September 30, 2017

December 31, 2016

Term Loans

—

5,000

Future maturities of ~~long term~~long-term debt, excluding the ~~net~~ discount on debt and deferred financing fees, as of September 30, ~~2017,~~2022, 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 2022	$	2,681
2023	7,124
2024	7,390
2025	3,600
2026	147,350
Thereafter	292,500

~~The~~

As part of the termination of the Company's previous debt facilities, the Company ~~incurred debt issuance costs of $248 related~~wrote off $5.5 million in deferred financing fees to ~~the A&R Credit Agreement during the first nine months of 2016. The debt~~ ~~transaction~~ ~~resulted in a~~ loss on debt extinguishment ~~of $993,~~and incurred an additional $0.9 million in costs related to the transaction which are included in Selling, general and administrative expenses for the ~~write off of unamortized debt issuance costs and debt discount, early termination fees, and legal costs.~~

nine months ended September 30, 2021.

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Note 3 -— Leases

The Company leases certain real estate ~~both office~~for commercial, production, and ~~production facilities,~~retail purposes, as well as equipment from third parties. Lease expiration dates are between ~~2018~~2022 and ~~2025.~~2027. A portion of ~~capital~~ leases are denominated in foreign currencies. ~~Many~~

For both operating and finance leases, the Company recognizes a right-of-use (“ROU”) asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of ~~these~~our obligation to make payments arising over the lease term.

We elected the short-term lease exemption for all leases ~~include renewal options~~that qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and ~~in some cases~~the related lease expense is recognized on a straight-line basis over the term of the lease.

The Company’s leases may include options to ~~purchase.~~

extend or terminate the lease. Renewal options generally range from one to ten years and the options to extend are included in the lease term when it is reasonably certain that we will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment and vehicles primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for most of the Company’s leases, the Company applies a portfolio approach using an estimated incremental borrowing rate, giving consideration to company specific information and publicly available interest rates for instruments with similar characteristics, to determine the initial present value of lease payments over the lease terms.

The components of lease expense consists of the following:


	For the Three Months Ended				For the Nine Months Ended
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Finance lease cost
Amortization of right-of-use assets	$	455	$	412	$	1,438	$	1,781
Interest on lease liabilities	64		63		185		277
Operating lease cost	1,509		1,435		4,823		4,059
Variable lease cost(1)	280		363		1,061		978
Short-term lease cost	5		4		18		10
Sublease income	(65)		(65)		(195)		(173)
Total lease cost	$	2,248	$	2,212	$	7,330	$	6,932

(1)Variable lease cost primarily relates to percentage rent, common area maintenance, property taxes, and insurance on leased real estate.

Other information related to leases was as follows as of:


	September 30, 2022	September 30, 2021
Weighted-average remaining lease term (years)
Operating leases	3.42	4.01
Finance leases	2.00	2.50
Weighted-average discount rate
Operating leases	4.5%	5.0%
Finance leases	4.5%	4.7%

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Annual future commitments under non-cancelable leases as of September 30, ~~2017,~~2022, 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 2022	$	1,796	$	407
2023	7,190		1,702
2024	5,665		622
2025	4,639		239
2026	2,288		79
Thereafter	179		—
Total minimum future obligations	$	21,758	$	3,049
Less interest	(1,487)		(145)
Present value of net future minimum obligations	20,271		2,904
Less current lease obligations	(6,266)		(1,423)
Long-term lease obligations	$	14,005	$	1,481

Supplemental cash flow information:


	For the Nine Months Ended
$'s in 000's	September 30, 2022		September 30, 2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	185	$	277
Operating cash flows from operating leases	4,945		3,928
Financing cash flows from finance leases	1,097		1,573
(Noncash) right-of-use assets obtained in exchange for lease obligations
Operating leases	3,864		4,828
Finance leases	59		141

Note 4 — Intangible Assets and Goodwill

Goodwill and non-amortizable intangible assets

The ~~net book~~Company tests goodwill and indefinite lived intangibles for impairment at least annually or more frequently whenever events or circumstances occur indicating that it might be impaired. During the three months ended September 30, 2022, the Company’s market capitalization declined significantly, driven by rising interest rates and macroeconomic conditions. Additionally, the Company has slowed its expansion plans for the Services reporting unit. Based on these events, the Company concluded that an indicator of impairment existed for the Services reporting unit related to its goodwill during the three months ended September 30, 2022.

Goodwill impairment is evaluated based on a discounted cash flow method (Level 3). Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of ~~assets under capital lease~~goodwill. In addition, the Company’s publicly traded market capitalization was $883reconciled to the sum of the fair values of the reporting units. Although the Company believes the assumptions and ~~$775 as~~estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.

As a result of the Company's interim impairment test, the Company determined that the fair value of the Services reporting unit was less than it's carrying value, resulting in a non-cash goodwill impairment charge of $47.3 million during the three and nine months ended September 30, ~~2017~~2022. No impairment was recognized for the three and ~~December 31, 2016,~~nine months ended September 30, 2021.

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Amortizable intangibles

Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets.

Due to the aforementioned goodwill impairment, during the three months ended September 30, 2022, the Company determined that a triggering event had occurred for certain amortizable intangible assets and conducted Step 1 of impairment testing utilizing undiscounted cash flows. No additional impairment was recorded as a result of this test.

Intangible assets consist of the following at:


$'s in 000's	Useful Lives	September 30, 2022		December 31, 2021
Amortizable intangibles
Certification	7 years	$	350	$	350
Customer relationships	12-20 years	159,956		160,167
Patents and processes	5-10 years	14,494		14,843
Brand names	5-15 years	24,568		24,731
Total amortizable intangibles		199,368		200,091
Less accumulated amortization		(57,339)		(44,438)
Total net amortizable intangibles		142,029		155,653
Non-amortizable intangibles
Trademarks and other		33,239		33,341
In-process research and development		1,668		1,668
Intangible assets, net of accumulated amortization		$	176,936	$	190,662

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 September 30, 2022 and 2021 was $4.6 million and $4.6 million, respectively, and $13.6 million and $17.7 million for the nine months ended September 30, 2022 and 2021, respectively. ~~Total operating lease~~

The in-process research and development (“IPRD”), intangible assets represent the value assigned to three acquired Research and Development ("R&D") projects that principally represent rights to develop and sell products that the Company has acquired which has not yet been completed or approved. The IPRD acquired as part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and regulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development. In the event that the efforts are not successful, the Company will write off the relevant IPRD in the period in which it is no longer considered feasible. During the nine months ended September 30, 2021, the Company opted out of two of the acquired projects, effectively abandoning the associated research and development efforts. Accordingly, the Company wrote off the associated IPRD assets of $3.8 million, the expense for which is included as amortization expense in selling, general and administrative expenses on the condensed consolidated statement of operations for the nine months ended September 30, 2021.

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


Years ending December 31, ($'s in 000's)
Remainder of 2022	$	4,473
2023	16,875
2024	14,526
2025	13,874
2026	13,292
Thereafter	79,052

The following is a summary of the changes in the carrying value of goodwill for the period from January 1, 2021 to September 30, 2022:


	Reporting Unit
($'s in 000's)	Products		Services		Total
Goodwill as of January 1, 2021	183,894		47,264		231,158
Foreign currency translation	(48)		—		(48)
Goodwill as of December 31, 2021	183,846		47,264		231,110
Foreign currency translation	(897)		—		(897)
Impairment	—		(47,264)		(47,264)
Goodwill as of September 30, 2022	$	182,949	$	—	$	182,949

Note 5 — Income Tax

Our effective tax rate from continuing operations was 0.7% and (0.9)% for the three and nine months ended September 30, 2022, respectively, and (4.0)% and (10.8)% for the three and nine months ended September 30, 2021, respectively, including discrete items. Income tax expense for the three and nine months ended September 30, ~~2017~~2022 and ~~2016 totaled $449 and $472, and $1,357 and $1,250, respectively.~~

~~Note 4 -~~ ~~Income Taxes~~

~~As a result of~~2021 was different than the IPO and related reorganization transactions completed in July 2017, the Company holds an economic interest of approximately 62% in Holdco and consolidates the financial position and results of Holdco. The approximate 38% of Holdco not held by the Company is considered noncontrolling interest. Holdco is treated as a partnership forU.S federal statutory 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 effective tax rate is significantly less than the statutory~~ 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.~~ effects of a change in valuation allowance, state taxes, and foreign global intangible low-taxed income inclusion.

The ~~effective~~Company has assessed the realizability of the net deferred tax ~~rate for the nine months ended~~assets as of September 30, ~~2017~~2022 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is ~~also lower~~more likely than ~~statutory rates because income for the period prior to the IPO was~~ not ~~taxable to the Company as it did not yet hold an equity interest in Holdco.~~

~~As a result~~that some portion or all of the ~~IPO and reorganization transactions,~~deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company ~~has~~believes it is more likely than not that the benefit from recorded deferred tax assets ~~and liabilities based on the differences between the book value of assets and liabilities~~will not be realized. The Company has recorded a valuation allowance 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~~

~~Table of Contents~~

~~assets. The~~ deferred tax assets ~~resulted primarily from net operating losses~~of $106.3 million as of September 30, 2022 and ~~were fully offset by a~~December 31, 2021. In future periods, if we conclude we have future taxable income sufficient to recognize the deferred tax assets, we may reduce or eliminate the valuation allowance.

Note ~~5 –~~6 — Earnings per Share

Basic and Diluted ~~Earnings~~Loss per Share

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

Table of common membership interests, the LLC Interests of Holdco, and (ii) exchange all of the then-existing membership interests of the Continuing LLC Owners for common units of Holdco. This Recapitalization changed the relative membership rights of the Continuing LLC Owners such that retroactive application of the Recapitalization to periods prior to the IPO for the purposes of calculating earnings per share would not be appropriate.

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

Contents

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted ~~earnings~~loss 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 September 30,				Nine months ended September 30,
(in 000's, except for per share amounts)	2022		2021		2022		2021
Numerator:
Net loss	$	(49,571)	$	(8,328)	$	(41,733)	$	(1,908)
Less: net loss attributable to non-controlling interests	(435)		(426)		(360)		(65)
Net loss attributable to PetIQ, Inc. — basic and diluted	(49,136)		(7,902)		(41,373)		(1,843)
Denominator:
Weighted-average shares of Class A common stock outstanding — basic	29,224		28,940		29,224		27,949
Dilutive effects of stock options that are convertible into Class A common stock	—		—		—		—
Dilutive effect of RSUs	—		—		—		—
Dilutive effect of conversion of Notes	—		—		—		—
Weighted-average shares of Class A common stock outstanding — diluted	29,224		28,940		29,224		27,949

Loss per share of Class A common stock — basic	$	(1.68)	$	(0.27)	$	(1.42)	$	(0.07)
Loss per share of Class A common stock — diluted	$	(1.68)	$	(0.27)	$	(1.42)	$	(0.07)

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

~~Shares~~

The computation of dilutive effect of other potential common shares excludes all stock options and restricted stock units for the three and nine months ended September 30, 2022 and 2021, as the inclusion under the treasury stock method would have been antidilutive. The dilutive impact of the ~~Company’s Class B common stock as well as stock options~~Notes have not been included in the ~~diluted earnings~~dilutive loss per share calculation for the three and nine months ended September 30, 2022 and 2021 as they would have been ~~determined to be anti-dilutive under the if-converted method and treasury stock method, respectively.~~

antidilutive.

~~Table of Contents~~

Note ~~6 –~~7 — Stock Based Compensation

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

PetIQ, Inc. Omnibus Incentive Plan

The PetIQ, Inc. Amended and Restated 2017 Omnibus Incentive Plan, (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights ~~(SARs)~~("SARs"), restricted stock, restricted stock units ~~(RSUs)~~("RSUs"), and other stock-based awards. ~~The Company initially~~On June 22, 2022, the Company’s stockholders approved an amendment and restatement of the Plan to, among other things, increase the total number of shares of the Company’s Class A common stock reserved ~~1,914,047 registered~~and available for issuance thereunder by 1,890 thousand shares resulting in a total of 5,804 thousand shares of Class A common stock ~~for issuance~~issuable under the Plan. As of September 30, ~~2017, 1,109,998~~2022 and 2021, 2,081 thousand and 713 thousand shares were available for issuance under the ~~Plan.~~Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock.

Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares.

PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees

The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with an acquisition in 2018 as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A common stock of the Company, of which 760 thousand were granted. No further grants may be made under the Inducement Plan. All awards issued under the Inducement Plan may only be settled in shares of Class A common stock.

