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Confidential Submission No. 4 submitted on June 17, 2016

pursuant to the Jumpstart Our Business Startups Act of 2012.

This draft registration statement has not been publicly filed with the Securities and Exchange Commission

and all information herein remains strictly confidential.

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

PetIQ, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware		5122		35-2554312
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(IRS Employer Identification No.)

500 E. Shore Drive, Suite 120

Eagle, Idaho 83616

208-939-8900

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

McCord Christensen

Chief Executive Officer

PetIQ, Inc.

500 E. Shore Drive, Suite 120

Eagle, Idaho 83616

208-939-8900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Please send copies of all communications to:

 

James J. Junewicz, Esq. Winston & Strawn LLP 35 West Wacker Drive Chicago, Illinois 60601 (312) 558-5600		Christopher D. Lueking, Esq. Latham & Watkins LLP 330 North Wabash Avenue, Suite 2800 Chicago, Illinois 60611 (312) 876-7700

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (Do not check if a smaller reporting company)		Smaller reporting company		¨

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered		Proposed Maximum Aggregate Offering Price(1)(2)		Amount of Registration Fee
Class A common stock, $0.001 par value per share		$		$

 

(1)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

(2)	Includes                      shares of Class A common stock subject to the underwriters’ option to purchase additional shares of Class A common stock.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated June 17, 2016

PROSPECTUS

             Shares

 

 

PetIQ, Inc.

CLASS A COMMON STOCK

This is an initial public offering of shares of Class A common stock of PetIQ, Inc. We are offering              shares of our Class A common stock.

Prior to this offering, there has been no public market for our Class A common stock. We anticipate that the initial public offering price will be between $         and $         per share. We have applied to list our Class A common stock on the NASDAQ Global Market under the symbol “PETQ.”

Investing in our Class  A common stock involves substantial risk. See “Risk Factors” beginning on page 19 of this prospectus.

 

		Per Share					Total
Initial public offering price			$					$
Underwriting discounts and commissions(1)			$					$
Proceeds to us, before expenses			$					$

 

(1)	We have agreed to reimburse the underwriters for certain expenses. See “Underwriting.”

Delivery of the shares of Class A common stock is expected to be made on or about                     , 2016.

We have granted the underwriters a 30-day option to purchase up to an additional              shares of Class A common stock at the initial public offering price less underwriting discounts and commissions.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and will be eligible for reduced public company reporting requirements.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

Baird		William Blair

 

 

                    , 2016

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TABLE OF CONTENTS

 

			Page
BASIS OF PRESENTATION			iii
TRADEMARKS			iv
MARKET AND INDUSTRY DATA			iv
PROSPECTUS SUMMARY			1
RISK FACTORS			19
FORWARD-LOOKING STATEMENTS			39
THE TRANSACTIONS			40
USE OF PROCEEDS			44
DIVIDEND POLICY			45
CAPITALIZATION			46
DILUTION			47
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION			49
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA			55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			57
BUSINESS			72
MANAGEMENT			87
EXECUTIVE COMPENSATION			93
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			99
PRINCIPAL STOCKHOLDERS			106
DESCRIPTION OF CAPITAL STOCK			109
SHARES ELIGIBLE FOR FUTURE SALE			116
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS TO NON-U.S. HOLDERS			119
UNDERWRITING			124
LEGAL MATTERS			131
EXPERTS			131
WHERE YOU CAN FIND MORE INFORMATION			131
INDEX TO FINANCIAL STATEMENTS			F-1

 

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You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we nor the underwriters have authorized anyone to provide you with different information. We and the underwriters are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States. See “Underwriting.”

 

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BASIS OF PRESENTATION

In connection with the closing of this offering, we will effect certain organizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions, which we refer to collectively as the “Transactions,” and this offering. See “The Transactions” for a description of the Transactions and a diagram depicting our organizational structure after giving effect to the Transactions and this offering.

