PetIQ, Inc. Reports Third Quarter 2020 Financial Results

EAGLE, Idaho, November 5, 2020 (GLOBE NEWSWIRE) -- PetIQ, Inc. (“PetIQ” or the “Company”) (Nasdaq: PETQ), a leading pet medication and wellness company, today reported financial results for the three and nine months ended September 30, 2020.

“We are incredibly proud of our team’s collaboration, resilience and performance during a very dynamic operating environment due to COVID-19. We’ve experienced an atypical business cadence since March of this year in our Products and Services segments resulting in episodic surges in demand and extensive temporary veterinarian clinic closures making quarterly year-over-year comparisons less indicative than our year-to-date comparisons as to the strength and momentum of our underlying business trends, which gives us tremendous confidence in our future growth trajectory,” commented Cord Christensen, PetIQ’s Chairman and CEO. “Year-to-date our Products segment has achieved more than 20% top-line growth, ahead of our original expectations, and we plan to invest in capacity to support future anticipated growth across key customers with new programs for 2021. In our Services segment, our team executed on our stated re-opening plan with approximately 95% of our business in operation at the end of the quarter and both pets per clinic and dollars per pet are outperforming pre-COVID and prior year comparisons.”

Christensen continued, “We are very pleased to have completed the acquisition of Capstar® in the quarter, and after owning the business for three months, believe we have clear line of sight to conservatively achieve our stated greater than $20 million of incremental EBITDA contribution in full year 2021. At PetIQ, we have a strong foundation for long-term growth with our diversified business model of providing affordable and convenient access to veterinarian services, prescriptions and OTC medications.”

Third Quarter & Year-to-Date 2020 Highlights Compared to Prior Year Period

Provides Update on Services Segment Reopening Plan

Third Quarter 2020 Financial Results

Net sales decreased 12.9% to $162.1 million for the third quarter of 2020, compared to $186.0 million for the same period in the prior year. Product segment sales were $150.1 million and Services segment revenues were $12.0 million in the third quarter of 2020. The decrease in consolidated net sales primarily reflects the temporary closure of clinics in the Services segment and following an atypical surge in Products segment orders in the second quarter of 2020 related to COVID-19 which corrected itself during the third quarter of 2020. In addition, late in the third quarter of 2020, a key retail partner transitioned a significant product program earlier than anticipated to fiscal 2021, which resulted in an approximate third quarter loss of Products segment net sales and adjusted EBITDA of approximately $5 million and $4 million, respectively. Management estimates that the Services segment would have contributed approximately $39.6 million in net revenues if existing Services locations had remained open and performed at budget in the third quarter.

Third quarter 2020 gross profit was $32.3 million, an increase of 18.3% compared to $27.3 million in the prior year period. Gross margin increased 520 basis points to 19.9% from 14.7% in the prior year period. Adjusted gross profit was $35.6 million compared to $39.0 million in the prior year period, which reflects the addition of costs associated with the temporary Services segment closures and non-same store loss contribution. Adjusted gross margin increased 100 basis points to 22.0% for the third quarter 2020 compared to 21.0% in the prior year period. Management estimates that the Services segment would have contributed an additional 391 basis points to gross margin if Services locations had remained open and performed at budget in the third quarter.

Net loss was $64.5 million for the third quarter of 2020 compared to a net loss of $8.8 million in the prior year period. The third quarter of 2020 net loss was primarily due a $53.2 million tax expense driven by a non-cash tax valuation allowance on the Company’s deferred tax asset and $4.7 million in additional interest, depreciation, and amortization expense related to the Capstar® acquisition.

Adjusted net loss was $2.7 million compared to adjusted net income of $9.3 million in the prior year period.

Third quarter adjusted EBITDA of $12.0 million compared to $19.3 million in the prior year period. Adjusted EBITDA margin decreased 290 basis points to 7.5% compared to 10.5% in the prior year period.

Adjusted gross profit, adjusted gross margin, adjusted net income, adjusted net loss and adjusted EBITDA are non-GAAP financial measures. The Company believes these non-GAAP financial measures provide investors with additional insight into the way management views reportable segment operations in light of changes in the Company’s operations, including the increase of manufacturing operations as a result of the Perrigo Animal Health Acquisition and the Capstar® Acquisition in the Products segment and the growth of the Company’s wellness centers, host partners, and regions within the Services segment. See “Non-GAAP Measures” for a definition of these measures and the financial tables that accompany this release for a reconciliation to the most comparable GAAP measure.

Segment Results

Products:

For the third quarter of 2020, Product segment net sales decreased 7.1% to $150.1 million. Product adjusted EBITDA increased 28.3% to $26.3 million. The Products segment net sales and adjusted EBITDA were negatively impacted late in the third quarter as a result of the aforementioned product program transition. The Product segment did benefit from additional sales of manufactured products, including a full quarter contribution from Perrigo Animal Health and a partial quarter contribution from Capstar®. This compares to Product segment sales and adjusted EBITDA of $161.5 million and $20.5 million, respectively, for the third quarter of 2019.

Year-to-date, Product segment net sales increased 20.4% to $580.7 million and Product adjusted EBITDA increased 65% to $92.4 million.

Services:

For the third quarter of 2020, Services segment net revenues were $12.0 million compared to $24.5 million in the same period last year. Services segment adjusted EBITDA loss of $0.2 million compared to $7.0 million in the third quarter of 2019. Management estimates that the Services segment would have contributed an additional $27.5 million of net revenue and $6.2 million of adjusted EBITDA if existing Services locations had remained open and performed at budget in the third quarter.

Year-to-date Services segment net revenues and adjusted EBITDA were $35.2 million and $2.9 million, respectively. Management estimates that the Services segment would have contributed an additional $75.1 million of net revenue and $15.6 million of adjusted EBITDA if existing Services locations had remained open and performed at budget for the year-to-date period ended September 30, 2020.

Cash Flow and Balance Sheet

As of September 30, 2020, the Company had cash and cash equivalents of $57.8 million. The Company’s long-term debt balance, which is largely comprised of its revolving credit facility, term loan and convertible debt issued in the previous quarter, was $355.5 million as of September 30, 2020. The Company had total liquidity of approximately $152 million, and an additional $15 million available via an accordion feature of the credit agreement for a total of $167 million.

Working capital increased to $146.9 million for the year-to-date period ended September 30, 2020 versus year end, primarily as a result of $123 million in net proceeds from the convertible note offering, as well as positive operating cash flows, offset by cash used to purchase Capstar®, growth in working capital assets and pay downs on the Company’s ABL.

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Outlook

As previously announced, the Company’s annual guidance provided on March 10, 2020 remains suspended due to the uncertainty surrounding the impact and duration from the COVID-19 pandemic on its Services segment. While 95% of the Company’s community clinics and wellness centers have been re-opened as of September 30, 2020, the Services segment continues to experience an elevated level of absenteeism due to COVID-19 related illnesses and as a result 12% to 16% of the Services segment operations are temporarily closed week to week in an effort to keep employees and pet parents safe.

The Company continues to expect full year 2021 incremental EBITDA contribution from Capstar® of greater than $20 million. Long-term, the Company remains confident in achieving its strategic and financial objectives.

Conference Call and Webcast

The Company will host a conference call with members of the executive management team to discuss these results with additional comments and details. The conference call is scheduled to begin today at 4:30 p.m. ET. To participate on the live call listeners in North America may dial 800-753-0594 and international listeners may dial 312-281-2942.

In addition, the call will be broadcast live over the Internet hosted at the “Investors” section of the Company's website at www.PetIQ.com. A telephonic playback will be available through November 19, 2020. North American listeners may dial 844-512-2921 and international listeners may dial 412-317-6671 the passcode is 21971418.

About PetIQ

PetIQ is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. The company engages with customers through more than 60,000 points of distribution across retail and e-commerce channels with its branded distributed medications, which is further supported by its own world-class medications manufacturing facility in Omaha, Nebraska. The company’s national service platform, VIP Petcare, operates in over 3,400 retail partner locations in 41 states providing cost effective and convenient veterinary wellness services. PetIQ believes that pets are an important part of the family and deserve the best products and care we can give them.

Contact: Investor.relations@petiq.com or 208.513.1513

Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions. 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, the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, our Form 10-Q for the quarter ended June 30, 2020 and other reports filed 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.

Non-GAAP Financial Measures

In addition to financial results reported in accordance with U.S. GAAP, PetIQ uses the following non-GAAP financial measures: Adjusted net income, adjusted net loss, adjusted gross profit, adjusted gross margin, Adjusted EBITDA, and Adjusted EBITDA Margin.

Adjusted net income (loss) consists of net income (loss) adjusted for tax expense, acquisition expenses, COVID-19 related costs, integration costs and costs of discontinued clinics, new clinic launch expense, and stock-based compensation expense. Adjusted net income (loss) is utilized by management: to evaluate the effectiveness of our business strategies.

Adjusted gross profit consists of gross profit adjusted for COVID-19 related costs, gross profit (loss) on veterinarian clinics and wellness centers that are not part of same store sales, and new clinic launch expense. Adjusted gross profit is utilized by management to evaluate the effectiveness of our business strategies.

EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA plus adjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA margin is adjusted EBITDA stated as a percentage of net sales. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management's performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) allow for improved comparability over prior periods due to significant growth in the Company’s new wellness centers. The Company presents EBITDA because it is a necessary component for computing adjusted EBITDA.

We believe that the use of adjusted net income, adjusted net loss, adjusted gross profit, adjusted gross margin, adjusted EBITDA, and adjusted EBITDA margin provide additional tools for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating adjusted net income, adjusted gross profit, adjusted EBITDA and adjusted EBITDA margin, that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of adjusted net income, adjusted gross profit, adjusted EBITDA and adjusted EBITDA margin may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate adjusted net income, adjusted gross profit, adjusted EBITDA and adjusted EBITDA margin in the same manner. Our management does not, and you should not, consider adjusted net income, adjusted gross profit, adjusted EBITDA margin, or adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of adjusted net income adjusted gross profit, adjusted EBITDA margin, and adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. See a reconciliation of Non-GAAP measures to the most comparable GAAP measure, in the financial tables that accompany this release.

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