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Stock Options

The Company awards stock options to certain employees ~~and directors~~ under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 ~~years~~

years.

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled ~~$246~~$0.5 million and $2.7 million for the three and nine months ended September 30, ~~2017.~~2022, respectively, and $1.7 million and $4.5 million for the three and nine months ended September 30, 2021, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant ~~date~~dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the ~~period ended September 30:~~


	~~2017~~
~~Expected term (years)~~ ~~(1)~~		~~6.25~~
~~Expected volatility~~ ~~(2)~~		~~35.00~~	%
~~Risk-free interest rate~~ ~~(3)~~		~~1.98~~	%
~~Dividend yield~~ ~~(4)~~		~~0.00~~	%

⁽¹⁾

The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

⁽²⁾

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

⁽³⁾

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

⁽⁴⁾

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

~~Table of Contents~~

~~The following table summarizes the activity of the Company’s unvested stock options for the period~~periods ended September 30, ~~2017:~~

2022 and 2021:

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

—


	September 30, 2022		September 30, 2021
Expected term (years) (1)	6.25		6.17
Expected volatility (2)	37.21	%	33.45	%
Risk-free interest rate (3)	1.44	%	0.89	%
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.

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

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

(4)The Company has not paid and does not anticipate paying a cash dividend on our common stock.

The weighted average grant date fair value of stock options granted during the period ended September 30, ~~2017~~2022 was ~~$6.08~~$9.14 per option. At September 30, ~~2017,~~2022, total unrecognized compensation cost related to unvested stock options was ~~$4.4~~$3.7 million and is expected to be recognized over a weighted-average period of ~~3.8~~2.1 years.

~~Note 7 - Stockho~~l~~ders’ Equity~~

~~Reorganization Transactions~~

~~In connection with the IPO on July 20, 2017, the Company completed the following Reorganization Transactions:~~

~~The Company amended and restated its certificate of incorporation (see “Amendment and Restatement of Certificate of Incorporation” below);~~

~~PetIQ Holdings, LLC (“Holdco”) amended and restated its limited liability company agreement (the “LLC Agreement”) (see “Holdco Recapitalization” below);~~

The Company acquired, by the contribution by certain sponsors, three entities (“Sponsor Corps”) that were owned by former indirect members of Holdco (the “Sponsors”), for which the Company issued 5,615,981 shares of Class A common stock and Preference Notes equal to $30,526 as merger consideration (the “Merger”). The only significant asset held by the Sponsor Corps prior to the Merger was 7,523,839 LLC Interests. Upon consummation of the Merger, the Company recognized the 7,523,839 LLC Interests at carrying value, as the contribution was considered to be a transaction between entities under common control;

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

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

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

Following the completion of the Reorganization Transactions and IPO, PetIQ owned 61.5% of HoldCo. The remaining 38.5% of Holdco was held by the “Continuing LLC Owners,” whom the Company defines as all remaining direct and indirect owners of Holdco except for PetIQ. As a result of the Reorganization Transactions, PetIQ became the sole managing member of Holdco and has the sole voting power in, and controls the management of, Holdco. Accordingly, the Company consolidated the financial results of Holdco and reported a non-controlling interest in its consolidated financial statements.


	Stock Options (in 000's)	Weighted Average Exercise Price		Aggregate Intrinsic Value (in 000's)		Weighted Average Remaining Contractual Life (years)
Outstanding at January 1, 2021	2,086	$	23.93	$	30,302	7.2
Granted	354	35.66
Exercised	(583)	23.05		$	8,499
Forfeited	(64)	24.84
Cancelled	(25)	25.70
Outstanding at December 31, 2021	1,768	$	26.51	$	2,897	7.3
Granted	37	21.91
Exercised	(2)	19.49		$	10
Forfeited	(72)	30.70
Cancelled	(62)	32.96
Outstanding at September 30, 2022	1,669	$	26.00	$	—	6.5
Options exercisable at September 30, 2022	1,130

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AsRestricted Stock Units

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

~~Amendment and Restatement~~subject to time-based vesting conditions. Upon a termination of ~~Certificate of Incorporation~~

~~On July 20, 2017,~~service relationship by the Company, ~~amended~~all unvested RSUs will be forfeited and ~~restated its certificate of incorporation to, among other things, provide for~~ the ~~(i) authorization of 125,000,000~~ shares of ~~Class A~~ common stock ~~with a par~~underlying such awards will become available for issuance under the Plan. The fair value of ~~$0.001 per share; (ii) authorization of 8,401,521 shares of Class B common stock with a par~~RSUs are measured based on the closing fair market value of $0.001 per share; (iii) authorization of 12,500,000 shares of blank check preferred stock; and (iv) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.

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

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

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

~~Initial Public Offering~~

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

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

~~PetIQ Holdings, LLC Recapitalization~~

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

The LLC Agreement also provides that the Continuing LLC Owners may from time to time at each of their options require Holdco to exchange all or a portion of their LLC Interests in exchange for, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC Interests or are otherwise affiliated with holders of LLC interests), shares of the Company’s Class A common stock on ~~a one-for-one basis or a cash payment equal~~the date of grant. At September 30, 2022, total unrecognized compensation cost related to unvested RSUs was $17.2 million and is expected to vest over a ~~volume~~ weighted average ~~market price~~period of ~~one share~~3.0 years.

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $1.7 million and $6.1 million for the three and nine months ended September 30, 2022, respectively, and $1.7 million and $3.6 million for the three and nine months ended September 30, 2021, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients.

The following table summarizes the activity of the Company’s RSUs for the period ended September 30, 2022.


	Number of Shares (in 000's)	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2021	317	$	22.91
Granted	268	37.91
Settled	(103)	24.81
Forfeited	(23)	26.02
Outstanding at December 31, 2021	459	$	31.08
Granted	795	20.42
Settled	(202)	28.25
Forfeited	(124)	37.36
Nonvested RSUs at September 30, 2022	929	$	23.14

Note 8 — Stockholders Equity

Exchanges

During the nine months ended September 30, 2022 holders of Class AB common stock and LLC membership interests in HoldCo ("LLC Interests") exercised exchange rights and exchanged 20 thousand Class B common shares and corresponding LLC Interests for each LLC interest exchanged, in each case in accordance with the terms of the LLC Agreement; provided that, at the Company’s election (determined solely by the Company’s board of directors, which includes directors who hold LLC interests or are otherwise affiliated with holders of LLC interests), the Company may effect a direct exchange of such

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Class A common stock or such cash, as applicable, for such LLC interests. The Continuing LLC Owners may exercise such redemption right for as long as their LLC interests remain outstanding. Simultaneously with the payment of cash ornewly issued shares of Class A common stock. The LLC Agreement of HoldCo generally allows for exchanges on the last day of each calendar month.

Stock repurchase program

On September 6, 2022, the Company's Board of Directors authorized a stock ~~as applicable, in connection with a redemption or exchange of LLC interests pursuant~~repurchase program for up to ~~the terms~~$30 million 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~~stock. Repurchases of Class BA common stock ~~owned by Continuing LLC Owners~~may be made at management’s discretion from time to time in one or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations promulgated under Securities Exchange Act. During the ~~number~~three and nine months ended September 30, 2022 the Company repurchased 373,408 shares at a weighted average price of $10.33 per share.

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Note 9 — Non-Controlling Interests

The following table presents the outstanding LLC Interests ~~of Holdco owned by the Continuing LLC Owners.~~

~~Note 8 - Non-Controlling Interests~~

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

The Company reports a non-controlling interest representing the LLC interests of Holdco held by Continuing LLC Owners. Changes in PetIQ’s ownership interest in Holdco while PetIQ retains its controlling interest in Holdco will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC interests of Holdco by the Continuing LLC Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when Holdco has positive or negative net assets, respectively. The Company is also required to make tax distributions based on the LLC Agreement to Continuing LLC Members on a regular basis, these distributions will reduce the noncontrolling interest.

~~The Company used the net proceeds from its IPO to purchase 3,556,666 newly-issued~~ LLC Interests ~~of Holdco~~for the periods presented.


	LLC Interests held			% of Total
$'s in 000's	LLC Owners	PetIQ, Inc.	Total	LLC Owners		PetIQ, Inc.
As of January 1, 2021	3,040	25,711	28,751	10.6	%	89.4	%
Stock based compensation transactions	—	660	660
Exchange transactions	(2,768)	2,768	—
As of December 31, 2021	272	29,139	29,411	0.9	%	99.1	%
Stock based compensation transactions		160	160
Exchange transactions	(20)	20	—
Unit redemption	—	(373)	(373)
As of September 30, 2022	252	28,946	29,198	0.9	%	99.1	%

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

For the three and ~~133,334 LLC Interests from Continuing LLC Owners. Additionally, in connection with the Reorganization Transactions,~~nine months ended September 30, 2022 the Company ~~acquired 9,532,58~~3 ~~LLC Interests~~owned a weighted average of ~~Holdco.~~

As99.1%, of HoldCo, and for the three and nine months ended September 30, ~~2017, there were 21,490,771 LLC Interests outstanding,~~2021 the Company owned a weighted average of ~~which PetIQ owned 13,222,583, representing a 61.5% ownership interest in Holdco.~~

98.6% and 95.8%, respectively.

-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 -~~10 — Customer Concentration

The Company has significant exposure to customer concentration. During the three and nine months ended September 30, ~~2017 and 2016,~~2022, three ~~and~~ ~~three~~customers ~~respectively,~~individually accounted for more than 10% of sales, ~~individually. In total for the three months ended September 30, 2017~~comprising 44% and ~~2016, the three customers accounted for 61% and 68%~~44% of net sales ~~respectively. In total~~in aggregate, respectively for such periods. During the three and nine months ended September 30, ~~2017~~2021, two customers and ~~2016, the three customers~~one customer individually accounted for ~~61%~~more than 10% of sales, comprising 41% and ~~71%~~26% of net sales in aggregate in both such periods, respectively.

At September 30, ~~2017 and December 31, 2016 four and four~~2022 two Products segment customers ~~respectively,~~ individually accounted for more than 10% of outstanding trade receivables, and ~~in aggregate~~ accounted for ~~53%~~ ~~and 60%, respectively,~~ 51% of outstanding trade receivables, net. ~~The~~At December 31, 2021 one Products segment customers ~~are customers~~individually accounted for more than 10% of ~~the domestic segment.~~

outstanding trade receivables, and accounted for 47% of outstanding trade receivables, net.

Note ~~10 -~~11 — Commitments and Contingencies

Litigation Contingencies

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

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

The Company records a liability when a particular contingency is both probable and ~~estimable~~estimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and ~~provides disclosure for contingencies~~the reasons to the effect that it cannot be reasonably estimated are ~~at least~~disclosed. If a loss is reasonably possible, ~~of resulting in a loss including an estimate which we currently cannot make. The~~the Company ~~has not accrued for~~ ~~any~~ ~~contingency at~~will provide disclosure to that affect. As of September 30, ~~2017~~2022 and December 31, ~~2016, as~~2021 the Company ~~does not consider any contingency to be probable or estimable.~~had $1.2 million and $3.5 million accrued on the condensed consolidated balance sheet, respectively. The Company expenses legal costs as incurred within selling, general and administrative expenses on the condensed consolidated ~~condensed~~ statements of operations.

During the three and nine months ended September 30, 2021, the Company entered into mediation with a third party who had filed a class action lawsuit against the Company. As a result of that mediation, the Company accrued the expected settlement of $1.4 million as SG&A expense during the period, the settlement and final payment are expected to be finalized in the three months ended December 31, 2022.

Additionally, during the nine months ended September 30, 2022, the Company settled a lawsuit brought by a former supplier to the Company related to the redemption of ownership interest for $5.5 million. The Company had an accrued obligation of $2.0 million related to the lawsuit recorded as of December 31, 2021. During the nine months ended September, 30, 2022, the Company recorded an additional $3.5 million of expense in the condensed consolidated statements of operations and paid $5.5 million in full satisfaction of the lawsuit.

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Commitments

We have commitments for leases and long-term debt that are discussed further in Note ~~11 -~~2, Debt, and Note 3, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.

Note 12 — Segments

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

The segments isare based on the ~~level at which the chief operating decision maker reviews~~ discrete financial information reviewed by the Chief Operating Decision Maker to ~~assess performance and~~ make resource allocation decisions ~~which is done~~and to evaluate performance. We measure and evaluate our reportable segments based on ~~these two geographic areas.~~

net sales and segment Adjusted EBITDA. We exclude from our segments certain corporate costs and expenses, such as accounting, legal, human resources, information technology, and corporate headquarters expenses as our corporate functions do not meet the definition of a segment as defined in the accounting guidance related to segment reporting.

