10-Q 1 petq-20230930.htm 10-Q petq-20230930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38163
PetIQ, Inc.
(Exact name of registrant as specified in its charter)
Delaware35-2554312
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
230 E. Riverside Dr.
83616
Eagle, Idaho
(Zip Code)
(Address of principal executive offices)
208-939-8900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading
Symbol
Name of Each Exchange on Which Registered
Class A Common Stock, $0.001 par valuePETQThe Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes x 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). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨Accelerated filer x
Non-accelerated filer ¨Smaller reporting company ¨
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No
As of November 7, 2023, we had 29,187,756 shares of Class A common stock and 239,540 shares of Class B common stock outstanding.




PetIQ, Inc.
Table of Contents
Page
2




PART I —FINANCIAL INFORMATION
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,” “believe,” “continuing,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “project,” “should,” “will,” and similar expressions. Examples of forward-looking statements include, without limitation:
statements regarding our strategies, results of operations or liquidity;
statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;
statements of management’s goals and objectives; and
assumptions underlying statements regarding us or our business.
Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q; general economic or market conditions, including the impacts of the global economic slowdown, increased inflation, rising interest rates, global conflict and recent and potential bank failures; our ability to improve profitability and achieve the anticipated cost savings and reinvestment from the Services segment, the anticipated costs associated with the optimization and the success of our remaining wellness centers following the optimization; our ability to successfully grow our business through acquisitions and our ability to integrate acquisitions, including Rocco & Roxie; our dependency on a limited number of customers; labor shortages, strikes, lock outs, walk offs or other disruptions to labor; our ability to implement our growth strategy effectively; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; war, conflict, insurrection, pandemic, revolution, riot or severe weather; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q for the period ended September 30, 2023, 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.
3



PetIQ, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, in 000’s except for per share amounts)
September 30, 2023December 31, 2022
Current assets
Cash and cash equivalents$124,614 $101,265 
Accounts receivable, net 151,680 118,004 
Inventories128,126 142,605 
Other current assets6,241 8,238 
Total current assets410,661 370,112 
Property, plant and equipment, net62,927 73,395 
Operating lease right of use assets12,289 18,231 
Other non-current assets2,373 1,373 
Intangible assets, net 164,644 172,479 
Goodwill204,195 183,306 
Total assets$857,089 $818,896 
Liabilities and equity  
Current liabilities  
Accounts payable$113,449 $112,995 
Accrued wages payable19,162 11,512 
Accrued interest payable7,915 1,912 
Other accrued expenses9,133 7,725 
Current portion of operating leases6,877 6,595 
Current portion of long-term debt and finance leases8,105 8,751 
Total current liabilities164,641 149,490 
Operating leases, less current installments8,783 12,405 
Long-term debt, less current installments439,210 443,276 
Finance leases, less current installments617 907 
Other non-current liabilities4,667 1,025 
Total non-current liabilities453,277 457,613 
Equity  
Additional paid-in capital385,839 378,709 
Class A common stock, par value $0.001 per share, 125,000 shares authorized; 29,558 and 29,348 shares issued, respectively
29 29 
Class B common stock, par value $0.001 per share, 8,402 shares authorized; 239 and 252 shares issued and outstanding, respectively
  
Class A treasury stock, at cost, 373 shares
(3,857)(3,857)
Accumulated deficit(143,115)(162,733)
Accumulated other comprehensive loss(1,715)(2,224)
Total stockholders' equity237,181 209,924 
Non-controlling interest1,990 1,869 
Total equity239,171 211,793 
Total liabilities and equity$857,089 $818,896 
See accompanying notes to the condensed consolidated financial statements.
4



