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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 5/07/21 PetIQ, Inc. 10-Q 3/31/21 83:8.9M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.12M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 26K
12: R1 Document and Entity Information HTML 81K
13: R2 Condensed Consolidated Balance Sheets HTML 110K
14: R3 Condensed Consolidated Balance Sheets HTML 34K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Operations HTML 80K
16: R5 Condensed Consolidated Statements of Comprehensive HTML 39K
Loss
17: R6 Condensed Consolidated Statements of Cash Flows HTML 106K
18: R7 Condensed Consolidated Statements of Equity HTML 71K
19: R8 Principal Business Activity and Significant HTML 109K
Accounting Policies
20: R9 Asset Acquisitions HTML 36K
21: R10 Property, Plant, and Equipment HTML 49K
22: R11 Intangible Assets and Goodwill HTML 114K
23: R12 Debt HTML 69K
24: R13 Leases HTML 113K
25: R14 Income Tax HTML 27K
26: R15 Earnings per Share HTML 54K
27: R16 Stock Based Compensation HTML 121K
28: R17 Stockholder's Equity HTML 25K
29: R18 Non-Controlling Interests HTML 62K
30: R19 Customer Concentration HTML 25K
31: R20 Commitments and Contingencies HTML 26K
32: R21 Segments HTML 144K
33: R22 Related Parties HTML 25K
34: R23 Subsequent Events HTML 25K
35: R24 Principal Business Activity and Significant HTML 140K
Accounting Policies (Policies)
36: R25 Principal Business Activity and Significant HTML 82K
Accounting Policies (Tables)
37: R26 Asset Acquisitions (Tables) HTML 31K
38: R27 Property, Plant, and Equipment (Tables) HTML 48K
39: R28 Intangible Assets and Goodwill (Tables) HTML 115K
40: R29 Debt (Tables) HTML 56K
41: R30 Leases (Tables) HTML 114K
42: R31 Earnings per Share (Tables) HTML 51K
43: R32 Stock Based Compensation (Tables) HTML 120K
44: R33 Non-Controlling Interests (Tables) HTML 59K
45: R34 Segments (Tables) HTML 148K
46: R35 Principal Business Activity and Significant HTML 29K
Accounting Policies (Details)
47: R36 Principal Business Activity and Significant HTML 34K
Accounting Policies - Receivables and Credit
Policy (Details)
48: R37 Principal Business Activity and Significant HTML 31K
Accounting Policies - Inventories (Details)
49: R38 Principal Business Activity and Significant HTML 42K
Accounting Policies - Property, Plant, and
Equipment (Details)
50: R39 Principal Business Activity and Significant HTML 45K
Accounting Policies - Convertible Debt (Details)
51: R40 Principal Business Activity and Significant HTML 26K
Accounting Policies - Disaggregation of revenue
(Details)
52: R41 Principal Business Activity and Significant HTML 27K
Accounting Policies - Research and Development and
Advertising Costs (Details)
53: R42 Principal Business Activity and Significant HTML 26K
Accounting Policies - Collaboration Agreements
(Details)
54: R43 Principal Business Activity and Significant HTML 26K
Accounting Policies - Non-controlling interest
(Details)
55: R44 Asset Acquisitions - Capstar Acquisition (Details) HTML 46K
56: R45 Asset Acquisitions - Supplier Termination, HTML 37K
Settlement and Asset Purchase Agreement (Details)
57: R46 Property, Plant, and Equipment (Details) HTML 52K
58: R47 Intangible Assets and Goodwill - Intangible Assets HTML 67K
(Details)
59: R48 Intangible Assets and Goodwill - Estimated future HTML 36K
amortization expense (Details)
60: R49 Intangible Assets and Goodwill - Schedule of HTML 30K
Goodwill (Details)
61: R50 Debt - Convertible Notes (Details) HTML 51K
62: R51 Debt - A&R (Details) HTML 121K
63: R52 Leases - Narrative (Details) HTML 27K
64: R53 Leases - Components of lease expense and other HTML 49K
information (Details)
65: R54 Leases - Annual future commitments under HTML 68K
non-cancelable leases (Details)
66: R55 Leases - Supplemental Cash Flow (Details) HTML 33K
67: R56 Income Tax (Details) HTML 40K
68: R57 Earnings per Share (Details) HTML 59K
69: R58 Stock Based Compensation (Details) HTML 55K
70: R59 Stock Based Compensation - Weighted Average HTML 32K
Assumptions (Details)
71: R60 Stock Based Compensation - Summary of Unvested HTML 56K
Stock Options (Details)
72: R61 Stock Based Compensation - Restricted Stock HTML 58K
(Details)
73: R62 Stockholder's Equity (Details) HTML 41K
74: R63 Non-Controlling Interests (Details) HTML 43K
75: R64 Customer Concentration (Details) HTML 34K
76: R65 Segments (Details) HTML 68K
77: R66 Segments - Reconciliation (Details) HTML 64K
78: R67 Related Parties (Details) HTML 32K
79: R68 Subsequent Events (Details) HTML 41K
81: XML IDEA XML File -- Filing Summary XML 150K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
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i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i March 31, 2021 | |
i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission File Number: i 001-38163 | |
i PetIQ, Inc.
(Exact name of registrant as specified in its charter)
| |
i Delaware | i 35-2554312 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
i 923 S. Bridgeway Pl. | i 83616 |
i Eagle, i Idaho | (Zip Code) |
(Address of principal executive offices) | |
i 208- i 939-8900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | ||
| | | ||
Title of Each Class | | Trading | | Name of Each Exchange on Which Registered |
i Class A Common Stock, $0.001 par value | | i PETQ | | i The Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days i Yes ⌧ 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). i Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
i Large accelerated filer ⌧ | Accelerated filer ◻ |
| |
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 has filed a report on and attestation of its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. i ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i ☐ Yes ⌧ No
As of May 6, 2021, we had i 28,372,028 shares of Class A common stock and i 766,825 shares of Class B common stock outstanding.
PetIQ, Inc.
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| | | PetIQ, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) | | 5 |
| | | | 6 | |
| | | | 8 | |
| | | PetIQ, Inc. Notes to Condensed Consolidated Financial Statements | | 9 |
| | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 29 | |
| | | 38 | ||
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2
PetIQ, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, in 000’s except for per share amounts)
| | | | | | | |
| | | | ||||
| | | | | As adjusted (Note 1) | | |
| |
|
| ||||
Current assets | | | | | | | |
Cash and cash equivalents | | $ | i 11,064 | | $ | i 33,456 | |
Accounts receivable, net | | | i 175,186 | | | i 102,755 | |
Inventories | | | i 130,523 | | | i 97,773 | |
Other current assets | | | i 9,150 | | | i 8,312 | |
Total current assets | | | i 325,923 | | | i 242,296 | |
Property, plant and equipment, net | | | i 68,783 | | | i 63,146 | |
Operating lease right of use assets | | | i 20,171 | | | i 20,122 | |
Other non-current assets | | | i 1,836 | | | i 1,870 | |
Intangible assets, net | | | i 204,589 | | | i 213,000 | |
Goodwill | | | i 231,202 | | | i 231,158 | |
Total assets | | $ | i 852,504 | | $ | i 771,592 | |
Liabilities and equity | |
|
| |
|
| |
Current liabilities | |
|
| |
|
| |
Accounts payable | | $ | i 101,033 | | $ | i 68,131 | |
Accrued wages payable | | | i 8,344 | | | i 10,540 | |
Accrued interest payable | | | i 538 | | | i 903 | |
Other accrued expenses | | | i 10,864 | | | i 8,815 | |
Current portion of operating leases | | | i 5,151 | | | i 4,915 | |
Current portion of long-term debt and finance leases | | | i 6,752 | | | i 7,763 | |
Total current liabilities | | | i 132,682 | | | i 101,067 | |
Operating leases, less current installments | | | i 15,741 | | | i 15,789 | |
Long-term debt, less current installments | | | i 443,139 | | | i 403,591 | |
Finance leases, less current installments | | | i 3,001 | | | i 3,338 | |
Other non-current liabilities | | | i 1,253 | | | i 1,397 | |
Total non-current liabilities | | | i 463,134 | | | i 424,115 | |
Commitments and contingencies (Note 13) | | |
| | |
| |
Equity | | |
| | |
| |
Additional paid-in capital | | | i 345,386 | | | i 319,642 | |
Class A common stock, par value $ i i 0.001 / per share, i i 125,000 / shares authorized; i 28,102 and i 25,771 shares issued and outstanding, respectively | | | i 28 | | | i 26 | |
Class B common stock, par value $ i i 0.001 / per share, i i 100,000 / shares authorized; i 941 and i 3,040 shares issued and outstanding, respectively | | | i 1 | | | i 3 | |
Accumulated deficit | | | ( i 96,525) | | | ( i 98,558) | |
Accumulated other comprehensive loss | | | ( i 500) | | | ( i 686) | |
Total stockholders' equity | | | i 248,390 | | | i 220,427 | |
Non-controlling interest | | | i 8,298 | | | i 25,983 | |
Total equity | | | i 256,688 | | | i 246,410 | |
Total liabilities and equity | | $ | i 852,504 | | $ | i 771,592 | |
See accompanying notes to the condensed consolidated financial statements.
3
PetIQ, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in 000’s except for per share amounts)
| | | | | | |
| | For the Three Months Ended | ||||
|
|
| ||||
| | | | | | |
Product sales | | $ | i 230,034 | | $ | i 166,280 |
Services revenue | | | i 24,313 | | | i 20,498 |
Total net sales | | | i 254,347 | | | i 186,778 |
Cost of products sold | |
| i 182,827 | |
| i 134,779 |
Cost of services | | | i 23,721 | | | i 19,845 |
Total cost of sales | | | i 206,548 | | | i 154,624 |
Gross profit | |
| i 47,799 | |
| i 32,154 |
Operating expenses | |
| | |
|
|
General and administrative expenses | |
| i 40,672 | |
| i 31,690 |
Operating income | |
| i 7,127 | |
| i 464 |
Interest expense, net | |
| ( i 4,870) | |
| ( i 4,704) |
Foreign currency (loss) income, net | |
| ( i 113) | |
| i 73 |
Other income, net | |
| i 317 | |
| i 365 |
Total other expense, net | |
| ( i 4,666) | |
| ( i 4,266) |
Pretax net income (loss) | | | i 2,461 | | | ( i 3,802) |
Income tax (expense) benefit | | | ( i 75) | | | i 1,169 |
Net income (loss) | |
| i 2,386 | |
| ( i 2,633) |
Net income (loss) attributable to non-controlling interest | | | i 353 | | | ( i 530) |
Net income (loss) attributable to PetIQ, Inc. | | $ | i 2,033 | | $ | ( i 2,103) |
Net income (loss) per share attributable to PetIQ, Inc. Class A common stock | | | | | | |
Basic | | $ | i 0.08 | | $ | ( i 0.09) |
Diluted | | $ | i 0.08 | | $ | ( i 0.09) |
Weighted Average shares of Class A common stock outstanding | | | | | | |
Basic | | | i 26,386 | | | i 23,728 |
Diluted | | | i 27,004 | | | i 23,728 |
See accompanying notes to the condensed consolidated financial statements.
