10-Q 1 petq-20180630x10q.htm 10-Q petq_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2018

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.)

 

 

923 S. Bridgeway Pl.

83616

Eagle, Idaho

(Zip Code)

(Address of principal executive offices)

 

208‑939‑8900

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☒   (Do not check if a smaller reporting company)

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    No

As of August 14, 2018, we had 16,856,379 shares of Class A common stock and 8,834,389 shares of Class B common stock outstanding.

 

 

 


 

PetIQ, Inc.

 

Table of Contents

 

 

 

 

 

 

 

 

    

 

    

Page

 

 

 

 

 

Part I. 

 

Financial Information

 

3

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

PetIQ, Inc. Condensed Consolidated Balance Sheets 

 

3

 

 

 

PetIQ, Inc. Condensed Consolidated Statements of Income

 

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

 

29

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

Item 4.

Controls and Procedures

 

38

 

 

 

 

 

Part II. 

 

Other Information

 

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

40

 

 

Item 1A.

Risk Factors

 

40

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

Item 5.

Other Information

 

41

 

 

Item 6.

Exhibits

 

41

 

 

 

 

 

Signatures 

 

42

 

 

 

 

2


 

PetIQ, Inc.

Condensed Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 31, 2017

    

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,672

 

$

37,896

 

Accounts receivable, net

 

 

50,910

 

 

21,759

 

Inventories

 

 

81,208

 

 

44,056

 

Supplier prepayments

 

 

1,692

 

 

3,173

 

Other current assets

 

 

1,967

 

 

1,991

 

Total current assets

 

 

147,449

 

 

108,875

 

Property, plant and equipment, net

 

 

25,833

 

 

15,000

 

Deferred tax assets

 

 

18,595

 

 

5,994

 

Other non-current assets

 

 

2,933

 

 

2,646

 

Intangible assets, net

 

 

86,714

 

 

3,266

 

Goodwill

 

 

118,335

 

 

5,064

 

Total assets

 

$

399,859

 

$

140,845

 

Liabilities and equity

 

 

  

 

 

  

 

Current liabilities

 

 

  

 

 

  

 

Accounts payable

 

$

65,291

 

$

14,234

 

Accrued wages payable

 

 

3,423

 

 

1,811

 

Accrued interest payable

 

 

926

 

 

115

 

Other accrued expenses

 

 

2,225

 

 

1,880

 

Current portion of long-term debt and capital leases

 

 

2,033

 

 

151

 

Total current liabilities

 

 

73,898

 

 

18,191

 

Long-term debt

 

 

107,404

 

 

17,183

 

Capital leases, less current installments

 

 

1,646

 

 

389

 

Contingent notes

 

 

7,500

 

 

 —

 

Other non-current liabilities

 

 

403

 

 

238

 

Total non-current liabilities

 

 

116,953

 

 

17,810

 

Commitments and contingencies

 

 

  

 

 

  

 

Equity

 

 

  

 

 

  

 

Additional paid-in capital

 

 

146,054

 

 

70,873

 

Class A common stock, par value $0.001 per share, 125,000,000 shares authorized, 16,647,998 and 13,222,583 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

16

 

 

13

 

Class B common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,042,773 and  8,268,188 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

 9

 

 

 8

 

Accumulated deficit

 

 

(3,197)

 

 

(3,493)

 

Accumulated other comprehensive loss

 

 

(913)

 

 

(687)

 

Total stockholders' equity

 

 

141,969

 

 

66,714

 

Non-controlling interest

 

 

67,039

 

 

38,130

 

Total equity

 

 

209,008

 

 

104,844

 

Total liabilities and equity

 

$

399,859

 

$

140,845

 

 

 

See accompanying notes to the condensed consolidated financial statements

3


 

PetIQ, Inc.