As used in this prospectus, unless the context otherwise requires, references to:

 

●

“we,” “us,” “our,” the “Company,” “PetIQ” and similar references refer: (i) following the consummation of the Transactions and this offering, to PetIQ, Inc., a Delaware corporation, and, unless otherwise stated, all of its subsidiaries, including PetIQ Holdings, LLC, a Delaware limited liability company, which we refer to as “HoldCo,” and PetIQ, LLC, an Idaho limited liability company, which we refer to as “OpCo,” and, unless otherwise stated, all of its subsidiaries and (ii) on or prior to the completion of the Transactions and this offering, to HoldCo and, unless otherwise stated, all of its subsidiaries.

 

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“Certain Sponsors” refer to, collectively, Eos Capital Partners IV, L.P., Eos Partners, L.P. and Highland Consumer Fund 1-B Limited Partnership, which prior to the Transactions are the owners of the Sponsor Corps and will contribute the Sponsor Corps to us in exchange for Class A common stock and certain preference notes (the “Certain Sponsor Preference Notes”) in connection with the consummation of this offering.

 

●

“Sponsor Corps” refer to, collectively, ECP IV TS Investor Co., Eos TS Investor Co. and HCP—TS Blocker Corp, each an owner of HoldCo prior to the Transactions that will become our wholly owned subsidiary after giving effect to the Transactions.

 

●

“Continuing LLC Owners” refer to the owners of HoldCo prior to the Transactions (other than the Sponsor Corps) who will exchange certain LLC interests for preference notes (the “Continuing LLC Owner Preference Notes” and, together with the Certain Sponsor Preference Notes, the “Preference Notes”) and/or Class B common stock, continue to own LLC Interests after the Transactions and who may, following the consummation of this offering, exchange their LLC Interests and Class B common stock for shares of our Class A common stock as described in “Certain Relationships and Related Party Transactions—HoldCo Agreement.”

 

●

“LLC Interests” refer to the single class of newly issued common membership interests of HoldCo.

PetIQ is a holding company and will be the sole managing member of HoldCo. HoldCo is a holding company and the sole member of OpCo and has no operations and no assets other than the equity interests of OpCo. Upon the completion of this offering and the application of proceeds therefrom, PetIQ’s principal asset will be LLC Interests of HoldCo held directly and indirectly. OpCo is the predecessor of the issuer, PetIQ, for financial reporting purposes. PetIQ will be the audited financial reporting entity following this offering. Accordingly, this prospectus contains the following historical financial statements:

 

●

PetIQ. Other than the inception balance sheet, dated as of February 29, 2016, the historical financial information of PetIQ has not been included in this prospectus as it is a newly incorporated entity, has no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus.

 

●

OpCo. As we will have no other interest in any operations other than those of OpCo and its subsidiaries, the historical consolidated financial information included in this prospectus is that of OpCo and its subsidiaries.

The unaudited pro forma financial information of PetIQ presented in this prospectus has been derived by the application of pro forma adjustments to the historical consolidated financial statements of OpCo and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to the Transactions

 

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as described in “The Transactions,” including the completion of this offering, as if all such transactions had occurred on January 1, 2015, in the case of the unaudited pro forma consolidated statement of operations data, and as of December 31, 2015 and March 31, 2016, in the case of the unaudited pro forma consolidated balance sheet. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

TRADEMARKS

This prospectus includes our trademarks, trade names and service marks, such as “PetAction Plus,” “VetIQ,” “PetIQ,” “Heart Shield Plus,” “Minties,” “Advecta II,” “TruProfen,” “PetLock Plus,” “Delightibles” and “Betsy Farms,” which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ^®, ™ or ^SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts) and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. The Company’s statement that it is the industry leader in bringing a broad portfolio of Rx and veterinarian-recommended OTC pet medications to national retail stores is based upon the Company’s first-hand experience in the pet medication market as a vendor of pet medications to national retail stores. As a result of its relationship with such national retail stores, the Company knows that no other vendors supply the same breadth of both Rx and OTC medications and wellness products as the Company to such national retailers. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider each of the following risk factors, as well as the other information in this prospectus, including our consolidated financial statements and the related notes, before deciding whether to invest in shares of our Class A common stock. If any of the following risks actually occurs, our business, results of operations and financial condition may be materially adversely affected. In that event, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

We are dependent on a relatively limited number of customers for a significant portion of our net sales.