PetIQ, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in 000’s except for per share amounts)
For the Three Months Ended For the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
Product sales$239,665 $176,217 $776,825 $642,981 
Services revenue37,354 33,508 105,212 94,453 
Total net sales277,019 209,725 882,037 737,434 
Cost of products sold174,286 131,414 585,616 485,833 
Cost of services30,122 27,541 87,671 81,222 
Total cost of sales204,408 158,955 673,287 567,055 
Gross profit72,611 50,770 208,750 170,379 
Operating expenses
Selling, general and administrative expenses55,021 45,984 153,507 144,815 
Restructuring 8,235  8,235  
Goodwill impairment 47,264  47,264 
Operating income (loss)9,355 (42,478)47,008 (21,700)
Interest expense, net8,581 7,276 26,137 19,696 
Other expense (income), net35 172 158 (31)
Total other expense, net8,616 7,448 26,295 19,665 
Pretax net income (loss)739 (49,926)20,713 (41,365)
Income tax (expense) benefit(283)355 (923)(368)
Net income (loss)456 (49,571)19,790 (41,733)
Net income (loss) attributable to non-controlling interest5 (435)172 (360)
Net income (loss) attributable to PetIQ, Inc.$451 $(49,136)$19,618 $(41,373)
Net income (loss) per share attributable to PetIQ, Inc. Class A common stock
Basic$0.02 $(1.68)$0.67 $(1.42)
Diluted$0.02 $(1.68)$0.67 $(1.42)
Weighted Average shares of Class A common stock outstanding
Basic29,181 29,224 29,116 29,224 
Diluted29,715 29,224 29,386 29,224 
See accompanying notes to the condensed consolidated financial statements.
5



PetIQ, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in 000’s)
For the Three Months Ended For the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
Net income (loss)$456 $(49,571)$19,790 $(41,733)
Foreign currency translation adjustment277 (942)513 (2,475)
Comprehensive income (loss)733 (50,513)20,303 (44,208)
Comprehensive income (loss) attributable to non-controlling interest7 (442)176(381)
Comprehensive income (loss) attributable to PetIQ, Inc.$726 $(50,071)$20,127 $(43,827)
See accompanying notes to the condensed consolidated financial statements.
6



PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in 000’s)
For the Nine Months Ended September 30,
20232022
Cash flows from operating activities
Net income (loss)$19,790 $(41,733)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities  
Depreciation and amortization of intangible assets and loan fees35,816 26,564 
Loss on disposition of property, plant, and equipment7 56 
Stock based compensation expense8,059 8,904 
Goodwill impairment 47,264 
Other non-cash activity672 (7)
Changes in assets and liabilities, net of business acquisition
Accounts receivable(32,562)(11,219)
Inventories16,451 (50,847)
Other assets2,078 1,924 
Accounts payable(593)18,957 
Accrued wages payable7,649 1,083 
Other accrued expenses7,362 (1,818)
Net cash provided by (used in) operating activities64,729 (872)
Cash flows from investing activities  
Business acquisition (net of cash acquired)(27,634) 
Purchase of property, plant, and equipment(6,205)(9,797)
Net cash used in investing activities(33,839)(9,797)
Cash flows from financing activities  
Proceeds from issuance of long-term debt35,000 44,000 
Principal payments on long-term debt(40,700)(49,700)
Repurchase of Class A common stock (3,857)
Principal payments on finance lease obligations(1,138)(1,097)
Tax withholding payments on Restricted Stock Units(984)(862)
Exercise of options to purchase Class A common stock 115 
Net cash used in financing activities(7,822)(11,401)
Net change in cash and cash equivalents23,068 (22,070)
Effect of exchange rate changes on cash and cash equivalents281 (618)
Cash and cash equivalents, beginning of period101,265 79,406 
Cash and cash equivalents, end of period$124,614 $56,718 
See accompanying notes to the condensed consolidated financial statements.
7



PetIQ, Inc.
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited, in 000’s)
For the Nine Months Ended September 30,
Supplemental cash flow information20232022
Interest paid$18,139 $18,550 
Property, plant, and equipment acquired through accounts payable185 376 
Finance lease additions 59 
Income taxes paid, net of refunds376 258 
See accompanying notes to the condensed consolidated financial statements.
8