Condensed Consolidated Statements of Income

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

June 30, 2018

    

June 30, 2017

 

June 30, 2018

    

June 30, 2017

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

$

148,713

 

$

87,178

 

$

246,564

 

$

154,207

 

Services revenue

 

22,429

 

 

 —

 

 

39,644

 

 

 —

 

Total net sales

 

171,142

 

 

87,178

 

 

286,208

 

 

154,207

 

Cost of products sold

 

127,583

 

 

71,227

 

 

212,169

 

 

126,056

 

Cost of services

 

17,241

 

 

 —

 

 

31,838

 

 

 —

 

Total cost of sales

 

144,824

 

 

71,227

 

 

244,007

 

 

126,056

 

Gross profit

 

26,318

 

 

15,951

 

 

42,201

 

 

28,151

 

Operating expenses

 

  

 

 

  

 

 

  

 

 

  

 

General and administrative expenses

 

16,943

 

 

9,277

 

 

35,911

 

 

16,682

 

Operating income

 

9,375

 

 

6,674

 

 

6,290

 

 

11,469

 

Interest expense, net

 

(2,216)

 

 

(535)

 

 

(3,981)

 

 

(999)

 

Foreign currency gain (loss), net

 

136

 

 

(72)

 

 

58

 

 

(121)

 

  Other (expense) income, net

 

(877)

 

 

 3

 

 

(973)

 

 

 —

 

Total other expense, net

 

(2,957)

 

 

(604)

 

 

(4,896)

 

 

(1,120)

 

Pretax net income

 

6,418

 

 

6,070

 

 

1,394

 

 

10,349

 

Income tax (expense) benefit

 

(1,020)

 

 

 —

 

 

47

 

 

 —

 

Net income

 

5,398

 

 

6,070

 

 

1,441

 

 

10,349

 

Net income attributable to non-controlling interest

 

2,899

 

 

6,070

 

 

970

 

 

10,349

 

Net income attributable to PetIQ, Inc.

$

2,499

 

$

 —

 

$

471

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to PetIQ, Inc. Class A common stock(1)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.16

 

 

 —

 

$

0.03

 

 

 —

 

Diluted

$

0.16

 

 

 —

 

$

0.03

 

 

 —

 

Weighted average shares of Class A common stock outstanding(1) 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

15,980,111

 

 

 —

 

 

15,285,138

 

 

 —

 

Diluted

 

16,008,046

 

 

 —

 

 

15,328,596

 

 

 —

 

 

 

 

(1)

Basic and Diluted earnings per share is applicable only for periods after the Company’s IPO.  See Note 8 – Earnings Per Share.

See accompanying notes to the condensed consolidated financial statements

 

 

4


 

PetIQ, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, $’s in 000’s)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

June 30, 2018

    

June 30, 2017

 

June 30, 2018

    

June 30, 2017

Net income

$

5,398

 

$

6,070

 

$

1,441

 

$

10,349

Foreign currency translation adjustment

 

(725)

 

 

374

 

 

(289)

 

 

515

Comprehensive income

 

4,673

 

 

6,444

 

 

1,152

 

 

10,864

Comprehensive income attributable to non-controlling interest

 

2,668

 

 

6,444

 

 

901

 

 

10,864

Comprehensive income attributable to PetIQ

$

2,005

 

$

 —

 

$

251

 

$

 —

 

 

 

5


 

PetIQ, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, $’s in 000’s)

 

 

 

 

 

 

 

 

    

For the six months ended

 

 

June 30, 2018

 

June 30, 2017

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

1,441

 

$

10,349

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

 

 

  

 

 

  

Depreciation and amortization of intangible assets and loan fees

 

 

5,714

 

 

1,687

Foreign exchange (gain) loss on liabilities

 

 

(41)

 

 

14

(Gain) loss on disposition of property

 

 

(49)

 

 

149

Stock based compensation expense

 

 

1,454

 

 

 —

Deferred tax adjustment

 

 

(47)

 

 

 —

Other non-cash activity

 

 

266

 

 

 —

Changes in assets and liabilities

 

 

  

 

 

  

Accounts receivable

 

 

(20,820)

 

 

(14,175)

Inventories

 

 

(29,384)

 

 

(8,473)

Prepaid expenses and other assets

 

 

2,080

 

 

(574)

Accounts payable

 

 

31,859

 

 

3,603

Accrued wages payable

 

 

410

 

 

377

Other accrued expenses

 

 

(2,304)

 

 

54

Net cash used in operating activities

 

 

(9,421)

 

 

(6,989)

Cash flows from investing activities

 

 

  

 

 

  

Proceeds from disposition of property, plant, and equipment

 

 

103

 

 

 —

Purchase of property, plant, and equipment

 

 

(4,732)

 

 

(681)

Business acquisition (net of cash acquired)

 

 

(92,083)

 

 

 —

Net cash used in investing activities

 

 

(96,712)

 

 

(681)

Cash flows from financing activities

 

 

  

 

 

  

Proceeds from issuance of long-term debt

 

 

299,078

 