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


$'s in 000's	Products		Services		Unallocated Corporate		Total
September 30, 2022
Net sales	$	176,217	$	33,508	$	—	$	209,725
Segment Adjusted EBITDA	35,634		4,226		(20,651)		19,209
Depreciation expense	1,001		1,671		904		3,576
Capital expenditures	1,114		85		572		1,771


$'s in 000's	Products		Services		Unallocated Corporate		Total
September 30, 2021
Net sales	$	181,557	$	28,977	$	—	$	210,534
Segment Adjusted EBITDA	33,678		3,821		(21,135)		16,364
Depreciation expense	982		1,454		709		3,145
Capital expenditures	578		2,177		3,520		6,275

Financial information relating to the Company’s operating segments for the 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	Products		Services		Unallocated Corporate		Total
September 30, 2022
Net sales	$	642,981	$	94,453	$	—	$	737,434
Segment Adjusted EBITDA	126,923		12,050		(60,588)		78,385
Depreciation expense	3,039		4,956		2,778		10,773
Capital expenditures	5,352		2,507		1,938		9,797


$'s in 000's	Products		Services		Unallocated Corporate		Total
September 30, 2021
Net sales	$	654,448	$	81,444	$	—	$	735,892
Segment Adjusted EBITDA	120,657		8,945		(52,018)		77,584
Depreciation expense	2,913		3,924		2,582		9,419
Capital expenditures	1,533		8,810		14,234		24,577

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~~Note 12 - Related Parties~~

~~Opco had entered into management~~The following table reconciles Segment Adjusted EBITDA to Net income for the periods presented.


	For the three months ended				For the nine months ended
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Adjusted EBITDA:
Product	$	35,634	$	33,678	$	126,923	$	120,657
Services	4,226		3,821		12,050		8,945
Unallocated Corporate	(20,651)		(21,135)		(60,588)		(52,018)
Segment Adjusted EBITDA	19,209		16,364		78,385		77,584
Adjustments:
Depreciation	(3,576)		(3,145)		(10,773)		(9,419)
Amortization	(4,602)		(4,627)		(13,602)		(17,682)
Interest expense, net	(7,276)		(6,168)		(19,696)		(18,693)
Goodwill impairment(1)	(47,264)		—		(47,264)		—
Acquisition costs(2)	(1,035)		—		(1,191)		(92)
Loss on debt extinguishment and related costs(3)	—		—		—		(6,438)
Stock based compensation expense	(2,238)		(2,627)		(8,904)		(7,188)
Non same-store adjustment(4)	(2,944)		(6,195)		(13,575)		(16,930)
Integration costs and costs of discontinued clinics(5)	(200)		1,041		(943)		354
Litigation expenses	—		(2,323)		(3,802)		(2,886)
CFO Transition	—		(331)		—		(331)

Pretax net loss	$	(49,926)	$	(8,011)	$	(41,365)	$	(1,721)
Income tax (expense) benefit	355		(317)		(368)		(187)
Net loss	$	(49,571)	$	(8,328)	$	(41,733)	$	(1,908)

(1) Non-cash goodwill impairment due to a significant decline in the Company’s market capitalization, driven primarily by rising interest rates and macroeconomic conditions. Additionally, the Company made the strategic decision to slow expansion plans for the Services business this year.

(2) Acquisition costs include legal, accounting, banking, consulting, ~~services agreements with members of Holdco. The services were~~diligence, and other costs related to ~~financial transactions~~completed and ~~other senior management matters~~contemplated acquisitions.

(3) Loss on debt extinguishment and related costs are related to ~~business administration. Those agreements provided for~~our entering into two new credit facilities, including the ~~Company~~write off of deferred financing costs and related costs.

(4) Non same-store adjustment includes revenue and costs, and associated gross profit, related to ~~pay base annual management fees plus expenses, typically paid quarterly. These expenses were recorded in general~~our Services segment wellness centers and ~~administrative expenses~~host partners with less than six full quarters of operating results, and also include pre-opening expenses.

(5) Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. Depending on the type of costs, the costs are primarily in the ~~condensed consolidated statement~~Products and the corporate segments. Costs of ~~comprehensive income (loss).~~discontinued clinics represent costs to close Services segment locations.

Supplemental geographic disclosures are below.


	Nine Months Ended September 30, 2022
$'s in 000's	U.S.		Foreign		Total
Product sales	$	637,385	$	5,597	$	642,981
Service revenue	94,453		—		94,453
Total net sales	$	731,838	$	5,597	$	737,434

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	Nine Months Ended September 30, 2021
$'s in 000's	U.S.		Foreign		Total
Product sales	$	649,232	$	5,216	$	654,448
Service revenue	81,444		—		81,444
Total net sales	$	730,676	$	5,216	$	735,892


	Three Months Ended September 30, 2022
$'s in 000's	U.S.		Foreign		Total
Product sales	$	174,517	$	1,700	$	176,217
Service revenue	33,508		—		33,508
Total net sales	$	208,026	$	1,700	$	209,725


	Three Months Ended September 30, 2021
$'s in 000's	U.S.		Foreign		Total
Product sales	$	179,759	$	1,798	$	181,557
Service revenue	28,977		—		28,977
Total net sales	$	208,736	$	1,798	$	210,534

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


	September 30, 2022		December 31, 2021
United States	$	71,318	$	75,315
Europe	3,505		1,298
Total	$	74,823	$	76,613

Note 13 — Related Parties

Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance, which acts as a broker for a number of the Company’s insurance policies. The ~~Company recorded $545~~Company’s premium expense, which is generally paid directly to the relevant insurance company, amounted to $7.2 million and ~~$508~~$6.8 million for policies that cover the nine months ended September 30, ~~2017~~2022 and ~~2016, respectively,~~2021, respectively. Mr. Chris Christensen earns various forms of compensation based on the specifics of each policy.

Katie Turner, the spouse of CEO, McCord Christensen, is the owner of Acadia Investor Relations LLC, (“Acadia”) which acts as the Company’s investor relations consultant. Acadia was paid $0.06 million and ~~$158 and $208~~$0.2 million for the three and nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively. ~~Upon consummation of the recapitalization 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.

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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~~10-Q and our audited consolidated financial statements for the year ended December 31, ~~2016~~2021 and related notes included in the ~~final prospectus~~Annual Report on Form 10-K for PetIQ, Inc., ~~dated July 20, 2017 and~~ filed with the Securities and Exchange Commission (the “SEC”) ~~on July 21, 2017.~~for the year ended December 31, 2021. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See ~~“-Cautionary~~“Cautionary Note Regarding Forward-Looking Statements.”

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

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

Business

Overview

PetIQ is a ~~rapidly growing~~leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail and e-commerce channels with our branded and distributed medications as well as health and wellness ~~company providing convenient access~~items, which are further supported by our world-class medications manufacturing facility in Omaha, Nebraska and ~~affordable choices to a broad portfolio of veterinarian-recommended pet~~ health and wellness ~~products across a network of leading~~manufacturing facility in Springville, Utah. Our national service platform, operates in over 2,600 retail ~~stores, including more than 40,000 retail pharmacy locations.~~partner locations in 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best ~~pet~~products and care that we can give them. ~~Through our retail relationships, we encourage pet owners to regularly visit their veterinarian and educate them about the importance of veterinarian-grade products.~~

Our sales occur predominantly in the U.S. and Canada. Approximately 98% of our nine months ended September 30, 2017 and fiscal 2016 net sales were generated from customers located in the United States and Canada (“Domestic”), with the remaining sales generated from other foreign locations.

We have two reporting segments: (i) ~~Domestic;~~Products; and (ii) International. This is based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. In our judgment, because our operations in the U.S. and Canada comprise 98%Services. The Products segment consists of our ~~net sales, it is appropriate~~manufacturing and distribution business. The Services segments consists of veterinary and wellness services and and products provided by the Company directly to ~~view our operations as~~consumers.

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

~~Recent Developments~~

~~As discussed more fully in Note 7~~OpCo.

Macroeconomic Considerations

Unfavorable conditions in the ~~accompanying Notes to Condensed Consolidated Financial Statements contained~~economy both 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~~United States and ~~commissions, which we utilized to repay preference notes, pay offering costs, and purchase LLC Interests in Holdco.~~

~~Results of Operations~~

~~Components~~abroad may negatively affect the growth of our ~~Results~~business and our results of ~~Operations~~

~~Net Sales~~

~~Our net sales consist~~operations.For example, macroeconomic events including the COVID-19 pandemic, rising inflation, the U.S. Federal Reserve raising interest rates and the Russian invasion of ~~our total sales net~~Ukraine have led to economic uncertainty. These factors may reduce economic growth, increase the chances of ~~product returns, allowances (discounts), trade promotions~~a global recession, and ~~incentives. We offer a variety of trade promotions and incentives~~affect consumers’ ability 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~~pay for ~~profitability; aggressive pricing by our competitors; and whether we can maintain and develop positive relationships with key retail customers, such as Walmart and Sam’s Club.~~

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~~While most of~~ our products ~~are sold consistently throughout the year, we~~and services.

The global COVID-19 pandemic created significant volatility, disruption and uncertainty. We have continued to experience ~~seasonality in the form of increased retailer demand for~~ ~~our~~ ~~flea and tick product offerings in the first two quarters of the year in preparation for increased consumer demand during the summer months.~~

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

~~Gross Profit~~

Gross profit is our net sales less cost of sales. Our cost of sales consists primarily of costs of raw goods, finished goods packaging materials, manufacturing, shipping and handling costs and costs associated with our warehouses and distribution network. Gross margin measures our gross profit as a percentage of net sales. With respect to our proprietary ~~products~~, we have a manufacturing network that includes leased manufacturing facilities where we manufacture finished goods, as well as third-party contract manufacturing facilities from which we purchase finished products predominately on a dollar-per-unit basis. Since our inception in 2010, we have worked closely with our contract manufacturers to negotiate lower costs through increased volume of purchases and price negotiations. The gross margin on our proprietary value-branded products is higher than on our distributed products. For distributed products, our costs are driven largely by whether we source the product direct from the manufacturer or a licensed distributor. Increasingly, PetIQ sources distributed brands direct from the manufacturer or from licensed distributors.

~~General and Administrative Expenses~~

~~Our general and administrative expenses primarily consist of employee compensation and benefits expenses, sales and merchandizing~~ ~~expenses~~, advertising and marketing expenses, rent and lease expenses, IT and utilities expenses, professional fees, insurance costs, R&D costs, and consulting fees. General and administrative expenses as a percentage of net sales have decreased from 15.7% in the first nine months of 2016 to 12.8% in the first nine months of 2017, primarily driven by increasing net sales with a high proportion of fixed expenses. In the future, we expect our general and administrative expenses to grow at a slower rate than our net sales growth as we leverage our past investments. In addition, we expect that as a result of our IPO, there will be an increase in our general and administrative expenses each yearcertain negative effects 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~~pandemic, including labor related shortages. Nonetheless, COVID-19 has presented new opportunities for our ~~flea~~business as it has accelerated pet owner purchases of veterinary-grade pet products from retail and ~~tick product offerings~~e-commerce channels. Consumers have started to resume normal activities, including seeking in person veterinary care for their companion animals, and more businesses have commenced resuming operations. There can be no assurance that such positive trends will continue or that there will not be any increases of new infections or new variants that may impede or reverse recovery and such positive trends.

The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. However, if economic uncertainty increases or the ~~first two quarters~~global economy worsens, our business, financial condition and results of operations may be harmed.For further discussion of the ~~year~~potential impacts of macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in ~~preparation for the spring~~Part II, Item 1A of this Quarterly Report on Form 10-Q and ~~summer seasons and, as a result, the sales and merchandizing~~ ~~expenses~~ ~~component~~Part I, Item 1A 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~~most recent Annual Report 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.

Form 10-K.

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~~Net Income (Loss)~~

~~Our net income (loss)~~

Stock Repurchase Program

On September 6, 2022, the Company's Board of Directors authorized a stock repurchase program for ~~future periods will~~up to $30 million of Class A common stock. Repurchases of Class A common stock may be ~~affected by~~made at management’s discretion from time to time in one or more transactions on the ~~various factors described above. In addition, our historical~~ ~~results prior to~~open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations promulgated under Securities Exchange Act. During the ~~IPO~~ ~~benefit from insignificant income taxes due to Opco’s status as~~three and nine months ended September 30, 2022, the Company repurchased 373,408 shares at 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.~~

weighted average price of $10.33 per share.

