PetIQ, Inc.

Table of Contents


			Page

Part I.	Financial Information		3

	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		PetIQ, Inc. Condensed Consolidated Balance Sheets	3

		PetIQ, Inc. Condensed Consolidated Statements of ~~Comprehensive~~(Loss) Income ~~(Loss)~~	4

		PetIQ, Inc. Condensed Consolidated Statements of ~~Cash Flows~~Comprehensive (Loss) Income	5
		PetIQ, Inc. Condensed Consolidated Statements of ~~Members/Stockholders Equity~~Cash Flows	6
		PetIQ, Inc. Condensed Consolidated Statements of Equity	8
		PetIQ, Inc. Notes to Condensed Consolidated Financial Statements	79
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2129
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2938
	Item 4.	Controls and Procedures	2939
	Item 5	Other information	41

Part II.	Other Information

	Item 1.	Legal Proceedings	3140
	Item 1A.	Risk Factors	31
	~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	31
	~~Item 5.~~	~~Other Information~~	3241
	Item 6.	Exhibits	3241

Signatures			3342

2

Table of Contents

PetIQ, Inc.

Condensed Consolidated Balance Sheets

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



	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
Current assets
Cash and cash equivalents	$	46,536	$	767	$	28,108	$	27,272
Accounts receivable, net of allowance for doubtful accounts		24,841		17,195
Accounts receivable, net						131,541		71,377
Inventories		34,654		34,232		118,738		79,703
Supplier prepayments		2,251		2,985
Other current assets		1,471		1,358		8,043		7,071
Total current assets		109,753		56,537		286,430		185,423
Property, plant and equipment, net		14,865		13,044		54,240		52,525
Restricted deposits		200		250
Operating lease right of use assets						20,582		20,785
Deferred tax assets		9,707		—		64,149		59,780
Other non-current assets		1,932		2,826		3,268		3,214
Intangible assets, net of accumulated amortization		3,522		4,054
Intangible assets, net						117,621		119,956
Goodwill		5,063		4,619		230,702		231,045
Total assets	$	145,042	$	81,330	$	776,992	$	672,728
Liabilities and member's equity
Liabilities and equity
Current liabilities
Accounts payable	$	11,860	$	9,333	$	78,733	$	51,538
Accrued wages payable		1,691		1,100		6,536		9,082
Accrued interest payable		112		44		643		83
Other accrued expenses		2,266		277		5,968		3,871
Current portion of long-term debt and capital leases		145		2,321
Current portion of operating leases						4,770		4,619
Current portion of long-term debt and finance leases						3,841		3,821
Total current liabilities		16,074		13,075		100,491		73,014
Non-current liabilities
Long-term debt		19,928		25,158
Obligations under capital leases, less current installments		403		434
Deferred acquisition liability		—		1,303
Operating leases, less current installments						16,283		16,580
Long-term debt, less current installments						325,432		251,376
Finance leases, less current installments						3,225		3,331
Other non-current liabilities		336		378		58		117
Total non-current liabilities		20,667		27,273		344,998		271,404
Commitments and contingencies
Commitments and contingencies (Note 13)
Equity
Members equity		—		42,941
Additional Paid-in capital		71,192		—
Class A common stock, par value $.001 per share, 125,000,000 shares authorized, 13,222,583 shares issued and outstanding September 30, 2017		13		—
Class B common stock, par value $.001 per share, 8,401,000 shares authorized, 8,268,188 shares issued and outstanding at September 30, 2017		8		—
Additional paid-in capital						312,874		300,120
Class A common stock, par value $0.001 per share, 125,000 shares authorized; 24,318 and 23,554 shares issued and outstanding, respectively						24		23
Class B common stock, par value $0.001 per share, 100,000 shares authorized; 4,049 and 4,752 shares issued and outstanding, respectively						4		5
Accumulated deficit		(226)		—		(18,006)		(15,903)
Accumulated other comprehensive loss		(684)		(1,940)		(1,655)		(1,131)
Total stockholders' / member's equity		70,303		41,001
Total stockholders' equity						293,241		283,114
Non-controlling interest		37,998		(19)		38,262		45,196
Total equity		108,301		40,982		331,503		328,310
Total liabilities and equity	$	145,042	$	81,330	$	776,992	$	672,728

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PetIQ, Inc.

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

~~Three and nine months ended September 30,~~

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

Three months ended

Nine months ended


September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Net sales

$
60,554

$
41,671

$
214,761

$
155,249
Cost of sales

48,037

35,511

174,093

130,356
Gross profit

12,517

6,160

40,668

24,893
Operating expenses








General and administrative expenses

10,739

7,942

27,421

24,307
Operating income (loss)

1,778

(1,782)

13,247

586
Interest expense, net

(352)

(737)

(1,351)

(2,389)
Foreign currency gain/(loss), net

(31)

2

(152)

(83)
Loss on debt extinguishment

—

—

—

(993)
Other income, net

14

5

14

661
Total other expense, net

(369)

(730)

(1,489)

(2,804)
Pretax net income (loss)

1,409

(2,512)

11,758

(2,218)
Income tax expense

(550)

—

(550)

—
Net income (loss)

859

(2,512)

11,208

(2,218)
Net income (loss) attributable to noncontrolling interest

1,085

(2,512)

11,434

(2,218)
Net loss attributable to PetIQ, Inc.

$
(226)

$
—

$
(226)

$
—
Comprehensive income/(loss)








Net income (loss)

$
859

$
(2,512)

$
11,208

$
(2,218)
Foreign currency translation adjustment

314

(351)

829

(1,407)
Comprehensive income/(loss)

1,173

(2,863)

12,037

(3,625)
Comprehensive income attributable to noncontrolling interest

1,206

(2,863)

12,070

(3,625)
Comprehensive loss attributable to member/PetIQ, Inc.

$
(33)

$
—

$
(33)

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

-Basic

$
(0.02)

—

$
(0.02)

—
-Diluted

$
(0.02)

—

$
(0.02)

—
Weighted Average shares of Class A common stock outstanding

-Basic

13,222,583

—

13,222,583

—
-Diluted

13,222,583

—

13,222,583

—


	For the Three Months Ended
	March 31, 2020			March 31, 2019

Product sales	$	166,280		$	126,084
Services revenue		20,498			22,352
Total net sales		186,778			148,436
Cost of products sold		134,779			108,064
Cost of services		19,845			15,642
Total cost of sales		154,624			123,706
Gross profit		32,154			24,730
Operating expenses
General and administrative expenses		31,690			20,538
Contingent note revaluations gain		—			(680)
Operating income		464			4,872
Interest expense, net		(4,704)			(1,937)
Foreign currency gain (loss), net		73			(122)
Other income, net		365			13
Total other expense, net		(4,266)			(2,046)
Pretax net (loss) income		(3,802)			2,826
Income tax benefit (expense)		1,169			(500)
Net (loss) income		(2,633)			2,326
Net (loss) income attributable to non-controlling interest		(530)			715
Net (loss) income attributable to PetIQ, Inc.	$	(2,103)		$	1,611
Net (loss) income per share attributable to PetIQ, Inc. Class A common stock
Basic	$	(0.09)	��	$	0.07
Diluted	$	(0.09)		$	0.07
Weighted Average shares of Class A common stock outstanding
Basic		23,728			21,800
Diluted		23,728			21,978

⁽¹⁾

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

See accompanying notes to the condensed consolidated financial ~~statements~~statements.

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PetIQ, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited, in 000’s)


	For the Three Months Ended
	March 31, 2020		March 31, 2019
Net (loss) income	$	(2,633)	$	2,326
Foreign currency translation adjustment		(574)		539
Comprehensive (loss) income		(3,207)		2,865
Comprehensive (loss) income attributable to non-controlling interest		(623)		848
Comprehensive (loss) income attributable to PetIQ	$	(2,584)	$	2,017

See accompanying notes to the condensed consolidated financial statements.

5

Table of Contents

PetIQ, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, ~~dollars~~ in ~~thousands)~~000’s)

September 30, 2017

September 30, 2016
Cash flows from operating activities

Net income

$
11,208

$
(2,218)
Adjustments to reconcile net income to net cash used for operating activities




Depreciation and amortization of intangible assets and loan fees

2,725

2,885
Loss on disposition of property

14

52
Foreign exchange loss on liabilities

204

52
Stock based compensation expense

246

—
Deferred tax adjustment

351

—
Warranty settlement gain

—

(645)
Changes in assets and liabilities




Accounts receivable

(7,257)

(882)
Inventories

(316)

(2,015)
Prepaid expenses and other assets

1,137

3,663
Accounts payable

1,797

(1,125)
Accrued wages payable

570

(940)
Other accrued expenses

287

(163)
Net cash provided by (used in) operating activities

10,966

(1,336)
Cash flows from investing activities




Purchase of property, plant, and equipment and intangibles

(3,558)

(1,604)
Net cash used in investing activities

(3,558)

(1,604)
Cash flows from financing activities:




Proceeds from issuance of long term debt

206,020

167,052
Principal payments on long term debt

(213,522)

(172,785)
Proceeds from Initial Public Offering (IPO) of Class A Shares, net of underwriting discounts and offering costs

104,010

—
Repayment of Preference notes

(55,960)

—
Change in restricted cash and deposits

50

6,894
Purchase of LLC units from Continuing LLC Owners

(2,133)

—
Principal payments on capital lease obligations

(86)

(62)
Payment of deferred financing fees and debt discount

(42)

(248)
Net cash provided by financing activities

38,337

851
Net change in cash and cash equivalents

45,745

(2,089)
Effect of exchange rate changes on cash and cash equivalents

24

(206)
Cash and cash equivalents, beginning of period

767

3,250
Cash and cash equivalents, end of period

$
46,536

$
955
Supplemental cash flow information

Interest paid

$
1,116

$
2,150
Property, plant, and equipment acquired through accounts payable

(53)

(46)
Capital lease additions

17

127
Issuance of preference notes for LLC Interests

55,960

—
Establishment of deferred tax asset from step-up in basis

9,814

—
Accrued tax distribution

709

—


	For the Three Months Ended March 31,
	2020		2019
Cash flows from operating activities
Net (loss) income	$	(2,633)	$	2,326
Adjustments to reconcile net (loss) income to net cash used in operating activities
Depreciation and amortization of intangible assets and loan fees		5,470		3,091
Gain on disposition of property, plant, and equipment		(375)		(34)
Stock based compensation expense		2,558		1,544
Deferred tax adjustment		(1,169)		500
Contingent note revaluation		—		(680)
Other non-cash activity		33		17
Changes in assets and liabilities
Accounts receivable		(60,217)		(20,444)
Inventories		(39,069)		(20,366)
Other assets		(1,090)		21
Accounts payable		27,827		17,335
Accrued wages payable		(2,561)		(1,150)
Other accrued expenses		2,620		(359)
Net cash used in operating activities		(68,606)		(18,199)
Cash flows from investing activities
Proceeds from disposition of property, plant, and equipment		429		47
Purchase of property, plant, and equipment		(5,075)		(897)
Net cash used in investing activities		(4,646)		(850)
Cash flows from financing activities
Proceeds from issuance of long-term debt		239,600		134,134
Principal payments on long-term debt		(165,816)		(125,717)
Tax distributions to LLC Owners		(20)		(1,378)
Principal payments on finance lease obligations		(394)		(371)
Payment of deferred financing fees and debt discount		—		(50)
Tax withholding payments on Restricted Stock Units		(149)		—
Exercise of options to purchase class A common stock		1,002		315
Net cash provided by financing activities		74,223		6,933
Net change in cash and cash equivalents		971		(12,116)
Effect of exchange rate changes on cash and cash equivalents		(135)		123
Cash and cash equivalents, beginning of period		27,272		66,360
Cash and cash equivalents, end of period	$	28,108	$	54,367

See accompanying notes to the condensed consolidated financial ~~statements~~statements.

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PetIQ, Inc.

Condensed Consolidated Statements of ~~Members/Stockholders Equity~~Cash Flows, Continued

(Unaudited, ~~dollars~~ in ~~thousands)~~000’s)

Accumulated

Retained

Other

Total

Earnings/

Comprehensive

Additional

Stockholders

Members

(Accumulated

(Loss)

Paid-in

Noncontrolling

Equity/

Equity

Deficit)

Income

Class A Common

Class B Common

Capital

Interest

Members Equity

Shares

Dollars

Shares

Dollars

Balance - January 1, 2016

$
46,339

$
—

$
(42)


—

$
—


—

$
—

$
—

$
(22)

$
46,275
Net loss

(3,398)

—

—

—

—

—

—

—

3

(3,395)
Other comprehensive income

—

—

(1,898)

—

—

—

—

—

—

(1,898)
Balance - December 31, 2016

$
42,941

$
—

$
(1,940)

—

$
—

—

$
—

$
—

$
(19)

$
40,982
Net Income prior to IPO

11,161

—

—

—

—

—

—

—

(4)

11,157
Other comprehensive income prior to IPO

—

—

515

—

—

—

—

—

—

515
Accrued tax distribution prior to recapitalization

(511)

—

—

—

—

—

—

—

—

(511)
Recapitalization transaction:

—
Issuance of Class A common stock for merger

—

—

—

6,035,083

6

—

—

—

—

6
Exchange of LLC Interests held by Continuing LLC owners and certain employees for Class A common stock

(53,591)

—

668

—

—

—

—

28,497

24,426

—
Issuance of Class B Shares

—

—

—

—

—

8,401,522

8

—

—

8
Initial Public Offering transactions

Issuance of Class A Shares for IPO net of under writing discounts and offering costs

—

—

—

7,187,500

7

—

—

104,003

—

104,010
Payment of preference notes to affiliates

—

—

—

—

—

—

—

(55,960)

—

(55,960)
Increase in deferred tax asset from step-up in tax basis

—

—

—

—

—

—

—

9,814

—

9,814
Purchase of noncontrolling interests

—

—

(120)

—

—

(133,334)

(0)

(15,313)

13,300

(2,133)
Accrued Tax Distributions

—

—

—

—

—

—

—

—

(198)

(198)
Stock based compensation expense

—

—

—

—

—

—

—

151

95

246
Other comprehensive income post IPO

—

—

193

—

—

—

—

—

121

314
Net (loss) Income post IPO

—

(226)

—

—

—

—

—

—

277

51
Balance - September 30, 2017

$
—

$
(226)

$
(684)

13,222,583

$
13

8,268,188

$
8

$
71,192

$
37,998

$
108,301


	For the Three Months Ended March 31,
Supplemental cash flow information	2020		2019
Interest paid	$	3,789	$	2,146
Net change in property, plant, and equipment acquired through accounts payable		681		(51)
Finance lease additions		381		210
Net change of deferred tax asset from step-up in basis		3,199		3,138
Income taxes paid		89		176
Accrued tax distribution		106		257

See accompanying notes to the consolidated financial statements.

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PetIQ, Inc.

Condensed Consolidated Statements of Equity

(Unaudited, in 000’s)


	Three months ended March 31, 2020
			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, 2020	$	(15,903)	$	(1,131)		23,554	$	23		4,752	$	5	$	300,120	$	45,196	$	328,310
Exchange of LLC Interests held by LLC Owners		—		(43)		703		1		(703)		(1)		6,665		(6,622)		—
Net increase in deferred tax asset from LLC Interest transactions		—		—		—		—		—		—		3,199		—		3,199
Accrued tax distributions		—		—		—		—		—		—		—		(106)		(106)
Other comprehensive income		—		(481)		—		—		—		—		—		(93)		(574)
Stock based compensation expense		—		—		—		—		—		—		2,142		416		2,558
Exercise of Options to purchase Common Stock		—		—		46		—		—		—		1,002		—		1,002
Issuance of stock vesting of RSU's, net of tax withholdings		—		—		15		—		—		—		(255)		—		(255)
Net loss		(2,103)		—		—		—		—		—		—		(530)		(2,633)
Balance - March 31, 2020	$	(18,006)	$	(1,655)		24,318	$	24		4,049	$	4	$	312,874	$	38,262	$	331,503


	Three months ended March 31, 2019
			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, 2019	$	(4,450)	$	(1,316)		21,620	$	22		6,547	$	7	$	262,219	$	64,496	$	320,977
Exchange of LLC Interests held by LLC Owners		—		(31)		519		1		(519)		(1)		5,049		(5,018)		—
Net increase in deferred tax asset from LLC Interest transactions		—		—		—		—		—		—		3,138		—		3,138
Accrued tax distributions		—		—		—		—		—		—		—		(257)		(257)
Other comprehensive loss		—		406		—		—		—		—		—		133		539
Stock based compensation expense		—		—		—		—		—		—		1,195		349		1,544
Exercise of Options to purchase Common Stock		—		—		17		—		—		—		315		—		315
Issuance of stock for vesting of RSU's		—		—		1		—		—		—		—		—		—
Net Loss		1,611		—		—		—		—		—		—		715		2,326
Balance - March 31, 2019	$	(2,839)	$	(941)		22,157	$	22		6,028	$	6	$	271,916	$	60,418	$	328,582

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

See accompanying notes to the condensed consolidated financial statements.

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PetIQ Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

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

Note 1 - – Principal Business Activity and Significant Accounting Policies

Principal Business Activity and Principles of Consolidation

PetIQ ~~Inc. (the “Company”~~is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail, including veterinary, and e-commerce channels with our branded distributed medications, which is further supported by our own world-class medication manufacturing facility in Omaha, Nebraska. Our national service platform, VIP Petcare (“VIP”), ~~or “PetIQ”) was formed as a Delaware corporation on February 29, 2016.~~operates in over 3,400 retail partner locations in 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care we can give them.

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

We are the sole managing member of PetIQ Holdings, LLC (“~~Holdco”~~HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, through Holdco, ~~will~~ operate and control all of the business and affairs of ~~Opco and continue to conduct the business now conducted by Opco and its subsidiaries. The Company’s fiscal year end is December 31.~~

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

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

The condensed consolidated financial statements as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 and for the three ~~and nine~~ months ~~ended September 30,~~ ~~2017~~ ended March 31, 2020 and ~~2016~~2019 are unaudited. The condensed consolidated balance sheet as of December 31, ~~2016~~2019 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, ~~2016~~2019 and related notes thereto included in ~~the final prospectus for PetIQ, Inc. dated July 20, 2017~~most recent annual report and filed with the Securities and Exchange Commission (“SEC”) on ~~July 21, 2017.~~Form 10-K on March 11, 2020. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and ~~equipment; allowance for doubtful accounts;~~equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, the valuation of assets and 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

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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~~property, plant,~~

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, accounts receivable, accounts payable and ~~equipment, intangible assets~~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. Our term loan and ~~goodwill, inventories,~~revolving credit facility bear interest at a variable interest rate plus an applicable margin and, ~~notes receivable;~~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 ~~reserves~~such acquisition, the “VIP Acquisition”) was structured in the form of Contingent Notes (the “Contingent Notes”) that vested based on the combined Company EBITDA targets for ~~legal contingencies.~~the years ending December 31, 2018 and 2019 (“Measurement Dates”). The combined Company EBITDA targets were met for each year end, and as such the Contingent Notes were earned. As such, the portion of the liability as it relates to each Contingent Note became fixed as of December 31, 2019, and 2018, and are carried at cost, which approximates fair value as the stated interest rate is consistent with current market rates. See Note 2 �� “Business Combinations” for more information regarding the VIP Acquisition.

~~Foreign Currencies~~The Contingent Notes are included in long-term debt in the accompanying consolidated balance sheets. The Contingent Notes began bearing interest at a fixed rate of 6.75% once they were earned, with the balance payable July 17, 2023.

The Company ~~operates subsidiaries in foreign countries who use~~was required to reassess the local currency as the functional currency. The Company translates its foreign subsidiaries’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange asfair value of the ~~balance sheet date and income and expense items~~Contingent Notes at each reporting period prior to the ~~average exchange rate~~Measurement Dates.

The following table summarizes the Level 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 for each period.three months ended March 31, 2019:


$'s in 000's
Balance at beginning of the period	$	2,680
Change in fair value of contingent consideration		(680)
Balance at the end of the period	$	2,000

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the date of ~~acquisition, excluding amounts restricted for various state licensing regulations. Restricted deposits~~acquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are ~~not considered~~classified as cash and cash equivalents. The Company maintains its cash accounts in various deposit accounts, the balances of which at times exceeded federal deposit insurance limits during the periods presented.

Receivables and Credit Policy

Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms generally requiring payment within 3045 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for doubtful accounts 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 has~~Other receivables consists of various receivables due from vendors, banking partners, and notes receivable ~~due~~ from various suppliers included in accounts receivable. The notes typically bear interest at 4% and are repaid based on amortization schedules. Non-current portions of these notes receivable are included in other non-current assets on the consolidated balance sheets.suppliers.