 

150,000

Principal payments on long-term debt

 

 

(215,964)

 

 

(141,962)

Principal payments on capital lease obligations

 

 

(561)

 

 

(56)

Payment of deferred financing fees and debt discount

 

 

(2,613)

 

 

(25)

Net cash provided by financing activities

 

 

79,940

 

 

7,957

Net change in cash and cash equivalents

 

 

(26,193)

 

 

287

Effect of exchange rate changes on cash and cash equivalents

 

 

(31)

 

 

(6)

Cash and cash equivalents, beginning of period

 

 

37,896

 

 

767

Cash and cash equivalents, end of period

 

$

11,672

 

$

1,048

 

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements

6


 

PetIQ, Inc.

Condensed Consolidated Statements of Cash Flows, Continued

(Unaudited, $’s in 000’s)

 

 

 

 

 

 

 

 

 

For the six months ended

Supplemental cash flow information

 

June 30, 2018

 

June 30, 2017

Interest paid

 

$

3,104

 

$

799

Property, plant, and equipment acquired through accounts payable

 

 

(433)

 

 

(121)

Capital lease additions

 

 

34

 

 

17

Net change of deferred tax asset from step-up in basis

 

 

12,505

 

 

 —

Income taxes paid

 

 

400

 

 

 —

Accrued tax distribution

 

 

693

 

 

 —

Non cash consideration - Contingent notes

 

 

6,900

 

 

 —

Non cash consideration - Guarantee note

 

 

10,000

 

 

 —

Non cash consideration - Issuance of Class B common stock and LLC Interests

 

 

90,031

 

 

 —

 

 

 

 

 

 

7


 

PetIQ, Inc.

Condensed Consolidated Statements of Equity

(Unaudited, $’s in 000’s)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

 

(Loss)

 

 

 

 

 

 

 

 

 

Paid-in

 

Non-controlling

 

Total

 

Deficit

 

Income

 

Class A Common

 

Class B Common

 

Capital

 

Interest

 

Equity

 

 

 

 

 

Shares

 

Dollars

 

Shares

 

Dollars

 

 

 

 

 

 

Balance - December 31, 2017

$

(3,493)

 

$

(687)

 

 

13,222,583

 

$

13

 

 

8,268,188

 

$

 8

 

$

70,873

 

$

38,130

 

$

104,844

ASC 606 adoption, net of tax

 

(175)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(110)

 

 

(285)

Issuance of equity for business combination

 

 —

 

 

112

 

 

 —

 

 

 —

 

 

4,200,000

 

 

 4

 

 

36,280

 

 

53,635

 

 

90,031

Exchange of LLC Interests held by Continuing LLC Owners

 

 —

 

 

(118)

 

 

3,425,415

 

 

 3

 

 

(3,425,415)

 

 

(3)

 

 

25,517

 

 

(25,399)

 

 

 —

Net increase in deferred tax asset from LLC Interest transactions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,505

 

 

 —

 

 

12,505

Accrued tax distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(693)

 

 

(693)

Other comprehensive income

 

 —

 

 

(220)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(69)

 

 

(289)

Stock based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

879

 

 

575

 

 

1,454

Net income

 

471

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

970

 

 

1,441

Balance - June 30, 2018

$

(3,197)

 

$

(913)

 

 

16,647,998

 

$

16

 

 

9,042,773

 

$

 9

 

$

146,054

 

$

67,039

 

$

209,008

 

 

 

 

 

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. (the “Company”, or “PetIQ”) was formed as a Delaware corporation on February 29, 2016. The Company was formed for the purpose of completing a public offering and related transactions in order to carry on the business of PetIQ, LLC, an Idaho limited liability company. The Company is 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, will operate and control all of the business and affairs of Opco and continue to conduct the business now conducted by Opco and its subsidiaries.

The Company’s principal asset is the Holdco LLC Interests that it holds. As the sole managing member of Holdco, the Company operates and controls all of the business and affairs of Holdco and, through Holdco and its subsidiaries, conducts the Company’s business. In addition, the Company controls the management of, and has a controlling interest in, Holdco and, therefore, is the primary beneficiary of Holdco. As a result, the Company consolidates the financial results of Holdco pursuant to the variable-interest entity (“VIE”) accounting model, and a portion of the Company’s net income (loss) will be allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners (defined as all owners of Holdco other than PetIQ) to a portion of Holdco’s net (loss) income. Holdco’s assets may be used only to settle Holdco’s obligations and Holdco’s beneficial interest holders have no recourse to the general credit to the Company. Through Holdco and its subsidiaries, the Company is a manufacturer and wholesale distributor of over-the-counter and prescription pet medications and pet wellness products to various retail customers and distributors throughout the United States and Europe. The Company also provides veterinary services to retail consumers through a network of community clinics and wellness centers.  The Company is headquartered in Eagle, Idaho and manufactures and distributes products from facilities in Florida, Texas, Utah, and Europe. The Company provides veterinary services in the United States through a network of 34 district offices.