Results of Operations

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

Three months ended

% of Net sales

$'s in 000's

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net sales

$
60,554

$
41,671

100.0
%

100.0
%
Cost of sales

48,037

35,511

79.3
%

85.2
%
Gross profit

12,517

6,160

20.7
%

14.8
%
Operating expenses









General and administrative expenses

10,739

7,942

17.7
%

19.1
%
Operating income

1,778

(1,782)

2.9
%

(4.3)
%
Interest expense

(352)

(737)

(0.6)
%

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

(31)

2

(0.1)
%

0.0
%
Loss on debt extinguishment

—

—

—
%

—
%
Other income, net

14

5

0.0
%

0.0
%
Total other expense, net

(369)

(730)

(0.6)
%

(1.8)
%
Pretax net income

1,409

(2,512)

2.3
%

(6.0)
%
Provision for income taxes

(550)

—

(0.9)
%

—
%
Net income

859

(2,512)

1.4
%

(6.0)
%


	For the Three Months Ended				% of Net Sales
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022	September 30, 2021
Product sales	$	176,217	$	181,557	84.0%	86.2%
Services revenue	33,508		28,977		16.0%	13.8%
Total net sales	209,725		210,534		100.0%	100.0%
Cost of products sold	131,414		142,009		62.7%	67.5%
Cost of services	27,541		26,453		13.1%	12.6%
Total cost of sales	158,955		168,462		75.8%	80.0%
Gross profit	50,770		42,072		24.2%	20.0%
Selling, general and administrative expenses	45,984		45,252		21.9%	21.5%
Goodwill impairment	47,264		—		22.5%	—%
Operating (loss) income	(42,478)		(3,180)		(20.3)%	(1.5)%
Interest expense, net	7,276		6,168		3.5%	2.9%

Other expense (income), net	172		(1,337)		0.1%	(0.6)%
Total other expense, net	7,448		4,831		3.6%	2.3%
Pretax net loss	(49,926)		(8,011)		(23.8)%	(3.8)%
Income tax benefit (expense)	355		(317)		0.2%	(0.2)%
Net loss	(49,571)		(8,328)		(23.6)%	(4.0)%

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	For the Nine Months Ended				% of Net Sales
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022	September 30, 2021
Product sales	$	642,981	$	654,448	87.2%	88.9%
Services revenue	94,453		81,444		12.8%	11.1%
Total net sales	737,434		735,892		100.0%	100.0%
Cost of products sold	485,833		510,673		65.9%	69.4%
Cost of services	81,222		75,720		11.0%	10.3%
Total cost of sales	567,055		586,393		76.9%	79.7%
Gross profit	170,379		149,499		23.1%	20.3%
Selling, general and administrative expenses	144,815		129,066		19.6%	17.5%
Goodwill impairment	47,264		—		6.4%	—%
Operating (loss) income	(21,700)		20,433		(2.9)%	2.8%
Interest expense, net	19,696		18,693		2.7%	2.5%
Loss on debt extinguishment	—		5,453		—%	0.7%
Other expense (income), net	(31)		(1,992)		—%	(0.3)%
Total other expense, net	19,665		22,154		2.7%	3.0%
Pretax net loss	(41,365)		(1,721)		(5.6)%	(0.2)%
Income tax benefit (expense)	(368)		(187)		—%	—%
Net loss	(41,733)		(1,908)		(5.7)%	(0.3)%

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


	For the Three Months Ended				For the Nine Months Ended
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Products segment sales	$	176,217	$	181,557	$	642,981	$	654,448
Services segment revenue:
Same-store sales	29,591		21,732		78,580		63,822
Non same-store sales	3,917		7,245		15,873		17,622
Total services segment revenue	$	33,508	$	28,977	$	94,453	$	81,444
Total net sales	$	209,725	$	210,534	$	737,434	$	735,892

Adjusted EBITDA
Products	$	35,634	$	33,678	$	126,923	$	120,657
Services	4,226		3,821		12,050		8,945
Unallocated Corporate	(20,651)		(21,135)		(60,588)		(52,018)
Total Adjusted EBITDA	$	19,209	$	16,364	$	78,385	$	77,584

Three Months Ended September 30, ~~2017~~2022 Compared With Three Months Ended September 30, ~~2016~~

2021

Net sales

Consolidated Net Sales

Consolidated net sales ~~increased $18.9~~decreased $0.8 million or ~~45.3%~~0.4%, to ~~$60.6~~$209.7 million for the three months ended September 30, ~~2017,~~2022, compared to ~~$41.7 million for the three~~ ~~months~~ ~~ended September 30, 2016. This increase was driven by expanding item count at existing customers, both for existing and new items.~~

~~Gross profit~~

~~Gross profit increased by $6.4 million, or 103.2%, to $12.5~~$210.5 million for the three months ended September 30, ~~2017, compared to $6.2~~2021. This decrease was driven by a reduction in product sales of $5.4 million ~~for the three~~ ~~months~~ ~~ended September 30, 2016. This increase is~~of which approximately $3.5 million was due to ~~the significant~~lost distribution of certain manufacturers' products to certain customers, and due to negative macroeconomic trends in consumer spending, partially offset by price

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increases. The Services segment revenues grew by $4.5 million as we served more pets and increased our average dollar per pet served.

Products Segment

Product sales growth as well as gross margin increases on improved economies of scale and product mix. Gross margin increased to 20.7% for the three months ended September 30, 2017, from 14.8% for the three months ended September 30, 2016.

~~General and administrative expenses~~

~~General and~~ ~~administrative~~ ~~expenses increased by $2.8~~decreased $5.4 million, or ~~35.2%~~2.9%, to ~~$10.7~~$176.2 million for the three months ended September 30, ~~2017~~2022, compared to ~~$7.9~~$181.6 million for the three months ended September 30, ~~2016.~~2021. The ~~increase reflects:~~

~~increased merchandising expenses related to more products and customers;~~

decrease was driven by lost distribution of certain manufacturers' products to certain customers which reduced sales by approximately $3.5 million and due to negative macroeconomic trends in consumer spending, partially offset by price increases.

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

Services Segment

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

~~Interest expense, net~~

~~Interest expense, net decreased $0.4~~Services revenue increased $4.5 million, or ~~52.2%~~15.6%, to ~~$0.4~~$33.5 million for the three months ended September 30, ~~2017,~~2022, compared to ~~$0.7 million for the three months ended~~ ~~September~~ 30, 2016. This decrease was driven by the new debt agreement, entered into in December of 2016, which reduced interest rates and provided more flexibility on borrowings, as well as seasonal paydowns of debt, including the full repayment of the Term loan.

~~Pre-tax net income~~

As ~~a result of the factors above, pre-tax net income increased $3.9 million to $1.4~~$29.0 million for the three months ended September 30, ~~2017 compared~~2021. Same-store sales increased $7.9 million, or 36.2%, to ~~a pre-tax net loss of $2.5~~$29.6 million for the three months ended September 30, ~~2016.~~

2022, compared to $21.7 million for the three months ended September 30, 2021. The increase in same-store sales was driven by increased average dollar per pet served as well as a small increase in pet counts. Non same-store sales decreased $3.4 million or 46.4%, to $3.9 million for the three months ended September 30, 2022, compared to $7.3 million for the three months ended September 30, 2021. The decrease in non same-store sales was due to lower store count driven by a number of wellness centers aging into the same-store base.

Gross profit

Gross profit increased by $8.7 million, or 20.7%, to $50.8 million for the three months ended September 30, 2022, compared to $42.1 million for the three months ended September 30, 2021. This increase is driven by the Products segment gross profit increasing by $5.3 million due to product mix, price increases/timing of purchases, and operational efficiency as well as due to improvements in Services segment gross profit of $3.4 million.

Gross margin increased to 24.2% for the three months ended September 30, 2022, compared to 20.0% for the three months ended September 30, 2021. Products segment gross margin improved due to the mix of products sold as our manufactured product sales increased and due to the impact of pricing. Additionally, Services segment margin grew due to efficiency improvements and due to increased average dollar per pet served.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses (“SG&A”) increased by $0.7 million, or 1.6%, to $46.0 million for the three months ended September 30, 2022, compared to $45.3 million for the three months ended September 30, 2021. As a percentage of net sales, SG&A increased from 21.5% for the three months ended September 30, 2021 to 21.9% for the three months ended September 30, 2022. The Company had higher selling and marketing costs for both Products and Services segment to support the launch of new products and was impacted by inflationary pressures across other categories. Additional items are detailed below.

Products Segment

Products segment SG&A increased $1.5 million or approximately 16.5% to $10.5 million for the three months ended September 30, 2022, compared to $9.0 million for the three months ended September 30, 2021. This increase was primarily due to higher selling costs related to product launches.

Services Segment

Services segment SG&A decreased $0.5 million, or 7.6%, to $6.2 million for the three months ended September 30, 2022, compared to $6.7 million for the three months ended September 30, 2021. This decrease was driven by lower new clinic opening expenses, partially offset by increased variable costs on higher sales.

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Unallocated Corporate

Unallocated corporate SG&A decreased $0.6 million, or 1.9%, to $29.1 million for the three months ended September 30, 2022, from $29.7 million for the three months ended September 30, 2021. The decrease was related to the following:

▪An increase in marketing and advertising of $2.1 million;

▪additional corporate compensation of approximately $1.6 million, driven by higher headcount and higher wages driven by inflation; and

▪an increase in acquisition related expenses on an abandoned acquisition target of $1.0 million; offset by

▪a $2.0 million milestone accrual for research and development in 2021 which did not recur; and

▪a legal contingency of approximately $2.3 million was accrued for in 2021 that did not recur in 2022.

Interest expense, net

Interest expense, net, increased $1.1 million to $7.3 million for the three months ended September 30, 2022, compared to $6.2 million for the three months ended September 30, 2021. This increase was driven by the higher rates on the Company's variable rate debt due to rising interest rates.

Provision for income taxes

Our effective tax rate was 0.7% and (4.0%) for the three months ended September 30, 2022 and 2021, respectively, with a tax benefit of $0.4 million and a tax expense of $0.3 million, respectively. The tax rate is different than the U.S federal statutory income tax rate of 21% primarily due to the effects of a change in valuation allowance, state taxes, and foreign Global Intangible Low-Taxed Income (“GILTI “) inclusion.

Segment Adjusted EBITDA

Products Segment

Products segment Adjusted EBITDA increased $1.9 million, or 5.8% to $35.6 million for the three months ended September 30, 2022, compared to $33.7 million for the three months ended September 30, 2021. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced by PetIQ, or are distributed for other manufacturers. The increase in Products segment Adjusted EBITDA relates primarily to higher margin percentage on improved mix of manufactured vs. distributed products and price increases.

Services Segment

Services segment Adjusted EBITDA increased $0.4 million, or 10.6% to $4.2 million for the three months ended September 30, 2022, compared to $3.8 million for the three months ended September 30, 2021. 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 clinic costs. Services segment EBITDA improved as a result of efficiency including the company’s scheduling optimization efforts and increased average dollar per pet served.

Unallocated Corporate

Unallocated corporate expenses consist of corporate costs including accounting, legal, human resources, information technology, and headquarters expenses, as well as executive compensation and company incentive compensation expenses, and other miscellaneous costs. Unallocated corporate costs have grown due to the growth in the size of the Company. Adjustments to unallocated corporate costs include expenses related to specific events, such as acquisition expenses and

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integration costs. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.

The following tables reconcile Segment pre-tax net income (loss) to Adjusted EBITDA for the periods presented.


	Three Months Ended September 30, 2022
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	34,633	$	(47,653)	$	(36,906)	$	(49,926)
Adjustments:
Depreciation	1,001		1,671		904		3,576
Interest expense, net	—		—		7,276		7,276
Amortization	—		—		4,602		4,602
Goodwill impairment(1)	—		47,264		—		47,264
Acquisition costs(2)	—		—		1,035		1,035
Stock based compensation expense	—		—		2,238		2,238
Non same-store adjustment(4)	—		2,944		—		2,944
Integration costs and costs of discontinued clinics(5)	—		—		200		200


Adjusted EBITDA	$	35,634	$	4,226	$	(20,651)	$	19,209


	Three Months Ended September 30, 2021
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	32,696	$	(3,828)	$	(36,879)	$	(8,011)
Adjustments:
Depreciation	982		1,454		709		3,145
Interest expense, net	—		—		6,168		6,168
Amortization	—		—		4,627		4,627

Stock based compensation expense	—		—		2,627		2,627

Non same-store adjustment(4)	—		6,195		—		6,195
Integration costs and costs of discontinued clinics(5)	—		—		(1,041)		(1,041)
Litigation expenses	—		—		2,323		2,323
CFO Transition	—		—		331		331
Adjusted EBITDA	$	33,678	$	3,821	$	(21,135)	$	16,364

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

(4) Non same-store adjustment includes revenue and costs, and associated gross profit, related to our Services segment wellness centers and host partners with less than six full quarters of operating results, and also include pre-opening expenses.