Accounts receivable consists of the following as of:

September 30, 2017

December 31, 2016

Trade receivables

$
25,981

$
18,086
Notes receivable

324

440

26,305

18,526
Less: Allowance for doubtful accounts

(911)

(498)
Non-current portion of receivables

(553)

(833)
Total accounts receivable, net

$
24,841

$
17,195

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$'s in 000's	March 31, 2020		December 31, 2019
Trade receivables	$	124,845	$	67,551
Other receivables		7,040		4,257
		131,885		71,808
Less: Allowance for doubtful accounts		(344)		(431)
Total accounts receivable, net	$	131,541	$	71,377

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is ~~typically~~ determined ~~using~~on the first-in first-out (“FIFO”) method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management

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The Company ~~offers~~determined that certain products manufactured to a ~~variety~~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 ~~trade promotions~~the products the Company manufactures.

Revenue is recognized for services at the time the service is delivered. Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its relative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data.

Incentives in the form of cash paid to the customer (or a reduction of a customer cash payment to us) typically are recognized as a reduction of sales unless the incentive is for a distinct benefit that we receive from the customer (e.g., advertising or marketing).

The performance obligations in our contracts are satisfied within one year. As such, we have not disclosed the transaction price allocated to remaining performance obligations as of March 31, 2020.

Significant Payment Terms

Our customer contracts identify the product, quantity, price, payment and ~~incentives~~final delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.

Shipping

All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales. This includes shipping and handling costs after control over a product has transferred to a customer.

Variable Consideration

In addition to fixed contract consideration, most contracts include some form of variable consideration. The most common forms of variable consideration include discounts, rebates, and sales returns and allowances. Variable consideration is treated as a 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 updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in the market. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.

Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other temporary price reductions. These programs are offered to our customers ~~such~~both in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.

Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.

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Both trade marketing expense and product introductory fees are recognized as ~~cooperative advertising programs and store placement. Sales are recorded net~~reductions of ~~trade promotion spending, which is recognized~~revenue at the ~~later~~time the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in the Condensed Consolidated Balance Sheets.

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 ~~accrued expenses.~~warranties provided under the law. No significant services beyond an assurance warranty are provided to customers.

~~Shipping~~

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 ~~Handling Costs~~

~~Shipping~~related refund liability is estimated and ~~handling costs are~~ recorded as ~~cost of~~a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience.

Contract balances

Contract asset and liability balances as of March 31, 2020 and December 31, 2019 are immaterial. The Company does not ~~billed~~have significant deferred revenue or unbilled receivable balances.

Cost of Services

Cost of Services are comprised of all service and product costs related to ~~customers.~~the delivery of veterinary services, including but not limited to, salaries of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold.

Research and Development and Advertising Costs

Research and development and advertising costs are expensed as incurred and are included in general and administrative expenses. Research and development costs amounted to ~~$11~~$41.0 million and ~~$82~~$0.1 million for three months ended March 31, 2020 and 2019, respectively. Advertising costs were $2.5 million and $0.7 million for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively~~2019, respectively.

Collaboration Agreements

Through the Company’s 2019 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”), we entered into a product development and $~~427~~asset purchase agreement with a third party for certain product formulations in development by the third party. The Company may make up to $20.8 million of payments over the course of the next several years contingent on achievement of certain development and $~~248~~ ~~for~~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 ~~nine months ended September 30, 2017~~U.S. Food and ~~2016, respectively. Advertising~~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 (Loss) Income. No costs were ~~$436 and $273 for~~incurred during the three months ended ~~September 30, 2017 and 2016, respectively and $2,028 and $~~March 31, 2020 or 2019.~~883~~ ~~for the nine months ended September 30, 2017 and 2016, respectively.~~

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Income taxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company may record a valuation allowance, if conditions are applicable, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

Non-controlling interest

The non-controlling interests on the condensed consolidated statements of (loss) income represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, ~~PetIQ Holdings, LLC,~~Holdco, held by the non-controlling ~~Continuing LLC Owners.~~holders of Class B common stock and limited liability company interests in Holdco. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling ~~Continuing LLC Owners,~~holders of Class B common stock and limited liability company interests in Holdco, based on the portion of the LLC Interests owned by such LLC interest holders. There was no significant non-controlling interest for the nine months ended September 30, 2016 as well as the period prior to the IPO on July 20, 2017 because the Company operated as Opco during those periods.holders of Class B common stock and limited liability company interests in Holdco. As of ~~September 30, 2017~~March 31, 2020 and December 31, 2019 the non-controlling interest was approximately ~~38.5%.~~14.3% and 16.8%, respectively.

Litigation

The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If the likelihood of an adverse legal outcome is determined to be probable and the amount of loss is estimable, then a liability is accrued in accordance with accounting guidance for ~~contingencies.~~Contingencies. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. The ~~company~~Company consults with both internal and external legal counsel related to ~~litigation.~~litigation.

~~Recently Issued~~

Adopted Accounting ~~Pronouncements~~Standard Updates

~~In February 2016,~~

Effective January 1, 2020, the ~~FASB issued~~Company adopted Accounting Standards Update (“ASU”) ~~2016-02, Leases.~~No. 2016-13, "Financial Instruments - Credit Losses." This ASU ~~is a comprehensive new leases standard that was issued~~requires an organization to ~~increase transparency~~measure all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and ~~comparability among organizations by recognizing lease assets~~reasonable and ~~lease liabilities on the balance sheet and disclosing key~~supportable information. Organizations will now use forward-looking information ~~about leasing arrangements.~~to better estimate their credit losses. The ~~amendments in~~Company adopted this ASU ~~are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requires adoption based upon~~using a modified retrospective ~~transition approach for leases existing at, or entered into after, the beginning~~approach. Under this method of ~~the earliest comparative period presented in the~~

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AsThe fair value of ~~December~~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, developed technology and know-how and in-process research and development intangibles. The $14.5 million represents the fair value and will be amortized over the estimated useful lives of the assets through June 2039. Amortization expense for these definite-lived intangible assets for the three months ended March 31, ~~2016,~~2020 was $0.6 million.

The indefinite-lived intangibles primarily relate to trademarks and in-process research and development. We evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis and more frequently if an event occurs or circumstances change that would indicate impairment may exist.

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.

Pro Forma Combined Statements of Operations (Unaudited)

The following unaudited pro forma combined statements of operations presents the Company's operations as if the Perrigo Animal Health Acquisition and related financing activities had occurred on January 1, 2019. Additionally the share count utilized and Net (loss) income do not account for non-controlling interests. The pro forma combined statements of operations are not necessarily indicative of the results of operations as they would have been had the Perrigo Animal Health Acquisition been effected on the assumed date and are not intended to be a projection of future results: Pro forma results for the three months ended March 31, 2019:


($'s in 000's, except per share data)
Net sales	$	168,005
Net (loss) income	$	1,636

(Loss) Earnings per share:
Basic	$	0.08
Diluted	$	0.07

For the three months ended March 31, 2020, the acquired business had Product sales of $23.8 million and pre-tax net income of $6.9 million and are included in the Condensed Consolidated Statements of (Loss) Income.

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Note 3 – Property, Plant, and Equipment

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


$'s in 000's	March 31, 2020		December 31, 2019
Leasehold improvements	$	17,252	$	15,517
Equipment		23,666		23,138
Vehicles and accessories		5,985		6,007
Computer equipment and software		9,642		8,070
Buildings		10,069		10,050
Furniture and fixtures		1,951		1,836
Land		4,557		4,557
Construction in progress		3,824		3,392
		76,946		72,567
Less accumulated depreciation		(22,706)		(20,042)
Total property, plant, and equipment	$	54,240	$	52,525

Depreciation expense related to these assets was $2.9 million and $1.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

Note 4 – Intangible Assets and Goodwill

Intangible assets consist of the following at:


$'s in 000's	Useful Lives	March 31, 2020		December 31, 2019
Amortizable intangibles
Certification	7 years	$	350	$	350
Customer relationships	12-20 years		89,170		89,232
Patents and processes	5-10 years		4,828		4,928
Brand names	5-15 years		14,971		15,019
Total amortizable intangibles			109,319		109,529
Less accumulated amortization			(15,184)		(13,058)
Total net amortizable intangibles			94,135		96,471
Non-amortizable intangibles
Trademarks and other			18,016		18,016
In-process research and development			5,470		5,469
Intangible assets, net of accumulated amortization		$	117,621	$	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 three months ended March 31, 2020 and 2019 was $2.2million and $1.3 million, respectively.

The in-process research and development (“IPRD”), intangible assets represent the value assigned to acquired R&D projects that principally represent rights to develop and sell a product that the Company ~~had $5,000 outstanding~~has acquired which have not yet been completed or approved. The IPRD acquired as ~~Term Loans~~part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and ~~$22,473 outstanding~~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.

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


Years ending December 31, ($'s in 000's)
Remainder of 2020	$	6,708
2021		8,941
2022		9,154
2023		8,796
2024		6,788
Thereafter		53,748

The following is a summary of the changes in the carrying value of goodwill for the period from January 1, 2019 to March 31, 2020:


	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		(343)		—		(343)
Goodwill as of March 31, 2020	$	183,438	$	47,264	$	230,702

Note 5 – Debt

A&R Credit Agreement

In connection with the Perrigo Animal Health Acquisition, 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 of $125 million that matures on July 8, 2024. The borrowers under the ~~Revolver. The interest~~ ~~rate~~Amended Revolving Credit Facility incur fees between 0.375% and 0.50% as unused facility fees, dependent on the ~~Term Loans was 4.25%~~aggregate amount borrowed.

All obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the ~~interest rate on~~guarantees of those obligations, are secured by substantially all of the ~~Revolver was also 4.25%, both were Base Rate loans.~~

Asassets of ~~September 30, 2017, the Company had fully repaid the Term Loans~~each borrower and ~~had $18,05~~9 ~~outstanding~~guarantor under the ~~Revolver. The interest rate on the Revolver was 4.75% as a Base Rate loan. The Revolver contains a lockbox mechanism.~~Amended Revolving Credit Agreement, subject to certain exceptions.

The ~~New~~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 March 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 ~~restrictions including~~events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio ~~and~~covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a ~~minimum EBITDA target and is secured by collateral consisting of a percentage of eligible accounts receivable, inventories, and machinery and equipment.~~ certain level. As of ~~September 30, 2017,~~March 31, 2020, the ~~Company was~~borrower and guarantors thereunder were in compliance with these covenants.

