North America Europe Asia | 35 W. Wacker Drive Chicago, IL 60601 T +1 312 558 5600 F +1 312 558 5700 |
November 4, 2019
Suying Li
Rufus Decker
Division of Corporation Finance
Office of Beverages, Apparel and Mining
United States Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
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Re: | PetIQ, Inc. | ||
Form 10-K for Fiscal Year Ended December 31, 2018 | ||||
Filed March 12, 2019 Form 10-Q for Fiscal Quarter Ended June 30, 2019 Filed August 8, 2019 Item 2.02 Form 8-K Filed August 7, 2019 | ||||
File No. 001-38163 |
Dear Ms. Li and Mr. Decker:
Reference is made to the comments of the Staff of the Division of Corporation Finance (the Staff) of the Securities and Exchange Commission (the Commission) set forth in your letter dated August 15, 2019 to PetIQ, Inc. (the Company) with respect to the Companys Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2018, Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2019 and Current Report on Form 8-K, filed on August 7, 2019. With respect to Comment No. 3 contained in the Staffs letter, the Company (i) submitted a response letter via EDGAR on October 22, 2019 wherein it advised the Staff that it would adopt segment Adjusted EBITDA as its segment measure of profitability beginning in the third quarter of 2019 and (ii) engaged in a telephone conference with the Staff on October 31, 2019. To provide additional clarity, the Company is providing the Staff with draft language to be included in its Form 10-Q for the quarter ended September 30, 2019 (the Form 10-Q) related to the presentation of segment Adjusted EBITDA and related segment-level disclosure to be included under Managements Discussion and Analysis of Financial Condition and Results of Operations. The Company is also providing the Staff with draft language to be included in the Companys earnings release to be furnished to the Commission on Form 8-K (the Earnings Release). Please note that Company is still in the process of finalizing its third quarter financial reporting and, as such, the presentation below is provided for illustrative purposes and certain numbers have been omitted.
The following disclosure will be included in the Form 10-Q under Note 14 Segments to the Companys financial statements:
Effective January 17, 2018, the Company has two operating segments: Products and Services. The Products segment consists of the Companys manufacturing and distribution business. The Services segment consists of the Companys veterinary services, and related product sales, provided by the Company directly to consumers. The period from January 1, 2018 to January 16, 2018 has been recast to reflect these reportable operating segments.
The segments are based on the discrete financial information reviewed by the Chief Operating Decision Maker (CODM) to make resource allocation decisions and to evaluate performance. We measure and evaluate our reportable segments based on net sales and segment Adjusted EBITDA. We exclude from our segments certain corporate costs and expenses, such as accounting, legal, human resources, information technology and corporate headquarters expenses as our corporate functions do not meet the definition of a segment as defined in the accounting guidance related to segment reporting.
November 4, 2019
Page 2
Effective during the three months ended September 30, 2019, the Company changed its segment measure of profitability for its reportable segments from segment operating income (loss) to Adjusted EBITDA to better align the way the CODM views reportable segment operations in light of changes in the Companys operations, including the increase of manufacturing operations as a result of the Perrigo Animal Health Acquisition in the Products segment and the growth of the Companys wellness centers, host partners, and regions within the Services segment. For comparability purposes, previous periods have been recast to reflect the measure of segment profitability.
Financial information relating to the Companys operating segments for the three months ended:
$s in 000s | ||||||||||||||||
September 30, 2019 |
Products | Services | Unallocated Corporate |
Consolidated | ||||||||||||
Net Sales |
$ | [●] | $ | [●] | $ | | $ | [●] | ||||||||
Adjusted EBITDA |
[●] | [●] | [●] | [●] |
$s in 000s | ||||||||||||||||
September 30, 2018 |
Products | Services | Unallocated Corporate |
Consolidated | ||||||||||||
Net Sales |
$ | 108,524 | $ | 22,858 | $ | | $ | 131,382 | ||||||||
Adjusted EBITDA |
14,691 | 5,160 | (6,442 | ) | 13,409 |
Financial information relating to the Companys operating segments for the nine months ended:
$s in 000s | ||||||||||||||||
September 30, 2019 |
Products | Services | Unallocated Corporate |
Consolidated | ||||||||||||
Net Sales |
$ | [●] | $ | [●] | $ | | $ | [●] | ||||||||
Adjusted EBITDA |
[●] | [●] | [●] | [●] |
$s in 000s | ||||||||||||||||
September 30, 2018 |
Products | Services | Unallocated Corporate |
Consolidated | ||||||||||||
Net Sales |
$ | 355,088 | $ | 62,502 | $ | | $ | 417,590 | ||||||||
Adjusted EBITDA |
43,443 | 10,734 | (19,118 | ) | 35,059 |
The following table reconciles Segment Adjusted EBITDA to Net (loss) income for the periods presented.
