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Income
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(Exact name of registrant as specified in its charter)
iDelaware
i35-2554312
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i230 E. Riverside Dr.
i83616
iEagle,
iIdaho
(Zip Code)
(Address of principal executive offices)
i208-i939-8900
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
iClass
A Common Stock, $0.001 par value
iPETQ
iThe Nasdaq Global Select Market
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days iYesx No ¨
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
iAccelerated
filer
x
Non-accelerated filer
¨
Smaller reporting company
i¨
Emerging growth company
i¨
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i☐
Yes x No
As of May 10, 2023, we had i29,137,754 shares of Class A common stock and i244,540
shares of Class B common stock outstanding.
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,”“believe,”“continuing,”“could,”“estimate,”“expect,”“intend,”“may,”“ongoing,”“plan,”“project,”“should,”“will,” 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 heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q; general economic or market
conditions, including the impacts of the ongoing COVID-19 pandemic, global economic slowdown, increased inflation, rising interest rates and recent and potential bank failures; our ability to successfully grow our business through acquisitions and our ability to integrate acquisitions, including Rocco & Roxie; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation;
our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, and other reports filed from time to time with the Securities and Exchange Commission.
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.
Notes to the Condensed Consolidated Financial Statements (unaudited)
i
Note
1 — Principal Business Activity and Significant Accounting Policies
Principal Business Activity and Principles of Consolidation
PetIQ, Inc. ("PetIQ", the "Company", "we", or "us") is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than i60,000 points
of distribution across retail and e-commerce channels with our branded and distributed medications as well as health and wellness items, which are further supported by our world-class medications manufacturing facility in Omaha, Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national service platform operates in over i2,600 retail partner locations in i41
states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care that we can give them.
PetIQ has itwo reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segment consists of veterinary and wellness services and related product sales provided by the
Company directly to consumers.
PetIQ is the managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“OpCo”) and, through HoldCo, operates and controls all of the business and affairs of OpCo.
The condensed consolidated financial statements as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and 2022 are unaudited. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the disclosures
required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2022 and related notes thereto included in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (the "Annual Report"). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
i
Use of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies.
Significant Accounting Policies
The Company's
significant accounting policies are discussed in Note 1 – Principal Business Activity and Significant Accounting Policies in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company's unaudited condensed financial statements and related notes during the three months ended March 31, 2023.
/i
Note
2 — Business Combination
Rocco & Roxie
The Company completed the acquisition of all of the membership units of Rocco & Roxie Supply Co, LLC ("R&R") on January 13, 2023, (the "R&R Acquisition"), which resulted in R&R becoming a wholly owned subsidiary of the Company. The R&R Acquisition expands the Company's brand and product portfolio to include stain and odor products and enables the Company to extend its offerings into premium dog supplements and jerky
treats. The Company paid $i26.5 million for
the
membership interests of R&R using cash on hand, resulting in R&R becoming a wholly owned subsidiary of PetIQ. The purchase is subject to normal working capital adjustments.
i
The following table summarizes the preliminary allocations of the consideration paid, which included $i26.5 million
price plus $i1.1 million of preliminary working capital, of the purchase price to the assets acquired and liabilities assumed, based on our current estimates of the fair value at the date of the R&R Acquisition:
$'s in 000's
Fair Value
Current
assets
$
i3,020
Other assets
i1,208
Amortizable
intangibles
Trade name
i7,600
Customer relationships
i320
Total
amortizable intangibles
$
i7,920
Goodwill
i20,266
Total
assets
$
i32,414
Current liabilities
i1,000
Other
tax liabilities
i3,780
Total liabilities
i4,780
Purchase
price, net of cash acquired
$
i27,634
/
Intangible assets will be amortized over the estimated
useful lives of the assets through January 2043. The weighted average amortization period of the amortizable intangible assets is approximately i19.4 years. The identifiable intangible assets are measured at fair value as Level III in accordance with the fair value hierarchy.
Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. Approximately $i19.0 million
of the $i20.3 million of Goodwill will not be tax deductible, and the remaining balance is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment. Transaction costs of $i0.5
million were incurred and are recorded in Selling, General, and Administrative costs on the condensed consolidated statement of operations.
The estimate of fair value and purchase price allocation were based on information available at the time of closing the R&R Acquisition. These preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of closing the R&R Acquisition.
On April 13, 2021, OpCo entered into an asset-based revolving credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides revolving credit commitments of $i125.0 million, subject to a borrowing base limitation (the "ABL"). The borrowing base for
the ABL at any time equals the sum of: (i) i90% of eligible investment-grade accounts receivable; plus (ii) i85%
of eligible other accounts receivable; plus, (iii) i85% of the net orderly liquidation value of the cost of certain eligible on-hand and in-transit inventory; plus, (iv) at the option of OpCo, i100%
of qualified cash; minus (v) reserves. The ABL bears interest at a variable rate plus a margin, with the variable rate being based on a base rate or LIBOR at the option of the Company. On February 3, 2023, HoldCo and Opco, entered into the First Amendment Agreement to the ABL Facility to replace the interest rate benchmark from LIBOR to SOFR. The interest rate at March 31, 2023 was i5.90%.
The Company also pays a commitment fee on unused borrowings at a rate of i0.35%.
The ABL Facility is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts (such collateral subject to first-priority security interest, "ABL Priority Collateral"), and a second-priority security interest in all other personal and real property of HoldCo and its wholly-owned domestic subsidiaries (such collateral subject to such second-priority security interest, “Term Priority Collateral”), in each case, subject to customary exceptions. The ABL contains customary representations and warranties, affirmative
and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions. As of March 31, 2023, ino amounts were outstanding.
Senior Secured Term Loan Facility - Term Loan B
On April 13,
2021, OpCo entered into a term credit and guaranty agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $i300.0 million (which may be increased in certain circumstances) (the "Term Loan B"). The Term Loan B bears interest at a variable rate of either prime, federal funds effective rate or LIBOR, plus an applicable margin of between i3.25%
and i4.25% depending on the underlying base rate. LIBOR rates are subject to a i0.50% floor. The interest rate at March 31, 2023 was i8.96%.
The Term Loan B requires quarterly payments of i0.25% of the original principal amount, with the balance due on the seventh anniversary of the closing date.
The Term Loan B is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries, including a first-priority security interest in Term Priority Collateral and a second-priority security interest in ABL Priority
Collateral, in each case, subject to customary exceptions. The Term Loan B contains customary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.
Convertible Notes
On May 19, 2020, the Company issued $i143.8 million
in aggregate principal amount of i4.00% Convertible Senior Notes due 2026 (the “Notes”) pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The Notes accrue interest at a rate of i4.00%
per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes will mature on June 1, 2026, unless earlier repurchased, redeemed or converted. Before January 15, 2026, holders will have the right to convert their Notes only upon the occurrence of certain events. From and after January 15, 2026, holders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock,
at its election. The initial conversion rate is 33.7268 shares of Class A common stock per $1,000 principal amount of Notes. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
i
The following represents
the Company’s long-term debt as of:
Intangible
assets, net of accumulated amortization
$
i176,145
$
i172,479
/
Certain
intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currency movements. Amortization expense for the three months ended March 31, 2023 and 2022 was $i4.3 million and $i4.5
million, respectively.
i
Estimated future amortization expense for each of the following years is as follows:
Our effective tax rate from continuing operations was i4.4% and i3.7% for the three months ended March 31,
2023 and 2022, respectively, including discrete items. Income tax expense for the three months ended March 31, 2023 and 2022 was different than the U.S federal statutory income tax rate of 21% primarily due to the effects of the change in valuation allowance, state taxes, and the foreign rate differential.
The Company has assessed the realizability of the net deferred tax assets as of March 31, 2023 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross
deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from recorded deferred tax assets will not be realized. 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.