PetIQ, Inc.
Condensed Consolidated Statements of Equity
(Unaudited, in 000’s)
Three months ended September 30, 2023
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Class A CommonClass A Treasury StockClass B CommonAdditional
Paid-in
Capital
Non-controlling
Interest
Total
Equity
SharesDollarsSharesDollarsSharesDollars
Balance - July 1, 2023$(143,566)$(1,990)29,551 $29 373 $(3,857)244 $ $383,020 $1,967 $235,603 
Exchange of LLC Interests held by LLC Owners— — 5 — — — (5)— 7 (7) 
Other comprehensive income— 275 — — — — — — — 2 277 
Stock based compensation expense— — — — — — — — 2,827 23 2,850 
Issuance of stock vesting of RSU's, net of tax withholdings— — 2 — — — — — (15)— (15)
Net income451 — — — — — — — — 5 456 
Balance - September 30, 2023$(143,115)$(1,715)29,558 $29 373 $(3,857)239 $ $385,839 $1,990 $239,171 
Nine months ended September 30, 2023
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Class A CommonClass A Treasury StockClass B CommonAdditional
Paid-in
Capital
Non-controlling
Interest
Total
Equity
SharesDollarsSharesDollarsSharesDollars
Balance - January 1, 2023$(162,733)$(2,224)29,348 $29 373 $(3,857)252 $ $378,709 $1,869 $211,793 
Exchange of LLC Interests held by LLC Owners— — 13 — — — (13)— 122 (122) 
Other comprehensive income— 509 — — — — — — — 4 513 
Stock based compensation expense— — — — — — — — 7,992 67 8,059 
Issuance of stock vesting of RSU's, net of tax withholdings— — 197 — — — — — (984)— (984)
Net income19,618 — — — — — — — — 172 19,790 
Balance - September 30, 2023$(143,115)$(1,715)29,558 $29 373 $(3,857)239 $ $385,839 $1,990 $239,171 

9



Three months ended September 30, 2022
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Class A CommonClass A Treasury StockClass B CommonAdditional
Paid-in
Capital
Non-controlling
Interest
Total
Equity
SharesDollarsSharesDollarsSharesDollars
Balance - July 1, 2022$(106,762)$(2,203)29,304 $29  $ 252 $ $374,057 $2,320 $267,441 
Other comprehensive loss— (935)— — — — — — — (7)(942)
Treasury stock purchased— — — — 373 (3,857)— — — — (3,857)
Stock based compensation expense— — — — — — — — 2,217 21 2,238 
Issuance of stock vesting of RSU's, net of tax withholdings— — 15 — — — — — 3 — 3 
Net loss(49,136)— — — — — — — — (435)(49,571)
Balance - September 30, 2022$(155,898)$(3,138)29,319 $29 373 $(3,857)252 $ $376,277 $1,899 $215,312 
Nine months ended September 30, 2022
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Class A CommonClass A Treasury StockClass B CommonAdditional
Paid-in
Capital
Non-controlling
Interest
Total
Equity
SharesDollarsSharesDollarsSharesDollars
Balance - January 1, 2022$(114,525)$(684)29,139 $29  $ 272 $ $368,006 $2,394 $255,220 
Exchange of LLC Interests held by LLC Owners— — 20 — — — (20)— 192 (192) 
Other comprehensive income— (2,454)— — — — — — — (21)(2,475)
Treasury stock purchased— — — — 373 (3,857)— — — — (3,857)
Stock based compensation expense— — — — — — — — 8,826 78 8,904 
Exercise of Options to purchase common stock— — 2 — — — — — 115 — 115 
Issuance of stock vesting of RSU's, net of tax withholdings— — 158 — — — — — (862)— (862)
Net loss(41,373)— — — — — — — — (360)(41,733)
Balance - September 30, 2022$(155,898)$(3,138)29,319 $29 373 $(3,857)252 $ $376,277 $1,899 $215,312 
Note that certain figures shown in the tables above may not recalculate due to rounding.
See accompanying notes to the condensed consolidated financial statements.
10



PetIQ 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", "our", 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 60,000 points of distribution across retail and e-commerce channels with our branded and distributed medications as well as health and wellness items, which are further supported by our world-class medications manufacturing facility in Omaha, Nebraska and health and wellness manufacturing facility in Springville, Utah. Our national service platform operates in over 2,600 retail partner locations in 41 states, providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care that we can give them.
PetIQ has two reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segment consists of veterinary and wellness services and related product sales provided by the Company directly to consumers.
PetIQ is the managing member of PetIQ Holdings, LLC (“HoldCo”), a Delaware limited liability company, which is the sole member of PetIQ, LLC (“OpCo”) and, through HoldCo, operates and controls all of the business and affairs of OpCo.
The condensed consolidated financial statements as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022 are unaudited. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2022 and related notes thereto included in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (the "Annual Report"). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant, and equipment and intangible assets; the valuation of property, plant, and equipment, intangible assets and goodwill, the valuation of deferred tax assets, the valuation of inventories, and reserves for legal contingencies.
Significant Accounting Policies
The Company's significant accounting policies are discussed in Note 1 Principal Business Activity and Significant Accounting Policies in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company's unaudited condensed financial statements and related notes during the three and nine months ended September 30, 2023.
Note 2 — Business Combination
Rocco & Roxie
The Company completed the acquisition of all of the membership units of Rocco & Roxie Supply Co, LLC ("R&R") on January 13, 2023 (the "R&R Acquisition"), which resulted in R&R becoming a wholly owned subsidiary of the Company. The R&R Acquisition expands the Company's brand and product portfolio to include stain and odor products and enables the Company to extend its offerings into premium dog supplements and jerky treats. The Company paid $26.5 million for the membership interests of R&R using cash on hand. The purchase was subject to normal working capital adjustments.
11



The following table summarizes the final allocations of the consideration paid of $27.6 million, which included the $26.5 million purchase price plus $1.1 million of working capital, to the assets acquired and liabilities assumed, based on the fair value at the date of the R&R Acquisition:
$'s in 000'sFair Value
Current assets$3,020 
Other assets1,208 
Amortizable intangibles
Trade name 7,100 
Customer relationships320 
Total amortizable intangibles$7,420 
Goodwill20,641 
Total assets$32,289 
Current liabilities1,000 
Other tax liabilities3,655 
Total liabilities4,655 
Purchase price, net of cash acquired$27,634 
Intangible assets will be amortized over the estimated useful lives of the assets through January 2033. The weighted average amortization period of the amortizable intangible assets is approximately 9.9 years. The identifiable intangible assets are measured at fair value as Level III in accordance with the fair value hierarchy.
Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. Approximately $19.4 million of the $20.6 million of Goodwill will not be tax deductible, and the remaining balance is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment. Transaction costs of $0.5 million were incurred and are recorded in Selling, General, and Administrative costs on the condensed consolidated statement of operations.
Note 3 — Debt
Senior Secured Asset-Based Revolving Credit Facility
On April 13, 2021, OpCo entered into an asset-based revolving credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides revolving credit commitments of $125.0 million, subject to a borrowing base limitation (the "ABL"). The borrowing base for the ABL at any time equals the sum of: (i) 90% of eligible investment-grade accounts receivable; plus (ii) 85% of eligible other accounts receivable; plus, (iii) 85% of the net orderly liquidation value of the cost of certain eligible on-hand and in-transit inventory; plus, (iv) at the option of OpCo, 100% of qualified cash; minus (v) reserves. The ABL bears interest at a variable rate plus a margin, with the variable rate being based on a base rate or LIBOR at the option of the Company. On February 3, 2023, HoldCo and Opco, entered into the First Amendment Agreement to the ABL to replace the interest rate benchmark from LIBOR to Secured Overnight Financing Rate ("SOFR"). The interest rate at September 30, 2023 was 6.84%. The Company also pays a commitment fee on unused borrowings at a rate of 0.35%.
The ABL Facility is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts (such collateral subject to first-priority security interest, "ABL Priority Collateral"), and a second-priority security interest in all other personal and real property of HoldCo and its wholly-owned domestic subsidiaries (such collateral subject to such second-priority security interest, “Term Priority Collateral”), in each case, subject to customary exceptions. The ABL contains customary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay
12



dividends, make investments, loans, and acquisitions, among other restrictions. As of September 30, 2023, no amounts were outstanding under the ABL.
Senior Secured Term Loan Facility - Term Loan B
On April 13, 2021, OpCo entered into a term credit and guaranty agreement with Jefferies Finance LLC, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured term loans of $300.0 million (which may be increased in certain circumstances) (the "Term Loan B"). The Term Loan B bears interest at a variable rate of either prime, federal funds effective rate or LIBOR, plus an applicable margin of between 3.25% and 4.25% depending on the underlying base rate. LIBOR rates are subject to a 0.50% floor. . The Term Loan B requires quarterly payments of 0.25% of the original principal amount, with the balance due on April 13, 2028. On May 25, 2023, the Term Loan B was amended to replace the interest rate benchmark from the Adjusted Eurodollar Rate to SOFR. The interest rate at September 30, 2023 was 9.84%
The Term Loan B is secured by substantially all the assets of HoldCo and its wholly-owned domestic subsidiaries, including a first-priority security interest in Term Priority Collateral and a second-priority security interest in ABL Priority Collateral, in each case, subject to customary exceptions. The Term Loan B contains customary representations and warranties, affirmative and negative covenants and events of default, including negative covenants that restrict the ability of HoldCo and its restricted subsidiaries to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.