Our two largest retail customers, Wal-Mart and Sam’s Club, accounted for 41% and 26% of our net sales in 2014, 39% and 21% of our net sales in 2015 and 30% and 29% of our net sales in the first quarter of 2016, respectively. No other retail customer has accounted for 10% or more of our net sales for these periods. In addition, Anda, Inc. (“Anda”), which distributes our products to pharmacies, accounted for 12% of our net sales in 2014, 14% of our net sales in 2015 and 12% of our net sales in the first quarter of 2016. If we were to lose any of our key customers, if any of our key customers reduce the amount of their orders or if any of our key customers consolidate, reduce their store footprint and/or gain greater market power, our business, financial condition and results of operations may be materially adversely affected. We may be similarly adversely impacted if any of our key customers experience any financial or operational difficulties or generate less traffic.

In addition, we generally do not enter into long-term contracts with our retail customers. As a result, we rely on consumers’ continuing demand for our products and our position in the market for all purchase orders. If our retail customers change their pricing, margin expectations or business terms (including through the imposition of warehouse and other fees), change their business strategies as a result of industry consolidation or otherwise, reduce the number of brands or product lines they carry, decrease their advertising or promotional efforts for, or the amount of shelf space they allocate to, our products or allocate greater shelf space to other products, our net sales could decrease and our business, financial condition and results of operations may be materially adversely affected. For example, in the fourth quarter of 2015, Wal-Mart advised us that it would not purchase from us in 2016 certain product lines that accounted for approximately $17 million of our net sales in 2015. However, since then, Wal-Mart has agreed to purchase from us certain new product lines that it has not purchased from us in the past.

We may not be able to successfully implement our growth strategy on a timely basis or at all.

Our future success depends, in large part, on our ability to implement our growth strategy, including introducing products and expanding into new markets, attracting new consumers to our brand and sub-brands, improving placement of our products in the stores of our retail customers and expanding our distribution. In particular, we recently began to expand our sales plan to include online sales. We also plan to expand our product offerings and have given consideration to applying the business model we developed for the sale of pet treats to the sale of a complete array of food products for dogs and cats. Our ability to implement this growth strategy depends, among other things, on our ability to:

 

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develop new proprietary value-branded products and product line extensions that appeal to consumers;

 

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continue to effectively compete in our industry;

 

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increase our brand and sub-brand recognition by effectively implementing our marketing strategy and advertising initiatives;

 

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maintain and, to the extent necessary, improve our high standards for product quality, safety and integrity;

 

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expand and maintain brand and sub-brand loyalty;

 

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secure shelf space in the stores of our retail customers; and

 

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enter into distribution and other strategic arrangements with traditional retailers and other potential distributors of our products.

We may not be able to successfully implement our growth strategy and may need to change our strategy in order to maintain our growth. If we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful, our business, financial condition and results of operations may be materially adversely affected.

We have incurred net losses in the past and may be unable to achieve or sustain profitability in the future.

We incurred net losses in most fiscal years since inception. We incurred net losses of $1.3 million and $11.0 million for the years ended December 31, 2015 and 2014, respectively and a net loss of $0.3 million for the three months ended March 31, 2016. As a result of ongoing losses, as of March 31, 2016, we had an accumulated deficit of $27,144. We expect to continue to incur significant product commercialization and regulatory, sales and marketing and other expenses. In addition, our general and administrative expenses will increase following this offering due to the additional costs associated with being a public company. The net losses we incur may fluctuate significantly from quarter to quarter. We will need to generate additional net sales or increased gross margin to achieve and sustain profitability, and even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.

If we continue to grow rapidly, we may not be able to manage our growth effectively.