For the three months ended | For the nine months ended | |||||||||||||||
$s in 000s | September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
Adjusted EBITDA: |
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Product |
$ | [●] | $ | 14,642 | $ | [●] | $ | 41,337 | ||||||||
Services |
[●] | 5,160 | [●] | 12,236 | ||||||||||||
Corporate |
[●] | (6,393 | ) | [●] | (18,514 | ) | ||||||||||
Total Consolidated |
[●] | 13,409 | [●] | 35,059 | ||||||||||||
Adjustments: |
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Depreciation |
[●] | (1,786 | ) | [●] | (4,816 | ) | ||||||||||
Amortization |
[●] | (1,294 | ) | [●] | (3,691 | ) | ||||||||||
Interest |
[●] | (2,159 | ) | [●] | (6,140 | ) | ||||||||||
Acquisition costs(1) |
[●] | (113 | ) | [●] | (3,479 | ) | ||||||||||
Stock based compensation expense |
[●] | (1,224 | ) | [●] | (2,678 | ) | ||||||||||
Purchase accounting adjustment to inventory(2) |
[●] | | [●] | (1,502 | ) | |||||||||||
Non same-store revenue(3) |
[●] | 1,472 | [●] | 2,775 |
November 4, 2019
Page 3
Non same-store costs |
[●] | (3,845 | ) | [●] | (6,667 | ) | ||||||||||
Fair value adjustment of contingent note |
[●] | 350 | [●] | (250 | ) | |||||||||||
Integration costs and costs of discontinued clinics(4) |
[●] | (57 | ) | [●] | (813 | ) | ||||||||||
Clinic launch expenses(5) |
[●] | (50 | ) | [●] | (1,261 | ) | ||||||||||
Non-recurring royalty settlement(6) |
| | | (440 | ) | |||||||||||
SKU Rationalization |
[●] | [●] | ||||||||||||||
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Pretax net (loss) income |
$ | [●] | $ | 4,703 | $ | [●] | $ | 6,097 | ||||||||
Income tax benefit (expense) |
[●] | (801 | ) | [●] | (754 | ) | ||||||||||
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Net (loss) income |
$ | [●] | $ | 3,902 | $ | [●] | $ | 5,343 | ||||||||
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(1) | Acquisition costs are costs directly related to the acquisition of Perrigo Animal Health, HBH, and VIP, and include diligence, accounting, banking, and other out of pocket costs. |
(2) | Purchase accounting adjustment to inventory represents the portion of costs of sales related to the fair value of inventory adjusted as part of the purchase price allocation. During 2019 the amounts relate to the Perrigo Animal Health Acquisition and are part of the Product Segment. During 2018 the costs relate to the VIP Acquisition and are part of the Services Segment. |
(3) | Non-same store revenue and costs relate to Service Segment regional offices, mobile community clinics provided with host partners and wellness centers that have been operating for less than six full trailing quarters. |
(4) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, brand realignment and IT conversion costs, in addition to costs associated with vet services clinics that were discontinued subsequent to the acquisition of VIP in the Services Segment. These costs are primarily in the Products segment and unallocated corporate for personnel costs, legal and consulting expenses, and IT costs. |
(5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
(6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
The following disclosure will be included in the Form 10-Q under Managements Discussion and Analysis of Financial Condition and Results of OperationsRecent Developments:
Segment Financial Information
Effective for the three months ended September 30, 2019, the Company changed its segment measure of profitability for its reportable segments from segment operating income (loss) to Adjusted EBITDA to better align the way the chief operating decision maker views reportable segment operations in light of changes in the Companys operations, including the increase of manufacturing operations as a result of the Perrigo Animal Health Acquisition in the Products segment and the growth of the Companys wellness centers, host partners, and regions within the Services segment. For comparability purposes, previous periods have been recast to reflect the measure of segment profitability.
November 4, 2019
Page 4
Additionally, in the Services segment, the Company began reporting same-store and non same-store sales for the three months ended September 30, 2019. The term same-store sales refer to revenue in the Services segment from retail service regional offices, mobile community clinics provided within host partners and wellness centers that have been operating for at least six trailing quarters. The Company believes that it takes six quarters for its new Services segments regional offices, community clinics and wellness centers to reach maturity and providing information on a same-store sales basis provides comparability for the Companys mature offices, community clinics and wellness centers. As of September 30, 2019, there were [●] and [●] retail service regional offices, mobile community clinics provided within host partners and wellness centers that were included in same-store sales and non same-store sales, respectively.
