,773 | | | 79,703 | | Other current assets | | | 8,312 | | | 7,071 | | Total current assets | | | 242,296 | | | 185,423 | | Property, plant and equipment, net | | | 63,146 | | | 52,525 | | Operating lease right of use assets | | | 20,122 | | | 20,785 | | Deferred tax assets | | | — | | | 59,780 | | Other non-current assets | | | 1,870 | | | 3,214 | | Intangible assets, net | | | 213,000 | | | 119,956 | | Goodwill | | | 231,158 | | | 231,045 | | Total assets | | $ | 771,592 | | $ | 672,728 | | Liabilities and equity | | | | | | | | Current liabilities | | | | | | | | Accounts payable | | $ | 68,131 | | $ | 51,538 | | Accrued wages payable | | | 10,540 | | | 9,082 | | Accrued interest payable | | | 903 | | | 83 | | Other accrued expenses | | | 8,815 | | | 3,871 | | Current portion of operating leases | | | 4,915 | | | 4,619 | | Current portion of long-term debt and finance leases | | | 7,763 | | | 3,821 | | Total current liabilities | | | 101,067 | | | 73,014 | | Operating leases, less current installments | | | 15,789 | | | 16,580 | | Long-term debt, less current installments | | | 355,979 | | | 251,376 | | Finance leases, less current installments | | | 3,338 | | | 3,331 | | Other non-current liabilities | | | 1,397 | | | 117 | | Total non-current liabilities | | | 376,503 | | | 271,404 | | Commitments and contingencies (Note 13) | | | | | | | | Equity | | | | | | | | Additional paid-in capital | | | 356,442 | | | 300,120 | | Class A common stock, par value $0.001 per share, 125,000 shares authorized; 25,711 and 23,554 shares issued and outstanding, respectively | | | 26 | | | 23 | | Class B common stock, par value $0.001 per share, 100,000 shares authorized; 3,040 and 4,752 shares issued and outstanding, respectively | | | 3 | | | 5 | | Accumulated deficit | | | (93,377) | | | (15,903) | | Accumulated other comprehensive loss | | | (686) | | | (1,131) | | Total stockholders' equity | | | 262,408 | | | 283,114 | | Non-controlling interest | | | 31,614 | | | 45,196 | | Total equity | | | 294,022 | | | 328,310 | | Total liabilities and equity | | $ | 771,592 | | $ | 672,728 | |
See accompanying notes to the consolidated financialstatements. | | | | | | | | | December 31, 2017 | | December 31, 2016 | Current assets | | | | | | | Cash and cash equivalents | | $ | 37,896 | | $ | 767 | Accounts receivable, net of allowance for doubtful accounts | | | 21,759 | | | 17,195 | Inventories | | | 44,056 | | | 34,232 | Supplier prepayments | | | 3,173 | | | 2,985 | Other current assets | | | 1,991 | | | 1,358 | Total current assets | | | 108,875 | | | 56,537 | Property, plant and equipment, net | | | 15,000 | | | 13,044 | Restricted deposits | | | 200 | | | 250 | Deferred tax assets | | | 5,994 | | | — | Other non-current assets | | | 2,446 | | | 2,826 | Intangible assets, net of accumulated amortization | | | 3,266 | | | 4,054 | Goodwill | | | 5,064 | | | 4,619 | Total assets | | $ | 140,845 | | $ | 81,330 | Liabilities and member's equity | | | | | | | Current liabilities | | | | | | | Accounts payable | | $ | 14,234 | | $ | 9,333 | Accrued wages payable | | | 1,811 | | | 1,100 | Accrued interest payable | | | 115 | | | 44 | Other accrued expenses | | | 305 | | | 27 | Current portion of deferred acquisition liability | | | 1,575 | | | 250 | Current portion of long-term debt and capital leases | | | 151 | | | 2,321 | Total current liabilities | | | 18,191 | | | 13,075 | Non-current liabilities | | | | | | | Long-term debt | | | 17,183 | | | 25,158 | Obligations under capital leases, less current installments | | | 389 | | | 434 | Deferred acquisition liability | | | — | | | 1,303 | Other non-current liabilities | | | 238 | | | 378 | Total non-current liabilities | | | 17,810 | | | 27,273 | Commitments and contingencies | | | | | | | Equity | | | | | | | Members equity | | | — | | | 42,941 | Additional Paid-in capital | | | 70,873 | | | — | Class A common stock, par value $.001 per share, 125,000,000 shares authorized, 13,222,583 shares issued and outstanding December 31, 2017 | | | 13 | | | — | Class B common stock, par value $.001 per share, 8,401,521 shares authorized, 8,268,188 shares issued and outstanding at December 31, 2017 | | | 8 | | | — | Accumulated deficit | | | (3,493) | | | — | Accumulated other comprehensive loss | | | (687) | | | (1,940) | Total stockholders' / member's equity | | | 66,714 | | | 41,001 | Non-controlling interest | | | 38,130 | | | (19) | Total equity | | | 104,844 | | | 40,982 | Total liabilities and equity | | $ | 140,845 | | $ | 81,330 |
48 PetIQ, Inc. Consolidated Statements of Operations (In 000’s except for per share amounts) | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | | | | | | | | | | | Product sales | | $ | 725,705 | | $ | 617,118 | | $ | 450,229 | Services revenue | | | 54,346 | | | 92,313 | | | 78,385 | Total net sales | | | 780,051 | | | 709,431 | | | 528,614 | Cost of products sold | | | 584,401 | | | 530,031 | | | 383,501 | Cost of services | | | 60,462 | | | 72,017 | | | 61,825 | Total cost of sales | | | 644,863 | | | 602,048 | | | 445,326 | Gross profit | | | 135,188 | | | 107,383 | | | 83,288 | Operating expenses | | | | | | | | | | General and administrative expenses | | | 138,375 | | | 103,200 | | | 72,260 | Contingent note revaluation loss | | | — | | | 7,320 | | | 3,280 | Operating (loss) income | | | (3,187) | | | (3,137) | | | 7,748 | Interest expense, net | | | (26,299) | | | (14,495) | | | (8,022) | Foreign currency gain (loss), net | | | 109 | | | (151) | | | 45 | Other income (expense), net | | | 571 | | | 172 | | | (345) | Total other expense, net | | | (25,619) | | | (14,474) | | | (8,322) | Pretax net (loss) income | | | (28,806) | | | (17,611) | | | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | | (81,022) | | | (14,302) | | | 87 | Net (loss) income attributable to non-controlling interest | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. | | $ | (77,474) | | $ | (11,453) | | $ | (782) | | | | | | | | | | | Net loss per share attributable to PetIQ, Inc. Class A common stock | | | | | | | | | | Basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Weighted average shares of Class A common stock outstanding | | | | | | | | | | Basic | | | 24,629 | | | 22,652 | | | 17,216 | Diluted | | | 24,629 | | | 22,652 | | | 17,216 |
See accompanying notes to the consolidated financialstatements. PetIQ, Inc. Consolidated Statements of Comprehensive Loss ($’s in 000’s) | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Foreign currency translation adjustment | | | 363 | | | 366 | | | (613) | Comprehensive (loss) income | | | (80,659) | | | (13,936) | | | (526) | Comprehensive (loss) income attributable to non-controlling interest | | | (3,525) | | | (2,777) | | | 697 | Comprehensive loss attributable to PetIQ | | $ | (77,134) | | $ | (11,159) | | $ | (1,223) |
See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc. Consolidated Statements of OperationsCash Flows ($($’s in 000’s, except for per share amounts)000’s)
| | | | | | | | | | | | | For the year ended December 31, | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | | Net sales | | $ | 266,687 | | $ | 200,162 | | $ | 205,687 | | Cost of sales | | | 215,493 | | | 167,615 | | | 166,529 | | Gross profit | | | 51,194 | | | 32,547 | | | 39,158 | | Operating expenses | | | | | | | | | | | General and administrative expenses | | | 37,905 | | | 31,845 | | | 35,588 | | Operating income | | | 13,289 | | | 702 | | | 3,570 | | Interest expense, net | | | (1,563) | | | (3,058) | | | (3,545) | | Foreign currency gain (loss), net | | | (140) | | | (24) | | | 75 | | Loss on debt extinguishment | | | — | | | (1,681) | | | (1,449) | | Other income, net | | | 201 | | | 666 | | | — | | Total other expense, net | | | (1,502) | | | (4,097) | | | (4,919) | | Pretax net income (loss) | | | 11,787 | | | (3,395) | | | (1,349) | | Income tax expense | | | (3,970) | | | — | | | — | | Net income (loss) | | | 7,817 | | | (3,395) | | | (1,349) | | Net income (loss) attributable to non-controlling interest | | | 11,310 | | | (3,395) | | | (1,349) | | Net loss attributable to PetIQ, Inc. | | $ | (3,493) | | $ | — | | $ | — | | | | | | | | | | | | | Net loss per share attributable to PetIQ, Inc. Class A common stock(1) | | | | | | | | | | | Basic | | $ | (0.26) | | | — | | $ | - | | Diluted | | $ | (0.26) | | | — | | $ | - | | Weighted Average shares of Class A common stock outstanding | | | | | | | | | | | Basic | | | 13,222,583 | | | — | | | - | | Diluted | | | 13,222,583 | | | — | | | - | |
| (1)
| | Basic and Diluted earnings per share is applicable only for periods after the Company’s IPO. See Note 7 – Earnings per share.
|
| | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Cash flows from operating activities | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | | | | | | Depreciation and amortization of intangible assets and loan fees | | | 30,975 | | | 16,509 | | | 12,467 | Termination of supply agreement | | | 7,801 | | | — | | | 16 | Gain on disposition of property, plant, and equipment | | | (238) | | | (189) | | | (90) | Stock based compensation expense | | | 9,170 | | | 7,355 | | | 3,812 | Deferred tax adjustment | | | 51,511 | | | (3,458) | | | (843) | Contingent note revaluation | | | — | | | 7,320 | | | 3,280 | Other non-cash activity | | | 164 | | | 405 | | | (334) | Changes in assets and liabilities | | | | | | | | | | Accounts receivable | | | (31,652) | | | (14,123) | | | (14,209) | Inventories | | | (17,846) | | | 30,448 | | | (36,610) | Other assets | | | 556 | | | (1,619) | | | 1,423 | Accounts payable | | | 17,435 | | | (7,595) | | | 15,701 | Accrued wages payable | | | 1,424 | | | 2,800 | | | 1,979 | Other accrued expenses | | | 7,121 | | | (2,718) | | | 908 | Net cash (used in) provided by operating activities | | | (4,601) | | | 20,833 | | | (12,413) | Cash flows from investing activities | | | | | | | | | | Proceeds from disposition of property, plant, and equipment | | | 442 | | | 340 | | | 229 | Purchase of property, plant, and equipment | | | (22,392) | | | (10,276) | | | (7,178) | Purchase of Capstar and related intangibles | | | (96,072) | | | — | | | — | Business acquisitions (net of cash acquired) | | | — | | | (185,090) | | | (93,052) | Net cash used in investing activities | | | (118,022) | | | (195,026) | | | (100,001) | Cash flows from financing activities | | | | | | | | | | Proceeds from issuance of convertible notes - liability component | | | 90,465 | | | — | | | — | Proceeds from issuance of convertible notes - equity component | | | 53,285 | | | — | | | — | Payment for Capped Call options | | | (14,821) | | | — | | | — | Proceeds from issuance of long-term debt | | | 837,675 | | | 818,387 | | | 538,028 | Principal payments on long-term debt | | | (838,073) | | | (676,509) | | | (466,912) | Payment of financing fees on Convertible Notes | | | (5,884) | | | — | | | — | Proceeds from public offering of class A common stock, net of underwriting discounts and offering costs | | | — | | | — | | | 73,914 | Tax distributions to LLC Owners | | | (47) | | | (1,686) | | | (1,485) | Principal payments on finance lease obligations | | | (1,965) | | | (1,547) | | | (1,254) | Payment of deferred financing fees and debt discount | | | (550) | | | (5,790) | | | (2,750) | Tax withholding payments on Restricted Stock Units | | | (595) | | | (114) | | | — | Exercise of options to purchase class A common stock | | | 9,274 | | | 2,318 | | | 1,429 | Net cash provided by financing activities | | | 128,764 | | | 135,059 | | | 140,970 | Net change in cash and cash equivalents | | | 6,141 | | | (39,134) | | | 28,556 | Effect of exchange rate changes on cash and cash equivalents | | | 43 | | | 46 | | | (92) | Cash and cash equivalents, beginning of period | | | 27,272 | | | 66,360 | | | 37,896 | Cash and cash equivalents, end of period | | $ | 33,456 | | $ | 27,272 | | $ | 66,360 |
See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc. Consolidated Statements of Comprehensive Income (Loss)Cash Flows ($($’s in 000’s)
| | | | | | | | | | | | For the Year Ended December 31, | Supplemental cash flow information | | 2020 | | 2019 | | 2018 | Interest paid | | $ | 19,402 | | $ | 13,632 | | $ | 7,220 | Net change in property, plant, and equipment acquired through accounts payable | | | 279 | | | (1,814) | | | 25 | Finance lease additions | | | 2,019 | | | (3,006) | | | 656 | Deferred tax liability created by convertible debt issuance | | | (8,197) | | | — | | | — | Net change of deferred tax asset from step-up in basis | | | — | | | 12,381 | | | 36,882 | Income taxes paid, net of refunds | | | 130 | | | 249 | | | 640 | Accrued tax distribution | | | (434) | | | 786 | | | 2,097 | Issuance of note for termination, settlement, and asset acquisition agreement | | | 17,487 | | | — | | | — | Purchase of intangible assets from note issuance | | | (9,686) | | | — | | | — | Non cash consideration - Issuance of Contingent Notes | | | — | | | — | | | 6,900 | Non cash consideration - Issuance of Guarantee Notes | | | — | | | — | | | 10,000 | Non cash consideration - Issuance of Class B common stock and LLC Interests | | | — | | | — | | | 103,004 | | | | | | | | | | | See accompanying notes to the consolidated financial statements. |
| | | | | | | | | | | | | | For the year ended December 31, | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | Net income (loss) | | $ | 7,817 | | $ | (3,395) | | $ | (1,349) | Other comprehensive income (loss), net: | | | | | | | | | | Foreign currency translation adjustment | | | 823 | | | (1,898) | | | (515) | Total other comprehensive income/(loss) | | | 8,640 | | | (5,293) | | | (1,864) | Comprehensive income (loss) attributable to non-controlling interest | | | 11,943 | | | (5,293) | | | (1,864) | Comprehensive loss attributable to PetIQ, Inc. | | $ | (3,303) | | $ | — | | $ | — |
54 PetIQ, Inc. Consolidated Statements of Stockholders’ Equity (In 000’s) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | Additional | | | | | | | | Accumulated | | Comprehensive | | | | | | | | | | Paid-in | | Non-controlling | | Total | | | Deficit | | Loss | | Class A Common | | Class B Common | | Capital | | Interest | | Equity | | | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | Balance - January 1, 2018 | | $ | (3,493) | | $ | (687) | | | 13,223 | | $ | 13 | | | 8,268 | | $ | 8 | | $ | 70,873 | | $ | 38,130 | | $ | 104,844 | ASC 606 adoption, net of tax | | | (175) | | | — | | | — | | | — | | | — | | | — | | | — | | | (110) | | | (285) | Issuance of equity for business combination | | | — | | | 128 | | | — | | | — | | | 4,600 | | | 5 | | | 43,075 | | | 59,796 | | | 103,004 | Exchange of LLC Interests held by LLC Owners | | | — | | | (290) | | | 6,321 | | | 6 | | | (6,321) | | | (6) | | | 47,458 | | | (47,168) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 36,882 | | | — | | | 36,882 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,097) | | | (2,097) | Other comprehensive income | | | — | | | (441) | | | — | | | — | | | — | | | — | | | — | | | (172) | | | (613) | Public offering | | | — | | | — | | | 2,000 | | | 2 | | | — | | | — | | | 73,912 | | | — | | | 73,914 | Equity shift as a result of the public offering | | | — | | | (26) | | | — | | | — | | | — | | | — | | | (13,914) | | | 13,940 | | | — | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,504 | | | 1,308 | | | 3,812 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 76 | | | — | | | — | | | — | | | 1,429 | | | — | | | 1,429 | Net (loss) income | | | (782) | | | — | | | — | | | — | | | — | | | — | | | — | | | 869 | | | 87 | Balance - December 31, 2018 | | $ | (4,450) | | $ | (1,316) | | | 21,620 | | $ | 22 | | | 6,547 | | $ | 7 | | $ | 262,219 | | $ | 64,496 | | $ | 320,977 | Exchange of LLC Interests held by LLC Owners | | | — | | | (109) | | | 1,794 | | | 1 | | | (1,794) | | | (1) | | | 17,299 | | | (17,190) | | | — | Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,381 | | | — | | | 12,381 | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (786) | | | (786) | Other comprehensive income | | | — | | | 294 | | | — | | | — | | | — | | | — | | | — | | | 72 | | | 366 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,902 | | | 1,453 | | | 7,355 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 119 | | | — | | | — | | | — | | | 2,318 | | | — | | | 2,318 | Issuance of stock vesting of RSU's | | | — | | | — | | | 21 | | | — | | | — | | | — | | | — | | | — | | | — | Net (loss) | | | (11,453) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,849) | | | (14,302) | Balance - December 31, 2019 | | $ | (15,903) | | $ | (1,131) | | | 23,554 | | $ | 23 | | | 4,752 | | $ | 5 | | $ | 300,120 | | $ | 45,196 | | $ | 328,310 | Exchange of LLC Interests held by LLC Owners | | | — | | | 105 | | | 1,712 | | | 2 | | | (1,712) | | | (2) | | | 15,461 | | | (15,566) | | | — | Equity component of Convertible Notes, net of offering costs and tax | | | — | | | — | | | — | | | — | | | — | | | — | | | 37,064 | | | 5,843 | | | 42,907 | Payment for capped call share options | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,803) | | | (2,018) | | | (14,821) | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 434 | | | 434 | Other comprehensive income | | | — | | | 340 | | | — | | | — | | | — | | | — | | | — | | | 23 | | | 363 | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,921 | | | 1,249 | | | 9,170 | Exercise of Options to purchase Common Stock | | | — | | | — | | | 395 | | | — | | | — | | | — | | | 9,274 | | | — | | | 9,274 | Issuance of stock vesting of RSU's, net of tax withholdings | | | — | | | — | | | 50 | | | — | | | — | | | — | | | (595) | | | — | | | (595) | Net (loss) | | | (77,474) | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,548) | | | (81,022) | Balance - December 31, 2020 | | $ | (93,377) | | $ | (686) | | | 25,711 | | $ | 26 | | | 3,040 | | $ | 3 | | $ | 356,442 | | $ | 31,614 | | $ | 294,022 |
Note that certain figures shown in the table above may not recalculate due to rounding. See accompanying notes to the consolidated financial statementsstatements. PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | | | | | For the year ended December 31, | | | 2017 | | 2016 | | 2015 | | Cash flows from operating activities | | | | | | | | | | | Net income (loss) | | $ | 7,817 | | $ | (3,395) | | $ | (1,349) | | Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | | | | | | | | Depreciation and amortization of intangible assets and loan fees | | | 3,614 | | | 4,074 | | | 3,140 | | Loss on disposition of property | | | 20 | | | 42 | | | 28 | | Foreign exchange (gain) loss on liabilities | | | 228 | | | (28) | | | (300) | | Stock based compensation expense | | | 447 | | | — | | | — | | Deferred tax adjustment | | | 3,690 | | | — | | | — | | Warranty settlement gain | | | — | | | (645) | | | 1,449 | | Changes in assets and liabilities | | | | | | | | | | | Accounts receivable | | | (4,313) | | | (2,216) | | | (1,907) | | Inventories | | | (9,718) | | | (542) | | | (10,399) | | Prepaid expenses and other assets | | | (721) | | | 2,037 | | | (3,789) | | Accounts payable | | | 4,152 | | | 104 | | | 6,114 | | Accrued wages payable | | | 694 | | | (128) | | | 827 | | Other accrued expenses | | | (28) | | | (229) | | | (229) | | Net cash provided by (used in) operating activities | | | 5,882 | | | (926) | | | (6,415) | | Cash flows from investing activities | | | | | | | | | | | Proceeds from disposition of property, plant, and equipment | | | — | | | 1 | | | 12 | | Purchase of property, plant, and equipment and intangibles | | | (4,131) | | | (2,041) | | | (1,550) | | Net cash used in investing activities | | | (4,131) | | | (2,040) | | | (1,538) | | Cash flows from financing activities | | | | | | | | | | | Proceeds from issuance of long-term debt | | | 260,020 | | | 238,252 | | | 236,981 | | Principal payments on long-term debt | | | (270,458) | | | (243,852) | | | (218,532) | | 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 | | | — | | | — | | Purchase of LLC units from Continuing LLC Owners | | | (2,133) | | | 6,894 | | | (6,944) | | Principal payments on capital lease obligations | | | (116) | | | (93) | | | (382) | | Payment of deferred financing fees and debt discount | | | (42) | | | (509) | | | (1,316) | | Net cash provided by financing activities | | | 35,371 | | | 692 | | | 9,807 | | Net change in cash and cash equivalents | | | 37,122 | | | (2,274) | | | 1,854 | | Effect of exchange rate changes on cash and cash equivalents | | | 7 | | | (209) | | | 26 | | Cash and cash equivalents, beginning of period | | | 767 | | | 3,250 | | | 1,370 | | Cash and cash equivalents, end of period | | $ | 37,896 | | $ | 767 | | $ | 3,250 | | | | | | | | | | | | |
Seeaccompanying notesNotes to the consolidated financial statements
PetIQ, Inc.