Convertible Notes

On May 19, 2020, the Company issued $143.8 million in aggregate principal amount of 4.00% Convertible Senior Notes due 2026 (the “Notes”) pursuant to the indenture (the “Indenture”), dated as of May 19, 2020. The Notes accrue interest at a rate of 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 following represents the Company’s long-term debt as of:
$'s in 000'sSeptember 30, 2023December 31, 2022
Convertible Notes$143,750 $143,750 
Term Loan B293,250 295,500 
Revolving credit facility  
Other debt16,642 19,690 
Net discount on debt and deferred financing fees(7,096)(8,531)
$446,546 $450,409 
Less current maturities of long-term debt(7,336)(7,133)
Total long-term debt$439,210 $443,276 
13



Future maturities of long-term debt, excluding the discount on debt and deferred financing fees, as of September 30, 2023, are as follows:
($'s in 000's)
Remainder of 2023$1,766 
20247,426 
20254,600 
2026147,350 
20273,600 
Thereafter288,900 

Note 4 — Intangible Assets and Goodwill
Goodwill and non-amortizable intangible assets
Intangible assets consist of the following at:
$'s in 000'sUseful LivesSeptember 30, 2023December 31, 2022
Amortizable intangibles
Certification7 years$350 $350 
Customer relationships
10-20 years
160,418 160,040 
Patents and processes
5-10 years
14,731 14,634 
Brand names
5-15 years
31,778 24,633 
Total amortizable intangibles207,277 199,657 
Less accumulated amortization(75,872)(62,085)
Total net amortizable intangibles131,405 137,572 
Non-amortizable intangibles
Trademarks and other33,239 33,239 
In-process research and development 1,668 
Intangible assets, net of accumulated amortization$164,644 $172,479 
Certain intangible assets are denominated in currencies other than the U.S. Dollar; therefore, their gross and net carrying values are subject to foreign currency movements. Amortization expense for the three months ended September 30, 2023 and 2022 was $4.5 million and $4.6 million, respectively. Amortization expense for the nine months ended September 30, 2023, and 2022 was $15.3 million and $13.6 million, respectively. During the nine months ended September 30, 2023, the Company opted out of the final acquired project included in in-process research and development, effectively abandoning the associated research and development effort. Accordingly, the Company wrote off the associated intangible asset of $1.7 million in the Products segment, the expense for which is included as amortization expense in selling, general and administrative expenses on the condensed consolidated statement of operations for the nine months ended September 30, 2023.
14



Estimated future amortization expense for each of the following years is as follows:
Years ending December 31, ($'s in 000's)
Remainder of 2023$4,510 
202415,839 
202515,110 
202614,415 
202713,702 
Thereafter67,829 
The following is a summary of the changes in the carrying value of goodwill for the period from January 1, 2022 to September 30, 2023:
Reporting Unit
($'s in 000's)ProductsServicesTotal
Goodwill as of January 1, 2022$183,846 $47,264 $231,110 
Foreign currency translation(540) (540)
Impairment (47,264)(47,264)
Goodwill as of December 31, 2022183,306  183,306 
R&R Acquisition20,641  20,641 
Foreign currency translation248  248 
Goodwill as of September 30, 2023$204,195 $ $204,195 
Note 5 — Income Tax
The Company’s tax provision for interim periods is determined by using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates the estimated annual effective tax rate and makes a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to significant volatility due to several factors, including our ability to accurately predict the Company’s pre-tax and taxable income and loss and the mix of jurisdictions to which they relate.
Our effective tax rate from continuing operations was 38.3% and 4.5% for the three and nine months ended September 30, 2023, respectively, and 0.7% and (0.9%) for the three and nine months ended September 30, 2022, respectively, including discrete items. Income tax expense for the three and nine months ended September 30, 2023 and 2022 was different than the U.S federal statutory income tax rate of 21% primarily due to the effects of the change in valuation allowance, state taxes, and the foreign rate differential.
The Company has assessed the realizability of the net deferred tax assets as of September 30, 2023 and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income to realize its deferred tax assets. The Company believes it is more likely than not that the benefit from recorded deferred tax assets will not be realized. In future periods, if we conclude we have future taxable income sufficient to recognize the deferred tax assets, we may reduce or eliminate the valuation allowance.
Note 6 — Earnings per Share
Basic and Diluted Earnings (Loss) per Share
Basic earnings (loss) per share of Class A common stock is computed by dividing net income (loss) available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings (loss) per share of Class A common stock is computed by dividing net income (loss) available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
15