4
PetIQ, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in 000’s)
| | | | | | |
| | For the Three Months Ended | ||||
| |
| ||||
Net income (loss) | | $ | i 2,386 | | $ | ( i 2,633) |
Foreign currency translation adjustment | |
| i 141 | |
| ( i 574) |
Comprehensive income (loss) | |
| i 2,527 | |
| ( i 3,207) |
Comprehensive income (loss) attributable to non-controlling interest | |
| i 358 | |
| ( i 623) |
Comprehensive income (loss) attributable to PetIQ | | $ | i 2,169 | | $ | ( i 2,584) |
See accompanying notes to the condensed consolidated financial statements.
5
PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in 000’s)
| | | | | | |
|
| For the Three Months Ended March 31, | ||||
| | 2021 | | 2020 | ||
Cash flows from operating activities |
| | | | | |
Net income (loss) |
| $ | i 2,386 | | $ | ( i 2,633) |
Adjustments to reconcile net income (loss) to net cash used in operating activities |
| |
| | |
|
Depreciation and amortization of intangible assets and loan fees |
| | i 12,351 | | | i 5,470 |
Loss (gain) on disposition of property, plant, and equipment |
| | i 30 | | | ( i 375) |
Stock based compensation expense | | | i 2,122 | | | i 2,558 |
Deferred tax adjustment | | | — | | | ( i 1,169) |
Other non-cash activity |
| | i 145 | | | i 33 |
Changes in assets and liabilities |
| | | | | |
Accounts receivable |
| | ( i 72,423) | | | ( i 60,217) |
Inventories |
| | ( i 32,767) | | | ( i 39,069) |
Other assets |
| | ( i 726) | | | ( i 1,090) |
Accounts payable |
| | i 32,182 | | | i 27,827 |
Accrued wages payable |
| | ( i 2,184) | | | ( i 2,561) |
Other accrued expenses |
| | i 1,531 | | | i 2,620 |
Net cash used in operating activities |
| | ( i 57,353) | | | ( i 68,606) |
Cash flows from investing activities |
| |
| | |
|
Proceeds from disposition of property, plant, and equipment | | | — | | | i 429 |
Purchase of property, plant, and equipment |
| | ( i 8,325) | | | ( i 5,075) |
Net cash used in investing activities |
| | ( i 8,325) | | | ( i 4,646) |
Cash flows from financing activities |
| |
| | |
|
Proceeds from issuance of long-term debt |
| | i 242,500 | | | i 239,600 |
Principal payments on long-term debt |
| | ( i 204,641) | | | ( i 165,816) |
Tax distributions to LLC Owners | | | — | | | ( i 20) |
Principal payments on finance lease obligations |
| | ( i 468) | | | ( i 394) |
Tax withholding payments on Restricted Stock Units | | | ( i 802) | | | ( i 149) |
Exercise of options to purchase class A common stock | | | i 6,580 | | | i 1,002 |
Net cash provided by financing activities |
| | i 43,169 | | | i 74,223 |
Net change in cash and cash equivalents |
| | ( i 22,509) | | | i 971 |
Effect of exchange rate changes on cash and cash equivalents |
| | i 117 | | | ( i 135) |
Cash and cash equivalents, beginning of period |
| | i 33,456 | | | i 27,272 |
Cash and cash equivalents, end of period | | $ | i 11,064 | | $ | i 28,108 |
See accompanying notes to the condensed consolidated financial statements.
6
PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited, in 000’s)
| | | | | | |
| | For the Three Months Ended March 31, | ||||
Supplemental cash flow information | | 2021 | | 2020 | ||
Interest paid | | $ | i 4,441 | | $ | i 3,789 |
Net change in property, plant, and equipment acquired through accounts payable | | | ( i 622) | | | i 681 |
Finance lease additions | | | — | | | i 381 |
Net change of deferred tax asset from step-up in basis | | | — | | | i 3,199 |
Income taxes paid, net of refunds | | | i 17 | | | i 89 |
Accrued tax distribution | | | i 149 | | | i 106 |
| | | | | | |
See accompanying notes to the consolidated financial statements. | ||||||
7
PetIQ, Inc.
Condensed Consolidated Statements of Equity
(Unaudited, in 000’s)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2021 | |||||||||||||||||||||||||
| | | | Accumulated | | | | | | | | | | | | | | | |||||||||
| | | | Other | | | | | | | | | | Additional | | | | | | ||||||||
| | Accumulated | | Comprehensive | | | | | | | | | | Paid-in | | Non-controlling | | Total | |||||||||
| | Deficit | | Loss | | Class A Common | | Class B Common | | Capital | | Interest | | Equity | |||||||||||||
| | | | | | Shares | | Dollars | | Shares | | Dollars | | | | | | | |||||||||
Balance - January 1, 2021 As adjusted (Note 1) | | $ | ( i 98,558) | | $ | ( i 686) | | | i 25,711 | | $ | i 26 | | | i 3,040 | | $ | i 3 | | $ | i 319,642 | | $ | i 25,983 | | $ | i 246,410 |
Exchange of LLC Interests held by LLC Owners | | | — | | | i 50 | | | i 2,099 | | | i 2 | | | ( i 2,099) | | | ( i 2) | | | i 18,031 | | | ( i 18,081) | | | — |
Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | ( i 149) | | | ( i 149) |
Other comprehensive income | | | — | | | i 136 | | | — | | | — | | | — | | | — | | | — | | | i 5 | | | i 141 |
Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | i 1,935 | | | i 187 | | | i 2,122 |
Exercise of Options to purchase Common Stock | | | — | | | — | | | i 242 | | | — | | | — | | | — | | | i 6,580 | | | — | | | i 6,580 |
Issuance of stock vesting of RSU's, net of tax withholdings | | | — | | | — | | | i 50 | | | — | | | — | | | — | | | ( i 802) | | | — | | | ( i 802) |
Net income | | | i 2,033 | | | — | | | — | | | — | | | — | | | — | | | — | | | i 353 | | | i 2,386 |
Balance - March 31, 2021 | | $ | ( i 96,525) | | $ | ( i 500) | | | i 28,102 | | $ | i 28 | | | i 941 | | $ | i 1 | | $ | i 345,386 | | $ | i 8,298 | | $ | i 256,688 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2020 | |||||||||||||||||||||||||
| | | | | Accumulated | | | | | | | | | | | | | | | | |||||||
| | | | | Other | | | | | | | | | | Additional | | | | | | | ||||||
| | Accumulated | | Comprehensive | | Class A Common | | Class B Common | | Paid-in | | Non-controlling | | Total | |||||||||||||
| | Deficit | | Loss | | Shares | | Dollars | | Shares | | Dollars | | Capital | | Interest | | Equity | |||||||||
Balance - January 1, 2020 | | $ | ( i 15,903) |
| $ | ( i 1,131) |
| | i 23,554 |
| $ | i 23 |
| | i 4,752 |
| $ | i 5 |
| $ | i 300,120 |
| $ | i 45,196 |
| $ | i 328,310 |
Exchange of LLC Interests held by LLC Owners | | | — | | | ( i 43) | | | i 703 | | | i 1 | | | ( i 703) | | | ( i 1) | | | i 6,665 | | | ( i 6,622) | | | — |
Net increase in deferred tax asset from LLC Interest transactions | | | — | | | — | | | — | | | — | | | — | | | — | | | i 3,199 | | | — | | | i 3,199 |
Accrued tax distributions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | ( i 106) | | | ( i 106) |
Other comprehensive loss | | | — | | | ( i 481) | | | — | | | — | | | — | | | — | | | — | | | ( i 93) | | | ( i 574) |
Stock based compensation expense | | | — | | | — | | | — | | | — | | | — | | | — | | | i 2,142 | | | i 416 | | | i 2,558 |
Exercise of Options to purchase Common Stock | | | — | | | — | | | i 46 | | | — | | | — | | | — | | | i 1,002 | | | — | | | i 1,002 |
Issuance of stock vesting of RSU's, net of tax withholdings | | | — | | | — | | | i 15 | | | — | | | — | | | — | | | ( i 255) | | | — | | | ( i 255) |
Net loss | | | ( i 2,103) | | | — | | | — | | | — | | | — | | | — | | | — | | | ( i 530) | | | ( i 2,633) |
Balance - March 31, 2020 | | $ | ( i 18,006) | | $ | ( i 1,655) | | | i 24,318 | | $ | i 24 | | | i 4,049 | | $ | i 4 | | $ | i 312,874 | | $ | i 38,262 | | $ | i 331,503 |
Note that certain figures shown in the tables above may not recalculate due to rounding.
See accompanying notes to the condensed consolidated financial statements.
8
iPetIQ Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
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 i 60,000 points of distribution across retail, including veterinary, channels with our branded distributed medications, which is further supported by our own world-class medication manufacturing facility in Omaha, Nebraska. Our national service platform, VIP Petcare (“VIP”), operates in over i 2,900 retail partner locations in i 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care we can give them.
We have i two reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segment consists of veterinary services and related product sales provided by the Company directly to consumers.
We are the sole managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, through Holdco, operate and control all of the business and affairs of Opco.
The condensed consolidated financial statements as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020 are unaudited. The condensed consolidated balance sheet as of December 31, 2020 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, 2020 and related notes thereto included in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
iUse of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, the valuation of assets and liabilities in connection with acquisitions, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies.
iFair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are at cost, which approximates fair value due to their relatively short maturities. The Notes Payable – VIP Acquisition are carried at cost, which approximates fair value. Our term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amounts approximate fair value.
iCash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the date of acquisition. All credit card, debit card and electronic transfer transactions that process in less than seven days are classified as cash and cash equivalents. The Company maintains its cash accounts in various deposit accounts, the balances of which at times exceeded federal deposit insurance limits during the periods presented.
iReceivables and Credit Policy
Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 45 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, net of discounts and estimated deductions. The Company does not have a policy for charging interest on overdue customer account balances. The Company provides an allowance for credit losses equal to expected losses. The Company’s estimate is based on historical collection experience, a review of the current status of trade accounts receivable and known current economic conditions including the current and expected impact of COVID-19. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice.