Consolidated Statements of Cash Flows
($’s in 000’s)
| | | | | | | | | | | | | For the year ended December 31, | Supplemental cash flow information | | 2017 | | 2016 | | 2015 | | Interest paid | | $ | 1,353 | | $ | 2,911 | | $ | 2,997 | | Property, plant, and equipment acquired through accounts payable | | | (80) | | | 125 | | | 24 | | Capital lease additions | | | 35 | | | 188 | | | — | | Issuance of preference notes for LLC Interests | | | 55,960 | | | — | | | — | | Non cash acquisition of intangibles | | | — | | | — | | | 350 | | Establishment of deferred tax asset from step-up in basis | | | 9,441 | | | — | | | — | | Taxes paid | | | 323 | | | — | | | — | | Accrued tax distribution | | | 597 | | | — | | | — | |
PetIQ, Inc.
Consolidated Statements of Members’/Stockholders’ Equity
($’s in 000’s, except for per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Retained | | Other | | | | | | | | | | | | | | Total | | | | | Earnings/ | | Comprehensive | | | | | | | | | | Additional | | | | Stockholders | | | Members | | (Accumulated | | (Loss) | | | | | | | | | | Paid-in | | Non-controlling | | Equity/ | | | Equity | | Deficit) | | Income | | Class A Common | | Class B Common | | Capital | | Interest | | Members Equity | | | | | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | Balance - January 1, 2015 | | $ | 47,681 | | $ | — | | $ | 473 | | | — | | $ | — | | | — | | $ | — | | $ | — | | $ | (15) | | $ | 48,139 | Net loss | | | (1,342) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | (1,349) | Other comprehensive income | | | — | | | — | | | (515) | | | — | | | — | | | — | | | — | | | — | | | — | | | (515) | Balance - December 31, 2015 | | $ | 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 | | | 11,165 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | 11,161 | Other comprehensive income prior to IPO | | | — | | | — | | | 515 | | | — | | | — | | | — | | | — | | | — | | | — | | | 515 | Accrued tax distribution prior to recapitalization | | | (591) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (591) | 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 | | | (53,515) | | | — | | | 668 | | | — | | | — | | | — | | | — | | | 28,459 | | | 24,388 | | | — | 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 | Issuance of preference notes to affiliates | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (55,960) | | | — | | | (55,960) | Increase in deferred tax asset from step-up in tax basis | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,441 | | | — | | | 9,441 | Purchase of non-controlling interests | | | — | | | — | | | (120) | | | — | | | — | | | (133,334) | | | (0) | | | (15,345) | | | 13,332 | | | (2,133) | Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 275 | | | 172 | | | 447 | Other comprehensive income post IPO | | | — | | | — | | | 190 | | | — | | | — | | | — | | | — | | | — | | | 119 | | | 308 | Net (loss) income post IPO | | | — | | | (3,493) | | | — | | | — | | | — | | | — | | | — | | | — | | | 149 | | | (3,344) | Balance - December 31, 2017 | | $ | — | | $ | (3,493) | | $ | (687) | | | 13,222,583 | | $ | 13 | | | 8,268,188 | | $ | 8 | | $ | 70,873 | | $ | 38,130 | | $ | 104,844 |
See accompanying notes to the consolidated financial statements
Note 1 – Principal Business Activity and Significant Accounting Policies Principal Business Activity and Principals of Consolidation PetIQ Inc and Subsidiaries (the Company) is a manufacturerleading pet medication and wholesale distributorwellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. The company engages with customers through points of over-the-counterdistribution across retail channels with its branded distributed medications, which is further supported by its own world-class medications manufacturing facility in Omaha, Nebraska. The Company’s national service platform, VIP Petcare, operates retail partner locations providing cost effective and prescription pet medicationsconvenient veterinary wellness services. PetIQ has 2 reporting segments: (i) Products; and pet wellness products(ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segments consists of veterinary services, and related product sales, provided by the Company directly to various retail customersconsumers. PetIQ is the managing member of PetIQ Holdings, LLC (“Holdco”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, distributors throughoutthrough Holdco, operate and control all the United Statesbusiness and Europe. The Company is headquartered in Eagle, Idaho and manufactures and distributes products from facilities in Florida, Texas, Utah, and Europe.affairs of Opco. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAPGenerally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and equipment; allowance for doubtful accounts;equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, inventoriesthe valuation of assets and notes receivable;liabilities in connection with acquisitions, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies. Fair Value of Financial Instruments Foreign CurrenciesFair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are at cost, which approximates fair value due to their relatively short maturities. The guarantee note is carried at cost, which approximates fair value due to the recent issuance of the note. Our term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amounts approximate fair value. A portion of the purchase price for the acquisition of Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP” and such acquisition, the “VIP Acquisition”) was structured in the form of Contingent Notes (the “Contingent Notes”) that vest based on the combined Company operates subsidiaries in foreign countries who useEBITDA targets for the local currencyyears ending December 31, 2018 and 2019 (“Measurement Dates”). See Note 2 – “Business Combinations” for more information regarding the VIP Acquisition. The liabilities related to the 2018 and 2019 Contingent Notes became fixed as of December 31, 2018 and 2019, respectively, and are carried at cost, which approximates fair value as the functional currency. stated interest rate is consistent with current market rates. The Company translates its foreign subsidiaries’ assets and liabilities denominatedContingent Notes are included in foreign currencies into U.S. dollarslong-term debt in the accompanying consolidated balance sheets. The Contingent Notes began bearing interest at current ratesa fixed rate of exchange as of6.75%, with the balance sheet date and income and expense items atpayable July 17, 2023. The following table summarizes the average exchange rateLevel 3 activity related to the Contingent Notes 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 (loss) for each period.twelve months ended December 31, 2019: | | | $'s in 000's | | Balance at beginning of the period | $ | 2,680 | Change in fair value of contingent consideration | | 7,320 | Transfer out of level 3 | | (10,000) | Balance at the end of the period | $ | — |
Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with an original maturity of three months or less excluding amounts restricted for various state licensing regulations. Restricted depositsat the date of acquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are not consideredclassified as cash and cash equivalents. The Company maintains its cash accounts in various deposit accounts, the balances of which at times exceeded federal deposit insurance limits during the periods presented. Receivables and Credit Policy Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within a set number45 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for doubtful accountscredit losses equal to estimated uncollectible amounts.expected losses. The Company’s estimate is based on historical collection experience, and a review of the current status of trade accounts receivable.receivable and known current economic conditions including the current and expected impact of COVID-19. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice. The Company also hasOther receivables consists of various receivables due from vendors, banking partners, and notes receivable due from various suppliers included in accounts receivable. The notes bear interest at 0% to 4% and are repaid based on either amortization schedules or from certain sales to third parties.suppliers. Non-current portions of these notes receivableother receivables are included in other non-current assets on the consolidated balance sheet. Interest income is included in interest expense, net on the consolidated statement of operations.
sheets. Accounts receivable consists of the following as of: | | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Trade receivables | | $ | 96,381 | | $ | 67,551 | Other receivables | | | 7,094 | | | 4,257 | | | | 103,475 | | | 71,808 | Less: Allowance for doubtful accounts | | | (720) | | | (431) | Total accounts receivable, net | | $ | 102,755 | | $ | 71,377 |
| | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Trade receivables | | $ | 22,189 | | $ | 18,086 | Notes receivable | | | 297 | | | 440 | | | | 22,486 | | | 18,526 | Less: Allowance for doubtful accounts | | | (343) | | | (498) | Non-current portion of receivables | | | (384) | | | (833) | Total accounts receivable, net | | $ | 21,759 | | $ | 17,195 |
57 Inventories Inventories are stated at the lower of cost or net realizable value, which approximatevalue. Cost is determined on the first-in first-out (“FIFO”) basis.method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Major components of inventories wereconsist of the following as follows as of December 31, 2017 and 2016:of: | | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Raw materials and work in progress | | $ | 4,004 | | $ | 5,924 | Finished goods | | | 40,052 | | | 28,308 | Total inventories | | $ | 44,056 | | $ | 34,232 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Raw materials | | $ | 15,761 | | $ | 10,675 | Work in progress | | | 2,273 | | | 1,717 | Finished goods | | | 79,739 | | | 67,311 | Total inventories | | $ | 97,773 | | $ | 79,703 |
Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation and amortization is provided using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and capitalfinance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales orand general and administrative expenses in the consolidated statements of comprehensive income,operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows: | | | | Computer equipment and software | | | 3 years | Vehicle and vehicle accessories | | | 3-5 years | Buildings | | | 33 years | Equipment | | | 3-152-15 years
| Leasehold improvements | | | 3-92-15 years
| Furniture and fixtures | | | 8-105-10 years
|
Goodwill and Intangible Assets Indefinite lived intangible assets consist primarily of trademarks. Trademarks represent costs paid to legally register phrases and graphic designs that identify and distinguish products sold by the Company. Trademarks are not amortized, rather potential impairment is considered on an annual basis in the fourth quarter, or more frequently upon the occurrence of an event, when circumstances indicate that the book value of trademarks are greater than their fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the indefinite lived intangible asset is less than the carrying value as a basis to determine whether further impairment testing under ASC 350 is necessary. No impairment charge was recorded for the years ended December 31, 2017, 2016, and 2015.
Definite-lived intangible assets consist of a distribution agreement, production certifications, patents and processes, customer relationships, and brand names. The assets are amortized on a straight-line basis over their expected useful lives. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to the company’s future cash flows. Useful lives range from 2 to 15 years.
Goodwill
Goodwill is the excess of the consideration paid over the fair value of specifically identifiable assets, liabilities and contingent liabilities in a business combinationcombination. Intangible assets acquired are recorded at estimated fair value. Goodwill and relatesintangible assets deemed to the future economic benefits arising from assets, whichhave indefinite lives are not capable of being individually identified and separately recognized. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized, but is reviewedare tested for impairment annually induring the Company’s fourth quarter, or more frequently ifand at any time when events or changes in circumstances indicate that the carrying value may be impaired.
The goodwillsuggest an impairment test consists of a two-step process, if necessary. However, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basisoccurred.
To assess goodwill for determining whether it is necessary to perform the two-step goodwill impairment, test described in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, the Company, determines that it is not more likely than not that the fair value ofdepending on relevant facts and circumstances, performs either a reporting unit is less than its carrying amount, thenqualitative assessment or a quantitative analysis utilizing a discounted cash flow valuation model. In performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if based on the qualitative assessment, the Company concludesevaluates relevant factors such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the faircarrying value of the reporting unit is less than its carrying amount, the two-step process will be carried out. fair value, then no further testing is required. In step one,performing a quantitative analysis, the Company determines the fair value of eacha reporting unit using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including discount rates and future growth rates. In the event the carrying amount of a reporting unit exceeded its fair value, an impairment loss would be recognized. Indefinite-lived intangible assets are tested for impairment utilizing either a qualitative assessment or a quantitative analysis. For a qualitative assessment, the Company identifies and considers relevant key factors, events, and circumstances to determine whether it is necessary to perform a quantitative impairment test. The key factors considered include macroeconomic, industry, and market conditions, as well as the asset's actual and forecasted results. For the quantitative impairment tests, the Company compares itthe carrying amounts to its carrying value. Ifthe current fair market values. Intangible assets with definite lives are amortized over their estimated useful lives to reflect the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. NaN impairment charge was recorded for the years ended December 31, 2020, 2019, and 2018. Convertible Debt On May 19, 2020, we issued $143.8 million aggregate principal amount of Convertible Notes due 2026 (the “Notes”). See Note 5 – “Debt”. We separately account for the liability and equity components of convertible debt instruments that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the reporting unit exceedsliability component, using the carrying valueinterest rate of a similar liability that does not have a conversion feature, as of the net assets assigned to that unit, goodwillissuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. We recognize amortization of the resulting discount using the effective interest method as interest expense in our consolidated statements of operations. The equity component is not impairedremeasured as long as it continues to meet the conditions for equity classification. We have allocated issuance costs to the liability and no further testing is performed. Ifequity components. Issuance costs attributable to the carrying valueliability component are being amortized to expense over the respective term of the net assets assignedNotes, and issuance costs attributable to the reportingequity component were netted with the respective equity component in additional paid-in capital. Revenue Recognition When Performance Obligations Are Satisfied A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit exceedsof account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the fair valueperformance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of veterinary services. Revenue is generally recognized for product sales on a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the reporting unit, thenremaining benefits from the Company must perform the second step of the impairment testasset at this point in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. time. The Company performeddetermined that certain products manufactured to a customer’s specifications do not have an alternative future use at a reasonable profit margin due to costs associated with reworking, transporting and repackaging these products. These products are produced subject to purchase orders that include an enforceable right to payment. Therefore the Company determined that revenue on these products would be recognized over time, as the products are produced. This represents a minor subset of the products the Company manufactures. Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered at the time of service. Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its qualitative assessment during the fourth fiscal quarterrelative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data. The qualitative factors that were considered included, but were not limited to, general economic conditions, outlook for the pet sector, market capitalization, consolidated company stock price, and recent and forecasted financial performance. Goodwill impairment analysis and measurement is a process that requires significant judgment. If there are significant changes in market conditions or a future downturnperformance obligations in our business, or a future annual goodwill impairment test indicates an impairment of our goodwill,contracts are satisfied within one year. As such, we have not disclosed the Company may havetransaction price allocated to recognize impairment of its goodwill.
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 recordedremaining performance obligations as of December 31, 20172020.
Variable Consideration In addition to fixed contract consideration, most contracts include some form of variable consideration. The most common forms of variable consideration include discounts, rebates, and December 31, 2016 was $1,575 thousandsales returns and $250 thousand, respectively,allowances. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We believe there will not be significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. The Company reviews and is includedupdates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in other accrued expenses. The non-current portion recorded asthe market. Any uncertainties in the ultimate resolution of December 31, 2017 and December 31, 2016 was zero and $1,303 thousand, respectively, and is included in deferred acquisition liability. As discussed in Note 16, subsequent to December 31, 2017, the Company completed the VIP Acquisition, which included guarantee and contingent notesvariable consideration due to the sellers. See Note 16 for more information.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shipped to the customer. For customers with Free on Board (“FOB”) destination terms, a provision is recorded to exclude shipments determined to be in-transit to these customers at the endfactors outside of the reportingCompany’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.
period. A sales return allowance is recordedcustomer pricing allowances and accounts receivablemerchandising funds are reduced as revenuesoffered through various programs to customers and are recognized for estimated losses on credit sales duedesigned to customer claims for discounts, returned goodspromote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other items.
The Company offers a variety of trade promotions and incentivestemporary price reductions. These programs are offered to our customers suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties. Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and in-store displays. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in other accrued expenses.the Consolidated Balance Sheets. Significant Payment Terms ShippingOur customer contracts identify the product, quantity, price, payment and Handling Costsfinal delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.
Shipping All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales. This includes shipping and handling costs after control over a product has transferred to a customer. Warranties & Returns PetIQ provides all customers with a standard or assurance type warranty. Either stated or implied, the Company provides assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No significant services beyond an assurance warranty are provided to customers. The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as cost ofa reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience. Contract balances Contract asset and liability balances as of December 31, 2020 and 2019 are immaterial. The Company does not typically billedhave significant deferred revenue or unbilled receivable balances. Cost of Services Cost of Services are comprised of all service and product costs related to customers.the delivery of veterinary services, including but not limited to, salaries and contract costs of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold. Research and Development and Advertising Costs Research and development and advertising costs are expensed as incurred and are included in general and administrative expenses. Research and development costs amounted to $514 thousand, $310 thousand,$2.3 million, $1.3 million, and $380 thousand$0.2 million and advertising costs were $2,229 thousand, $1,179 thousand,$10.1 million, $4.5 million, and $6,077 thousand$2.9 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Collaboration Agreements Through the Perrigo Animal Health Acquisition, we entered into a product development and asset purchase agreement with a third party for certain product formulations in development by the third party. The Company may make up to $20.5 million of payments over the course of the next several years contingent on achievement of certain development and regulatory approval milestones. Product development costs are expensed as incurred or as milestone payments become probable. There can be no assurance that these products will be approved by the U.S. Food and Drug Administration (“FDA”) on the anticipated schedule or at all. Consideration paid after FDA approval will be capitalized and amortized to cost of goods sold over the economic life of each product. The expenses paid prior to FDA approval will be included in General and Administrative expenses on the Consolidated Statements of Operations. There were no expenses incurred under the agreement for the periods ended December 31, 2020 and 2019. Litigation The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If the likelihood of an adverse legal outcome is determined to be probable and the amount of loss is estimable, then a liability is accrued in accordance with accounting guidance for Contingencies. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. The Company consults with both internal and external legal counsel related to litigation. See Note 13 for more information. Stock based compensation The Company expenses employee share-based awards under ASC Topic 718, Compensation—Stock Compensation, which requires compensation cost for the grant-date fair value of share-based awards to be recognized over the requisite service period. Stock options granted to executives and other employees are valued using the Black-Scholes option pricing model. See Note 89 for more information. Accounting for Income Taxes The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense. Interest expense, net Interest expense, net, is comprised primarily of interest expense related to (i) our debt agreements, (ii) unused line fees, (iii) amortization of deferred loan fees and (iii) capitaldiscounts, (iv) finance lease obligations and the mortgage note outstanding, offset by interest income earned on our demand deposits and other assets. Interest expense was $1,638 thousand, $3,078 thousand,$26.3 million, $14.9 million, and $3,567 thousand$8.3 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively, offset by $75 thousand, $20 thousand,$0.0 million, $0.4 million, and $22 thousand$0.3 million of interstinterest income, respectively. Non-controlling interest The non-controlling interests on the consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, Holdco, held by the non-controlling holders of Class B common stock and limited liability company interests in Holdco. Non-controlling interests on the consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling holders of Class B common stock and Limited Liability Company interests in Holdco. Earnings Per Share Basic earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc. by the weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing net incomeloss attributable to PetIQ, Inc., adjusted as necessary for the impact of potentially dilutive securities, by the weighted-average shares outstanding during the period and the impact of securities that would have a dilutive effect on earnings per share. See Note 78 for further discussion. Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial statemetns to conform to current year presentation. These reclassifications had no impact on net income, shareholders’ equity, or cash flows as previously reported.
Recently Issued Accounting Pronouncements / Adopted Accounting Standard Updates In May 2014,From time to time, the Financial Accounting Standards Board (“FASB”) issuedor other standards setting bodies issue new accounting pronouncements. Updates to the Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several relatedare communicated through issuance of an Accounting Standards UpdatesUpdate (“ASUs”ASU”).
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) (“Topic 606”), which provide guidanceNo. 2016-13, "Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for recognizing revenue from contracts with customers.financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable information. Organizations will now use forward-looking information to better estimate their credit losses. The core principle of Topic 606 is that revenue is recognized when promised goods or services are transferred 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 ending March 31, 2018. We will adopt Topic 606Company adopted this ASU using thea modified retrospective transition approachapproach. Under this method of adoption, the Company determined that there was no cumulative-effect adjustment to beginning Retained earnings on the consolidated balance sheet. Adoption of this standard did not impact the Company’s net loss and expect the impact to be immaterial, with an estimated reduction of beginning accumulated deficit of $0.3 million. During 2017, we completed our evaluation of Topic 606, including thehad no impact on our business processes, systems and controls, and differences in the timing and/or methodconsolidated statement of revenue recognition. As a result of our evaluation, we identified changes to and modified certain of our accounting policies and practices. We also designed and implemented specific controls over our evaluation of the impact of Topic 606, including our calculation of the cumulative effect of adopting Topic 606. Although there were no significant changes to our accounting systems or controls upon adoption of Topic 606, we modified certain of our existing controls to incorporate the revisions we made to our accounting policies and practices. cash flows.
Based on our evaluation of Topic 606, we will make the following changes:
| ·
| | Revenue is recognized as control transfers to the customer. As such, under the new standard, revenue for our contracts is general recognized at a point in time when goods are transferred to the customer, which can be upon shipment or upon delivery, depending on the terms of the specific contract. This is generally consistent with our current recognition policy and practice for most contracts based on the transfer of title and risk of loss, however, we do anticipate a change in timing of recognition for certain contracts based on our analysis of the timing of transfer of control of products to our customers;
|
| ·
| | Make a change in performance obligation in certain of our contracts, specifically the treatment of certain merchandising products and services we provide to our customers. Prior to the adoption of Topic 606, the Company treated certain merchandising activities as selling expenses within general and administrative expenses, with the expense recognized over the time period the activities occurred. Under Topic 606 those products and services are considered a separate performance obligation and allocated revenue, with the costs included in cost of sales at the time control transfers to the customer;
|
| ·
| | Alter the accounting for certain reductions in revenue. Previously the Company accounted for certain reductions in sales at the later of sale of goods or agreement with the customer. Under Topic 606, the Company will estimate all elements of variable consideration, without consideration as to the timing of the agreement with customers;
|
| ·
| | Adjust the manner in which we present our allowance for sales returns in our Consolidated Balance Sheets, to reflect a refund liability and a returns asset;and
|
| ·
| | Topic 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when we satisfy our performance obligations and the relationship between revenue recognized and changes in contract balances during a reporting period. We have evaluated these disclosure requirements and incorporated the collection of relevant data into our reporting process.
|
In February 2016, the FASB issued ASU 2016-02,, Leases “Leases (Topic 842). This” The purpose of ASU 2016-02 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 thisIn addition, ASU are2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requiresthe year of adoption. Originally under ASU 2016-02, an organization was required upon adoption based uponto recognize and measure leases beginning in the earliest period presented using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented inand restate the financial statements with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption. The Company is currently making over $1,700 per year in operating lease payments, and the Company expects the majority of these leases to be classified as operating lease liabilities and right-of-use assets upon adoption. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. for all periods presented. In July 2015,2018, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying2018-11, which amends ASU 2016-02 to provide organizations with an additional (and optional) transition method whereby it may elect to recognize and measure leases by applying the Measurementcumulative impact of Inventory. Thisadopting ASU requires entities2016-02 to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new 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 August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will be 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 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 classificationopening retained earnings balance in the statementperiod of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interimadoption, thereby removing the requirement that the financial statements of prior 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.by restated. The Company adopted the provisions of this standardguidance effective January 1, 2017.2019, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2019 and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. The Company elected the package of practical expedients and implemented internal controls and system functionality to continueenable the preparation of financial information upon adoption. In addition, the Company has elected to recognize estimated forfeitures overapply the termpractical expedient to not separate the lease and non-lease components for all of the awards. Company’s leases.
The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company’s consolidated balance sheet related to operating leases. Accounting for finance leases remained substantially unchanged. In addition, the adoption of the standard did not have a material impact on the Company’s financial condition, results of operations or cash flows and disclosures.flows. In January 2017, August 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2017-04, GoodwillAccounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other (Topic 350) (“Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2017-04”): Simplifying2020-06, the Testembedded conversion features are no longer separated from the host contract for Goodwill Impairment.convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The amendednew guidance simplifiesalso requires the accounting for goodwill impairmentif-converted method to be applied for all entities by eliminating the requirement to perform a hypothetical purchase price allocation. A goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. Theconvertible instruments. ASU 2020-06 is effective for interim and annual periods for the Company on January 1, 2020. fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, we intend to adopt ASU 2020-06 using the full retrospective approach. We expect the adoption of the new standard to result in a decrease to stockholders equity of $51.4 million and a corresponding increase to convertible senior notes. Interest expense, net for the year ending December 31, 2020 will decrease approximately $4.0 million. Interest expense, net, recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. Additionally we expect that the change will result in significantly more dilutive shares outstanding. Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements. Note 2 – Business Combination and Asset Acquisition Perrigo Animal Health Acquisition On July 8, 2019, PetIQ, Inc., through its subsidiary PetIQ, LLC, completed the acquisition of all the outstanding stock of Sergeant’s Pet Care Products, Inc. (“Sergeant’s”), d/b/a Perrigo Animal Health, including any assets related to Perrigo Company plc’s animal health business (the “Perrigo Animal Health Acquisition”). Sergeant’s is now an indirect wholly-owned subsidiary of the Company. The fair value of the consideration is summarized as follows: $'s in 000's | Fair Value | Inventories | $ | 17,998 | Property, plant and equipment | | 19,568 | Other current assets | | 13,048 | Other assets | | 9,680 | Indefinite-lived intangible assets | | 23,040 | Definite-lived intangible assets – 13 year weighted average life | | 14,480 | Goodwill | | 105,838 | Total assets | | 203,652 | | | | Liabilities assumed | | 19,259 | | | | Purchase price | $ | 184,393 | | | | Cash paid, net of cash acquired | $ | (185,090) | Post-closing working capital adjustment | | 697 | | | | Fair value of total consideration transferred | $ | (184,393) |
The definite-lived intangibles primarily relate to trademarks, customer relationships, and developed technology and know-how. The $14.6 million represents the fair value and will be amortized over the estimated useful lives of the assets through June 2039. The indefinite-lived intangibles primarily relate to trademarks and in-process research and development. Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. Approximately $105.8 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment. Transaction costs of $6.1 million were incurred in the year ended December 31, 2019, and are included in General and Administrative expenses on the Consolidated Statements of Operations. Capstar ® (nitenpyram) Acquisition On July 31, 2020 the Company completed the acquisition of Capstar® and CapAction® and related assets (the “Capstar Acquisition”) from Elanco US Inc. for $95 million, plus the cost of certain outstanding finished goods inventory in saleable condition, using cash on hand as a result of the issuance of the Notes in May 2020. The Capstar Acquisition was accounted for as an asset acquisition and certain transaction related costs of approximately $1.0 million were included in the cost of the acquired assets. The fair value assigned to trade names was based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The estimated fair value of customer relationship was determined using an income approach, specifically a discounted cash flow analysis. The rate utilized to discount net cash flows to their present values was approximately 15% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The fair value assigned to patents and processes was determined based on the income approach. The purchased assets are identified below: | | | $'s in 000's | Fair Value | Amortizable intangibles | | | Customer relationships | $ | 70,901 | Patents and processes | | 9,895 | Total amortizable intangibles | | 80,796 | Non-amortizable intangibles | | | Trademarks and other | | 15,276 | Total purchased intangible assets | $ | 96,072 |
The weighted average amortization period of the amortizable intangible assets is approximately 11.8 years. Supplier Termination, Settlement and Asset Purchase Agreement: During July 2020, the Company entered into a Termination, Settlement and Asset Purchase Agreement (“Agreement”) with a supplier who alleged PetIQ had breached its supply agreement due to the acquisition of Perrigo Animal Health. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter. The Agreement terminated the supply agreement that was previously in place, settled all outstanding claims and operations, and allowed PetIQ to purchase certain intellectual property related assets. The Company expectshas estimated the fair value of the payment obligation as $17.5 million, and determined the fair value of the acquired assets to early adoptbe $9.7 million. The assets acquired are included within the patents and processes intangible assets category and will be amortized over 10 years. The assets were valued using the standard beginning with its annual goodwill impairment testrelief from royalty method. The remainder of the obligation is considered to be a payment to settle the alleged breach of the supply agreement, the termination expense is included in 2018. general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2020. The obligation is considered debt and is included in debt on the condensed consolidated balance sheet. See Note 5 – “Debt” for additional information. Note 23 – Property, Plant, and Equipment Property, plant, and equipment consists of the following at December 31:at: | | | | | | | $'s in 000's | | | 2017 | | | 2016 | Leasehold improvements | | $ | 6,616 | | $ | 6,587 | Equipment | | | 10,665 | | | 9,512 | Computer equipment ans software | | | 927 | | | 896 | Buildings | | | 771 | | | 668 | Furniture and fixtures | | | 407 | | | 377 | Land | | | 660 | | | - | Construction in progress | | | 2,344 | | | 150 | | | | 22,390 | | | 18,190 | Less accumulated depreciation | | | (7,390) | | | (5,146) | Total property, plant, and equipment | | | 15,000 | | | 13,044 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Leasehold improvements | | $ | 19,709 | | $ | 15,517 | Equipment | | | 25,664 | | | 23,138 | Vehicles and accessories | | | 7,110 | | | 6,007 | Computer equipment and software | | | 10,858 | | | 8,070 | Buildings | | | 10,168 | | | 10,050 | Furniture and fixtures | | | 2,347 | | | 1,836 | Land | | | 7,067 | | | 4,557 | Construction in progress | | | 11,331 | | | 3,392 | | | | 94,254 | | | 72,567 | Less accumulated depreciation | | | (31,108) | | | (20,042) | Total property, plant, and equipment | | $ | 63,146 | | $ | 52,525 |
Depreciation and amortization expense related to these assets total $2,348 thousand, $1,915 thousand,$12.1 million, $9.1 million, and $1,842 thousand$6.7 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Note 34 – Intangible Assets and Goodwill Intangible assets consist of the following at December 31:at: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Useful Lives | | 2017 | | 2016 | Amortizable Intangibles | | | | | | | | | | | | | Distribution agreement | | | | | | | | 2 years | $ | 3,021 | $ | 3,021 | Certification | | | | | | | | 7 years | | 350 | | 350 | Customer relationships | | | | | | | | 12 years | | 1,191 | | 1,086 | Patents and processes | | | | | | | | 10 years | | 1,998 | | 1,797 | Brand names | | | | | | | | 15 years | | 923 | | 841 | Total amortizable intangibles | | | | | | | | | | 7,483 | | 7,095 | Less accumulated amortization | | | | | | | | | $ | (4,733) | $ | (3,557) | Total net amortizable intangibles | | | | | | | | | | 2,750 | | 3,538 | Non-amortizable intangibles | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | 516 | | 516 | Intangible assets, net of accumulated amortization | | | | | | | | | $ | 3,266 | $ | 4,054 |
| | | | | | | | | | | | | | | $'s in 000's | | | | | | Useful Lives | | | | December 31, 2020 | | December 31, 2019 | Amortizable intangibles | | | | | | | | | | | | | | | Certification | | | | | | 7 years | | | | $ | 350 | | $ | 350 | Customer relationships | | | | | | 12-20 years | | | | | 160,178 | | | 89,232 | Patents and processes | | | | | | 5-10 years | | | | | 14,905 | | | 4,928 | Brand names | | | | | | 5-15 years | | | | | 24,740 | | | 15,019 | Total amortizable intangibles | | | | | | | | | | | 200,173 | | | 109,529 | Less accumulated amortization | | | | | | | | | | | (25,984) | | | (13,058) | Total net amortizable intangibles | | | | | | | | | | | 174,189 | | | 96,471 | Non-amortizable intangibles | | | | | | | | | | | | | | | Trademarks and other | | | | | | | | | | | 33,341 | | | 18,016 | In-process research and development | | | | | | | | | | | 5,470 | | | 5,469 | Intangible assets, net of accumulated amortization | | | | | | | | | | $ | 213,000 | | $ | 119,956 |
Certain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currency movements. Amortization expense for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was $1,052 thousand, $1,067 thousand,$12.8 million, $6.0 million, and $735 thousand,$5.2 million, respectively. The in-process research and development (“IPRD”), intangible assets represent the value assigned to 3 acquired R&D projects that principally represent rights to develop and sell products that the Company has acquired which has not yet been completed or approved. The IPRD acquired as part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and regulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development. In the event that the efforts are not successful, the Company will write off the relevant IPRD in the period in which it is no longer considered feasible. Estimated future amortization expense for each of the following years is as follows: | | | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | | 2018 | | | | | | $ | 407 | 2019 | | | | | | | 407 | 2020 | | | | | | | 407 | 2021 | | | | | | | 406 | 2022 | | | | | | | 402 | Thereafter | | | | | | | 721 |
| | | | | | | Years ending December 31, ($'s in 000's) | | | | | | | 2021 | | | | | $ | 18,504 | 2022 | | | | | | 18,310 | 2023 | | | | | | 17,481 | 2024 | | | | | | 15,078 | 2025 | | | | | | 14,369 | Thereafter | | | | | | 90,447 |
The following is a summary of the changes in the carrying value of goodwill for the years ended December 31, 20172020 and 2016.2019. | | | | | | | | | | | | Reporting Unit | | | | ($'s in 000's) | | Products | | Services | | Total | Goodwill as of January 1, 2019 | | | 77,765 | | | 47,264 | | | 125,029 | Foreign currency translation | | | 178 | | | — | | | 178 | Acquisitions | | | 105,838 | | | — | | | 105,838 | Goodwill as of December 31, 2019 | | | 183,781 | | | 47,264 | | | 231,045 | Foreign currency translation | | | 113 | | | — | | | 113 | Goodwill as of December 31, 2020 | | $ | 183,894 | | $ | 47,264 | | $ | 231,158 |
| | | | | | | | ($’s in 000’s) | | | Reporting Unit | | | | | | Domestic | | International | | Total | Goodwill as of January 1, 2016 | | $ | 5,221 | $ | 359 | $ | 5,580 | Foreign currency translation | | | (900) | | (61) | | (961) | Goodwill as of December 31, 2016 | | | 4,321 | | 298 | | 4,619 | Foreign currency translation | | | 416 | | 29 | | 445 | Goodwill as of December 31, 2017 | | $ | 4,737 | $ | 327 | $ | 5,064 |
66 Note 45 – Debt The Company entered into a credit agreement (the “Credit Agreement”) on December 21, 2016. The Credit Agreement provided for secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting ofConvertible Notes
(i) $45 million revolving credit facility (“Revolver”) maturing on December 21, 2019; and
(ii) $5 million term loan (“Term Loans”), requiring equal amortizing payments for 24 months.
As of December 31, 2017,On May 19, 2020, the Company had $0 outstanding as Term Loans and $15.3 million outstanding under the Revolver. The interest rate on the revolving credit facility was 5.00%, as a Base Rate loan. The Revolver contains a lockbox mechanism.
As of December 31, 2016, the Company had $5 million outstanding as Term Loans and $22.5 million outstanding under the Revolver. The interest rate on the Term Loans was 4.25% and the interest rate on the revolving credit facility was also 4.25%, both were Base Rate loans.
The Company refinanced its credit facility in March 2016 with an amended and restated credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provided for secured financing of $48,000 in the aggregate, consisting of
(i) $3issued $143.8 million in aggregate principal amount of term loans maturing4.00% Convertible Senior Notes due 2026 pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $137.9 million. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 31, 2016 (the “Term B Loans”);
(ii) $20 million in aggregate1, 2020. The Notes will mature on June 1, 2026, unless earlier repurchased, redeemed or converted. Before January 15, 2026, holders will have the right to convert their Notes only upon the occurrence of certain events. From and after January 15, 2026, holders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of term loans maturingNotes. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on March 16, 2018or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption. If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock. The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 13%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The amount of the equity component representing the conversion option was $53.3 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual terms of the Notes. The Company has early adopted ASU 2020-06 as of January 1, 2021, which will impact the accounting for the Notes. The fair value of the Notes was $218.1 million as of December 31, 2020. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of December 31, 2020 and is classified as Level 2 in the fair value hierarchy. As of December 31, 2020 the if-converted value of the Notes did not exceed the principal amount. The net carrying amount of the liability component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Par value of the Notes | | $ | 143,750 | Unamortized debt discount | | | (49,526) | Unamortized debt issuance costs | | | (3,441) | Net carrying amount | | $ | 90,783 |
The net carrying amount of the equity component of the Notes was as follows: | | | | ($'s in 000's) | | December 31, 2020 | Proceeds allocated to the conversion option | | $ | 53,285 | Deferred tax affect | | | (8,197) | Issuance costs | | | (2,181) | Net carrying amount | | $ | 42,907 |
The following table sets forth the interest expense recognized related to the Notes: | | | | | | | | | | | | For the Year Ended | | | | | | December 31, 2020 | ($'s in 000's) | | | | | | | Contractual interest expense | | | | | $ | 3,546 | Amortization of debt discount | | | | | | 3,759 | Amortization of debt issuance costs | | | | | | 261 | Total | | | | | $ | 7,566 | Effective interest rate of the liability component | | | | | | 13.0% |
Capped Call Transactions On May 14, 2020 and May 19, 2020, the Company entered into capped call transactions (the “Term“Capped Call Transactions”) with 2 counterparties (the “Option Counterparties”). The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to the Notes, the underlying shares of Class A Loans”);common stock and are intended to reduce, subject to a limit, the potential dilution with respect to the Class A common stock upon conversion of the Notes. The cap price of the Capped Call Transactions is $41.51 per share of Class A common stock, and is subject to certain adjustments under the terms of the Capped Call Transactions. (iii)
The Company paid approximately $14.8 million for the Capped Call Transactions, which was recorded as additional paid-in capital, using a $25portion of the gross proceeds from the sale of the Notes. The capped call is expected to be tax deductible as the Company elected to integrate the capped call into the Notes for tax purposes. The tax effect on the equity component of the Convertible Notes of $8.2 million was recorded through additional paid-in capital. The Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2020, as a result, the $8.2 million deferred tax liability associated with the Capped Call Transactions will be offset by a reduction to the valuation allowance adjustment through continuing operations. A&R Credit Agreement The Company amended the existing revolving credit agreement of Opco and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”) on July 8, 2019. The Amended Revolving Credit Agreement provides for a secured revolving credit facility maturingof $125 million that matures on March 16, 2018.July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur fees between 0.375% and 0.50% as unused facility fees, dependent on the aggregate amount borrowed. On May 14, 2020, the Company amended the Amended Revolving Credit Agreement to allow for the Notes described above. Additionally the amendment instituted a Eurodollar floor of 1% to the agreement. OnAll obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.
The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowers and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of December 31, 2020, the borrowers and guarantors thereunder were in compliance with these covenants. Although the Company currently expects continued compliance with debt covenants, the impact COVID-19 may negatively affect the Company’s ability to comply with these covenants. The Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $15.0 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 2.3% at December 31, 2020. A&R Term Loan Credit Agreement The Company amended and restated the existing term loan credit agreement of Opco (the “A&R Term Loan Credit Agreement”) on July 24, 2017,8, 2019. The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls for 1% of the original loan balance to be paid annually via equal quarterly payments, with the balance of the loan due on the sixth anniversary of the agreement. All obligations under the A&R Term Loan Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of PetIQ, LLC and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions. The A&R Term Loan Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2019, the borrower and guarantors thereunder were in compliance with these covenants. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of December 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants. As of December 31, 2020, $217.3 million was outstanding under the A&R Term Loan Credit Agreement. General Other Debt The Company entered into a mortgage with a local bank to provide financing forfinance $1.9 million of the purchase price of a commercial building.building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and requires monthly principalutilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time. In July 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset Acquisitions”. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest payments,rate of 8.3%, resulting in an obligation of $17.5 million. In connection with the balanceVIP Acquisition, the Company entered into a guarantee note of the loan due on July 25, 2027. The Credit Agreement and Amended Credit Agreement both contained 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.$10.0 million. As of December 31, 2017,2019, $7.5 million was payable pursuant to the Company2018 Contingent Note and $10.0 million was in compliancepayable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million require quarterly interest payments of 6.75% with these covenants.the balance payable July 17, 2023.
The following represents the Company’s long-term debt as of December 31, 2017 and December 31, 2016:of: | | | | | | | $'s in 000's | | December 31, 2017 | | December 31, 2016 | Term loans | | $ | — | | $ | 5,000 | Revolving credit facility | | | 15,325 | | | 22,473 | Mortgage | | | 1,902 | | | — | Net discount on debt and deferred financing fees | | | — | | | (92) | | | $ | 17,227 | | $ | 27,381 | Less current maturities of long-term debt | | | (44) | | | (2,223) | Total long-term debt | | $ | 17,183 | | $ | 25,158 |
| | | | | | | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Convertible Notes | | $ | 143,750 | | $ | — | Term loans | | | 217,250 | | | 220,000 | Revolving credit facility | | | 15,000 | | | 10,000 | Notes Payable - VIP Acquisition | | | 27,500 | | | 27,500 | Other Debt | | | 16,257 | | | 1,812 | Net discount on debt and deferred financing fees | | | (57,559) | | | (5,688) | | | $ | 362,198 | | $ | 253,624 | Less current maturities of long-term debt | | | (6,219) | | | (2,248) | Total long-term debt | | $ | 355,979 | | $ | 251,376 |
Future maturities of long-term debt, excluding the net discount on debt and deferred financing fees, as of December 31, 20172020, are as follows: | | | | ($'s in 000's) | | | | 2018 | | $ | 44 | 2019 | | | 15,372 | 2020 | | | 48 | 2021 | | | 50 | 2022 | | | 52 | Thereafter | | | 1,661 |
| | | | ($'s in 000's) | | | | 2021 | | $ | 6,219 | 2022 | | | 5,476 | 2023 | | | 33,255 | 2024 | | | 6,057 | 2025 | | | 2,259 | Thereafter | | | 366,491 |
The Company incurred debt issuance costs of $218$0.6 million related to the AmendedA&R Credit Agreement during the first quarter of 2016. The debt transaction resulted in a loss on debt extinguishment of $993 thousand, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs. year ended December 31, 2020. The Company incurred debt issuance costs of $261 thousand$0.7 million during the year ended December 31, 2019 related to the NewA&R Credit Agreement during 2016. This second refinancing transaction resulted in a loss on extinguishment of $688 thousand, which includedand $5.1 million related to the write off of unamortizedA&R Term Loan Credit Agreement. The Company incurred debt issuance costs of $5.9 million in May 2020 in connection with the Notes. In accordance with FASB ASC 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. $2.2 million of issuance costs were recorded as additional paid-in capital and such amounts are not subject to amortization. The remaining issuance costs of $3.7 million are recorded as debt issuance costs in the net carrying value of the Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Notes and is included in interest expense, net on the condensed consolidated statements of operations. Future amortization of our debt discount and debt discount, early termination fees, and legal costs.issuance costs for the term of the Convertible Notes is as follows: | | | | | | | ($'s in 000's) | | Debt Discounts | | Debt Issuance Costs | 2021 | | $ | 6,761 | | $ | 470 | 2022 | | | 7,684 | | | 534 | 2023 | | | 8,733 | | | 607 | 2024 | | | 9,925 | | | 690 | 2025 | | | 11,280 | | | 784 | Thereafter | | | 5,143 | | | 356 |
Note 5 -6 – Leases The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182021 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term. We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease. The Company’s leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms. The components of lease expense consists of the follow: | | | | | | | | | For the Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Finance lease cost | | | | | | | Amortization of right-of-use assets | | $ | 1,681 | | $ | 1,441 | Interest on lease liabilities | | | 315 | | | 308 | Operating lease cost | | | 5,831 | | | 4,833 | Variable lease cost(1) | | | 1,130 | | | 629 | Short-term lease cost | | | 34 | | | 41 | Sublease income | | | (528) | | | (452) | Total lease cost | | $ | 8,463 | | $ | 6,800 |
| (1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
Other information related to leases was as follows as of: | | | | | | | | | | December 31, 2020 | | | December 31, 2019 | Weighted-average remaining lease term (years) | | | | | | | Operating leases | | | 4.41 | | | 5.15 | Finance leases | | | 2.38 | | | 2.73 | Weighted-average discount rate | | | | | | | Operating leases | | | 5.3% | | | 5.3% | Finance leases | | | 5.7% | | | 5.7% |
Annual future commitments under non-cancelable leases as of December 31, 2017,2020, consist of the following: | | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Capital Leases | 2018 | | $ | 2,053 | | $ | 113 | 2019 | | | 937 | | | 110 | 2020 | | | 353 | | | 96 | 2021 | | | 176 | | | 93 | 2022 | | | 176 | | | 72 | Thereafter | | | 127 | | | 27 | Total minimum future obligations | | $ | 3,822 | | $ | 511 | Less interest | | | | | | (15) | Present value of net future minimum obligations | | | | | | 496 | Less current capital lease obligations | | | | | | (107) | Long-term capital lease obligations | | | | | $ | 389 | | | | | | | |
The net book value of assets under capital lease was $850 thousand and $775 thousand as of December 31, 2017 and 2016, respectively.
| | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Finance Leases | 2021 | | $ | 5,861 | | $ | 1,757 | 2022 | | | 5,591 | | | 1,584 | 2023 | | | 4,789 | | | 1,580 | 2024 | | | 3,280 | | | 330 | 2025 | | | 2,357 | | | 20 | Thereafter | | | 1,365 | | | — | Total minimum future obligations | | $ | 23,243 | | $ | 5,271 | Less interest | | | (2,539) | | | (367) | Present value of net future minimum obligations | | | 20,704 | | | 4,904 | Less current lease obligations | | | (4,915) | | | (1,566) | Long-term lease obligations | | $ | 15,789 | | $ | 3,338 | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | Year Ended | | Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | Operating cash flows from finance leases | | $ | 315 | | $ | 308 | Operating cash flows from operating leases | | | 5,668 | | | 4,568 | Financing cash flows from finance leases | | | 1,965 | | | 1,547 | (Noncash) right-of-use assets obtained in exchange for lease obligations | | | | | | | Operating leases | | | 5,105 | | | 5,368 | Finance leases | | | 2,019 | | | (3,006) |
Total operating lease expense for the yearsyear ended December 31, 2017, 2016, and 20152018, totaled $1,716 thousand, $1,718 thousand, and $1,627 thousand, respectively.$6.0 million. Note 67 - Income TaxesAs a result of the IPO and related reorganization transactions completed in July 2017, the Company holds an economic interest of approximately 62% in HoldCo and consolidates the financial position and results of HoldCo. The approximate 38% of HoldCo not held by the Company is considered non-controlling interest. HoldCothe sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax reporting. purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $67.6M of deferred tax assets associated with these exchanges, which currently have a full valuation allowance against the deferred tax asset. The non-controlling interests totaled approximately 11% of the ownership of Holdco as of December 31, 2020. See Note 11 – Non-controlling interests for more information.
HoldCo’s members, including the Company, are liable for federal, state, and local income taxes based on their share of HoldCo’s taxable income. Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. OpcoHoldco makes cash distributions to permit the membermembers to pay these taxes as needed by the member’s tax situation.attributable to their allocable share of income earned. In the years ended December 31, 20172020 and 2016,2019, the Company did not make anymade cash distributions. Indistributions of $0.05 million and $1.7 million, respectively. Additionally, Holdco accrues for distributions required to be made related to estimated income taxes. During the yearyears ended December 31, 2017 Opco2020 and 2019, the Company relieved previously accrued $597 thousand for anticipated tax distributions to Continuing LLC Owners.of $(0.4)million and accrued distributions of $0.8 million, respectively. This liability is included in accounts payable on the consolidated balance sheet.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 to 21 percent and requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. Staff Accounting Bulletin (SAB) 118 establishes a one-year measurement period to complete the accounting for the ASC 740 income tax effects of the Tax Act. An entity recognizes the impact of those amounts for which the accounting is complete. For matters that have not been completed, provisional amounts are recorded to the extent they can be reasonably estimated. For amounts for which a reasonable estimate cannot be determined, no adjustment is made until such estimate can be completed.
The Company was able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the deemed repatriation tax, and the remeasurement of deferred taxes. We recorded a provisional net tax expense of $3.6 million in the period ended December 31, 2017 attributable to the Tax Act. This net expense consists of an expense of $0.2 million for the Company’s allocated share of the one-time transition tax on unrepatriated earnings of foreign subsidiaries and a net expense of $3.4 million primarily due to the remeasurement of deferred tax assets associated with the corporate rate reduction.
These estimates may be impacted as we further analyze available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and guidance issued by standard-setting bodies that provide interpretative guidance of the Tax Act.
The components of earnings before incomenet loss taxes, determined by tax jurisdiction, are as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | United States | | $ | 11,479 | | $ | (3,634) | | $ | (1,209) | Foreign | | | 308 | | | 239 | | | (140) | Total | | $ | 11,787 | | $ | (3,395) | | $ | (1,349) |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | United States | | $ | (29,239) | | $ | (17,953) | | $ | (1,116) | Foreign | | | 433 | | | 342 | | | 542 | Total | | $ | (28,806) | | $ | (17,611) | | $ | (574) |
The provision for income taxes for 2017, 2016,2020, 2019, and 20152018 consisted of the following: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Current: | | | | | | | | | | Federal | | $ | (10) | | $ | - | | $ | - | State | | | 63 | | | - | | | - | Foreign | | | - | | | - | | | - | | | $ | 53 | | $ | - | | $ | - | Deferred and other: | | | | | | | | | | Federal | | | 3,708 | | | - | | | - | State | | | 19 | | | - | | | - | Foreign | | | 190 | | | - | | | - | | | | 3,917 | | | - | | | - | Total tax expense | | $ | 3,970 | | $ | - | | $ | - |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | Current: | | | | | | | | | | Federal | | $ | — | | $ | — | | $ | — | State | | | 327 | | | 317 | | | 148 | Foreign | | | 137 | | | 17 | | | — | | | $ | 464 | | $ | 334 | | $ | 148 | Deferred and other: | | | | | | | | | | Federal | | | 40,598 | | | (2,146) | | | (751) | State | | | 11,175 | | | (1,336) | | | (135) | Foreign | | | (21) | | | (161) | | | 77 | | | | 51,752 | | | (3,643) | | | (809) | Total income tax expense (benefit) | | $ | 52,216 | | $ | (3,309) | | $ | (661) |
Reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Income tax expense (benefit) at federal statutory rate | | | 35.0 | % | | 35.0 | % | | 35.0 | State and local income taxes net of federal tax benefit | | | - | | | - | | | (43) | Non-controlling interest and nontaxable income | | | (33.2) | | | (37.4) | | | - | Tax Cuts and Jobs Act of 2017 | | | 30.7 | | | - | | | - | Nondeductible/nontaxable items | | | 1.2 | | | 2.4 | | | 8 | Income tax expense (benefit) | | | 33.7 | % | | - | | | - |
| | | | | | | | | | | | | Years Ended December 31 | | | | | 2020 | | | 2019 | | | 2018 | | Income tax expense (benefit) at federal statutory rate | | | 21.0 | % | | 21.0 | % | | 21.0 | % | State and local income taxes net of federal tax benefit | | | 2.4 | | | 1.3 | | | (5.7) | | Non-controlling interest and nontaxable income | | | (2.9) | | | (4.0) | | | 54.7 | | Deferred tax rate changes | | | (1.3) | | | (0.4) | | | 37.2 | | Share-based compensation | | | 0.6 | | | 0.1 | | | 18.3 | | Tax Cuts and Jobs Act of 2017 | | | - | | | - | | | (13.1) | | Return-to-Provision | | | (2.0) | | | 0.8 | | | 13.4 | | Valuation Allowance | | | (198.4) | | | 0.4 | | | 0.7 | | Other | | | (0.7) | | | (0.4) | | | (11.3) | | Effective income tax rate | | | (181.3) | % | | 18.8 | % | | 115.2 | % |
Our effective income tax rate differsis affected primarily by the recognition of a valuation allowance during the year ended December 31, 2020 and the portion of income and expense allocated to the noncontrolling interest. It is also affected by discrete items that may occur in any given year such as stock based compensation, but are not consistent from statutory rates primarily dueyear to our pass-through entity structure for U.S. income tax purposes.year. As a result of the IPO and reorganization transactions, the Company has recorded deferred tax assets and liabilities based on the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 20172020 and 20162019 are as follows: | | | | | | | $'s in 000's | | 2020 | | 2019 | Deferred tax assets | | | | | | | Investment in partnership | | $ | 53,294 | | $ | 53,303 | Fixed assets | | | 32 | | | 29 | Net operating loss carryforwards and tax credits | | | 18,001 | | | 6,775 | Other accruals and reversals | | | 9 | | | 5 | Subtotal | | | 71,336 | | | 60,112 | Less: valuation allowance | | | (71,161) | | | (143) | Net deferred tax assets | | | 175 | | | 59,969 | | | | | | | | Deferred tax liabilities | | | | | | | Intangible assets | | $ | (447) | | $ | (293) | Other | | | (6) | | | (5) | Net deferred tax liabilities | | $ | (453) | | $ | (298) |
$'s in 000's | | | 2017 | | | 2016 | Investment in partnership | | $ | 5,855 | | $ | - | Net operating loss carryforwards and tax credits | | | 536 | | | 520 | Other | | | 66 | | | 47 | Subtotal | | | 6,457 | | | 567 | Less: valuation allowance | | $ | (237) | | $ | (91) | Total net deferred tax assets | | | 6,220 | | | 476 | Intangible assets | | | (412) | | | (476) | Other | | | (5) | | | - | Total deferred tax liabilities | | | (417) | | | - | Net deferred tax asset | | $ | 5,803 | | $ | - |
$66.0 million, of which $1.9 million, generated in 2017 and prior, will expire in 2037, the remaining NOLs do not expire. The NOL generated in 2018 and after of $64.1 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company has a federal business interest expense carryover totaling $6.1 million as of December 31, 2020, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. As of December 31, 2020, the Company has charitable contribution carryforwards of $1.0 million, which if unused will expire between 2021 and 2025. The Company has state NOL carryforwards of $384.7 million (tax effected $2.8 million) as of December 31, 2020 which expire between 2022 and 2038 and others that have an indefinite carryforward period. At December 31, 2020 the Company had foreign NOL carryforwards of $0.8 million which do not expire. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from the recorded deferred tax assets will not be realized. The Company has recorded a valuation allowance for certain deferred tax assets of $237 thousand$71.2 million and $91 thousand,$0.1 million as of December 31, 20172020 and December 31, 2016,2019, respectively. The valuation allowance pertains to certain international loss carryforwards, some of whichIn future periods, if we conclude we have no expiration and others that would expire beginning in 2018. The Tax Act contains a new law that requires a current inclusion in U.S. federalfuture taxable income of certain earnings of controlled foreign corporations, also known as the tax on global intangible low taxed income (GILTI), beginning in 2018. The FASB has provided that companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, orsufficient to recognize the deferred taxes for temporary differences, including outside basis differences, expected to reverse as GILTI. Due totax assets, we may reduce or eliminate the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act. We have not recorded any provisional amounts as of December 31, 2017 nor have we made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into our measurement of deferred taxes.
valuation allowance. The Company has not recognized any uncertain tax positions, penalties or interest as we have concluded that no such positions exist. Accordingly, no0 unrecognized tax benefit would impact the effective tax rate. If interest and penalties were accrued, we would recognize interest and penalties as income tax expense. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017,2020, tax years for 2014, 2015, and 2016from 2017 to present are subject to examination by the tax authorities. With few exceptions, as On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes temporary changes regarding the prior and future utilization of December 31, 2017, we are no longer subjectnet operating losses, temporary changes to U.S. federal, state, local, or foreign examinations bythe prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax authoritieslegislation for years before 2014.tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company will benefit from the Employee Retention Credits and the payroll tax deferral. Note 7Note 8 – Earnings (loss)Loss per Share Basic and Diluted Earnings (loss)Loss per Share share Basic earnings (loss)loss per share of Class A common stock is computed by dividing net income (loss)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 incomeloss 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 9 — 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 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 (loss) per share would not be appropriate.
Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit 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 (loss) per share information has not been presented for periods
prior to the IPO on July 20, 2017. The basic and diluted earnings (loss) per share represent only the the period July 20, 2017 to December 31, 2017.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock: | | | | | | | ($'s in 000's, except for per share amounts) | | December 31, 2017 | Numerator: | | | | Net income | | $ | 7,817 | Less: net income attributable to non-controlling interests | | | (11,310) | Net loss attributable to PetIQ, Inc. — basic | | | (3,493) | 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 (in 000's)-- diluted | | | 13,223 | | | | | Earnings per share of Class A common stock — basic | | $ | (0.26) | Earnings per share of Class A common stock — diluted | | $ | (0.26) |
| | | | | | | | | | | | Year ended December 31, | (in 000's, except for per share amounts) | | | 2020 | | 2019 | | 2018 | Numerator: | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Less: net (loss) income attributable to non-controlling interests | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. — basic and diluted | | | (77,474) | | | (11,453) | | | (782) | Denominator: | | | | | | | | | | Weighted-average shares of Class A common stock outstanding -- basic | | | 24,629 | | | 22,652 | | | 17,216 | Dilutive effects of stock options that are convertible into Class A common stock | | | — | | | — | | | — | Dilutive effect of RSUs | | | — | | | — | | | — | Dilutive effect for conversion of Notes | | | — | | | — | | | — | Weighted-average shares of Class A common stock outstanding -- diluted | | | 24,629 | | | 22,652 | | | 17,216 | | | | | | | | | | | Loss per share of Class A common stock — basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Loss per share of Class A common stock — diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock as well as all stock options and restricted stock units have not been included in the diluted earnings (loss)loss per share calculation as they have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively. Additionally, all stock options and restricted stock units and convertible Notes have not been included in the diluted earnings per share calculation for the years ended December 31, 2020, 2019 and 2018, as they have been determined to be anti-dilutive under the treasury stock method. Note 89 – Stock Based Compensation Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of December 31, 2017, 1,315,4032020 and 2019, 1,293 thousand and 2,017 thousand shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares. PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provides for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800thousand shares of Class A Common Stock of the Company. As of December 31, 2020, 0 shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock. Stock Options The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, whichperiod. Expense recognized totaled $447 thousand$6.5 million and $6.2 million for the yearyears ended December 31, 2017.2020, and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended December 31:periods ended: | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Expected term (years) (1) | | | 6.25 | | | | 6.25 | | Expected volatility (2) | | | 33.91 | % | | | 35.00 | % | Risk-free interest rate (3) | | | 0.37 | % | | | 2.37 | % | Dividend yield (4) | | | 0.00 | % | | | 0.00 | % |
| (1) | | | | | | | 2017
| Expected term (years) (1)
| | | 6.25 | | Expected volatility (2)
| | | 35.00 | %
| Risk-free interest rate (3)
| | | 1.98 | %
| Dividend yield (4)
| | | 0.00 | %
|
| (1)
| | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
| (2) | (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) | (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) | (4)
| | The Company has not paid and does not anticipate paying a cash dividend on our common stock. |
The weighted average grant date fair value of stock options granted during the period ended December 31, 2020 and 2019 was $11.88 and $10.63, respectively, per option. The following table summarizes the activity of the Company’s unvested stock options for the period ended December 31, 2017: The grant date fair value of stock options granted during the period ended December 31, 2017 was $6.08 per option.2020: | | | | | | | | | | | | | | | | | | | | | 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 | | | (205,405) | | | 16 | | | | | | | Cancelled | | | — | | | | | | | | | | Outstanding at December 31, 2017 | | | 598,644 | | $ | 16 | | $ | 3,496 | | | 9.5 | Options exercisable at December 31, 2017 | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Average | | | | | Weighted | | Aggregate | | Remaining | | | Stock | | Average | | Intrinsic | | Contractual | | | Options | | Exercise | | Value | | Life | | | (in 000's) | | Price | | (in 000's) | | (years) | Outstanding at December 31, 2017 | | | 599 | | $ | 16.00 | | $ | 3,496 | | | 9.5 | Granted | | | 1,617 | | | 25.74 | | | | | | | Exercised | | | (76) | | | 18.83 | | | | | | | Forfeited | | | (195) | | | 21.37 | | | | | | | Cancelled/Expired | | | — | | | — | | | | | | | Outstanding at December 31, 2018 | | | 1,945 | | $ | 23.45 | | $ | 5,527 | | | 9.1 | Granted | | | 423 | | | 27.54 | | | | | | | Exercised | | | (119) | | | 19.51 | | | | | | | Forfeited | | | (168) | | | 21.92 | | | | | | | Cancelled/Expired | | | (9) | | | 25.70 | | | | | | | Outstanding at December 31, 2019 | | | 2,072 | | $ | 24.63 | | $ | 6,266 | | | 8.0 | Granted | | | 505 | | | 20.22 | | | | | | | Exercised | | | (395) | | | 23.48 | | $ | 4,468 | | | | Forfeited | | | (96) | | | 21.42 | | | | | | | Outstanding at December 31, 2020 | | | 2,086 | | $ | 23.93 | | $ | 30,302 | | | 7.2 | Options exercisable at December 31, 2020 | | | 831 | | | | | $ | 11,778 | | | 5.9 |
At December 31, 2017,2020, total unrecognized compensation cost related to unvested stock options was $3.2$8.4 million and is expected to be recognized over a weighted-average period of approximately 3.52.2 years. Restricted Stock Units The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will generally be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At December 31, 2020, total unrecognized compensation cost related to unvested RSUs was $5.8 million and is expected to vest over a weighted average of 2.8 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.6 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The following table summarizes the activity of the Company’s RSUs for the period ended December 31, 2020: | | | | | | | | | | | Weighted | | | Number of | | Average | | | Shares | | Grant Date | | | (in 000's) | | Fair Value | Outstanding at December 31, 2018 | | | 51 | | $ | 33.16 | Granted | | | 123 | | | 27.61 | Settled | | | (25) | | | 30.43 | Forfeited | | | (15) | | | 30.58 | Outstanding at December 31, 2019 | | | 133 | | $ | 28.85 | Granted | | | 271 | | | 20.73 | Settled | | | (70) | | | 25.65 | Forfeited | | | (17) | | | 23.34 | Nonvested RSUs at December 31, 2020 | | | 317 | | $ | 22.91 |
The total equity based compensation expense for these plans over the vesting period totaled $9.2 million, $7.4 million, and $3.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.0 million, $1.4 million and $0.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Note 910 - 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 $30.5 million 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 $25.4 million in preference notes;
|
| ·
| | The Company purchased from Continuing LLC Owners 133,334 LLC Interests in exchange for $2.1 million.
|
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. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.
Immediately following the Reclassification, PetIQ became a holding company and our principal asset is the LLC interests. As the sole managing member of HoldCo, PetIQ operates and controls all of the business and affairs of HoldCo and, through HoldCo and its subsidiaries, conducts business. In addition, PetIQ controls the management of, and has a controlling interest in, HoldCo and, therefore, PetIQ 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 net income (loss) is allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners to a portion of Holdco’s net income (loss).
Other than its purchase of LLC Interests with the net proceeds the IPO, PetIQ has not provided any financial or other support to HoldCo. PetIQ is not required to provide financial or other support for HoldCo, though it will control HoldCo’s business and other activities through its managing member interest in HoldCo. Because PetIQ is not a guarantor or obligor with respect to any of the liabilities of HoldCo, absent any such arrangement, the creditors of HoldCo will not have any recourse to the general credit of PetIQ. Nevertheless, because PetIQ will have no material assets other than its interests in HoldCo, any change in HoldCo’s financial condition could result in PetIQ recognizing a loss.
Amendment and Restatement of Certificate of Incorporation
On July 20, 2017, the CompanyThe Company’s amended and restated its certificate of incorporation, to, among other things, provideprovides for the (i) authorization of 125,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) authorization of 8,401,521100,000,000 shares of Class B common stock with a par value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.
Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one1 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-one1-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-one1-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). Initial2018 Public Offering
On July 20, 2017,October 1, 2018, the Company completedclosed an IPOunderwritten public offering of 7,187,5005,750 thousand 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.stock. The Company received $104.0 million in proceeds, net of underwriting discounts, commissions and offering costs, which were used repay $56.0 million 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 sharesold 2,000 thousand newly issued shares of Class A common stock in the IPO lessand received net proceeds of approximately $73.9 million after deducting underwriting discounts and commissions and to purchase 133,334offering expenses. The remaining 3,750 thousand shares of Class A common stock were sold by selling stockholders and the Company did not receive any proceeds with respect hereto. In conjunction with the 2018 Public Offering, a number of holders of Class B common stock exchanged 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 offor Class A common stock, there were 13,222,583 sharesstock. The
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, HoldCo amended and restatedimpact on non-controlling interest is shown along with other exchanges during the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interestsyear 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.Note 11 – Non-Controlling Interests.
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 equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of such 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 1011 - Non-Controlling Interests In connection with the Reorganization Transactions described in Note 9 — 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 non-controlling 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 December 31, 2017,2020, there were 21,490,77128,751 thousand LLC Interests outstanding, of which PetIQ owned 13,222,583,25,711thousand, representing a 61.5%an 89.4% ownership interest in HoldCo. Exchange and other equity activity during the years ended December 31, 2020 and 2019 resulted in weighted average ownership of HoldCo by PetIQ of 86.4% and 80.2%, respectively. | | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | Continuing LLC | | | | | | | | | Continuing LLC | | | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of December 31, 2017 | | | 8,268,188 | | | 13,222,583 | | | 21,490,771 | | | 38.5% | 61.5% |
| | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | LLC | | | | | | | | | LLC | | $'s in 000's | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of January 1, 2019 | | | 6,547 | | | 21,620 | | | 28,167 | | | 23.2% | 76.8% | Stock based compensation adjustments | | | — | | | 140 | | | 140 | | | | | Exchange transactions | | | (1,794) | | | 1,794 | | | — | | | | | As of December 31, 2019 | | | 4,752 | | | 23,554 | | | 28,306 | | | 16.8% | 83.2% | Stock based compensation adjustments | | | — | | | 445 | | | 445 | | | | | Exchange transactions | | | (1,712) | | | 1,712 | | | — | | | | | As of December 31, 2020 | | | 3,040 | | | 25,711 | | | 28,751 | | | 10.6% | 89.4% |
Note 11Note 12 - Customer Concentration The Company has significant exposure to customer concentration. During each of the years ended December 31, 2017, 2016,2020, 2019, and 2015, three2018, 2, 2, and 1 customers, respectively, accounted for more than 10% of sales individually. In total for the years ended December 31, 2017, 2016,individually and 2015, the three customersin aggregate accounted for 61%42%, 70%35%, and 74%18% of net sales, respectively. At December 31, 2017 and December 31, 2016, three and four customers, respectively,2020, 1 Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 48% and 60%, respectively, 52% of outstanding trade receivables, net. TheAt December 31, 2019 2 Products segment customers are customersindividually accounted for more than 10% of outstanding trade receivables, and accounted for 61% of outstanding trade receivables, net. All of our Domesticcustomer concentration exists in our Products segment. Note 1213 - Commitments and Contingencies Litigation Contingencies In May 2017, Bayer Healthcare LLCDuring the years ended December 31, 2020 and its affiliates2019, the Company recorded liabilities of $7.8 million and $1.0 million, respectively, for contract termination costs, related to settlements for alleged breach of contract. The expense is included within General and Administrative expenses for the years ended December 31, 2020 and 2019.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplierfor alleged unlawful merger and other antitrust violations. On June 29, 2020, the 9th Circuit Court of Advecta 3 and PetLock MAX,Appeals issued an opinion affirming the dismissal of Med Vets’ merger challenge. On July 13, 2020, the Plaintiffs filed for an en banc hearing in the 9th Circuit Court of Appeals which we beganwas unanimously denied on August 7, 2020. The Plaintiffs time period to sell in 2017 as our value-branded alternatives to Bayer’s K9 Advantix II. Bayer alleges that 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 MAXpetition the Supreme Court for certiorari has passed, therefore the matter is considered resolved. As no impact to the Company. BayerCompany is considered probable or estimable, 0 litigation reserve has filed a motion for preliminary injunction, which motion was argued in February 2018. 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 paymentaccrued. 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 December 31, 2017 and December 31, 2016,2020 as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations. Commitments We have commitments for leases and long-term debt that are discussed further in Note 5, Debt, and Note 6, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business. Note 1314 - Segments The Company has two2 operating segments,segments: Products and thus two reportable segments, which areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers. The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas. a segment as defined in the accounting guidance related to segment reporting. Financial information relating to the Company’s operating segments for the years ended December 31: | | | | | | | | | | $'s in 000's | | Domestic | | International | | Consolidated | 2017 | | | | | | | | | | Net Sales | | $ | 261,526 | | $ | 5,161 | | $ | 266,687 | Gross profit | | | 48,997 | | | 2,197 | | | 51,194 | General and administrative expenses | | | 36,053 | | | 1,852 | | | 37,905 | Operating income | | | 12,944 | | | 345 | | | 13,289 | Interest expense | | | — | | | — | | | (1,563) | Other income, net | | | — | | | — | | | 201 | Foreign currency loss, net | | | — | | | — | | | (140) | Identifiable assets | | $ | 134,841 | | $ | 6,004 | | $ | 140,845 | Depreciation expense | | $ | 2,209 | | $ | 139 | | $ | 2,348 | Amortization expense | | $ | 797 | | $ | 255 | | $ | 1,052 | Capital expenditures | | $ | 4,011 | | $ | 120 | | $ | 4,131 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2016 | | | | | | | | | | Net Sales | | $ | 195,698 | | $ | 4,464 | | $ | 200,162 | Gross profit | | | 30,683 | | | 1,864 | | | 32,547 | General and administrative expenses | | | 30,127 | | | 1,718 | | | 31,845 | Operating income | | | 556 | | | 146 | | | 702 | Interest expense | | | — | | | — | | | (3,058) | Other income, net | | | — | | | — | | | 666 | Loss on debt extinguishment | | | — | | | — | | | (1,681) | Foreign currency loss, net | | | — | | | — | | | (24) | Identifiable assets | | $ | 76,270 | | $ | 5,060 | | $ | 81,330 | Depreciation expense | | $ | 1,877 | | $ | 38 | | $ | 1,915 | Amortization expense | | $ | 798 | | $ | 269 | | $ | 1,067 | Capital expenditures | | $ | 1,892 | | $ | 149 | | $ | 2,041 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2015 | | | | | | | | | | Net Sales | | $ | 202,092 | | $ | 3,595 | | $ | 205,687 | Gross profit | | | 37,582 | | | 1,576 | | | 39,158 | General and administrative expenses | | | 33,926 | | | 1,662 | | | 35,588 | Operating income (loss) | | | 3,656 | | | (86) | | | 3,570 | Interest expense | | | — | | | — | | | (3,545) | Loss on debt extinguishment | | | — | | | — | | | (1,449) | Foreign currency gain, net | | | — | | | — | | | 75 | Identifiable assets | | $ | 86,531 | | $ | 5,804 | | $ | 92,335 | Depreciation expense | | $ | 1,800 | | $ | 42 | | $ | 1,842 | Amortization expense | | $ | 330 | | $ | 405 | | $ | 735 | Capital expenditures | | $ | 1,479 | | $ | 71 | | $ | 1,550 |
ended: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2020 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 725,705 | | $ | 54,346 | | $ | — | | $ | 780,051 | Adjusted EBITDA | | | 117,216 | | | 3,387 | | | (52,811) | | | 67,792 | Depreciation expense | | | 4,810 | | | 3,775 | | | 3,497 | | | 12,082 | Capital expenditures | | | 13,394 | | | 7,373 | | | 1,625 | | | 22,392 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2019 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 617,118 | | $ | 92,313 | | $ | — | | $ | 709,431 | Adjusted EBITDA | | | 73,537 | | | 20,045 | | | (32,907) | | | 60,675 | Depreciation expense | | | 3,552 | | | 3,170 | | | 2,417 | | | 9,139 | Capital expenditures | | | 1,297 | | | 6,409 | | | 2,570 | | | 10,276 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2018 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 450,229 | | $ | 78,385 | | $ | — | | $ | 528,614 | Adjusted EBITDA | | | 52,185 | | | 15,246 | | | (25,892) | | | 41,539 | Depreciation expense | | | 2,343 | | | 2,326 | | | 1,988 | | | 6,657 | Capital expenditures | | | 1,339 | | | 3,440 | | | 2,399 | | | 7,178 |
The following table reconciles Segment Adjusted EBITDA to Net (Loss) income for the periods presented. | | | | | | | | | | | | For the years ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | Adjusted EBITDA: | | | | | | | | | | Product | | $ | 117,216 | | $ | 73,537 | | $ | 52,185 | Services | | | 3,387 | | | 20,045 | | | 15,246 | Unallocated Corporate | | | (52,811) | | | (32,907) | | | (25,892) | Total Consolidated | | | 67,792 | | | 60,675 | | | 41,539 | Adjustments: | | | | | | | | | | Depreciation | | | (12,082) | | | (9,139) | | | (6,657) | Amortization | | | (12,815) | | | (5,994) | | | (5,210) | Interest | | | (26,299) | | | (14,495) | | | (8,022) | Acquisition costs(1) | | | (2,620) | | | (6,147) | | | (3,787) | Stock based compensation expense | | | (9,170) | | | (7,355) | | | (3,812) | Purchase accounting adjustment to inventory(2) | | | — | | | (4,805) | | | (2,149) | Non same-store revenue(3) | | | 8,987 | | | 8,088 | | | 3,967 | Non same-store costs(3) | | | (22,256) | | | (19,553) | | | (10,345) | Fair value adjustment of contingent note | | | — | | | (7,320) | | | (3,280) | Integration costs and costs of discontinued clinics(4) | | | (9,776) | | | (3,788) | | | (998) | Clinic launch expenses(5) | | | (3,085) | | | (767) | | | (1,380) | Non-recurring royalty settlement(6) | | | — | | | — | | | (440) | SKU Rationalization(7) | | | — | | | (6,482) | | | — | Litigation expenses | | | (1,006) | | | (529) | | | — | COVID-19 related costs(8) | | | (6,476) | | | — | | | — | Pretax net loss | | $ | (28,806) | | $ | (17,611) | | $ | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Purchase accounting adjustment to inventory represents the portion of costs of sales related to the fair value of inventory adjusted as part of the purchase price allocation. During 2019 the amounts relate to the Perrigo Animal Health Acquisition and are part of the Products segment. During 2018 the costs relate to the VIP Acquisition which are part of the Services Segment and the HBH Acquisition, which is part of the Products Segment. |
| (3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
| (6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
| (7) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
| (8) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
Supplemental geographic disclosures are below. | | | | | | | | | | | Year ended December 31, 2020 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 719,282 | $ | 6,423 | $ | 725,705 | Service revenue | | | 54,346 | | — | | 54,346 | Total net sales | | $ | 773,628 | $ | 6,423 | $ | 780,051 |
| | | | | | | | | | | Year ended December 31, 2019 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 610,986 | $ | 6,132 | $ | 617,118 | Service revenue | | | 92,313 | | — | | 92,313 | Total net sales | | $ | 703,299 | $ | 6,132 | $ | 709,431 |
| | | | | | | | | | | Year ended December 31, 2018 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 444,364 | $ | 5,865 | $ | 450,229 | Service revenue | | | 78,385 | | — | | 78,385 | Total net sales | | $ | 522,749 | $ | 5,865 | $ | 528,614 |
The net book value of property plant and equipment, by geographic location was as follows as of: | | | | | | | | | December 31, 2020 | | December 31, 2019 | United States | | $ | 61,807 | | $ | 51,397 | Europe | | | 1,339 | | | 1,128 | Total | | $ | 63,146 | | $ | 52,525 |
Note 1415 - Related Parties Opco had entered into management consulting services agreements with members of HoldCo. The services were related to financial transactions and other senior management matters related to business administration. Those agreements provided for the Company to pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded in general and administrative expenses in the consolidated statement of operations. The Company recorded $610 thousand, $864 thousand and $462 thousand for the year ended December 31, 2017, 2016, and 2015, respectively. Upon consummation of the recapitalization and IPO transactions, these agreements were terminated.
As discussed in Note 6–7– Income taxes, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At December 31, 2017,2020 and 2019, the Company had paid $0.03 million in advance on required tax distributions and accrued $597 thousand$0.4 million, respectively, for estimated tax distributions, which are included in accounts payable on the consolidated balance sheets. As discussed in Note 5– Debt, the Company has notes payable to the Sellers of VIP, who are significant shareholders of the Company, of $27.5 million. The Company had $0.5 million and $0.3 million of accrued interest on these notes as of December 31, 2020, and 2019, respectively. The Company paid $1.7 million and $1.3 million of interest for the years ended December 31, 2020 and 2019, respectively, and paid 0 interest for the year ended December 31, 2018. Will Santana, a former owner of VIP and board member of PetIQ until July 1, 2020, was one of the main beneficiaries of the VIP Notes. Mr. Santana has sold a sizable portion of his ownership in PetIQ and resigned from the board during 2020, as such he will no longer be considered a related party. The Company leases office and warehouse space from a company under common control of the sellers of VIP, commencing on January 17, 2018. The Company incurred rent expenses of $0.4 million in each of the years ending December 31, 2020, 2019, and 2018, respectively. The lease ended January 5, 2021. Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s annual premium expense, paid to Moreton and subsequently transferred to insurance providers, was $1.1$2.8 million, $2.3 million and $1.5 million in 2017.2020, 2019 and 2018, respectively. Mr. Christensen was paid a commission of approximately $60 thousand$0.1 million in each of the years ending December 31, 2020, 2019, and 2018, respectively, by Moreton for the sale of such insurance policies to the Company. In April 2020, the Company purchased a parcel of land for $2.5 million. The broker for the Company was Colliers International, and the agent was Mike Christensen, the brother of CEO McCord Christensen. Total commission paid to Colliers was approximately $75 thousand. Note 15 – Quarterly information (unaudited)
| | | | | | | | | | | | | ($’s in 000’s except per share amounts) | | | Quarter 1 | | | Quarter 2 | | | Quarter 3 | | | Quarter 4 | 2017: | | | | | | | | | | | | | Net sales | | $ | 67,029 | | $ | 87,178 | | $ | 60,554 | | $ | 51,926 | Gross profit | | | 12,200 | | | 15,951 | | | 12,517 | | | 10,526 | Selling, general, and administrative expenses | | | 7,405 | | | 9,277 | | | 10,739 | | | 10,484 | Operating income | | | 4,795 | | | 6,674 | | | 1,778 | | | 42 | Net income | | | 4,279 | | | 6,070 | | | 859 | | | (3,391) | Basic net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Diluted net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Basic weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | Diluted weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | | | | March 31, 2016 | | | June 30, 2016 | | | September 30, 2016 | | | December 31, 2016 | 2016: | | | | | | | | | | | | | Net sales | | $ | 52,298 | | $ | 61,280 | | $ | 41,671 | | $ | 44,913 | Gross profit | | | 9,772 | | | 8,961 | | | 6,160 | | | 7,654 | Selling, general, and administrative expenses | | | 8,063 | | | 8,302 | | | 7,942 | | | 7,538 | Operating income | | | 1,709 | | | 659 | | | (1,782) | | | 116 | Net income | | | (304) | | | 598 | | | (2,512) | | | (1,177) | Basic net income per common share(1) | | | - | | | - | | | - | | | - | Diluted net income per common share(1) | | | - | | | - | | | - | | | - | Basic weighted average shares(1) | | | - | | | - | | | - | | | - | Diluted weighted average shares(1) | | | - | | | - | | | - | | | - |
| (1)
| | Number of shares out standing and earnings per share prior to our IPO on July 26, 2017 are not reported, see Note 7 in the accompanying consolidated financial statements.
|
Note 16 – Subsequent EventsEmployee Benefit Plans On January 17, 2018, we acquired Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP”). The aggregate consideration, comprisedCompany sponsors 401(k) defined contribution plans at certain subsidiaries. Participants may elect to defer up to 100% of (i) $100compensation. The Company makes matching contributions of 100% of the employee deferrals up to 3% of compensation. The Company may also make discretionary profit sharing contributions each year, which are allocated to each eligible participant based on compensation. The Company made matching contributions of $0.9 million, of cash, (ii) 4,200,000 LLC Interests of PetIQ Holdings, LLC, 4,200,000 shares of Class B common stock, (iii) promissory notes consisting of (A) a $10.0$0.6 million, note payable 5 years and 6 months after the closing, which shall accrue interest quarterly in arrears at a rate of 6.75% per annum, (B) a $10.0$0.3 million, note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $40.0 millionrespectively, for the year endingyears ended December 31, 2018, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the first anniversary of the closing,2020, 2019 and (C) a $10.0 million note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2019, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the second anniversary of the closing; provided that such note shall also become payable if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2018.
In connection with the VIP Acquisition, the Company amended and restated their existing revolving credit agreement (the “A&R Credit Agreement”) on January 17, 2018. The A&R Credit Agreement provides for a secured revolving credit facility of $50 million in the aggregate, at either LIBOR or Base (prime) interest rates plus an applicable margin.
All obligations under the A&R Credit Agreement are unconditionally guaranteed by HoldCo and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the A&R Credit Agreement, subject to certain exceptions.
Also in connection with the closing of the VIP Acquisition, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”). The Term Loan Credit Agreement provides for a secured term loan credit facility of $75 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin.
In connection with execution of the Unit Purchase Agreement to acquire VIP, options to purchase an aggregate 800,000 shares of Class A Common Stock of the Company (the “Inducement Awards”) were issued to 30 employees hired in connection with the transaction as employment inducement awards. The awards vest quarterly on each of the first four anniversaries of the closing date of the acquisition, generally subject to continued employment through each vesting date.
ItemItem 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None. ItemItem 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information that we are required to disclose in reports that we file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting We are responsible for establishing and maintaining internal control over Financing Reportingfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include a reportOur management, under the supervision and with the participation of management’sour Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, regardingour management used the Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
The Company’s registered independent accounting firm, KPMG LLP, has audited the effectiveness of our internal controls over financial reporting as of December 31, 2020, as stated in their report which appears on the next page. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended, December 31, 2020 that has materially affected, or an attestation reportis reasonably likely to materially affect, our internal control over financial reporting. | |
| | | KPMG LLP Suite 600 205 North 10th Street Boise, ID 83702-5798 |
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on Internal Control Over Financial Reporting We have audited PetIQ, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, consolidated stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s registeredmanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm dueregistered with the PCAOB and are required to a transition period established bybe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SECSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for newly public companies.our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Boise, Idaho
February 26, 2021 Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation: | ·
● | | statements regarding our strategies, results of operations or liquidity; |
| ·
● | | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
| ·
● | | statements of management’s goals and objectives; and |
| ·
● | | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy and our ability to successfully grow our business through acquisitions; our ability to integrate, manage and expand VIP’s business; and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others in our industry; 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’ section of this annual report on Form 10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements. Item 9B - Other Information None. PART III Item 10 – Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 11 – Executive Compensation The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 13 – Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 14 – Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
PART IV Item 15. Exhibits, Financial Statement Schedules See "Index to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notesnotes. | | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Unit Purchase Agreement dated January 5, 2018 | 8-K | 001-38163 | 2.1 | 8-Jan-18 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 11-Jul-17 | 3.2 | Bylaws of PetIQ, Inc. | S-1/A | 333-218955 | 3.2 | 6-Jul-17 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 17-Jul-17 | 10.1 | Registration Rights Agreement | S-1/A | 333-218955 | 10.2 | 6-Jul-17 | 10.2 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 23-Jan-18 | 10.3 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 23-Jan-18 | 10.4 | Term Loan Credit Agreement, dated January 17, 2018 by and among PetIQ, LLC, Ares Capital Corporation and the other Lenders party there, and Ares Capital Corporation, as Administrative Agent | 8-K | 001-38163 | 10.3 | 23-Jan-18 | 10.5 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 6-Jul-17 | 10.6* | Employment Agreement, dated as of January 17, 2018, by and between PetIQ, LLC and Will Santana | 8-K | 001-38163 | 10.4 | 23-Jan-18 | 10.7 | Form of Contribution Agreement | S-1/A | 333-218955 | 10.5 | 6-Jul-17 | 10.8 | Form of Preference Note | S-1/A | 333-218955 | 10.6 | 6-Jul-17 | 10.9 | Amended and Restated Credit Agreement, dated March 24, 2016, among PetIQ, LLC, the other credit parties thereto, Crystal Financial LLC and the other lenders party thereto | DRS/A | | 10.14 | 13-May-16 | 10.10 | Form of Recapitalization Agreement | S-1/A | 333-218955 | 10.7 | 6-Jul-17 | 10.11* | Employment and Non-Competition Agreement between True Science Holdings, LLC, and Scott Adcock | DRS/A | | 10.8 | 13-May-16 | 10.12* | Chief Financial Officer Employment Offer | DRS/A | | 10.10 | 13-May-16 | 10.13* | PetIQ Inc. 2017 Omnibus Incentive Plan | S-1/A | 333-218955 | 10.11 | 6-Jul-17 |
| | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Purchase and Sale Agreement, dated May 8, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc and PetIQ, Inc. | 8-K | 001-38163 | 2.1 | 5/8/2019 | 2.2 | Amended and Restated Asset Purchase Agreement, dated June 21, 2020, by and between Elanco US Inc., PetIQ, LLC and PetIQ, Inc. | 10-Q | 001-38163 | 2.1 | 8/10/2020 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 7/11/2017 | 3.2 | Amended and Restated Bylaws of PetIQ, Inc. | 8-K | 001-38163 | 3.1 | 2/23/2021 | 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | 8-K | 001-38163 | 3.1 | 6/1/2018 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 7/17/2017 | 4.2 | Registration Rights Agreement, dated July 20, 2017, among PetIQ, Inc. the Continuing LLC owners and the C-Corp LLC Parents | S-3 | 333-227186 | 4.1 | 9/4/2018 | 4.3 | Registration Rights Agreement, dated January 17, 2018, between PetIQ, Inc. and each VIP Petcare Owner | S-3 | 333-227186 | 4.2 | 9/4/2018 | 4.4 | Description of PetIQ, Inc.’s Securities | 10-K | 001-38163 | 4.4 | 3/11/2020 | 4.5 | Indenture, dated May 14, 2020, among PetIQ, Inc. and Wells Fargo, National Association, as trustee | 8-K | 001-38163 | 4.1 | 5/20/2020 | 10.1 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 7/6/2017 | 10.2 | First Amendment to PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | 10-K | 001-38163 | 10.1 | 3/12/2019 | 10.3 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party thereto, East West Bank and the other lenders party thereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 1/23/2018 | 10.4 | First Amendment and Joinder, dated as of August 9, 2018, to Credit Agreement dated as January 17, 2018 | 10-Q | 001-38163 | 10.1 | 8/14/2018 | 10.5 | Second Amendment to Amended and Restated Credit Agreement, dated March 25, 2019, by and among PetIQ, LLC, the other credit parties party thereto, the lenders party thereto and East West Bank | 10-Q | 001-38163 | 10.1 | 8/8/2019 | 10.6 | Third Amendment to Amended and Restated Revolving Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 7/9/2019 | 10.7 | Third Amendment to Amended and Restated Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 10-Q | 001-38163 | 10.2 | 8/10/2020 | 10.8 | Fourth Amendment to Amended and Restated Credit Agreement, dated May 14, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 5/14/2020 |
10.9 | Sixth Amendment to Amended and Restated Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 8/3/2020 | 10.10 | Amended and Restructured Term Loan Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.3 | 7/9/2019 | 10.11 | Second Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.1 | 5/14/2020 | 10.12 | Third Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.2 | 8/10/2020 | 10.13 | Fourth Amendment to Term Loan Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.1 | 8/3/2020 | 10.14 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 1/23/2018 | 10.15* | PetIQ Inc. Amended and Restated 2017 Omnibus Incentive Plan | 8-K | 333-218955 | 10.1 | 5/31/2019 | 10.16* | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 7/20/2017 | 10.17* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | 10-Q | 001-38163 | 10.2 | 11/14/2018 | 10.18* | Amended and Restated Employment and Non-Competition Agreement between PetIQ, LLC and McCord Christensen | 10-Q | 001-38163 | 10.1 | 5/9/2019 | 10.19* | Employment and Non-Competition Agreement, dated September 17, 2018, between PetIQ, LLC and Susan Sholtis | 8-K | 001-38163 | 10.1 | 9/20/2018 | 10.20* | Employment and Non-Competition Agreement, dated as of May 28, 2019, between PetIQ, LLC and Michael Smith | 8-K | 001-38163 | 10.5 | 7/9/2019 | 10.21* | Employment and Non-Competition Agreement between PetIQ, LLC and John Newland | 10-Q | 001-38163 | 10.2 | 5/9/2019 | 10.22* | Employment and Non-Competition Agreement between PetIQ, LLC and R. Michael Herrman | 10-Q | 001-38163 | 10.3 | 5/9/2019 | 10.23* | PetIQ, Inc. 2017 Omnibus Incentive Plan Restricted Stock Unit Agreement | 10-Q | 001-38163 | 10.3 | 11/14/2018 | 10.24* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors | 10-Q | 333-218955 | 10.4 | 11/14/2018 | 10.25* | PetIQ, Inc. Amended and Restated 2018 Inducement and Retention Stock Plan for CVC Employees | S-8 | 333-223635 | 4.3 | 3/13/2018 | 10.26 | First Amendment to Purchase and Sale Agreement, dated July 7, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc, and PetIQ, Inc. | 8-K | 001-38163 | 10.1 | 7/9/2019 | 10.27 | Transition Services Agreement, dated July 8, 2019, by and between PetIQ, LLC and L. Perrigo Company | 8-K | 001-38163 | 10.4 | 7/9/2019 | 10.28 | Form of Base Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.1 | 5/20/2020 | 10.29 | Form of Additional Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.2 | 5/20/2020 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
10.14* | PetIQ Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | S-1/A | 333-218955 | 10.12 | 6-Jul-17 | 10.15 | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 20-Jul-17 | 10.16 | Credit Agreement, Dated as of December 21, 2016 among PetIQ, LLC, as a Borrower and as Borrower Representative, The Other Credit Parties Part Hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | S-1 | 333-218955 | 10.14 | 23-Jun-17 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 32.1** | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 32.2** | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 101.INS | XBRL Instance Document | | | | | 101.SCH | XBRL Schema Documents | | | | | 101.CAL | XBRL Calculation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | | 101.LAB | XBRL Labels Linkbase Document | | | | | 101.PRE | XBRL Presentation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | |
* Indicates management contract or compensatory plan or arrangement. ** Filed herewith Item 16. Form 10-K Summary None. 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.
| | | March 13, 2018
| /s/ John Newland
| | John Newland
| | Chief Financial Officer
|
POWER OF ATTORNEY KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint McCord Christensen and John Newland, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 13, 2018.February 26, 2021. | | | SIGNATURE | | TITLE | | | | /s/ McCord Christensen | | Chief Executive Officer, President (principal executive officer) | McCord Christensen | | Officer and Chairman of the Board | | | | /s/ John Newland | | Chief Financial Officer (principal financial and accounting officer) | John Newland | | Officer | | | | /s/ Mark First | | Director | Mark First | | | | | | /s/ James Clarke
| | Director
| James Clarke
| | | | | | /s/ Ronald Kennedy | | Director | Ronald Kennedy | | | | | | /s/ Gary MichaelScott Huff | | Director | Gary MichaelScott Huff
| | | | | | /s/ Will SantanaLarry Bird | | Director | Will SantanaLarry Bird
| | Executive Vice President
| | | |
s in 000's) | | | | | | | 2018 | | $ | 44 | | 2019 | | | 15,372 | | 2020 | | | 48 | | 2021 | | | 50 | | $ | 6,219 | 2022 | | | 52 | | | 5,476 | 2023 | | | | 33,255 | 2024 | | | | 6,057 | 2025 | | | | 2,259 | Thereafter | | | 1,661 | | | 366,491 |
The Company incurred debt issuance costs of $218$0.6 million related to the AmendedA&R Credit Agreement during the first quarter of 2016. The debt transaction resulted in a loss on debt extinguishment of $993 thousand, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs. year ended December 31, 2020. The Company incurred debt issuance costs of $261 thousand$0.7 million during the year ended December 31, 2019 related to the NewA&R Credit Agreement during 2016. This second refinancing transaction resulted in a loss on extinguishment of $688 thousand, which includedand $5.1 million related to the write off of unamortizedA&R Term Loan Credit Agreement. The Company incurred debt issuance costs of $5.9 million in May 2020 in connection with the Notes. In accordance with FASB ASC 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. $2.2 million of issuance costs were recorded as additional paid-in capital and such amounts are not subject to amortization. The remaining issuance costs of $3.7 million are recorded as debt issuance costs in the net carrying value of the Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Notes and is included in interest expense, net on the condensed consolidated statements of operations. Future amortization of our debt discount and debt discount, early termination fees, and legal costs.issuance costs for the term of the Convertible Notes is as follows: | | | | | | | ($'s in 000's) | | Debt Discounts | | Debt Issuance Costs | 2021 | | $ | 6,761 | | $ | 470 | 2022 | | | 7,684 | | | 534 | 2023 | | | 8,733 | | | 607 | 2024 | | | 9,925 | | | 690 | 2025 | | | 11,280 | | | 784 | Thereafter | | | 5,143 | | | 356 |
Note 5 -6 – Leases The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182021 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term. We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease. The Company’s leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms. The components of lease expense consists of the follow: | | | | | | | | | For the Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Finance lease cost | | | | | | | Amortization of right-of-use assets | | $ | 1,681 | | $ | 1,441 | Interest on lease liabilities | | | 315 | | | 308 | Operating lease cost | | | 5,831 | | | 4,833 | Variable lease cost(1) | | | 1,130 | | | 629 | Short-term lease cost | | | 34 | | | 41 | Sublease income | | | (528) | | | (452) | Total lease cost | | $ | 8,463 | | $ | 6,800 |
| (1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
Other information related to leases was as follows as of: | | | | | | | | | | December 31, 2020 | | | December 31, 2019 | Weighted-average remaining lease term (years) | | | | | | | Operating leases | | | 4.41 | | | 5.15 | Finance leases | | | 2.38 | | | 2.73 | Weighted-average discount rate | | | | | | | Operating leases | | | 5.3% | | | 5.3% | Finance leases | | | 5.7% | | | 5.7% |
Annual future commitments under non-cancelable leases as of December 31, 2017,2020, consist of the following: | | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Capital Leases | 2018 | | $ | 2,053 | | $ | 113 | 2019 | | | 937 | | | 110 | 2020 | | | 353 | | | 96 | 2021 | | | 176 | | | 93 | 2022 | | | 176 | | | 72 | Thereafter | | | 127 | | | 27 | Total minimum future obligations | | $ | 3,822 | | $ | 511 | Less interest | | | | | | (15) | Present value of net future minimum obligations | | | | | | 496 | Less current capital lease obligations | | | | | | (107) | Long-term capital lease obligations | | | | | $ | 389 | | | | | | | |
The net book value of assets under capital lease was $850 thousand and $775 thousand as of December 31, 2017 and 2016, respectively.
| | | | | | | | | Lease Obligations | $'s in 000's | | Operating Leases | | Finance Leases | 2021 | | $ | 5,861 | | $ | 1,757 | 2022 | | | 5,591 | | | 1,584 | 2023 | | | 4,789 | | | 1,580 | 2024 | | | 3,280 | | | 330 | 2025 | | | 2,357 | | | 20 | Thereafter | | | 1,365 | | | — | Total minimum future obligations | | $ | 23,243 | | $ | 5,271 | Less interest | | | (2,539) | | | (367) | Present value of net future minimum obligations | | | 20,704 | | | 4,904 | Less current lease obligations | | | (4,915) | | | (1,566) | Long-term lease obligations | | $ | 15,789 | | $ | 3,338 | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | Year Ended | | Year Ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | Cash paid for amounts included in the measurement of lease liabilities | | | | | | | Operating cash flows from finance leases | | $ | 315 | | $ | 308 | Operating cash flows from operating leases | | | 5,668 | | | 4,568 | Financing cash flows from finance leases | | | 1,965 | | | 1,547 | (Noncash) right-of-use assets obtained in exchange for lease obligations | | | | | | | Operating leases | | | 5,105 | | | 5,368 | Finance leases | | | 2,019 | | | (3,006) |
Total operating lease expense for the yearsyear ended December 31, 2017, 2016, and 20152018, totaled $1,716 thousand, $1,718 thousand, and $1,627 thousand, respectively.$6.0 million. Note 67 - Income TaxesAs a result of the IPO and related reorganization transactions completed in July 2017, the Company holds an economic interest of approximately 62% in HoldCo and consolidates the financial position and results of HoldCo. The approximate 38% of HoldCo not held by the Company is considered non-controlling interest. HoldCothe sole managing member of Holdco. Holdco is treated as a partnership for U.S. federal income tax reporting. purposes with the remaining partners of Holdco (the “LLC Owners”) owning a non-controlling interest. The LLC Owners have an exchange right which grants them the right to exchange a Holdco partnership interest and a PetIQ Class B Common Stock share for a PetIQ Class A Common Stock share. Upon such an exchange, the Company is treated as purchasing an additional interest in Holdco from the LLC Owners in a taxable exchange which generates deferred tax assets as a result of an increase in tax basis for the Company. As of December 31, 2020, the Company had $67.6M of deferred tax assets associated with these exchanges, which currently have a full valuation allowance against the deferred tax asset. The non-controlling interests totaled approximately 11% of the ownership of Holdco as of December 31, 2020. See Note 11 – Non-controlling interests for more information.
HoldCo’s members, including the Company, are liable for federal, state, and local income taxes based on their share of HoldCo’s taxable income. Prior to the IPO, the Company’s predecessor for financial reporting purposes was Opco, which is a limited liability company, and the majority of Opco’s businesses and assets are held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. OpcoHoldco makes cash distributions to permit the membermembers to pay these taxes as needed by the member’s tax situation.attributable to their allocable share of income earned. In the years ended December 31, 20172020 and 2016,2019, the Company did not make anymade cash distributions. Indistributions of $0.05 million and $1.7 million, respectively. Additionally, Holdco accrues for distributions required to be made related to estimated income taxes. During the yearyears ended December 31, 2017 Opco2020 and 2019, the Company relieved previously accrued $597 thousand for anticipated tax distributions to Continuing LLC Owners.of $(0.4)million and accrued distributions of $0.8 million, respectively. This liability is included in accounts payable on the consolidated balance sheet.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 to 21 percent and requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. Staff Accounting Bulletin (SAB) 118 establishes a one-year measurement period to complete the accounting for the ASC 740 income tax effects of the Tax Act. An entity recognizes the impact of those amounts for which the accounting is complete. For matters that have not been completed, provisional amounts are recorded to the extent they can be reasonably estimated. For amounts for which a reasonable estimate cannot be determined, no adjustment is made until such estimate can be completed.
The Company was able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the deemed repatriation tax, and the remeasurement of deferred taxes. We recorded a provisional net tax expense of $3.6 million in the period ended December 31, 2017 attributable to the Tax Act. This net expense consists of an expense of $0.2 million for the Company’s allocated share of the one-time transition tax on unrepatriated earnings of foreign subsidiaries and a net expense of $3.4 million primarily due to the remeasurement of deferred tax assets associated with the corporate rate reduction.
These estimates may be impacted as we further analyze available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and guidance issued by standard-setting bodies that provide interpretative guidance of the Tax Act.
The components of earnings before incomenet loss taxes, determined by tax jurisdiction, are as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | United States | | $ | 11,479 | | $ | (3,634) | | $ | (1,209) | Foreign | | | 308 | | | 239 | | | (140) | Total | | $ | 11,787 | | $ | (3,395) | | $ | (1,349) |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | United States | | $ | (29,239) | | $ | (17,953) | | $ | (1,116) | Foreign | | | 433 | | | 342 | | | 542 | Total | | $ | (28,806) | | $ | (17,611) | | $ | (574) |
The provision for income taxes for 2017, 2016,2020, 2019, and 20152018 consisted of the following: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Current: | | | | | | | | | | Federal | | $ | (10) | | $ | - | | $ | - | State | | | 63 | | | - | | | - | Foreign | | | - | | | - | | | - | | | $ | 53 | | $ | - | | $ | - | Deferred and other: | | | | | | | | | | Federal | | | 3,708 | | | - | | | - | State | | | 19 | | | - | | | - | Foreign | | | 190 | | | - | | | - | | | | 3,917 | | | - | | | - | Total tax expense | | $ | 3,970 | | $ | - | | $ | - |
| | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | 2020 | | 2019 | | 2018 | Current: | | | | | | | | | | Federal | | $ | — | | $ | — | | $ | — | State | | | 327 | | | 317 | | | 148 | Foreign | | | 137 | | | 17 | | | — | | | $ | 464 | | $ | 334 | | $ | 148 | Deferred and other: | | | | | | | | | | Federal | | | 40,598 | | | (2,146) | | | (751) | State | | | 11,175 | | | (1,336) | | | (135) | Foreign | | | (21) | | | (161) | | | 77 | | | | 51,752 | | | (3,643) | | | (809) | Total income tax expense (benefit) | | $ | 52,216 | | $ | (3,309) | | $ | (661) |
Reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows: | | | | | | | | | | | | | Years Ended December 31 | $'s in 000's | | | 2017 | | | 2016 | | | 2015 | Income tax expense (benefit) at federal statutory rate | | | 35.0 | % | | 35.0 | % | | 35.0 | State and local income taxes net of federal tax benefit | | | - | | | - | | | (43) | Non-controlling interest and nontaxable income | | | (33.2) | | | (37.4) | | | - | Tax Cuts and Jobs Act of 2017 | | | 30.7 | | | - | | | - | Nondeductible/nontaxable items | | | 1.2 | | | 2.4 | | | 8 | Income tax expense (benefit) | | | 33.7 | % | | - | | | - |
| | | | | | | | | | | | | Years Ended December 31 | | | | | 2020 | | | 2019 | | | 2018 | | Income tax expense (benefit) at federal statutory rate | | | 21.0 | % | | 21.0 | % | | 21.0 | % | State and local income taxes net of federal tax benefit | | | 2.4 | | | 1.3 | | | (5.7) | | Non-controlling interest and nontaxable income | | | (2.9) | | | (4.0) | | | 54.7 | | Deferred tax rate changes | | | (1.3) | | | (0.4) | | | 37.2 | | Share-based compensation | | | 0.6 | | | 0.1 | | | 18.3 | | Tax Cuts and Jobs Act of 2017 | | | - | | | - | | | (13.1) | | Return-to-Provision | | | (2.0) | | | 0.8 | | | 13.4 | | Valuation Allowance | | | (198.4) | | | 0.4 | | | 0.7 | | Other | | | (0.7) | | | (0.4) | | | (11.3) | | Effective income tax rate | | | (181.3) | % | | 18.8 | % | | 115.2 | % |
Our effective income tax rate differsis affected primarily by the recognition of a valuation allowance during the year ended December 31, 2020 and the portion of income and expense allocated to the noncontrolling interest. It is also affected by discrete items that may occur in any given year such as stock based compensation, but are not consistent from statutory rates primarily dueyear to our pass-through entity structure for U.S. income tax purposes.year. As a result of the IPO and reorganization transactions, the Company has recorded deferred tax assets and liabilities based on the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for the basis differences resulting from the purchase of LLC Interests from existing members and newly issued LLC Interests acquired directly from Holdco. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 20172020 and 20162019 are as follows: | | | | | | | $'s in 000's | | 2020 | | 2019 | Deferred tax assets | | | | | | | Investment in partnership | | $ | 53,294 | | $ | 53,303 | Fixed assets | | | 32 | | | 29 | Net operating loss carryforwards and tax credits | | | 18,001 | | | 6,775 | Other accruals and reversals | | | 9 | | | 5 | Subtotal | | | 71,336 | | | 60,112 | Less: valuation allowance | | | (71,161) | | | (143) | Net deferred tax assets | | | 175 | | | 59,969 | | | | | | | | Deferred tax liabilities | | | | | | | Intangible assets | | $ | (447) | | $ | (293) | Other | | | (6) | | | (5) | Net deferred tax liabilities | | $ | (453) | | $ | (298) |
$'s in 000's | | | 2017 | | | 2016 | Investment in partnership | | $ | 5,855 | | $ | - | Net operating loss carryforwards and tax credits | | | 536 | | | 520 | Other | | | 66 | | | 47 | Subtotal | | | 6,457 | | | 567 | Less: valuation allowance | | $ | (237) | | $ | (91) | Total net deferred tax assets | | | 6,220 | | | 476 | Intangible assets | | | (412) | | | (476) | Other | | | (5) | | | - | Total deferred tax liabilities | | | (417) | | | - | Net deferred tax asset | | $ | 5,803 | | $ | - |
$66.0 million, of which $1.9 million, generated in 2017 and prior, will expire in 2037, the remaining NOLs do not expire. The NOL generated in 2018 and after of $64.1 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable income in any particular year. The Company has a federal business interest expense carryover totaling $6.1 million as of December 31, 2020, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. As of December 31, 2020, the Company has charitable contribution carryforwards of $1.0 million, which if unused will expire between 2021 and 2025. The Company has state NOL carryforwards of $384.7 million (tax effected $2.8 million) as of December 31, 2020 which expire between 2022 and 2038 and others that have an indefinite carryforward period. At December 31, 2020 the Company had foreign NOL carryforwards of $0.8 million which do not expire. The Company has assessed the realizability of the net deferred tax assets as of December 31, 2020 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from the recorded deferred tax assets will not be realized. The Company has recorded a valuation allowance for certain deferred tax assets of $237 thousand$71.2 million and $91 thousand,$0.1 million as of December 31, 20172020 and December 31, 2016,2019, respectively. The valuation allowance pertains to certain international loss carryforwards, some of whichIn future periods, if we conclude we have no expiration and others that would expire beginning in 2018. The Tax Act contains a new law that requires a current inclusion in U.S. federalfuture taxable income of certain earnings of controlled foreign corporations, also known as the tax on global intangible low taxed income (GILTI), beginning in 2018. The FASB has provided that companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, orsufficient to recognize the deferred taxes for temporary differences, including outside basis differences, expected to reverse as GILTI. Due totax assets, we may reduce or eliminate the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act. We have not recorded any provisional amounts as of December 31, 2017 nor have we made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into our measurement of deferred taxes.
valuation allowance. The Company has not recognized any uncertain tax positions, penalties or interest as we have concluded that no such positions exist. Accordingly, no0 unrecognized tax benefit would impact the effective tax rate. If interest and penalties were accrued, we would recognize interest and penalties as income tax expense. We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017,2020, tax years for 2014, 2015, and 2016from 2017 to present are subject to examination by the tax authorities. With few exceptions, as On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes temporary changes regarding the prior and future utilization of December 31, 2017, we are no longer subjectnet operating losses, temporary changes to U.S. federal, state, local, or foreign examinations bythe prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax authoritieslegislation for years before 2014.tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company will benefit from the Employee Retention Credits and the payroll tax deferral. Note 7Note 8 – Earnings (loss)Loss per Share Basic and Diluted Earnings (loss)Loss per Share share Basic earnings (loss)loss per share of Class A common stock is computed by dividing net income (loss)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 incomeloss 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 9 — 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 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 (loss) per share would not be appropriate.