PetIQ, Inc. consolidates Holdco and Opco; Opco is considered to be the predecessor to PetIQ, Inc. for accounting and reporting purposes.  The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, all majority-owned subsidiaries and certain veterinary medical groups to which we provide services. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. All intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements as of June 30, 2018 and December 31, 2017 and for the three and six months ended June 30, 2018 and 2017 are unaudited. The condensed consolidated balance sheet as of December 31, 2017 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, 2017 and related notes thereto included in most recent annual report and filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on March 13, 2018. 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 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,

9


 

plant, and equipment, intangible assets and goodwill, the valuation of assets and liabilities in connection with acquisitions, the valuation of deferred tax assets and liabilities, the valuation of inventories, and reserves for legal contingencies

Foreign Currencies

The Company operates subsidiaries in foreign countries who use the local currency as the functional currency.  The Company translates its foreign subsidiaries’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of accumulated other comprehensive income. The Company records gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location's functional currency in net income for each period.

Fair 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.

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, accounts receivable, accounts payable and accrued liabilities, are at cost, which approximates fair value due to their relatively short maturities. The guarantee note is carried at cost, which approximates fair value due to the recent issuance of the note. 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.

The following table presents liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

$'s in 000's

 

 

June 30, 2018

 

 

December 31, 2017

Liabilities:

 

 

 

 

 

 

Contingent notes

 

$

7,500

 

$

 —

 

In connection with the acquisition of Community Veterinary Clinics, LLC d/b/a VIP Petcare (“VIP” and such acquisition, the “VIP Acquisition”) a payment of a portion of the purchase price is structured in the form of Contingent Notes (the “Contingent Notes”) that vest based on the adjusted EBITDA  for the years ending December 31, 2018 and 2019 (“Measurement Dates”).  See Note 2 – “Business Combinations” for more information regarding the VIP Acquisition.  The Company is required to reassess the fair value of the Contingent Notes at each reporting period.

A Monte Carlo simulation method was utilized in estimating the fair value (Level 3) of the Contingent Notes. The simulation model is a numerical algorithm that generates thousands of scenarios for the future EBITDA in order to assess the probability of achieving the EBITDA hurdles. The valuation model simulates the last twelve months EBITDA from the Valuation Date to the end of each Measurement Date in one 'jump'. The Contingent Notes were valued within a

10


 

risk-neutral option pricing framework with the real growth rate adjusted for the market price of EBITDA risk. The Company used the WACC less risk-free rate as a proxy for the EBITDA risk premium.

Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the operating results of the Company, or changes in the future may result in different estimated amounts.

The contingent consideration is included in Contingent Notes in the accompanying condensed consolidated balance sheets. The Company will satisfy this obligation with a cash payment to the sellers due in July 2023 upon the achievement of the respective milestones discussed above.  The Contingent Notes will bear interest at a fixed rate of 6.75%, beginning upon the achievement of the respective milestones discussed above.

The following table summarizes the Level 3 activity related to the contingent consideration:

 

 

 

 

 

 

 

$'s in 000's

 

June 30, 2018

 

December 31, 2017

Balance at beginning of the period

 

$

 —

 

$

 —

Fair value of contingent consideration at VIP Acquisition date

 

 

6,900

 

 

 —

Loss on change in fair value of contingent consideration

 

 

600

 

 

 —

Balance at the end of the period

 

$

7,500

 

$

 —

 

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the date of acquisition. 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.

Receivables and Credit Policy

Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms generally 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 doubtful accounts equal to estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  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 consolidated balance sheets.