The following disclosure will be included in the Form 10-Q under Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations:
The following tables set forth financial information relating to the Companys operating segments for the periods presented:
For the three months ended | For the nine months ended | |||||||||||||||
$s in 000s |
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
Services segment sales: |
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Same-store sales |
$ | [●] | $ | 21,386 | $ | [●] | $ | 59,727 | ||||||||
Non same-store sales |
[●] | 1,472 | [●] | 2,775 | ||||||||||||
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Net services segment sales |
[●] | 22,858 | [●] | 62,502 | ||||||||||||
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Product segment sales |
[●] | 108,524 | [●] | 355,088 | ||||||||||||
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Total net sales |
[●] | 131,382 | [●] | 417,590 | ||||||||||||
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[●] | [●] | |||||||||||||||
Adjusted EBITDA |
[●] | [●] | ||||||||||||||
Products |
[●] | 14,642 | [●] | 41,337 | ||||||||||||
Services |
[●] | 5,160 | [●] | 12,236 | ||||||||||||
Corporate |
[●] | (6,393 | ) | [●] | (18,514 | ) | ||||||||||
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Total Adjusted EBITDA |
$ | [●] | $ | 13,409 | $ | [●] | $ | 35,059 | ||||||||
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The following disclosure will be included in the Form 10-Q under Managements Discussion and Analysis of Financial Condition and Results of OperationsThree Months Ended September 30, 2019 Compared With Three Months Ended September 30, 2019 (with corresponding disclosure related to the nine month period ended September 30, 2019 compare to the nine month period ended September 30, 2019, which has not been included herein):
Net sales
Consolidated Net Sales
Consolidated net sales increased $[●] million or [●]%, to $[●] for the three months ended September 30, 2019, compared to $131.4 million for the three months ended September 30, 2018. This increase was driven by the Perrigo Animal Health Acquisition, other growth in the Products segment, and the opening of additional wellness centers in the Services segment.
Products Segment
Product sales increased $[●] million or [●]%, to $[●] million for the three months ended September 30, 2019, compared to $108.5 million for the three months ended September 30, 2018. This increase was driven by acquisitions, resulting in approximately $[●] million in sales growth, and by velocity growth within current customers.
November 4, 2019
Page 5
Services Segment
Service revenue increased $[●] million, or [●]% from $22.9 million to $[●] million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The Services revenue growth was driven by the opening of new wellness centers and increasing pet counts within existing community clinics, as a result of scheduling improvements. Same-store sales increased $[●] million, or [●]% to $[●] million for the three months ended September 30, 2019 compared to $21.4 million for the three months ended September 30, 2018. The increase in same-store sales was driven by two additional wellness centers included in same-store sales for the 2019 period that were not in the same-store sales base for the 2018 periods, as well as increasing pet counts within existing community clinics, offset slightly by the opening of new wellness centers in the vicinity of current mobile clinics. Non same-store sales increased $[●] million, or [●]% to $[●] million for the three months ended September 30, 2019 compared to $1.5 million for the three months ended September 30, 2018. The increase in non same-store sales was a result of opening [●] additional wellness centers in the 2019 period, as well the maturation of clinics opened in the past six trailing quarters.
Gross profit
Gross profit increased by $[●] million, or [●]%, to $[●] million for the three months ended September 30, 2019, compared to $24.2 million for the three months ended September 30, 2018. This increase is due to the significant sales growth.
Gross margin decreased to [●]% for the three months ended September 30, 2019, from 18.4% for the three months ended September 30, 2018, driven by purchase accounting adjustments related to the Perrigo Animal Health Acquisition, and the other product sales growth being primarily in lower margin items.
General and administrative expenses
Consolidated general and administrative (G&A) expenses increased by $[●] million or [●]% to $[●]million for the three months ended September 30, 2019 compared to $17.6 million for the three months ended September 30, 2018. As a percentage of net sales, G&A expenses increased from 13.4% for the third quarter of 2018 to [●]% for the third quarter of 2019, primarily driven by costs related to the acquisition of Perrigo Animal Health and overall expansion of corporate services.
Products Segment
Product segment G&A increased $[●] million or [●]%, to $[●] million for the three months ended September 30, 2019, compared to $[●] million for the three months ended September 30, 2018. This increase was driven by acquisitions, resulting in approximately $[●] million in G&A costs related to the acquired businesses, primarily selling and distribution expenses.
Services Segment
Service segment G&A increased $[●] million or [●]%, to $[●] million for the three months ended September 30, 2019, compared to $[●] million for the three months ended September 30, 2018. This increase was driven by additional marketing spend as the Company launches new wellness centers, as well as normal variable costs in supporting the Services revenue growth. Nearly all of the G&A growth relates to clinics opened in the last six quarters and therefore is derived from the non same-store sales base.
November 4, 2019
Page 6
Unallocated Corporate
Unallocated corporate G&A increased $[●] million or [●]% to $[●] million for the three months ended September 30, 2019 from $[●] million for the three months ended September 30, 2018. The increase was driven by costs related to the Perrigo Animal Health Acquisition, including $[●] million of acquisition costs and $[●] million related to contract termination to adjust service providers. Stock based compensation expense has grown by $[●] million on normal corporate growth, amortization has grown by $[●] million, related to the additional acquisitions, and expenses have grown due to additional corporate infrastructure related to acquisitions, including the administrative departments at the Companys new subsidiaries of $[●] million, as well as growth in the headquarters overhead related to corporate employees. This was offset slightly by reduction of corporate overhead as duplicate positions have been eliminated as functions are centralized.
Pre-tax net income
As a result of the factors above, consolidated pre-tax net (loss) income decreased $[●] million to $[●] million for the three months ended September 30, 2019 compared to pre-tax net income of $4.7 million for the three months ended September 30, 2018. The reduction of pre-tax income was driven by expenses related to the Perrigo Animal Health Acquisition, such as acquisition expenses included in unallocated Corporate, SKU rationalization costs, and integration costs within the Product Segment, as well as growing net losses related to new clinics in the Services Segment.
Provision for income taxes
Our effective tax rate was [●]% and 17.0% for the three months ended September 30, 2019 and 2018, respectively, with a tax benefit of $[●] million and a tax expense of $0.8 million. The Companys tax rate is impacted by the ownership structure, which changes over time.
Segment Adjusted EBITDA
Effective during the three months ended September 30, 2019, the Company changed its segment measure of profitability for its reportable segments from segment operating income (loss) to Adjusted EBITDA to better align the way the chief operating decision maker views reportable segment operations in light of changes in the Companys operations, including the increase of manufacturing operations as a result of the Perrigo Animal Health Acquisition in the Products segment and the growth of the Companys wellness centers, host partners, and regions within the Services segment. For comparability purposes, previous periods have been recast to reflect the measure of segment profitability.
Products Segment
Product segment Adjusted EBITDA increased $[●] million, or [●]% to $[●] million for the three months ended September 30, 2019 compared to $14.7 million for the three months ended September 30, 2018. Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced by PetIQ, or are distributed for other manufacturers. The significant growth in Products Adjusted EBITDA relates to significant sales growth as well as the Perrigo Animal Health Acquisition and HBH Acquisition ($[●] million of additional sales), which expanded the Companys manufacturing capabilities as well as added additional brands of products. Adjustments related to the segment include a purchase accounting adjustment for the step up of inventory to fair value of $[●] million, depreciation on production assets, and costs related to the Companys SKU rationalization process of $[●] million which resulted in disposal of or a reserve on inventory not expected to be sold due to brand re-alignment.
November 4, 2019
Page 7
Services Segment
Services segment Adjusted EBITDA increased $[●] million, or [●]% to $[●] million for the three months ended September 30, 2019 compared to $5.2 million for the three months ended September 30, 2018. Services segment Adjusted EBITDA can fluctuate considerably for the Services segment based on the volume of pets seen in clinics, due to the relatively fixed cost nature of a clinic. Additionally, Service segment earnings are impacted by the Companys growth strategy of opening new wellness centers and the impact of the Companys same store portfolio, discussed further below. The Services Segment Adjusted EBITDA has grown on increasing pet counts in existing clinics driven by schedule optimization and price alignment, as well as the movement of two wellness centers into the same store base.
Unallocated Corporate
Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including accounting, legal, human resources information technology and headquarters expenses, as well as executive and incentive compensation expenses, and other miscellaneous costs. Unallocated corporate costs have primarily grown due to the growth in the Company, including adding to administrative headcount through acquisitions, as well as headquarters growth to support the larger Company. Adjustments to corporate include expenses related to specific events, such as the acquisition expenses, fair value of the inventory adjustment, integration costs, and the fair value adjustment to the contingent note. Adjustments also include non cash expenses, such as depreciation, amortization, and stock based compensation.
The following tables reconcile Segment pre-tax net income to Adjusted EBITDA for the periods presented.
$s in 000s | Three months ended September 30, 2019 | |||||||||||||||
September 30, 2019 |
Products | Services | Unallocated | Consolidated | ||||||||||||
Pretax net income (loss) |
$ | [●] | $ | [●] | $ | [●] | $ | [●] | ||||||||
Adjustments: |
[●] | [●] | [●] | [●] | ||||||||||||
Depreciation |
[●] | [●] | [●] | [●] | ||||||||||||
Interest |
[●] | [●] | [●] | [●] | ||||||||||||
Amortization |
[●] | [●] | [●] | [●] | ||||||||||||
Acquisition costs |
[●] | [●] | [●] | [●] | ||||||||||||
Stock based compensation expense |
[●] | [●] | [●] | [●] | ||||||||||||
Purchase accounting adjustment to inventory |
[●] | [●] | [●] | [●] | ||||||||||||
Non same-store revenue |
[●] | [●] | [●] | [●] | ||||||||||||
Non same-store costs |
[●] | [●] | [●] | [●] | ||||||||||||
Fair value adjustment of contingent note |
[●] | [●] | [●] | [●] | ||||||||||||
Integration costs and costs of discontinued clinics |
[●] | [●] | [●] | [●] | ||||||||||||
SKU Rationalization |
[●] | [●] | [●] | [●] | ||||||||||||
Clinic launch expense |
[●] | [●] | [●] | [●] | ||||||||||||
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Adjusted EBITDA |
$ | [●] | $ | [●] | $ | [●] | [●] | |||||||||
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$s in 000s | Three months ended September 30, 2018 | |||||||||||||||
September 30, 2018 |
Products | Services | Unallocated | Consolidated | ||||||||||||
Pretax net income (loss) |
$ | 14,053 | $ | 2,260 | $ | (11,610 | ) | $ | 4,703 | |||||||
Adjustments: |
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Depreciation |
589 | 477 | 720 | 1,786 | ||||||||||||
Interest |
| | 2,159 | 2,159 | ||||||||||||
Amortization |
| | 1,294 | 1,294 |
November 4, 2019
Page 8
Acquisition costs |
| | 113 | 113 | ||||||||||||
Stock based compensation expense |
| | 1,224 | 1,224 | ||||||||||||
Purchase accounting adjustment to inventory |
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Non same-store revenue |
| (1,472 | ) | | (1,472 | ) | ||||||||||
Non same-store costs |
| 3,845 | | 3,845 | ||||||||||||
Fair value adjustment of contingent note |
| | (350 | ) | (350 | ) | ||||||||||
Integration costs and costs of discontinued clinics |
| | 57 | 57 | ||||||||||||
Clinic launch expense |
| 50 | | 50 | ||||||||||||
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Adjusted EBITDA |
$ | 14,642 | $ | 5,160 | $ | (6,393 | ) | 13,409 | ||||||||
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The Company will add additional footnote disclosure to the consolidated Adjusted EBITDA reconciliation table included in the Form 10-Q under Managements Discussion and Analysis of Financial Condition and Results of OperationsConsolidated Non-GAAP Financial Measures to provide better clarity as to which of the Companys segments each adjustment relates:
The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented.