The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock:
Three months ended September 30,Nine months ended September 30,
(in 000's, except for per share amounts)2023202220232022
Numerator:
Net income (loss)$456 $(49,571)$19,790 $(41,733)
Less: net income (loss) attributable to non-controlling interests5 (435)172 (360)
Net income (loss) attributable to PetIQ, Inc. — basic and diluted451 (49,136)19,618 (41,373)
Denominator(1):
Weighted-average shares of Class A common stock outstanding — basic29,181 29,224 29,116 29,224 
Dilutive impact of share-based compensation awards (2)
534  270  
Dilutive effect of conversion of Notes (3)
    
Weighted-average shares of Class A common stock outstanding — diluted29,715 29,224 29,386 29,224 
Income (loss) per share of Class A common stock — basic$0.02 $(1.68)$0.67 $(1.42)
Income (loss) per share of Class A common stock — diluted$0.02 $(1.68)$0.67 $(1.42)
(1) Shares of the Company’s Class B common stock do not share in the earnings of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
(2) For the three and nine months ended September 30, 2023, 1,367 thousand and 2,142 thousand of outstanding share-based compensation awards were excluded from the computation of diluted earnings per share, as the effect of including those shares would be anti-dilutive. For the three and nine months ended September 30, 2022, 2,571 thousand and 2,194 thousand of outstanding share-based compensation awards were excluded from the computation of diluted earnings per share, as the effect of including those shares would be anti-dilutive.
(3) For the three and nine months ended September 30, 2023 and 2022, 4,848 thousand shares of common stock associated with the assumed conversion of the Notes have been excluded from the computation of diluted earnings per share, as the effect of including those shares would be anti-dilutive.
Note 7 — Stock Based Compensation

PetIQ, Inc. Omnibus Incentive Plan

The Amended and Restated PetIQ, Inc. Omnibus Incentive Plan, (the “Plan”), provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), and other stock-based awards, up to a total of 5,804,000 shares of Class A common stock issuable under the Plan. As of September 30, 2023 and 2022, 1,105,658 and 2,081,000 shares were available for issuance under the Plan, respectively. All awards issued under the Plan may only be settled in shares of Class A common stock. Shares issued pursuant to awards under the incentive plans are from our authorized but unissued shares.
PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees
The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with an acquisition in 2018 as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800,000 shares of Class A common stock of the Company, of which 760,000 were granted. No further grants may be made under the Inducement Plan. All awards issued under the Inducement Plan may only be settled in shares of Class A common stock.
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Stock Options
The Company awards stock options to certain employees under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options are typically forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $0.4 million and $1.3 million for the three and nine months ended September 30, 2023, respectively, and $0.5 million and $2.7 million for the three and nine months ended September 30, 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the nine months ended September 30, 2022. No options were issued for the nine months ended September 30, 2023:
September 30, 2022
Expected term (years) (1)
6.25
Expected volatility (2)
37.21 %
Risk-free interest rate (3)
1.44 %
Dividend yield (4)
0.00 %
(1)The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
(2)The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period consistent with the expected option term.
(3)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.
(4)The Company has not paid and does not anticipate paying a cash dividend on our common stock.
As of September 30, 2023, total unrecognized compensation cost related to unvested stock options was $2.1 million and is expected to be recognized over a weighted-average period of 1.2 years.