Accounts receivable consists of the following as of:

 

 

 

 

 

 

 

$'s in 000's

    

June 30, 2018

    

December 31, 2017

Trade receivables

 

$

48,449

 

$

22,189

Other receivables

 

 

3,182

 

 

297

 

 

 

51,631

 

 

22,486

Less: Allowance for doubtful accounts

 

 

(400)

 

 

(343)

Non-current portion of receivables

 

 

(321)

 

 

(384)

Total accounts receivable, net

 

$

50,910

 

$

21,759

 

Inventories

Inventories are stated at the lower of cost or net realizable value.  Cost is typically determined using the first-in first-out (“FIFO”) method.  The Company maintains reserves for estimated obsolete or unmarketable inventory based on the

11


 

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:

 

 

 

 

 

 

 

$'s in 000's

    

June 30, 2018

    

December 31, 2017

Raw materials and work in progress

 

$

4,422

 

$

4,004

Finished goods

 

 

76,786

 

 

40,052

Total inventories

 

$

81,208

 

$

44,056

 

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.

Depreciation and amortization is provided using the straight-line method, based on useful lives of the assets, except for leasehold improvements and capital 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:

 

 

 

 

Computer equipment and software

    

 

3 years

Vehicle and vehicle accessories

 

 

3-5 years

Buildings

 

 

33 years

Equipment

 

 

3-15 years

Leasehold improvements

 

 

3-15 years

Furniture and fixtures

 

 

5-10 years

 

Deferred Acquisition Liability

The Company has a deferred acquisition liability related to an acquisition that occurred in 2013.  The liability is denominated in Euros and requires annual payments based on a percentage of gross profit from the sales of certain products, and any amounts not repaid by the annual payments will be due in 2018.  The note was fully repaid in July 2018.  The current balance recorded as of June 30, 2018, and December 31, 2017 was $1,525 thousand and $1,575 thousand, respectively, and is included in other accrued expenses on the condensed consolidated balance sheets.  The note was fully repaid in July 2018.

Revenue Recognition

On January 1, 2018, we adopted Asscounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method as described under Adopted Accounting Standard Updates below.  As a result of the adoption of Topic 606, we have updated our accounting policy for revenue recognition as follows:

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 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

12


 

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.   

 

Revenue is recognized for services over time when the service is delivered. 

 

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 one year. As such, we have not disclosed the transaction price allocated to remaining performance obligations as of June 30, 2018.

 

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. 

 

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 other current assets or accounts payable in the Condensed Consolidated Balance Sheet.

 

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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. 

 

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 June 30, 2018 are immaterial.  The Company does not have significant deferred revenue or unbilled receivable balances because of transactions with customers.

 

Cost 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 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.

Research 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 $48 thousand and $118 thousand for the three months ended June 30, 2018 and 2017, respectively, and $97 thousand and $313 thousand for the six months ended June 30, 2018 and 2017, respectively.  Advertising costs were $1,418 thousand and $1,134 thousand for the three months ended June 30, 2018 and 2017, respectively, and $2,013 thousand and $1,592 thousand for the six months ended June 30, 2018 and 2017, respectively.  Advertising costs do not include trade marketing programs which are part of net sales.

 

Income taxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company may record a valuation allowance, if conditions are applicable, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

 

Non-controlling interest

The non-controlling interests on the condensed consolidated statements of income represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, PetIQ Holdings, LLC, held by the non-controlling Continuing LLC Owners. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling Continuing LLC Owners, based on the portion of the LLC Interests owned by such LLC interest holders. All operations were considered owned by non-controlling interest for the three months ended June 30, 2017 or the remaining period prior to the IPO on July 20, 2017 because the Company operated as Opco during those periods. As of June 30, 2018 and December 31, 2017 the non-controlling interest was approximately 35.2% and 38.5%, respectively.

14


 

Litigation

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.  The company consults with both internal and external legal counsel related to litigation.

 

Adopted Accounting Standard Updates

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

 

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective approach.  Under the modified retrospective approach, the Company is required to recognize the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of retained earnings as of January 1, 2018, the date of initial application.  The cumulative effect of initially applying Topic 606 was immaterial to the Condensed Consolidated Financial Statements.

 

In conjunction with adoption of Topic 606, the Company updated its significant accounting policy related to revenue recognition.  The Company’s previous revenue recognition policy was disclosed in Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Results for the three and six month period ended June 30, 2018 is presented under Topic 606.  Prior periods are not adjusted and will continue to be reported in accordance with ASC 605 Revenue Recognition (“ASC 605”).  The following tables summarize the impacts of adopting Topic 606 on the Company’s Condensed Consolidated Financial Statements as of and for the three and six month periods ended June 30, 2018.