/i
Note
6 — Earnings per Share
Basic and Diluted Earnings per Share
Basic earnings per share of Class A common stock is computed by dividing net income available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
The
following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:
Three months ended March 31,
(in 000's, except for per share amounts)
2023
2022
Numerator:
Net
income
$
i9,781
$
i3,160
Less:
net income attributable to non-controlling interests
i82
i29
Net
income attributable to PetIQ, Inc. — basic
i9,699
i3,131
Plus:
interest expense on Convertible Notes
i1,676
i—
Net
income attributable to PetIQ, Inc. — diluted
i11,375
i3,131
Denominator:
Weighted-average
shares of Class A common stock outstanding — basic
i29,125
i29,164
Dilutive
effects of stock options that are convertible into Class A common stock
i—
i60
Dilutive
effect of RSUs
i45
i66
Dilutive
effect of conversion of Convertible Notes
i6,060
i—
Weighted-average
shares of Class A common stock outstanding — diluted
i35,230
i29,290
Income
per share of Class A common stock — basic
$
i0.33
$
i0.11
Income
per share of Class A common stock — diluted
$
i0.32
$
i0.11
/
Shares
of the Company’s Class B common stock do not share in the earnings of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
The computation of dilutive effect of other potential common shares includes i0
and i60 for stock options as well as i45 and i66
restricted stock units for the three months ended March 31, 2023 and 2022, respectively. All stock options and i693 thousand restricted stock units have been excluded from the computation of dilutive effect as they are antidilutive for the three months ended March 31, 2023. For the three months ended March 31,
2022 stock awards of i1,797 thousand shares were excluded from the computation of dilutive effect as they were antidilutive.
The dilutive impact of the Notes has been included in the dilutive earnings per share calculation for the three months ended March 31, 2023. The dilutive impact of the Notes have not been included in the dilutive earnings per share calculation for
the three months ended March 31, 2022 as they would have been antidilutive.
i
Note 7 — Stock Based Compensation
PetIQ, Inc. Omnibus Incentive Plan
The
Amended and Restated PetIQ, Inc. 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), restricted stock, restricted stock units (RSUs), and other stock-based awards, up to a total of i5,804,000 shares
of Class A common stock issuable under the Plan. As of March 31, 2023 and 2022, i1,167,937 and i26,000
shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares.
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 i800,000
shares of Class A common stock of
the Company, of which i760,000
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.
Stock Options
The Company awards stock options to certain employees under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically i25%
on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options are typically forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is i10 years.
The fair value of these equity awards is
amortized to equity based compensation expense over the vesting period, which totaled $i0.3 million and $i1.3 million for the three months ended March 31,
2023 and 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. iThe fair value of the stock option awards was determined on the grant dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the period ended March 31,
2022. No options were issued for the period ended March 31, 2023:
(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.
As of March 31,
2023, total unrecognized compensation cost related to unvested stock options was $i3.1 million and is expected to be recognized over a weighted-average period of i1.6
years.
i
Stock Options (in
000's)
Weighted Average Exercise Price
Aggregate Intrinsic Value (in 000's)
Weighted Average Remaining Contractual Life (years)
The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Typically, upon a termination of service relationship by the Company, all unvested RSUs will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s Class A common stock on the date of grant. At March 31, 2023, total unrecognized
compensation cost related to unvested RSUs was $i26.7 million and is expected to vest over a weighted average period of i3.4
years.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $i1.4 million for the three months ended March 31, 2023, and $i2.5
million for the three months ended March 31, 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients.
i
The following table summarizes the activity of the Company’s RSUs for the period ended March 31,
2023.
The Company has significant exposure to customer concentration. During the three months ended March 31, 2023 and 2022, three and two customers individually accounted for more than 10% of
sales, comprising i50% and i36% of net sales in aggregate, respectively for such periods.
At March 31, 2023
one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and accounted for i41% of outstanding trade receivables, net. At December 31, 2022 one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and accounted for i46%
of outstanding trade receivables, net.
/i
Note 10 — Commitments and Contingencies
Litigation Contingencies
The Company records
a liability when a particular contingency is probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency as of March 31, 2023 and December 31, 2022 as the Company does not consider any contingency to be probable or estimable.
The Company recorded $i2.5
million of expense in the three months ended March 31, 2022 related to a lawsuit brought by a former supplier to the Company related to the redemption of ownership interest, which is included within selling, general and administrative expenses on the condensed consolidated statements of operations. The matter was settled and paid during 2022.
Commitments
We have commitments for leases and long-term debt that are discussed further in Note - 3, Debt. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.
/i
Note
11 — Segments
The Company has itwo operating segments: Products and Services. The Products segment consists of the Company’s manufacturing and distribution business. The Services segment consists of the Company’s veterinary services and related product sales. The
segments are based on the discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to make resource allocation decisions and to evaluate performance. We measure and evaluate our reportable segments based on their respective Segment Adjusted EBITDA performance. Beginning in the fourth quarter of 2022, we allocate to our segments capital expenditures and certain costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses, on a pro rata basis based on net sales to better align with the discrete financial information reviewed by our CODM. Such expenses previously were not allocated to segments. The Company has recast prior periods to give effect to this change. This change in presentation had no impact on the Condensed Consolidated Statements of Operations.
i
Financial
information relating to the Company’s operating segments for the three months ended:
(1)Beginning
in the fourth quarter of 2022, the Company is allocating corporate expenses to each segment pro rata based on net sales for each segment. The presentation of Products Segment Adjusted EBITDA and Services Segment Adjusted EBITDA for the three months ended March 31, 2022 has been recast for comparability. For the three months ended March 31, 2022, total corporate expenses were $i19.4 million, of which $i17.4 million
was allocated to Products and $i2.0 million was allocated to Services.
(2) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.
(3) 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.
(4)
Integration costs represent costs related to integrating the acquired businesses including personnel costs such as severance and retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily within the Products segment.
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’s premium expense, which is generally paid directly to the relevant insurance company, amounted to $i6.9
million and $i6.9 million for policies that cover the three months ended March 31, 2023 and 2022, 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 $i0.06 million and $i0.06
million for the three months ended March 31, 2023 and 2022, respectively.
Mike Glasman, the brother of CFO, Zvi Glasman, acted as a broker in connection with the Company's entry into a Master Services Agreement with Syndeo, LLC d/b/a Broadvoice ("Broadvoice") in February 2023 for the provision of certain information technology related services. The amount to be paid to Broadvoice over the i39-month
agreement is $i0.4 million. iNo payments were made in the three months ended March 31,
2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2022 and related notes included in the Annual Report on Form 10-K for the year ended December 31 filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2023. 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 Note Regarding Forward-Looking Statements.” Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,”“us” and “our” refer to PetIQ, Inc. and our consolidated subsidiaries.
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 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 items, which are further supported by our world-class
medications manufacturing facility in Omaha, Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national service platform, operates in over 2,600 retail partner locations in 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care that we can give them.
We have two reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segments consists of veterinary and wellness services and products provided by the Company directly to consumers.
On January 13, 2023, the
Company completed the acquisition of all of the membership units of Rocco and Roxie Supply Co, LLC ("R&R"), after which R&R became a wholly owned and consolidated subsidiary of the Company. The acquisition expands the Company's product portfolio to include stain and odor products, jerky treats and behavioral products as well as expands sales channels in e-commerce.
We are the managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“OpCo”) and, through HoldCo, operates and controls all of the business and affairs of OpCo.
Stock
Repurchase Program
On September 6, 2022, the Company's Board of Directors authorized a stock repurchase program for up to $30 million of Class A common stock. Repurchases of Class A common stock may be made at management’s discretion from time to time in one or more transactions on the open market or in privately negotiated purchase and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations promulgated under Securities Exchange Act. The Company did not repurchase any shares during the current period.
The following tables set forth our condensed consolidated statements of operations in dollars and as a percentage of net sales for the periods presented:
Consolidated net sales increased $14.8 million or 5.4%, to $290.5 million for the three months ended March 31, 2023, compared
to $275.7 million for the three months ended March 31, 2022. Net sales growth of $11.3 million within the Products segment was driven by increases in distributed Rx medication sales, manufactured treats, and increases in sales from the acquisition of R&R, which occurred in January 2023. The Services segment revenues grew by $3.5 million on increased pet counts and increased average dollar per pet served during the first quarter of 2023.
Products Segment
Product sales increased $11.3 million, or 4.5%, to $259.0 million for the three months ended March 31, 2023, compared to $247.8 million for the three months ended March 31, 2022. The increase was driven by increases in distributed products sales of approximately $9.8 million,
increased sales from the acquisition of R&R, which occurred in January 2023, partially offset by a decline in other manufactured products
Services Segment
Services revenue increased $3.5 million, or 12.6%, to $31.5 million for the three months ended March 31, 2023, compared to $28.0 million for the three months ended March 31, 2022. Same-store sales increased $7.8 million, or 37.7%, to $28.5 million for the three months ended March 31, 2023, compared to $20.7 million for the three months ended March 31, 2022. The increased service revenue was driven by maturation of wellness centers that allowed for an increase in pet counts and an increase in average dollar per pets served during
the first quarter of 2023.
Gross profit
Gross profit increased by $4.6 million, or 8.0%, to $62.3 million for the three months ended March 31, 2023, compared to $57.6 million for the three months ended March 31, 2022. This increase is driven by the Products segment gross profit
increasing by $1.2 million due to net sales growth, and also due to maturation of wellness centers and operational improvements within the Services segment driving gross
profit increase of $3.4 million.
Gross margin increased to 21.4% for the three months ended March 31, 2023, compared to 20.9% for the three months ended March 31, 2022. The improvement was driven by our Service segment which improved from 2.6% to 12.7% as a result of increased efficiencies and maturation of wellness centers which drove higher pet counts as well as higher average dollar per pets served. Partially offsetting this increase, Products segment gross margin decreased approximately 0.5% due primarily to impact of product mix.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses (“SG&A”) decreased by $4.9 million, or 10.2%, to $43.3 million for the three months ended March
31, 2023, compared to $48.2 million for the three months ended March 31, 2022. As a percentage of net sales, SG&A decreased from 17.5% for the three months ended March 31, 2022 to 14.9% for the three months ended March 31, 2023. The decrease was driven by legal expense of $2.6 million in 2022 for which no similar expense occurred in 2023 and a $1.4 million decrease in stock compensation due to accelerated vesting that occurred in the prior year and had no comparable event in the current year. Additional items are detailed below.
Products Segment
Products segment SG&A decreased $3.7 million or approximately 9.6% to $35.0 million for the three months ended March 31, 2023, compared
to $38.7 million for the three months ended March 31, 2022. This decrease was primarily due to lower legal expense and stock compensation as described above.
Services Segment
Services segment SG&A decreased $1.2 million, or 12.3%, to $8.3 million for the three months ended March 31, 2023, compared to $9.5 million for the three months ended March 31, 2022. This decrease was driven by lower corporate allocations, operational improvements, and lower marketing spend due to fewer new store openings.
Interest expense, net
Interest expense, net, increased $2.6 million to $8.7 million for the three months ended March
31, 2023, compared to $6.1 million for the three months ended March 31, 2022. 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 4.4% and 3.7% for the three months ended March 31, 2023 and 2022, respectively, with a tax expense of $0.4 million and $0.1 million, respectively. The tax rate is different than the U.S federal statutory income tax rate of 21% primarily due to the effects of the change in valuation allowance, state taxes, and the foreign rate differential.
Consolidated Non-GAAP
Financial Measures
EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA plus adjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.
The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware
when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.
Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative
to financial measures determined in accordance with Generally Accepted Accounting Principles ("GAAP"). The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:
•EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
•EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA does not reflect the interest expenses, or the cash requirements necessary to service interest or principal payments, on our debts;
•although depreciation and amortization
are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements;
•Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing core operations; and
•Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementary. You should
review the reconciliations of net income to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
Three Months Ended March 31,
$'s in 000's
2023
2022
Net income
$
9,781
$
3,160
Plus:
Tax
expense
448
121
Depreciation
3,521
3,682
Amortization
4,261
4,523
Interest
8,732
6,121
EBITDA
$
26,743
$
17,607
Acquisition
costs(1)
538
—
Stock based compensation expense
2,466
3,823
Integration costs(2)
976
339
Litigation expenses
—
2,661
Adjusted
EBITDA
$
30,722
$
24,430
(1) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.
(2) Integration costs represent costs related to integrating the acquired businesses including personnel costs such as severance and retention bonuses, consulting costs, contract termination, and IT conversion costs. The costs are primarily in the Products segment.
Financial
Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flows from operations, borrowings, and equity financing. As of March 31, 2023 and December 31, 2022, our cash and cash equivalents were $25.4 million and $101.3 million, respectively. As of March 31, 2023, we had an unused revolving credit facility with availability of $125.0 million, $294.8 million under our term loan, $143.8 million of outstanding convertible notes, and $18.7 million in other debt. Our debt
agreements bear interest at rates between 4.0% and 8.96%. See “Note 3 – Debt” to our condensed consolidated financial statements included herein for a description of each of our debt arrangements.
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 investment in additional veterinary clinics. Our primary working capital requirements are to fund inventory and accounts receivable to support our sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of March 31, 2023 and December 31,
2022, we had working capital (current assets less current liabilities) of $211.0 million and $220.6 million, respectively. The Company has not historically made significant non-contractual debt pay downs, but may choose to do so in the future as part of its capital allocation strategy.
We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our debt facilities will be adequate to meet our operating, investing, and financing needs for at least the 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, 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 or at all. As in the past, we will continue to explore opportunities to optimize our capital structure.
Cash Flows
Cash used in Operating Activities
Net cash used in operating activities was $43.3 million for the three months ended March 31, 2023, compared to $45.4 million used in
operating activities for the three months ended March 31, 2022. The change in operating cash flows primarily reflects higher earning partially offset by increased cash usage for working capital of $2.2 million. Working capital changes are driven primarily by growth in accounts receivable and inventory on higher sales, while accounts payable growth provided working capital benefit driven by increase in inventory and timing of inventory purchases.
Cash used in Investing Activities
Net cash used in investing activities was $29.5 million for the three months ended March 31, 2023, compared to $5.7 million for the three months ended March 31, 2022. The increase in net cash used in investing activities
was primarily the result of $27.6 million of the cash utilized in the acquisition of R&R.
Cash (used in) provided by Financing Activities
Net cash used in financing activities was $3.1 million for the three months ended March 31, 2023, compared to net cash provided by financing activities of $22.9 million for the three months ended March 31, 2022. The change in cash (used in) provided by financing activities is primarily driven by reduced borrowing on the Company's ABL on improved Company cash flows.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates. We currently do not enter into derivatives or other financial instruments for trading or speculative purposes.
Interest Rate Risk
We are exposed to changes in interest rates because the indebtedness incurred under our ABL and our Term Loan B are variable rate debt. Interest rate changes generally do not affect the recorded value of our credit agreements but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of March 31, 2023, we had variable rate debt of approximately $294.8 million under our Revolver and Term Loan. An increase of 1% would have increased
our interest expense for the three months ended March 31, 2023 by approximately $0.7 million.
Inflation is a factor in our business and 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.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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. 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 10 — 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.
Item 1A. Risk Factors.
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 February 28, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
Item 2.Unregistered Sales of Equity Securities and Results of Operations
On September 6, 2022, the Company's Board of Directors authorized a stock repurchase program for up to $30 million of the Company’s outstanding shares of Class A common stock. Repurchases of Class A common stock may be made at management’s discretion from time to time in one or more transactions on the open market or in privately negotiated purchase
and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations promulgated under Securities Exchange Act. The Company did not purchase any shares during the quarter ended March 31, 2023. As of March 31, 2023, $26.1 million in aggregate dollar value of shares remained available for purchase under the stock repurchase program.
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.