(5) Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. Depending on the type of costs, the costs are primarily in the Products and the corporate segments. Costs of discontinued clinics represent costs to close Services segment locations.

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Nine Months Ended September 30, ~~2017~~2022 Compared With Nine Months Ended September 30, ~~2016~~

2021

Net sales

Consolidated Net Sales

Consolidated net sales increased ~~$59.5~~$1.5 million, or ~~38.3%~~0.2%, to ~~$214.8~~$737.4 million for the nine months ended September 30, ~~2017,~~2022, 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~~$735.9 million for the nine months ended September 30, ~~2017, compared~~2021. This increase was driven by price increases in both segments, as well as additional pet traffic in the Services segment and new products sold in the Products segment. The increase was partially offset by the loss of distribution business in the Products segment.

Products Segment

Product sales decreased $11.5 million, or 1.8%, to ~~$24.3~~$643.0 million for the nine months ended September 30, ~~2016. The increase reflects:~~

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

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

~~Interest expense, net~~

~~Interest expense, net, decreased $1.0 million, or 43.4%,~~2022, compared to ~~$1.4~~$654.5 million for the nine months ended September 30, ~~2017, compared to $2.4 million for the nine months ended~~ ~~September~~ ~~30, 2016.~~2021. This decrease was driven by ~~the new debt agreement,~~lost distribution of certain manufacturers' products which reduced ~~interest rates~~sales by approximately $35.6 million. This reduction in sales was partially offset by price increases and ~~provided more flexibility, offset slightly by increases in~~ the ~~base rate.~~

~~Other income, net~~

~~Other income, net, decreased $0.6~~launch of several new products.

Services Segment

Services revenue increased $13.1 million, or 16.1%, to ~~$14 thousand in the nine months ended September 30, 2017 compared to $0.7~~$94.5 million for the nine months ended September 30, ~~2016. This is due~~2022, compared 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, pre-tax net income increased $14.0 million, to net income of $11.8~~$81.4 million for the nine months ended September 30, ~~2017, compared~~2021. Same-store sales increased $14.8 million, or 23.1%, to ~~a pre-tax net loss of $2.2~~$78.6 million for the nine months ended September 30, ~~2016.~~

2022, compared to $63.8 million for the nine months ended September 30, 2021. The increase in same-store sales was driven by higher average dollar per pet served, as well as increased pet counts in wellness centers, offset by fewer community clinics being run as part of the optimization efforts undertaken by the Company. Non same-store sales decreased $1.7 million or 9.9%, to $15.9 million for the nine months ended September 30, 2022, compared to $17.6 million for the nine months ended September 30, 2021. The decrease in non same-store sales was a result of slowed openings of additional wellness centers in 2022, as well as by wellness centers aging into the same-store base, offset slightly by the maturation of clinics opened in the past six trailing quarters.

Gross profit

Gross profit increased by $20.9 million, or 14.0%, to $170.4 million for the nine months ended September 30, 2022, compared to $149.5 million for the nine months ended September 30, 2021. This increase is due to efficiency improvements in the Services Segment due to clinic optimization efforts and higher average dollar per pet, as well as price increases and improved product mix in the Products segment, partially offset by the loss of certain distribution business.

Gross margin increased to 23.1% for the nine months ended September 30, 2022, compared to 20.3% for the nine months ended September 30, 2021. This increase was driven by product sales growth in higher margin items manufactured by the Company, price increases, and the loss of low margin distribution business resulting in Products segment gross margin improving 250 basis points. In the Services segment gross margin is up 700 basis points on the operational improvements and price increases previously mentioned.

Selling, general and administrative expenses

Consolidated SG&A increased by $15.7 million, or 12.2%, to $144.8 million for the nine months ended September 30, 2022, compared to $129.1 million for the nine months ended September 30, 2021. As a percentage of net sales, SG&A increased from 17.5% for the nine months ended September 30, 2021 to 19.6% for the nine months ended September 30, 2022, primarily due to the increase in marketing and advertising expenses, higher compensation and benefits, and increased legal costs, partially offset by the amortization of $3.8 million due to the termination of an in-process research and development agreement that did not recur in 2022.

Products Segment

Products segment SG&A increased $5.5 million or approximately 18.8% to $34.6 million for the nine months ended September 30, 2022, compared to $29.1 million for the nine months ended September 30, 2021. This increase was driven by planned investment in selling and advertising costs related primarily to new product launches.

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Services Segment

Services segment SG&A increased $1.7 million, or 9.4%, to $19.6 million for the nine months ended September 30, 2022, compared to $17.9 million for the nine months ended September 30, 2021. This increase was driven by increased wages and marketing, as well as increased variable costs on higher sales.

Unallocated Corporate

Unallocated corporate SG&A increased $8.4 million, or 10.3%, to $90.6 million for the nine months ended September 30, 2022, from $82.2 million for the nine months ended September 30, 2021. The increase was related to the following:

▪Additional corporate compensation of approximately $5.7 million, driven by growth in headcount and wage rates;

▪an increase in marketing and advertising of approximately $5.0 million; and

▪an increase in acquisition related expenses on an abandoned acquisition target of $1.0 million;

▪an increase in legal accruals of approximately $1.0 million; offset by

▪lower amortization due to the $3.8 million in accelerated amortization recorded in the prior period related to the in-process research and development asset, with no comparable event in the current year; and

▪lower costs related to the Company's refinance in 2021 of approximately $1.0 million, with no comparable event in the current year.

Interest expense, net

Interest expense, net, increased $1.0 million to $19.7 million for the nine months ended September 30, 2022, compared to $18.7 million for the nine months ended September 30, 2021. This increase was driven higher interest rates on the Company's variable rate debt due to the United States Federal Reserve raising benchmark interest rates.

Provision for income taxes

Our effective tax rate was (0.9%) and (10.8%) for the nine months ended September 30, 2022 and 2021, respectively, with a tax expense of $0.4 million and $0.2 million, respectively. The tax rate is different than the U.S federal statutory income tax rate of 21% primarily due to the effects of a change in valuation allowance, state taxes, and foreign GILTI inclusion.

Segment Adjusted EBITDA

Products Segment

Products segment Adjusted EBITDA increased $6.2 million, or 5.2% to $126.9 million for the nine months ended September 30, 2022, compared to $120.7 million for the nine months ended September 30, 2021. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are manufactured by PetIQ, or are distributed for other manufacturers. The Company benefited in the current period by increased sales of manufactured products, from 26.9% of product sales to 29.0% of product sales.

Services Segment

Services segment Adjusted EBITDA increased $3.0 million, or 34.0% to $12.0 million for the nine months ended September 30, 2022, compared to $9.0 million for the nine months ended September 30, 2021. Services segment Adjusted EBITDA can fluctuate considerably based on the volume of pets served per clinics, due to the relatively fixed cost nature of a clinic. Additionally, Services segment earnings are impacted by the opening of new wellness centers and the impact of the Company’s same-store portfolio, discussed further below. Services segment Adjusted EBITDA improved due to the optimization efforts and price increases previously noted.

Unallocated Corporate

Unallocated corporate Adjusted EBITDA decreased due to the previously mentioned changes in SG&A costs.

Table of Contents

The following tables reconcile Segment pre-tax net income to Adjusted EBITDA for the periods presented.


	Nine Months Ended September 30, 2022
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	123,884	$	(53,745)	$	(111,504)	$	(41,365)
Adjustments:
Depreciation	3,039		4,956		2,778		10,773
Interest expense, net	—		—		19,696		19,696
Amortization	—		—		13,602		13,602
Goodwill impairment(1)	—		47,264		—		47,264
Acquisition costs(2)	—		—		1,191		1,191
Stock based compensation expense	—		—		8,904		8,904
Non same-store adjustment(4)	—		13,575		—		13,575
Integration costs and costs of discontinued clinics(5)	—		—		943		943
Litigation expenses	—		—		3,802		3,802

Adjusted EBITDA	$	126,923	$	12,050	$	(60,588)	$	78,385


	Nine Months Ended September 30, 2021
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	117,010	$	(11,909)	$	(106,822)	$	(1,721)
Adjustments:
Depreciation	2,913		3,924		2,582		9,419
Interest expense, net	—		—		18,693		18,693
Amortization	—		—		17,682		17,682
Acquisition costs(2)	—		—		92		92
Stock based compensation expense	—		—		7,188		7,188
Loss on debt extinguishment and related costs (3)	—		—		6,438		6,438
Non same-store adjustment(4)	—		16,930		—		16,930
Integration costs and costs of discontinued clinics(5)	734		—		(1,088)		(354)
Litigation expenses	—		—		2,886		2,886
CFO Transition	—		—		331		331
Adjusted EBITDA	$	120,657	$	8,945	$	(52,018)	$	77,584

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

(3) Loss on debt extinguishment and related costs are related to our entering into two new credit facilities, including the write off of deferred financing costs and related costs.

Table of Contents

Depending on the type of costs, the costs are primarily in the Products and the corporate segments. Costs of discontinued clinics represent costs to close Services segment locations.

Consolidated Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are non-GAAP financial measures. We calculate EBITDA ~~represents~~as net (loss) adjusted for income ~~before~~tax (benefit), depreciation, amortization, goodwill impairment, and interest ~~income taxes and depreciation and amortization.~~expense, net. We calculate Adjusted EBITDA ~~represents~~as EBITDA ~~plus~~adjusted for acquisition costs, loss on debt extinguishment and related costs, stock based compensation expense, non same-store adjustment, integration costs and costs of discontinued clinics, litigation expenses, ~~costs associated with becoming a public company,~~CFO transition, and ~~a supplier receivable write-off. Adjusted EBITDA adjusts for~~other one-time 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.

~~Table of Contents~~

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.

Additionally, beginning with the period ending December 31, 2022 we anticipate no longer adding back the non-same store adjustment in our calculation of Adjusted EBITDA.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table of Contents

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

Three months ended

Nine months ended
$'s in 000's

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Net income

$
859

$
(2,512)

$
11,208

$
(2,218)
Plus:








Tax expense

550

—

550

—
Depreciation

$
684

$
375

$
1,795

$
1,350
Amortization

261

264

782

808
Interest

352

737

1,351

2,389
EBITDA

$
2,706

$
(1,136)

$
15,686

$
2,329
Loss on extinguishment and related costs(1)

—

—

—

993
Management fees(2)

158

208

545

508
Litigation expenses(3)

—

41

—

3,226
Costs associated with becoming a public company

2,275

2,042

2,275

2,042
Stock based compensation expense

246

—

246

—
Adjusted EBITDA

$
5,385

$
1,155

$
18,752

$
9,098

⁽¹⁾

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


	For the Three Months Ended				For the Nine Months Ended
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net loss	$	(49,571)	$	(8,328)	$	(41,733)	$	(1,908)
Plus:
Tax expense (benefit)	(355)		317		368		187
Depreciation	3,576		3,145		10,773		9,419
Amortization	4,602		4,627		13,602		17,682
Goodwill impairment(1)	47,264		—		47,264		—
Interest expense, net	7,276		6,168		19,696		18,693
EBITDA	$	12,792	$	5,929	$	49,970	$	44,073
Acquisition costs(2)	1,035		—		1,191		92
Loss on debt extinguishment and related costs(3)	—		—		—		6,438
Stock based compensation expense	2,238		2,627		8,904		7,188
Non same-store adjustment (4)	2,944		6,195		13,575		16,930
Integration costs and costs of discontinued clinics(5)	200		(1,041)		943		(354)
Litigation expenses	—		2,323		3,802		2,886
CFO Transition	—		331		—		331
Adjusted EBITDA	$	19,209	$	16,364	$	78,385	$	77,584

⁽²⁾

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

⁽³⁾

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

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

(3) Loss on debt extinguishment and related costs are related to our entering into two new credit facilities, including the write off of deferred financing costs and related costs.

(5) Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. Depending on the type of costs, the costs are primarily in the Products and the corporate segments. Costs of discontinued clinics represent costs to close Services segment locations.

Financial Condition, Liquidity, and Capital Resources

Historically, our primary sources of liquidity have been cash ~~flow~~flows from operations, borrowings, and equity ~~contributions.~~capital. As of September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, our cash and cash equivalents were ~~$46.5~~$56.7 million and ~~$0.8~~$79.4 million, respectively. As of September 30, ~~2017,~~2022, we had ~~$18.1 million~~no balance outstanding under ~~the~~a revolving credit facility, ~~and $1.9~~$296.3 million ~~outstanding~~ under a ~~mortgage,~~term loan, $143.8 million of outstanding Convertible Notes, and $20.6 million in other debt. Our debt agreements bear interest at ~~4.75%~~rates between 4.0% and ~~4.35%, respectively.~~

7.07%.

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~~investment in

Table of ~~a commercial building for use as our corporate headquarters for $2.4 million during the quarter ended September 30, 2017.~~Contents

additional veterinary clinics. Our primary working capital requirements are to ~~carry inventory~~fund Inventory and ~~receivable levels necessary~~Accounts Receivable to support our ~~increasing net~~ sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, we had working capital (current assets less current liabilities) of ~~$93.7~~$220.3 million and ~~$43.5~~$200.5 million, respectively.

~~On July~~ ~~26, 2017, we closed~~ The Company has not historically made significant non-contractual debt pay downs, but may choose to do so in the ~~initial public offering (the “IPO”)~~future as part of 7,187,500 Class A common shares at a price of $16.00 per share. Net proceeds of $106.9 Million , prior to underwriting discount and other offering expenses were utilized to immediately repay $56.0 million aggregate principal amount of preference notes, purchase 133,334 shares of Class B common stock from certain executives and purchase 3,556,666 newly issued limited liability company interests (“LLC Interests”) from PetIQ Holdings, LLC (“Holdco”). Holdco utilized the proceeds from the sale of the LLC Interest to pay offering costs and expenses with approximately $45.9 million in net proceeds available for general corporate purposes. As a public company, additional future liquidity needs will include public company costs, the payment of any cash dividends declared by our board, tax distributions to certain Continuing LLC Owners as required by the Holdco LLC agreement, and tax payments to Federal and State governments. Our predecessor for financial reporting purposes, PetIQ, LLC, did not make distributions or incur taxes as a pass through entity.

its capital allocation strategy.

~~Table of Contents~~

We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit ~~facility~~facilities will be adequate to meet our operating, investing, and financing needs for at least the ~~foreseeable future.~~ next 12 months. We believe we will meet our longer-term expected future cash requirements primarily from a combination of cash flow from operating activities, borrowings under our debt facilities and available cash and cash equivalents.To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings, or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.

Cash Flows

Cash ~~provided by or~~ used in Operating Activities

Net cash ~~provided by (used in)~~used in operating activities was ~~$11.0~~$0.9 million for the nine months ended September 30, ~~2017,~~2022, compared ~~net cash used in~~to $10.5 million provided by operating activities ~~of $1.3 million~~ for the nine months ended September 30, ~~2016.~~2021. The ~~increase~~change in operating cash flows primarily reflects ~~improved net income,~~higher cash usage for working capital partially offset by ~~increased use~~higher earnings excluding the effect of ~~cash for working capital.~~the $47.3 million goodwill impairment, which is non-cash in nature. Working capital ~~uses~~changes are driven primarily by ~~increased~~inventory growth, as prior year end inventory was unusually low due to a variety of factors, and changes in accounts receivable ~~resulting from our growing~~ growth which fluctuate based on seasonality and timing of sales. within the period. Net changes in assets and liabilities accounted for ~~$3.8~~$41.9 million in cash used in operating activities for the nine months ended September 30, ~~2017~~2022 compared to ~~$1.5~~$28.2 million of cash used in operating activities for the nine months ended September 30, ~~2016.~~

2021.

Cash used in Investing Activities

Net cash used in investing activities was ~~$3.6~~$9.8 million for the nine months ended September 30, ~~2017,~~2022, compared to ~~$1.6~~$19.5 million for the nine months ended September 30, ~~2016.~~2021. The ~~increase~~decrease in net cash used in investing activities is a result of lower investment in new wellness centers as well as the ~~Company purchasing an office building~~investment in construction of a new corporate headquarters in 2021 that did not recur in 2022. Additionally, the ~~quarter for use as its corporate headquarters.~~

nine months ended September 30, 2021 included approximately $5.0 million of proceeds on the disposal of assets, which had no comparable event in 2022.

Cash (used in) provided by Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$38.3~~$11.4 million for the nine months ended September 30, ~~2017~~2022, compared to ~~$0.9 million in~~ net cash provided by financing activities of $38.9 million for the nine months ended September 30, ~~2016. This increase~~2021. The change in cash (used in) provided by financing activities is primarily driven by the ~~Company’s initial public offering offset by operating cash generation facilitating~~refinance activities that occurred in 2021 and did not recur in 2022 as well as significant option exercise activity in 2021 that did not recur in 2022. Additionally, in the ~~repayment~~third quarter of ~~borrowed capital.~~

2022 the Company used $3.9 million to repurchase 373,408 Class A common stock at a weighted average price of $10.33 per share under the newly approved stock buy back plan, inclusive of commissions.

Description of Indebtedness

~~The Company entered into a new credit agreement (“New Credit Agreement”) on December 21, 2016. This agreement fully repaid and terminated~~

Refer to Note 2 – Debt in the ~~A&R Credit Agreement described below. The New Credit Agreement provides~~attached condensed consolidated financial statements for ~~secured financing of $50 million in aggregate at either LIBOR or Base (prime) interest rates plus an applicable margin, consisting of:~~

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

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

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

As of September 30, 2017, the Company had fully repaid the Term Loans and had $18.1 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.

further information.

~~Table of Contents~~

~~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.

Table of Contents

Interest Rate Risk

We are exposed to changes in interest rates because the indebtedness incurred under our ~~New Credit Agreement is~~ABL and our Term Loan B are variable rate debt. Interest rate changes generally do not affect the ~~market~~recorded value of our credit ~~agreement~~agreements but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of September 30, ~~2017,~~2022, we had variable rate debt of approximately ~~$18.1~~$296.3 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~~2022 by approximately ~~$52 thousand~~$0.8 million.

Inflation

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

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

Item 4. Controls and Procedures.

~~Internal Control over Financing Reporting~~

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

Evaluation of Disclosure Controls and Procedures

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

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

~~Table of Contents~~

Changes in Internal Control over Financial Reporting

~~As a result of our July 2017 IPO and resulting~~

There was no change in ~~tax structure, the Company implemented~~our internal ~~controls over significant processes specific to the IPO and tax structure that management believes are appropriate in consideration of related integration of operations, systems,~~ control ~~activities, and accounting for the IPO and tax structure related transactions. Except as previously described, there have been no changes in the Company’s internal controls~~ over financial reporting that occurred during ~~the third~~our fiscal quarter ~~of fiscal 2017~~ended September 30, 2022, that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, ~~the Company’s~~our internal control over financial reporting.

~~Cautionary Note Regarding Forward-Looking Statements~~

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:

~~statements regarding our strategies, results of operations or liquidity;~~

~~statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;~~

~~statements of management’s goals and objectives; and~~

~~assumptions underlying statements regarding us or our business.~~

Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; our ability to achieve or sustain profitability; competition from veterinarians and others in our industry; failure of the Fairness to Pet Owners Act of 2017 to become law; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing ~~and~~ distribution chains; our ability to successfully grow our business through acquisitions; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; risks related to our international operations; our ability to keep and retain key employees; and the risks set forth under the “Risk Factors’ section of the final prospectus for PetIQ, Inc., dated July 20, 2017, and filed with the SEC on July 21, 2017.

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

~~Table of Contents~~

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to, and are presently involved in, litigation and other proceedings. ~~Other than the litigation described in Note 8 of the previous financial statements, we~~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.

The Company records a liability when a particular contingency is both probable and estimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and the reasons to the effect that it cannot be reasonably estimated are disclosed. If a loss is reasonably possible, the Company will provide disclosure to that affect. The Company expenses legal costs as incurred within selling, general and administrative expenses on the condensed consolidated statements of operations. For information on legal proceedings, please refer to Note 11 — Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements included in Part I Item 1 of this Quarterly Report on Form 10-Q.

Table of Contents

Item 1A. Risk Factors.

~~There have been no~~

Factors that could cause our actual results to differ materially from those in this report are any of the risks disclosed in our Annual Report on Form 10-K, which was filed with the SEC on March 1, 2022. Any of these factors could result in a significant or material ~~changes~~adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

The information presented below updates, and should be read in conjunction with, the risk factors disclosed in ~~the final prospectus for PetIQ, Inc., dated July 20, 2017, and~~our Annual Report on Form 10-K, which was filed with the SEC on ~~July 21, 2017.~~

March 1, 2022.

Global economic conditions may harm our industry, business and results of operations.

We operate globally and as a result, our business, revenues and profitability are impacted by global macroeconomic conditions. The success of our activities is affected by general economic and market conditions, including, among others, inflation, interest rates, tax rates, economic uncertainty, political instability, warfare, changes in laws, trade barriers, and economic and trade sanctions. The U.S. capital markets experienced and continue to experience extreme volatility and disruption following the global outbreak of COVID-19 in 2020 and the Russian invasion of Ukraine in 2022. Furthermore, inflation rates in the U.S. have recently increased to levels not seen in decades. Such economic volatility could adversely affect our business, financial condition, results of operations and cash flows, and future market disruptions could negatively impact us. These unfavorable economic conditions could increase our operating costs and our profitability could be negatively affected. Geopolitical destabilization and warfare have impacted and could continue to impact global currency exchange rates, commodity prices, trade and movement of resources, which may adversely affect the buying power of our customers, our access to and cost of resources from our suppliers, and ability to operate or grow our business. In addition, from time to time, the U.S. and other key international economies have been impacted by geopolitical and economic instability, high levels of credit defaults, international trade disputes, changes in demand for various goods and services, high levels of persistent unemployment, wage and income stagnation, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, inflation, bankruptcies, international trade agreements, export controls, economic and trade sanctions, and overall economic uncertainty. These conditions can arise suddenly and could adversely affect our customers' or prospective customers' ability or willingness to purchase our products and services, delay purchasing decisions, all of which could harm our operating results. Further, while our ability to do business has not been materially affected, the Russian invasion of Ukraine and the global restrictive measures that have been taken, and could be taken in the future, have created significant global economic uncertainty that could prolong and escalate tensions and expand the geopolitical conflict, which could have a lasting impact on regional and global economies, any of which could harm our business and operating results.

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

~~Recent Sale~~Operations

As described under Item 2 – “Management’s Discussion and Analysis of ~~Unregistered Securities~~

~~Simultaneously with~~Financial Condition and Results of Operations – Stock Repurchase Program,” on September 6, 2022, the ~~consummation~~Company's Board of ~~our IPO, we issued~~Directors authorized a stock repurchase program for up to ~~the Continuing LLC Owners~~ ~~8,268,188~~ ~~shares~~$30 million of Class B common stock. The issuances of the Class B common stock described in this paragraph were made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.

~~The Continuing LLC Owners have the right, from time to time, to exchange their LLC Interests, along with a corresponding number of shares of our Class B common stock, for newly issued shares of our~~ Class A common ~~stock on~~stock.

During the three and nine months ended September 30, 2022, the Company repurchased 373,408 shares at a one-for-one basis, subject to customary conversion rate adjustments 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~~$10.31 per share.


Period	Total number of shares purchased	Average price paid per share(1)		Total number of shares purchased as part of public announced plans or program	Approximate dollar value of shares that may yet be purchased under the plan or program(1)
July 1, 2022 - July 31, 2022	—	—		—	—
August 1, 2022 - August 31, 2022	—	—		—	—
September 1, 2022 - September 30, 2022	373,408	$	10.33	373,408	26,142,696
Total	373,408	10.33		373,408	26,142,696

(1) - Inclusive 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.