Prior to the IPO, the PetIQ, LLC membership structure included several different types of LLC interests including ownership interests and profits interests. The Company analyzed the calculation of earnings per unit 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 (loss) per share information has not been presented for periods
prior to the IPO on July 20, 2017. The basic and diluted earnings (loss) per share represent only the the period July 20, 2017 to December 31, 2017.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock: | | | | | | | ($'s in 000's, except for per share amounts) | | December 31, 2017 | Numerator: | | | | Net income | | $ | 7,817 | Less: net income attributable to non-controlling interests | | | (11,310) | Net loss attributable to PetIQ, Inc. — basic | | | (3,493) | 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 (in 000's)-- diluted | | | 13,223 | | | | | Earnings per share of Class A common stock — basic | | $ | (0.26) | Earnings per share of Class A common stock — diluted | | $ | (0.26) |
| | | | | | | | | | | | Year ended December 31, | (in 000's, except for per share amounts) | | | 2020 | | 2019 | | 2018 | Numerator: | | | | | | | | | | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 | Less: net (loss) income attributable to non-controlling interests | | | (3,548) | | | (2,849) | | | 869 | Net loss attributable to PetIQ, Inc. — basic and diluted | | | (77,474) | | | (11,453) | | | (782) | Denominator: | | | | | | | | | | Weighted-average shares of Class A common stock outstanding -- basic | | | 24,629 | | | 22,652 | | | 17,216 | Dilutive effects of stock options that are convertible into Class A common stock | | | — | | | — | | | — | Dilutive effect of RSUs | | | — | | | — | | | — | Dilutive effect for conversion of Notes | | | — | | | — | | | — | Weighted-average shares of Class A common stock outstanding -- diluted | | | 24,629 | | | 22,652 | | | 17,216 | | | | | | | | | | | Loss per share of Class A common stock — basic | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) | Loss per share of Class A common stock — diluted | | $ | (3.15) | | $ | (0.51) | | $ | (0.05) |
Shares of the Company’s Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock as well as all stock options and restricted stock units have not been included in the diluted earnings (loss)loss per share calculation as they have been determined to be anti-dilutive under the if-converted method and treasury stock method, respectively. Additionally, all stock options and restricted stock units and convertible Notes have not been included in the diluted earnings per share calculation for the years ended December 31, 2020, 2019 and 2018, as they have been determined to be anti-dilutive under the treasury stock method. Note 89 – Stock Based Compensation Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of December 31, 2017, 1,315,4032020 and 2019, 1,293 thousand and 2,017 thousand shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares. PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provides for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800thousand shares of Class A Common Stock of the Company. As of December 31, 2020, 0 shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock. Stock Options The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, whichperiod. Expense recognized totaled $447 thousand$6.5 million and $6.2 million for the yearyears ended December 31, 2017.2020, and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended December 31:periods ended: | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Expected term (years) (1) | | | 6.25 | | | | 6.25 | | Expected volatility (2) | | | 33.91 | % | | | 35.00 | % | Risk-free interest rate (3) | | | 0.37 | % | | | 2.37 | % | Dividend yield (4) | | | 0.00 | % | | | 0.00 | % |
| (1) | | | | | | | 2017
| Expected term (years) (1)
| | | 6.25 | | Expected volatility (2)
| | | 35.00 | %
| Risk-free interest rate (3)
| | | 1.98 | %
| Dividend yield (4)
| | | 0.00 | %
|
| (1)
| | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
| (2) | (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) | (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) | (4)
| | The Company has not paid and does not anticipate paying a cash dividend on our common stock. |
The weighted average grant date fair value of stock options granted during the period ended December 31, 2020 and 2019 was $11.88 and $10.63, respectively, per option. The following table summarizes the activity of the Company’s unvested stock options for the period ended December 31, 2017: The grant date fair value of stock options granted during the period ended December 31, 2017 was $6.08 per option.2020: | | | | | | | | | | | | | | | | | | | | | 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 | | | (205,405) | | | 16 | | | | | | | Cancelled | | | — | | | | | | | | | | Outstanding at December 31, 2017 | | | 598,644 | | $ | 16 | | $ | 3,496 | | | 9.5 | Options exercisable at December 31, 2017 | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Average | | | | | Weighted | | Aggregate | | Remaining | | | Stock | | Average | | Intrinsic | | Contractual | | | Options | | Exercise | | Value | | Life | | | (in 000's) | | Price | | (in 000's) | | (years) | Outstanding at December 31, 2017 | | | 599 | | $ | 16.00 | | $ | 3,496 | | | 9.5 | Granted | | | 1,617 | | | 25.74 | | | | | | | Exercised | | | (76) | | | 18.83 | | | | | | | Forfeited | | | (195) | | | 21.37 | | | | | | | Cancelled/Expired | | | — | | | — | | | | | | | Outstanding at December 31, 2018 | | | 1,945 | | $ | 23.45 | | $ | 5,527 | | | 9.1 | Granted | | | 423 | | | 27.54 | | | | | | | Exercised | | | (119) | | | 19.51 | | | | | | | Forfeited | | | (168) | | | 21.92 | | | | | | | Cancelled/Expired | | | (9) | | | 25.70 | | | | | | | Outstanding at December 31, 2019 | | | 2,072 | | $ | 24.63 | | $ | 6,266 | | | 8.0 | Granted | | | 505 | | | 20.22 | | | | | | | Exercised | | | (395) | | | 23.48 | | $ | 4,468 | | | | Forfeited | | | (96) | | | 21.42 | | | | | | | Outstanding at December 31, 2020 | | | 2,086 | | $ | 23.93 | | $ | 30,302 | | | 7.2 | Options exercisable at December 31, 2020 | | | 831 | | | | | $ | 11,778 | | | 5.9 |
At December 31, 2017,2020, total unrecognized compensation cost related to unvested stock options was $3.2$8.4 million and is expected to be recognized over a weighted-average period of approximately 3.52.2 years. Restricted Stock Units The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will generally be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At December 31, 2020, total unrecognized compensation cost related to unvested RSUs was $5.8 million and is expected to vest over a weighted average of 2.8 years. The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.6 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The following table summarizes the activity of the Company’s RSUs for the period ended December 31, 2020: | | | | | | | | | | | Weighted | | | Number of | | Average | | | Shares | | Grant Date | | | (in 000's) | | Fair Value | Outstanding at December 31, 2018 | | | 51 | | $ | 33.16 | Granted | | | 123 | | | 27.61 | Settled | | | (25) | | | 30.43 | Forfeited | | | (15) | | | 30.58 | Outstanding at December 31, 2019 | | | 133 | | $ | 28.85 | Granted | | | 271 | | | 20.73 | Settled | | | (70) | | | 25.65 | Forfeited | | | (17) | | | 23.34 | Nonvested RSUs at December 31, 2020 | | | 317 | | $ | 22.91 |
The total equity based compensation expense for these plans over the vesting period totaled $9.2 million, $7.4 million, and $3.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.0 million, $1.4 million and $0.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Note 910 - 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 $30.5 million 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 $25.4 million in preference notes;
|
| ·
| | The Company purchased from Continuing LLC Owners 133,334 LLC Interests in exchange for $2.1 million.
|
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. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements for the previously separate entities have been combined for presentation purposes.
Immediately following the Reclassification, PetIQ became a holding company and our principal asset is the LLC interests. As the sole managing member of HoldCo, PetIQ operates and controls all of the business and affairs of HoldCo and, through HoldCo and its subsidiaries, conducts business. In addition, PetIQ controls the management of, and has a controlling interest in, HoldCo and, therefore, PetIQ 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 net income (loss) is allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners to a portion of Holdco’s net income (loss).
Other than its purchase of LLC Interests with the net proceeds the IPO, PetIQ has not provided any financial or other support to HoldCo. PetIQ is not required to provide financial or other support for HoldCo, though it will control HoldCo’s business and other activities through its managing member interest in HoldCo. Because PetIQ is not a guarantor or obligor with respect to any of the liabilities of HoldCo, absent any such arrangement, the creditors of HoldCo will not have any recourse to the general credit of PetIQ. Nevertheless, because PetIQ will have no material assets other than its interests in HoldCo, any change in HoldCo’s financial condition could result in PetIQ recognizing a loss.
Amendment and Restatement of Certificate of Incorporation
On July 20, 2017, the CompanyThe Company’s amended and restated its certificate of incorporation, to, among other things, provideprovides for the (i) authorization of 125,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) authorization of 8,401,521100,000,000 shares of Class B common stock with a par value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.
Each share of the Company’s Class A common stock and Class B common stock entitles its holders to one1 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-one1-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-one1-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). Initial2018 Public Offering
On July 20, 2017,October 1, 2018, the Company completedclosed an IPOunderwritten public offering of 7,187,5005,750 thousand 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.stock. The Company received $104.0 million in proceeds, net of underwriting discounts, commissions and offering costs, which were used repay $56.0 million 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 sharesold 2,000 thousand newly issued shares of Class A common stock in the IPO lessand received net proceeds of approximately $73.9 million after deducting underwriting discounts and commissions and to purchase 133,334offering expenses. The remaining 3,750 thousand shares of Class A common stock were sold by selling stockholders and the Company did not receive any proceeds with respect hereto. In conjunction with the 2018 Public Offering, a number of holders of Class B common stock exchanged 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 offor Class A common stock, there were 13,222,583 sharesstock. The
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, HoldCo amended and restatedimpact on non-controlling interest is shown along with other exchanges during the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interestsyear 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.Note 11 – Non-Controlling Interests.
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 equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of such 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 1011 - Non-Controlling Interests In connection with the Reorganization Transactions described in Note 9 — 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 non-controlling 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 December 31, 2017,2020, there were 21,490,77128,751 thousand LLC Interests outstanding, of which PetIQ owned 13,222,583,25,711thousand, representing a 61.5%an 89.4% ownership interest in HoldCo. Exchange and other equity activity during the years ended December 31, 2020 and 2019 resulted in weighted average ownership of HoldCo by PetIQ of 86.4% and 80.2%, respectively. | | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | Continuing LLC | | | | | | | | | Continuing LLC | | | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of December 31, 2017 | | | 8,268,188 | | | 13,222,583 | | | 21,490,771 | | | 38.5% | 61.5% |
| | | | | | | | | | | | | | | | LLC Interests held | | | % of Total | | | | LLC | | | | | | | | | LLC | | $'s in 000's | | Owners | | PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | As of January 1, 2019 | | | 6,547 | | | 21,620 | | | 28,167 | | | 23.2% | 76.8% | Stock based compensation adjustments | | | — | | | 140 | | | 140 | | | | | Exchange transactions | | | (1,794) | | | 1,794 | | | — | | | | | As of December 31, 2019 | | | 4,752 | | | 23,554 | | | 28,306 | | | 16.8% | 83.2% | Stock based compensation adjustments | | | — | | | 445 | | | 445 | | | | | Exchange transactions | | | (1,712) | | | 1,712 | | | — | | | | | As of December 31, 2020 | | | 3,040 | | | 25,711 | | | 28,751 | | | 10.6% | 89.4% |
Note 11Note 12 - Customer Concentration The Company has significant exposure to customer concentration. During each of the years ended December 31, 2017, 2016,2020, 2019, and 2015, three2018, 2, 2, and 1 customers, respectively, accounted for more than 10% of sales individually. In total for the years ended December 31, 2017, 2016,individually and 2015, the three customersin aggregate accounted for 61%42%, 70%35%, and 74%18% of net sales, respectively. At December 31, 2017 and December 31, 2016, three and four customers, respectively,2020, 1 Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 48% and 60%, respectively, 52% of outstanding trade receivables, net. TheAt December 31, 2019 2 Products segment customers are customersindividually accounted for more than 10% of outstanding trade receivables, and accounted for 61% of outstanding trade receivables, net. All of our Domesticcustomer concentration exists in our Products segment. Note 1213 - Commitments and Contingencies Litigation Contingencies In May 2017, Bayer Healthcare LLCDuring the years ended December 31, 2020 and its affiliates2019, the Company recorded liabilities of $7.8 million and $1.0 million, respectively, for contract termination costs, related to settlements for alleged breach of contract. The expense is included within General and Administrative expenses for the years ended December 31, 2020 and 2019.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplierfor alleged unlawful merger and other antitrust violations. On June 29, 2020, the 9th Circuit Court of Advecta 3 and PetLock MAX,Appeals issued an opinion affirming the dismissal of Med Vets’ merger challenge. On July 13, 2020, the Plaintiffs filed for an en banc hearing in the 9th Circuit Court of Appeals which we beganwas unanimously denied on August 7, 2020. The Plaintiffs time period to sell in 2017 as our value-branded alternatives to Bayer’s K9 Advantix II. Bayer alleges that 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 MAXpetition the Supreme Court for certiorari has passed, therefore the matter is considered resolved. As no impact to the Company. BayerCompany is considered probable or estimable, 0 litigation reserve has filed a motion for preliminary injunction, which motion was argued in February 2018. 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 paymentaccrued. 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 December 31, 2017 and December 31, 2016,2020 as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations. Commitments We have commitments for leases and long-term debt that are discussed further in Note 5, Debt, and Note 6, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business. Note 1314 - Segments The Company has two2 operating segments,segments: Products and thus two reportable segments, which areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers. The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas. a segment as defined in the accounting guidance related to segment reporting. Financial information relating to the Company’s operating segments for the years ended December 31: | | | | | | | | | | $'s in 000's | | Domestic | | International | | Consolidated | 2017 | | | | | | | | | | Net Sales | | $ | 261,526 | | $ | 5,161 | | $ | 266,687 | Gross profit | | | 48,997 | | | 2,197 | | | 51,194 | General and administrative expenses | | | 36,053 | | | 1,852 | | | 37,905 | Operating income | | | 12,944 | | | 345 | | | 13,289 | Interest expense | | | — | | | — | | | (1,563) | Other income, net | | | — | | | — | | | 201 | Foreign currency loss, net | | | — | | | — | | | (140) | Identifiable assets | | $ | 134,841 | | $ | 6,004 | | $ | 140,845 | Depreciation expense | | $ | 2,209 | | $ | 139 | | $ | 2,348 | Amortization expense | | $ | 797 | | $ | 255 | | $ | 1,052 | Capital expenditures | | $ | 4,011 | | $ | 120 | | $ | 4,131 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2016 | | | | | | | | | | Net Sales | | $ | 195,698 | | $ | 4,464 | | $ | 200,162 | Gross profit | | | 30,683 | | | 1,864 | | | 32,547 | General and administrative expenses | | | 30,127 | | | 1,718 | | | 31,845 | Operating income | | | 556 | | | 146 | | | 702 | Interest expense | | | — | | | — | | | (3,058) | Other income, net | | | — | | | — | | | 666 | Loss on debt extinguishment | | | — | | | — | | | (1,681) | Foreign currency loss, net | | | — | | | — | | | (24) | Identifiable assets | | $ | 76,270 | | $ | 5,060 | | $ | 81,330 | Depreciation expense | | $ | 1,877 | | $ | 38 | | $ | 1,915 | Amortization expense | | $ | 798 | | $ | 269 | | $ | 1,067 | Capital expenditures | | $ | 1,892 | | $ | 149 | | $ | 2,041 |
| | | | | | | | | | ($’s in 000’s) | | Domestic | | International | | Consolidated | 2015 | | | | | | | | | | Net Sales | | $ | 202,092 | | $ | 3,595 | | $ | 205,687 | Gross profit | | | 37,582 | | | 1,576 | | | 39,158 | General and administrative expenses | | | 33,926 | | | 1,662 | | | 35,588 | Operating income (loss) | | | 3,656 | | | (86) | | | 3,570 | Interest expense | | | — | | | — | | | (3,545) | Loss on debt extinguishment | | | — | | | — | | | (1,449) | Foreign currency gain, net | | | — | | | — | | | 75 | Identifiable assets | | $ | 86,531 | | $ | 5,804 | | $ | 92,335 | Depreciation expense | | $ | 1,800 | | $ | 42 | | $ | 1,842 | Amortization expense | | $ | 330 | | $ | 405 | | $ | 735 | Capital expenditures | | $ | 1,479 | | $ | 71 | | $ | 1,550 |
ended: | | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2020 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 725,705 | | $ | 54,346 | | $ | — | | $ | 780,051 | Adjusted EBITDA | | | 117,216 | | | 3,387 | | | (52,811) | | | 67,792 | Depreciation expense | | | 4,810 | | | 3,775 | | | 3,497 | | | 12,082 | Capital expenditures | | | 13,394 | | | 7,373 | | | 1,625 | | | 22,392 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2019 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 617,118 | | $ | 92,313 | | $ | — | | $ | 709,431 | Adjusted EBITDA | | | 73,537 | | | 20,045 | | | (32,907) | | | 60,675 | Depreciation expense | | | 3,552 | | | 3,170 | | | 2,417 | | | 9,139 | Capital expenditures | | | 1,297 | | | 6,409 | | | 2,570 | | | 10,276 |
| | | | | | | | | | | | | $'s in 000's | | | | | | | | Unallocated | | | | December 31, 2018 | | Products | | Services | | Corporate | | Consolidated | Net Sales | | $ | 450,229 | | $ | 78,385 | | $ | — | | $ | 528,614 | Adjusted EBITDA | | | 52,185 | | | 15,246 | | | (25,892) | | | 41,539 | Depreciation expense | | | 2,343 | | | 2,326 | | | 1,988 | | | 6,657 | Capital expenditures | | | 1,339 | | | 3,440 | | | 2,399 | | | 7,178 |
The following table reconciles Segment Adjusted EBITDA to Net (Loss) income for the periods presented. | | | | | | | | | | | | For the years ended | $'s in 000's | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | Adjusted EBITDA: | | | | | | | | | | Product | | $ | 117,216 | | $ | 73,537 | | $ | 52,185 | Services | | | 3,387 | | | 20,045 | | | 15,246 | Unallocated Corporate | | | (52,811) | | | (32,907) | | | (25,892) | Total Consolidated | | | 67,792 | | | 60,675 | | | 41,539 | Adjustments: | | | | | | | | | | Depreciation | | | (12,082) | | | (9,139) | | | (6,657) | Amortization | | | (12,815) | | | (5,994) | | | (5,210) | Interest | | | (26,299) | | | (14,495) | | | (8,022) | Acquisition costs(1) | | | (2,620) | | | (6,147) | | | (3,787) | Stock based compensation expense | | | (9,170) | | | (7,355) | | | (3,812) | Purchase accounting adjustment to inventory(2) | | | — | | | (4,805) | | | (2,149) | Non same-store revenue(3) | | | 8,987 | | | 8,088 | | | 3,967 | Non same-store costs(3) | | | (22,256) | | | (19,553) | | | (10,345) | Fair value adjustment of contingent note | | | — | | | (7,320) | | | (3,280) | Integration costs and costs of discontinued clinics(4) | | | (9,776) | | | (3,788) | | | (998) | Clinic launch expenses(5) | | | (3,085) | | | (767) | | | (1,380) | Non-recurring royalty settlement(6) | | | — | | | — | | | (440) | SKU Rationalization(7) | | | — | | | (6,482) | | | — | Litigation expenses | | | (1,006) | | | (529) | | | — | COVID-19 related costs(8) | | | (6,476) | | | — | | | — | Pretax net loss | | $ | (28,806) | | $ | (17,611) | | $ | (574) | Income tax benefit (expense) | | | (52,216) | | | 3,309 | | | 661 | Net (loss) income | | $ | (81,022) | | $ | (14,302) | | $ | 87 |
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Purchase accounting adjustment to inventory represents the portion of costs of sales related to the fair value of inventory adjusted as part of the purchase price allocation. During 2019 the amounts relate to the Perrigo Animal Health Acquisition and are part of the Products segment. During 2018 the costs relate to the VIP Acquisition which are part of the Services Segment and the HBH Acquisition, which is part of the Products Segment. |
| (3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
| (6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
| (7) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
| (8) | Costs related to maintaining service segment infrastructure, staffing, and overhead related to clinics and wellness centers closed due to COVID-19 related health and safety initiatives. Product segment and unallocated corporate costs related to incremental wages paid to essential workers and sanitation costs due to COVID. |
Supplemental geographic disclosures are below. | | | | | | | | | | | Year ended December 31, 2020 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 719,282 | $ | 6,423 | $ | 725,705 | Service revenue | | | 54,346 | | — | | 54,346 | Total net sales | | $ | 773,628 | $ | 6,423 | $ | 780,051 |
| | | | | | | | | | | Year ended December 31, 2019 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 610,986 | $ | 6,132 | $ | 617,118 | Service revenue | | | 92,313 | | — | | 92,313 | Total net sales | | $ | 703,299 | $ | 6,132 | $ | 709,431 |
| | | | | | | | | | | Year ended December 31, 2018 | $'s in 000's | | | U.S. | | Foreign | | Total | Product sales | | $ | 444,364 | $ | 5,865 | $ | 450,229 | Service revenue | | | 78,385 | | — | | 78,385 | Total net sales | | $ | 522,749 | $ | 5,865 | $ | 528,614 |
The net book value of property plant and equipment, by geographic location was as follows as of: | | | | | | | | | December 31, 2020 | | December 31, 2019 | United States | | $ | 61,807 | | $ | 51,397 | Europe | | | 1,339 | | | 1,128 | Total | | $ | 63,146 | | $ | 52,525 |
Note 1415 - Related Parties Opco had entered into management consulting services agreements with members of HoldCo. The services were related to financial transactions and other senior management matters related to business administration. Those agreements provided for the Company to pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded in general and administrative expenses in the consolidated statement of operations. The Company recorded $610 thousand, $864 thousand and $462 thousand for the year ended December 31, 2017, 2016, and 2015, respectively. Upon consummation of the recapitalization and IPO transactions, these agreements were terminated.
As discussed in Note 6–7– Income taxes, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At December 31, 2017,2020 and 2019, the Company had paid $0.03 million in advance on required tax distributions and accrued $597 thousand$0.4 million, respectively, for estimated tax distributions, which are included in accounts payable on the consolidated balance sheets. As discussed in Note 5– Debt, the Company has notes payable to the Sellers of VIP, who are significant shareholders of the Company, of $27.5 million. The Company had $0.5 million and $0.3 million of accrued interest on these notes as of December 31, 2020, and 2019, respectively. The Company paid $1.7 million and $1.3 million of interest for the years ended December 31, 2020 and 2019, respectively, and paid 0 interest for the year ended December 31, 2018. Will Santana, a former owner of VIP and board member of PetIQ until July 1, 2020, was one of the main beneficiaries of the VIP Notes. Mr. Santana has sold a sizable portion of his ownership in PetIQ and resigned from the board during 2020, as such he will no longer be considered a related party. The Company leases office and warehouse space from a company under common control of the sellers of VIP, commencing on January 17, 2018. The Company incurred rent expenses of $0.4 million in each of the years ending December 31, 2020, 2019, and 2018, respectively. The lease ended January 5, 2021. Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s annual premium expense, paid to Moreton and subsequently transferred to insurance providers, was $1.1$2.8 million, $2.3 million and $1.5 million in 2017.2020, 2019 and 2018, respectively. Mr. Christensen was paid a commission of approximately $60 thousand$0.1 million in each of the years ending December 31, 2020, 2019, and 2018, respectively, by Moreton for the sale of such insurance policies to the Company. In April 2020, the Company purchased a parcel of land for $2.5 million. The broker for the Company was Colliers International, and the agent was Mike Christensen, the brother of CEO McCord Christensen. Total commission paid to Colliers was approximately $75 thousand. Note 15 – Quarterly information (unaudited)
| | | | | | | | | | | | | ($’s in 000’s except per share amounts) | | | Quarter 1 | | | Quarter 2 | | | Quarter 3 | | | Quarter 4 | 2017: | | | | | | | | | | | | | Net sales | | $ | 67,029 | | $ | 87,178 | | $ | 60,554 | | $ | 51,926 | Gross profit | | | 12,200 | | | 15,951 | | | 12,517 | | | 10,526 | Selling, general, and administrative expenses | | | 7,405 | | | 9,277 | | | 10,739 | | | 10,484 | Operating income | | | 4,795 | | | 6,674 | | | 1,778 | | | 42 | Net income | | | 4,279 | | | 6,070 | | | 859 | | | (3,391) | Basic net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Diluted net income per common share(1) | | | - | | | - | | $ | (0.02) | | $ | (0.25) | Basic weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | Diluted weighted average shares(1) | | | - | | | - | | | 13,222,583 | | | 13,222,583 | | | | March 31, 2016 | | | June 30, 2016 | | | September 30, 2016 | | | December 31, 2016 | 2016: | | | | | | | | | | | | | Net sales | | $ | 52,298 | | $ | 61,280 | | $ | 41,671 | | $ | 44,913 | Gross profit | | | 9,772 | | | 8,961 | | | 6,160 | | | 7,654 | Selling, general, and administrative expenses | | | 8,063 | | | 8,302 | | | 7,942 | | | 7,538 | Operating income | | | 1,709 | | | 659 | | | (1,782) | | | 116 | Net income | | | (304) | | | 598 | | | (2,512) | | | (1,177) | Basic net income per common share(1) | | | - | | | - | | | - | | | - | Diluted net income per common share(1) | | | - | | | - | | | - | | | - | Basic weighted average shares(1) | | | - | | | - | | | - | | | - | Diluted weighted average shares(1) | | | - | | | - | | | - | | | - |
| (1)
| | Number of shares out standing and earnings per share prior to our IPO on July 26, 2017 are not reported, see Note 7 in the accompanying consolidated financial statements.
|
Note 16 – Subsequent EventsEmployee Benefit Plans On January 17, 2018, we acquired Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP”). The aggregate consideration, comprisedCompany sponsors 401(k) defined contribution plans at certain subsidiaries. Participants may elect to defer up to 100% of (i) $100compensation. The Company makes matching contributions of 100% of the employee deferrals up to 3% of compensation. The Company may also make discretionary profit sharing contributions each year, which are allocated to each eligible participant based on compensation. The Company made matching contributions of $0.9 million, of cash, (ii) 4,200,000 LLC Interests of PetIQ Holdings, LLC, 4,200,000 shares of Class B common stock, (iii) promissory notes consisting of (A) a $10.0$0.6 million, note payable 5 years and 6 months after the closing, which shall accrue interest quarterly in arrears at a rate of 6.75% per annum, (B) a $10.0$0.3 million, note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $40.0 millionrespectively, for the year endingyears ended December 31, 2018, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the first anniversary of the closing,2020, 2019 and (C) a $10.0 million note payable 5 years and 6 months after the closing if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2019, which, if payable, shall accrue interest quarterly in arrears at a rate of 6.75% per annum beginning on the second anniversary of the closing; provided that such note shall also become payable if PetIQ and its consolidated subsidiaries have EBITDA of $50.0 million for the year ending December 31, 2018.
In connection with the VIP Acquisition, the Company amended and restated their existing revolving credit agreement (the “A&R Credit Agreement”) on January 17, 2018. The A&R Credit Agreement provides for a secured revolving credit facility of $50 million in the aggregate, at either LIBOR or Base (prime) interest rates plus an applicable margin.
All obligations under the A&R Credit Agreement are unconditionally guaranteed by HoldCo and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the A&R Credit Agreement, subject to certain exceptions.
Also in connection with the closing of the VIP Acquisition, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”). The Term Loan Credit Agreement provides for a secured term loan credit facility of $75 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin.
In connection with execution of the Unit Purchase Agreement to acquire VIP, options to purchase an aggregate 800,000 shares of Class A Common Stock of the Company (the “Inducement Awards”) were issued to 30 employees hired in connection with the transaction as employment inducement awards. The awards vest quarterly on each of the first four anniversaries of the closing date of the acquisition, generally subject to continued employment through each vesting date.
ItemItem 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None. ItemItem 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information that we are required to disclose in reports that we file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting We are responsible for establishing and maintaining internal control over Financing Reportingfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include a reportOur management, under the supervision and with the participation of management’sour Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, regardingour management used the Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
The Company’s registered independent accounting firm, KPMG LLP, has audited the effectiveness of our internal controls over financial reporting as of December 31, 2020, as stated in their report which appears on the next page. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended, December 31, 2020 that has materially affected, or an attestation reportis reasonably likely to materially affect, our internal control over financial reporting. | |
| | | KPMG LLP Suite 600 205 North 10th Street Boise, ID 83702-5798 |
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
PetIQ, Inc.: Opinion on Internal Control Over Financial Reporting We have audited PetIQ, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, consolidated stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s registeredmanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm dueregistered with the PCAOB and are required to a transition period established bybe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SECSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for newly public companies.our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Boise, Idaho
February 26, 2021 Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation: | ·
● | | statements regarding our strategies, results of operations or liquidity; |
| ·
● | | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
| ·
● | | statements of management’s goals and objectives; and |
| ·
● | | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy and our ability to successfully grow our business through acquisitions; our ability to integrate, manage and expand VIP’s business; and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others in our industry; 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’ section of this annual report on Form 10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements. Item 9B - Other Information None. PART III Item 10 – Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 11 – Executive Compensation The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 13 – Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
ItemItem 14 – Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of the Company to be held in 2018. The Company intendsWe intend to file such definitive proxy statement with the Securities and Exchange Commission, pursuant to Regulation 14A withinnot later than 120 days after the endclose of theour fiscal year coveredended December 31, 2020, a definitive proxy statement or an amendment to this report filed under cover of Form 10-K/A containing the information required by this Annual Report on Form 10-K.Item.
PART IV Item 15. Exhibits, Financial Statement Schedules See "Index to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notesnotes. | | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Unit Purchase Agreement dated January 5, 2018 | 8-K | 001-38163 | 2.1 | 8-Jan-18 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 11-Jul-17 | 3.2 | Bylaws of PetIQ, Inc. | S-1/A | 333-218955 | 3.2 | 6-Jul-17 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 17-Jul-17 | 10.1 | Registration Rights Agreement | S-1/A | 333-218955 | 10.2 | 6-Jul-17 | 10.2 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 23-Jan-18 | 10.3 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 23-Jan-18 | 10.4 | Term Loan Credit Agreement, dated January 17, 2018 by and among PetIQ, LLC, Ares Capital Corporation and the other Lenders party there, and Ares Capital Corporation, as Administrative Agent | 8-K | 001-38163 | 10.3 | 23-Jan-18 | 10.5 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 6-Jul-17 | 10.6* | Employment Agreement, dated as of January 17, 2018, by and between PetIQ, LLC and Will Santana | 8-K | 001-38163 | 10.4 | 23-Jan-18 | 10.7 | Form of Contribution Agreement | S-1/A | 333-218955 | 10.5 | 6-Jul-17 | 10.8 | Form of Preference Note | S-1/A | 333-218955 | 10.6 | 6-Jul-17 | 10.9 | Amended and Restated Credit Agreement, dated March 24, 2016, among PetIQ, LLC, the other credit parties thereto, Crystal Financial LLC and the other lenders party thereto | DRS/A | | 10.14 | 13-May-16 | 10.10 | Form of Recapitalization Agreement | S-1/A | 333-218955 | 10.7 | 6-Jul-17 | 10.11* | Employment and Non-Competition Agreement between True Science Holdings, LLC, and Scott Adcock | DRS/A | | 10.8 | 13-May-16 | 10.12* | Chief Financial Officer Employment Offer | DRS/A | | 10.10 | 13-May-16 | 10.13* | PetIQ Inc. 2017 Omnibus Incentive Plan | S-1/A | 333-218955 | 10.11 | 6-Jul-17 |
| | | | | | Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | 2.1 | Purchase and Sale Agreement, dated May 8, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc and PetIQ, Inc. | 8-K | 001-38163 | 2.1 | 5/8/2019 | 2.2 | Amended and Restated Asset Purchase Agreement, dated June 21, 2020, by and between Elanco US Inc., PetIQ, LLC and PetIQ, Inc. | 10-Q | 001-38163 | 2.1 | 8/10/2020 | 3.1 | Amended and Restated Certificate of Incorporation of PetIQ, Inc. | S-1/A | 333-218955 | 3.1 | 7/11/2017 | 3.2 | Amended and Restated Bylaws of PetIQ, Inc. | 8-K | 001-38163 | 3.1 | 2/23/2021 | 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | 8-K | 001-38163 | 3.1 | 6/1/2018 | 4.1 | Specimen Stock Certificate evidencing the shares of Class A common stock | S-1/A | 333-218955 | 4.1 | 7/17/2017 | 4.2 | Registration Rights Agreement, dated July 20, 2017, among PetIQ, Inc. the Continuing LLC owners and the C-Corp LLC Parents | S-3 | 333-227186 | 4.1 | 9/4/2018 | 4.3 | Registration Rights Agreement, dated January 17, 2018, between PetIQ, Inc. and each VIP Petcare Owner | S-3 | 333-227186 | 4.2 | 9/4/2018 | 4.4 | Description of PetIQ, Inc.’s Securities | 10-K | 001-38163 | 4.4 | 3/11/2020 | 4.5 | Indenture, dated May 14, 2020, among PetIQ, Inc. and Wells Fargo, National Association, as trustee | 8-K | 001-38163 | 4.1 | 5/20/2020 | 10.1 | PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | S-1/A | 333-218955 | 10.4 | 7/6/2017 | 10.2 | First Amendment to PetIQ Holdings, LLC Sixth Amended and Restated Limited Liability Company Agreement | 10-K | 001-38163 | 10.1 | 3/12/2019 | 10.3 | A&R Credit Agreement dated as of January 17, 2018 among PetIQ, LLC, as a Borrower Representative, the other credit parties party thereto, East West Bank and the other lenders party thereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | 8-K | 001-38163 | 10.2 | 1/23/2018 | 10.4 | First Amendment and Joinder, dated as of August 9, 2018, to Credit Agreement dated as January 17, 2018 | 10-Q | 001-38163 | 10.1 | 8/14/2018 | 10.5 | Second Amendment to Amended and Restated Credit Agreement, dated March 25, 2019, by and among PetIQ, LLC, the other credit parties party thereto, the lenders party thereto and East West Bank | 10-Q | 001-38163 | 10.1 | 8/8/2019 | 10.6 | Third Amendment to Amended and Restated Revolving Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 7/9/2019 | 10.7 | Third Amendment to Amended and Restated Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 10-Q | 001-38163 | 10.2 | 8/10/2020 | 10.8 | Fourth Amendment to Amended and Restated Credit Agreement, dated May 14, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 5/14/2020 |
10.9 | Sixth Amendment to Amended and Restated Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, East West Bank and the lenders party thereto | 8-K | 001-38163 | 10.2 | 8/3/2020 | 10.10 | Amended and Restructured Term Loan Credit Agreement, dated July 8, 2019, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.3 | 7/9/2019 | 10.11 | Second Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, Ares Capital Corporation and the Lenders party thereto | 8-K | 001-38163 | 10.1 | 5/14/2020 | 10.12 | Third Amendment to Term Loan Credit Agreement, dated July 9, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.2 | 8/10/2020 | 10.13 | Fourth Amendment to Term Loan Credit Agreement, dated July 28, 2020, by and among PetIQ, LLC, the guarantors party thereto, Ares Corporation and the other Lenders party thereto | 8-K | 001-38163 | 10.1 | 8/3/2020 | 10.14 | Letter Agreement, dated January 17, 2018, by and among PetIQ, Inc., PetIQ Holdings, LLC, PetIQ, LLC, Community Veterinary Clinics, LLC, VIP Petcare Holdings, Inc., Will Santana, Kenneth Pecoraro, and the Equity Support Holders party thereto | 8-K | 001-38163 | 10.1 | 1/23/2018 | 10.15* | PetIQ Inc. Amended and Restated 2017 Omnibus Incentive Plan | 8-K | 333-218955 | 10.1 | 5/31/2019 | 10.16* | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 7/20/2017 | 10.17* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | 10-Q | 001-38163 | 10.2 | 11/14/2018 | 10.18* | Amended and Restated Employment and Non-Competition Agreement between PetIQ, LLC and McCord Christensen | 10-Q | 001-38163 | 10.1 | 5/9/2019 | 10.19* | Employment and Non-Competition Agreement, dated September 17, 2018, between PetIQ, LLC and Susan Sholtis | 8-K | 001-38163 | 10.1 | 9/20/2018 | 10.20* | Employment and Non-Competition Agreement, dated as of May 28, 2019, between PetIQ, LLC and Michael Smith | 8-K | 001-38163 | 10.5 | 7/9/2019 | 10.21* | Employment and Non-Competition Agreement between PetIQ, LLC and John Newland | 10-Q | 001-38163 | 10.2 | 5/9/2019 | 10.22* | Employment and Non-Competition Agreement between PetIQ, LLC and R. Michael Herrman | 10-Q | 001-38163 | 10.3 | 5/9/2019 | 10.23* | PetIQ, Inc. 2017 Omnibus Incentive Plan Restricted Stock Unit Agreement | 10-Q | 001-38163 | 10.3 | 11/14/2018 | 10.24* | PetIQ, Inc. 2017 Omnibus Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors | 10-Q | 333-218955 | 10.4 | 11/14/2018 | 10.25* | PetIQ, Inc. Amended and Restated 2018 Inducement and Retention Stock Plan for CVC Employees | S-8 | 333-223635 | 4.3 | 3/13/2018 | 10.26 | First Amendment to Purchase and Sale Agreement, dated July 7, 2019, by and among PetIQ, LLC, L. Perrigo Company, Perrigo Company plc, and PetIQ, Inc. | 8-K | 001-38163 | 10.1 | 7/9/2019 | 10.27 | Transition Services Agreement, dated July 8, 2019, by and between PetIQ, LLC and L. Perrigo Company | 8-K | 001-38163 | 10.4 | 7/9/2019 | 10.28 | Form of Base Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.1 | 5/20/2020 | 10.29 | Form of Additional Capped Call Transaction Confirmation | 8-K | 001-38163 | 10.2 | 5/20/2020 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
10.14* | PetIQ Inc. 2017 Omnibus Incentive Plan Form of Nonqualified Stock Option Agreement | S-1/A | 333-218955 | 10.12 | 6-Jul-17 | 10.15 | Form of Indemnification Agreement | S-1/A | 333-218955 | 10.13 | 20-Jul-17 | 10.16 | Credit Agreement, Dated as of December 21, 2016 among PetIQ, LLC, as a Borrower and as Borrower Representative, The Other Credit Parties Part Hereto, East West Bank and the other Lenders Party Hereto, and East West Bank, as Administrative Agent, L/C Issuer and Swingline Lender | S-1 | 333-218955 | 10.14 | 23-Jun-17 | 21.1** | List of Subsidiaries of PetIQ Inc. | | | | | 23.1** | Consent of KPMG LLP | | | | | 31.1** | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 31.2** | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | 32.1** | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 32.2** | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | 101.INS | XBRL Instance Document | | | | | 101.SCH | XBRL Schema Documents | | | | | 101.CAL | XBRL Calculation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | | 101.LAB | XBRL Labels Linkbase Document | | | | | 101.PRE | XBRL Presentation Linkbase Document | | | | | 101.DEF | XBRL Definition Linkbase Document | | | | |
* Indicates management contract or compensatory plan or arrangement. ** Filed herewith Item 16. Form 10-K Summary None. 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.
| | | March 13, 2018
| /s/ John Newland
| | John Newland
| | Chief Financial Officer
|
POWER OF ATTORNEY KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint McCord Christensen and John Newland, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 13, 2018.February 26, 2021. | | | SIGNATURE | | TITLE | | | | /s/ McCord Christensen | | Chief Executive Officer, President (principal executive officer) | McCord Christensen | | Officer and Chairman of the Board | | | | /s/ John Newland | | Chief Financial Officer (principal financial and accounting officer) | John Newland | | Officer | | | | /s/ Mark First | | Director | Mark First | | | | | | /s/ James Clarke
| | Director
| James Clarke
| | | | | | /s/ Ronald Kennedy | | Director | Ronald Kennedy | | | | | | /s/ Gary MichaelScott Huff | | Director | Gary MichaelScott Huff
| | | | | | /s/ Will SantanaLarry Bird | | Director | Will SantanaLarry Bird
| | Executive Vice President
| | | |
s in 000's | | | | Total | | | 2018 | | | 2019-2020 | | | 2021-2022 | | | Thereafter | | | Total | | | 2021 | | | 2022-2023 | | | 2024-2025 | | | Thereafter |