Other receivables consists of various receivables due from vendors, banking partners, and notes receivable from suppliers. Non-current portions of these other receivables are included in other non-current assets on the condensed consolidated balance sheets.
Accounts receivable consists of the following as of:
i
| | | | | | |
$'s in 000's |
|
| ||||
Trade receivables | | $ | i 162,152 | | $ | i 96,381 |
Other receivables | |
| i 13,369 | |
| i 7,094 |
| |
| i 175,521 | |
| i 103,475 |
Less: Allowance for doubtful accounts | |
| ( i 335) | |
| ( i 720) |
Total accounts receivable, net | | $ | i 175,186 | | $ | i 102,755 |
iInventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in first-out (“FIFO”) method and includes estimated rebate amounts. The Company maintains reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, and market conditions. Changes in these conditions may result in additional reserves. Major components of inventories consist of the following as of:
i
| | | | | | |
$'s in 000's |
|
| ||||
Raw materials | | $ | i 12,267 | | $ | i 15,761 |
Work in progress | | | i 2,676 | | | i 2,273 |
Finished goods | |
| i 115,580 | |
| i 79,739 |
Total inventories | | $ | i 130,523 | | $ | i 97,773 |
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Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Expenditures for improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Depreciation and amortization is provided using the straight-line method, based on estimated useful lives of the assets, except for leasehold improvements and finance leased assets which are depreciated over the shorter of the expected useful life or the lease term. Depreciation and amortization expense is recorded in cost of sales and general and administrative expenses in the consolidated statements of operations, depending on the use of the asset. The estimated useful lives of property, plant, and equipment are as follows:
i
| | | |
Computer equipment and software |
| | i 3 years |
Vehicle and vehicle accessories | | | i 3- i 5 years |
Buildings |
| | i 33 years |
Equipment |
| | i 2- i 15 years |
Leasehold improvements |
| | i 2- i 15 years |
Furniture and fixtures |
| | i 5- i 10 years |
iConvertible Debt
On May 19, 2020, we issued $ i 143.8 million aggregate principal amount of Convertible Notes due 2026 (the “Notes”). See Note 5 – “Debt.” Simultaneously, with the issuance of the Notes, we bought capped call options from certain financial institutions to minimize the impact of potential dilution of our Class A common stock upon conversion of the Notes. The premium for the capped call options was recorded as additional paid-in capital in our condensed consolidated balance sheets as the options are settleable in our Class A common stock.
Effective January 1, 2021, we adopted ASU 2020-06 using the full retrospective approach. As a result of this adoption, we have de-recognized the debt discount on the Notes and therefore no longer recognize any amortization of debt discount on the Notes as interest expense (see below, Adopted Accounting Standard Update).
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Revenue Recognition
When Performance Obligations Are Satisfied
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are product sales and the delivery of veterinary services.
Revenue is generally recognized for product sales on a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the remaining benefits from the asset at this point in time.
The Company determined that certain products manufactured to a customer’s specifications do not have an alternative future use at a reasonable profit margin due to costs associated with reworking, transporting and repackaging these products. These products are produced subject to purchase orders that include an enforceable right to payment. Therefore the Company determined that revenue on these products would be recognized over time, as the products are produced. This represents a minor subset of the products the Company manufactures.
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Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered at the time of service. Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its relative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data.
The performance obligations in our contracts are satisfied within i one year. As such, we have not disclosed the transaction price allocated to remaining performance obligations as of March 31, 2021.
Variable Consideration
In addition to fixed contract consideration, most contracts include some form of variable consideration. The most common forms of variable consideration include discounts, rebates, and sales returns and allowances. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We believe there will not be significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in the market. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.
Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other temporary price reductions. These programs are offered to our customers both in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is subject to management estimates.
Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.
Both trade marketing expense and product introductory fees are recognized as reductions of revenue at the time the transfer of control of the associated products occurs. Accruals for expected payouts, or amounts paid in advance, under these programs are included as accounts payable or other current assets in the condensed consolidated balance sheets.
Significant Payment Terms
Our customer contracts identify the product, quantity, price, payment and final delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.
Shipping
All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales. This includes shipping and handling costs after control over a product has transferred to a customer.
Warranties & Returns
PetIQ provides all customers with a standard or assurance type warranty. Either stated or implied, the Company provides assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law. No significant services beyond an assurance warranty are provided to customers.
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The Company does not grant a general right of return. However, customers may return defective or non-conforming products. Customer remedies may include either a cash refund or an exchange of the product. As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue. This return estimate is reviewed and updated each period and is based on historical sales and return experience.
Contract balances
Contract asset and liability balances as of March 31, 2021 and 2020 are immaterial. The Company does not have significant deferred revenue or unbilled receivable balances.
iCost of Services
Cost of Services are comprised of all service and product costs related to the delivery of veterinary services, including but not limited to, salaries and contract costs of veterinarians, technicians and other clinic based personnel, transportation and delivery costs, rent, occupancy costs, supply costs, depreciation and amortization of clinic assets, certain marketing and promotional expenses and costs of goods sold.
iResearch and Development and Advertising Costs
Research and development and advertising costs are expensed as incurred and are included in general and administrative expenses. Research and development costs amounted to $ i 1.1 million and $ i 1.0 million for the three months ended March 31, 2021 and 2020, respectively. Advertising costs were $ i 2.4 million and $ i 2.5 million for the three months ended March 31, 2021 and 2020, respectively.
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iCollaboration Agreements
Through our acquisition of Perrigo Animal Health, we entered into a product development and asset purchase agreement with a third party for certain product formulations in development by the third party. During the three months ended March 31, 2021, the Company opted out of the arrangement for i two of the product formulations, which reduced the amount of any potential payments under the agreement. The Company may make up to $ i 5.8 million of payments over the course of the next several years contingent on achievement of certain development and regulatory approval milestones. Product development costs are expensed as incurred or as milestone payments become probable. There can be no assurance that these products will be approved by the U.S. Food and Drug Administration (“FDA”) on the anticipated schedule or at all. Consideration paid after FDA approval will be capitalized and amortized to cost of goods sold over the economic life of each product. The expenses paid prior to FDA approval will be included in General and Administrative expenses on the condensed consolidated statements of operations. There were no expenses incurred under the agreement for the three months ended March 31, 2021 or 2020.
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iAccounting for Income Taxes
The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
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The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense.
iNon-controlling interest
The non-controlling interests on the condensed consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, Holdco, held by the non-controlling holders of Class B common stock and limited liability company interests in Holdco. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling holders of Class B common stock and Limited Liability Company interests in Holdco. As of March 31, 2021 and December 31, 2020 the non-controlling interest was approximately i 3.2% and i 10.6%, respectively of ownership of LLC Interests.
/ iLitigation
The Company is subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If the likelihood of an adverse legal outcome is determined to be probable and the amount of loss is estimable, then a liability is accrued in accordance with accounting guidance for Contingencies. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. The Company consults with both internal and external legal counsel related to litigation.
iAdopted Accounting Standard Updates
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The ASU made amendments to the EPS guidance in Topic 260 for convertible debt instruments, the most significant of which is requiring the use of the if-converted method for diluted EPS calculation. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the ASU can either be on a modified retrospective or full retrospective basis.
On January 1, 2021, we adopted the ASU using the full retrospective method. Under the full retrospective method, the prior period condensed consolidated financial statements have been retrospectively adjusted to reflect the adoption of the accounting standard in those periods. There was no impact to condensed consolidated statement of operations for the three months ended March 31, 2020 as we had no relevant instruments outstanding. The following table shows the impact of the adoption on our condensed consolidated balance sheet.
i
| | | | | | | | |
| | | | | ASU 2020-06 | | ||
| | | | As reported | | Adjustment | | As Restated |
Liabilities | | | | | | | | |
| Long-term debt, less current installments | | $ | i 355,979 | $ | i 47,612 | $ | i 403,591 |
Stockholders' Equity | | | | | | | | |
| Additional Paid-in Capital | | | i 356,442 | | ( i 36,800) | | i 319,642 |
| Non-controlling Interest | | | i 31,614 | | ( i 5,631) | | i 25,983 |
| Accumulated Deficit | | | ( i 93,377) | | ( i 5,181) | | ( i 98,558) |
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iNote 2 –Asset Acquisitions
Capstar ® Acquisition
On July 31, 2020 the Company completed the acquisition of Capstar® and CapAction® and related assets (the “Capstar Acquisition”) from Elanco US Inc. for $ i 95 million, plus the cost of certain outstanding finished goods inventory in saleable condition, using cash on hand as a result of the issuance of the Notes in May 2020.
The Capstar Acquisition was accounted for as an asset acquisition and certain transaction related costs of approximately $ i 1.1 million were included in the cost of the acquired assets. The fair value assigned to trade names was based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The estimated fair value of customer relationship was determined using an income approach, specifically a discounted cash flow analysis. The rate utilized to discount net cash flows to their present values was approximately i 15% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The fair value assigned to patents and processes was determined based on the income approach. The purchased assets are identified below:
i
| | |
$'s in 000's | Fair Value | |
Amortizable intangibles | | |
Customer relationships | $ | i 70,901 |
Patents and processes | | i 9,895 |
Total amortizable intangibles | | i 80,796 |
Non-amortizable intangibles | | |
Trademarks and other | | i 15,276 |
Total purchased intangible assets | $ | i 96,072 |
The weighted average amortization period of the amortizable intangible assets is approximately i 11.8 years.
Supplier Termination, Settlement and Asset Purchase Agreement:
During July 2020, the Company entered into a Termination, Settlement and Asset Purchase Agreement (“Agreement”) with a supplier who alleged PetIQ had breached its supply agreement due to the acquisition of Perrigo Animal Health. The Agreement called for PetIQ to pay $ i 20.6 million, $ i 2.6 million at signing and $ i 1.0 million per quarter thereafter. The Agreement terminated the supply agreement that was previously in place, settled all outstanding claims and operations, and allowed PetIQ to purchase certain intellectual property related assets. The Company estimated the fair value of the payment obligation as $ i 17.5 million, and determined the fair value of the acquired assets to be $ i 9.7 million. The assets acquired are included within the patents and processes intangible assets category and are amortized over i 10 years. The assets were valued using the relief from royalty method. The remainder of the obligation was considered to be a payment to settle the alleged breach of the supply agreement, the termination expense is included in general and administrative expenses on the condensed consolidated statement of operations for the three months ended June 30, 2020. The obligation is considered debt and is included in debt on the condensed consolidated balance sheet. See Note 5 – “Debt” for additional information.
