UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission File Number:001-38163 |
PetIQ, Inc. | ||
(Exact name of registrant as specified in its charter) | ||
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Delaware | 35‑2554312 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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| 83616 | |
Eagle, Idaho | (Zip Code) | |
(Address of principal executive offices) |
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208‑939‑8900 | ||
(Registrant’s telephone number, including area code) | ||
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Title of Each Class | Trading | Name of Each Exchange on Which Registered | ||
Class A Common Stock, $0.001 par value | PETQ | The Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer |
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Non-accelerated filer | Smaller reporting |
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Emerging growth company ☒ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ☐Yes ☒No
As of NovemberMay 8, 2017,2020, we had 13,222,58324,341,237 shares of Class A common stock and 8,268,1884,039,658 shares of Class B common stock outstanding.
Table of Contents
2
Condensed Consolidated Balance Sheets
(DollarsUnaudited, in thousands)000’s except for per share amounts)
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| September 30, 2017 |
| December 31, 2016 |
| March 31, 2020 |
| December 31, 2019 |
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Current assets |
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Cash and cash equivalents |
| $ | 46,536 |
| $ | 767 |
| $ | 28,108 |
| $ | 27,272 |
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Accounts receivable, net of allowance for doubtful accounts |
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| 24,841 |
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| 17,195 | |||||||
Accounts receivable, net |
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| 131,541 |
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| 71,377 |
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Inventories |
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| 34,654 |
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| 34,232 |
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| 118,738 |
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| 79,703 |
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Supplier prepayments |
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| 2,251 |
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| 2,985 | |||||||
Other current assets |
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| 1,471 |
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| 1,358 |
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| 8,043 |
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| 7,071 |
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Total current assets |
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| 109,753 |
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| 56,537 |
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| 286,430 |
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| 185,423 |
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Property, plant and equipment, net |
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| 14,865 |
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| 13,044 |
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| 54,240 |
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| 52,525 |
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Restricted deposits |
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| 200 |
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| 250 | |||||||
Operating lease right of use assets |
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| 20,582 |
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| 20,785 |
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Deferred tax assets |
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| 9,707 |
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| — |
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| 64,149 |
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| 59,780 |
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Other non-current assets |
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| 1,932 |
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| 2,826 |
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| 3,268 |
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| 3,214 |
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Intangible assets, net of accumulated amortization |
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| 3,522 |
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| 4,054 | |||||||
Intangible assets, net |
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| 117,621 |
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| 119,956 |
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Goodwill |
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| 5,063 |
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| 4,619 |
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| 230,702 |
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| 231,045 |
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Total assets |
| $ | 145,042 |
| $ | 81,330 |
| $ | 776,992 |
| $ | 672,728 |
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Liabilities and member's equity |
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Liabilities and equity |
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Current liabilities |
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Accounts payable |
| $ | 11,860 |
| $ | 9,333 |
| $ | 78,733 |
| $ | 51,538 |
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Accrued wages payable |
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| 1,691 |
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| 1,100 |
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| 6,536 |
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| 9,082 |
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Accrued interest payable |
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| 112 |
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| 44 |
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| 643 |
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| 83 |
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Other accrued expenses |
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| 2,266 |
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| 277 |
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| 5,968 |
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| 3,871 |
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Current portion of long-term debt and capital leases |
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| 145 |
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| 2,321 | |||||||
Current portion of operating leases |
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| 4,770 |
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| 4,619 |
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Current portion of long-term debt and finance leases |
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| 3,841 |
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| 3,821 |
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Total current liabilities |
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| 16,074 |
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| 13,075 |
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| 100,491 |
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| 73,014 |
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Non-current liabilities |
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Long-term debt |
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| 19,928 |
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| 25,158 | |||||||
Obligations under capital leases, less current installments |
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| 403 |
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| 434 | |||||||
Deferred acquisition liability |
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| — |
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| 1,303 | |||||||
Operating leases, less current installments |
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| 16,283 |
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| 16,580 |
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Long-term debt, less current installments |
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| 325,432 |
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| 251,376 |
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Finance leases, less current installments |
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| 3,225 |
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| 3,331 |
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Other non-current liabilities |
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| 336 |
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| 378 |
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| 58 |
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| 117 |
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Total non-current liabilities |
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| 20,667 |
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| 27,273 |
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| 344,998 |
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| 271,404 |
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Commitments and contingencies |
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Commitments and contingencies (Note 13) |
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Equity |
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Members equity |
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| — |
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| 42,941 | |||||||
Additional Paid-in capital |
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| 71,192 |
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| — | |||||||
Class A common stock, par value $.001 per share, 125,000,000 shares authorized, 13,222,583 shares issued and outstanding September 30, 2017 |
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| 13 |
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| — | |||||||
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 |
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| 8 |
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| — | |||||||
Additional paid-in capital |
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| 312,874 |
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| 300,120 |
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Class A common stock, par value $0.001 per share, 125,000 shares authorized; 24,318 and 23,554 shares issued and outstanding, respectively |
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| 24 |
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| 23 |
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Class B common stock, par value $0.001 per share, 100,000 shares authorized; 4,049 and 4,752 shares issued and outstanding, respectively |
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| 4 |
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| 5 |
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Accumulated deficit |
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| (226) |
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| — |
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| (18,006) |
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| (15,903) |
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Accumulated other comprehensive loss |
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| (684) |
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| (1,940) |
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| (1,655) |
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| (1,131) |
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Total stockholders' / member's equity |
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| 70,303 |
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| 41,001 | |||||||
Total stockholders' equity |
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| 293,241 |
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| 283,114 |
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Non-controlling interest |
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| 37,998 |
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| (19) |
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| 38,262 |
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| 45,196 |
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Total equity |
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| 108,301 |
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| 40,982 |
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| 331,503 |
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| 328,310 |
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Total liabilities and equity |
| $ | 145,042 |
| $ | 81,330 |
| $ | 776,992 |
| $ | 672,728 |
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See accompanying notes to the condensed consolidated financial statements
statements.
3
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)
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| Three months ended |
| Nine months ended | ||||||||
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| September 30, 2017 |
| September 30, 2016 |
| September 30, 2017 |
| September 30, 2016 | ||||
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Net sales |
| $ | 60,554 |
| $ | 41,671 |
| $ | 214,761 |
| $ | 155,249 |
Cost of sales |
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| 48,037 |
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| 35,511 |
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| 174,093 |
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| 130,356 |
Gross profit |
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| 12,517 |
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| 6,160 |
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| 40,668 |
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| 24,893 |
Operating expenses |
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General and administrative expenses |
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| 10,739 |
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| 7,942 |
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| 27,421 |
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| 24,307 |
Operating income (loss) |
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| 1,778 |
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| (1,782) |
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| 13,247 |
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| 586 |
Interest expense, net |
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| (352) |
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| (737) |
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| (1,351) |
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| (2,389) |
Foreign currency gain/(loss), net |
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| (31) |
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| 2 |
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| (152) |
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| (83) |
Loss on debt extinguishment |
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| — |
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| — |
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| — |
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| (993) |
Other income, net |
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| 14 |
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| 5 |
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| 14 |
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| 661 |
Total other expense, net |
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| (369) |
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| (730) |
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| (1,489) |
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| (2,804) |
Pretax net income (loss) |
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| 1,409 |
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| (2,512) |
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| 11,758 |
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| (2,218) |
Income tax expense |
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| (550) |
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| — |
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| (550) |
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| — |
Net income (loss) |
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| 859 |
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| (2,512) |
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| 11,208 |
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| (2,218) |
Net income (loss) attributable to noncontrolling interest |
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| 1,085 |
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| (2,512) |
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| 11,434 |
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| (2,218) |
Net loss attributable to PetIQ, Inc. |
| $ | (226) |
| $ | — |
| $ | (226) |
| $ | — |
Comprehensive income/(loss) |
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Net income (loss) |
| $ | 859 |
| $ | (2,512) |
| $ | 11,208 |
| $ | (2,218) |
Foreign currency translation adjustment |
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| 314 |
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| (351) |
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| 829 |
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| (1,407) |
Comprehensive income/(loss) |
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| 1,173 |
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| (2,863) |
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| 12,037 |
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| (3,625) |
Comprehensive income attributable to noncontrolling interest |
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| 1,206 |
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| (2,863) |
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| 12,070 |
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| (3,625) |
Comprehensive loss attributable to member/PetIQ, Inc. |
| $ | (33) |
| $ | — |
| $ | (33) |
| $ | — |
Net loss per share attributable to PetIQ, Inc. Class A common stock(1) |
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-Basic |
| $ | (0.02) |
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| — |
| $ | (0.02) |
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| — |
-Diluted |
| $ | (0.02) |
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| — |
| $ | (0.02) |
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| — |
Weighted Average shares of Class A common stock outstanding |
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-Basic |
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| 13,222,583 |
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| — |
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| 13,222,583 |
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| — |
-Diluted |
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| 13,222,583 |
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| — |
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| 13,222,583 |
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| — |
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| For the Three Months Ended | ||||
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| March 31, 2020 |
| March 31, 2019 | ||
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Product sales |
| $ | 166,280 |
| $ | 126,084 |
Services revenue |
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| 20,498 |
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| 22,352 |
Total net sales |
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| 186,778 |
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| 148,436 |
Cost of products sold |
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| 134,779 |
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| 108,064 |
Cost of services |
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| 19,845 |
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| 15,642 |
Total cost of sales |
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| 154,624 |
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| 123,706 |
Gross profit |
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| 32,154 |
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| 24,730 |
Operating expenses |
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General and administrative expenses |
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| 31,690 |
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| 20,538 |
Contingent note revaluations gain |
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| — |
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| (680) |
Operating income |
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| 464 |
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| 4,872 |
Interest expense, net |
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| (4,704) |
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| (1,937) |
Foreign currency gain (loss), net |
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| 73 |
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| (122) |
Other income, net |
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| 365 |
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| 13 |
Total other expense, net |
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| (4,266) |
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| (2,046) |
Pretax net (loss) income |
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| (3,802) |
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| 2,826 |
Income tax benefit (expense) |
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| 1,169 |
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| (500) |
Net (loss) income |
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| (2,633) |
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| 2,326 |
Net (loss) income attributable to non-controlling interest |
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| (530) |
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| 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 |
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Basic |
| $ | (0.09) | �� | $ | 0.07 |
Diluted |
| $ | (0.09) |
| $ | 0.07 |
Weighted Average shares of Class A common stock outstanding |
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Basic |
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| 23,728 |
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| 21,800 |
Diluted |
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| 23,728 |
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| 21,978 |
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See accompanying notes to the condensed consolidated financial statementsstatements.
4
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited, in 000’s)
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| For the Three Months Ended | ||||
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| March 31, 2020 |
| March 31, 2019 | ||
Net (loss) income |
| $ | (2,633) |
| $ | 2,326 |
Foreign currency translation adjustment |
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| (574) |
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| 539 |
Comprehensive (loss) income |
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| (3,207) |
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| 2,865 |
Comprehensive (loss) income attributable to non-controlling interest |
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| (623) |
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| 848 |
Comprehensive (loss) income attributable to PetIQ |
| $ | (2,584) |
| $ | 2,017 |
See accompanying notes to the condensed consolidated financial statements.
5
PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)000’s)
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| September 30, 2017 |
| September 30, 2016 | ||
Cash flows from operating activities |
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Net income |
| $ | 11,208 |
| $ | (2,218) |
Adjustments to reconcile net income to net cash used for operating activities |
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Depreciation and amortization of intangible assets and loan fees |
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| 2,725 |
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| 2,885 |
Loss on disposition of property |
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| 14 |
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| 52 |
Foreign exchange loss on liabilities |
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| 204 |
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| 52 |
Stock based compensation expense |
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| 246 |
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| — |
Deferred tax adjustment |
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| 351 |
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| — |
Warranty settlement gain |
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| — |
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| (645) |
Changes in assets and liabilities |
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Accounts receivable |
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| (7,257) |
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| (882) |
Inventories |
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| (316) |
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| (2,015) |
Prepaid expenses and other assets |
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| 1,137 |
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| 3,663 |
Accounts payable |
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| 1,797 |
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| (1,125) |
Accrued wages payable |
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| 570 |
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| (940) |
Other accrued expenses |
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| 287 |
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| (163) |
Net cash provided by (used in) operating activities |
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| 10,966 |
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| (1,336) |
Cash flows from investing activities |
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Purchase of property, plant, and equipment and intangibles |
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| (3,558) |
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| (1,604) |
Net cash used in investing activities |
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| (3,558) |
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| (1,604) |
Cash flows from financing activities: |
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Proceeds from issuance of long term debt |
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| 206,020 |
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| 167,052 |
Principal payments on long term debt |
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| (213,522) |
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| (172,785) |
Proceeds from Initial Public Offering (IPO) of Class A Shares, net of underwriting discounts and offering costs |
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| 104,010 |
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| — |
Repayment of Preference notes |
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| (55,960) |
|
| — |
Change in restricted cash and deposits |
|
| 50 |
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| 6,894 |
Purchase of LLC units from Continuing LLC Owners |
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| (2,133) |
|
| — |
Principal payments on capital lease obligations |
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| (86) |
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| (62) |
Payment of deferred financing fees and debt discount |
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| (42) |
|
| (248) |
Net cash provided by financing activities |
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| 38,337 |
|
| 851 |
Net change in cash and cash equivalents |
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| 45,745 |
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| (2,089) |
Effect of exchange rate changes on cash and cash equivalents |
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| 24 |
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| (206) |
Cash and cash equivalents, beginning of period |
|
| 767 |
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| 3,250 |
Cash and cash equivalents, end of period |
| $ | 46,536 |
| $ | 955 |
Supplemental cash flow information |
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Interest paid |
| $ | 1,116 |
| $ | 2,150 |
Property, plant, and equipment acquired through accounts payable |
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| (53) |
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| (46) |
Capital lease additions |
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| 17 |
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| 127 |
Issuance of preference notes for LLC Interests |
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| 55,960 |
|
| — |
Establishment of deferred tax asset from step-up in basis |
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| 9,814 |
|
| — |
Accrued tax distribution |
|
| 709 |
|
| — |
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| For the Three Months Ended March 31, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities |
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|
|
Net (loss) income |
| $ | (2,633) |
| $ | 2,326 |
Adjustments to reconcile net (loss) income to net cash used in operating activities |
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|
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Depreciation and amortization of intangible assets and loan fees |
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| 5,470 |
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| 3,091 |
Gain on disposition of property, plant, and equipment |
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| (375) |
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| (34) |
Stock based compensation expense |
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| 2,558 |
|
| 1,544 |
Deferred tax adjustment |
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| (1,169) |
|
| 500 |
Contingent note revaluation |
|
| — |
|
| (680) |
Other non-cash activity |
|
| 33 |
|
| 17 |
Changes in assets and liabilities |
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Accounts receivable |
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| (60,217) |
|
| (20,444) |
Inventories |
|
| (39,069) |
|
| (20,366) |
Other assets |
|
| (1,090) |
|
| 21 |
Accounts payable |
|
| 27,827 |
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| 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 |
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|
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|
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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 |
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|
|
|
|
|
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 statementsstatements.
56
PetIQ, Inc.
Condensed Consolidated Statements of Members/Stockholders EquityCash 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. |
67
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.
8
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 purposeProducts segment consists of completing a public offeringour manufacturing and distribution business. The Services segments consists of veterinary services, and related transactions in orderproduct sales, provided by the Company directly to carry on the business of PetIQ, LLC, an Idaho limited liability company. The Company isconsumers.
We are the sole managing member of PetIQ Holdings, LLC (“Holdco”HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, through Holdco, will operate and control all of the business and affairs of Opco and continue to conduct the business now conducted by Opco and its subsidiaries. The Company’s fiscal year end is December 31.
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, 2017March 31, 2020 and December 31, 20162019 and for the three and nine months ended September 30, 2017 ended March 31, 2020 and 20162019 are unaudited. The condensed consolidated balance sheet as of December 31, 20162019 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, 20162019 and related notes thereto included in the final prospectus for PetIQ, Inc. dated July 20, 2017most 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.
79
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 assetsaccrued 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 reservessuch 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 CurrenciesThe 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 usewas 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 itemsContingent Notes at each reporting period prior to the average exchange rateMeasurement 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 depositsacquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are not consideredclassified as cash and cash equivalents. The Company maintains its cash accounts in various deposit accounts, the balances of which at times exceeded federal deposit insurance limits during the periods presented.
Receivables and Credit Policy
Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms generally requiring payment within 3045 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for doubtful 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 hasOther 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 |
10
|
|
|
|
|
|
|
$'s in 000's |
| March 31, 2020 |
| December 31, 2019 | ||
Trade receivables |
| $ | 124,845 |
| $ | 67,551 |
Other receivables |
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| 7,040 |
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| 4,257 |
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| 131,885 |
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| 71,808 |
Less: Allowance for doubtful accounts |
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| (344) |
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| (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 usingon the first-in first-out (“FIFO”) method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management
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considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Major components of inventories consist of the following as of:
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| September 30, 2017 |
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Raw materials and work in progress |
| $ | 5,227 |
| $ | 5,924 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization is
Revenue is
The Company 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 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 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. 12 Both trade marketing expense and product introductory fees are recognized as 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
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
Contract balances Contract asset and liability balances as of March 31, 2020 and December 31, 2019 are immaterial. The Company does not Cost of Services Cost of Services are comprised of all service and product costs related to 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 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 13 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, 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
Adopted Accounting
Effective January 1, 2020, the
Note 2
Perrigo Animal Health Acquisition On July 8, 2019, PetIQ, through Opco, completed the
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, 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:
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. 15 Note 3 – Property, Plant, and Equipment Property, plant, and equipment consists of the following at:
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:
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 16 Estimated future amortization expense for each of the following years is as follows:
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:
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 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
The 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. 17 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
balance payable July 17, 2023. The following represents the Company’s
18 Future maturities of
The Company did not incur any debt issuance costs during the three months ended March 31, 2020. The Company incurred debt issuance costs of
ended March 31, 2019. Note The Company leases certain real estate For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of We elected the short-term lease exemption for all leases The Company's leases may include options to
19 Other information related to leases was as follows as of:
Annual future commitments under non-cancelable leases as of
Supplemental cash flow information:
Note As a result of the
Our effective tax rate
The Company has assessed the realizability of the net deferred tax assets 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 Note
Basic and Diluted (Loss) Earnings per Share
Basic earnings per share of Class A common stock is computed by dividing net income
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:
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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.