For the three months ended | For the nine months ended | |||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||||
Net income |
$ | [●] | $ | 3,902 | $ | [●] | $ | 5,343 | ||||||||
Plus: |
[●] | [●] | ||||||||||||||
Tax expense (benefit) |
[●] | 801 | [●] | 754 | ||||||||||||
Depreciation |
[●] | 1,786 | [●] | 4,816 | ||||||||||||
Amortization |
[●] | 1,294 | [●] | 3,691 | ||||||||||||
Interest |
[●] | 2,159 | [●] | 6,140 | ||||||||||||
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EBITDA |
$ | [●] | $ | 9,942 | $ | [●] | $ | 20,744 | ||||||||
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Acquisition costs(1) |
[●] | 113 | [●] | 3,479 | ||||||||||||
Integration costs and costs of discontinued clinics(2) |
[●] | 57 | [●] | 813 | ||||||||||||
SKU rationalization(3) |
[●] | | [●] | | ||||||||||||
Purchase accounting adjustment to inventory |
[●] | | [●] | 1,502 | ||||||||||||
Stock based compensation expense |
[●] | 1,224 | [●] | 2,678 | ||||||||||||
Fair value adjustment of contingent note |
[●] | (350 | ) | [●] | 250 | |||||||||||
Non same-store revenue(4) |
[●] | (1,472 | ) | [●] | (2,775 | ) | ||||||||||
Non same-store costs(4) |
[●] | 3,845 | [●] | 6,667 | ||||||||||||
Clinic launch expenses(5) |
[●] | 50 | [●] | 1,261 | ||||||||||||
Non-recurring royalty settlement(6) |
[●] | | [●] | 440 | ||||||||||||
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Adjusted EBITDA |
$ | [●] | $ | 13,409 | $ | [●] | $ | 35,059 | ||||||||
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(1) | Acquisition costs relating to acquisitions of VIP, HBH and Perrigo Animal Health. |
(2) | Integration costs and costs of discontinued clinics represent costs related to integrating the acquired businesses, such as personnel costs like severance and signing bonuses, consulting work, contract termination, and IT conversion costs, in addition to costs associated with vet services clinics that were discontinued subsequent to the acquisition of VIP. These costs are primarily in the corporate segment for personnel costs, legal and consulting expenses, and IT costs, the costs of discontinued clinics from 2018 are part of the Services Segment. |
(3) | SKU rationalization relates to the disposal of or reserve to estimated net realizable value for inventory that will either no longer be sold, or will be de-emphasized, as the Company aligns brands between Legacy PetIQ brands and brands acquired as part of the Perrigo Animal Health Acquisition. All costs are included in the Products segment gross margin. |
(4) | Non same-store revenue and costs relate to our Services segment and are from wellness centers, host partners, and regions with less than six full trailing quarters of operating results. |
(5) | Clinic launch expenses relate to our Services segment and represent the nonrecurring costs to open new veterinary wellness centers, primarily employee costs, training, marketing, and rent prior to opening for business. |
(6) | Non-recurring royalty settlement represents a settlement paid to a supplier related to a royalty agreement in place since 2013. |
November 4, 2019
Page 9
The following language will be included in the Earnings Release under Segment Results along with related summary segment result tables and reconciliation:
Products: For the third quarter of 2019, the Product segment net sales increased [●]% to $[●] million and adjusted EBITDA increased [●]% to $[●] million. This compares to Product segment sales and adjusted EBITDA of $108.5 million and $14.7 million, respectively, for the third quarter of 2018. Product segment net sales and Adjusted EBITDA were driven by ongoing strength of the Companys prescription drug programs within retail partner pharmacies both in-store and online, the acquisition of Perrigo Animal Health and related operations, as well as greater SKU penetration within existing accounts.
Services: For the third quarter of 2019, the Services segment net revenues increased [●]% to $[●] million and adjusted EBITDA decreased [●]% to $[●]million. This compares to Service segment net revenues and adjusted EBITDA of $22.9 million and $5.2 million, respectively, for the third quarter of 2018. Services segment growth was achieved from increases in all substantive metrics including total pets, pets per clinic, revenue per pet and revenue per clinic, as well as contribution from new wellness centers.
Services same store revenue increased by [●]% and [●]% for the three and nine months ended September 30, 2019, respectively. The slowing same store growth rate is a result of new wellness centers opening in the vicinity of existing mobile clinics and the anniversary of the significant improvements in scheduling that were largely in place by the third quarter of 2018. Non-same store revenue increased [●]% and [●]% to $[●] million and $[●] million for the three and nine months ended September 30, 2019, respectively. Non same-store growth is a result of opening additional wellness centers as well as wellness centers opened in the prior year maturing, offset slightly by two wellness centers transitioning into the same-store base.
In line with PetIQs veterinarian wellness centers opening plan for 2019, the Company opened two locations in third quarter, or nine locations year-to-date, for a total of 43 units in operation as of September 30, 2019. The Company remains on track to open the balance of its 80 planned locations, or 71 locations, in the fourth quarter of 2019. In October, the Company opened 17 locations; the remaining 54 locations are currently under construction or contracted to start construction with 34 locations planned for November and the remaining 20 locations planned for December. In support of its veterinarian wellness center expansion, the Company operated 36 regional offices as of September 30, 2019.
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If you have any questions regarding any of the responses in this letter, please call me at (312) 558-3722.
Respectfully submitted,
/s/ Christina T. Roupas
Christina T. Roupas
cc: John Newland