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Note 3 – Property, Plant, and Equipment
Property, plant, and equipment consists of the following at:
i
| | | | | | |
$'s in 000's | | | ||||
Leasehold improvements | | $ | i 21,143 | | $ | i 19,709 |
Equipment | | | i 25,714 | | | i 25,664 |
Vehicles and accessories | | | i 6,825 | | | i 7,110 |
Computer equipment and software | | | i 11,326 | | | i 10,858 |
Buildings | | | i 10,362 | | | i 10,168 |
Furniture and fixtures | | | i 2,362 | | | i 2,347 |
Land | | | i 7,067 | | | i 7,067 |
Construction in progress | | | i 17,798 | | | i 11,331 |
| | | i 102,597 | | | i 94,254 |
Less accumulated depreciation | | | ( i 33,814) | | | ( i 31,108) |
Total property, plant, and equipment | | $ | i 68,783 | | $ | i 63,146 |
Depreciation expense related to these assets was $ i 3.1 million and $ i 2.9 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
/ iNote 4 – Intangible Assets and Goodwill
Intangible assets consist of the following at:
i
| | | | | | | | | | | | | | |
$'s in 000's | | | | | | Useful Lives | | | | | ||||
Amortizable intangibles | | | | | | | | | | | | | | |
Certification | | | | | | i 7 years | | | | $ | i 350 | | $ | i 350 |
Customer relationships | | | | | | i 12- i 20 years | | | | | i 160,188 | | | i 160,178 |
Patents and processes | | | | | | i 5- i 10 years | | | | | i 14,925 | | | i 14,905 |
Brand names | | | | | | i 5- i 15 years | | | | | i 24,748 | | | i 24,740 |
Total amortizable intangibles | | | | | | | | | | | i 200,211 | | | i 200,173 |
Less accumulated amortization | | | | | | | | | | | ( i 30,631) | | | ( i 25,984) |
Total net amortizable intangibles | | | | | | | | | | | i 169,580 | | | i 174,189 |
Non-amortizable intangibles | | | | | | | | | | | | | | |
Trademarks and other | | | | | | | | | | | i 33,341 | | | i 33,341 |
In-process research and development | | | | | | | | | | | i 1,668 | | | i 5,470 |
Intangible assets, net of accumulated amortization | | | | | | | | | | $ | i 204,589 | | $ | i 213,000 |
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, 2021 and 2020 was $ i 8.4 million and $ i 2.2 million, respectively.
The in-process research and development (“IPRD”), intangible assets represent the value assigned to i three acquired R&D projects that principally represent rights to develop and sell products that the Company has acquired which has not yet been completed or approved. The IPRD acquired as part of the Perrigo Animal Health Acquisition is accounted for as an indefinite-lived asset until the product is available for sale and regulatory approval is obtained, or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed, the IPRD would be amortized over its then estimated useful life. The fair value of the IPRD was estimated using the multi-period excess earnings income method. The projected cash flows estimates for the future products were based on certain key assumptions including estimates of future revenues and expenses, taking into account the stage of development at the acquisition date and the resources needed to complete development. In the event that the efforts are not successful, the Company will write off the relevant IPRD in the period in which it is no longer considered feasible. During the three months ended March 31, 2021, the Company opted out of i two of the acquired projects, effectively abandoning the associated research and development efforts. Accordingly, the Company wrote off the associated IPRD assets of $ i 3.8
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million, the expense for which is included in General and administrative expenses on the condensed consolidated statement of operations for the three months ended March 31, 2021.
Estimated future amortization expense for each of the following years is as follows:
i
| | | | | | |
Years ending December 31, ($'s in 000's) | | | | | | |
Remainder of 2021 | | | | | $ | i 13,877 |
2022 | | | | | | i 17,973 |
2023 | | | | | | i 16,925 |
2024 | | | | | | i 14,557 |
2025 | | | | | | i 13,895 |
Thereafter | | | | | | i 92,353 |
The following is a summary of the changes in the carrying value of goodwill for the period from January 1, 2020 to March 31, 2021:
i
| | | | | | | | | |
| | Reporting Unit | | | | ||||
($'s in 000's) | | Products | | Services | | Total | |||
Goodwill as of January 1, 2020 | | | i 183,781 | | | i 47,264 | | | i 231,045 |
Foreign currency translation | | | i 113 | | | — | | | i 113 |
Goodwill as of December 31, 2020 | | | i 183,894 | | | i 47,264 | | | i 231,158 |
Foreign currency translation | | | i 44 | | | — | | | i 44 |
Goodwill as of March 31, 2021 | | $ | i 183,938 | | $ | i 47,264 | | $ | i 231,202 |
iNote 5 – Debt
Convertible Notes
On May 19, 2020, the Company issued $ i 143.8 million in aggregate principal amount of i 4.00% Convertible Senior Notes due 2026 pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $ i 137.9 million. The Notes accrue interest at a rate of i 4.00% 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 i 33.7268 shares of Class A common stock per $ i 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.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds i 130% of the conversion price on (i) each of at least i 20 trading days, whether or not consecutive, during the i 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes
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to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock.
The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default.
The fair value of the Notes was $ i 204.5 million as of March 31, 2021. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of March 31, 2021 and is classified as Level 2 in the fair value hierarchy.
A&R Credit Agreement
The Company amended the existing revolving credit agreement of Opco and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”) on July 8, 2019. The Amended Revolving Credit Agreement provides for a secured revolving credit facility of $ i 125 million that matures on July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur fees between i 0.375% and i 0.50% as unused facility fees, dependent on the aggregate amount borrowed. On May 14, 2020, the Company amended the Amended Revolving Credit Agreement to allow for the Notes described above. Additionally the amendment instituted a Eurodollar floor of i 1% to the agreement.
All obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.
The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowers and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of March 31, 2021, the borrowers and guarantors thereunder were in compliance with these covenants. Although the Company currently expects continued compliance with debt covenants, the impact COVID-19 may negatively affect the Company’s ability to comply with these covenants. The Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of March 31, 2021, the borrower and guarantors thereunder were in compliance with these covenants.
As of March 31, 2021, $ i 54.4 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was i 3.3% at March 31, 2021.
A&R Term Loan Credit Agreement
The Company amended and restated the existing term loan credit agreement of Opco (the “A&R Term Loan Credit Agreement”) on July 8, 2019. The $ i 220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus i 5.00%. The A&R Term Loan Credit Agreement calls for 1% of the original loan balance to be paid annually via equal quarterly payments, with the balance of the loan due on the sixth anniversary of the agreement.
All obligations under the A&R Term Loan Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future
18
domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of PetIQ, LLC and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions.
The A&R Term Loan Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of March 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.
The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of March 31, 2021, the borrower and guarantors thereunder were in compliance with these covenants.
As of March 31, 2021, $ i 216.7 million was outstanding under the A&R Term Loan Credit Agreement.
General Other Debt
The Company entered into a mortgage with a local bank to finance a commercial building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of i 4.35% and utilizes a i 25 year amortization schedule with a i 10 year balloon payment of the balance due at that time.
In July 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset Acquisitions”. The Agreement called for PetIQ to pay $ i 20.6 million, $ i 2.6 million at signing and $ i 1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest rate of i 8.3%, resulting in an obligation of $ i 17.5 million at the time it was entered into.
In connection with the VIP Acquisition, the Company entered into a guarantee note of $ i 10.0 million and contingent Notes that were subsequently earned. As of December 31, 2020 and March 31, 2021, $ i 7.5 million was payable pursuant to the 2018 Contingent Note and $ i 10.0 million was payable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $ i 27.5 million require quarterly interest payments of i 6.75% with the balance payable July 17, 2023.
The following represents the Company’s long-term debt as of:
i
| | | | | | |
$'s in 000's |
|
| ||||
Convertible Notes | | $ | i 143,750 | | $ | i 143,750 |
Term loans | | | i 216,700 | | | i 217,250 |
Revolving credit facility | |
| i 54,422 | |
| i 15,000 |
Notes Payable - VIP Acquisition | | | i 27,500 | | | i 27,500 |
Other Debt | | | i 15,508 | | | i 16,257 |
Net discount on debt and deferred financing fees (1) | |
| ( i 9,461) | |
| ( i 9,947) |
| | $ | i 448,419 | | $ | i 409,810 |
Less current maturities of long-term debt | |
| ( i 5,280) | |
| ( i 6,219) |
Total long-term debt | | $ | i 443,139 | | $ | i 403,591 |
19
| (1) | – The net discount on debt and deferred financing fees were adjusted retrospectively for the adoption of ASU 2020-06 as discussed further in Note 1. |
Future maturities of long-term debt, excluding the discount on debt and deferred financing fees, as of March 31, 2021, are as follows:
i
| | | |
($'s in 000's) | | | |
Remainder of 2021 |
| $ | i 4,859 |
2022 | | | i 5,498 |
2023 | | | i 33,279 |
2024 | |
| i 6,083 |
2025 | | | i 2,260 |
Thereafter | |
| i 405,901 |
The Company entered into two new credit facilities on April 13, 2021, which fully repaid and terminated the Amended Revolving Credit Agreement, the A&R Term Loan Credit Agreement, and the VIP Notes. See Note 16 – “Subsequent Events.”
iNote 6 – Leases
The Company leases certain real estate for commercial, production, and retail purposes, as well as equipment from third parties. Lease expiration dates are between 2021 and 2026. A portion of leases are denominated in foreign currencies.
For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term.
We elected the short-term lease exemption for all leases that qualify. This means leases having an initial term of twelve months or less are not recorded on the balance sheet and 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 extend or terminate the lease. Renewal options generally range from one to i 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.