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.
Note
PetIQ, Inc. Omnibus Incentive Plan The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”) provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A Common Stock of the Company. As of March 31, 2020, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
Stock Options The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled
22
The
The fair value of The
Note 10 – Stockholders’ Equity Exchanges During the
Common Stock. The LLC Agreement
Note
Note For the three months ended March 31, 2020 and 2019, respectively, the Company owned a weighted average of 83.7% and 77.4% of Holdco,
Note The Company has significant exposure to customer concentration. During the three At Note Litigation Contingencies
The Company has a 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 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 The Company has two operating The segments 25 Financial information relating to the Company’s operating segments for the three
The following table reconciles Segment Adjusted EBITDA to Net (loss) income for the periods presented.
26
Supplemental geographic disclosures are below.
Property, plant, and equipment by geographic location is below.
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.
Note
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
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,
Overview PetIQ is a
We are the sole managing member of PetIQ Holdings, LLC ("Holdco"), a
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 The amount of the Our
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 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
Results of Operations
The following
The following tables set forth financial information relating to the Company’s operating segments for the periods presented:
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
manufactured products led by those produced in the newly acquired Omaha facilties and by velocity growth within current customers of distributed products.
Gross profit Gross profit increased by Gross margin increased to General and administrative expenses
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
32
Interest expense, net Interest expense, net, 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
Products Segment Products segment Adjusted EBITDA increased 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.
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
The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner. Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA 34 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:
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
The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA for the periods presented.
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Financial Condition, Liquidity, and Capital Resources Historically, our primary sources of liquidity have been cash 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
We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facility will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms. Cash Flows Cash Net cash Cash used in Investing Activities Net cash used in investing activities was 36 Cash provided by Financing Activities Net cash provided by financing activities was Description of Indebtedness
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
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) a credit agreement of this type. As of December 31,
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.
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 38 Item 4. Controls and Procedures. Internal Control over Financing Reporting
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.
Changes in Internal Control over Financial Reporting
Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. 39 in our industry; 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.
We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described During the year ended December 31, 2019, the Company recorded a liability of $1 million for contract termination costs, related to a settlement for alleged breach of contract. The expense is included within General and Administrative expenses for the quarter ended March 31, 2020. On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Plaintiffs”) filed suit in the United States District Court for the Northern District of California against PetIQ and VIP Petcare Holdings, Inc. for alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and we subsequently filed a second Motion to Dismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Dismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims. Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and 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. Additionally the Company is subject to various litigation related to its products as well as other corporate litigation. No individual item is significant. 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 March 31, 2020, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations. 40 There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the 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.,
Item 5. Other
* Filed herewith
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.
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| March 31, 2020 |
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Raw materials |
| $ | 10,755 |
| $ | 10,675 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Work in progress |
|
| 2,178 |
|
| 1,717 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finished goods |
|
| 29,427 |
|
| 28,308 |
|
| 105,805 |
|
| 67,311 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total inventories |
| $ | 34,654 |
| $ | 34,232 |
| $ | 118,738 |
| $ | 79,703 |
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation and amortization is providedcalculated using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and capitalfinance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales and general and administrative expenses in the condensed consolidated statements of operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows:
|
|
| |
Computer equipment and software |
| 3 years | |
Vehicle and vehicle accessories | 3-5 years | ||
Buildings |
| 33 years | |
Equipment |
|
| 2-15 years |
Leasehold improvements |
|
| 3-15 years |
Furniture and fixtures |
|
| 5-10 years |
Depreciation expense was $684 and $375 for the three months ended September 30, 2017, and 2016, respectively, and $1,795 and $1,350 for the nine months ended September 30, 2017 and 2016, respectively.Revenue Recognition
Restricted DepositsWhen Performance Obligations Are Satisfied
Restricted deposits are amounts requiredA performance obligation is a promise in a contract to be held by the Company in segregated accounts for various state licensing regulations in relationtransfer a distinct good or service to the salecustomer and is the unit of regulated prescription pet medications. Restricted depositsaccount for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of September 30, 2017, and December 31, 2016 were $200 and $250, respectively. Interest earned on restricted depositsveterinary services.
Revenue is included in other income when earned.
Deferred Acquisition Liability
The Company has a deferred acquisition liability related to an acquisition that occurred in 2013. The liability is denominated in Euros and requires annual payments basedgenerally recognized for product sales on a percentage of gross profit from the sales of certain products, and any amounts not repaid by the annual payments will be duepoint in June 2018. The current balance recorded as of September 30, 2017, and December 31, 2016 was $1,745 and $250, respectively, andtime basis when product control is included in other accrued expenses. The non-current portion recorded as of December 31, 2016 was $1,303, and is included in deferred acquisition liability.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shippedtransferred to the customer. For customers with Free on Board ("FOB") destinationIn general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, a provision is recorded to exclude shipments determined to be in-transit to these customers atas the endcustomer can direct the use and obtain substantially all of the reporting period. A sales return allowance is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, returned goods and other items.remaining benefits from the asset at this point in time.
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The Company offersdetermined that certain products manufactured to a varietycustomer’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 promotionsthe 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 incentivesfinal 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 suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.
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Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and store placement. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in 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
Shippingrelated refund liability is estimated and handling costs are recorded as cost ofa reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience.
Contract balances
Contract asset and liability balances as of March 31, 2020 and December 31, 2019 are immaterial. The Company does not billedhave significant deferred revenue or unbilled receivable balances.
Cost of Services
Cost of Services are comprised of all service and product costs related to customers.the delivery of veterinary services, including but not limited to, salaries 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, 2017March 31, 2020 and 2016, respectively2019, 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 $427asset 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 forregulatory 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, 2017U.S. Food and 2016, respectively. AdvertisingDrug 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 forincurred 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, 2017March 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 companyCompany consults with both internal and external legal counsel related to litigation.litigation.
Recently Issued
Adopted Accounting PronouncementsStandard Updates
In February 2016,
Effective January 1, 2020, the FASB issuedCompany 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 issuedrequires an organization to increase transparencymeasure 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 assetsreasonable and lease liabilities on the balance sheet and disclosing keysupportable information. Organizations will now use forward-looking information about leasing arrangements.to better estimate their credit losses. The amendments inCompany 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 uponusing a modified retrospective transition approach for leases existing at, or entered into after, the beginningapproach. Under this method of the earliest comparative period presented in the
10
financial statements, with optional practical expedients. Based on a preliminary assessment,adoption, the Company expectsdetermined that most of its operating lease commitments will be subjectthere was no cumulative-effect adjustment to beginning Retained earnings on the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in an increase in the assets and liabilities on ourcondensed consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several related Accounting Standards Updates (“ASUs”) (“Topic 606”), which provide guidance for recognizing revenue from contracts with customers. The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. Topic 606 will be effective commencing with our quarter ending March 31, 2018. We currently anticipate adopting Topic 606 using the modified retrospective transition approach that may result in a cumulative adjustment to beginning retained earnings as of January 1, 2018. Based on the analysis to date, the Company expects the new standard will require accelerated recognition of trade promotions and customer incentives. These transactions are currently recognized at the later of the sale of goods or agreement, however under the new standard the Company will estimate incentives to be offered to customers as part of the sales price. The Company does not expect the change to be material. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will be effective commencing with our quarter ending March 31, 2018. The Company does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU requires entities to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard is effective for annual and interim reporting periods beginning after December 15, 2016. The adoptionAdoption of this standard in first quarter of 2017 did not have a material effect on our financial statements.
In March 2016,impact the FASB issued ASU” No. 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718).” ASU No. 2016-09 simplifies the accounting for share-based payment transactions, including accounting forCompany’s income before income taxes forfeitures, statutory tax withholding requirements, and classification inhad no impact on the condensed consolidated statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interim periods beginning in the first interim period within the year of adoption. Any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted the provisions of this standard effective January 1, 2017. The Company elected to continue to recognize estimated forfeitures over the term of the awards. The adoption of the standard did not have a material impact on the Company’s financial condition, results of operations, cash flows and disclosures.
Note 2 - Debt– Business Combination
The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016. This agreement fully repaid and terminated
Perrigo Animal Health Acquisition
On July 8, 2019, PetIQ, through Opco, completed the A&R Credit Agreement described below. The New Credit Agreement provides for secured financingPerrigo Animal Health Acquisition. Sergeant’s is now an indirect wholly-owned subsidiary of $50,000 in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:
(i) $45,000 revolving credit facility (“Revolver”) maturing on December 16, 2019; and
(ii) $5,000 term loan (“Term Loans”), requiring equal amortizing payments for 24 months.the Company.
1114
AsThe fair value of Decemberthe 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.
15
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 outstandinghas acquired which have not yet been completed or approved. The IPRD acquired as Term Loanspart of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and $22,473 outstandingregulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development.
16
Estimated future amortization expense for each of the following years is as follows:
|
|
|
|
|
|
|
Years ending December 31, ($'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 rateAmended 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 onguarantees 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 Loanseach borrower and had $18,059 outstandingguarantor 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 NewAmended 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 includingevents of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio andcovenant 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 wasborrower 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.
17
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”), comprisedguarantee 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 amountcollective balance of term loans$27.5 million and $7,000 revolving credit facility. Borrowings underrequire 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 termlong-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 |
18
Future maturities of long termlong-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 ninethree months of 2016. The debt transaction resulted in a loss on debt extinguishment of $993, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs.
12
ended March 31, 2019.
Note 3 -6 – Leases
The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182019 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many
For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term.
We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease.
The Company's leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment, vehicles, and leases within supply agreements primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company's leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms.
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||
$'s in 000's |
| March 31, 2020 |
| March 31, 2019 | ||
Finance lease cost |
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 391 |
| $ | 290 |
Interest on lease liabilities |
|
| 82 |
|
| 50 |
Operating lease cost |
|
| 1,831 |
|
| 910 |
Variable lease cost(1) |
|
| 175 |
|
| 72 |
Short-term lease cost |
|
| 5 |
|
| 14 |
Sublease income |
|
| (75) |
|
| — |
Total lease cost |
| $ | 2,409 |
| $ | 1,336 |
(1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
19
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 $883 and $775 as of September 30, 2017 and December 31, 2016, respectively. Total operating lease expense for the three and nine months ended September 30, 2017 and 2016 totaled $449 and $472, and $1,357 and $1,250, respectively.
Note 4 - 7 – Income TaxesTax
As a result of the IPOCompany’s initial public offering and related reorganization transactions completed in July 2017, the Company holds anheld a majority of the economic interest of approximately 62% in Holdco and consolidates the financial position and results of Holdco. The approximate 38%remaining ownership of Holdco not held by the Company is considered noncontrollinga non-controlling interest. Holdco is treated as a partnership for income tax reporting. Holdco’s members, including the Company, are liable for federal, state, and local income taxes based on their share of Holdco’s taxable income.
The Company’s
Our effective tax rate is significantly less(ETR) from continuing operations was 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 resulteffect 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
1320
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 fromas 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 |
21
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.
SharesFor 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.
14
Note 69 – Stock Based Compensation
Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan
The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”) provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of September 30, 2017, 1,109,998March 31, 2020, 1,299 thousand shares were available for issuance under the Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees
The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A Common Stock of the Company. As of March 31, 2020, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
Stock Options
The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 yearsyears.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $246$2.2 million for the three and nine months ended September 30, 2017.March 31, 2020, and $1.4 million for the three months ended March 31, 2019. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periodperiods ended September 30:March 31, 2020 and 2019:
| ||||
| ||||
|
| |||
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2020 |
| March 31, 2019 | ||||
Expected term (years) (1) |
|
| 6.25 |
|
|
| 6.25 |
|
Expected volatility (2) |
|
| 33.91 | % |
|
| 35.00 | % |
Risk-free interest rate (3) |
|
| 0.72 | % |
|
| 2.74 | % |
Dividend yield (4) |
|
| 0.00 | % |
|
| 0.00 | % |
(1) | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
22
(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 |
15
The following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
|
|
| Remaining | ||||
|
|
|
| Average |
| Aggregate |
| Contractual | ||||
|
| Stock |
| Exercise |
| Intrinsic |
| Life | ||||
|
| Options |
| Price |
| Value |
| (years) | ||||
Outstanding at December 31, 2016 |
|
| — |
|
|
|
|
|
|
|
|
|
Granted |
|
| 804,049 |
| $ | 16 |
|
|
|
|
|
|
Exercised |
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
|
|
|
|
|
|
|
Cancelled |
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
|
| 804,049 |
| $ | 16 |
| $ | 8,909 |
|
| 9.8 |
Options exercisable at September 30, 2017 |
|
| — |
|
|
|
|
|
|
|
|
|
Theweighted average grant date fair value of stock options granted during the period ended September 30, 2017March 31, 2020 was $6.08$6.70 per option. At September 30, 2017,March 31, 2020, total unrecognized compensation cost related to unvested stock options was $4.4$13.2 million and is expected to be recognized over a weighted-average period of 3.82.7 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
| Aggregate |
| Remaining | ||||
|
| Stock |
| Average |
| Intrinsic |
| Contractual | ||||
|
| Options |
| Exercise |
| Value |
| Life | ||||
|
| (in 000's) |
| Price |
| (in 000's) |
| (years) | ||||
Outstanding at January 1, 2019 |
|
| 1,945 |
| $ | 23.45 |
| $ | 5,527 |
|
| 9.1 |
Granted |
|
| 423 |
|
| 27.54 |
|
|
|
|
|
|
Exercised |
|
| (119) |
|
| 19.51 |
|
|
|
|
|
|
Forfeited |
|
| (168) |
|
| 21.92 |
|
|
|
|
|
|
Cancelled/Expired |
|
| (9) |
|
| 25.70 |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 2,072 |
| $ | 24.63 |
| $ | 6,266 |
|
| 8.0 |
Granted |
|
| 478 |
|
| 19.49 |
|
|
|
|
|
|
Exercised |
|
| (46) |
|
| 21.65 |
|
|
|
|
|
|
Forfeited |
|
| (13) |
|
| 22.98 |
|
|
|
|
|
|
Outstanding at March 31, 2020 |
|
| 2,491 |
| $ | 23.70 |
| $ | 5,974 |
|
| 7.9 |
Options exercisable at March 31, 2020 |
|
| 870 |
|
|
|
|
|
|
|
|
|
Note 7 - Stockholders’ Equity
Reorganization TransactionsRestricted Stock Units
In connection withThe Company awards RSUs to certain employees and directors under the IPO on July 20, 2017,Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, completedall unvested RSUs will be forfeited and the following Reorganization Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Following the completion of the Reorganization TransactionsCompany’s common stock on the date of grant. At March 31, 2020, total unrecognized compensation cost related to unvested RSUs was $7.5 million and IPO, PetIQ owned 61.5%is expected to vest over a weighted average 3.5 years.
The fair value of HoldCo. these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $0.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.
The remaining 38.5% of Holdco was held byfollowing table summarizes the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ. As a resultactivity of the Reorganization Transactions, PetIQ becameCompany’s RSUs for the sole managing member of Holdco and has the sole voting power in, and controls the management of, Holdco. Accordingly, the Company consolidated the financial results of Holdco and reported a non-controlling interest in its consolidated financial statements.period ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
| Weighted | ||
|
| Number of |
| Average | ||
|
| Shares |
| Grant Date | ||
|
| (in 000's) |
| Fair Value | ||
Outstanding at January 1, 2019 |
|
| 51 |
| $ | 33.16 |
Granted |
|
| 123 |
|
| 27.61 |
Settled |
|
| (25) |
|
| 30.43 |
Forfeited |
|
| (15) |
|
| 30.58 |
Outstanding at December 31, 2019 |
|
| 133 |
| $ | 28.85 |
Granted |
|
| 243 |
|
| 19.49 |
Settled |
|
| (22) |
|
| 27.56 |
Forfeited |
|
| (1) |
|
| 32.53 |
Nonvested RSUs at March 31, 2020 |
|
| 353 |
| $ | 22.48 |
1623
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.
Amendmentthree 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 stockexercised exchange rights and the number of LLC Interests owned by PetIQ (subject to certain exceptions for treasury sharesexchanged 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 ofcorresponding LLC Interests for newly issued Class A common stock, there were 13,222,583 shares of Class A common stock outstanding and 8,268,188 shares of Class B common stock outstanding.
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, Holdco amended and restated the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interests in Holdco, the LLC Interests, (ii) exchange all of the then-existing membership interests for LLC Interests of Holdco and (iii) appoint the Company as the sole managing member of Holdco.
Common Stock. The LLC Agreement also provides thatgenerally allows for exchanges on the Continuing LLC Owners may from time to time atlast day of each of their options require Holdco to exchange all or a portion of their LLC Interests in exchange for, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC interests), shares of the Company’s Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of suchcalendar month.
17
Class A common stock or such cash, as applicable, for such LLC interests. The Continuing LLC Owners may exercise such redemption right for as long as their LLC interests remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC interests pursuant to the terms of the LLC Agreement, a number of shares of the Company’s Class B common stock will be cancelled for no consideration on a one-for-one basis with the number of LLC interests so redeemed or exchanged.
The amendment also requires that Holdco, at all times, maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC interests of Holdco owned by PetIQ, Inc. and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by Continuing LLC Owners and the number of LLC Interests of Holdco owned by the Continuing LLC Owners.
Note 8 -11 – Non-Controlling Interests
In connection withThe following table presents the Reorganization Transactions describedoutstanding LLC Interests and changes in LLC Interests for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| LLC |
|
|
|
|
|
|
|
| LLC |
|
$'s in 000's |
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of January 1, 2019 |
|
| 6,547 |
|
| 21,620 |
|
| 28,167 |
|
| 23.2% | 76.8% |
Stock based compensation adjustments |
|
| — |
|
| 140 |
|
| 140 |
|
|
|
|
Exchange transactions |
|
| (1,794) |
|
| 1,794 |
|
| — |
|
|
|
|
As of December 31, 2019 |
|
| 4,752 |
|
| 23,554 |
|
| 28,306 |
|
| 16.8% | 83.2% |
Stock based compensation adjustments |
|
|
|
|
| 61 |
|
| 61 |
|
|
|
|
Exchange transactions |
|
| (703) |
|
| 703 |
|
| — |
|
|
|
|
As of March 31, 2020 |
|
| 4,049 |
|
| 24,318 |
|
| 28,367 |
|
| 14.3% | 85.7% |
Note 7 — Stockholders’ Equity, PetIQ becamethat certain figures shown in the sole managing membertable above may not recalculate due to rounding.
For the three months ended March 31, 2020 and 2019, respectively, the Company owned a weighted average of 83.7% and 77.4% of Holdco, and, as a result, consolidates the financial results of Holdco.respectively.
The Company reports a non-controlling interest representing the LLC interests of Holdco held by Continuing LLC Owners. Changes in PetIQ’s ownership interest in Holdco while PetIQ retains its controlling interest in Holdco will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC interests of Holdco by the Continuing LLC Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when Holdco has positive or negative net assets, respectively. The Company is also required to make tax distributions based on the LLC Agreement to Continuing LLC Members on a regular basis, these distributions will reduce the noncontrolling interest.
The Company used the net proceeds from its IPO to purchase 3,556,666 newly-issued LLC Interests of Holdco and 133,334 LLC Interests from Continuing LLC Owners. Additionally, in connection with the Reorganization Transactions, the Company acquired 9,532,583 LLC Interests of Holdco.
As of September 30, 2017, there were 21,490,771 LLC Interests outstanding, of which PetIQ owned 13,222,583, representing a 61.5% ownership interest in Holdco.
-0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| Continuing LLC |
|
|
|
|
|
|
|
| Continuing LLC |
|
|
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of September 30, 2017 |
|
| 8,268,188 |
|
| 13,222,583 |
|
| 21,490,771 |
|
| 38.5% | 61.5% |
Note 9 -12 – Customer Concentration
The Company has significant exposure to customer concentration. During the three and nine months ended September 30, 2017 and 2016, three and March 31, 2020 twothreecustomers respectively,individually accounted for more than 10% of sales, individually. In totalcomprising 42% of net sales, for such periods. During the three months ended September 30, 2017 and 2016, the threeMarch 31, 2019 two customers individually accounted for 61% and 68%more than 10% of sales, comprising 33% of net sales, respectively. In total for the nine months ended September 30, 2017 and 2016, the three customers accounted for 61% and 71% of net sales, respectively. sales.
At September 30, 2017 and DecemberMarch 31, 2016 four and four customers, respectively,2020 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 53%45% of outstanding trade receivables, net. At December 31, 2019 two Products segment customers individually accounted for more than 10% of outstanding trade receivables, and and 60%, respectively,accounted for 61% of outstanding trade receivables, net. The customers are customers of the domestic segment.
Note 10 -13 – Commitments and Contingencies
Litigation Contingencies
In May 2017, Bayer Healthcare LLCOn April 4, 2018, Med Vets, Inc. and its affiliatesBay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplier of Advectafor alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and PetLock MAX, which we begansubsequently filed a second Motion to sell in 2017 as our value-branded alternativesDismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Bayer’s K9 Advantix II. Bayer allegesDismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims.
1824
Advecta 3Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and PetLock MAX infringebriefing 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 relatingsupplier 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 damagescure 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 salesthe $20 million alleged by CAP IMthe 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 MAXMarch 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, 2017March 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 areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers.
The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas.net sales and segment Adjusted EBITDA. We exclude from our segments certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses as our corporate functions do not meet the definition of a segment as defined in the accounting guidance related to segment reporting.
25
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 |
26
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.
1927
Note 12 - Related Parties16 – Subsequent events
Opco had entered into management consulting services agreements with membersIn 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 providedbroker 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 generalColliers 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 expensesbusiness 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 recapitalizationCOVID-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.
2028
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, 20162019 and related notes included in the final prospectusannual report for PetIQ, Inc., dated July 20, 2017 and filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017.Form 10-K for the year ended December 31, 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 growingleading pet healthmedication and wellness company providingdelivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leading national retail stores, includingservices. We engage with customers through more than 40,00060,000 points of distribution across retail pharmacy locations.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 petproducts and care we can give them. Through our retail relationships, we encourage pet owners to regularly visit their veterinarian and educate them about the importance of veterinarian-grade products.
Our sales occur predominantly in the U.S. and Canada. Approximately 98% of our nine months ended September 30, 2017 and fiscal 2016 net sales were generated from customers located in the United States and Canada (“Domestic”), with the remaining sales generated from other foreign locations. We have two reporting segments: (i) Domestic;Products; and (ii) International. This is based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. In our judgment, because our operations in the U.S. and Canada comprise 98%Services. The Products segment consists of our netmanufacturing and distribution business. The Services segments consists of our veterinary services, and related product sales, it is appropriateprovided by the Company directly to view our operations asconsumers.
We are the sole managing member of PetIQ Holdings, LLC ("Holdco"), a whole,Delaware limited liability company, which is the approach we follow in throughout this Management’s Discussionsole member of PetIQ, LLC ("Opco") and, Analysisthrough Holdco, operate and control all of Financial Conditionthe business and Resultsaffairs 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.
2129
While mostCoronavirus 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 productsveterinarian service clinics effective March 20, 2020 to protect the health and safety of our employees, customers and retail partners. We are sold consistently throughoutcontinuously monitoring the year, we experience seasonality in the formsituation 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 yeardecrease in preparation for increased consumerbusiness 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 duringas the summer months.public is reintroduced to our retail environments as government restrictions are lifted or reduced.
Our products are primarily consumablesProducts 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-partyour contract manufacturing facilities frompartner 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 purchaseoperate.
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 ongoods 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, weconsent 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 productsCompany 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 monthsprocess of 2016arranging financing to 12.8% incomplete 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.
2230
Net Income (Loss)
Our net income (loss) for future periods will be affected by the various factors described above. In addition, our historical results prior to the IPO benefit from insignificant income taxes due to Opco’s status as a pass-through entity for U.S. federal income tax purposes, and we anticipate future results will not be consistent as our net income will be subject to U.S. federal and state income taxes.
Results of Operations
The following table setstables set forth our consolidated statements of operationsincome 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
2331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 2016Services Segment
Net sales
Net sales increased $18.9Service 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 $41.7the 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 increaseMarch 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, bothCOVID-19 related closures. Non same-store sales increased $0.8 million or 51%, to $2.3 million for existingthe 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, 2019months ended September 30, 2016.. This increase is due to the significant Products sales growth, as well as grossand particularly in products manufactured in our Omaha Nebraska facility, which carry a higher margin increases on improved economies of scale andthan 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
GeneralConsolidated 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, 2017March 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:
|
|
|
|
|
|
32
§ | Other variable costs related to Company growth, such as insurance and information technology. |
Interest expense, net
Interest expense, net, decreased $0.4increased $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 decreaseincrease was driven by additional debt taken on to fund the new debt agreement, entered intoPerrigo 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 Decemberlight 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 repaymentincrease of the Term loan.
Pre-tax net income
As manufacturing operations as a result of the factors above, pre-tax net incomePerrigo 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, 2017March 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.
2433
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:
|
|
|
|
|
|
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 millionAdjusted 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 adjustsadjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.
25
The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA.
We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.
Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA
34
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.
26
The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended | ||||||||
$'s in 000's |
| September 30, 2017 |
| September 30, 2016 |
| September 30, 2017 |
| September 30, 2016 | ||||
Net income |
| $ | 859 |
| $ | (2,512) |
| $ | 11,208 |
| $ | (2,218) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense |
|
| 550 |
|
| — |
|
| 550 |
|
| — |
Depreciation |
| $ | 684 |
| $ | 375 |
| $ | 1,795 |
| $ | 1,350 |
Amortization |
|
| 261 |
|
| 264 |
|
| 782 |
|
| 808 |
Interest |
|
| 352 |
|
| 737 |
|
| 1,351 |
|
| 2,389 |
EBITDA |
| $ | 2,706 |
| $ | (1,136) |
| $ | 15,686 |
| $ | 2,329 |
Loss on extinguishment and related costs(1) |
|
| — |
|
| — |
|
| — |
|
| 993 |
Management fees(2) |
|
| 158 |
|
| 208 |
|
| 545 |
|
| 508 |
Litigation expenses(3) |
|
| — |
|
| 41 |
|
| — |
|
| 3,226 |
Costs associated with becoming a public company |
|
| 2,275 |
|
| 2,042 |
|
| 2,275 |
|
| 2,042 |
Stock based compensation expense |
|
| 246 |
|
| — |
|
| 246 |
|
| — |
Adjusted EBITDA |
| $ | 5,385 |
| $ | 1,155 |
| $ | 18,752 |
| $ | 9,098 |
|
|
|
|
|
|
|
|
|
| For the three months ended |
| ||||
|
| March 31, 2020 |
| March 31, 2019 |
| ||
Net (loss) income |
| $ | (2,633) |
| $ | 2,326 |
|
Plus: |
|
|
|
|
|
|
|
Tax (benefit) expense |
|
| (1,169) |
|
| 500 |
|
Depreciation |
|
| 2,873 |
|
| 1,654 |
|
Amortization |
|
| 2,242 |
|
| 1,279 |
|
Interest |
|
| 4,704 |
|
| 1,937 |
|
EBITDA |
| $ | 6,017 |
| $ | 7,696 |
|
Acquisition costs(1) |
|
| 586 |
|
| 576 |
|
Integration costs and costs of discontinued clinics(2) |
|
| 454 |
|
| — |
|
Stock based compensation expense |
|
| 2,558 |
|
| 1,544 |
|
Fair value adjustment of contingent note(3) |
|
| — |
|
| (680) |
|
Non same-store revenue(4) |
|
| (2,282) |
|
| (1,516) |
|
Non same-store costs(4) |
|
| 6,400 |
|
| 3,252 |
|
Clinic launch expenses(5) |
|
| 676 |
|
| — |
|
Litigation expenses |
|
| 49 |
|
| — |
|
Adjusted EBITDA |
| $ | 14,458 |
| $ | 10,872 |
|
Adjusted EBITDA Margin |
|
| 7.7% |
|
| 7.3% |
|
(1) |
|
(2) |
|
(3) |
|
35
(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 |
Financial Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.capital. As of September 30, 2017March 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, 2017March 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 d26, 2017, we closeduring the initial public offeringthree 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 discountacquire 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 executivesCapAction® and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”related assets (the “Acquisition”) from PetIQ Holdings, LLCElanco US Inc. (“Holdco”Elanco”). Holdco utilized for $95 million, plus the proceeds from the salecost 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 paymentsU.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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We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facility will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
Cash Flows
Cash provided by or used in Operating Activities
Net cash provided by (used in)used in operating activities was $11.0$68.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared netto cash used in operating activities of $1.3$18.2 million for the ninethree months ended September 30, 2016.March 31, 2019. The increasechange in operating cash flows primarily reflects improved net income, offset by increased use of cash forlower earnings and a significant expansion in working capital. Working capital useschanges are driven by increased inventory and accounts receivable resulting from ouron the seasonality of the business, growing sales,. offset somewhat by growth in accounts payable. Net changes in assets and liabilities accounted for $3.8$72.5 million in cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2020 compared to $1.5$25.0 million of cash used in operating activities for the ninethree months ended September 30, 2016.March 31, 2019.
Cash used in Investing Activities
Net cash used in investing activities was $3.6$4.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared to $1.6$0.9 million for the ninethree months ended September 30, 2016.March 31, 2019. The increase in net cash used in investing activities is a result of the Company purchasing an office building in the quarter for use as its corporate headquarters.continued wellness center rollout initiative.
36
Cash provided by Financing Activities
Net cash provided by financing activities was $38.3$74.2 million for the ninethree months ended September 30, 2017March 31, 2020, compared to $0.9$6.9 million in net cash provided by financing activities for the ninethree months ended September 30, 2016. This increaseMarch 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 repaymentutilization of borrowed capital.its revolving credit facility to fund working capital expansion.
Description of Indebtedness
TheA&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 newamended the existing revolving credit agreement (“Newof 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 NewAmended 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”) maturingof $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 paymentsincur 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 Loansborrowers 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%, bothguarantors 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.
2837
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 NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of 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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Changes in Internal Control over Financial Reporting
As a result of our July 2017 IPO and resultingThere was no change in tax structure, the Company implementedour internal controlscontrol over significant processes specificfinancial reporting that occurred during our fiscal quarter ended March 31, 2020, that has materially affected, or is reasonably likely to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,materially affect, our internal control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, thereover financial reporting.We have been no changes in the Company’snot experienced any material impact to our internal controls over financial reporting duringdespite the third quarterfact that our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of fiscal 2017 that have materially affected, or are reasonably likelyCOVID-19 on our internal controls to materially affect,minimize the Company’s internal control over financial reporting.impact on their design and operating effectiveness.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
· | statements regarding our strategies, results of operations or liquidity; |
· | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
· | statements of management’s goals and objectives; and |
· | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-lookingForward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others
39
in our industry; failure of the Fairness to Pet Owners Act of 2017 to become law; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to successfully grow our business through acquisitions; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; risks related to our international operations; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors’ sectionFactors” of our Annual Report on Form 10-K for the final prospectus for PetIQ, Inc., dated July 20, 2017,year ended December 31, 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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We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements,below, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.
During the year ended December 31, 2019, the Company recorded a liability of $1 million for contract termination costs, related to a settlement for alleged breach of contract. The expense is included within General and Administrative expenses for the quarter ended March 31, 2020.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Plaintiffs”) filed suit in the United States District Court for the Northern District of California against PetIQ and VIP Petcare Holdings, Inc. for alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and we subsequently filed a second Motion to Dismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Dismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims. Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and 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.
Additionally the Company is subject to various litigation related to its products as well as other corporate litigation. No individual item is significant.
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 March 31, 2020, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations.
40
There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the final prospectusyear 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 Salesincluding those of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Securities
Simultaneously with the consummationcertain 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 issuedmay 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 sharesCOVID-19 outbreak. The global scale and scope of Class B common stock. The issuancesCOVID-19 is unknown and the duration of the Class B common stock described inbusiness disruption and related financial impact cannot be reasonably estimated at this paragraph were made in reliancetime. The extent to which the coronavirus impacts the Company’s results will ultimately depend on Section 4(a)(2) offuture 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 sharesduration of our Class B common stock, for newly issued shareswellness center and community clinic closures as well as closures of our Class A common stockretail 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 adjustmentsour 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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Item 5. Other Information.Information
NonePlaceholder
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31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | XBRL Instance Document. |
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101.SCH* | XBRL Taxonomy Extension Schema Document. |
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith
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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.
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| PETIQ, INC. | |
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| /s/ John Newland | |
| John Newland | |
| Chief Financial Officer |
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September 30, 2017
September 30, 2016
September 30, 2017
September 30, 2016
Net income
$
859
$
(2,512)
$
11,208
$
(2,218)
March 31, 2020
March 31, 2019
Net (loss) income
$
(2,633)
$
2,326
Plus:
Tax expense
550
—
550
—
Tax (benefit) expense
(1,169)
500
Depreciation
$
684
$
375
$
1,795
$
1,350
2,873
1,654
Amortization
261
264
782
808
2,242
1,279
Interest
352
737
1,351
2,389
4,704
1,937
EBITDA
$
2,706
$
(1,136)
$
15,686
$
2,329
$
6,017
$
7,696
Loss on extinguishment and related costs(1)
—
—
—
993
Management fees(2)
158
208
545
508
Litigation expenses(3)
—
41
—
3,226
Costs associated with becoming a public company
2,275
2,042
2,275
2,042
Acquisition costs(1)
586
576
Integration costs and costs of discontinued clinics(2)
454
—
Stock based compensation expense
246
—
246
—
2,558
1,544
Fair value adjustment of contingent note(3)
—
(680)
Non same-store revenue(4)
(2,282)
(1,516)
Non same-store costs(4)
6,400
3,252
Clinic launch expenses(5)
676
—
Litigation expenses
49
—
Adjusted EBITDA
$
5,385
$
1,155
$
18,752
$
9,098
$
14,458
$
10,872
Adjusted EBITDA Margin
7.7%
7.3%
(1) |
|
(2) |
|
(3) |
|
35
(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 |
Financial Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.capital. As of September 30, 2017March 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, 2017March 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 d26, 2017, we closeduring the initial public offeringthree 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 discountacquire 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 executivesCapAction® and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”related assets (the “Acquisition”) from PetIQ Holdings, LLCElanco US Inc. (“Holdco”Elanco”). Holdco utilized for $95 million, plus the proceeds from the salecost 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 paymentsU.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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We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facility will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
Cash Flows
Cash provided by or used in Operating Activities
Net cash provided by (used in)used in operating activities was $11.0$68.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared netto cash used in operating activities of $1.3$18.2 million for the ninethree months ended September 30, 2016.March 31, 2019. The increasechange in operating cash flows primarily reflects improved net income, offset by increased use of cash forlower earnings and a significant expansion in working capital. Working capital useschanges are driven by increased inventory and accounts receivable resulting from ouron the seasonality of the business, growing sales,. offset somewhat by growth in accounts payable. Net changes in assets and liabilities accounted for $3.8$72.5 million in cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2020 compared to $1.5$25.0 million of cash used in operating activities for the ninethree months ended September 30, 2016.March 31, 2019.
Cash used in Investing Activities
Net cash used in investing activities was $3.6$4.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared to $1.6$0.9 million for the ninethree months ended September 30, 2016.March 31, 2019. The increase in net cash used in investing activities is a result of the Company purchasing an office building in the quarter for use as its corporate headquarters.continued wellness center rollout initiative.
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Cash provided by Financing Activities
Net cash provided by financing activities was $38.3$74.2 million for the ninethree months ended September 30, 2017March 31, 2020, compared to $0.9$6.9 million in net cash provided by financing activities for the ninethree months ended September 30, 2016. This increaseMarch 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 repaymentutilization of borrowed capital.its revolving credit facility to fund working capital expansion.
Description of Indebtedness
TheA&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 newamended the existing revolving credit agreement (“Newof 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 NewAmended 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”) maturingof $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 paymentsincur 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 Loansborrowers 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%, bothguarantors 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 NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of 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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Changes in Internal Control over Financial Reporting
As a result of our July 2017 IPO and resultingThere was no change in tax structure, the Company implementedour internal controlscontrol over significant processes specificfinancial reporting that occurred during our fiscal quarter ended March 31, 2020, that has materially affected, or is reasonably likely to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,materially affect, our internal control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, thereover financial reporting.We have been no changes in the Company’snot experienced any material impact to our internal controls over financial reporting duringdespite the third quarterfact that our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of fiscal 2017 that have materially affected, or are reasonably likelyCOVID-19 on our internal controls to materially affect,minimize the Company’s internal control over financial reporting.impact on their design and operating effectiveness.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
· | statements regarding our strategies, results of operations or liquidity; |
· | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
· | statements of management’s goals and objectives; and |
· | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-lookingForward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others
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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’ sectionFactors” 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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We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements,below, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.
During the year ended December 31, 2019, the Company recorded a liability of $1 million for contract termination costs, related to a settlement for alleged breach of contract. The expense is included within General and Administrative expenses for the quarter ended March 31, 2020.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Plaintiffs”) filed suit in the United States District Court for the Northern District of California against PetIQ and VIP Petcare Holdings, Inc. for alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and we subsequently filed a second Motion to Dismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Dismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims. Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and 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.
Additionally the Company is subject to various litigation related to its products as well as other corporate litigation. No individual item is significant.
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 March 31, 2020, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations.
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There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the final prospectusyear 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 Salesincluding those of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Securities
Simultaneously with the consummationcertain 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 issuedmay 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 sharesCOVID-19 outbreak. The global scale and scope of Class B common stock. The issuancesCOVID-19 is unknown and the duration of the Class B common stock described inbusiness disruption and related financial impact cannot be reasonably estimated at this paragraph were made in reliancetime. The extent to which the coronavirus impacts the Company’s results will ultimately depend on Section 4(a)(2) offuture 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 sharesduration of our Class B common stock, for newly issued shareswellness center and community clinic closures as well as closures of our Class A common stockretail 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 adjustmentsour 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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Item 5. Other Information.Information
NonePlaceholder
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31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | XBRL Instance Document. |
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101.SCH* | XBRL Taxonomy Extension Schema Document. |
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith
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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.
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| PETIQ, INC. | |
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| /s/ John Newland | |
| John Newland | |
| Chief Financial Officer |
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March 31, 2020
December 31, 2019
Raw materials
$
10,755
$
10,675
Work in progress
2,178
1,717
Finished goods
29,427
28,308
105,805
67,311
Total inventories
$
34,654
$
34,232
$
118,738
$
79,703
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation and amortization is providedcalculated using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and capitalfinance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales and general and administrative expenses in the condensed consolidated statements of operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows:
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|
| |
Computer equipment and software |
| 3 years | |
Vehicle and vehicle accessories | 3-5 years | ||
Buildings |
| 33 years | |
Equipment |
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| 2-15 years |
Leasehold improvements |
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| 3-15 years |
Furniture and fixtures |
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| 5-10 years |
Depreciation expense was $684 and $375 for the three months ended September 30, 2017, and 2016, respectively, and $1,795 and $1,350 for the nine months ended September 30, 2017 and 2016, respectively.Revenue Recognition
Restricted DepositsWhen Performance Obligations Are Satisfied
Restricted deposits are amounts requiredA performance obligation is a promise in a contract to be held by the Company in segregated accounts for various state licensing regulations in relationtransfer a distinct good or service to the salecustomer and is the unit of regulated prescription pet medications. Restricted depositsaccount for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of September 30, 2017, and December 31, 2016 were $200 and $250, respectively. Interest earned on restricted depositsveterinary services.
Revenue is included in other income when earned.
Deferred Acquisition Liability
The Company has a deferred acquisition liability related to an acquisition that occurred in 2013. The liability is denominated in Euros and requires annual payments basedgenerally recognized for product sales on a percentage of gross profit from the sales of certain products, and any amounts not repaid by the annual payments will be duepoint in June 2018. The current balance recorded as of September 30, 2017, and December 31, 2016 was $1,745 and $250, respectively, andtime basis when product control is included in other accrued expenses. The non-current portion recorded as of December 31, 2016 was $1,303, and is included in deferred acquisition liability.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shippedtransferred to the customer. For customers with Free on Board ("FOB") destinationIn general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, a provision is recorded to exclude shipments determined to be in-transit to these customers atas the endcustomer can direct the use and obtain substantially all of the reporting period. A sales return allowance is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, returned goods and other items.remaining benefits from the asset at this point in time.
911
The Company offersdetermined that certain products manufactured to a varietycustomer’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 promotionsthe 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 incentivesfinal 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 suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.
12
Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and store placement. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in 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
Shippingrelated refund liability is estimated and handling costs are recorded as cost ofa reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience.
Contract balances
Contract asset and liability balances as of March 31, 2020 and December 31, 2019 are immaterial. The Company does not billedhave significant deferred revenue or unbilled receivable balances.
Cost of Services
Cost of Services are comprised of all service and product costs related to customers.the delivery of veterinary services, including but not limited to, salaries 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, 2017March 31, 2020 and 2016, respectively2019, 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 $427asset 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 forregulatory 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, 2017U.S. Food and 2016, respectively. AdvertisingDrug 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 forincurred 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.
13
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, 2017March 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 companyCompany consults with both internal and external legal counsel related to litigation.litigation.
Recently Issued
Adopted Accounting PronouncementsStandard Updates
In February 2016,
Effective January 1, 2020, the FASB issuedCompany 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 issuedrequires an organization to increase transparencymeasure 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 assetsreasonable and lease liabilities on the balance sheet and disclosing keysupportable information. Organizations will now use forward-looking information about leasing arrangements.to better estimate their credit losses. The amendments inCompany 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 uponusing a modified retrospective transition approach for leases existing at, or entered into after, the beginningapproach. Under this method of the earliest comparative period presented in the
10
financial statements, with optional practical expedients. Based on a preliminary assessment,adoption, the Company expectsdetermined that most of its operating lease commitments will be subjectthere was no cumulative-effect adjustment to beginning Retained earnings on the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in an increase in the assets and liabilities on ourcondensed consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several related Accounting Standards Updates (“ASUs”) (“Topic 606”), which provide guidance for recognizing revenue from contracts with customers. The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. Topic 606 will be effective commencing with our quarter ending March 31, 2018. We currently anticipate adopting Topic 606 using the modified retrospective transition approach that may result in a cumulative adjustment to beginning retained earnings as of January 1, 2018. Based on the analysis to date, the Company expects the new standard will require accelerated recognition of trade promotions and customer incentives. These transactions are currently recognized at the later of the sale of goods or agreement, however under the new standard the Company will estimate incentives to be offered to customers as part of the sales price. The Company does not expect the change to be material. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will be effective commencing with our quarter ending March 31, 2018. The Company does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU requires entities to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard is effective for annual and interim reporting periods beginning after December 15, 2016. The adoptionAdoption of this standard in first quarter of 2017 did not have a material effect on our financial statements.
In March 2016,impact the FASB issued ASU” No. 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718).” ASU No. 2016-09 simplifies the accounting for share-based payment transactions, including accounting forCompany’s income before income taxes forfeitures, statutory tax withholding requirements, and classification inhad no impact on the condensed consolidated statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interim periods beginning in the first interim period within the year of adoption. Any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted the provisions of this standard effective January 1, 2017. The Company elected to continue to recognize estimated forfeitures over the term of the awards. The adoption of the standard did not have a material impact on the Company’s financial condition, results of operations, cash flows and disclosures.
Note 2 - Debt– Business Combination
The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016. This agreement fully repaid and terminated
Perrigo Animal Health Acquisition
On July 8, 2019, PetIQ, through Opco, completed the A&R Credit Agreement described below. The New Credit Agreement provides for secured financingPerrigo Animal Health Acquisition. Sergeant’s is now an indirect wholly-owned subsidiary of $50,000 in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:
(i) $45,000 revolving credit facility (“Revolver”) maturing on December 16, 2019; and
(ii) $5,000 term loan (“Term Loans”), requiring equal amortizing payments for 24 months.the Company.
1114
AsThe fair value of Decemberthe 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.
15
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 outstandinghas acquired which have not yet been completed or approved. The IPRD acquired as Term Loanspart of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and $22,473 outstandingregulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development.
16
Estimated future amortization expense for each of the following years is as follows:
|
|
|
|
|
|
|
Years ending December 31, ($'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 rateAmended 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 onguarantees 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 Loanseach borrower and had $18,059 outstandingguarantor 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 NewAmended 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 includingevents of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio andcovenant 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 wasborrower 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.
17
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”), comprisedguarantee 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 amountcollective balance of term loans$27.5 million and $7,000 revolving credit facility. Borrowings underrequire 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 termlong-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 |
18
Future maturities of long termlong-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 ninethree months of 2016. The debt transaction resulted in a loss on debt extinguishment of $993, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs.
12
ended March 31, 2019.
Note 3 -6 – Leases
The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182019 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many
For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term.
We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease.
The Company's leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment, vehicles, and leases within supply agreements primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company's leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms.
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||
$'s in 000's |
| March 31, 2020 |
| March 31, 2019 | ||
Finance lease cost |
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 391 |
| $ | 290 |
Interest on lease liabilities |
|
| 82 |
|
| 50 |
Operating lease cost |
|
| 1,831 |
|
| 910 |
Variable lease cost(1) |
|
| 175 |
|
| 72 |
Short-term lease cost |
|
| 5 |
|
| 14 |
Sublease income |
|
| (75) |
|
| — |
Total lease cost |
| $ | 2,409 |
| $ | 1,336 |
(1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
19
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 $883 and $775 as of September 30, 2017 and December 31, 2016, respectively. Total operating lease expense for the three and nine months ended September 30, 2017 and 2016 totaled $449 and $472, and $1,357 and $1,250, respectively.
Note 4 - 7 – Income TaxesTax
As a result of the IPOCompany’s initial public offering and related reorganization transactions completed in July 2017, the Company holds anheld a majority of the economic interest of approximately 62% in Holdco and consolidates the financial position and results of Holdco. The approximate 38%remaining ownership of Holdco not held by the Company is considered noncontrollinga non-controlling interest. Holdco is treated as a partnership for income tax reporting. Holdco’s members, including the Company, are liable for federal, state, and local income taxes based on their share of Holdco’s taxable income.
The Company’s
Our effective tax rate is significantly less(ETR) from continuing operations was 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 resulteffect 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
1320
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 fromas 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 |
21
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.
SharesFor 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.
14
Note 69 – Stock Based Compensation
Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan
The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”) provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of September 30, 2017, 1,109,998March 31, 2020, 1,299 thousand shares were available for issuance under the Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees
The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A Common Stock of the Company. As of March 31, 2020, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
Stock Options
The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 yearsyears.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $246$2.2 million for the three and nine months ended September 30, 2017.March 31, 2020, and $1.4 million for the three months ended March 31, 2019. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periodperiods ended September 30:March 31, 2020 and 2019:
| ||||
| ||||
|
| |||
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2020 |
| March 31, 2019 | ||||
Expected term (years) (1) |
|
| 6.25 |
|
|
| 6.25 |
|
Expected volatility (2) |
|
| 33.91 | % |
|
| 35.00 | % |
Risk-free interest rate (3) |
|
| 0.72 | % |
|
| 2.74 | % |
Dividend yield (4) |
|
| 0.00 | % |
|
| 0.00 | % |
(1) | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
22
(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 |
15
The following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
|
|
| Remaining | ||||
|
|
|
| Average |
| Aggregate |
| Contractual | ||||
|
| Stock |
| Exercise |
| Intrinsic |
| Life | ||||
|
| Options |
| Price |
| Value |
| (years) | ||||
Outstanding at December 31, 2016 |
|
| — |
|
|
|
|
|
|
|
|
|
Granted |
|
| 804,049 |
| $ | 16 |
|
|
|
|
|
|
Exercised |
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
|
|
|
|
|
|
|
Cancelled |
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
|
| 804,049 |
| $ | 16 |
| $ | 8,909 |
|
| 9.8 |
Options exercisable at September 30, 2017 |
|
| — |
|
|
|
|
|
|
|
|
|
Theweighted average grant date fair value of stock options granted during the period ended September 30, 2017March 31, 2020 was $6.08$6.70 per option. At September 30, 2017,March 31, 2020, total unrecognized compensation cost related to unvested stock options was $4.4$13.2 million and is expected to be recognized over a weighted-average period of 3.82.7 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
| Aggregate |
| Remaining | ||||
|
| Stock |
| Average |
| Intrinsic |
| Contractual | ||||
|
| Options |
| Exercise |
| Value |
| Life | ||||
|
| (in 000's) |
| Price |
| (in 000's) |
| (years) | ||||
Outstanding at January 1, 2019 |
|
| 1,945 |
| $ | 23.45 |
| $ | 5,527 |
|
| 9.1 |
Granted |
|
| 423 |
|
| 27.54 |
|
|
|
|
|
|
Exercised |
|
| (119) |
|
| 19.51 |
|
|
|
|
|
|
Forfeited |
|
| (168) |
|
| 21.92 |
|
|
|
|
|
|
Cancelled/Expired |
|
| (9) |
|
| 25.70 |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 2,072 |
| $ | 24.63 |
| $ | 6,266 |
|
| 8.0 |
Granted |
|
| 478 |
|
| 19.49 |
|
|
|
|
|
|
Exercised |
|
| (46) |
|
| 21.65 |
|
|
|
|
|
|
Forfeited |
|
| (13) |
|
| 22.98 |
|
|
|
|
|
|
Outstanding at March 31, 2020 |
|
| 2,491 |
| $ | 23.70 |
| $ | 5,974 |
|
| 7.9 |
Options exercisable at March 31, 2020 |
|
| 870 |
|
|
|
|
|
|
|
|
|
Note 7 - Stockholders’ Equity
Reorganization TransactionsRestricted Stock Units
In connection withThe Company awards RSUs to certain employees and directors under the IPO on July 20, 2017,Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, completedall unvested RSUs will be forfeited and the following Reorganization Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Following the completion of the Reorganization TransactionsCompany’s common stock on the date of grant. At March 31, 2020, total unrecognized compensation cost related to unvested RSUs was $7.5 million and IPO, PetIQ owned 61.5%is expected to vest over a weighted average 3.5 years.
The fair value of HoldCo. these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $0.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.
The remaining 38.5% of Holdco was held byfollowing table summarizes the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ. As a resultactivity of the Reorganization Transactions, PetIQ becameCompany’s RSUs for the sole managing member of Holdco and has the sole voting power in, and controls the management of, Holdco. Accordingly, the Company consolidated the financial results of Holdco and reported a non-controlling interest in its consolidated financial statements.period ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
| Weighted | ||
|
| Number of |
| Average | ||
|
| Shares |
| Grant Date | ||
|
| (in 000's) |
| Fair Value | ||
Outstanding at January 1, 2019 |
|
| 51 |
| $ | 33.16 |
Granted |
|
| 123 |
|
| 27.61 |
Settled |
|
| (25) |
|
| 30.43 |
Forfeited |
|
| (15) |
|
| 30.58 |
Outstanding at December 31, 2019 |
|
| 133 |
| $ | 28.85 |
Granted |
|
| 243 |
|
| 19.49 |
Settled |
|
| (22) |
|
| 27.56 |
Forfeited |
|
| (1) |
|
| 32.53 |
Nonvested RSUs at March 31, 2020 |
|
| 353 |
| $ | 22.48 |
1623
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.
Amendmentthree 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 stockexercised exchange rights and the number of LLC Interests owned by PetIQ (subject to certain exceptions for treasury sharesexchanged 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 ofcorresponding LLC Interests for newly issued Class A common stock, there were 13,222,583 shares of Class A common stock outstanding and 8,268,188 shares of Class B common stock outstanding.
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, Holdco amended and restated the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interests in Holdco, the LLC Interests, (ii) exchange all of the then-existing membership interests for LLC Interests of Holdco and (iii) appoint the Company as the sole managing member of Holdco.
Common Stock. The LLC Agreement also provides thatgenerally allows for exchanges on the Continuing LLC Owners may from time to time atlast day of each of their options require Holdco to exchange all or a portion of their LLC Interests in exchange for, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC interests), shares of the Company’s Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of suchcalendar month.
17
Class A common stock or such cash, as applicable, for such LLC interests. The Continuing LLC Owners may exercise such redemption right for as long as their LLC interests remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC interests pursuant to the terms of the LLC Agreement, a number of shares of the Company’s Class B common stock will be cancelled for no consideration on a one-for-one basis with the number of LLC interests so redeemed or exchanged.
The amendment also requires that Holdco, at all times, maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC interests of Holdco owned by PetIQ, Inc. and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by Continuing LLC Owners and the number of LLC Interests of Holdco owned by the Continuing LLC Owners.
Note 8 -11 – Non-Controlling Interests
In connection withThe following table presents the Reorganization Transactions describedoutstanding LLC Interests and changes in LLC Interests for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| LLC |
|
|
|
|
|
|
|
| LLC |
|
$'s in 000's |
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of January 1, 2019 |
|
| 6,547 |
|
| 21,620 |
|
| 28,167 |
|
| 23.2% | 76.8% |
Stock based compensation adjustments |
|
| — |
|
| 140 |
|
| 140 |
|
|
|
|
Exchange transactions |
|
| (1,794) |
|
| 1,794 |
|
| — |
|
|
|
|
As of December 31, 2019 |
|
| 4,752 |
|
| 23,554 |
|
| 28,306 |
|
| 16.8% | 83.2% |
Stock based compensation adjustments |
|
|
|
|
| 61 |
|
| 61 |
|
|
|
|
Exchange transactions |
|
| (703) |
|
| 703 |
|
| — |
|
|
|
|
As of March 31, 2020 |
|
| 4,049 |
|
| 24,318 |
|
| 28,367 |
|
| 14.3% | 85.7% |
Note 7 — Stockholders’ Equity, PetIQ becamethat certain figures shown in the sole managing membertable above may not recalculate due to rounding.
For the three months ended March 31, 2020 and 2019, respectively, the Company owned a weighted average of 83.7% and 77.4% of Holdco, and, as a result, consolidates the financial results of Holdco.respectively.
The Company reports a non-controlling interest representing the LLC interests of Holdco held by Continuing LLC Owners. Changes in PetIQ’s ownership interest in Holdco while PetIQ retains its controlling interest in Holdco will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC interests of Holdco by the Continuing LLC Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when Holdco has positive or negative net assets, respectively. The Company is also required to make tax distributions based on the LLC Agreement to Continuing LLC Members on a regular basis, these distributions will reduce the noncontrolling interest.
The Company used the net proceeds from its IPO to purchase 3,556,666 newly-issued LLC Interests of Holdco and 133,334 LLC Interests from Continuing LLC Owners. Additionally, in connection with the Reorganization Transactions, the Company acquired 9,532,583 LLC Interests of Holdco.
As of September 30, 2017, there were 21,490,771 LLC Interests outstanding, of which PetIQ owned 13,222,583, representing a 61.5% ownership interest in Holdco.
-0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| Continuing LLC |
|
|
|
|
|
|
|
| Continuing LLC |
|
|
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of September 30, 2017 |
|
| 8,268,188 |
|
| 13,222,583 |
|
| 21,490,771 |
|
| 38.5% | 61.5% |
Note 9 -12 – Customer Concentration
The Company has significant exposure to customer concentration. During the three and nine months ended September 30, 2017 and 2016, three and March 31, 2020 twothreecustomers respectively,individually accounted for more than 10% of sales, individually. In totalcomprising 42% of net sales, for such periods. During the three months ended September 30, 2017 and 2016, the threeMarch 31, 2019 two customers individually accounted for 61% and 68%more than 10% of sales, comprising 33% of net sales, respectively. In total for the nine months ended September 30, 2017 and 2016, the three customers accounted for 61% and 71% of net sales, respectively. sales.
At September 30, 2017 and DecemberMarch 31, 2016 four and four customers, respectively,2020 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 53%45% of outstanding trade receivables, net. At December 31, 2019 two Products segment customers individually accounted for more than 10% of outstanding trade receivables, and and 60%, respectively,accounted for 61% of outstanding trade receivables, net. The customers are customers of the domestic segment.
Note 10 -13 – Commitments and Contingencies
Litigation Contingencies
In May 2017, Bayer Healthcare LLCOn April 4, 2018, Med Vets, Inc. and its affiliatesBay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplier of Advectafor alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and PetLock MAX, which we begansubsequently filed a second Motion to sell in 2017 as our value-branded alternativesDismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Bayer’s K9 Advantix II. Bayer allegesDismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims.
1824
Advecta 3Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and PetLock MAX infringebriefing 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 relatingsupplier 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 damagescure 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 salesthe $20 million alleged by CAP IMthe 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 MAXMarch 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, 2017March 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 areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers.
The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas.net sales and segment Adjusted EBITDA. We exclude from our segments certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses as our corporate functions do not meet the definition of a segment as defined in the accounting guidance related to segment reporting.
25
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 |
26
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.
1927
Note 12 - Related Parties16 – Subsequent events
Opco had entered into management consulting services agreements with membersIn 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 providedbroker 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 generalColliers 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 expensesbusiness 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 recapitalizationCOVID-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.
2028
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, 20162019 and related notes included in the final prospectusannual report for PetIQ, Inc., dated July 20, 2017 and filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017.Form 10-K for the year ended December 31, 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 growingleading pet healthmedication and wellness company providingdelivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leading national retail stores, includingservices. We engage with customers through more than 40,00060,000 points of distribution across retail pharmacy locations.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 petproducts and care we can give them. Through our retail relationships, we encourage pet owners to regularly visit their veterinarian and educate them about the importance of veterinarian-grade products.
Our sales occur predominantly in the U.S. and Canada. Approximately 98% of our nine months ended September 30, 2017 and fiscal 2016 net sales were generated from customers located in the United States and Canada (“Domestic”), with the remaining sales generated from other foreign locations. We have two reporting segments: (i) Domestic;Products; and (ii) International. This is based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. In our judgment, because our operations in the U.S. and Canada comprise 98%Services. The Products segment consists of our netmanufacturing and distribution business. The Services segments consists of our veterinary services, and related product sales, it is appropriateprovided by the Company directly to view our operations asconsumers.
We are the sole managing member of PetIQ Holdings, LLC ("Holdco"), a whole,Delaware limited liability company, which is the approach we follow in throughout this Management’s Discussionsole member of PetIQ, LLC ("Opco") and, Analysisthrough Holdco, operate and control all of Financial Conditionthe business and Resultsaffairs 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.
2129
While mostCoronavirus 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 productsveterinarian service clinics effective March 20, 2020 to protect the health and safety of our employees, customers and retail partners. We are sold consistently throughoutcontinuously monitoring the year, we experience seasonality in the formsituation 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 yeardecrease in preparation for increased consumerbusiness 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 duringas the summer months.public is reintroduced to our retail environments as government restrictions are lifted or reduced.
Our products are primarily consumablesProducts 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-partyour contract manufacturing facilities frompartner 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 purchaseoperate.
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 ongoods 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, weconsent 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 productsCompany 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 monthsprocess of 2016arranging financing to 12.8% incomplete 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.
2230
Net Income (Loss)
Our net income (loss) for future periods will be affected by the various factors described above. In addition, our historical results prior to the IPO benefit from insignificant income taxes due to Opco’s status as a pass-through entity for U.S. federal income tax purposes, and we anticipate future results will not be consistent as our net income will be subject to U.S. federal and state income taxes.
Results of Operations
The following table setstables set forth our consolidated statements of operationsincome in dollars and as a percentage of net sales for the periods presented:
|
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|
|
|
|
|
|
|
|
|
| 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) | % |
|
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|
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|
|
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|
|
|
|
|
|
|
|
| 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:
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|
| For the three months ended |
| ||||
$'s in 000's |
| March 31, 2020 |
| March 31, 2019 |
| ||
Services segment sales: |
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|
|
|
|
|
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
2331
|
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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, 2016Services Segment
Net sales
Net sales increased $18.9Service 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 $41.7the 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 increaseMarch 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, bothCOVID-19 related closures. Non same-store sales increased $0.8 million or 51%, to $2.3 million for existingthe 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, 2019months ended September 30, 2016.. This increase is due to the significant Products sales growth, as well as grossand particularly in products manufactured in our Omaha Nebraska facility, which carry a higher margin increases on improved economies of scale andthan 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
GeneralConsolidated 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, 2017March 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:
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32
§ | Other variable costs related to Company growth, such as insurance and information technology. |
Interest expense, net
Interest expense, net, decreased $0.4increased $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 decreaseincrease was driven by additional debt taken on to fund the new debt agreement, entered intoPerrigo 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 Decemberlight 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 repaymentincrease of the Term loan.
Pre-tax net income
As manufacturing operations as a result of the factors above, pre-tax net incomePerrigo 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, 2017March 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.
2433
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:
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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 millionAdjusted EBITDA for the nine months ended September 30, 2017, compared to a pre-tax net loss of $2.2 million for the nine months ended September 30, 2016.periods presented.
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$'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: |
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|
|
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 |
|
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|
$'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 adjustsadjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.
25
The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA.
We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.
Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA
34
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.
26
The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended | ||||||||
$'s in 000's |
| September 30, 2017 |
| September 30, 2016 |
| September 30, 2017 |
| September 30, 2016 | ||||
Net income |
| $ | 859 |
| $ | (2,512) |
| $ | 11,208 |
| $ | (2,218) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense |
|
| 550 |
|
| — |
|
| 550 |
|
| — |
Depreciation |
| $ | 684 |
| $ | 375 |
| $ | 1,795 |
| $ | 1,350 |
Amortization |
|
| 261 |
|
| 264 |
|
| 782 |
|
| 808 |
Interest |
|
| 352 |
|
| 737 |
|
| 1,351 |
|
| 2,389 |
EBITDA |
| $ | 2,706 |
| $ | (1,136) |
| $ | 15,686 |
| $ | 2,329 |
Loss on extinguishment and related costs(1) |
|
| — |
|
| — |
|
| — |
|
| 993 |
Management fees(2) |
|
| 158 |
|
| 208 |
|
| 545 |
|
| 508 |
Litigation expenses(3) |
|
| — |
|
| 41 |
|
| — |
|
| 3,226 |
Costs associated with becoming a public company |
|
| 2,275 |
|
| 2,042 |
|
| 2,275 |
|
| 2,042 |
Stock based compensation expense |
|
| 246 |
|
| — |
|
| 246 |
|
| — |
Adjusted EBITDA |
| $ | 5,385 |
| $ | 1,155 |
| $ | 18,752 |
| $ | 9,098 |
|
|
|
|
|
|
|
|
|
| For the three months ended |
| ||||
|
| March 31, 2020 |
| March 31, 2019 |
| ||
Net (loss) income |
| $ | (2,633) |
| $ | 2,326 |
|
Plus: |
|
|
|
|
|
|
|
Tax (benefit) expense |
|
| (1,169) |
|
| 500 |
|
Depreciation |
|
| 2,873 |
|
| 1,654 |
|
Amortization |
|
| 2,242 |
|
| 1,279 |
|
Interest |
|
| 4,704 |
|
| 1,937 |
|
EBITDA |
| $ | 6,017 |
| $ | 7,696 |
|
Acquisition costs(1) |
|
| 586 |
|
| 576 |
|
Integration costs and costs of discontinued clinics(2) |
|
| 454 |
|
| — |
|
Stock based compensation expense |
|
| 2,558 |
|
| 1,544 |
|
Fair value adjustment of contingent note(3) |
|
| — |
|
| (680) |
|
Non same-store revenue(4) |
|
| (2,282) |
|
| (1,516) |
|
Non same-store costs(4) |
|
| 6,400 |
|
| 3,252 |
|
Clinic launch expenses(5) |
|
| 676 |
|
| — |
|
Litigation expenses |
|
| 49 |
|
| — |
|
Adjusted EBITDA |
| $ | 14,458 |
| $ | 10,872 |
|
Adjusted EBITDA Margin |
|
| 7.7% |
|
| 7.3% |
|
(1) |
|
(2) |
|
(3) |
|
35
(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 |
Financial Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.capital. As of September 30, 2017March 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, 2017March 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 d26, 2017, we closeduring the initial public offeringthree 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 discountacquire 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 executivesCapAction® and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”related assets (the “Acquisition”) from PetIQ Holdings, LLCElanco US Inc. (“Holdco”Elanco”). Holdco utilized for $95 million, plus the proceeds from the salecost 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 paymentsU.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.
27
We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facility will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
Cash Flows
Cash provided by or used in Operating Activities
Net cash provided by (used in)used in operating activities was $11.0$68.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared netto cash used in operating activities of $1.3$18.2 million for the ninethree months ended September 30, 2016.March 31, 2019. The increasechange in operating cash flows primarily reflects improved net income, offset by increased use of cash forlower earnings and a significant expansion in working capital. Working capital useschanges are driven by increased inventory and accounts receivable resulting from ouron the seasonality of the business, growing sales,. offset somewhat by growth in accounts payable. Net changes in assets and liabilities accounted for $3.8$72.5 million in cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2020 compared to $1.5$25.0 million of cash used in operating activities for the ninethree months ended September 30, 2016.March 31, 2019.
Cash used in Investing Activities
Net cash used in investing activities was $3.6$4.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared to $1.6$0.9 million for the ninethree months ended September 30, 2016.March 31, 2019. The increase in net cash used in investing activities is a result of the Company purchasing an office building in the quarter for use as its corporate headquarters.continued wellness center rollout initiative.
36
Cash provided by Financing Activities
Net cash provided by financing activities was $38.3$74.2 million for the ninethree months ended September 30, 2017March 31, 2020, compared to $0.9$6.9 million in net cash provided by financing activities for the ninethree months ended September 30, 2016. This increaseMarch 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 repaymentutilization of borrowed capital.its revolving credit facility to fund working capital expansion.
Description of Indebtedness
TheA&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 newamended the existing revolving credit agreement (“Newof 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 NewAmended 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”) maturingof $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 paymentsincur 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 Loansborrowers 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%, bothguarantors 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.
2837
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 NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of 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.
38
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.
29
Changes in Internal Control over Financial Reporting
As a result of our July 2017 IPO and resultingThere was no change in tax structure, the Company implementedour internal controlscontrol over significant processes specificfinancial reporting that occurred during our fiscal quarter ended March 31, 2020, that has materially affected, or is reasonably likely to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,materially affect, our internal control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, thereover financial reporting.We have been no changes in the Company’snot experienced any material impact to our internal controls over financial reporting duringdespite the third quarterfact that our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of fiscal 2017 that have materially affected, or are reasonably likelyCOVID-19 on our internal controls to materially affect,minimize the Company’s internal control over financial reporting.impact on their design and operating effectiveness.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
· | statements regarding our strategies, results of operations or liquidity; |
· | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
· | statements of management’s goals and objectives; and |
· | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-lookingForward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others
39
in our industry; failure of the Fairness to Pet Owners Act of 2017 to become law; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to successfully grow our business through acquisitions; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; risks related to our international operations; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors’ sectionFactors” of our Annual Report on Form 10-K for the final prospectus for PetIQ, Inc., dated July 20, 2017,year ended December 31, 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.
30
We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements,below, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.
During the year ended December 31, 2019, the Company recorded a liability of $1 million for contract termination costs, related to a settlement for alleged breach of contract. The expense is included within General and Administrative expenses for the quarter ended March 31, 2020.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Plaintiffs”) filed suit in the United States District Court for the Northern District of California against PetIQ and VIP Petcare Holdings, Inc. for alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and we subsequently filed a second Motion to Dismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Dismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims. Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and 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.
Additionally the Company is subject to various litigation related to its products as well as other corporate litigation. No individual item is significant.
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 March 31, 2020, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations.
40
There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the final prospectusyear 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 Salesincluding those of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Securities
Simultaneously with the consummationcertain 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 issuedmay 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 sharesCOVID-19 outbreak. The global scale and scope of Class B common stock. The issuancesCOVID-19 is unknown and the duration of the Class B common stock described inbusiness disruption and related financial impact cannot be reasonably estimated at this paragraph were made in reliancetime. The extent to which the coronavirus impacts the Company’s results will ultimately depend on Section 4(a)(2) offuture 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 sharesduration of our Class B common stock, for newly issued shareswellness center and community clinic closures as well as closures of our Class A common stockretail 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 adjustmentsour 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.
31
Item 5. Other Information.Information
NonePlaceholder
|
|
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
101.INS* | XBRL Instance Document. |
|
|
101.SCH* | XBRL Taxonomy Extension Schema Document. |
|
|
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. |
|
|
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith
3241
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. | |
|
| |
| /s/ John Newland | |
| John Newland | |
| Chief Financial Officer |
3342
March 31, 2020
December 31, 2019
Term loans
$
219,450
$
220,000
Revolving credit facility
18,059
22,473
84,346
10,000
Mortgage
1,913
—
1,801
1,812
Notes Payable - VIP Acquisition
27,500
27,500
Net discount on debt and deferred financing fees
—
(92)
(5,416)
(5,688)
$
19,972
$
27,381
$
327,681
$
253,624
Less current maturities of long-term debt
(44)
(2,223)
(2,249)
(2,248)
Total long-term debt
$
19,928
$
25,158
$
325,432
$
251,376
18
Future maturities of long termlong-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 ninethree months of 2016. The debt transaction resulted in a loss on debt extinguishment of $993, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs.
12
ended March 31, 2019.
Note 3 -6 – Leases
The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182019 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many
For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term.
We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease.
The Company's leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment, vehicles, and leases within supply agreements primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company's leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms.
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||
$'s in 000's |
| March 31, 2020 |
| March 31, 2019 | ||
Finance lease cost |
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 391 |
| $ | 290 |
Interest on lease liabilities |
|
| 82 |
|
| 50 |
Operating lease cost |
|
| 1,831 |
|
| 910 |
Variable lease cost(1) |
|
| 175 |
|
| 72 |
Short-term lease cost |
|
| 5 |
|
| 14 |
Sublease income |
|
| (75) |
|
| — |
Total lease cost |
| $ | 2,409 |
| $ | 1,336 |
(1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
19
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 $883 and $775 as of September 30, 2017 and December 31, 2016, respectively. Total operating lease expense for the three and nine months ended September 30, 2017 and 2016 totaled $449 and $472, and $1,357 and $1,250, respectively.
Note 4 - 7 – Income TaxesTax
As a result of the IPOCompany’s initial public offering and related reorganization transactions completed in July 2017, the Company holds anheld a majority of the economic interest of approximately 62% in Holdco and consolidates the financial position and results of Holdco. The approximate 38%remaining ownership of Holdco not held by the Company is considered noncontrollinga non-controlling interest. Holdco is treated as a partnership for income tax reporting. Holdco’s members, including the Company, are liable for federal, state, and local income taxes based on their share of Holdco’s taxable income.
The Company’s
Our effective tax rate is significantly less(ETR) from continuing operations was 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 resulteffect 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
1320
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 fromas 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 |
21
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.
SharesFor 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.
14
Note 69 – Stock Based Compensation
Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan
The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”) provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of September 30, 2017, 1,109,998March 31, 2020, 1,299 thousand shares were available for issuance under the Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees
The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A Common Stock of the Company. As of March 31, 2020, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
Stock Options
The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 yearsyears.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $246$2.2 million for the three and nine months ended September 30, 2017.March 31, 2020, and $1.4 million for the three months ended March 31, 2019. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periodperiods ended September 30:March 31, 2020 and 2019:
| ||||
| ||||
|
| |||
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2020 |
| March 31, 2019 | ||||
Expected term (years) (1) |
|
| 6.25 |
|
|
| 6.25 |
|
Expected volatility (2) |
|
| 33.91 | % |
|
| 35.00 | % |
Risk-free interest rate (3) |
|
| 0.72 | % |
|
| 2.74 | % |
Dividend yield (4) |
|
| 0.00 | % |
|
| 0.00 | % |
(1) | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
22
(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 |
15
The following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
|
|
| Remaining | ||||
|
|
|
| Average |
| Aggregate |
| Contractual | ||||
|
| Stock |
| Exercise |
| Intrinsic |
| Life | ||||
|
| Options |
| Price |
| Value |
| (years) | ||||
Outstanding at December 31, 2016 |
|
| — |
|
|
|
|
|
|
|
|
|
Granted |
|
| 804,049 |
| $ | 16 |
|
|
|
|
|
|
Exercised |
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
|
|
|
|
|
|
|
Cancelled |
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
|
| 804,049 |
| $ | 16 |
| $ | 8,909 |
|
| 9.8 |
Options exercisable at September 30, 2017 |
|
| — |
|
|
|
|
|
|
|
|
|
Theweighted average grant date fair value of stock options granted during the period ended September 30, 2017March 31, 2020 was $6.08$6.70 per option. At September 30, 2017,March 31, 2020, total unrecognized compensation cost related to unvested stock options was $4.4$13.2 million and is expected to be recognized over a weighted-average period of 3.82.7 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
| Aggregate |
| Remaining | ||||
|
| Stock |
| Average |
| Intrinsic |
| Contractual | ||||
|
| Options |
| Exercise |
| Value |
| Life | ||||
|
| (in 000's) |
| Price |
| (in 000's) |
| (years) | ||||
Outstanding at January 1, 2019 |
|
| 1,945 |
| $ | 23.45 |
| $ | 5,527 |
|
| 9.1 |
Granted |
|
| 423 |
|
| 27.54 |
|
|
|
|
|
|
Exercised |
|
| (119) |
|
| 19.51 |
|
|
|
|
|
|
Forfeited |
|
| (168) |
|
| 21.92 |
|
|
|
|
|
|
Cancelled/Expired |
|
| (9) |
|
| 25.70 |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 2,072 |
| $ | 24.63 |
| $ | 6,266 |
|
| 8.0 |
Granted |
|
| 478 |
|
| 19.49 |
|
|
|
|
|
|
Exercised |
|
| (46) |
|
| 21.65 |
|
|
|
|
|
|
Forfeited |
|
| (13) |
|
| 22.98 |
|
|
|
|
|
|
Outstanding at March 31, 2020 |
|
| 2,491 |
| $ | 23.70 |
| $ | 5,974 |
|
| 7.9 |
Options exercisable at March 31, 2020 |
|
| 870 |
|
|
|
|
|
|
|
|
|
Note 7 - Stockholders’ Equity
Reorganization TransactionsRestricted Stock Units
In connection withThe Company awards RSUs to certain employees and directors under the IPO on July 20, 2017,Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, completedall unvested RSUs will be forfeited and the following Reorganization Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Following the completion of the Reorganization TransactionsCompany’s common stock on the date of grant. At March 31, 2020, total unrecognized compensation cost related to unvested RSUs was $7.5 million and IPO, PetIQ owned 61.5%is expected to vest over a weighted average 3.5 years.
The fair value of HoldCo. these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $0.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.
The remaining 38.5% of Holdco was held byfollowing table summarizes the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ. As a resultactivity of the Reorganization Transactions, PetIQ becameCompany’s RSUs for the sole managing member of Holdco and has the sole voting power in, and controls the management of, Holdco. Accordingly, the Company consolidated the financial results of Holdco and reported a non-controlling interest in its consolidated financial statements.period ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
| Weighted | ||
|
| Number of |
| Average | ||
|
| Shares |
| Grant Date | ||
|
| (in 000's) |
| Fair Value | ||
Outstanding at January 1, 2019 |
|
| 51 |
| $ | 33.16 |
Granted |
|
| 123 |
|
| 27.61 |
Settled |
|
| (25) |
|
| 30.43 |
Forfeited |
|
| (15) |
|
| 30.58 |
Outstanding at December 31, 2019 |
|
| 133 |
| $ | 28.85 |
Granted |
|
| 243 |
|
| 19.49 |
Settled |
|
| (22) |
|
| 27.56 |
Forfeited |
|
| (1) |
|
| 32.53 |
Nonvested RSUs at March 31, 2020 |
|
| 353 |
| $ | 22.48 |
1623
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.
Amendmentthree 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 stockexercised exchange rights and the number of LLC Interests owned by PetIQ (subject to certain exceptions for treasury sharesexchanged 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 ofcorresponding LLC Interests for newly issued Class A common stock, there were 13,222,583 shares of Class A common stock outstanding and 8,268,188 shares of Class B common stock outstanding.
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, Holdco amended and restated the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interests in Holdco, the LLC Interests, (ii) exchange all of the then-existing membership interests for LLC Interests of Holdco and (iii) appoint the Company as the sole managing member of Holdco.
Common Stock. The LLC Agreement also provides thatgenerally allows for exchanges on the Continuing LLC Owners may from time to time atlast day of each of their options require Holdco to exchange all or a portion of their LLC Interests in exchange for, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC interests), shares of the Company’s Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of suchcalendar month.
17
Class A common stock or such cash, as applicable, for such LLC interests. The Continuing LLC Owners may exercise such redemption right for as long as their LLC interests remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC interests pursuant to the terms of the LLC Agreement, a number of shares of the Company’s Class B common stock will be cancelled for no consideration on a one-for-one basis with the number of LLC interests so redeemed or exchanged.
The amendment also requires that Holdco, at all times, maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC interests of Holdco owned by PetIQ, Inc. and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by Continuing LLC Owners and the number of LLC Interests of Holdco owned by the Continuing LLC Owners.
Note 8 -11 – Non-Controlling Interests
In connection withThe following table presents the Reorganization Transactions describedoutstanding LLC Interests and changes in LLC Interests for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| LLC |
|
|
|
|
|
|
|
| LLC |
|
$'s in 000's |
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of January 1, 2019 |
|
| 6,547 |
|
| 21,620 |
|
| 28,167 |
|
| 23.2% | 76.8% |
Stock based compensation adjustments |
|
| — |
|
| 140 |
|
| 140 |
|
|
|
|
Exchange transactions |
|
| (1,794) |
|
| 1,794 |
|
| — |
|
|
|
|
As of December 31, 2019 |
|
| 4,752 |
|
| 23,554 |
|
| 28,306 |
|
| 16.8% | 83.2% |
Stock based compensation adjustments |
|
|
|
|
| 61 |
|
| 61 |
|
|
|
|
Exchange transactions |
|
| (703) |
|
| 703 |
|
| — |
|
|
|
|
As of March 31, 2020 |
|
| 4,049 |
|
| 24,318 |
|
| 28,367 |
|
| 14.3% | 85.7% |
Note 7 — Stockholders’ Equity, PetIQ becamethat certain figures shown in the sole managing membertable above may not recalculate due to rounding.
For the three months ended March 31, 2020 and 2019, respectively, the Company owned a weighted average of 83.7% and 77.4% of Holdco, and, as a result, consolidates the financial results of Holdco.respectively.
The Company reports a non-controlling interest representing the LLC interests of Holdco held by Continuing LLC Owners. Changes in PetIQ’s ownership interest in Holdco while PetIQ retains its controlling interest in Holdco will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC interests of Holdco by the Continuing LLC Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when Holdco has positive or negative net assets, respectively. The Company is also required to make tax distributions based on the LLC Agreement to Continuing LLC Members on a regular basis, these distributions will reduce the noncontrolling interest.
The Company used the net proceeds from its IPO to purchase 3,556,666 newly-issued LLC Interests of Holdco and 133,334 LLC Interests from Continuing LLC Owners. Additionally, in connection with the Reorganization Transactions, the Company acquired 9,532,583 LLC Interests of Holdco.
As of September 30, 2017, there were 21,490,771 LLC Interests outstanding, of which PetIQ owned 13,222,583, representing a 61.5% ownership interest in Holdco.
-0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| Continuing LLC |
|
|
|
|
|
|
|
| Continuing LLC |
|
|
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of September 30, 2017 |
|
| 8,268,188 |
|
| 13,222,583 |
|
| 21,490,771 |
|
| 38.5% | 61.5% |
Note 9 -12 – Customer Concentration
The Company has significant exposure to customer concentration. During the three and nine months ended September 30, 2017 and 2016, three and March 31, 2020 twothreecustomers respectively,individually accounted for more than 10% of sales, individually. In totalcomprising 42% of net sales, for such periods. During the three months ended September 30, 2017 and 2016, the threeMarch 31, 2019 two customers individually accounted for 61% and 68%more than 10% of sales, comprising 33% of net sales, respectively. In total for the nine months ended September 30, 2017 and 2016, the three customers accounted for 61% and 71% of net sales, respectively. sales.
At September 30, 2017 and DecemberMarch 31, 2016 four and four customers, respectively,2020 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 53%45% of outstanding trade receivables, net. At December 31, 2019 two Products segment customers individually accounted for more than 10% of outstanding trade receivables, and and 60%, respectively,accounted for 61% of outstanding trade receivables, net. The customers are customers of the domestic segment.
Note 10 -13 – Commitments and Contingencies
Litigation Contingencies
In May 2017, Bayer Healthcare LLCOn April 4, 2018, Med Vets, Inc. and its affiliatesBay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplier of Advectafor alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and PetLock MAX, which we begansubsequently filed a second Motion to sell in 2017 as our value-branded alternativesDismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Bayer’s K9 Advantix II. Bayer allegesDismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims.
1824
Advecta 3Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and PetLock MAX infringebriefing 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 relatingsupplier 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 damagescure 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 salesthe $20 million alleged by CAP IMthe 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 MAXMarch 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, 2017March 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 areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers.
The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas.net sales and segment Adjusted EBITDA. We exclude from our segments certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses as our corporate functions do not meet the definition of a segment as defined in the accounting guidance related to segment reporting.
25
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 |
26
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.
1927
Note 12 - Related Parties16 – Subsequent events
Opco had entered into management consulting services agreements with membersIn 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 providedbroker 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 generalColliers 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 expensesbusiness 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 recapitalizationCOVID-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, 20162019 and related notes included in the final prospectusannual report for PetIQ, Inc., dated July 20, 2017 and filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017.Form 10-K for the year ended December 31, 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 growingleading pet healthmedication and wellness company providingdelivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leading national retail stores, includingservices. We engage with customers through more than 40,00060,000 points of distribution across retail pharmacy locations.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 petproducts and care we can give them. Through our retail relationships, we encourage pet owners to regularly visit their veterinarian and educate them about the importance of veterinarian-grade products.
Our sales occur predominantly in the U.S. and Canada. Approximately 98% of our nine months ended September 30, 2017 and fiscal 2016 net sales were generated from customers located in the United States and Canada (“Domestic”), with the remaining sales generated from other foreign locations. We have two reporting segments: (i) Domestic;Products; and (ii) International. This is based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. In our judgment, because our operations in the U.S. and Canada comprise 98%Services. The Products segment consists of our netmanufacturing and distribution business. The Services segments consists of our veterinary services, and related product sales, it is appropriateprovided by the Company directly to view our operations asconsumers.
We are the sole managing member of PetIQ Holdings, LLC ("Holdco"), a whole,Delaware limited liability company, which is the approach we follow in throughout this Management’s Discussionsole member of PetIQ, LLC ("Opco") and, Analysisthrough Holdco, operate and control all of Financial Conditionthe business and Resultsaffairs 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 mostCoronavirus 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 productsveterinarian service clinics effective March 20, 2020 to protect the health and safety of our employees, customers and retail partners. We are sold consistently throughoutcontinuously monitoring the year, we experience seasonality in the formsituation 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 yeardecrease in preparation for increased consumerbusiness 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 duringas the summer months.public is reintroduced to our retail environments as government restrictions are lifted or reduced.
Our products are primarily consumablesProducts 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-partyour contract manufacturing facilities frompartner 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 purchaseoperate.
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 ongoods 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, weconsent 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 productsCompany 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 monthsprocess of 2016arranging financing to 12.8% incomplete 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 setstables set forth our consolidated statements of operationsincome 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:
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|
|
| 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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|
|
|
|
|
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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, 2016Services Segment
Net sales
Net sales increased $18.9Service 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 $41.7the 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 increaseMarch 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, bothCOVID-19 related closures. Non same-store sales increased $0.8 million or 51%, to $2.3 million for existingthe 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, 2019months ended September 30, 2016.. This increase is due to the significant Products sales growth, as well as grossand particularly in products manufactured in our Omaha Nebraska facility, which carry a higher margin increases on improved economies of scale andthan 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
GeneralConsolidated 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, 2017March 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:
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32
§ | Other variable costs related to Company growth, such as insurance and information technology. |
Interest expense, net
Interest expense, net, decreased $0.4increased $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 decreaseincrease was driven by additional debt taken on to fund the new debt agreement, entered intoPerrigo 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 Decemberlight 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 repaymentincrease of the Term loan.
Pre-tax net income
As manufacturing operations as a result of the factors above, pre-tax net incomePerrigo 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, 2017March 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:
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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 millionAdjusted EBITDA for the nine months ended September 30, 2017, compared to a pre-tax net loss of $2.2 million for the nine months ended September 30, 2016.periods presented.
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$'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: |
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|
|
|
|
|
|
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 |
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$'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: |
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|
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|
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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 adjustsadjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.
25
The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA.
We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.
Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA
34
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.
26
The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA for the periods presented.
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|
| Three months ended |
| Nine months ended | ||||||||
$'s in 000's |
| September 30, 2017 |
| September 30, 2016 |
| September 30, 2017 |
| September 30, 2016 | ||||
Net income |
| $ | 859 |
| $ | (2,512) |
| $ | 11,208 |
| $ | (2,218) |
Plus: |
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Tax expense |
|
| 550 |
|
| — |
|
| 550 |
|
| — |
Depreciation |
| $ | 684 |
| $ | 375 |
| $ | 1,795 |
| $ | 1,350 |
Amortization |
|
| 261 |
|
| 264 |
|
| 782 |
|
| 808 |
Interest |
|
| 352 |
|
| 737 |
|
| 1,351 |
|
| 2,389 |
EBITDA |
| $ | 2,706 |
| $ | (1,136) |
| $ | 15,686 |
| $ | 2,329 |
Loss on extinguishment and related costs(1) |
|
| — |
|
| — |
|
| — |
|
| 993 |
Management fees(2) |
|
| 158 |
|
| 208 |
|
| 545 |
|
| 508 |
Litigation expenses(3) |
|
| — |
|
| 41 |
|
| — |
|
| 3,226 |
Costs associated with becoming a public company |
|
| 2,275 |
|
| 2,042 |
|
| 2,275 |
|
| 2,042 |
Stock based compensation expense |
|
| 246 |
|
| — |
|
| 246 |
|
| — |
Adjusted EBITDA |
| $ | 5,385 |
| $ | 1,155 |
| $ | 18,752 |
| $ | 9,098 |
|
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|
| For the three months ended |
| ||||
|
| March 31, 2020 |
| March 31, 2019 |
| ||
Net (loss) income |
| $ | (2,633) |
| $ | 2,326 |
|
Plus: |
|
|
|
|
|
|
|
Tax (benefit) expense |
|
| (1,169) |
|
| 500 |
|
Depreciation |
|
| 2,873 |
|
| 1,654 |
|
Amortization |
|
| 2,242 |
|
| 1,279 |
|
Interest |
|
| 4,704 |
|
| 1,937 |
|
EBITDA |
| $ | 6,017 |
| $ | 7,696 |
|
Acquisition costs(1) |
|
| 586 |
|
| 576 |
|
Integration costs and costs of discontinued clinics(2) |
|
| 454 |
|
| — |
|
Stock based compensation expense |
|
| 2,558 |
|
| 1,544 |
|
Fair value adjustment of contingent note(3) |
|
| — |
|
| (680) |
|
Non same-store revenue(4) |
|
| (2,282) |
|
| (1,516) |
|
Non same-store costs(4) |
|
| 6,400 |
|
| 3,252 |
|
Clinic launch expenses(5) |
|
| 676 |
|
| — |
|
Litigation expenses |
|
| 49 |
|
| — |
|
Adjusted EBITDA |
| $ | 14,458 |
| $ | 10,872 |
|
Adjusted EBITDA Margin |
|
| 7.7% |
|
| 7.3% |
|
(1) |
|
(2) |
|
(3) |
|
35
(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 |
Financial Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.capital. As of September 30, 2017March 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, 2017March 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 d26, 2017, we closeduring the initial public offeringthree 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 discountacquire 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 executivesCapAction® and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”related assets (the “Acquisition”) from PetIQ Holdings, LLCElanco US Inc. (“Holdco”Elanco”). Holdco utilized for $95 million, plus the proceeds from the salecost 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 paymentsU.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.
27
We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facility will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
Cash Flows
Cash provided by or used in Operating Activities
Net cash provided by (used in)used in operating activities was $11.0$68.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared netto cash used in operating activities of $1.3$18.2 million for the ninethree months ended September 30, 2016.March 31, 2019. The increasechange in operating cash flows primarily reflects improved net income, offset by increased use of cash forlower earnings and a significant expansion in working capital. Working capital useschanges are driven by increased inventory and accounts receivable resulting from ouron the seasonality of the business, growing sales,. offset somewhat by growth in accounts payable. Net changes in assets and liabilities accounted for $3.8$72.5 million in cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2020 compared to $1.5$25.0 million of cash used in operating activities for the ninethree months ended September 30, 2016.March 31, 2019.
Cash used in Investing Activities
Net cash used in investing activities was $3.6$4.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared to $1.6$0.9 million for the ninethree months ended September 30, 2016.March 31, 2019. The increase in net cash used in investing activities is a result of the Company purchasing an office building in the quarter for use as its corporate headquarters.continued wellness center rollout initiative.
36
Cash provided by Financing Activities
Net cash provided by financing activities was $38.3$74.2 million for the ninethree months ended September 30, 2017March 31, 2020, compared to $0.9$6.9 million in net cash provided by financing activities for the ninethree months ended September 30, 2016. This increaseMarch 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 repaymentutilization of borrowed capital.its revolving credit facility to fund working capital expansion.
Description of Indebtedness
TheA&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 newamended the existing revolving credit agreement (“Newof 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 NewAmended 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”) maturingof $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 paymentsincur 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 Loansborrowers 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%, bothguarantors 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.
2837
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 NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of 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.
38
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.
29
Changes in Internal Control over Financial Reporting
As a result of our July 2017 IPO and resultingThere was no change in tax structure, the Company implementedour internal controlscontrol over significant processes specificfinancial reporting that occurred during our fiscal quarter ended March 31, 2020, that has materially affected, or is reasonably likely to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,materially affect, our internal control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, thereover financial reporting.We have been no changes in the Company’snot experienced any material impact to our internal controls over financial reporting duringdespite the third quarterfact that our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of fiscal 2017 that have materially affected, or are reasonably likelyCOVID-19 on our internal controls to materially affect,minimize the Company’s internal control over financial reporting.impact on their design and operating effectiveness.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
· | statements regarding our strategies, results of operations or liquidity; |
· | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
· | statements of management’s goals and objectives; and |
· | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-lookingForward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others
39
in our industry; failure of the Fairness to Pet Owners Act of 2017 to become law; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to successfully grow our business through acquisitions; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; risks related to our international operations; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors’ sectionFactors” of our Annual Report on Form 10-K for the final prospectus for PetIQ, Inc., dated July 20, 2017,year ended December 31, 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.
30
We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements,below, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.
During the year ended December 31, 2019, the Company recorded a liability of $1 million for contract termination costs, related to a settlement for alleged breach of contract. The expense is included within General and Administrative expenses for the quarter ended March 31, 2020.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Plaintiffs”) filed suit in the United States District Court for the Northern District of California against PetIQ and VIP Petcare Holdings, Inc. for alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and we subsequently filed a second Motion to Dismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Dismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims. Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and 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.
Additionally the Company is subject to various litigation related to its products as well as other corporate litigation. No individual item is significant.
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 March 31, 2020, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations.
40
There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the final prospectusyear 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 Salesincluding those of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Securities
Simultaneously with the consummationcertain 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 issuedmay 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 sharesCOVID-19 outbreak. The global scale and scope of Class B common stock. The issuancesCOVID-19 is unknown and the duration of the Class B common stock described inbusiness disruption and related financial impact cannot be reasonably estimated at this paragraph were made in reliancetime. The extent to which the coronavirus impacts the Company’s results will ultimately depend on Section 4(a)(2) offuture 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 sharesduration of our Class B common stock, for newly issued shareswellness center and community clinic closures as well as closures of our Class A common stockretail 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 adjustmentsour 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.
31
Item 5. Other Information.Information
NonePlaceholder
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31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | XBRL Instance Document. |
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101.SCH* | XBRL Taxonomy Extension Schema Document. |
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith
3241
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.
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| PETIQ, INC. | |
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| |
| /s/ John Newland | |
| John Newland | |
| Chief Financial Officer |
3342
March 31, 2020
December 31, 2019
Raw materials
$
10,755
$
10,675
Work in progress
2,178
1,717
Finished goods
29,427
28,308
105,805
67,311
Total inventories
$
34,654
$
34,232
$
118,738
$
79,703
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation and amortization is providedcalculated using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and capitalfinance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales and general and administrative expenses in the condensed consolidated statements of operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows:
|
|
| |
Computer equipment and software |
| 3 years | |
Vehicle and vehicle accessories | 3-5 years | ||
Buildings |
| 33 years | |
Equipment |
|
| 2-15 years |
Leasehold improvements |
|
| 3-15 years |
Furniture and fixtures |
|
| 5-10 years |
Depreciation expense was $684 and $375 for the three months ended September 30, 2017, and 2016, respectively, and $1,795 and $1,350 for the nine months ended September 30, 2017 and 2016, respectively.Revenue Recognition
Restricted DepositsWhen Performance Obligations Are Satisfied
Restricted deposits are amounts requiredA performance obligation is a promise in a contract to be held by the Company in segregated accounts for various state licensing regulations in relationtransfer a distinct good or service to the salecustomer and is the unit of regulated prescription pet medications. Restricted depositsaccount for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of September 30, 2017, and December 31, 2016 were $200 and $250, respectively. Interest earned on restricted depositsveterinary services.
Revenue is included in other income when earned.
Deferred Acquisition Liability
The Company has a deferred acquisition liability related to an acquisition that occurred in 2013. The liability is denominated in Euros and requires annual payments basedgenerally recognized for product sales on a percentage of gross profit from the sales of certain products, and any amounts not repaid by the annual payments will be duepoint in June 2018. The current balance recorded as of September 30, 2017, and December 31, 2016 was $1,745 and $250, respectively, andtime basis when product control is included in other accrued expenses. The non-current portion recorded as of December 31, 2016 was $1,303, and is included in deferred acquisition liability.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has been delivered, the price is fixed or determinable and collectability is reasonably assured. The Company generally records revenues from product sales when the goods are shippedtransferred to the customer. For customers with Free on Board ("FOB") destinationIn general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, a provision is recorded to exclude shipments determined to be in-transit to these customers atas the endcustomer can direct the use and obtain substantially all of the reporting period. A sales return allowance is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, returned goods and other items.remaining benefits from the asset at this point in time.
911
The Company offersdetermined that certain products manufactured to a varietycustomer’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 promotionsthe 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 incentivesfinal 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 suchboth in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.
12
Both trade marketing expense and product introductory fees are recognized as cooperative advertising programs and store placement. Sales are recorded netreductions of trade promotion spending, which is recognizedrevenue at the latertime the transfer of control of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company’s net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in 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
Shippingrelated refund liability is estimated and handling costs are recorded as cost ofa reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience.
Contract balances
Contract asset and liability balances as of March 31, 2020 and December 31, 2019 are immaterial. The Company does not billedhave significant deferred revenue or unbilled receivable balances.
Cost of Services
Cost of Services are comprised of all service and product costs related to customers.the delivery of veterinary services, including but not limited to, salaries 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, 2017March 31, 2020 and 2016, respectively2019, 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 $427asset 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 forregulatory 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, 2017U.S. Food and 2016, respectively. AdvertisingDrug 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 forincurred 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.
13
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, 2017March 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 companyCompany consults with both internal and external legal counsel related to litigation.litigation.
Recently Issued
Adopted Accounting PronouncementsStandard Updates
In February 2016,
Effective January 1, 2020, the FASB issuedCompany 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 issuedrequires an organization to increase transparencymeasure 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 assetsreasonable and lease liabilities on the balance sheet and disclosing keysupportable information. Organizations will now use forward-looking information about leasing arrangements.to better estimate their credit losses. The amendments inCompany 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 uponusing a modified retrospective transition approach for leases existing at, or entered into after, the beginningapproach. Under this method of the earliest comparative period presented in the
10
financial statements, with optional practical expedients. Based on a preliminary assessment,adoption, the Company expectsdetermined that most of its operating lease commitments will be subjectthere was no cumulative-effect adjustment to beginning Retained earnings on the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in an increase in the assets and liabilities on ourcondensed consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several related Accounting Standards Updates (“ASUs”) (“Topic 606”), which provide guidance for recognizing revenue from contracts with customers. The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. Topic 606 will be effective commencing with our quarter ending March 31, 2018. We currently anticipate adopting Topic 606 using the modified retrospective transition approach that may result in a cumulative adjustment to beginning retained earnings as of January 1, 2018. Based on the analysis to date, the Company expects the new standard will require accelerated recognition of trade promotions and customer incentives. These transactions are currently recognized at the later of the sale of goods or agreement, however under the new standard the Company will estimate incentives to be offered to customers as part of the sales price. The Company does not expect the change to be material. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and provide specific guidance on eight cash flow classification issues that are not currently addressed by current U.S. GAAP. This ASU will be effective commencing with our quarter ending March 31, 2018. The Company does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU requires entities to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard is effective for annual and interim reporting periods beginning after December 15, 2016. The adoptionAdoption of this standard in first quarter of 2017 did not have a material effect on our financial statements.
In March 2016,impact the FASB issued ASU” No. 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718).” ASU No. 2016-09 simplifies the accounting for share-based payment transactions, including accounting forCompany’s income before income taxes forfeitures, statutory tax withholding requirements, and classification inhad no impact on the condensed consolidated statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 31, 2016, and interim periods beginning in the first interim period within the year of adoption. Any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted the provisions of this standard effective January 1, 2017. The Company elected to continue to recognize estimated forfeitures over the term of the awards. The adoption of the standard did not have a material impact on the Company’s financial condition, results of operations, cash flows and disclosures.
Note 2 - Debt– Business Combination
The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016. This agreement fully repaid and terminated
Perrigo Animal Health Acquisition
On July 8, 2019, PetIQ, through Opco, completed the A&R Credit Agreement described below. The New Credit Agreement provides for secured financingPerrigo Animal Health Acquisition. Sergeant’s is now an indirect wholly-owned subsidiary of $50,000 in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:
(i) $45,000 revolving credit facility (“Revolver”) maturing on December 16, 2019; and
(ii) $5,000 term loan (“Term Loans”), requiring equal amortizing payments for 24 months.the Company.
1114
AsThe fair value of Decemberthe consideration is summarized as follows:
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$'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 |
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|
Liabilities assumed |
| 19,259 |
|
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|
Purchase price | $ | 184,393 |
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|
Cash paid, net of cash acquired | $ | (185,090) |
Post-closing working capital adjustment |
| 697 |
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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 $105.8 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment.
Pro Forma Combined Statements of Operations (Unaudited)
The following unaudited pro forma combined statements of operations presents the Company's operations as if the Perrigo Animal Health Acquisition and related financing activities had occurred on January 1, 2019. Additionally the share count utilized and Net (loss) income do not account for non-controlling interests. The pro forma combined statements of operations are not necessarily indicative of the results of operations as they would have been had the Perrigo Animal Health Acquisition been effected on the assumed date and are not intended to be a projection of future results: Pro forma results for the three months ended March 31, 2019:
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($'s in 000's, except per share data) |
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| |
Net sales |
| $ | 168,005 |
Net (loss) income |
| $ | 1,636 |
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|
(Loss) Earnings per share: |
|
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|
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 $6.9 million and are included in the Condensed Consolidated Statements of (Loss) Income.
15
Note 3 – Property, Plant, and Equipment
Property, plant, and equipment consists of the following at:
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$'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 $1.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Note 4 – Intangible Assets and Goodwill
Intangible assets consist of the following at:
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$'s in 000's |
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|
|
| 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 outstandinghas acquired which have not yet been completed or approved. The IPRD acquired as Term Loanspart of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and $22,473 outstandingregulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development.
16
Estimated future amortization expense for each of the following years is as follows:
|
|
|
|
|
|
|
Years ending December 31, ($'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 rateAmended 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 onguarantees 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 Loanseach borrower and had $18,059 outstandingguarantor 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 NewAmended 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 includingevents of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio andcovenant 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 wasborrower 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.
17
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”), comprisedguarantee 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 amountcollective balance of term loans$27.5 million and $7,000 revolving credit facility. Borrowings underrequire 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 termlong-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 |
18
Future maturities of long termlong-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 ninethree months of 2016. The debt transaction resulted in a loss on debt extinguishment of $993, which included the write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs.
12
ended March 31, 2019.
Note 3 -6 – Leases
The Company leases certain real estate both officefor commercial, production, and production facilities,retail purposes, as well as equipment from third parties. Lease expiration dates are between 20182019 and 2025.2026. A portion of capital leases are denominated in foreign currencies. Many
For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of theseour obligation to make payments arising over the lease term.
We elected the short-term lease exemption for all leases include renewal optionsthat qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and in some casesthe related lease expense is recognized on a straight-line basis over the term of the lease.
The Company's leases may include options to purchase.extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment, vehicles, and leases within supply agreements primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company's leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms.
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||
$'s in 000's |
| March 31, 2020 |
| March 31, 2019 | ||
Finance lease cost |
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 391 |
| $ | 290 |
Interest on lease liabilities |
|
| 82 |
|
| 50 |
Operating lease cost |
|
| 1,831 |
|
| 910 |
Variable lease cost(1) |
|
| 175 |
|
| 72 |
Short-term lease cost |
|
| 5 |
|
| 14 |
Sublease income |
|
| (75) |
|
| — |
Total lease cost |
| $ | 2,409 |
| $ | 1,336 |
(1) | Variable lease cost primarily relates to common area maintenance, property taxes and insurance on leased real estate. |
19
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 $883 and $775 as of September 30, 2017 and December 31, 2016, respectively. Total operating lease expense for the three and nine months ended September 30, 2017 and 2016 totaled $449 and $472, and $1,357 and $1,250, respectively.
Note 4 - 7 – Income TaxesTax
As a result of the IPOCompany’s initial public offering and related reorganization transactions completed in July 2017, the Company holds anheld a majority of the economic interest of approximately 62% in Holdco and consolidates the financial position and results of Holdco. The approximate 38%remaining ownership of Holdco not held by the Company is considered noncontrollinga non-controlling interest. Holdco is treated as a partnership for income tax reporting. Holdco’s members, including the Company, are liable for federal, state, and local income taxes based on their share of Holdco’s taxable income.
The Company’s
Our effective tax rate is significantly less(ETR) from continuing operations was 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 resulteffect 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
1320
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 fromas 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 |
21
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.
SharesFor 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.
14
Note 69 – Stock Based Compensation
Stock based compensation expense is recorded within general and administrative expenses.
PetIQ, Inc. Omnibus Incentive Plan
The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”) provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company initially reserved 1,914,047 registeredhas 3,914 thousand authorized shares of Class A common stock for issuance under the Plan. As of September 30, 2017, 1,109,998March 31, 2020, 1,299 thousand shares were available for issuance under the Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees
The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A Common Stock of the Company. As of March 31, 2020, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
Stock Options
The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 yearsyears.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $246$2.2 million for the three and nine months ended September 30, 2017.March 31, 2020, and $1.4 million for the three months ended March 31, 2019. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant datedates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periodperiods ended September 30:March 31, 2020 and 2019:
| ||||
| ||||
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| |||
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| |||
|
|
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|
|
|
|
|
|
|
|
|
| March 31, 2020 |
| March 31, 2019 | ||||
Expected term (years) (1) |
|
| 6.25 |
|
|
| 6.25 |
|
Expected volatility (2) |
|
| 33.91 | % |
|
| 35.00 | % |
Risk-free interest rate (3) |
|
| 0.72 | % |
|
| 2.74 | % |
Dividend yield (4) |
|
| 0.00 | % |
|
| 0.00 | % |
(1) | The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
22
(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 |
15
The following table summarizes the activity of the Company’s unvested stock options for the period ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
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|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
|
|
| Remaining | ||||
|
|
|
| Average |
| Aggregate |
| Contractual | ||||
|
| Stock |
| Exercise |
| Intrinsic |
| Life | ||||
|
| Options |
| Price |
| Value |
| (years) | ||||
Outstanding at December 31, 2016 |
|
| — |
|
|
|
|
|
|
|
|
|
Granted |
|
| 804,049 |
| $ | 16 |
|
|
|
|
|
|
Exercised |
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
|
|
|
|
|
|
|
Cancelled |
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
|
| 804,049 |
| $ | 16 |
| $ | 8,909 |
|
| 9.8 |
Options exercisable at September 30, 2017 |
|
| — |
|
|
|
|
|
|
|
|
|
Theweighted average grant date fair value of stock options granted during the period ended September 30, 2017March 31, 2020 was $6.08$6.70 per option. At September 30, 2017,March 31, 2020, total unrecognized compensation cost related to unvested stock options was $4.4$13.2 million and is expected to be recognized over a weighted-average period of 3.82.7 years.
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
| Aggregate |
| Remaining | ||||
|
| Stock |
| Average |
| Intrinsic |
| Contractual | ||||
|
| Options |
| Exercise |
| Value |
| Life | ||||
|
| (in 000's) |
| Price |
| (in 000's) |
| (years) | ||||
Outstanding at January 1, 2019 |
|
| 1,945 |
| $ | 23.45 |
| $ | 5,527 |
|
| 9.1 |
Granted |
|
| 423 |
|
| 27.54 |
|
|
|
|
|
|
Exercised |
|
| (119) |
|
| 19.51 |
|
|
|
|
|
|
Forfeited |
|
| (168) |
|
| 21.92 |
|
|
|
|
|
|
Cancelled/Expired |
|
| (9) |
|
| 25.70 |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 2,072 |
| $ | 24.63 |
| $ | 6,266 |
|
| 8.0 |
Granted |
|
| 478 |
|
| 19.49 |
|
|
|
|
|
|
Exercised |
|
| (46) |
|
| 21.65 |
|
|
|
|
|
|
Forfeited |
|
| (13) |
|
| 22.98 |
|
|
|
|
|
|
Outstanding at March 31, 2020 |
|
| 2,491 |
| $ | 23.70 |
| $ | 5,974 |
|
| 7.9 |
Options exercisable at March 31, 2020 |
|
| 870 |
|
|
|
|
|
|
|
|
|
Note 7 - Stockholders’ Equity
Reorganization TransactionsRestricted Stock Units
In connection withThe Company awards RSUs to certain employees and directors under the IPO on July 20, 2017,Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, completedall unvested RSUs will be forfeited and the following Reorganization Transactions:
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|
Following the completion of the Reorganization TransactionsCompany’s common stock on the date of grant. At March 31, 2020, total unrecognized compensation cost related to unvested RSUs was $7.5 million and IPO, PetIQ owned 61.5%is expected to vest over a weighted average 3.5 years.
The fair value of HoldCo. these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $0.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.
The remaining 38.5% of Holdco was held byfollowing table summarizes the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ. As a resultactivity of the Reorganization Transactions, PetIQ becameCompany’s RSUs for the sole managing member of Holdco and has the sole voting power in, and controls the management of, Holdco. Accordingly, the Company consolidated the financial results of Holdco and reported a non-controlling interest in its consolidated financial statements.period ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
| Weighted | ||
|
| Number of |
| Average | ||
|
| Shares |
| Grant Date | ||
|
| (in 000's) |
| Fair Value | ||
Outstanding at January 1, 2019 |
|
| 51 |
| $ | 33.16 |
Granted |
|
| 123 |
|
| 27.61 |
Settled |
|
| (25) |
|
| 30.43 |
Forfeited |
|
| (15) |
|
| 30.58 |
Outstanding at December 31, 2019 |
|
| 133 |
| $ | 28.85 |
Granted |
|
| 243 |
|
| 19.49 |
Settled |
|
| (22) |
|
| 27.56 |
Forfeited |
|
| (1) |
|
| 32.53 |
Nonvested RSUs at March 31, 2020 |
|
| 353 |
| $ | 22.48 |
1623
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.
Amendmentthree 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 stockexercised exchange rights and the number of LLC Interests owned by PetIQ (subject to certain exceptions for treasury sharesexchanged 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 ofcorresponding LLC Interests for newly issued Class A common stock, there were 13,222,583 shares of Class A common stock outstanding and 8,268,188 shares of Class B common stock outstanding.
PetIQ Holdings, LLC Recapitalization
On July 20, 2017, Holdco amended and restated the LLC Agreement (the “Recapitalization”) to, among other things, (i) provide for a new single class of common membership interests in Holdco, the LLC Interests, (ii) exchange all of the then-existing membership interests for LLC Interests of Holdco and (iii) appoint the Company as the sole managing member of Holdco.
Common Stock. The LLC Agreement also provides thatgenerally allows for exchanges on the Continuing LLC Owners may from time to time atlast day of each of their options require Holdco to exchange all or a portion of their LLC Interests in exchange for, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC interests), shares of the Company’s Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of suchcalendar month.