Stock
Options
(in 000's)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
(in 000's)
Weighted
Average
Remaining
Contractual
Life
(years)
Outstanding at January 1, 20221,768 $26.51 $2,897 7.3
Granted83 14.16 
Exercised(2)19.49 $10 
Forfeited(110)29.24 
Cancelled(86)31.12 
Outstanding at December 31, 20221,652 $25.48 $53 6.2
Forfeited(90)18.31 
Cancelled (46)31.54 
Outstanding at September 30, 20231,516 $25.69 $964 4.9
Options exercisable at September 30, 20231,306 
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Restricted Stock Units
The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Typically, upon a termination of service relationship by the Company, all unvested RSUs will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s Class A common stock on the date of grant. At September 30, 2023, total unrecognized compensation cost related to unvested RSUs was $26.1 million and is expected to vest over a weighted average period of 3.1 years.
The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.5 million and $6.8 million for the three and nine months ended September 30, 2023, and $1.7 million and $6.1 million for the three and nine months ended September 30, 2022, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients.
The following table summarizes the activity of the Company’s RSUs for the period ended September 30, 2023.
Number of
Shares
(in 000's)
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2022459 $31.08 
Granted802 20.30 
Settled(231)27.81 
Forfeited(177)25.53 
Outstanding at December 31, 2022853 $23.06 
Granted1,312 12.01 
Settled(232)22.79 
Forfeited(194)16.84 
Nonvested RSUs at September 30, 20231,739 $15.20 
Note 8 — Non-Controlling Interests
The following table presents the outstanding membership interests in HoldCo ("LLC Interests") and changes in LLC Interests for the periods presented.
LLC Interests held% of Total
$'s in 000'sLLC
Owners
PetIQ, Inc.TotalLLC
Owners
PetIQ, Inc.
As of January 1, 2022272 29,139 29,411 0.9 %99.1 %
Stock based compensation transactions 188 188 
Exchange transactions(20)20  
Unit redemption (373)(373)
As of December 31, 2022252 28,974 29,226 0.9 %99.1 %
Stock based compensation transactions— 197 197 
Exchange transactions(13)13  
As of September 30, 2023239 29,184 29,423 0.8 %99.2 %
Note that certain figures shown in the table above may not recalculate due to rounding.
For the three and nine months ended September 30, 2023, the Company owned a weighted average of 99.2%, of HoldCo, and for the three and nine months ended September 30, 2022 the Company owned a weighted average of 99.1%, respectively.
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Note 9 — Customer Concentration
The Company has significant exposure to customer concentration. During the three and nine months ended September 30, 2023, two customers individually accounted for more than 10% of sales, comprising 36% and 41% of net sales in aggregate, respectively for such periods. During the three and nine months ended September 30, 2022 three customers individually accounted for more than 10% of sales, comprising 44% and 44% of net sales, respectively for such periods.
At September 30, 2023, two Products segment customers individually accounted for more than 10% of outstanding trade receivables, and accounted for 53% of outstanding trade receivables, net. At December 31, 2022, one Products segment customer individually accounted for more than 10% of outstanding trade receivables, and accounted for 46% of outstanding trade receivables, net.
Note 10 — Commitments and Contingencies
Litigation Contingencies
The Company records a liability when a particular contingency is probable and estimable and provides disclosure for contingencies that are at least reasonably possible of resulting in a loss including an estimate which we currently cannot make. The Company has not accrued for any contingency as of September 30, 2023 and December 31, 2022 as the Company does not consider any contingency to be probable or estimable.
During the nine months ended September 30, 2022, the Company recorded $3.5 million of expense associated with a lawsuit brought by a former supplier to the Company relating to the redemption of ownership interest, which is included within selling, general and administrative expenses on the condensed consolidated statements of operations. The matter was settled and paid during 2022.
Commitments
We have commitments for long-term debt that are discussed further in Note - 3, Debt, and leases. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business.
Note 11 — Segments
The Company has 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. The segments are based on the discrete financial information reviewed by the Chief Operating Decision Maker (“CODM”) to make resource allocation decisions and to evaluate performance. We measure and evaluate our reportable segments based on their respective Segment Adjusted EBITDA performance. Beginning in the fourth quarter of 2022, we allocate to our segments capital expenditures and certain costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses, on a pro rata basis based on net sales to better align with the discrete financial information reviewed by our CODM. Such expenses previously were not allocated to segments. The Company has recast prior periods to give effect to this change. This change in presentation had no impact on the Condensed Consolidated Statements of Operations.
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Financial information relating to the Company’s operating segments for the three months ended:
$'s in 000'sProductsServices
September 30, 2023
Net sales$239,665 $37,354 
Segment Adjusted EBITDA29,039 2,912 
Depreciation expense1,870 8,981 
$'s in 000'sProductsServices
September 30, 2022
Net sales$176,217 $33,508 
Segment Adjusted EBITDA18,282 927 
Depreciation expense1,761 1,815 
Financial information relating to the Company’s operating segments for the nine months ended:
$'s in 000'sProductsServices
September 30, 2023
Net sales$776,825 $105,212 
Segment Adjusted EBITDA94,513 5,274 
Depreciation expense5,547 12,989 
$'s in 000'sProductsServices
September 30, 2022
Net sales$642,981 $94,453 
Segment Adjusted EBITDA74,095 4,290 
Depreciation expense5,461 5,312 
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The following table reconciles Segment Adjusted EBITDA to Net income for the periods presented.
For the three months endedFor the nine months ended
$'s in 000'sSeptember 30, 2023September 30, 2022September 30, 2023September 30, 2022
Segment Adjusted EBITDA:
Products(1)
$29,039 $18,282 $94,513 $74,095 
Services(1)
2,912 927 5,274 4,290 
Total31,951 19,209 99,787 78,385 
Adjustments:
Depreciation(2)
(10,851)(3,576)(18,536)(10,773)
Amortization(4,546)(4,602)(15,285)(13,602)
Interest(8,581)(7,276)(26,137)(19,696)
Goodwill impairment(3)
 (47,264) (47,264)
Acquisition costs(4)
122 (1,035)(713)(1,191)
Stock based compensation expense(2,851)(2,238)(8,059)(8,904)
Non same-store adjustment(5)
(2,791)(2,944)(7,036)(13,575)
Integration costs(6)
(484)(200)(2,078)(943)
Restructuring(7)
(1,200) (1,200) 
Litigation expenses(30) (30)(3,802)
Pretax net income (loss)$739 $(49,926)$20,713 $(41,365)
Income tax (expense) benefit(283)355 (923)(368)
Net income (loss)$456 $(49,571)$19,790 $(41,733)
(1) In the fourth quarter of 2022, the Company began allocating corporate expenses to each segment pro rata based on net sales for each segment. The presentation of Products Segment Adjusted EBITDA and Services Segment Adjusted EBITDA for the three and nine months ended September 30, 2022 has been recast for comparability. For the three and nine months ended September 30, 2022, total corporate expenses were $20.7 million, of which $17.4 million was allocated to Products and $3.3 million was allocated to Services, and $60.6 million, of which $52.8 million was allocated to Products and $7.8 million was allocated to Services, respectively.
(2) Depreciation includes $7.3 million of accelerated depreciation recognized during the three and nine months ended September 30, 2023, associated with Services segment optimization.
(3) Non-cash goodwill impairment due to a significant decline in the Company’s market capitalization, driven primarily by rising interest rates and macroeconomic conditions.
(4) Acquisition costs include legal, accounting, banking, consulting, diligence, and other costs related to completed and contemplated acquisitions.
(5) Non same-store adjustment includes revenue and costs, and associated gross profit, related to our Services segment wellness centers and host partners with less than six full quarters of operating results, and also include pre-opening expenses.
(6) Integration costs represent costs related to integrating acquired businesses, including personnel costs such as severance and retention bonuses, consulting costs, contract termination costs and IT conversion costs.
(7) Restructuring consists of variable lease expenses, inventory valuation adjustments and other miscellaneous costs.
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Supplemental geographic disclosures are below.
Three Months Ended September 30, 2023
$'s in 000'sU.S.ForeignTotal
Product sales$237,962 $1,703 $239,665 
Service revenue37,354  37,354 
Total net sales$275,316 $1,703 $277,019 
Three Months Ended September 30, 2022
$'s in 000'sU.S.ForeignTotal
Product sales$174,517 $1,700 $176,217 
Service revenue33,508  33,508 
Total net sales$208,025 $1,700 $209,725 
Nine Months Ended September 30, 2023
$'s in 000'sU.S.ForeignTotal
Product sales$772,013 $4,812 $776,825 
Service revenue105,212  105,212 
Total net sales$877,225 $4,812 $882,037 
Nine Months Ended September 30, 2022
$'s in 000'sU.S.ForeignTotal
Product sales$637,385 $5,596 $642,981 
Service revenue94,453  94,453 
Total net sales$731,838 $5,596 $737,434 
Property, plant, and equipment by geographic location is below.