As of March 31, 2020, $84.3 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 3.1% at March 31, 2020.

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A&R Term Loan Credit Agreement

Also in connection with the closing of the Perrigo Animal Health Acquisition, the Company amended and restated the existing term loan credit agreement of Opco (the “A&R Term Loan Credit Agreement”) on July 8, 2019. The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 4.50%. The proceeds of the A&R Term Loan Agreement were used to refinance the existing term loan facility and consummate the Perrigo Animal Health Acquisition.

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 March 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.

General Other Debt

The Company entered into a mortgage with a local bank to finance ~~$1,920~~$1.9 million of the purchase price of a commercial building in Eagle, ~~ID,~~Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and utilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time.

~~On March 16, 2015,~~In connection with the VIP Acquisition, the Company entered into a ~~$40,000 credit facility (“Credit Agreement”), comprised~~guarantee note of $10.0 million and the Contingent Notes. As of March 31, 2020, $7.5 million was payable pursuant to the 2018 Contingent Note and $10.0 million was payable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, have a ~~$33,000 in aggregate principal amount~~collective balance of ~~term loans~~$27.5 million and ~~$7,000 revolving credit facility. Borrowings under~~require quarterly interest payments of 6.75% with the ~~agreement were subject to certain~~ ~~covenants~~ and restrictions including a fixed charge coverage ratio and a minimum EBITDA target, both measured on a quarterly basis beginning in the first quarter of 2016. The Company remained in compliance with these covenants for the duration of the agreement.

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

~~(i) $3,000 in aggregate principal amount of term loans maturing on December 31, 2016;~~

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

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

balance payable July 17, 2023. The following represents the Company’s ~~long term~~long-term debt as of:

September 30, 2017

December 31, 2016
Term Loans

$
—

$
5,000
Revolving credit facility

18,059

22,473
Mortgage

1,913

—
Net discount on debt and deferred financing fees

—

(92)

$
19,972

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

(44)

(2,223)
Total long-term debt

$
19,928

$
25,158


$'s in 000's	March 31, 2020		December 31, 2019
Term loans	$	219,450	$	220,000
Revolving credit facility		84,346		10,000
Mortgage		1,801		1,812
Notes Payable - VIP Acquisition		27,500		27,500
Net discount on debt and deferred financing fees		(5,416)		(5,688)
	$	327,681	$	253,624
Less current maturities of long-term debt		(2,249)		(2,248)
Total long-term debt	$	325,432	$	251,376

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Table of Contents

Future maturities of ~~long term~~long-term debt, excluding the ~~net~~ discount on debt and deferred financing fees, as of ~~September 30, 2017,~~March 31, 2020, are as follows:

Remainder of 2017

$
15
2018

44
2019

18,105
2020

48
2021

50
Thereafter

1,710


($'s in 000's)
Remainder of 2020	$	1,686
2021		2,250
2022		2,253
2023		29,755
2024		2,257
Thereafter		294,896

The Company did not incur any debt issuance costs during the three months ended March 31, 2020. The Company incurred debt issuance costs of ~~$248~~$0.1 million related to the A&R Credit Agreement and zero related to the Term Loan during the ~~first nine~~three months ~~of 2016. The debt~~ ~~transaction~~ ~~resulted in a loss on debt extinguishment of $993, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs.~~

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Table of Contents

Other information related to leases was as follows as of:


	March 31, 2020	March 31, 2019
Weighted-average remaining lease term (years)
Operating leases	4.82	3.95
Finance leases	2.80	2.65
Weighted-average discount rate
Operating leases	5.3%	5.0%
Finance leases	5.8%	5.5%

Annual future commitments under non-cancelable leases as of ~~September 30, 2017,~~March 31, 2020, consist of the following:

Lease Obligation


Operating Leases

Capital Leases
Reminder of 2017

$
436

$
27
2018

1,716

108
2019

597

104
2020

46

90
2021

29

88
Thereafter

85

103
Total minimum future obligations

$
2,909

$
520
Less Interest



(16)
Present value of net future minimum obligations

504
Less current capital lease obligations

(101)
Long-term capital lease obligations



$
403


	Lease Obligations
$'s in 000's	Operating Leases		Finance Leases
Remainder of 2020	$	4,452	$	1,237
2021		5,137		1,411
2022		4,829		1,225
2023		4,036		1,196
2024		2,516		150
Thereafter		2,957		23
Total minimum future obligations	$	23,927	$	5,242
Less interest		(2,874)		(426)
Present value of net future minimum obligations		21,053		4,816
Less current lease obligations		(4,770)		(1,591)
Long-term lease obligations	$	16,283	$	3,225

Supplemental cash flow information:



	Three Months Ended		Three Months Ended
$'s in 000's	March 31, 2020		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	82	$	50
Operating cash flows from operating leases		1,798		880
Financing cash flows from finance leases		394		371
(Noncash) right-of-use assets obtained in exchange for lease obligations
Operating leases		1,696		—
Finance leases		381		210

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

Note ~~4 -~~ 7 – Income ~~Taxes~~Tax

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

~~The Company’s~~

Our effective tax rate ~~is significantly less~~(ETR) from continuing operations was 30.8% and 17.7% for the three months ended March 31, 2020 and 2019, respectively including discrete items. Income tax expense for three months ended March 31, 2020 and 2019 was different than the U.S federal statutory income tax rate of ~~35%,~~21% primarily ~~because no taxes are payable by the Company for the noncontrolling interests’ share of Holdco’s taxable income~~ due to the pass through structure. The effective tax rate for the nine months ended September 30, 2017 is also lower than statutory rates because income for the period prior to the IPO was not taxable to the Company as it did not yet hold an equity interest in Holdco.

~~As a result~~effect 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.

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

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

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~~assets.~~ foreign GILTI income inclusion and various permanent tax differences which are offset partially by the impact of the non-controlling interest income that is not taxable.

The Company has assessed the realizability of the net deferred tax assets ~~resulted primarily from~~as of March 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 prior to the expiration of certain carryforwards. The Company believes that there will be sufficient taxable income in the future that the Company’s deferred tax assets will be realized except for the following. The Company has a valuation allowance for certain deferred tax assets of $0.1 million and $0.1 million as of March 31, 2020 and December 31, 2019, respectively. It is possible that some or all of the remaining deferred tax assets could ultimately not be realized in the future if our operations are not able to generate sufficient taxable income. Therefore, a substantial valuation allowance to reduce our deferred tax assets may be required, which would materially increase our tax expense in the period in which the allowance is recognized and would adversely affect our results of operations.

HoldCo makes cash distributions to members to pay taxes attributable to their allocable share of income earned. In the three months ended March 31, 2020 and 2019, the Company made cash distributions of $0.02 million and $1.40 million, respectively. Additionally, HoldCo accrues for distributions required to be made related to estimated income taxes. During the three months ended March 31, 2020 and 2019, the Company accrued distributions of $0.1 million and $0.3 million, respectively

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 net operating losses, temporary changes to the prior and ~~were fully offset by a valuation allowance.~~ future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. This legislation was enacted before the date of filing this Form 10-Q. The Company will benefit from the Employee Retention Credits and the payroll tax deferral.

Note 58 – Earnings per Share

Basic and Diluted (Loss) Earnings per Share

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

As described in Note 7 — Stockholders’ Equity, on July 20, 2017, the PetIQ Holdings, LLC Agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class of common membership interests, the LLC Interests of Holdco, and (ii) exchange all of the then-existing membership interests of the Continuing LLC Owners for common units of Holdco. This Recapitalization changed the relative membership rights of the Continuing LLC Owners such that retroactive application of the Recapitalization to periods prior to the IPO for the purposes of calculating earnings per share would not be appropriate.

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

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

Three months ended

September 30, 2017
Numerator:

Net income

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

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

(226)
Denominator:

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

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

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

13,223

Earnings per share of Class A common stock — basic

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

$
(0.02)


	Three months ended March 31,
(in 000's, except for per share amounts)		2020	2019
Numerator:
Net (loss) income	$	(2,633)	$	2,326
Less: net (loss) income attributable to non-controlling interests		(530)		715
Net (loss) income attributable to PetIQ, Inc. — basic and diluted		(2,103)		1,611
Denominator:
Weighted-average shares of Class A common stock outstanding -- basic		23,728		21,800
Dilutive effects of stock options that are convertible into Class A common stock		—		171
Dilutive effect of RSUs		—		7
Weighted-average shares of Class A common stock outstanding -- diluted		23,728		21,978

(Loss) earnings per share of Class A common stock — basic	$	(0.09)	$	0.07
(Loss) earnings per share of Class A common stock — diluted	$	(0.09)	$	0.07

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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~~For the three months ended March 31, 2020 and 2019, all shares of the Company’s Class B common stock ~~as well as stock options~~ have not been included in the diluted earnings 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 have not been included in the diluted earnings per share calculation for the three months ended March 31, 2020, as they have been determined to be anti-dilutive under the treasury stock method. For the three months ended March 31, 2019, 748 thousand and 30 thousand, respectively, stock options and restricted stock units have not been included in the diluted earnings per share calculation as they have been determined to be anti-dilutive under the treasury stock method.

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Table of Contents

⁽²⁾

The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period consistent with the expected option term.

⁽³⁾

The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.

⁽⁴⁾

The Company has not paid and does not anticipate paying a cash dividend on our common ~~stockThe following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2017:~~stock.

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As

Note 10 – Stockholders’ Equity

Exchanges

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

~~Amendment~~three months ended March 31, 2020 and ~~Restatement of Certificate of Incorporation~~

On July 20, 2017, the Company amended and restated its certificate of incorporation to, among other things, provide for the (i) authorization of 125,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) authorization of 8,401,521 shares2019, respectively, holders of Class B common stock ~~with a par value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock;~~ and ~~(iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.~~

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

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

~~The Company must, at all times, maintain a one-to-one ratio between the number of outstanding shares of Class A common stock~~exercised exchange rights and ~~the number of LLC Interests owned by PetIQ (subject to certain exceptions for treasury shares~~exchanged 703 thousand and ~~shares underlying certain convertible or exchangeable securities).~~

~~Initial Public Offering~~

On July 20, 2017, the Company completed an IPO of 7,187,500 shares of the Company’s Class A common stock at a public offering price of $16.00 per share, inclusive of the contemporaneous exercise of the underwriters option to purchase additional shares. The Company received $106,950 in proceeds, net of underwriting discounts and commissions, which were used repay $55,960 in preference notes, to purchase 3,556,666 newly-issued LLC Interests from Holdco at a price per unit equal to the initial public offering price per share of Class A common stock in the IPO less underwriting discounts and commissions, and to purchase 133,334 LLC Interests and corresponding519 thousand Class B common shares ~~from entities affiliated with the Company’s CEO~~ and ~~President.~~

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

~~PetIQ Holdings, LLC Recapitalization~~

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

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

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~~Advecta 3~~Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and ~~PetLock MAX infringe~~briefing on appeal was completed in December 2019. Oral arguments have been scheduled for June 9, 2020. A final decision from the 9th Circuit Court of Appeals is estimated in late 2020 or early 2021. As no impact to the Company is considered probable or estimable, no litigation reserve has been accrued.

The Company has a ~~patent relating~~supplier who has alleged PetIQ has breached its supply agreement. PetIQ believes the Company is not in breach, however even if the Company has breached the supply agreement, the Company has the ability to ~~K9 Advantix II. Bayer seeks unspecified monetary damages~~cure the breach prior to Q3 2020. The supplier has stated it believes the breach would warrant a $20 million payment. As PetIQ believes the Company has not breached the agreement, the potential outcome is between no payment and ~~an injunction against future sales~~the $20 million alleged by ~~CAP IM~~the supplier. Any amount within the range is as likely as any other, the Company has not recorded a liability as of ~~Advecta 3 and PetLock MAX~~March 31, 2020. Negotiations with the supplier are ongoing. The Company cannot provide assurance that any ultimate resolution will be favorable to the Company. Bayer has filed a motion for preliminary injunction, though no hearing has been set on that motion. Although we have not been named in the suit, our license and supply agreement with CAP IM requires us to share with CAP IM the payment of defense and settlement costs of such litigation and allows us to control the defense of the proceeding. CAP IM intends to vigorously defend this case and we believe that CAP IM has meritorious defenses. However, because of the inherent uncertainties of litigation, we can provide no assurance of an outcome favorable to CAP IM and to us. The case is presently scheduled for trial in February 2019.

The Company records a liability when a particular contingency is probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019 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 condensed statements of operations.

Commitments

During the three months ended March 31, 2020, the Company executed an Asset Purchase Agreement (the “Purchase Agreement”) to acquire the U.S. rights to Capstar® and CapAction® and related assets (the “Acquisition”) from Elanco US Inc. (“Elanco”) for $95 million, plus the cost of certain outstanding finished goods inventory in saleable condition. The closing of the transaction is contingent upon customary closing conditions, including, among others, the approval of the acquisition under a consent order issued by the U.S. Federal Trade Commission. The parties have agreed that the Acquisition will not close earlier than July 1, 2020. The Company is in the process of arranging financing to complete the Acquisition.

Note ~~11 -~~14 – Segments

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

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

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Table of Contents

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

Three months ended

Nine months ended


September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net Sales








Domestic

$
59,328

$
40,513

$
211,095

$
151,792
International

1,226

1,158

3,666

3,457
Net Sales

60,554

41,671

214,761

155,249
Gross Profit








Domestic

$
11,974

$
5,665

$
39,074

$
23,424
International

543

495

1,594

1,469
Gross Profit

12,517

6,160

40,668

24,893
General and administrative expenses








Domestic

$
10,207

$
7,522

$
25,977

$
22,991
International

532

420

1,444

1,316
General and administrative expenses

10,739

7,942

27,421

24,307
Operating income








Domestic

$
1,767

$
(1,857)

$
13,097

$
433
International

11

75

150

153
Operating income

1,778

(1,782)

13,247

586


$'s in 000's					Unallocated
March 31, 2020	Products		Services		Corporate		Consolidated
Net Sales	$	166,280	$	20,498	$	—	$	186,778
Adjusted EBITDA		24,279		1,989		(11,810)		14,458
Depreciation expense		1,316		848		709		2,873
Capital expenditures		1,673		2,833		569		5,075


$'s in 000's					Unallocated
March 31, 2019	Products		Services		Corporate		Consolidated
Net Sales	$	126,084	$	22,352	$	—	$	148,436
Adjusted EBITDA		13,556		5,277		(7,961)		10,872
Depreciation expense		553		524		576		1,653
Capital expenditures	$	462	$	281	$	154	$	897

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


	For the three months ended
$'s in 000's	March 31, 2020		March 31, 2019
Adjusted EBITDA:
Product	$	24,279	$	13,556
Services		1,989		5,277
Unallocated Corporate		(11,810)		(7,961)
Total Consolidated		14,458		10,872
Adjustments:
Depreciation		(2,873)		(1,654)
Amortization		(2,242)		(1,279)
Interest		(4,704)		(1,937)
Acquisition costs(1)		(586)		(576)
Stock based compensation expense		(2,558)		(1,544)
Non same-store revenue(2)		2,282		1,516
Non same-store costs(2)		(6,400)		(3,252)
Fair value adjustment of contingent note(3)		—		680
Integration costs and costs of discontinued clinics(4)		(454)		—
Clinic launch expenses(5)		(676)		—
Litigation expenses		(49)		—
Pretax net (loss) income	$	(3,802)	$	2,826
Income tax benefit (expense)		1,169		(500)
Net (loss) income	$	(2,633)	$	2,326

(1)

Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions.

(2)

Non same-store revenue and costs relate to Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results.

(3)

Fair value adjustment on the contingent note represents the non cash adjustment to mark the 2019 Contingent Note to Fair value.

(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

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Table of Contents

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.

Supplemental geographic disclosures are below.


	Three months ended March 31, 2020
$'s in 000's	U.S.		Foreign		Total
Products segment sales	$	165,072	$	1,208	$	166,280
Services segment revenue		20,498		—		20,498
Total net sales	$	185,570	$	1,208	$	186,778

	Three months ended March 31, 2019
$'s in 000's	U.S.		Foreign		Total
Products segment sales	$	124,451	$	1,633	$	126,084
Services segment revenue		22,352		—		22,352
Total net sales	$	146,803	$	1,633	$	148,436

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


	March 31, 2020		December 31, 2019
United States	$	53,129	$	51,397
Europe		1,111		1,128
Total	$	54,240	$	52,525

Note 15 – Related Parties

As discussed in Note 7– “Income Taxes,” the Company has accrued tax distributions that are payable to holders of Class B common stock and LLC Interests to facilitate the payment of periodic estimated tax obligations by such holders. At March 31, 2020 and December 31, 2019, the Company had an accrual of $0.5 million and $0.4 million, respectively, for estimated tax distributions, which is included in accounts payable on the condensed 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 in aggregate as of March 31, 2020 and December 31, 2019. The Company had $0.4 million in accrued interest on these notes as of March 31, 2020 and no accrued interest on these notes as of December 31, 2019. The Company paid no interest in the three months ended March 31, 2020, but paid $0.4 million of interest in the three months ended March 31, 2019.

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 $91 thousand and $73 thousand in the three months ended March 31, 2020 and March 31, 2019, respectively.

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 premium expense, paid to Moreton and subsequently transferred to insurance providers, was $283 thousand and $137 thousand for the three months ended March 31, 2020 and March 31, 2019. Mr. Chris Christensen was paid a commission of approximately $18 thousand and $7 thousand for the three months ended March 31, 2020 and March 31, 2019, respectively, for the sale of such insurance policies to the Company.

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Note ~~12 - Related Parties~~16 – Subsequent events

~~Opco had entered into management consulting services agreements with members~~In April 2020, the Company purchased a parcel of ~~Holdco.~~land for $2.5 million. The ~~services were related to financial transactions and other senior management matters related to business administration. Those agreements provided~~broker for the Company was Colliers International, and the agent was Mike Christensen, the brother of CEO McCord Christensen. Total commission paid to ~~pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded in general~~Colliers was approximately $75 thousand.

The Company is closely monitoring the impact of the coronavirus (“COVID-19”) pandemic on all aspects of its business. The COVID-19 pandemic adversely affected the Company’s financial results and ~~administrative expenses~~business operations in the ~~condensed consolidated statement of comprehensive income (loss).~~Company’s first fiscal quarter ended March 31, 2020, and uncertainties regarding the pandemic continue to result in serious economic disruptions including restrictions on our business activities or health impacts to our employees. The Company recorded $545 and $508 for the nine months ended September 30, 2017 and 2016, respectively, and $158 and $208 for the three months ended September 30, 2017 and 2016, respectively. Upon consummationfull impact of the ~~recapitalization~~COVID-19 outbreak is unknown, resulting in a high degree of uncertainty for potentially extended periods of time. At this time, neither the duration nor scope of the disruption can be predicted, therefore, the negative impact on our financial position and ~~IPO transactions, these agreements were terminated.~~

As discussed in Note 4– Income taxes, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At September 30, 2017, the Company had accrued $709 for estimated tax distributions, which are included in accounts payable on the condensed consolidated balance sheets.operating results cannot be reasonably estimated.

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

The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10‑Q and our audited consolidated financial statements for the year ended December 31, ~~2016~~2019 and related notes included in the ~~final prospectus~~annual report for PetIQ, Inc., ~~dated July 20, 2017 and~~ filed with the Securities and Exchange Commission (the “SEC”) on ~~July 21, 2017.~~Form 10-K for the year ended December 31, 2019. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See ~~“-Cautionary~~“Cautionary Note Regarding Forward-Looking Statements.”

~~Our~~ Business

Overview

PetIQ is a ~~rapidly growing~~leading pet ~~health~~medication and wellness company ~~providing~~delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and ~~affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leading national retail stores, including~~services. We engage with customers through more than ~~40,000~~60,000 points of distribution across retail ~~pharmacy locations.~~and e-commerce channels with our branded distributed medications, which is further supported by our own world-class medication manufacturing facility in Omaha, Nebraska. Our national service platform, VIP Petcare, operates in over 3,400 retail partner locations in 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best ~~pet~~products and care we can give them. ~~Through our retail relationships, we encourage pet owners to regularly visit their veterinarian and educate them about the importance of veterinarian-grade products.~~

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

We are the sole managing member of PetIQ Holdings, LLC ("Holdco"), a ~~whole,~~Delaware limited liability company, which is the ~~approach we follow in throughout this Management’s Discussion~~sole member of PetIQ, LLC ("Opco") and, ~~Analysis~~through Holdco, operate and control all of ~~Financial Condition~~the business and ~~Results~~affairs of ~~Operations.~~Opco.

~~Recent Developments~~

As discussed more fully in Note 7 in the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1, we completed our initial public offering ("IPO") on July 20, 2017, in which we sold 7,187,500 common shares to the public at a price of $16.00 per share. We received proceeds of $106,950 net of underwriters discounts and commissions, which we utilized to repay preference notes, pay offering costs, and purchase LLC Interests in Holdco.

~~Results of Operations~~

~~Components of our Results of Operations~~

~~Net Sales~~

Our net sales consist of our total sales net of product returns, allowances (discounts), trade promotions and incentives. We offer a variety of trade promotions and incentives to our customers, such as cooperative advertising programs and in‑store displays. We ~~recognize~~ revenue when persuasive evidence of an arrangement exists, in accordance with the terms of our contracts, which generally occurs upon shipment of product, when the price is fixed or determinable and when collectability is reasonably assured. These trade promotions are used to increase our aggregate net sales. Our net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.

~~Key factors that may affect our future sales growth include: new product introductions; expansion into e-commerce and other customer~~ ~~bases~~; expansion of items sold to existing customers, addition of new retail customers and to maintain pricing levels necessary for profitability; aggressive pricing by our competitors; and whether we can maintain and develop positive relationships with key retail customers, such as Walmart and Sam’s Club.

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~~While most~~Coronavirus Disease (COVID-19) Considerations

On March 11, 2020, the World Health Organization formally declared the Novel Coronavirus (“COVID-19”) outbreak to be a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity, widespread unemployment, supply chain interruptions, and overall economic and financial market instability. All states have declared states of emergency and various states and cities have restricted commerce and travel to a varied degree.

We made the strategic and difficult decision to temporarily close all of our ~~products~~veterinarian service clinics effective March 20, 2020 to protect the health and safety of our employees, customers and retail partners. We are ~~sold consistently throughout~~continuously monitoring the ~~year, we experience seasonality in the form~~situation and will reopen veterinary service locations as soon as it is practical to do so and are developing a number of ~~increased retailer demand for~~ protocols, including curbside service at some locations, to facilitate our ~~flea and tick product offerings in the first two quarters~~ ability to open as quickly as possibly once is safe to do so.

The amount of the ~~year~~decrease in ~~preparation for increased consumer~~business that we will ultimately experience remains uncertain. This is largely due to: (i) existing concerns that many non-essential businesses and employees face permanent closure or heavy reliance on newly-established federal government programs, such as the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), in order to remain in operation and the ultimate success of these programs remains unknown; and (ii) uncertainty of consumer/pet owner response and more specifically, the timing of engaged demand ~~during~~as the ~~summer months.~~public is reintroduced to our retail environments as government restrictions are lifted or reduced.

Our ~~products are primarily consumables~~Products segment has remained in operation at our main three facilities in Springville, Utah, Omaha, Nebraska, and ~~as such, they experience a replenishment cycle.~~

~~Gross Profit~~

Gross profit is our net sales less cost of sales. Our cost of sales consists primarily of costs of raw goods, finished goods packaging materials, manufacturing, shipping and handling costs and costs associated with our warehouses and distribution network. Gross margin measures our gross profit as a percentage of net sales. With respect to our proprietary ~~products, we have a manufacturing network that includes leased manufacturing facilities where we manufacture finished goods,~~Daytona Beach, Florida, as well as ~~third-party~~our contract manufacturing ~~facilities from~~partner in Plano, Texas. We have implemented a variety of policies and procedures to ensure the health and safety of our workforce, including staggering break times, adding additional shifts to enhance social distancing, enhancing sanitation procedures, providing personal protective equipment to employees, and requiring social distancing. We have also provided a $2 an hour temporary wage increase for our production employees.

Our corporate and administrative personnel have been fully functional since we closed various administrative offices to employees and the general public, and implemented enhanced social distancing and work-from-home policies. It is expected that our corporate function can remain fully functional while our employees work-from-home for an indefinite period of time. We expect to continually review and adjust to local health conditions for the various jurisdictions in which we ~~purchase~~operate.

We are taking precautions to protect the safety and well-being of our employees while providing uninterrupted deliveries of products to our retailer partners. However, no assurance can be given that these actions will be sufficient, nor can we predict the level of disruption that will occur should the COVID-19 pandemic and its related macro-economic risks continue for an extended period of time. Additional information regarding risks and uncertainties to our business and results of operations related to the COVID-19 pandemic are set forth in Part II, Item 1A of this report.

Recent Developments

During the three months ended March 31, 2020, the Company executed an Asset Purchase Agreement (the “Purchase Agreement”) to acquire the U.S. rights to Capstar® and CapAction® and related assets (the “Acquisition”) from Elanco US Inc. (“Elanco”) for $95 million, plus the cost of certain outstanding finished ~~products predominately on~~goods inventory in saleable condition. The closing of the transaction is contingent upon customary closing conditions, including, among others, the approval of the acquisition under a ~~dollar-per-unit basis. Since our inception in 2010, we~~consent order issued by the U.S. Federal Trade Commission. The parties have ~~worked closely with our contract manufacturers to negotiate lower costs through increased volume of purchases and price negotiations.~~agreed that the Acquisition will not close earlier than July 1, 2020. The ~~gross margin on our proprietary value-branded products~~Company is higher than on our distributed products. For distributed products, our costs are driven largely by whether we source the product direct from the manufacturer or a licensed distributor. Increasingly, PetIQ sources distributed brands direct from the manufacturer or from licensed distributors.

~~General and Administrative Expenses~~

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

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

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

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

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~~Net Income (Loss)~~

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

Results of Operations

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

Three months ended

% of Net sales

$'s in 000's

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net sales

$
60,554

$
41,671

100.0
%

100.0
%
Cost of sales

48,037

35,511

79.3
%

85.2
%
Gross profit

12,517

6,160

20.7
%

14.8
%
Operating expenses









General and administrative expenses

10,739

7,942

17.7
%

19.1
%
Operating income

1,778

(1,782)

2.9
%

(4.3)
%
Interest expense

(352)

(737)

(0.6)
%

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

(31)

2

(0.1)
%

0.0
%
Loss on debt extinguishment

—

—

—
%

—
%
Other income, net

14

5

0.0
%

0.0
%
Total other expense, net

(369)

(730)

(0.6)
%

(1.8)
%
Pretax net income

1,409

(2,512)

2.3
%

(6.0)
%
Provision for income taxes

(550)

—

(0.9)
%

—
%
Net income

859

(2,512)

1.4
%

(6.0)
%


	For the Three Months Ended				% of Net Sales
$'s in 000's	March 31, 2020		March 31, 2019		March 31, 2020		March 31, 2019
Product sales	$	166,280	$	126,084	89.0	%	84.9	%
Services revenue		20,498		22,352	11.0	%	15.1	%
Total net sales		186,778		148,436	100.0	%	100.0	%
Cost of products sold		134,779		108,064	72.2	%	72.8	%
Cost of services		19,845		15,642	10.6	%	10.5	%
Total cost of sales		154,624		123,706	82.8	%	83.3	%
Gross profit		32,154		24,730	17.2	%	16.7	%
General and administrative expenses		31,690		20,538	17.0	%	13.8	%
Contingent note revaluations (gain) loss		—		(680)	—	%	(0.5)	%
Operating income		464		4,872	0.2	%	3.3	%
Interest expense, net		4,704		(1,937)	2.5	%	(1.3)	%
Foreign currency loss, net		(73)		(122)	(0.0)	%	(0.1)	%
Other income, net		(365)		13	(0.2)	%	0.0	%
Total other expense, net		4,266		(2,046)	2.3	%	(1.4)	%
Pretax net (loss) income		(3,802)		2,826	(2.0)	%	1.9	%
Benefit (provision) from income taxes		1,169		(500)	0.6	%	(0.3)	%
Net (loss) income	$	(2,633)	$	2,326	(1.4)	%	1.6	%

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


	For the three months ended
$'s in 000's	March 31, 2020		March 31, 2019
Services segment sales:
Same-store sales	$	18,216	$	20,836
Non same-store sales		2,282		1,516
Net services segment sales		20,498		22,352
Products segment sales		166,280		126,084
Total net sales		186,778		148,436

Adjusted EBITDA
Products		24,279		13,556
Services		1,989		5,277
Unallocated Corporate		(11,810)		(7,961)
Total Adjusted EBITDA	$	14,458	$	10,872

Three Months Ended March 31, 2020 Compared With Three Months Ended March 31, 2019

Net sales

Consolidated Net Sales

Consolidated net sales increased $38.3 million, or 26%, to $186.8 for the three months ended March 31, 2020, compared to $148.4 million for the three months ended March 31, 2019. This increase was driven by the expansion of manufactured items as a result of the Perrigo Animal Health Acquisition, other growth in the Products segment related to distributed products, offset by declining sales in the Services segment due to COVID-19 related closures.

Products Segment

Product sales increased $40.2 million, or 32%, to $166.3 million for the three months ended March 31, 2020, compared to $126.1 million for the three months ended March 31, 2019. This increase was driven by accelerated growth in

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Nine months ended

% of Net sales

$'s in 000's

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net sales

$
214,761

$
155,249

100.0
%

100.0
%
Cost of sales

174,093

130,356

81.1
%

84.0
%
Gross profit

40,668

24,893

18.9
%

16.0
%
Operating expenses









General and administrative expenses

27,421

24,307

12.8
%

15.7
%
Operating income

13,247

586

6.2
%

0.4
%
Interest expense

(1,351)

(2,389)

(0.6)
%

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

(152)

(83)

(0.1)
%

(0.1)
%
Loss on debt extinguishment

—

(993)

—
%

(0.6)
%
Other income, net

14

661

0.0
%

0.4
%
Total other expense, net

(1,489)

(2,804)

(0.7)
%

(1.8)
%
Pretax net income

11,758

(2,218)

5.5
%

(1.4)
%
Provision for income taxes

(550)

—

(0.3)
%

—
%
Net income

11,208

(2,218)

5.2
%

(1.4)
%

manufactured products led by those produced in the newly acquired Omaha facilties and by velocity growth within current customers of distributed products.

~~Three Months Ended September 30, 2017 Compared With Three Months Ended September 30, 2016~~Services Segment

~~Net sales~~

~~Net sales increased $18.9~~Service revenue decreased $1.9 million, or ~~45.3%~~8%, from $22.4 million to ~~$60.6~~$20.5 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$41.7~~the three months ended March 31, 2019. Same-store sales decreased $2.6 million, or 13%, to $18.2 million for the three months ended ~~September 30, 2016. This increase~~March 31, 2020, compared to $20.8 million for the three months ended March 31, 2019. The decrease in same-store sales was driven by ~~expanding item count at existing customers, both~~COVID-19 related closures. Non same-store sales increased $0.8 million or 51%, to $2.3 million for ~~existing~~the three months ended March 31, 2020, compared to $1.5 million for the three months ended March 31, 2019. The increase in non same-store sales was a result of opening 80 additional wellness centers in the 2019 period, as well as the maturation of clinics opened in the past six trailing quarters, offset by the permanent closure of 15 wellness centers in the non-same store sales base and ~~new items.~~ COVID-19 related closures.

Gross profit

Gross profit increased by ~~$6.4~~$7.4 million, or ~~103.2%~~30%, to ~~$12.5~~$32.2 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$6.2~~$24.7 million for the three months ended March 31, 2019~~months~~ ~~ended September 30, 2016.~~. This increase is due to the significant Products sales growth, ~~as well as gross~~and particularly in products manufactured in our Omaha Nebraska facility, which carry a higher margin ~~increases on improved economies of scale and~~than our distributed product ~~mix.~~ sales.

Gross margin increased to ~~20.7%~~17.2% for the three months ended ~~September 30, 2017,~~March 31, 2020, from ~~14.8%~~16.7% for the three months ended ~~September 30, 2016.~~March 31, 2019, driven by product sales growth primarily in higher margin items.

General and administrative expenses

~~General~~Consolidated general and administrative expenses (“G&A”) increased by ~~$2.8~~$11.2 million, or ~~35.2%~~54%, to ~~$10.7~~$31.7 million for the three months ended ~~September 30, 2017~~March 31, 2020, compared to ~~$7.9~~$20.5 million for the three months ended ~~September 30, 2016.~~March 31, 2019. As a percentage of net sales, G&A increased from 13.8% for the first quarter of 2019 to 17.0% for the first quarter of 2020, primarily driven by costs related to the addition of overhead in and to support the Omaha facilities in addition to growth in corporate services.

Products Segment

Products segment G&A increased $3.7 million or 74% to $8.7 million for the three months ended March 31, 2020, compared to $5.0 million for the three months ended March 31, 2019. This increase was driven by acquisitions, resulting in approximately $3.2 million in G&A costs related to the acquired Perrigo Animal Health business, primarily selling and distribution expenses.

Services Segment

Services segment G&A increased $0.5 million, or 13%, to $4.2 million for the three months ended March 31, 2020, compared to $3.7 million for the three months ended March 31, 2019. This increase was driven by additional marketing spend and headcount costs as the Company launches new wellness centers, offset by variable costs in supporting the Services revenue decreases. Nearly all of the G&A growth relates to clinics opened in the last six quarters and therefore is derived from the non same-store sales base or clinic launch expenses.

Unallocated Corporate

Unallocated corporate G&A increased $7.0 million, or 59%, to $18.8 million for the three months ended March 31, 2020, from $11.8 million for the three months ended March 31, 2019. The increase ~~reflects:~~was related to the following:

·§

~~increased merchandising expenses related to more products and customers;~~Increased corporate marketing efforts for approximately $1.9 million;

·§

~~increased~~Additional corporate compensation ~~expense to support overall growth, the addition~~(both stock compensation and wages/bonus) of ~~our stock based compensation plan and related grants, as well as improved operations requiring increased incentive compensation accruals; and~~approximately $1.9 million;

·§

~~bonus payments and other expenses~~Increased professional fees, primarily related to the ~~completion~~increased size of the ~~IPO.~~Company, as well as non-recurring acquisition costs, integration costs, and litigation; and

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§

Other variable costs related to Company growth, such as insurance and information technology.

Interest expense, net

Interest expense, net, ~~decreased $0.4~~increased $2.8 million ~~or 52.2%,~~ to ~~$0.4~~$4.7 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$0.7~~$1.9 million for the three months ended ~~September~~ ~~30, 2016.~~March 31, 2019. This ~~decrease~~increase was driven by additional debt taken on to fund the ~~new debt agreement, entered into~~Perrigo Animal Health Acquisition during 2019.

Provision for income taxes

Our effective tax rate was 30.8% and 17.7% for the three months ended March 31, 2020 and 2019, respectively, with a tax benefit of $1.2 million and tax expense of $0.5 million. The Company’s tax rate is impacted by the ownership structure of Holdco, which changes over time.

Segment Adjusted EBITDA

Effective during the three months ended September 30, 2019, the Company changed its segment measure of profitability for its reportable segments from segment operating income (loss) to Adjusted EBITDA to better align the way the chief operating decision maker views reportable segment operations in ~~December~~light of ~~2016, which reduced interest rates and provided more flexibility on borrowings, as well as seasonal paydowns of debt,~~changes in the Company’s operations, including the ~~full repayment~~increase of ~~the Term loan.~~

~~Pre-tax net income~~

As manufacturing operations as a result of the ~~factors above, pre-tax net income~~Perrigo Animal Health Acquisition in the Products segment and the growth of the Company’s wellness centers, host partners, and regions within the Services segment. For comparability purposes, previous periods have been recast to reflect the measure of segment profitability.

Products Segment

Products segment Adjusted EBITDA increased ~~$3.9~~$10.8 million, or 79% to ~~$1.4~~$24.3 million for the three months ended ~~September 30, 2017~~March 31, 2020, compared to ~~a pre-tax net loss of $2.5~~$13.6 million for the three months ended ~~September 30, 2016.~~March 31, 2019. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced by PetIQ, or are distributed for other manufacturers. The significant growth in Products segment Adjusted EBITDA relates to significant sales growth of manufactured products, primarily produced as the newly acquired Omaha facility.

Services Segment

Services segment Adjusted EBITDA decreased $3.3 million, or 62%, to $2.0 million for the three months ended March 31, 2020, compared to $5.3 million for the three months ended March 31, 2019. Services segment Adjusted EBITDA can fluctuate considerably for the Services segment based on the volume of pets seen in clinics, due to the relatively fixed cost nature of a clinic. Additionally, Services segment earnings are impacted by the Company’s growth strategy of opening new wellness centers and the impact of the Company’s same store portfolio, discussed further below. Services segment Adjusted EBITDA was significantly impacted by the COVID-19 closures, as well as converting some community clinics to wellness centers, which transitions operations into the non-same store category.

Unallocated Corporate

Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including accounting, legal, human resources information technology and headquarters expenses, as well as executive and incentive compensation expenses, and other miscellaneous costs. Unallocated corporate costs have primarily grown due to the growth in the Company, including adding to administrative headcount through acquisitions, as well as headquarters growth to support the larger Company. Adjustments to unallocated corporate include expenses related to specific events, such as the acquisition expenses, fair value of the inventory adjustment, integration costs, and the fair value adjustment to the contingent note. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.

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

~~Net sales~~

~~Net sales increased $59.5 million, or 38.3%, to $214.8 million for the nine months ended September 30, 2017, compared to $155.2 million for the nine months~~ ~~ended~~ ~~September 30, 2016. This increase was driven by expanding item count at existing customers, both for existing and new items.~~

~~Gross profit~~

Gross profit increased by $15.8 million, or 63.4%, to $40.7 for the nine months ended September 30, 2017, compared to $24.9 for the nine months ended September 30, 2016. This increase is due to the increase in net sales, as well as improvement in gross margin. Gross margin ~~increased~~ ~~to 18.9% for the nine months ended September 30, 2017, from 16.0% for the nine months ended September 30, 2016, which was driven by economies of scale in certain products as well as product mix.~~

~~General and administrative expenses~~

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

·

~~increased merchandising costs as part of growing sales;~~

·

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

·

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

~~Interest expense, net~~

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

~~Other income, net~~

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

~~Pre-tax net income~~

~~As a result of the~~ ~~factors~~ ~~above,~~following tables reconcile Segment pre-tax net income ~~increased $14.0 million,~~ to ~~net income of $11.8 million~~Adjusted EBITDA for the ~~nine months ended September 30, 2017, compared to a pre-tax net loss of $2.2 million for the nine months ended September 30, 2016.~~periods presented.


$'s in 000's	Three months ended March 31, 2020
March 31, 2020	Products		Services		Unallocated Corporate		Consolidated
Pretax net (loss) income	$	22,962	$	(3,652)	$	(23,112)	$	(3,802)
Adjustments:
Depreciation		1,317		847		709		2,873
Interest		—		—		4,704		4,704
Amortization		—		—		2,242		2,242
Acquisition costs		—		—		586		586
Stock based compensation expense		—		—		2,558		2,558
Non same-store revenue		—		(2,282)		—		(2,282)
Non same-store costs		—		6,400		—		6,400
Integration costs and costs of discontinued clinics		—		—		454		454
Clinic launch expense		—		676		—		676
Litigation expenses		—		—		49		49
Adjusted EBITDA	$	24,279	$	1,989	$	(11,810)		14,458


$'s in 000's	Three months ended March 31, 2019
March 31, 2019	Products		Services		Unallocated Corporate		Consolidated
Pretax net (loss) income	$	13,003	$	3,017	$	(13,194)	$	2,826
Adjustments:
Depreciation		553		524		577		1,654
Interest		—		—		1,937		1,937
Amortization		—		—		1,279		1,279
Acquisition costs		—		—		576		576
Stock based compensation expense		—		—		1,544		1,544
Non same-store revenue		—		(1,516)		—		(1,516)
Non same-store costs		—		3,252		—		3,252
Fair value adjustment of contingent note		—		—		(680)		(680)
Adjusted EBITDA	$	13,556	$	5,277	$	(7,961)		10,872

Consolidated Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA plus ~~loss on debt extinguishment,~~ ~~litigation~~ ~~expenses, costs associated with becoming a public company, and a supplier receivable write-off. Adjusted EBITDA adjusts~~adjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.

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is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:

·

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

·

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

·

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

·

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

·

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

·

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

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally. You should review the reconciliations of net ~~loss~~(loss) income to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

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⁽⁴⁾

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.

⁽⁵⁾

Clinic launch expenses relate to ~~cases involving~~our Services segment and represent the ~~Company that were favorably resolved in the second quarter of 2016.~~nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business.

Financial Condition, Liquidity, and Capital Resources

Historically, our primary sources of liquidity have been cash ~~flow~~flows from operations, borrowings, and equity ~~contributions.~~capital. As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, our cash and cash equivalents were ~~$46.5~~$28.1 million and ~~$0.8~~$27.3 million, respectively. On March 18, 2020, as a precautionary measure to provide financial flexibility due to uncertainties in the marketplace as a result of COVID-19, the Company proactively drew $25 million against its revolving Credit facility. As of ~~September 30, 2017,~~March 31, 2020, we had ~~$18.1 million outstanding under the revolving credit facility and $1.9~~$84.3 million outstanding under a ~~mortgage,~~revolving credit facility, $219.5 million under a term loan and $29.3 million in other debt. The debt agreements bear interest at ~~4.75%~~rates between 4.3% and ~~4.35%, respectively.~~6.8%.

Our primary cash needs are for working capital. Our maintenance capital expenditures have typically been less than 1.0% of net sales, but we may make additional capital expenditures as necessary to support our growth, such as the ~~purchase of a commercial building for use as our corporate headquarters for $2.4 million during the quarter ended September 30, 2017.~~investment in additional veterinary clinics. Our primary working capital requirements are to carry inventory and receivable levels necessary to support our increasing net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, we had working capital (current assets less current liabilities) of ~~$93.7~~$185.9 million and ~~$43.5~~$112.4 million, respectively.

~~On July~~ Additionally d~~26, 2017, we closed~~uring the ~~initial public offering~~three months ended March 31, 2020, the Company executed an Asset Purchase Agreement (the ~~“IPO”~~“Purchase Agreement”) ~~of 7,187,500 Class A common shares at a price of $16.00 per share. Net proceeds of $106.9 Million , prior~~ to ~~underwriting discount~~acquire the U.S. rights to Capstar® and ~~other offering expenses were utilized to immediately repay $56.0 million aggregate principal amount of preference notes, purchase 133,334 shares of Class B common stock from certain executives~~CapAction® and ~~purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”~~related assets (the “Acquisition”) from ~~PetIQ Holdings, LLC~~Elanco US Inc. (“~~Holdco”~~Elanco”)~~. Holdco utilized~~ for $95 million, plus the ~~proceeds from the sale~~cost of certain outstanding finished goods inventory in saleable condition. The closing of the ~~LLC Interest to pay offering costs and expenses with approximately $45.9 million in net proceeds available for general corporate purposes.~~ Astransaction is contingent upon customary closing conditions, including, among others, the approval of the acquisition under a public company, additional future liquidity needs will include public company costs, the payment of any cash dividends declared by our board, tax distributions to certain Continuing LLC Owners as requiredconsent order issued by the ~~Holdco LLC agreement, and tax payments~~U.S. Federal Trade Commission. The parties have agreed that the Acquisition will not close earlier than July 1, 2020. The Company is in the process of arranging financing to ~~Federal and State governments. Our predecessor for financial reporting purposes, PetIQ, LLC, did not make distributions or incur taxes as a pass through entity.~~complete the Acquisition. There is no assurance that financing will be available at terms advantageous to the Company.

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Cash provided by Financing Activities

Net cash provided by financing activities was ~~$38.3~~$74.2 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020, compared to ~~$0.9~~$6.9 million in net cash provided by financing activities for the ~~nine~~three months ended ~~September 30, 2016. This increase~~March 31, 2019. The change in cash provided by financing activities is primarily driven by the Company’s ~~initial public offering offset by operating cash generation facilitating the repayment~~utilization of ~~borrowed capital.~~its revolving credit facility to fund working capital expansion.

Description of Indebtedness

~~The~~A&R Credit Agreement

In connection with the Perrigo Animal Health Acquisition described in Note 2 – Business Combinations in the notes to the condensed consolidated financial statements, the Company ~~entered into a new~~amended the existing revolving credit agreement ~~(“New~~of PetIQ, LLC and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”) on ~~December 21, 2016. This agreement fully repaid and terminated the A&R Credit Agreement described below.~~July 8, 2019. The ~~New~~Amended Revolving Credit Agreement provides for a secured ~~financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:~~

~~(i) $45.0 million~~ revolving credit facility ~~(“Revolver”) maturing~~of $110 million, with an accordion feature allowing an additional increase up to a total facility of $125 million and extends the maturity date of the revolving facility to July 8, 2024. In addition, the Amended Revolving Credit Agreement reduces the interest rate on ~~December 16, 2019;~~Eurodollar rate loans and modifies certain financial covenants, including eliminating the maximum first lien net coverage ratio. 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.

All obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC 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) ~~$5.0 million term loan (“Term Loans”), requiring equal amortizing payments~~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 ~~24 months.~~

a credit agreement of this type. As of December 31, ~~2016,~~2019, the ~~Company had $5.0 million outstanding as Term Loans~~borrowers and ~~$22.5 million outstanding under the~~ ~~Revolver. The interest rate on the Term Loans was 4.25% and the interest rate on the Revolver was also 4.25%, both~~guarantors thereunder were ~~Base Rate loans.~~

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

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

The 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 March 31, 2020, the borrowers and guarantors thereunder were in compliance with these covenants.

As of March 31, 2020, $84.3 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 3.1% at March 31, 2020.

A&R Term Loan Credit Agreement

Also in connection with the closing of the Perrigo Animal Health Acquisition, the Company amended and restated the existing term loan credit agreement of PetIQ, LLC (the “A&R Term Loan Credit Agreement”) on July 8, 2019. The A&R Term Loan Credit Agreement was increased from $74.1 million to $220.0 million at an interest rate equal to the Eurodollar rate plus 4.50%, the proceeds of which were used to refinance the existing term loan facility and consummate the acquisition.

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.

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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. As of March 31, 2020, 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 March 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.

As of March 31, 2020, $219.5 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 finance $1.9 million of the purchase price of a commercial building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and utilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time.

In connection with the VIP Acquisition, the Company entered into a guarantee note of $10.0 million. As of March 31, 2020, $7.5 million was payable pursuant to the 2018 Contingent Note and $10.0 million was payable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million require quarterly interest payments of 6.75% with the balance payable July 17, 2023.

The Company did not incur any debt issuance costs during the three months ended March 31, 2020, related to the A&R Credit Agreement or the A&R Term Loan Credit Agreement. The Company incurred debt issuance costs of $0.1 million related to the A&R Credit Agreement and zero related to the Term Loan during the three months ended March 31, 2019

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Interest Rate Risk

We are exposed to changes in interest rates because the indebtedness incurred under our ~~New~~A&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of ~~September 30, 2017,~~March 31, 2020, we had variable rate debt of approximately ~~$18.1~~$303.8 million under our ~~New Credit Agreement.~~Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~ by approximately ~~$52 thousand and $235 thousand, respectively.~~$1.2 million.

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Item 4. Controls and Procedures.

Internal Control over Financing Reporting

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

Evaluation of Disclosure Controls and Procedures

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

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

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in our industry; ~~failure of the Fairness to Pet Owners Act of 2017 to become law;~~ reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; ~~our ability to successfully grow our business through acquisitions;~~ our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; ~~risks related to our international operations;~~ our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk ~~Factors’ section~~Factors” of our Annual Report on Form 10-K for the ~~final prospectus for PetIQ, Inc., dated July 20, 2017,~~year ended December 31, 2019, this Quarterly Report on Form 10-Q and our other reports filed with the SEC ~~on July 21, 2017.~~from time to time.

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

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Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the ~~final prospectus~~year ended December 31, 2019, except for ~~PetIQ, Inc.~~the risk factor updated below:

The scale and scope of the recent COVID-19 outbreak and resulting pandemic is unknown and, due to wellness center and community clinic closures and other factors, is likely to result in an adverse impact on our business at least for the near term.

As the U.S. faces the novel COVID-19 pandemic, the Company is following the recommendations of government and health authorities to minimize exposure for its veterinarians, associates, customers and retail partners. As a result, the Company announced on March 19, 2020 that it is temporarily closing all of its veterinary community clinics and wellness centers effective Friday, March 20, 2020. The Company will closely monitor this global health crisis to reopening its community clinics and wellness centers as quickly as practical. The Company will continue to reassess its strategy on a regular, ongoing basis as the situation evolves. Additionally, the rapid spread of COVID-19 globally also has resulted in travel restrictions and disruption and shutdown of certain businesses in the U.S., ~~dated July 20, 2017, and filed with the SEC on July 21, 2017.~~

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

~~Recent Sale of Unregistered Securities~~

~~Simultaneously with the consummation~~certain of our ~~IPO,~~retail partners. We may experience impacts from changes in customer behavior related to pandemic fears, quarantines and market downturns, as well as impacts on our workforce if the virus becomes widespread in any of our markets. If the virus were to affect a significant amount of the workforce employed or operating at our facilities, we ~~issued~~may experience delays or the inability to produce and deliver products to our retail partners on a timely basis. In addition, one or more of our customers, service providers or suppliers may experience financial distress, file for bankruptcy protection, go out of business, or suffer disruptions in their business due to the ~~Continuing LLC Owners~~ ~~8,268,188~~ ~~shares~~COVID-19 outbreak. The global scale and scope of ~~Class B common stock. The issuances~~COVID-19 is unknown and the duration of the ~~Class B common stock described in~~business disruption and related financial impact cannot be reasonably estimated at this ~~paragraph were made in reliance~~time. The extent to which the coronavirus impacts the Company’s results will ultimately depend on ~~Section 4(a)(2) of~~future developments, which are highly uncertain and will include the ~~Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.~~

~~The Continuing LLC Owners have the right, from time to time, to exchange their LLC Interests, along with a corresponding number of shares~~duration of our ~~Class B common stock, for newly issued shares~~wellness center and community clinic closures as well as closures of our ~~Class A common stock~~retail partners, emerging information concerning the severity of COVID-19 and the actions taken by governments and private businesses to attempt to contain COVID-19. However, the Company believes COVID-19 is likely to result in an adverse impact on ~~a one-for-one basis, subject to customary conversion rate adjustments~~our business, results of operations and financial condition, at least for stock splits, stock dividends, reclassifications and similar transactions. Our board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC Interests may, at its option, instead cause Holdco to make a cash payment equal to the volume weighted average market price of one share of our Class A common stock for each LLC Interest exchanged (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Holdco Agreement.near term.

~~Use of Proceeds~~

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PETIQ, INC.

~~November~~May 8, ~~2017~~2020	/s/ John Newland
	John Newland
	Chief Financial Officer

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