17
Class A common stock or such cash, as applicable, for such LLC interests. The Continuing LLC Owners may exercise such redemption right for as long as their LLC interests remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC interests pursuant to the terms of the LLC Agreement, a number of shares of the Company’s Class B common stock will be cancelled for no consideration on a one-for-one basis with the number of LLC interests so redeemed or exchanged.
The amendment also requires that Holdco, at all times, maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC interests of Holdco owned by PetIQ, Inc. and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by Continuing LLC Owners and the number of LLC Interests of Holdco owned by the Continuing LLC Owners.
Note 8 -11 – Non-Controlling Interests
In connection withThe following table presents the Reorganization Transactions describedoutstanding LLC Interests and changes in LLC Interests for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| LLC |
|
|
|
|
|
|
|
| LLC |
|
$'s in 000's |
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of January 1, 2019 |
|
| 6,547 |
|
| 21,620 |
|
| 28,167 |
|
| 23.2% | 76.8% |
Stock based compensation adjustments |
|
| — |
|
| 140 |
|
| 140 |
|
|
|
|
Exchange transactions |
|
| (1,794) |
|
| 1,794 |
|
| — |
|
|
|
|
As of December 31, 2019 |
|
| 4,752 |
|
| 23,554 |
|
| 28,306 |
|
| 16.8% | 83.2% |
Stock based compensation adjustments |
|
|
|
|
| 61 |
|
| 61 |
|
|
|
|
Exchange transactions |
|
| (703) |
|
| 703 |
|
| — |
|
|
|
|
As of March 31, 2020 |
|
| 4,049 |
|
| 24,318 |
|
| 28,367 |
|
| 14.3% | 85.7% |
Note 7 — Stockholders’ Equity, PetIQ becamethat certain figures shown in the sole managing membertable above may not recalculate due to rounding.
For the three months ended March 31, 2020 and 2019, respectively, the Company owned a weighted average of 83.7% and 77.4% of Holdco, and, as a result, consolidates the financial results of Holdco.respectively.
The Company reports a non-controlling interest representing the LLC interests of Holdco held by Continuing LLC Owners. Changes in PetIQ’s ownership interest in Holdco while PetIQ retains its controlling interest in Holdco will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC interests of Holdco by the Continuing LLC Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when Holdco has positive or negative net assets, respectively. The Company is also required to make tax distributions based on the LLC Agreement to Continuing LLC Members on a regular basis, these distributions will reduce the noncontrolling interest.
The Company used the net proceeds from its IPO to purchase 3,556,666 newly-issued LLC Interests of Holdco and 133,334 LLC Interests from Continuing LLC Owners. Additionally, in connection with the Reorganization Transactions, the Company acquired 9,532,583 LLC Interests of Holdco.
As of September 30, 2017, there were 21,490,771 LLC Interests outstanding, of which PetIQ owned 13,222,583, representing a 61.5% ownership interest in Holdco.
-0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interests held |
|
| % of Total | ||||||||
|
|
| Continuing LLC |
|
|
|
|
|
|
|
| Continuing LLC |
|
|
| Owners |
| PetIQ, Inc. |
|
| Total |
|
| Owners | PetIQ, Inc. | ||
As of September 30, 2017 |
|
| 8,268,188 |
|
| 13,222,583 |
|
| 21,490,771 |
|
| 38.5% | 61.5% |
Note 9 -12 – Customer Concentration
The Company has significant exposure to customer concentration. During the three and nine months ended September 30, 2017 and 2016, three and March 31, 2020 twothreecustomers respectively,individually accounted for more than 10% of sales, individually. In totalcomprising 42% of net sales, for such periods. During the three months ended September 30, 2017 and 2016, the threeMarch 31, 2019 two customers individually accounted for 61% and 68%more than 10% of sales, comprising 33% of net sales, respectively. In total for the nine months ended September 30, 2017 and 2016, the three customers accounted for 61% and 71% of net sales, respectively. sales.
At September 30, 2017 and DecemberMarch 31, 2016 four and four customers, respectively,2020 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and in aggregate accounted for 53%45% of outstanding trade receivables, net. At December 31, 2019 two Products segment customers individually accounted for more than 10% of outstanding trade receivables, and and 60%, respectively,accounted for 61% of outstanding trade receivables, net. The customers are customers of the domestic segment.
Note 10 -13 – Commitments and Contingencies
Litigation Contingencies
In May 2017, Bayer Healthcare LLCOn April 4, 2018, Med Vets, Inc. and its affiliatesBay Medical Solutions Inc. (collectively “Bayer”“Plaintiffs”) filed suit in the United States District Court for the Northern District of Delaware,California against CAP IM Supply,PetIQ and VIP Petcare Holdings, Inc. (“CAP IM”), our supplier of Advectafor alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and PetLock MAX, which we begansubsequently filed a second Motion to sell in 2017 as our value-branded alternativesDismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Bayer’s K9 Advantix II. Bayer allegesDismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims.
1824
Advecta 3Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and PetLock MAX infringebriefing 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 relatingsupplier 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 damagescure 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 salesthe $20 million alleged by CAP IMthe 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 MAXMarch 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, 2017March 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 areServices. The Products segment consists of the procurement, packaging,Company’s manufacturing and distribution of pet health and wellness products in the Domestic markets (U.S. and Canada) and in the International markets (primarily Europe).business. The determinationServices segment consists of the operatingCompany’s veterinary services, and related product sales, provided by the Company directly to consumers.
The segments isare based on the level at which the chief operating decision maker reviews discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to assess performance and make resource allocation decisions which is doneand to evaluate performance. We measure and evaluate our reportable segments based on these two geographic areas.net sales and segment Adjusted EBITDA. We exclude from our segments certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses as our corporate functions do not meet the definition of a segment as defined in the accounting guidance related to segment reporting.
25
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 |
26
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.
1927
Note 12 - Related Parties16 – Subsequent events
Opco had entered into management consulting services agreements with membersIn 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 providedbroker 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 generalColliers 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 expensesbusiness 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 recapitalizationCOVID-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.
2028
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, 20162019 and related notes included in the final prospectusannual report for PetIQ, Inc., dated July 20, 2017 and filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017.Form 10-K for the year ended December 31, 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 growingleading pet healthmedication and wellness company providingdelivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and affordable choices to a broad portfolio of veterinarian-recommended pet health and wellness products across a network of leading national retail stores, includingservices. We engage with customers through more than 40,00060,000 points of distribution across retail pharmacy locations.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 petproducts and care we can give them. Through our retail relationships, we encourage pet owners to regularly visit their veterinarian and educate them about the importance of veterinarian-grade products.
Our sales occur predominantly in the U.S. and Canada. Approximately 98% of our nine months ended September 30, 2017 and fiscal 2016 net sales were generated from customers located in the United States and Canada (“Domestic”), with the remaining sales generated from other foreign locations. We have two reporting segments: (i) Domestic;Products; and (ii) International. This is based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. In our judgment, because our operations in the U.S. and Canada comprise 98%Services. The Products segment consists of our netmanufacturing and distribution business. The Services segments consists of our veterinary services, and related product sales, it is appropriateprovided by the Company directly to view our operations asconsumers.
We are the sole managing member of PetIQ Holdings, LLC ("Holdco"), a whole,Delaware limited liability company, which is the approach we follow in throughout this Management’s Discussionsole member of PetIQ, LLC ("Opco") and, Analysisthrough Holdco, operate and control all of Financial Conditionthe business and Resultsaffairs 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.
2129
While mostCoronavirus 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 productsveterinarian service clinics effective March 20, 2020 to protect the health and safety of our employees, customers and retail partners. We are sold consistently throughoutcontinuously monitoring the year, we experience seasonality in the formsituation 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 yeardecrease in preparation for increased consumerbusiness 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 duringas the summer months.public is reintroduced to our retail environments as government restrictions are lifted or reduced.
Our products are primarily consumablesProducts 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-partyour contract manufacturing facilities frompartner 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 purchaseoperate.
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 ongoods 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, weconsent 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 productsCompany 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 monthsprocess of 2016arranging financing to 12.8% incomplete 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.
2230
Net Income (Loss)
Our net income (loss) for future periods will be affected by the various factors described above. In addition, our historical results prior to the IPO benefit from insignificant income taxes due to Opco’s status as a pass-through entity for U.S. federal income tax purposes, and we anticipate future results will not be consistent as our net income will be subject to U.S. federal and state income taxes.
Results of Operations
The following table setstables set forth our consolidated statements of operationsincome 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
2331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 2016Services Segment
Net sales
Net sales increased $18.9Service 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 $41.7the 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 increaseMarch 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, bothCOVID-19 related closures. Non same-store sales increased $0.8 million or 51%, to $2.3 million for existingthe 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, 2019months ended September 30, 2016.. This increase is due to the significant Products sales growth, as well as grossand particularly in products manufactured in our Omaha Nebraska facility, which carry a higher margin increases on improved economies of scale andthan 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
GeneralConsolidated 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, 2017March 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:
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32
§ | Other variable costs related to Company growth, such as insurance and information technology. |
Interest expense, net
Interest expense, net, decreased $0.4increased $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 decreaseincrease was driven by additional debt taken on to fund the new debt agreement, entered intoPerrigo 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 Decemberlight 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 repaymentincrease of the Term loan.
Pre-tax net income
As manufacturing operations as a result of the factors above, pre-tax net incomePerrigo 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, 2017March 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.
2433
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:
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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 millionAdjusted EBITDA for the nine months ended September 30, 2017, compared to a pre-tax net loss of $2.2 million for the nine months ended September 30, 2016.periods presented.
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$'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 adjustsadjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.
25
The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA.
We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.
Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA
34
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.
26
The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA for the periods presented.
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|
|
| Three months ended |
| Nine months ended | ||||||||
$'s in 000's |
| September 30, 2017 |
| September 30, 2016 |
| September 30, 2017 |
| September 30, 2016 | ||||
Net income |
| $ | 859 |
| $ | (2,512) |
| $ | 11,208 |
| $ | (2,218) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense |
|
| 550 |
|
| — |
|
| 550 |
|
| — |
Depreciation |
| $ | 684 |
| $ | 375 |
| $ | 1,795 |
| $ | 1,350 |
Amortization |
|
| 261 |
|
| 264 |
|
| 782 |
|
| 808 |
Interest |
|
| 352 |
|
| 737 |
|
| 1,351 |
|
| 2,389 |
EBITDA |
| $ | 2,706 |
| $ | (1,136) |
| $ | 15,686 |
| $ | 2,329 |
Loss on extinguishment and related costs(1) |
|
| — |
|
| — |
|
| — |
|
| 993 |
Management fees(2) |
|
| 158 |
|
| 208 |
|
| 545 |
|
| 508 |
Litigation expenses(3) |
|
| — |
|
| 41 |
|
| — |
|
| 3,226 |
Costs associated with becoming a public company |
|
| 2,275 |
|
| 2,042 |
|
| 2,275 |
|
| 2,042 |
Stock based compensation expense |
|
| 246 |
|
| — |
|
| 246 |
|
| — |
Adjusted EBITDA |
| $ | 5,385 |
| $ | 1,155 |
| $ | 18,752 |
| $ | 9,098 |
|
|
|
|
|
|
|
|
|
| For the three months ended |
| ||||
|
| March 31, 2020 |
| March 31, 2019 |
| ||
Net (loss) income |
| $ | (2,633) |
| $ | 2,326 |
|
Plus: |
|
|
|
|
|
|
|
Tax (benefit) expense |
|
| (1,169) |
|
| 500 |
|
Depreciation |
|
| 2,873 |
|
| 1,654 |
|
Amortization |
|
| 2,242 |
|
| 1,279 |
|
Interest |
|
| 4,704 |
|
| 1,937 |
|
EBITDA |
| $ | 6,017 |
| $ | 7,696 |
|
Acquisition costs(1) |
|
| 586 |
|
| 576 |
|
Integration costs and costs of discontinued clinics(2) |
|
| 454 |
|
| — |
|
Stock based compensation expense |
|
| 2,558 |
|
| 1,544 |
|
Fair value adjustment of contingent note(3) |
|
| — |
|
| (680) |
|
Non same-store revenue(4) |
|
| (2,282) |
|
| (1,516) |
|
Non same-store costs(4) |
|
| 6,400 |
|
| 3,252 |
|
Clinic launch expenses(5) |
|
| 676 |
|
| — |
|
Litigation expenses |
|
| 49 |
|
| — |
|
Adjusted EBITDA |
| $ | 14,458 |
| $ | 10,872 |
|
Adjusted EBITDA Margin |
|
| 7.7% |
|
| 7.3% |
|
(1) |
|
(2) |
|
(3) |
|
35
(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 |
Financial Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flowflows from operations, borrowings, and equity contributions.capital. As of September 30, 2017March 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, 2017March 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 d26, 2017, we closeduring the initial public offeringthree 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 discountacquire 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 executivesCapAction® and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”related assets (the “Acquisition”) from PetIQ Holdings, LLCElanco US Inc. (“Holdco”Elanco”). Holdco utilized for $95 million, plus the proceeds from the salecost 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 paymentsU.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.
27
We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facility will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
Cash Flows
Cash provided by or used in Operating Activities
Net cash provided by (used in)used in operating activities was $11.0$68.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared netto cash used in operating activities of $1.3$18.2 million for the ninethree months ended September 30, 2016.March 31, 2019. The increasechange in operating cash flows primarily reflects improved net income, offset by increased use of cash forlower earnings and a significant expansion in working capital. Working capital useschanges are driven by increased inventory and accounts receivable resulting from ouron the seasonality of the business, growing sales,. offset somewhat by growth in accounts payable. Net changes in assets and liabilities accounted for $3.8$72.5 million in cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2020 compared to $1.5$25.0 million of cash used in operating activities for the ninethree months ended September 30, 2016.March 31, 2019.
Cash used in Investing Activities
Net cash used in investing activities was $3.6$4.6 million for the ninethree months ended September 30, 2017,March 31, 2020, compared to $1.6$0.9 million for the ninethree months ended September 30, 2016.March 31, 2019. The increase in net cash used in investing activities is a result of the Company purchasing an office building in the quarter for use as its corporate headquarters.continued wellness center rollout initiative.
36
Cash provided by Financing Activities
Net cash provided by financing activities was $38.3$74.2 million for the ninethree months ended September 30, 2017March 31, 2020, compared to $0.9$6.9 million in net cash provided by financing activities for the ninethree months ended September 30, 2016. This increaseMarch 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 repaymentutilization of borrowed capital.its revolving credit facility to fund working capital expansion.
Description of Indebtedness
TheA&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 newamended the existing revolving credit agreement (“Newof 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 NewAmended 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”) maturingof $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 paymentsincur 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 Loansborrowers 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%, bothguarantors 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 NewA&R Credit Agreement isand A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of 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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Changes in Internal Control over Financial Reporting
As a result of our July 2017 IPO and resultingThere was no change in tax structure, the Company implementedour internal controlscontrol over significant processes specificfinancial reporting that occurred during our fiscal quarter ended March 31, 2020, that has materially affected, or is reasonably likely to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,materially affect, our internal control activities, and accounting for the IPO and tax structure related transactions. Except as previously described, thereover financial reporting.We have been no changes in the Company’snot experienced any material impact to our internal controls over financial reporting duringdespite the third quarterfact that our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of fiscal 2017 that have materially affected, or are reasonably likelyCOVID-19 on our internal controls to materially affect,minimize the Company’s internal control over financial reporting.impact on their design and operating effectiveness.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
· | statements regarding our strategies, results of operations or liquidity; |
· | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
· | statements of management’s goals and objectives; and |
· | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-lookingForward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our ability to achieve or sustain profitability;manufacturing and distribution chains; competition from veterinarians and others
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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’ sectionFactors” 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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We are from time to time subject to, and are presently involved in, litigation and other proceedings. Other than the litigation described in Note 8 of the previous financial statements,below, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.
During the year ended December 31, 2019, the Company recorded a liability of $1 million for contract termination costs, related to a settlement for alleged breach of contract. The expense is included within General and Administrative expenses for the quarter ended March 31, 2020.
On April 4, 2018, Med Vets, Inc. and Bay Medical Solutions Inc. (collectively “Plaintiffs”) filed suit in the United States District Court for the Northern District of California against PetIQ and VIP Petcare Holdings, Inc. for alleged unlawful merger and other antitrust violations. The Plaintiffs’ sought unspecified monetary damages, and various injunctive relief, including an order to require PetIQ to divest its interests in VIP. In June 2018, the Company filed a Motion to Dismiss the Complaint for failure to state a claim upon which relief could be granted. On August 3, 2018 the Court granted the Company’s Motion to Dismiss the Complaint, but permitted the plaintiffs to attempt to plead a viable Complaint. The Plaintiffs’ filed an Amended Complaint on December 13, 2018 and we subsequently filed a second Motion to Dismiss the Amended Complaint. On April 22, 2019, the Court granted the Company’s Motion to Dismiss without further leave to amend, concluding that Plaintiffs were not able to identify any factual allegations to support their alleged claims. Plaintiffs filed a notice of appeal with the 9th Circuit Court of Appeals on May 21, 2019 and 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.
Additionally the Company is subject to various litigation related to its products as well as other corporate litigation. No individual item is significant.
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 March 31, 2020, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the consolidated statements of operations.
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There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the final prospectusyear 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 Salesincluding those of Equity Securities and Use of Proceeds.
Recent Sale of Unregistered Securities
Simultaneously with the consummationcertain 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 issuedmay 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 sharesCOVID-19 outbreak. The global scale and scope of Class B common stock. The issuancesCOVID-19 is unknown and the duration of the Class B common stock described inbusiness disruption and related financial impact cannot be reasonably estimated at this paragraph were made in reliancetime. The extent to which the coronavirus impacts the Company’s results will ultimately depend on Section 4(a)(2) offuture 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 sharesduration of our Class B common stock, for newly issued shareswellness center and community clinic closures as well as closures of our Class A common stockretail 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 adjustmentsour 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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Item 5. Other Information.Information
NonePlaceholder
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31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | XBRL Instance Document. |
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101.SCH* | XBRL Taxonomy Extension Schema Document. |
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith
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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.
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| PETIQ, INC. | |
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| /s/ John Newland | |
| John Newland | |
| Chief Financial Officer |
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