~~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 andselling 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.~~

~~Table of Contents~~

Item 5. Other ~~Information.~~Information

Table of Contents

~~None~~

On October 26, 2022, the Company’s Board of Directors approved and adopted the Amended and Restated Bylaws (the “Bylaws”), which became effective the same day, in order to, among other things (1)update provisions regarding (i) the availability of the list of stockholders entitled to vote at a meeting of stockholders and (ii) the manner in which a meeting of stockholders may be adjourned without having to provide additional notice, in each case to reflect recent amendments to the DGCL; (2) update procedural mechanics and disclosure requirements in connection with stockholder nominations of directors and submission of stockholder proposals (other than proposals to be included in the Company’s proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) made in connection with annual and special meetings of stockholders, including, without limitation, as follows (a) require a stockholder submitting a nomination notice to make a representation as to whether such stockholder intends (i) to solicit proxies from the required number of the Company’s voting shares in support of its proposed nominees in accordance with and as required by Rule 14a-19 under the Exchange Act (“Rule 14a-19”), (ii) to deliver, or make available, a proxy statement and/or form of proxy to such number of holders of the Company’s voting shares that would be sufficient to elect the nominee, and/or (iii) otherwise to solicit proxies or votes from stockholders in support of such nomination; and (b) provide that if the stockholder provides notice pursuant to Rule 14a-19 with respect to a proposed nominee and subsequently fails to comply with requirements of Rule 14a-19, the Company will disregard the nomination of the proposed nominee. The preceding summary of the amendments to the Bylaws is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Amended and Restated Bylaws filed herewith as Exhibit 3.1.

Item 6. Exhibits.

–


3.1		Amended and Restated Bylaws of PetIQ, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on October 31, 2022).
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002
31.2*
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002
32.1**
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002
32.2**
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002
101.INS*		Inline XBRL Instance Document
101.INS* 101.SCH*		~~XBRL Instance Document.~~

101.SCH*	Inline XBRL Taxonomy Extension Schema ~~Document.~~ Document
101.CAL*
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document.~~ Document
101.LAB*
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.
104*		Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.)

* Filed herewith

** Furnished herewith

Table of Contents

SIGNATURES

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


			PETIQ, INC.

November ~~8, 2017~~ 9, 2022			/s/ ~~John Newland~~ Zvi Glasman
			~~John Newland~~ Zvi Glasman
			Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

s in 000's

Future maturities of ~~long term~~long-term debt, excluding the ~~net~~ discount on debt and deferred financing fees, as of September 30, ~~2017,~~2022, 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 2022	$	2,681
2023	7,124
2024	7,390
2025	3,600
2026	147,350
Thereafter	292,500

~~The~~

nine months ended September 30, 2021.

Table of Contents

Note 3 -— Leases

The Company’s leases may include options to ~~purchase.~~

The components of lease expense consists of the following:


	For the Three Months Ended				For the Nine Months Ended
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Finance lease cost
Amortization of right-of-use assets	$	455	$	412	$	1,438	$	1,781
Interest on lease liabilities	64		63		185		277
Operating lease cost	1,509		1,435		4,823		4,059
Variable lease cost(1)	280		363		1,061		978
Short-term lease cost	5		4		18		10
Sublease income	(65)		(65)		(195)		(173)
Total lease cost	$	2,248	$	2,212	$	7,330	$	6,932

(1)Variable lease cost primarily relates to percentage rent, common area maintenance, property taxes, and insurance on leased real estate.

Other information related to leases was as follows as of:


	September 30, 2022	September 30, 2021
Weighted-average remaining lease term (years)
Operating leases	3.42	4.01
Finance leases	2.00	2.50
Weighted-average discount rate
Operating leases	4.5%	5.0%
Finance leases	4.5%	4.7%

Table of Contents

Annual future commitments under non-cancelable leases as of September 30, ~~2017,~~2022, consist of the following:


	Lease Obligations
$'s in 000's	Operating Leases		Finance Leases
Remainder of 2022	$	1,796	$	407
2023	7,190		1,702
2024	5,665		622
2025	4,639		239
2026	2,288		79
Thereafter	179		—
Total minimum future obligations	$	21,758	$	3,049
Less interest	(1,487)		(145)
Present value of net future minimum obligations	20,271		2,904
Less current lease obligations	(6,266)		(1,423)
Long-term lease obligations	$	14,005	$	1,481

Supplemental cash flow information:


	For the Nine Months Ended
$'s in 000's	September 30, 2022		September 30, 2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	185	$	277
Operating cash flows from operating leases	4,945		3,928
Financing cash flows from finance leases	1,097		1,573
(Noncash) right-of-use assets obtained in exchange for lease obligations
Operating leases	3,864		4,828
Finance leases	59		141

Note 4 — Intangible Assets and Goodwill

Goodwill and non-amortizable intangible assets

Table of Contents

Amortizable intangibles

Intangible assets consist of the following at:


$'s in 000's	Useful Lives	September 30, 2022		December 31, 2021
Amortizable intangibles
Certification	7 years	$	350	$	350
Customer relationships	12-20 years	159,956		160,167
Patents and processes	5-10 years	14,494		14,843
Brand names	5-15 years	24,568		24,731
Total amortizable intangibles		199,368		200,091
Less accumulated amortization		(57,339)		(44,438)
Total net amortizable intangibles		142,029		155,653
Non-amortizable intangibles
Trademarks and other		33,239		33,341
In-process research and development		1,668		1,668
Intangible assets, net of accumulated amortization		$	176,936	$	190,662

Table of Contents

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


Years ending December 31, ($'s in 000's)
Remainder of 2022	$	4,473
2023	16,875
2024	14,526
2025	13,874
2026	13,292
Thereafter	79,052

The following is a summary of the changes in the carrying value of goodwill for the period from January 1, 2021 to September 30, 2022:


	Reporting Unit
($'s in 000's)	Products		Services		Total
Goodwill as of January 1, 2021	183,894		47,264		231,158
Foreign currency translation	(48)		—		(48)
Goodwill as of December 31, 2021	183,846		47,264		231,110
Foreign currency translation	(897)		—		(897)
Impairment	—		(47,264)		(47,264)
Goodwill as of September 30, 2022	$	182,949	$	—	$	182,949

Note 5 — Income Tax

~~Note 4 -~~ ~~Income Taxes~~

~~Table of Contents~~

Note ~~5 –~~6 — Earnings per Share

Basic and Diluted ~~Earnings~~Loss per Share

Contents

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


	Three months ended September 30,				Nine months ended September 30,
(in 000's, except for per share amounts)	2022		2021		2022		2021
Numerator:
Net loss	$	(49,571)	$	(8,328)	$	(41,733)	$	(1,908)
Less: net loss attributable to non-controlling interests	(435)		(426)		(360)		(65)
Net loss attributable to PetIQ, Inc. — basic and diluted	(49,136)		(7,902)		(41,373)		(1,843)
Denominator:
Weighted-average shares of Class A common stock outstanding — basic	29,224		28,940		29,224		27,949
Dilutive effects of stock options that are convertible into Class A common stock	—		—		—		—
Dilutive effect of RSUs	—		—		—		—
Dilutive effect of conversion of Notes	—		—		—		—
Weighted-average shares of Class A common stock outstanding — diluted	29,224		28,940		29,224		27,949

Loss per share of Class A common stock — basic	$	(1.68)	$	(0.27)	$	(1.42)	$	(0.07)
Loss per share of Class A common stock — diluted	$	(1.68)	$	(0.27)	$	(1.42)	$	(0.07)

~~Shares~~

antidilutive.

~~Table of Contents~~

Note ~~6 –~~7 — Stock Based Compensation

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

PetIQ, Inc. Omnibus Incentive Plan

Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares.

PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees

Table of Contents

Stock Options

years.


	~~2017~~
~~Expected term (years)~~ ~~(1)~~		~~6.25~~
~~Expected volatility~~ ~~(2)~~		~~35.00~~	%
~~Risk-free interest rate~~ ~~(3)~~		~~1.98~~	%
~~Dividend yield~~ ~~(4)~~		~~0.00~~	%

⁽¹⁾

⁽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⁾

~~Table of Contents~~

~~The following table summarizes the activity of the Company’s unvested stock options for the period~~periods ended September 30, ~~2017:~~

2022 and 2021:


	September 30, 2022		September 30, 2021
Expected term (years) (1)	6.25		6.17
Expected volatility (2)	37.21	%	33.45	%
Risk-free interest rate (3)	1.44	%	0.89	%
Dividend yield (4)	0.00	%	0.00	%

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

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

(4)The Company has not paid and does not anticipate paying a cash dividend on our common stock.

~~Note 7 - Stockho~~l~~ders’ Equity~~

~~Reorganization Transactions~~

~~In connection with the IPO on July 20, 2017, the Company completed the following Reorganization Transactions:~~

~~The Company amended and restated its certificate of incorporation (see “Amendment and Restatement of Certificate of Incorporation” below);~~

~~PetIQ Holdings, LLC (“Holdco”) amended and restated its limited liability company agreement (the “LLC Agreement”) (see “Holdco Recapitalization” below);~~

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

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

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


	Stock Options (in 000's)	Weighted Average Exercise Price		Aggregate Intrinsic Value (in 000's)		Weighted Average Remaining Contractual Life (years)
Outstanding at January 1, 2021	2,086	$	23.93	$	30,302	7.2
Granted	354	35.66
Exercised	(583)	23.05		$	8,499
Forfeited	(64)	24.84
Cancelled	(25)	25.70
Outstanding at December 31, 2021	1,768	$	26.51	$	2,897	7.3
Granted	37	21.91
Exercised	(2)	19.49		$	10
Forfeited	(72)	30.70
Cancelled	(62)	32.96
Outstanding at September 30, 2022	1,669	$	26.00	$	—	6.5
Options exercisable at September 30, 2022	1,130

Table of Contents

AsRestricted Stock Units

~~Amendment and Restatement~~subject to time-based vesting conditions. Upon a termination of ~~Certificate of Incorporation~~

~~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.~~

~~Initial Public Offering~~

~~PetIQ Holdings, LLC Recapitalization~~

The following table summarizes the activity of the Company’s RSUs for the period ended September 30, 2022.


	Number of Shares (in 000's)	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2021	317	$	22.91
Granted	268	37.91
Settled	(103)	24.81
Forfeited	(23)	26.02
Outstanding at December 31, 2021	459	$	31.08
Granted	795	20.42
Settled	(202)	28.25
Forfeited	(124)	37.36
Nonvested RSUs at September 30, 2022	929	$	23.14

Note 8 — Stockholders Equity

Exchanges

~~Table of Contents~~

Stock repurchase program

Table of Contents

Note 9 — Non-Controlling Interests

The following table presents the outstanding LLC Interests ~~of Holdco owned by the Continuing LLC Owners.~~

~~Note 8 - Non-Controlling Interests~~

~~The Company used the net proceeds from its IPO to purchase 3,556,666 newly-issued~~ LLC Interests ~~of Holdco~~for the periods presented.


	LLC Interests held			% of Total
$'s in 000's	LLC Owners	PetIQ, Inc.	Total	LLC Owners		PetIQ, Inc.
As of January 1, 2021	3,040	25,711	28,751	10.6	%	89.4	%
Stock based compensation transactions	—	660	660
Exchange transactions	(2,768)	2,768	—
As of December 31, 2021	272	29,139	29,411	0.9	%	99.1	%
Stock based compensation transactions		160	160
Exchange transactions	(20)	20	—
Unit redemption	—	(373)	(373)
As of September 30, 2022	252	28,946	29,198	0.9	%	99.1	%

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

98.6% and 95.8%, respectively.

-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 -~~10 — Customer Concentration

outstanding trade receivables, and accounted for 47% of outstanding trade receivables, net.

Note ~~10 -~~11 — Commitments and Contingencies

Litigation Contingencies

~~Table of Contents~~

Table of Contents

Commitments

Note 12 — Segments

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


$'s in 000's	Products		Services		Unallocated Corporate		Total
September 30, 2022
Net sales	$	176,217	$	33,508	$	—	$	209,725
Segment Adjusted EBITDA	35,634		4,226		(20,651)		19,209
Depreciation expense	1,001		1,671		904		3,576
Capital expenditures	1,114		85		572		1,771


$'s in 000's	Products		Services		Unallocated Corporate		Total
September 30, 2021
Net sales	$	181,557	$	28,977	$	—	$	210,534
Segment Adjusted EBITDA	33,678		3,821		(21,135)		16,364
Depreciation expense	982		1,454		709		3,145
Capital expenditures	578		2,177		3,520		6,275

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


$'s in 000's	Products		Services		Unallocated Corporate		Total
September 30, 2022
Net sales	$	642,981	$	94,453	$	—	$	737,434
Segment Adjusted EBITDA	126,923		12,050		(60,588)		78,385
Depreciation expense	3,039		4,956		2,778		10,773
Capital expenditures	5,352		2,507		1,938		9,797


$'s in 000's	Products		Services		Unallocated Corporate		Total
September 30, 2021
Net sales	$	654,448	$	81,444	$	—	$	735,892
Segment Adjusted EBITDA	120,657		8,945		(52,018)		77,584
Depreciation expense	2,913		3,924		2,582		9,419
Capital expenditures	1,533		8,810		14,234		24,577

Table of Contents

~~Note 12 - Related Parties~~

~~Opco had entered into management~~The following table reconciles Segment Adjusted EBITDA to Net income for the periods presented.