 

Condensed Consolidated Statements of Income for the three months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Without

$'s in 000's

 

 

As Reported

 

 

Adjustments

 

 

Adoption of Topic 606

Revenues

 

$

171,142

 

$

5,349

 

$

176,491

Cost of sales

 

 

144,824

 

 

3,748

 

 

148,572

General and Administrative expenses

 

 

16,943

 

 

345

 

 

17,288

(Provision) benefit for income taxes

 

 

(1,020)

 

 

(202)

 

 

(1,222)

Net Income

 

 

5,398

 

 

1,054

 

 

6,452

 

Condensed Consolidated Statements of Income for the six months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Without

$'s in 000's

 

As Reported

 

Adjustments

 

 

Adoption of Topic 606

Revenues

 

$

286,208

 

$

5,965

 

$

292,173

Cost of sales

 

 

244,007

 

 

3,734

 

 

247,741

General and Administrative expenses

 

 

35,911

 

 

444

 

 

36,355

(Provision) benefit for income taxes

 

 

47

 

 

(286)

 

 

(239)

Net Income

 

 

1,441

 

 

1,501

 

 

2,942

 

15


 

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Without

$'s in 000's

 

 

As Reported

 

 

Adjustments

 

 

Adoption of Topic 606

Assets

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

50,910

 

$

5,296

 

$

56,206

Inventories

 

 

81,208

 

 

(4,962)

 

 

76,246

Other current assets

 

 

1,967

 

 

426

 

 

2,393

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

65,291

 

 

(1,099)

 

 

64,192

Accumulated deficit

 

 

(3,197)

 

 

1,216

 

 

(1,981)

 

The following tables represent the disaggregation of revenue by contract type for each of our reportable segments:

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

$'s in 000's

 

U.S.

 

Foreign

 

Total

Product sales

$

147,278

$

1,435

$

148,713

Service revenue

 

22,429

 

 —

 

22,429

Total net sales

$

169,707

$

1,435

$

171,142

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2017

$'s in 000's

 

U.S.

 

Foreign

 

Total

Product sales

$

85,857

$

1,321

$

87,178

Service revenue

 

 —

 

 —

 

 —

Total net sales

$

85,857

$

1,321

$

87,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

$'s in 000's

 

 

U.S.

 

 

Foreign

 

 

Total

Product sales

 

$

243,534

 

$

3,030

 

$

246,564

Service revenue

 

 

39,644

 

 

 —

 

 

39,644

Total net sales

 

$

283,178

 

$

3,030

 

$

286,208

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

$'s in 000's

 

 

U.S.

 

 

Foreign

 

 

Total

Product sales

 

$

151,767

 

$

2,440

 

$

154,207

Service revenue

 

 

 —

 

 

 —

 

 

 —

Total net sales

 

$

151,767

 

$

2,440

 

$

154,207

 

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new lease standard that was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients.   Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in an increase in the assets and liabilities on our consolidated balance sheet.  The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

In March 2018, the FASB issued ASU No. 2018-05Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments add various SEC paragraphs pursuant to the

16


 

issuance of SEC Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“Act”) (“SAB 118”). The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has provided a reasonable estimate in the notes to the condensed consolidated financial statements.

 

 

 

Note 2 – Business Combination

 

On January 17, 2018 PetIQ, Inc. completed the acquisition of VIP from VIP Holdings, LLC (“VIPH” or the “Sellers”). VIP is a provider of veterinary wellness and pet preventive services as well as a distributor of pet wellness products and medications.  The total purchase price was approximately $198 million, net of cash acquired and the effective settlement of pre-existing payables between the Company and VIP at cost which approximates fair value, and was funded through a combination of cash on hand, borrowings under a new $75 million term loan, a $10 million note payable, two $10 million contingent notes, payable upon the achievement of certain combined Company EBITDA targets, and equity consideration consisting of 4.2 million LLC interests of PetIQ Holdings, LLC (the “LLC Interests”) and 4.2 million shares of Class B common stock of  the Company.

 

The estimate of fair value and purchase price allocation were based on information available at the time of closing the VIP Acquisition and the Company continues to evaluate the underlying inputs and assumptions that are being used in fair value estimates.  In addition, the Company is in process of finalizing the net working capital adjustment.  Accordingly, these preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of closing the VIP Acquisition.   The preliminary estimated fair value of the consideration is summarized as follows: