10-Q 1 petq-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

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)

Delaware

35-2554312

(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 Class

Trading
Symbol

Name of Each Exchange on Which Registered

Class A Common Stock, $0.001 par value

PETQ

The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes       No   

Indicate by check mark whether the registrant has submitted electronically 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       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

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 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 4, 2022, we had 29,270,190 shares of Class A common stock and 252,540 shares of Class B common stock outstanding.

PetIQ, Inc.

Table of Contents

    

    

Page

Part I.

Financial Information

3

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

PetIQ, Inc. Condensed Consolidated Balance Sheets

3

PetIQ, Inc. Condensed Consolidated Statements of Operations

4

PetIQ, Inc. Condensed Consolidated Statements of Comprehensive Income

5

PetIQ, Inc. Condensed Consolidated Statements of Cash Flows

6

PetIQ, Inc. Condensed Consolidated Statements of Equity

8

PetIQ, Inc. Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

Part II.

Other Information

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 6.

Exhibits

27

Signatures

28

2

PetIQ, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, in 000’s except for per share amounts)

March 31, 2022

    

December 31, 2021

    

Current assets

Cash and cash equivalents

$

51,104

$

79,406

Accounts receivable, net

179,058

113,947

Inventories

167,714

96,440

Other current assets

10,148

8,896

Total current assets

408,024

298,689

Property, plant and equipment, net

78,194

76,613

Operating lease right of use assets

19,162

20,489

Other non-current assets

1,970

2,024

Intangible assets, net

186,111

190,662

Goodwill

230,973

231,110

Total assets

$

924,434

$

819,587

Liabilities and equity

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

128,913

$

55,057

Accrued wages payable

11,236

12,704

Accrued interest payable

5,099

3,811

Other accrued expenses

13,709

11,680

Current portion of operating leases

6,047

6,500

Current portion of long-term debt and finance leases

8,411

8,350

Total current liabilities

173,415

98,102

Operating leases, less current installments

14,300

14,843

Long-term debt, less current installments

472,945

448,470

Finance leases, less current installments

2,164

2,493

Other non-current liabilities

451

459

Total non-current liabilities

489,860

466,265

Equity

  

  

Additional paid-in capital

371,398

368,006

Class A common stock, par value $0.001 per share, 125,000 shares authorized; 29,272 and 29,139 shares issued and outstanding, respectively

29

29

Class B common stock, par value $0.001 per share, 100,000 shares authorized; 252 and 272 shares issued and outstanding, respectively

Accumulated deficit

(111,394)

(114,525)

Accumulated other comprehensive loss

(1,136)

(684)

Total stockholders' equity

258,897

252,826

Non-controlling interest

2,262

2,394

Total equity

261,159

255,220

Total liabilities and equity

$

924,434

$

819,587

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

    

March 31, 2022

    

March 31, 2021

Product sales

$

247,750

$

230,034

Services revenue

27,945

24,313

Total net sales

275,695

254,347

Cost of products sold

 

190,851

 

182,827

Cost of services

27,209

23,721

Total cost of sales

218,060

206,548

Gross profit

 

57,635

 

47,799

Operating expenses

 

  

 

  

Selling, general and administrative expenses

 

48,236

 

40,672

Operating income

 

9,399

 

7,127

Interest expense, net

 

6,121

 

4,870

Other income, net

 

(3)

 

(204)

Total other expense, net

 

6,118

 

4,666

Pretax net income

3,281

2,461

Income tax expense

(121)

(75)

Net income

3,160

 

2,386

Net income attributable to non-controlling interest

29

353

Net income attributable to PetIQ, Inc.

$

3,131

$

2,033

Net income per share attributable to PetIQ, Inc. Class A common stock

Basic

$

0.11

$

0.08

Diluted

$

0.11

$

0.08

Weighted Average shares of Class A common stock outstanding

Basic

29,164

26,386

Diluted

29,290

27,004

See accompanying notes to the condensed consolidated financial statements.

4

PetIQ, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, in 000’s)

For the Three Months Ended

March 31, 2022

March 31, 2021

Net income

$

3,160

$

2,386

Foreign currency translation adjustment

(456)

141

Comprehensive income

2,704

 

2,527

Comprehensive income attributable to non-controlling interest

25

358

Comprehensive income attributable to PetIQ

$

2,679

$

2,169

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, 

2022

2021

Cash flows from operating activities

 

Net income

 

$

3,160

$

2,386

Adjustments to reconcile net income to net cash used in operating activities

 

  

  

Depreciation, amortization of intangible assets and loan fees

 

8,966

12,351

Loss on disposition of property, plant, and equipment

 

148

30

Stock based compensation expense

3,823

2,122

Other non-cash activity

 

316

145

Changes in assets and liabilities

 

Accounts receivable

 

(65,026)

(72,423)

Inventories

 

(71,417)

(32,767)

Other assets

 

(1,273)

(726)

Accounts payable

 

74,094

32,182

Accrued wages payable

 

(1,496)

(2,184)

Other accrued expenses

 

3,325

1,531

Net cash used in operating activities

 

(45,380)

(57,353)

Cash flows from investing activities

 

  

  

Purchase of property, plant, and equipment

 

(5,678)

(8,325)

Net cash used in investing activities

 

(5,678)

(8,325)

Cash flows from financing activities

 

  

  

Proceeds from issuance of long-term debt

 

40,000

242,500

Principal payments on long-term debt

 

(16,150)

(204,641)

Principal payments on finance lease obligations

 

(399)

(468)

Tax withholding payments on Restricted Stock Units

(688)

(802)

Exercise of options to purchase class A common stock

100

6,580

Net cash provided by financing activities

 

22,863

43,169

Net change in cash and cash equivalents

 

(28,195)

(22,509)

Effect of exchange rate changes on cash and cash equivalents

 

(107)

117

Cash and cash equivalents, beginning of period

 

79,406

33,456

Cash and cash equivalents, end of period

$

51,104

$

11,064

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

2022

2021

Interest paid

$

4,072

$

4,441

Net change in property, plant, and equipment acquired through accounts payable

290

(622)

Finance lease additions

59

Income taxes paid, net of refunds

(5)

17

Accrued tax distribution

149

See accompanying notes to the condensed consolidated financial statements.

7

PetIQ, Inc.

Condensed Consolidated Statements of Equity

(Unaudited, in 000’s)

Three months ended March 31, 2022

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, 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 (loss)

(452)

(4)

(456)

Stock based compensation expense

3,788

35

3,823

Exercise of Options to purchase common stock

2

100

100

Issuance of stock vesting of RSU's, net of tax withholdings

110

(688)

(688)

Net income

3,131

29

3,160

Balance - March 31, 2022

$

(111,394)

$

(1,136)

29,272

$

29

252

$

$

371,398

$

2,262

$

261,159

Three months ended March 31, 2021

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, 2021

$

(98,558)

$

(686)

25,711

$

26

3,040

$

3

$

319,642

$

25,983

$

246,410

Exchange of LLC Interests held by LLC Owners

50

2,099

2

(2,099)

(2)

18,031

(18,081)

Accrued tax distributions

(149)

(149)

Other comprehensive income

136

5

141

Stock based compensation expense

1,935

187

2,122

Exercise of Options to purchase Common Stock

242

6,580

6,580

Issuance of stock vesting of RSU's, net of tax withholdings

50

(802)

(802)

Net income

2,033

353

2,386

Balance - March 31, 2021

$

(96,525)

$

(500)

28,102

$

28

941

$

1

$

345,386

$

8,298

$

256,688

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

See accompanying notes to the condensed consolidated financial statements.

8

PetIQ Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

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 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 42 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 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, 2022 and December 31, 2021 and for the three months ended March 31, 2022 and 2021 are unaudited. The condensed consolidated balance sheet as of December 31, 2021 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, 2021 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, 2022. 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.12

Significant Accounting Policies

The Company's significant accounting policies are discussed in Note 1 – Principal Business Activity and Significant Accounting Policies in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company's unaudited condensed financial statements and related notes during the three months ended March 31, 2022.

9

Note 2 – Debt

Senior Secured Asset-Based Revolving Credit Facility

On April 13, 2021, Opco entered into an asset-based credit agreement with KeyBank National Association, as administrative agent and collateral agent, and the lenders’ party thereto, that provides senior secured financing of $125.0 million (which may be increased by up to $50.0 million in certain circumstances), subject to a borrowing base limitation (the “ABL”). The borrowing base for the ABL Facility at any time equals the sum of: (i) 90% of eligible investment-grade accounts; plus (ii) 85% of eligible other accounts; 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 Facility 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.  The rate at March 31, 2022 was 1.48%.  The Company also pays a commitment fee on unused borrowings at a rate of 0.35%.  

The ABL is secured by the assets of the Company including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, and deposit accounts.  The ABL contains certain negative covenants that restrict the Company’s ability to incur additional indebtedness, pay dividends, make investments, loans, and acquisitions, among other restrictions.  The ABL is due on the fifth anniversary of the agreement.

Senior Secured Term Loan Facility

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) (“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 interest rate at March 31, 2022 was 4.75%.  The Term Loan B requires quarterly payments of 0.25% of the original principal amount, with the balance due on the seventh anniversary of the closing date.

The credit agreement governing the Term Loan B does not require Opco to comply with any financial maintenance covenants but contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.  Any unpaid balance is due on the seventh anniversary of the agreement.

The following represents the Company’s long-term debt as of:

$'s in 000's

    

March 31, 2022

    

December 31, 2021

Convertible Notes

$

143,750

$

143,750

Term loans

298,500

298,500

Revolving credit facility

 

25,000

 

Other Debt

22,582

23,518

Net discount on debt and deferred financing fees

 

(9,946)

 

(10,418)

$

479,886

$

455,350

Less current maturities of long-term debt

 

(6,941)

 

(6,880)

Total long-term debt

$

472,945

$

448,470

10

Future maturities of long-term debt, excluding the discount on debt and deferred financing fees, as of March 31, 2022, are as follows:

($'s in 000's)

Remainder of 2022

5,992

2023

7,124

2024

 

7,426

2025

4,600

2026

172,350

Thereafter

 

292,340

Note 3 – 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 2022 and 2027. A portion of leases are denominated in foreign currencies.

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

The components of lease expense consists of the following:

For the Three Months Ended

$'s in 000's

March 31, 2022

    

March 31, 2021

    

Finance lease cost

Amortization of right-of-use assets

$

525

$

566

Interest on lease liabilities

64

91

Operating lease cost

1,577

1,292

Variable lease cost(1)

515

306

Short-term lease cost

5

4

Sublease income

(65)

(43)

Total lease cost

$

2,621

$

2,216

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

11

Other information related to leases was as follows as of:

March 31, 2022

March 31, 2021

Weighted-average remaining lease term (years)

Operating leases

3.75

4.26

Finance leases

2.40

2.78

Weighted-average discount rate

Operating leases

4.5%

5.3%

Finance leases

4.6%

4.9%

Annual future commitments under non-cancelable leases as of March 31, 2022, consist of the following:

Lease Obligations

$'s in 000's

    

Operating Leases

    

Finance Leases

Remainder of 2022

$

5,052

$

1,203

2023

 

6,336

 

1,702

2024

 

4,781

 

622

2025

 

3,745

 

239

2026

 

2,147

 

79

Thereafter

 

124

 

Total minimum future obligations

$

22,185

$

3,845

Less interest

 

(1,838)

 

(211)

Present value of net future minimum obligations

20,347

3,634

Less current lease obligations

(6,047)

(1,470)

Long-term lease obligations

$

14,300

$

2,164

Supplemental cash flow information:

For the Year Ended

$'s in 000's

March 31, 2022

March 31, 2021

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from finance leases

$

64

$

91

Operating cash flows from operating leases

1,583

1,224

Financing cash flows from finance leases

399

468

(Noncash) right-of-use assets obtained in exchange for lease obligations

Operating leases

572

1,418

Finance leases

81

Note 4 – Income Tax

Our effective tax rate (ETR) from continuing operations was 3.7% for the three months ended March 31, 2022, and 3.06% for the three months ended March 31, 2021, including discrete items. Income tax expense for the three months ended March 31, 2022 and 2021 was 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 has assessed the realizability of the net deferred tax assets as of March 31, 2022 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 $106.3 million as of March 31, 2022 and

12

December 31, 2021. In future periods, if we conclude we have future taxable income sufficient to recognize the deferred tax assets, we may reduce or eliminate the valuation allowance.