	For the three months ended				For the nine months ended
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Adjusted EBITDA:
Product	$	35,634	$	33,678	$	126,923	$	120,657
Services	4,226		3,821		12,050		8,945
Unallocated Corporate	(20,651)		(21,135)		(60,588)		(52,018)
Segment Adjusted EBITDA	19,209		16,364		78,385		77,584
Adjustments:
Depreciation	(3,576)		(3,145)		(10,773)		(9,419)
Amortization	(4,602)		(4,627)		(13,602)		(17,682)
Interest expense, net	(7,276)		(6,168)		(19,696)		(18,693)
Goodwill impairment(1)	(47,264)		—		(47,264)		—
Acquisition costs(2)	(1,035)		—		(1,191)		(92)
Loss on debt extinguishment and related costs(3)	—		—		—		(6,438)
Stock based compensation expense	(2,238)		(2,627)		(8,904)		(7,188)
Non same-store adjustment(4)	(2,944)		(6,195)		(13,575)		(16,930)
Integration costs and costs of discontinued clinics(5)	(200)		1,041		(943)		354
Litigation expenses	—		(2,323)		(3,802)		(2,886)
CFO Transition	—		(331)		—		(331)

Pretax net loss	$	(49,926)	$	(8,011)	$	(41,365)	$	(1,721)
Income tax (expense) benefit	355		(317)		(368)		(187)
Net loss	$	(49,571)	$	(8,328)	$	(41,733)	$	(1,908)

Supplemental geographic disclosures are below.


	Nine Months Ended September 30, 2022
$'s in 000's	U.S.		Foreign		Total
Product sales	$	637,385	$	5,597	$	642,981
Service revenue	94,453		—		94,453
Total net sales	$	731,838	$	5,597	$	737,434

Table of Contents


	Nine Months Ended September 30, 2021
$'s in 000's	U.S.		Foreign		Total
Product sales	$	649,232	$	5,216	$	654,448
Service revenue	81,444		—		81,444
Total net sales	$	730,676	$	5,216	$	735,892


	Three Months Ended September 30, 2022
$'s in 000's	U.S.		Foreign		Total
Product sales	$	174,517	$	1,700	$	176,217
Service revenue	33,508		—		33,508
Total net sales	$	208,026	$	1,700	$	209,725


	Three Months Ended September 30, 2021
$'s in 000's	U.S.		Foreign		Total
Product sales	$	179,759	$	1,798	$	181,557
Service revenue	28,977		—		28,977
Total net sales	$	208,736	$	1,798	$	210,534

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


	September 30, 2022		December 31, 2021
United States	$	71,318	$	75,315
Europe	3,505		1,298
Total	$	74,823	$	76,613

Note 13 — Related Parties

Table of Contents

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

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

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

Business

Overview

~~Recent Developments~~

~~As discussed more fully in Note 7~~OpCo.

Macroeconomic Considerations

~~Results of Operations~~

~~Components~~abroad may negatively affect the growth of our ~~Results~~business and our results of ~~Operations~~

~~Net Sales~~

~~Table of Contents~~

~~While most of~~ our products ~~are sold consistently throughout the year, we~~and services.

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

~~Gross Profit~~

~~General and Administrative Expenses~~

Form 10-K.

Table of Contents

~~Net Income (Loss)~~

~~Our net income (loss)~~

Stock Repurchase Program

weighted average price of $10.33 per share.

Results of Operations

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


	For the Three Months Ended				% of Net Sales
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022	September 30, 2021
Product sales	$	176,217	$	181,557	84.0%	86.2%
Services revenue	33,508		28,977		16.0%	13.8%
Total net sales	209,725		210,534		100.0%	100.0%
Cost of products sold	131,414		142,009		62.7%	67.5%
Cost of services	27,541		26,453		13.1%	12.6%
Total cost of sales	158,955		168,462		75.8%	80.0%
Gross profit	50,770		42,072		24.2%	20.0%
Selling, general and administrative expenses	45,984		45,252		21.9%	21.5%
Goodwill impairment	47,264		—		22.5%	—%
Operating (loss) income	(42,478)		(3,180)		(20.3)%	(1.5)%
Interest expense, net	7,276		6,168		3.5%	2.9%

Other expense (income), net	172		(1,337)		0.1%	(0.6)%
Total other expense, net	7,448		4,831		3.6%	2.3%
Pretax net loss	(49,926)		(8,011)		(23.8)%	(3.8)%
Income tax benefit (expense)	355		(317)		0.2%	(0.2)%
Net loss	(49,571)		(8,328)		(23.6)%	(4.0)%

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	For the Nine Months Ended				% of Net Sales
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022	September 30, 2021
Product sales	$	642,981	$	654,448	87.2%	88.9%
Services revenue	94,453		81,444		12.8%	11.1%
Total net sales	737,434		735,892		100.0%	100.0%
Cost of products sold	485,833		510,673		65.9%	69.4%
Cost of services	81,222		75,720		11.0%	10.3%
Total cost of sales	567,055		586,393		76.9%	79.7%
Gross profit	170,379		149,499		23.1%	20.3%
Selling, general and administrative expenses	144,815		129,066		19.6%	17.5%
Goodwill impairment	47,264		—		6.4%	—%
Operating (loss) income	(21,700)		20,433		(2.9)%	2.8%
Interest expense, net	19,696		18,693		2.7%	2.5%
Loss on debt extinguishment	—		5,453		—%	0.7%
Other expense (income), net	(31)		(1,992)		—%	(0.3)%
Total other expense, net	19,665		22,154		2.7%	3.0%
Pretax net loss	(41,365)		(1,721)		(5.6)%	(0.2)%
Income tax benefit (expense)	(368)		(187)		—%	—%
Net loss	(41,733)		(1,908)		(5.7)%	(0.3)%


	For the Three Months Ended				For the Nine Months Ended
$'s in 000's	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Products segment sales	$	176,217	$	181,557	$	642,981	$	654,448
Services segment revenue:
Same-store sales	29,591		21,732		78,580		63,822
Non same-store sales	3,917		7,245		15,873		17,622
Total services segment revenue	$	33,508	$	28,977	$	94,453	$	81,444
Total net sales	$	209,725	$	210,534	$	737,434	$	735,892

Adjusted EBITDA
Products	$	35,634	$	33,678	$	126,923	$	120,657
Services	4,226		3,821		12,050		8,945
Unallocated Corporate	(20,651)		(21,135)		(60,588)		(52,018)
Total Adjusted EBITDA	$	19,209	$	16,364	$	78,385	$	77,584

Three Months Ended September 30, ~~2017~~2022 Compared With Three Months Ended September 30, ~~2016~~

2021

Net sales

Consolidated Net Sales

~~Gross profit~~

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increases. The Services segment revenues grew by $4.5 million as we served more pets and increased our average dollar per pet served.

Products Segment

~~General and administrative expenses~~

~~increased merchandising expenses related to more products and customers;~~

Services Segment

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

~~Interest expense, net~~

~~Pre-tax net income~~

Gross profit

Selling, general and administrative expenses

Products Segment

Services Segment

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Unallocated Corporate

▪An increase in marketing and advertising of $2.1 million;

▪additional corporate compensation of approximately $1.6 million, driven by higher headcount and higher wages driven by inflation; and

▪an increase in acquisition related expenses on an abandoned acquisition target of $1.0 million; offset by

▪a $2.0 million milestone accrual for research and development in 2021 which did not recur; and

▪a legal contingency of approximately $2.3 million was accrued for in 2021 that did not recur in 2022.

Interest expense, net

Provision for income taxes

Segment Adjusted EBITDA

Products Segment

Services Segment

Unallocated Corporate

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integration costs. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.

The following tables reconcile Segment pre-tax net income (loss) to Adjusted EBITDA for the periods presented.


	Three Months Ended September 30, 2022
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	34,633	$	(47,653)	$	(36,906)	$	(49,926)
Adjustments:
Depreciation	1,001		1,671		904		3,576
Interest expense, net	—		—		7,276		7,276
Amortization	—		—		4,602		4,602
Goodwill impairment(1)	—		47,264		—		47,264
Acquisition costs(2)	—		—		1,035		1,035
Stock based compensation expense	—		—		2,238		2,238
Non same-store adjustment(4)	—		2,944		—		2,944
Integration costs and costs of discontinued clinics(5)	—		—		200		200


Adjusted EBITDA	$	35,634	$	4,226	$	(20,651)	$	19,209


	Three Months Ended September 30, 2021
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	32,696	$	(3,828)	$	(36,879)	$	(8,011)
Adjustments:
Depreciation	982		1,454		709		3,145
Interest expense, net	—		—		6,168		6,168
Amortization	—		—		4,627		4,627

Stock based compensation expense	—		—		2,627		2,627

Non same-store adjustment(4)	—		6,195		—		6,195
Integration costs and costs of discontinued clinics(5)	—		—		(1,041)		(1,041)
Litigation expenses	—		—		2,323		2,323
CFO Transition	—		—		331		331
Adjusted EBITDA	$	33,678	$	3,821	$	(21,135)	$	16,364

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

(5) Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses including personnel costs such as severance and signing bonuses, consulting costs, contract termination, and IT conversion costs. Depending on the type of costs, the costs are primarily in the Products and the corporate segments. Costs of discontinued clinics represent costs to close Services segment locations.

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Nine Months Ended September 30, ~~2017~~2022 Compared With Nine Months Ended September 30, ~~2016~~

2021

Net sales

Consolidated Net Sales

~~Gross profit~~

~~General and administrative expenses~~

Products Segment

Product sales decreased $11.5 million, or 1.8%, to ~~$24.3~~$643.0 million for the nine months ended September 30, ~~2016. The increase reflects:~~

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

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

~~Interest expense, net~~

~~Other income, net~~

~~Other income, net, decreased $0.6~~launch of several new products.

Services Segment

~~Pre-tax net income~~

Gross profit

Selling, general and administrative expenses

Products Segment

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Services Segment

Unallocated Corporate

▪Additional corporate compensation of approximately $5.7 million, driven by growth in headcount and wage rates;

▪an increase in marketing and advertising of approximately $5.0 million; and

▪an increase in acquisition related expenses on an abandoned acquisition target of $1.0 million;

▪an increase in legal accruals of approximately $1.0 million; offset by

▪lower costs related to the Company's refinance in 2021 of approximately $1.0 million, with no comparable event in the current year.

Interest expense, net

Provision for income taxes

Segment Adjusted EBITDA

Products Segment

Services Segment

Unallocated Corporate

Unallocated corporate Adjusted EBITDA decreased due to the previously mentioned changes in SG&A costs.

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The following tables reconcile Segment pre-tax net income to Adjusted EBITDA for the periods presented.


	Nine Months Ended September 30, 2022
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	123,884	$	(53,745)	$	(111,504)	$	(41,365)
Adjustments:
Depreciation	3,039		4,956		2,778		10,773
Interest expense, net	—		—		19,696		19,696
Amortization	—		—		13,602		13,602
Goodwill impairment(1)	—		47,264		—		47,264
Acquisition costs(2)	—		—		1,191		1,191
Stock based compensation expense	—		—		8,904		8,904
Non same-store adjustment(4)	—		13,575		—		13,575
Integration costs and costs of discontinued clinics(5)	—		—		943		943
Litigation expenses	—		—		3,802		3,802

Adjusted EBITDA	$	126,923	$	12,050	$	(60,588)	$	78,385


	Nine Months Ended September 30, 2021
$'s in 000's	Products		Services		Unallocated Corporate		Consolidated
Pretax net income (loss)	$	117,010	$	(11,909)	$	(106,822)	$	(1,721)
Adjustments:
Depreciation	2,913		3,924		2,582		9,419
Interest expense, net	—		—		18,693		18,693
Amortization	—		—		17,682		17,682
Acquisition costs(2)	—		—		92		92
Stock based compensation expense	—		—		7,188		7,188
Loss on debt extinguishment and related costs (3)	—		—		6,438		6,438
Non same-store adjustment(4)	—		16,930		—		16,930
Integration costs and costs of discontinued clinics(5)	734		—		(1,088)		(354)
Litigation expenses	—		—		2,886		2,886
CFO Transition	—		—		331		331
Adjusted EBITDA	$	120,657	$	8,945	$	(52,018)	$	77,584