/20
The components of lease expense consists of the follow:
i
| | | | | | | |
| | For the Three Months Ended | | ||||
$'s in 000's | |
|
| ||||
Finance lease cost | | | | | | | |
Amortization of right-of-use assets | | $ | i 566 | | $ | i 391 | |
Interest on lease liabilities | | | i 91 | | | i 82 | |
Operating lease cost | | | i 1,292 | | | i 1,831 | |
Variable lease cost(1) | | | i 306 | | | i 175 | |
Short-term lease cost | | | i 4 | | | i 5 | |
Sublease income | | | ( i 43) | | | ( i 75) | |
Total lease cost | | $ | i 2,216 | | $ | i 2,409 | |
| (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:
i
| | | | | | |
| | | | | ||
Weighted-average remaining lease term (years) | | | | | | |
Operating leases | | | i 4.26 | | | i 4.82 |
Finance leases | | | i 2.78 | | | i 2.80 |
Weighted-average discount rate | | | | | | |
Operating leases | | | i 5.3% | | | i 5.3% |
Finance leases | | | i 4.9% | | | i 5.8% |
Annual future commitments under non-cancelable leases as of March 31, 2021, consist of the following:
i
| | | | | | |
| | Lease Obligations | ||||
$'s in 000's |
| Operating Leases |
| Finance Leases | ||
Remainder of 2021 | | $ | i 4,582 | | $ | i 1,314 |
2022 | |
| i 5,955 | |
| i 1,584 |
2023 | |
| i 5,154 | |
| i 1,580 |
2024 | |
| i 3,631 | |
| i 361 |
2025 | |
| i 2,711 | |
| i 20 |
Thereafter | |
| i 1,468 | |
| — |
Total minimum future obligations | | $ | i 23,501 | | $ | i 4,859 |
Less interest | |
| ( i 2,609) | |
| ( i 334) |
Present value of net future minimum obligations | | | i 20,892 | | | i 4,525 |
Less current lease obligations | | | ( i 5,151) | | | ( i 1,524) |
Long-term lease obligations | | $ | i 15,741 | | $ | i 3,001 |
| | | | | | |
21
Supplemental cash flow information:
i
| | | | | | |
| | | | | | |
| | Three Months Ended | | Three Months Ended | ||
$'s in 000's | | | ||||
Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
Operating cash flows from finance leases | | $ | i 91 | | $ | i 82 |
Operating cash flows from operating leases | | | i 1,224 | | | i 1,798 |
Financing cash flows from finance leases | | | i 468 | | | i 394 |
(Noncash) right-of-use assets obtained in exchange for lease obligations | | | | | | |
Operating leases | | | i 1,418 | | | i 1,696 |
Finance leases | | | — | | | i 381 |
iNote 7 – Income Tax
As a result of the Company’s initial public offering and related reorganization transactions completed in July 2017, the Company held a majority of the economic interest in Holdco and consolidates the financial position and results of Holdco. The remaining ownership of Holdco not held by the Company is considered a non-controlling interest. Holdco is treated as a partnership for income tax reporting. Holdco’s members, including the Company, are liable for federal, state, and local income taxes based on their share of Holdco’s taxable income.
Our effective tax rate (ETR) from continuing operations was i 3.06% and i 30.8% for the three months ended March 31, 2021, and 2020 respectively, including discrete items. Income tax expense for three months ended March 31, 2021 and 2020 was different than the U.S federal statutory income tax rate of i i 21 / % primarily due to the effects of a change in valuation allowance, state taxes, and foreign GILTI income inclusion.
The Company has assessed the realizability of the net deferred tax assets as of March 31, 2021 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. The Company has recorded a valuation allowance for deferred tax assets of $ i 89.5 million and $ i 71.2 million as of March 31, 2021 and December 31, 2020, respectively. 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.
HoldCo makes cash distributions to members to pay taxes attributable to their allocable share of income earned. In the three months ended March 31, 2021 and 2020, the Company made cash distributions of $ i 0 and $ i 0.02 million, respectively. Additionally, HoldCo accrues for distributions required to be made related to estimated income taxes. During the three months ended March 31, 2021 and 2020, the Company accrued distributions of $ i 0.1 million and $ i 0.1 million, respectively.
/ iNote 8 – 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) 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 (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.
22
On January 1, 2021, we adopted ASU 2020-06 using the full retrospective method. Following this adoption, we utilize the if-converted method for the diluted net income (loss) per share calculation of our convertible Notes (see Note 1 for more information on the adoption of ASU 2020-06).
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:
i
| | | | | | |
| | Three months ended March 31, | ||||
(in 000's, except for per share amounts) | | | 2021 | | 2020 | |
Numerator: | | | | | | |
Net (loss) income | | $ | i 2,386 | | $ | ( i 2,633) |
Less: net (loss) income attributable to non-controlling interests | | | i 353 | | | ( i 530) |
Net income (loss) attributable to PetIQ, Inc. — basic and diluted | | | i 2,033 | | | ( i 2,103) |
Denominator: | | | | | | |
Weighted-average shares of Class A common stock outstanding -- basic | | | i 26,386 | | | i 23,728 |
Dilutive effects of stock options that are convertible into Class A common stock | | | i 470 | | | — |
Dilutive effect of RSUs | | | i 148 | | | — |
Dilutive effect for conversion of Notes | | | — | | | — |
Weighted-average shares of Class A common stock outstanding -- diluted | | | i 27,004 | | | i 23,728 |
| | | | | | |
Earnings (loss) per share of Class A common stock — basic | | $ | i 0.08 | | $ | ( i 0.09) |
Earnings (loss) per share of Class A common stock — diluted | | $ | i 0.08 | | $ | ( i 0.09) |
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.
The computation of dilutive effect of other potential common shares excludes stock awards of i 652 thousand shares for the three months ended March 31, 2021, as the inclusion under the treasury stock method would have been antidilutive. The dilutive impact of the Notes have not been included in the dilutive earnings per share calculation for the three months ended March 31, 2021 as they would be antidilutive.
Additionally, all stock options and restricted stock units and convertible Notes have not been included in the diluted earnings per share calculation for the three months ended March 31, 2020, as they would have been anti-dilutive.
iNote 9 – Stock Based Compensation
PetIQ, Inc. Omnibus Incentive Plan
The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company has i 3,914 thousand authorized shares under the Plan. As of March 31, 2021 and 2020, i 767 thousand and i 1,299 thousand shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares.
PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees
The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provides for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved i 800 thousand shares of Class A Common Stock of the Company. As of March 31, 2021, i no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.
/23
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 i 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 i 10 years.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $ i 1.4 million and $ i 2.2 million for the three months ended March 31, 2021 and 2020, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periods ended March 31, 2021 and 2020:
i
| | | | | | | | |
| | | ||||||
Expected term (years) (1) |
| | i 6.25 | | | | i 6.25 | |
Expected volatility (2) | | | i 33.91 | % | | | i 33.91 | % |
Risk-free interest rate (3) | | | i 0.90 | % | | | i 0.72 | % |
Dividend yield (4) | | | i 0.00 | % | | | i 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 March 31, 2021 was $ i 12.39 per option. At March 31, 2021, total unrecognized compensation cost related to unvested stock options was $ i 11.3 million and is expected to be recognized over a weighted-average period of i 2.4 years.
i
| | | | | | | | | | | | |
| | | | | | | | Weighted | ||||
| | | | | | | | Average | ||||
| | | | Weighted | | Aggregate | | Remaining | ||||
| | Stock | | Average | | Intrinsic | | Contractual | ||||
| | Options | | Exercise | | Value | | Life | ||||
| | (in 000's) | | Price | | (in 000's) | | (years) | ||||
Outstanding at January 1, 2020 | | | i 2,072 | | $ | i 24.63 | | $ | i 6,266 | | | i 8.0 |
Granted | | | i 505 | | | i 20.22 | | | | | | |
Exercised | | | ( i 395) | | | i 23.48 | | $ | i 4,468 | | | |
Forfeited | | | ( i 96) | | | i 21.42 | | | | | | |
Outstanding at December 31, 2020 | | | i 2,086 | | $ | i 23.93 | | $ | i 30,302 | | | i 7.2 |
Granted | | | i 354 | | | i 35.66 | | | | | | |
Exercised | | | ( i 242) | | | i 27.17 | | $ | i 2,450 | | | |
Forfeited | | | ( i 11) | | | i 21.22 | | | | | | |
Cancelled | | | ( i 1) | | | i 27.73 | | | | | | |
Outstanding at March 31, 2021 | | | i 2,186 | | $ | i 25.48 | | $ | i 21,763 | | | i 7.9 |
Options exercisable at March 31, 2021 | | | i 910 | | | | | | | | | |
Restricted Stock Units
The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At
24
March 31, 2021, total unrecognized compensation cost related to unvested RSUs was $ i 11.4 million and is expected to vest over a weighted average i 3.3 years.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $ i 0.8 million and $ i 0.4 million for the three months ended March 31, 2021 and 2020, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.
The following table summarizes the activity of the Company’s RSUs for the period ended March 31, 2021.
i
| | | | | | |
| | | | Weighted | ||
| | Number of | | Average | ||
| | Shares | | Grant Date | ||
| | (in 000's) | | Fair Value | ||
Outstanding at January 1, 2020 | | | i 133 | | $ | i 28.85 |
Granted | | | i 271 | | | i 20.73 |
Settled | | | ( i 70) | | | i 25.65 |
Forfeited | | | ( i 17) | | | i 23.34 |
Outstanding at December 31, 2020 |
| | i 317 |
| $ | i 22.91 |
Granted | | | i 179 | | | i 35.66 |
Settled | | | ( i 71) | | | i 21.62 |
Forfeited | | | ( i 2) | | | i 21.06 |
Nonvested RSUs at March 31, 2021 | | | i 423 | | $ | i 28.55 |
iNote 10 – Stockholders’ Equity
Exchanges
During the three months ended March 31, 2021 holders of Class B common stock and LLC Interests exercised exchange rights and exchanged i 2,099 thousand Class B common shares and corresponding LLC Interests for newly issued Class A Common Stock. The LLC Agreement generally allows for exchanges on the last day of each calendar month.
/ iNote 11 – Non-Controlling Interests
The following table presents the outstanding LLC Interests and changes in LLC Interests for the periods presented.
i
| | | | | | | | | | | | | |
| | LLC Interests held | | | % of Total | ||||||||
| | | LLC | | | | | | | | | LLC | |
$'s in 000's |
| Owners |
| PetIQ, Inc. | | | Total | | | Owners | PetIQ, Inc. | ||
As of January 1, 2020 | | | i 4,752 | | | i 23,554 | | | i 28,306 | | | i 16.8% | i 83.2% |
Stock based compensation adjustments | | | — | | | i 445 | | | i 445 | | | | |
Exchange transactions | | | ( i 1,712) | | | i 1,712 | | | — | | | | |
As of December 31, 2020 | | | i 3,040 | | | i 25,711 | | | i 28,751 | | | i 10.6% | i 89.4% |
Stock based compensation adjustments | | | | | | i 292 | | | i 292 | | | | |
Exchange transactions | | | ( i 2,099) | | | i 2,099 | | | — | | | | |
As of March 31, 2021 | | | i 941 | | | i 28,102 | | | i 29,043 | | | i 3.2% | i 96.8% |
Note that certain figures shown in the table above may not recalculate due to rounding.