Note 5 – Earnings per Share

Basic and Diluted Earnings per Share

Basic earnings per share of Class A common stock is computed by dividing net income available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to PetIQ, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

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

Three months ended March 31, 

(in 000's, except for per share amounts)

2022

2021

Numerator:

Net income

$

3,160

$

2,386

Less: net income attributable to non-controlling interests

29

353

Net income attributable to PetIQ, Inc. — basic and diluted

3,131

2,033

Denominator:

Weighted-average shares of Class A common stock outstanding — basic

29,164

26,386

Dilutive effects of stock options that are convertible into Class A common stock

60

470

Dilutive effect of RSUs

66

148

Dilutive effect for conversion of Notes

Weighted-average shares of Class A common stock outstanding — diluted

29,290

27,004

Earnings per share of Class A common stock — basic

$

0.11

$

0.08

Earnings per share of Class A common stock — diluted

$

0.11

$

0.08

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 the dilutive effect of other potential common shares excludes stock awards of 1,797 thousand and 652 thousand shares for the three months ended March 31, 2022 and 2021, respectively, 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 and three months ended March 31, 2022 and 2021 as they would be antidilutive.

Note 6 – 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 3,914 thousand authorized shares under the Plan. As of March 31, 2022 and 2021, 26 thousand and 767 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.

13

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 an acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A common stock of the Company. As of March 31, 2022, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.

Stock Options

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

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $1.3 million and $1.4 million for the three months ended March 31, 2022 and 2021, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periods ended March 31, 2022 and 2021:

March 31, 2022

March 31, 2021

Expected term (years) (1)

    

6.25

6.25

Expected volatility (2)

37.21

%

33.91

%

Risk-free interest rate (3)

1.44

%

0.90

%

Dividend yield (4)

0.00

%

0.00

%

(1)The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
(2)The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period consistent with the expected option term.
(3)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.
(4)The Company has not paid and does not anticipate paying a cash dividend on our common stock.

14

The weighted average grant date fair value of stock options granted during the period ended March 31, 2022 was $9.14 per option. At March 31, 2022, total unrecognized compensation cost related to unvested stock options was $5.9 million and is expected to be recognized over a weighted-average period of 2.3 years.

Weighted

Average

Weighted

Aggregate

Remaining

Stock

Average

Intrinsic

Contractual

Options

Exercise

Value

Life

(in 000's)

Price

(in 000's)

(years)

Outstanding at January 1, 2021

2,086

$

23.93

$

30,302

7.2

Granted

354

35.66

Exercised

(583)

23.05

$

8,499

Forfeited

(64)

24.84

Cancelled

(25)

25.70

Outstanding at December 31, 2021

1,768

26.51

$

2,897

7.3

Granted

37

21.91

Exercised

(2)

19.49

$

5

Forfeited

(2)

35.66

Outstanding at March 31, 2022

1,801

$

26.41

$

4,132

7.1

Options exercisable at March 31, 2022

1,155

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 March 31, 2022, total unrecognized compensation cost related to unvested RSUs was $23.5 million and is expected to vest over a weighted average 3.4 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 $0.8 million for the three months ended March 31, 2022 and 2021, respectively. All stock based compensation expense is included in selling, general and administrative expenses based on the role of recipients.

The following table summarizes the activity of the Company’s RSUs for the period ended March 31, 2022.

Weighted

Number of

Average

Shares

Grant Date

(in 000's)

Fair Value

Outstanding at January 1, 2021

    

317

    

$

22.91

Granted

268

37.91

Settled

(103)

24.81

Forfeited

(23)

26.02

Outstanding at December 31, 2021

459

31.08

Granted

712

20.85

Settled

(143)

26.10

Forfeited

(1)

35.66

Nonvested RSUs at March 31, 2022

1,027

$

24.68

15

Note 7 – Non-Controlling Interests

The following table presents the outstanding LLC Interests and changes in LLC Interests for the periods presented.

LLC Interests held

% of Total

LLC

LLC

$'s in 000's

    

Owners

    

PetIQ, Inc.

Total

Owners

PetIQ, Inc.

As of January 1, 2021

3,040

25,711

28,751

10.6%