For the three months ended March 31, 2021 and 2020 the Company owned a weighted average of i 91.2% and i 83.7%, respectively, of Holdco.
/
25
Note 12 – Customer Concentration
The Company has significant exposure to customer concentration. During the three months ended March 31, 2021 and 2020, i two customers individually accounted for more than 10% of sales, comprising i 42% of net sales, respectively for such periods.
At March 31, 2021 i one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and accounted for i 45% of outstanding trade receivables, net. At December 31, 2020 i one Products segment customers individually accounted for more than 10% of outstanding trade receivables, and accounted for i 52% of outstanding trade receivables, net.
/ iNote 13 – 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 at March 31, 2021 and December 31, 2020 as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the condensed consolidated statements of operations.
Commitments
We have commitments for leases and long-term debt that are discussed further in Note 5, Debt, and Note 6, Leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.
iNote 14 – Segments
The Company has i two 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, provided by the Company directly to consumers.
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 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.
/26
Financial information relating to the Company’s operating segments for the three months ended:
| | | | | | | | | | | | |
$'s in 000's |
| | | | | | | Unallocated | | | | |
| Products |
| Services |
| Corporate | | Consolidated | |||||
Net Sales | | $ | i 230,034 | | $ | i 24,313 | | $ | — | | $ | i 254,347 |
Adjusted EBITDA | |
| i 38,792 | | | i 2,096 | | | ( i 14,027) | | | i 26,861 |
Depreciation expense | | | i 940 | | | i 1,182 | | | i 1,009 | | | i 3,131 |
Capital expenditures | | | i 270 | | | i 2,379 | | | i 5,676 | | | i 8,325 |
| | | | | | | | | | | | |
$'s in 000's |
| | | | | | | Unallocated | | | | |
| Products |
| Services |
| Corporate | | Consolidated | |||||
Net Sales | | $ | i 166,280 | | $ | i 20,498 | | $ | — | | $ | i 186,778 |
Adjusted EBITDA | |
| i 24,279 | | | i 1,989 | | | ( i 11,810) | | | i 14,458 |
Depreciation expense | | | i 1,316 | | | i 848 | | | i 709 | | | i 2,873 |
Capital expenditures | | | i 1,673 | | | i 2,833 | | | i 569 | | | i 5,075 |
/
The following table reconciles Segment Adjusted EBITDA to Net income (loss) for the periods presented.
i
| | | | | | |
| For the three months ended | | ||||
$'s in 000's | | | ||||
Adjusted EBITDA: | | | | | | |
Product | $ | i 38,792 | | $ | i 24,279 | |
Services | | i 2,096 | | | i 1,989 | |
Unallocated Corporate | | ( i 14,027) | | | ( i 11,810) | |
Total Consolidated | | i 26,861 | | | i 14,458 | |
Adjustments: | | | | | | |
Depreciation | | ( i 3,131) | | | ( i 2,873) | |
Amortization | | ( i 8,428) | | | ( i 2,242) | |
Interest | | ( i 4,870) | | | ( i 4,704) | |
Acquisition costs(1) | | ( i 6) | | | ( i 586) | |
Stock based compensation expense | | ( i 2,122) | | | ( i 2,558) | |
Integration costs and costs of discontinued clinics(2) | | i 48 | | | ( i 454) | |
Non same-store revenue(3) | | i 4,395 | | | i 2,282 | |
Non same-store costs(3) | | ( i 9,339) | | | ( i 6,400) | |
Clinic launch expenses(4) | | ( i 704) | | | ( i 676) | |
Litigation expenses | | ( i 243) | | | ( i 49) | |
Pretax net income (loss) | $ | i 2,461 | | $ | ( i 3,802) | |
Income tax benefit (expense) | | ( i 75) | | | i 1,169 | |
Net loss | $ | i 2,386 | | $ | ( i 2,633) | |
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (4) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
27
Supplemental geographic disclosures are below.
i
| | | | | | | |
| | | Three months ended March 31, 2021 | ||||
$'s in 000's | | | U.S. | | Foreign | | Total |
Product sales | | $ | i 228,575 | $ | i 1,459 | $ | i 230,034 |
Service revenue | | | i 24,313 | | — | | i 24,313 |
Total net sales | | $ | i 252,888 | $ | i 1,459 | $ | i 254,347 |
| | | | | | | |
| | | Three months ended March 31, 2020 | ||||
$'s in 000's | | | U.S. | | Foreign | | Total |
Product sales | | $ | i 165,072 | $ | i 1,208 | $ | i 166,280 |
Service revenue | | | i 20,498 | | — | | i 20,498 |
Total net sales | | $ | i 185,570 | $ | i 1,208 | $ | i 186,778 |
| | | | | | | |
Property, plant, and equipment by geographic location is below.
| | | | | | |
| |
| ||||
United States | | $ | i 67,522 | | $ | i 61,807 |
Europe | | | i 1,261 | | | i 1,339 |
Total | | $ | i 68,783 | | $ | i 63,146 |
iNote 15 – Related Parties
As discussed in Note 7– “Income Taxes”, the Company has accrued tax distributions that are payable to Continuing LLC Owners to facilitate the Continuing LLC Owners periodic estimated tax obligations. At March 31, 2021 and December 31, 2020, the Company had accrued $ i i 0.1 / million for estimated tax distributions and paid $ i i 0.03 / million in advance on required tax distributions, respectively, which are included in accounts payable on the consolidated balance sheets.
Chris Christensen, the brother of CEO, McCord Christensen, acts as the Company’s agent at Moreton Insurance (“Moreton”), which acts as a broker for a number of the Company’s insurance policies. The Company’s premium expense, paid to Moreton and subsequently transferred to insurance providers, was $ i 0 million and $ i 0.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Mr. Chris Christensen was paid a commission of approximately $ i 0 thousand and $ i 18 thousand for the three months ended March 31, 2021 and March 31, 2020, respectively, for the sale of such insurance policies to the Company.
/
iNote 16 – Subsequent Events
On April 13, 2021, the Company entered into a new $ i 300 million term loan (“Term Loan B”) and a $ i 125 million new asset-based revolving line of credit (“ABL”), collectively referred to as the (“credit facilities”).
The credit facilities replace both the Amended Revolving Credit Agreement and A&R Term Loan Agreement and increase total borrowing capacity by approximately $ i 109 million. The Term Loan B, priced at LIBOR+425 with a i 0.50% LIBOR floor, has a maturity of April 2028 and contains no financial covenants. The new ABL, priced at LIBOR+125 to LIBOR+175, has a maturity of April 2026. The credit facilities provide significant improvements in debt covenants, increased operational flexibility and incremental debt baskets to facilitate future growth. In addition to replacing previous facilities, a portion of the proceeds were used to fully repay $ i 27.5 million of the unsecured VIP Seller Notes bearing interest at i 6.75%.
/
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2020 and related notes included in the annual report for PetIQ, Inc., filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K for the year ended December 31, 2020. 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.”
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, including veterinary, channels with our branded distributed medications, which is further supported by our own world-class medication manufacturing facility in Omaha, Nebraska. Our national service platform, VIP Petcare (“VIP”), operates in over 2,900 retail partner locations in 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care we can give them.
We have two reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segments consists of veterinary services and related product sales provided by the Company directly to consumers.
We are the sole managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“Opco”) and, through Holdco, operate and control all of the business and affairs of Opco.
Coronavirus Disease (COVID-19) Considerations
The global COVID-19 pandemic has created significant volatility, disruption and uncertainty. It has resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and the implementation of social distancing measures, leading to the closure of businesses and causing weakened economic conditions and an economic slowdown and recession.
With the anticipated gradual receding of the pandemic, as well as COVID-19 vaccinations becoming more widespread and various restrictions continuing to ease, consumers have started to resume normal activities, including seeking in person veterinary care for their companion animals, and more businesses have commenced resuming operations. The Company has continued to experience absenteeism in excess of historical averages, however, throughout the first quarter the impact has been declining. 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.
Since the beginning of the pandemic in the first quarter of 2020, the Company has implemented various policies and procedures designed to ensure the safety of our customers and team members. With COVID-19 cases and hospitalizations declining through the United States, we have begun to roll back certain policies that incurred additional costs, such as incremental team members at veterinary services clinics and wellness centers to ensure social distancing and enhanced sanitation.
29
Results of Operations
The following tables set forth our 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 | |
| | | | ||||||||
Product sales | $ | 230,034 | | $ | 166,280 | | | | 90.4 | % | | 89.0 | % |
Services revenue | | 24,313 | | | 20,498 | | | | 9.6 | % | | 11.0 | % |
Total net sales | | 254,347 | | | 186,778 | | | | 100.0 | % | | 100.0 | % |
Cost of products sold |
| 182,827 | |
| 134,779 | | | | 71.9 | % | | 72.2 | % |
Cost of services | | 23,721 | | | 19,845 | | | | 9.3 | % | | 10.6 | % |
Total cost of sales | | 206,548 | | | 154,624 | | | | 81.2 | % | | 82.8 | % |
Gross profit |
| 47,799 | |
| 32,154 | | | | 18.8 | % | | 17.2 | % |
General and administrative expenses |
| 40,672 | |
| 31,690 | | | | 16.0 | % | | 17.0 | % |
Operating income |
| 7,127 | |
| 464 | | | | 2.8 | % | | 0.2 | % |
Interest expense, net |
| 4,870 | |
| 4,704 | | | | 1.9 | % | | 2.5 | % |
Foreign currency (loss) gain, net |
| 113 | |
| (73) | | | | 0.0 | % | | (0.0) | % |
Other income, net |
| (317) | |
| (365) | | | | (0.1) | % | | (0.2) | % |
Total other expense, net |
| 4,666 | |
| 4,266 | | | | 1.8 | % | | 2.3 | % |
Pretax net income (loss) | | 2,461 | | | (3,802) | | | | 1.0 | % | | (2.0) | % |
(Provision) benefit for income taxes | | (75) | | | 1,169 | | | | (0.0) | % | | 0.6 | % |
Net income (loss) | $ | 2,386 | | $ | (2,633) | | | | 0.9 | % | | (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 | | ||||
$'s in 000's | | | ||||
Services segment sales: | | | | | | |
Same-store sales | $ | 19,918 | | $ | 18,216 | |
Non same-store sales | | 4,395 | | | 2,282 | |
Net services segment sales | | 24,313 | | | 20,498 | |
Products segment sales | | 230,034 | | | 166,280 | |
Total net sales | | 254,347 | | | 186,778 | |
| | | | | | |
Adjusted EBITDA | | | | | | |
Products | | 38,792 | | | 24,279 | |
Services | | 2,096 | | | 1,989 | |
Unallocated Corporate | | (14,027) | | | (11,810) | |
Total Adjusted EBITDA | $ | 26,861 | | $ | 14,458 | |
Three Months Ended March 31, 2021 Compared With Three Months Ended March 31, 2020
Net sales
Consolidated Net Sales
Consolidated net sales increased $67.6 million, or 36.2%, to $254.3 for the three months ended March 31, 2021, compared to $186.8 million for the three months ended March 31, 2020. This increase was driven by the acceleration of sales of distributed items, both OTC and Rx. Large gains occurred within both the online channel and brick and mortar. Manufactured items as a result of the Capstar acquisition added some sales growth, as well growth of health and wellness items. Growth in the Services segment is related to more days open and newly opened wellness centers, compared to the closures related to COVID-19 that started during the three months ended March 31, 2020.
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Products Segment
Product sales increased $63.8 million, or 38.3%, to $230.0 million for the three months ended March 31, 2021, compared to $166.3 million for the three months ended March 31, 2020. This increase was driven by velocity growth within current customers of distributed products. This includes a program change at a major partner who moved from a manufactured offering to a distributed offering.
Services Segment
Services revenues increased $3.8 million, or 18.6%, from $20.5 million to $24.3 million for the three months ended March 31, 2021, compared to the three months ended March 31, 2020. Same-store sales increased $1.7 million, or 9.3%, to $19.9 million for the three months ended March 31, 2021, compared to $18.2 million for the three months ended March 31, 2020. The increase in same-store sales was driven by relaxation of COVID-19 related closures. Non same-store sales increased $2.1 million or 92.6%, to $4.4 million for the three months ended March 31, 2021, compared to $2.3 million for the three months ended March 31, 2020. The increase in non same-store sales was a result of opening approximately 15 additional wellness centers in 2021, as well as the maturation of clinics opened in the past six trailing quarters.
Gross profit
Gross profit increased by $15.6 million, or 48.7%, to $47.8 million for the three months ended March 31, 2021, compared to $32.2 million for the three months ended March 31, 2020. This increase is due to margin improvement on Capstar products now that it is owned by PetIQ as well total sales growth.
Gross margin increased to 18.8% for the three months ended March 31, 2021, compared to 17.2% for the three months ended March 31, 2020. This increase was driven by product sales growth in higher margin items such as Capstar, offset slightly by services margin declines due to additional new wellness center openings and product sales growth in lower margin distributed items.
General and administrative expenses
Consolidated general and administrative expenses (“G&A”) increased by $9.0 million, or 28.3%, to $40.6 million for the three months ended March 31, 2021, compared to $31.7 million for the three months ended March 31, 2020. As a percentage of net sales, G&A decreased from 17.0% for the three months ended March 31, 2020 to 16.0% for the first quarter of 2021, as sales growth have outpaced overhead and other G&A cost growth.
Products Segment
Products segment G&A increased $0.7 million or approximately 8.0% to $9.4 million for the three months ended March 31, 2021, compared to $8.7 million for the three months ended March 31, 2020. This increase was driven due to higher sales resulting in higher selling costs, offset slightly be efficiencies gained through centralizing our OTC distribution to our Omaha, Nebraska distribution facility.
Services Segment
Services segment G&A increased $1.1 million, or 26.9%, to $5.3 million for the three months ended March 31, 2021, compared to $4.2 million for the three months ended March 31, 2020. This increase was driven by increased wages and marketing related to new clinic rollouts, as well as increased variable costs on higher sales.
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Unallocated Corporate
Unallocated corporate G&A increased $7.2 million, or 38.0%, to $26.0 million for the three months ended March 31, 2021, from $18.8 million for the three months ended March 31, 2020. The increase was related to the following:
| ◾ | Additional corporate compensation (wages/bonus) of approximately $1.5 million, driven by corporate growth in headcount and wage rates; |
| ◾ | Increased amortization of $2.4 million resulting from the new acquisitions; and |
| ◾ | $3.8 million amortization due to the acceleration of in-process research and development assets. |
Interest expense, net
Interest expense, net, increased $0.2 million to $4.9 million for the three months ended March 31, 2021, compared to $4.7 million for the three months ended March 31, 2020. This increase was driven by the Notes issued in May 2020 to finance the Capstar Acquisition, mostly offset by lower rates on our variable rate debt.
Provision for income taxes
Our effective tax rate was 3.0% and (30.8)% for the three months ended March 31, 2021 and 2020, respectively, with a tax expense of $0.07 million and a tax benefit of $1.2 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 income inclusion. The Company’s tax rate is also impacted by the ownership structure of Holdco, which changes over time.
Segment Adjusted EBITDA
Products Segment
Products segment Adjusted EBITDA increased $14.5 million, or 59.8% to $38.8 million for the three months ended March 31, 2021, compared to $24.3 million for the three months ended March 31, 2020. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced by PetIQ, or are distributed for other manufacturers. The significant growth in Products segment Adjusted EBITDA relates to significant sales growth as well as expanded margins related to the purchase of the Capstar branded products.
Services Segment
Services segment Adjusted EBITDA increased $0.1 million, to $2.1 million for the three months ended March 31, 2021, compared to $2.0 million for the three months ended March 31, 2020. Services segment Adjusted EBITDA can fluctuate considerably for the Services segment based on the volume of pets seen in clinics, due to the relatively fixed cost nature of a clinic. Additionally, Services segment earnings are impacted by the Company’s growth strategy of opening new wellness centers and the impact of the Company’s same store portfolio, discussed further below. Services segment Adjusted EBITDA was significantly impacted by the COVID-19, with the impact lessening throughout the three months ended March 31, 2021.
Unallocated Corporate
Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including accounting, legal, human resources information technology and headquarters expenses, as well as executive and incentive compensation expenses, and other miscellaneous costs. Unallocated corporate costs have primarily grown due to the growth in the size of the Company, including adding to administrative headcount through acquisitions, as well as headquarters growth to support the larger Company. Adjustments to unallocated corporate include expenses related to specific events, such as the acquisition expenses and integration costs. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.
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The following tables reconcile Segment pre-tax net income to Adjusted EBITDA for the periods presented.
| | | | | | | | | | | | |
| | Three months ended March 31, 2021 | ||||||||||
$'s in 000's |
| Products |
| Services |
| Unallocated Corporate | | Consolidated | ||||
Pretax net income (loss) | | $ | 37,852 | | $ | (4,734) | | $ | (30,657) | | $ | 2,461 |
Adjustments: | | | | | | | | | | | | |
Depreciation | | | 940 | | | 1,182 | | | 1,009 | | | 3,131 |
Interest | | | — | | | — | | | 4,870 | | | 4,870 |
Amortization | | | — | | | — | | | 8,428 | | | 8,428 |
Acquisition costs(1) | | | — | | | — | | | 6 | | | 6 |
Stock based compensation expense | | | — | | | — | | | 2,122 | | | 2,122 |
Non same-store revenue(3) | | | — | | | (4,395) | | | — | | | (4,395) |
Non same-store costs(3) | | | — | | | 9,339 | | | — | | | 9,339 |
Integration costs and costs of discontinued clinics(2) | | | — | | | — | | | (48) | | | (48) |
Clinic launch expense(4) | | | — | | | 704 | | | — | | | 704 |
Litigation expenses | | | — | | | — | | | 243 | | | 243 |
Adjusted EBITDA | | $ | 38,792 | | $ | 2,096 | | $ | (14,027) | | | 26,861 |
| | | | | | | | | | | | | |||||||||||
| | Three months ended March 31, 2020 | |||||||||||||||||||||
$'s in 000's |
| Products |
| Services |
| Unallocated Corporate | | Consolidated | |||||||||||||||
Pretax net income (loss) | | $ | 22,962 | | $ | (3,652) | | $ | (23,112) | | $ | (3,802) | |||||||||||
Adjustments: | | | | | | | | | | | | | |||||||||||
Depreciation | | | 1,317 | | | 847 | | | 709 | | | 2,873 | |||||||||||
Interest, net | | | — | | | — | | | 4,704 | | | 4,704 | |||||||||||
Amortization | | | — | | | — | | | 2,242 | | | 2,242 | |||||||||||
Acquisition costs(1) | | | — | | | — | | | 586 | | | 586 | |||||||||||
Stock based compensation expense | | | — | | | — | | | 2,558 | | | 2,558 | |||||||||||
Non same-store revenue(3) | | | — | | | (2,282) | | | — | | | (2,282) | |||||||||||
Non same-store costs(3) | | | — | | | 6,400 | | | — | | | 6,400 | |||||||||||
Integration costs and costs of discontinued clinics(2) | | | — | | | — | | | 454 | | | 454 | |||||||||||
Clinic launch expense(4) | | | — | | | 676 | | | — | | | 676 | |||||||||||
Litigation expenses | | | — | | | — | | | 49 | | | 49 | |||||||||||
Adjusted EBITDA | | $ | 24,279 | | $ | 1,989 | | $ | (11,810) | | | 14,458 | |||||||||||
| | | | | | | | | | | | ||||||||||||
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (3) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (4) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
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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 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 Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| ● | Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing core operations; and |
| ● | Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally. You should review the reconciliations of net income (loss) to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
34
The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented.
| | | | | | |
| For the three months ended | | ||||
| | | ||||
Net income (loss) | $ | 2,386 |
| $ | (2,633) |
|
Plus: |
|
| |
|
| |
Tax expense (benefit) | | 75 | | | (1,169) | |
Depreciation | | 3,131 | | | 2,873 | |
Amortization |
| 8,428 | |
| 2,242 | |
Interest |
| 4,870 | |
| 4,704 | |
EBITDA | $ | 18,890 | | $ | 6,017 | |
Acquisition costs(1) | | 6 | | | 586 | |
Stock based compensation expense | | 2,122 | | | 2,558 | |
Non same-store revenue(2) | | (4,395) | | | (2,282) | |
Non same-store costs(2) | | 9,339 | | | 6,400 | |
Integration costs and costs of discontinued clinics(3) | | (48) | | | 454 | |
Clinic launch expenses(4) | | 704 | | | 676 | |
Litigation expenses | | 243 | | | 49 | |
Adjusted EBITDA | $ | 26,861 | | $ | 14,458 | |
| (1) | Acquisition costs include legal, accounting, banking, consulting, diligence, and other out-of-pocket costs related to completed and contemplated acquisitions. |
| (2) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
| (3) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs. These costs are primarily in the Products segment and the corporate segment for personnel costs, legal and consulting expenses, and IT costs. |
| (4) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
Financial Condition, Liquidity, and Capital Resources
Historically, our primary sources of liquidity have been cash flows from operations, borrowings, and equity capital. As of March 31, 2021 and December 31, 2020, our cash and cash equivalents were $11.1 million and $33.5 million, respectively. As of March 31, 2021, we had $54.4 million outstanding under a revolving credit facility, $216.7 million under a term loan, $143.8 million of outstanding Notes, and $43.0 million in other debt. Our debt agreements bear interest at rates between 3.3% and 6.75%.
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 carry inventory and receivable levels necessary to support our increasing net sales. Fluctuations in working capital are primarily driven by the timing of new product launches and seasonal retailer demand. As of March 31, 2021 and December 31, 2020, we had working capital (current assets less current liabilities) of $193.2 million and $141.2 million, respectively.
We believe that our operating cash flow, cash on hand, and debt proceeds from our borrowings under our credit facilities will be adequate to meet our operating, investing, and financing needs for the foreseeable future. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.
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Cash Flows
Cash used in Operating Activities
Net cash used in operating activities was $57.4 million for the three months ended March 31, 2021, compared to cash used in operating activities of $68.6 million for the three months ended March 31, 2020. The change in operating cash flows primarily reflects higher earnings offset by significant growth in working capital items. Working capital changes are driven by accounts receivable growth on both sales growth and seasonality. Net changes in assets and liabilities accounted for $74.4 million in cash used in operating activities for the three months ended March 31, 2021 compared to $72.5 million of cash used in operating activities for the three months ended March 31, 2020.
Cash used in Investing Activities
Net cash used in investing activities was $8.3 million for the three months ended March 31, 2021, compared to $4.6 million for the three months ended March 31, 2020. The increase in net cash used in investing activities is a result of continued investment in new wellness centers as well as construction of a new corporate headquarters.
Cash provided by Financing Activities
Net cash provided by financing activities was $43.2 million for the three months ended March 31, 2021, compared to $74.2 million for the three months ended March 31, 2020. The change in cash provided by financing activities is primarily driven improved profitability allowing for less use of debt financing.
Description of Indebtedness
Convertible Notes
On May 19, 2020, the Company issued $143.8 million in aggregate principal amount of 4.00% Convertible Senior Notes due 2026 pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The total net proceeds from the Notes offering, after deducting debt issuance costs paid or payable by us, was $137.9 million. The Notes accrue interest at a rate of 4.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 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.
The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any Notes will constitute a Make-Whole Fundamental Change with respect to such Notes, which will result in an increase to the conversion rate if such Notes are converted after they are called for redemption.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock.
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The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. The Notes contain customary events of default.
The fair value of the Notes was $204.5 million as of March 31, 2021. The estimated fair value of the Notes is based on market rates and the closing trading price of the Convertible Notes as of March 31, 2021 and is classified as Level 2 in the fair value hierarchy.
A&R Credit Agreement
The Company amended the existing revolving credit agreement of Opco and each of its domestic wholly-owned subsidiaries (the “Amended Revolving Credit Agreement”) on July 8, 2019. The Amended Revolving Credit Agreement provides for a secured revolving credit facility of $125 million that matures on July 8, 2024. The borrowers under the Amended Revolving Credit Facility incur fees between 0.375% and 0.50% as unused facility fees, dependent on the aggregate amount borrowed. On May 14, 2020, the Company amended the Amended Revolving Credit Agreement to allow for the Notes described above. Additionally the amendment instituted a Eurodollar floor of 1% to the agreement.
All obligations under the Amended Revolving Credit Agreement are unconditionally guaranteed by HoldCo and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the Amended Revolving Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of each borrower and guarantor under the Amended Revolving Credit Agreement, subject to certain exceptions.
The Amended Revolving Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrowers and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. As of March 31, 2021, the borrowers and guarantors thereunder were in compliance with these covenants. Although the Company currently expects continued compliance with debt covenants, the impact COVID-19 may negatively affect the Company’s ability to comply with these covenants. The Amended Revolving Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the Amended Revolving Credit Agreement contains a minimum fixed charge coverage ratio covenant which is tested if availability under the Amended Revolving Credit Agreement falls below a certain level. As of March 31, 2021, the borrower and guarantors thereunder were in compliance with these covenants.
As of March 31, 2021, $54.4 million was outstanding under the Amended Revolving Credit Agreement. The weighted average interest rate on the Amended Revolving Credit Agreement was 3.3% at March 31, 2021.
A&R Term Loan Credit Agreement
The Company amended and restated the existing term loan credit agreement of Opco (the “A&R Term Loan Credit Agreement”) on July 8, 2019. The $220.0 million A&R Term Loan Credit Agreement has an interest rate equal to the Eurodollar rate plus 5.00%. The A&R Term Loan Credit Agreement calls for 1% of the original loan balance to be paid annually via equal quarterly payments, with the balance of the loan due on the sixth anniversary of the agreement.
All obligations under the A&R Term Loan Credit Agreement are unconditionally guaranteed by PetIQ Holdings, LLC and each of its domestic wholly-owned subsidiaries and, subject to certain exceptions, each of its material current and future domestic wholly-owned subsidiaries. All obligations under the A&R Term Loan Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of PetIQ, LLC and each guarantor under the A&R Term Loan Credit Agreement, subject to certain exceptions.
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The A&R Term Loan Credit Agreement contains a number of covenants that, among other things, restrict the ability of the borrower and guarantors thereunder to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) engage in mergers or consolidations and/or sell assets; (v) pay dividends and distributions or repurchase our equity interests; (vi) repay subordinated indebtedness; (vii) make certain acquisitions; and (viii) other restrictions typical for a credit agreement of this type. The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of March 31, 2020, the borrower and guarantors thereunder were in compliance with these covenants.
The A&R Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Term Loan Credit Agreement includes a maintenance covenant that requires compliance with a maximum first lien net leverage ratio. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends) may also be subject to compliance with secured leverage ratios. As of March 31, 2021, the borrower and guarantors thereunder were in compliance with these covenants.
As of March 31, 2021, $216.7 million was outstanding under the A&R Term Loan Credit Agreement.
General Other Debt
The Company entered into a mortgage with a local bank to finance a commercial building in Eagle, Idaho, in July 2017. The mortgage bears interest at a fixed rate of 4.35% and utilizes a 25 year amortization schedule with a 10 year balloon payment of the balance due at that time.
In July 2020, the Company entered into the Agreement. See Note 2 – “Business Combinations and Asset Acquisitions”. The Agreement called for PetIQ to pay $20.6 million, $2.6 million at signing and $1.0 million per quarter thereafter with no interest. The Company discounted the payment stream using a market interest rate of 8.3%, resulting in an obligation of $17.5 million at the time it was entered into.
In connection with the VIP Acquisition, the Company entered into a guarantee note of $10.0 million and contingent Notes that were subsequently earned. As of December 31, 2020 and March 31, 2021, $7.5 million was payable pursuant to the 2018 Contingent Note and $10.0 million was payable pursuant to the 2019 Contingent Note. The guarantee note and the Contingent Notes, collectively, “Notes Payable – VIP Acquisition” of $27.5 million require quarterly interest payments of 6.75% with the balance payable July 17, 2023.
The Company entered into two new credit facilities on April 13, 2021, which fully repaid and terminated the Amended Revolving Credit Agreement, the A&R Term Loan Credit Agreement, and the VIP Notes. See Note 16 – “Subsequent Events.”
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.
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Interest Rate Risk
We are exposed to changes in interest rates because the indebtedness incurred under our A&R Credit Agreement and A&R Term Loan Credit Agreement are variable rate debt. Interest rate changes generally do not affect the market value of our credit agreement but do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of March 31, 2021, we had variable rate debt of approximately $268.9 million under our Revolver and Term Loan. An increase of 1% would have increased our interest expense for the three months ended March 31, 2021 by approximately $0.6 million.
Item 4. Controls and Procedures.
Internal Control over Financing Reporting
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that some of our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. Examples of forward-looking statements include, without limitation:
| ● | statements regarding our strategies, results of operations or liquidity; |
| ● | statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; |
| ● | statements of management’s goals and objectives; and |
| ● | assumptions underlying statements regarding us or our business. |
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or
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implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, 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.
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 probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency at March 31, 2021, as the Company does not consider any contingency to be probable or estimable. The Company expenses legal costs as incurred within general and administrative expenses on the condensed consolidated statements of operations.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2020,
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Item 6. Exhibits. –
| |
10.1 | |
10.2 | |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS* | Inline XBRL Instance Document |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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.) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| PETIQ, INC. | |
| | |
/s/ John Newland | ||
| ||
| Chief Financial Officer | |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 6/1/26 | ||||
| 1/15/26 | ||||
| 7/8/24 | ||||
| 7/17/23 | ||||
| 6/1/23 | ||||
| 12/15/21 | ||||
| Filed as of: | 5/7/21 | 4 | ||
| Filed on: | 5/6/21 | |||
| 4/13/21 | 8-K | |||
| For Period end: | 3/31/21 | |||
| 3/1/21 | 10-K, 3, 4 | |||
| 1/1/21 | ||||
| 12/31/20 | 10-K, 4 | |||
| 12/1/20 | ||||
| 7/31/20 | ||||
| 6/30/20 | 10-Q, 8-K | |||
| 5/19/20 | ||||
| 5/14/20 | 8-K | |||
| 3/31/20 | 10-Q | |||
| 1/1/20 | ||||
| 7/8/19 | 3 | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 4/19/21 PetIQ, Inc. 8-K:1,8,9 4/13/21 13:4.4M Toppan Merrill Bridge/FA |