Our historical rapid growth has placed and, if continued, may continue to place significant demands on our management and our operational and financial resources. Our organizational structure may become more complex as we add additional staff, and we would likely require more resources to grow and continue to improve our operational, management and financial controls. If we are not able to manage our growth effectively, our business, financial condition and results of operations may be materially adversely affected.

We operate in a highly competitive industry and may lose market share or experience margin erosion if we are unable to compete effectively.

The pet health and wellness industry is highly competitive. We compete on the basis of product and ingredient quality, product availability, quality, palatability, brand awareness, loyalty and trust, product variety and innovation, product packaging and design, shelf space, reputation, price and convenience and promotional efforts. We compete directly and indirectly with both manufacturers and distributors of pet health and wellness products, including online distributors and veterinarians. We face direct competition from companies that distribute various pet medications and pet health and wellness products to traditional retailers, such as Perrigo, Unicharm Company and Central Garden and Pet Company, all of which are larger than we are and have greater financial resources. We also face competition in our other pet health and wellness products category from companies such as Nestlé S.A. (“Nestlé”), Mars, Inc. (“Mars”) and The J.M. Smucker Company (“Smucker”), all of which are larger than we are and have greater financial resources.

Although we do not compete with various human drug distributors today, we have no way to guarantee that they will not enter into the market in the future. These distributors, such as McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health, Inc., are larger than we are and have greater financial resources than we do.

 

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These competitors may be able to identify and adapt to changes in consumer preferences more quickly than us due to their resources and scale. They may also be more successful in marketing and selling their products, better able to increase prices to reflect cost pressures and better able to increase their promotional activity, which may impact us and the entire pet health and wellness industry. If these or other competitive pressures cause our products to lose market share or experience margin erosion, our business, financial condition and results of operations may be materially adversely affected.

We face significant competition from veterinarians and may not be able to compete profitably with them.

We compete indirectly with veterinarians for the sale of pet medications and other health and wellness products. Veterinarians hold a competitive advantage over us because many pet owners may find it more convenient or preferable to purchase these products directly from their veterinarians at the time of an office visit. In order to effectively compete with veterinarians in the future, we may be required to incur additional costs for marketing, promotions and other incentives, which may result in lower operating margins and adversely affect the results of operations.

Resistance from veterinarians to authorize prescriptions, or attempts/efforts on their part to discourage pet owners to purchase from retailers and pharmacies could cause our net sales to decrease and could materially adversely affect our financial condition and results of operations.

Since we began our operations some veterinarians have resisted providing, or simply refuse to provide, pet owners with a copy of their pet’s prescription or authorizing the prescription to an outside pharmacy, thereby effectively preventing outside pharmacies from filling such prescriptions under state law. We have also been informed by customers and consumers that veterinarians on certain occasions have tried to discourage pet owners from purchasing from the retail channel. If the number of veterinarians who refuse to authorize prescriptions should increase, or if veterinarians are successful in discouraging pet owners from purchasing from outside retailers and pharmacies, our net sales could decrease and our financial condition and results of operations may be materially adversely affected.

The Fairness to Pet Owners Act of 2015 may never be enacted into law, and even if it does become law, it may not change consumer behavior.

Traditionally, veterinarians have not offered portable pet prescriptions to pet owners, with the result that pet owners have generally purchased Rx medications directly from veterinarians’ offices. During the current congressional term, however, members of both the House of Representatives and the Senate proposed federal legislation entitled the FTPOA, which would, among other things, require veterinarians in every U.S. state to give a pet owner a copy of his or her pet’s prescription, regardless of whether the owner makes a request. The pet owner would then be free to fill the prescription at a retail store, including at retailers that now sell our products. The proposed legislation could greatly accelerate the shift from consumers purchasing pet Rx medications from veterinarians to purchasing such medications through traditional retail channels. Such acceleration could, in turn, increase our product sales, thereby improving our net sales, financial condition and results of operations. However, the proposed legislation is subject to legislative and political processes and accordingly may never become law. Additionally, even if the proposed legislation were to become law, there can be no guarantee that all veterinarians would follow the law and that it would accelerate or impact current trends of pet owners purchasing pet Rx medications in retail channels.

 

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Any damage to our reputation or our brand or sub-brands may materially adversely affect our business, financial condition and results of operations.

Maintaining, developing and expanding our reputation with consumers, our retail customers and our suppliers is critical to our success. Our brand and sub-brands may suffer if our marketing plans or product initiatives are not successful. The importance of our brand and sub-brands may decrease if competitors offer more products with formulations similar to the products that we manufacture. Further, our brand and sub-brands may be negatively impacted due to real or perceived quality issues or if consumers perceive us as being untruthful in our marketing and advertising, even if such perceptions are not accurate. Product contamination, the failure to maintain high standards for product quality, safety and integrity, including raw materials and ingredients obtained from suppliers, or allegations of product quality issues, mislabeling or contamination, even if untrue or caused by our contract manufacturing partners or raw material suppliers, may reduce demand for our products or cause production and delivery disruptions. We maintain guidelines and procedures to ensure the quality, safety and integrity of our products. However, we may be unable to detect or prevent product and/or ingredient quality issues, mislabeling or contamination, particularly in instances of fraud or attempts to cover up or obscure deviations from our guidelines and procedures. If any of our products become unfit for consumption, cause injury or are mislabeled, we may have to engage in a product recall and/or be subject to liability. Damage to our reputation or our brand or sub-brands or loss of consumer confidence in our products for any of these or other reasons could result in decreased demand for our products and our business, financial condition and results of operations may be materially adversely affected.

Our growth and business are dependent on trends that may change, and our historical growth may not be indicative of our future growth.

The growth of our business depends primarily on the continued shift from consumers purchasing pet health and wellness products from veterinarians to purchasing such products through traditional retail channels, growth of the pet health and wellness products market and popularity of pet ownership, as well as on general economic conditions. These trends may not continue or may change. In the event of a decline in consumers purchasing pet health and wellness products through traditional retail channels, a change in pet health and wellness trends or a decrease in the overall number of pets, or during challenging economic times, we may be unable to persuade our retail customers and consumers to purchase our products, and our business, financial condition and results of operations may be materially adversely affected and our growth rate may slow or stop.

There may be decreased spending on pets in a challenging economic climate.

The United States has from time to time experienced challenging economic conditions, and the global financial markets have recently undergone and may continue to experience significant volatility and disruption. Our business, financial condition and results of operations may be materially adversely affected by a challenging economic climate, including adverse changes in interest rates, volatile commodity markets and inflation, contraction in the availability of credit in the market and reductions in consumer spending. The keeping of pets and the purchase of pet-related products may constitute discretionary spending for some consumers and any material decline in the amount of consumer discretionary spending may reduce overall levels of pet ownership or spending on pets. As a result, a slow-down in the general economy may cause a decline in demand for our products. In addition, we cannot predict how worsening economic conditions would affect our retail customers and suppliers. If economic conditions result in decreased spending on pets and have a negative impact on our retail customers and suppliers, our business, financial condition and results of operations may be materially adversely affected.

 

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Our business depends, in part, on the sufficiency and effectiveness of our marketing and trade promotion programs and incentives.

Due to the highly competitive nature of our industry, we must effectively and efficiently promote and market our products through television, internet and print advertisements as well as through trade promotions and incentives to sustain and improve our competitive position in our market. Marketing investments may be costly. In addition, we may, from time to time, change our marketing strategies and spending, including the timing or nature of our trade promotions and incentives. We may also change our marketing strategies and spending in response to actions by our customers, competitors and other companies that manufacture and/or distribute pet health and wellness products. The sufficiency and effectiveness of our marketing and trade promotions and incentives are important to our ability to retain and improve our market share and margins. If our marketing and trade promotions and incentives are not successful or if we fail to implement sufficient and effective marketing and trade promotions and incentives or adequately respond to changes in industry marketing strategies, our business, financial condition and results of operations may be adversely affected.

If our products are alleged to cause injury or illness or fail to comply with governmental regulations, we may need to recall our products and may experience product liability claims.

Our products may be subject to product recalls, including voluntary recalls or withdrawals, if they are alleged to pose a risk of injury or illness, or if they are alleged to have been mislabeled, misbranded or adulterated or to otherwise be in violation of governmental regulations. We may also voluntarily recall or withdraw products in order to protect our brand or reputation if we determine that they do not meet our standards, whether for quality, palatability, appearance or otherwise. If there is any future product recall or withdrawal, it could result in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation and lost sales due to the unavailability of the product for a period of time, and our business, financial condition and results of operations may be materially adversely affected. In addition, a product recall or withdrawal may require significant management attention and could result in enforcement action by regulatory authorities.

We also may be subject to product liability claims if the consumption or use of our products is alleged to cause injury or illness. Although we carry product liability insurance, our insurance may not be adequate to cover all liabilities that we may incur in connection with product liability claims. For example, punitive damages are generally not covered by insurance. If we are subject to substantial product liability claims in the future, we may not be able to continue to maintain our existing insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage. This could result in future product liability claims being uninsured. If there is a product liability judgment against us or a settlement agreement related to a product liability claim, our business, financial condition and results of operations may be materially adversely affected. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims could be costly and time-consuming and may require management to spend time defending claims rather than operating our business.

To the extent our retail customers purchase products in excess of consumer consumption in any period, our net sales in a subsequent period may be adversely affected as our retail customers seek to reduce their inventory levels.

From time to time, our retail customers may purchase more products than they expect to sell to consumers during a particular time period. Our retail customers may grow their inventory in anticipation of, or during, our promotional events, which typically provide for reduced prices during a specified time or other incentives. Our retail customers may also increase inventory in anticipation of a price increase for our products, or otherwise over-order our products as a result of overestimating demand for our products. If a retail customer increases its inventory during a particular reporting period as a result of a promotional event, anticipated price increase or otherwise, then our net

 

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sales during the subsequent reporting period may be adversely impacted as our retail customers seek to reduce their inventory to customary levels. This effect may be particularly pronounced when the promotional event, price increase or other event occurs near the end or beginning of a reporting period or when there are changes in the timing of a promotional event, price increase or similar event, as compared to the prior year. To the extent our retail customers seek to reduce their usual or customary inventory levels or change their practices regarding purchases in excess of consumer consumption, our net sales and results of operations may be materially adversely affected in that or subsequent periods.

We may not be able to manage our manufacturing and supply chain effectively, which may adversely affect our results of operations.

We must accurately forecast demand for all of our products in order to ensure that we have enough products available to meet the needs of our retail customers. Our forecasts are based on multiple assumptions that may cause our estimates to be inaccurate and affect our ability to obtain adequate manufacturing capacity (whether our own manufacturing capacity or contract manufacturing capacity) in order to meet the demand for our proprietary value-branded products, which could prevent us from meeting increased retail customer or consumer demand and harm our brand, our sub-brands and our business. If we do not accurately align our manufacturing capabilities with demand, our business, financial condition and results of operations may be materially adversely affected.

If for any reason we were to change any one of our contract manufacturers, we could face difficulties that might adversely affect our ability to maintain an adequate supply of our proprietary value-branded products, and we would incur costs and expend resources in the course of making the change. Moreover, we might not be able to obtain terms as favorable as those received from our current contract manufacturers, which in turn would increase our costs.

In addition, we must continuously monitor our inventory and product mix against forecasted demand. If we underestimate demand, we risk having inadequate supplies. We also face the risk of having too much inventory on hand that may reach its expiration date and become unsalable, and we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory. If we are unable to manage our supply chain effectively, our operating costs could increase and our profit margins could decrease.

We rely on our contract manufacturing partners to produce a significant portion of our products and disruptions in our contract manufacturers’ systems or events outside our control could increase our cost of sales, adversely affect our net sales and injure our reputation and customer relationships, thereby harming our business.

We have agreements with several contract manufacturers, who produce a significant portion of our proprietary value-branded products. The loss of any of these contract manufacturers or the failure for any reason of any of these contract manufacturers to fulfill their obligations under their agreements with us, including a failure to meet our quality controls and standards, may result in disruptions to our supply of products. We may be unable to locate an additional or alternate contract manufacturing arrangement in a timely manner or on commercially reasonable terms, if at all. Identifying a suitable manufacturer is an involved process that requires us to become satisfied with the prospective manufacturer’s level of expertise, quality control, responsiveness and service, financial stability and labor practices.

Moreover, in the event of a disruption in our contract manufacturers’ systems, we may be unable to locate alternative manufacturers of comparable quality at an acceptable price, or at all. The manufacture of our products may not be easily transferable to other sites in the event that any of our contract manufacturers experience breakdown, failure or substandard performance of equipment, disruption of supply or shortages of raw materials and other supplies, labor problems, power outages, adverse weather conditions and natural disasters or the need to comply with

 

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environmental and other directives of governmental agencies. From time to time, a contract manufacturer may experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of products or require that we incur additional expense by providing financial accommodations to the contract manufacturer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new contract manufacturing arrangement with another provider. Any delay, interruption or increased cost in the proprietary value-branded products that might occur for any reason could affect our ability to meet customer demand for our products, adversely affect our net sales, increase our cost of sales and hurt our results of operations. In addition, manufacturing disruption could injure our reputation and customer relationships, thereby harming our business.

We currently purchase our distributed Rx and OTC medications from veterinarians and other third-party distributors and we are not an authorized distributor of these medications. We do not have any guaranteed supply of medications at any pre-established prices.

The majority of our net sales are attributable to sales of distributed, third-party Rx and OTC medications. Historically, substantially all the major pharmaceutical manufacturers have declined to sell Rx and OTC pet medications directly to us. In order to assure a supply of these medications, we purchase medications from various secondary sources, the majority of which are veterinarians. We anticipate that we will continue to rely upon secondary sources for our distributed medications.

We cannot guarantee that if we continue to purchase Rx and OTC medications from secondary sources that we will be able to purchase an adequate supply to meet our customers’ demands, or that we will be able to purchase these medications at competitive prices. As these medications represent a significant portion of our net sales, our failure to fill customer orders for these medications could adversely impact our net sales. If we are forced to pay higher prices for these medications to ensure an adequate supply, we cannot guarantee that we will be able to pass along to our customers any increases in the prices we pay for these medications. Additionally, in the event that the manufacturers of these Rx and OTC medications take action to prohibit our secondary sources from selling such medications to us entirely, or dictate the pricing at which our secondary suppliers sell such medications to us or that our retail customers sell such medications to end consumers, our financial condition and results of operations could be materially and adversely affected.

If any of our independent transportation providers experience delays or disruptions, our business could be adversely affected.

We currently rely on independent transportation service providers both to ship products to our manufacturing and distribution warehouses from our third-party suppliers and contract manufacturers and to ship products from our manufacturing and distribution warehouses to our retail customers. Our utilization of these delivery services, or those of any other shipping companies that we may elect to use, is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact the shipping company’s ability to provide delivery services sufficient to meet our shipping needs. If any of the foregoing occurs, our business, financial condition and results of operations may be materially adversely affected.

We may seek to grow our business through acquisitions of or investments in new or complementary businesses, facilities, technologies or products, or through strategic alliances, and the failure to manage acquisitions, investments or strategic alliances, or the failure to integrate them with our existing business, could have a material adverse effect on us.

From time to time we may consider opportunities to acquire or make investments in new or complementary businesses, facilities, technologies or products, or enter into strategic alliances, that may enhance our capabilities, expand our manufacturing network, complement our current products or expand the breadth of our markets.

 

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Potential and completed acquisitions and investments and other strategic alliances involve numerous risks, including:

 

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problems integrating the purchased business, facilities, technologies or products;

 

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issues maintaining uniform standards, procedures, controls and policies;

 

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unanticipated costs associated with acquisitions, investments or strategic alliances;

 

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diversion of management’s attention from our existing business;

 

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adverse effects on existing business relationships with suppliers, contract manufacturers, and retail customers;

 

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risks associated with entering new markets in which we have limited or no experience;

 

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potential loss of key employees of acquired businesses; and

 

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increased legal and accounting compliance costs.

We do not know if we will be able to identify acquisitions or strategic relationships we deem suitable, whether we will be able to successfully complete any such transactions on favorable terms or at all or whether we will be able to successfully integrate any acquired business, facilities, technologies or products into our business or retain any key personnel, suppliers or customers. Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, facilities, technologies and products and to obtain any necessary financing. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. If we are unable to integrate any acquired businesses, facilities, technologies and products effectively, our business, results of operations and financial condition could be materially adversely affected.

The growth of our business depends in part on our ability to introduce new products and improve existing products, and our research and development and partnership efforts may fail to generate new product developments.

A key element of our growth strategy depends on both our existing product portfolio and our ability to develop and market new products and improvements to our existing products, including those that we may develop through partnerships. The success of our innovation and product development efforts is affected by the technical capability of our product development staff and third-party consultants in developing and testing new products, including complying with governmental regulations, our attractiveness as a partner for outside research and development scientists and entrepreneurs and the success of our management and sales team in introducing and marketing new products.

We may be unable to determine with accuracy when or whether any of our products now under development will be approved or launched, and we may be unable to develop or otherwise acquire product candidates or products. Additionally, we cannot predict whether any such products, once launched, will be commercially successful. Furthermore, the timing and cost of our R&D initiatives may increase as a result of additional government regulation or otherwise, making it more time-consuming and/or costly to research, test and develop new products. If we are unable to successfully develop or otherwise acquire new products, our financial condition and results of operations may be materially adversely affected.

Failure to protect our intellectual property could harm our competitive position or require us to incur significant expenses to enforce our rights.

Our success depends in part on our ability to protect our intellectual property rights. Our trademarks such as “PetAction Plus,” “VetIQ,” “PetIQ,” “PetLock Plus,” “Delightibles” and “Betsy Farms” are valuable assets that support our brand, sub-brands and consumers’ perception of our products. We rely on trademark, copyright, trade

 

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secret, patent and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our trademarks, trade names, proprietary information, technologies and/or processes. Our non-disclosure agreements and confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes and may not provide an adequate remedy in the event of unauthorized disclosure of such information, which could harm our competitive position. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for some of our intellectual property rights and trade secrets in foreign countries. We may need to engage in litigation or similar activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others. Any such litigation could require us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. If we fail to protect our intellectual property, our business, financial condition and results of operations may be materially adversely affected.

We may be subject to intellectual property infringement claims or other allegations, which could result in substantial damages and diversion of management’s efforts and attention.

We have obligations to respect third-party intellectual property. The steps we take to prevent misappropriation, infringement or other violation of the intellectual property of others may not be successful. From time to time, third parties have asserted intellectual property infringement claims against us and our retail customers and may continue to do so in the future. Although we believe that our products and manufacturing processes do not infringe in any material respect upon proprietary rights of other parties and/or that meritorious defenses would exist with respect to any assertions of infringement of other parties, we may from time to time be found to infringe on the proprietary rights. For example, patent applications in the United States and some foreign countries are generally not publicly disclosed until the patent application is published, and we may not be aware of currently filed patent applications that relate to our products or processes. If patents later issue on these applications, we may be found liable for subsequent infringement. Such claims that our products or processes infringe these rights, regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. In part due to the complex technical issues and inherent uncertainties in intellectual property litigation, we cannot predict whether we will prevail in such proceedings. If such proceedings result in an adverse outcome, we could, among other things, be required to:

 

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pay substantial damages (potentially treble damages in the United States);

 

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cease the manufacture, use or sale of the infringing products;

 

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discontinue the use of the infringing processes;

 

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expend significant resources to develop non-infringing processes; and

 

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enter into licensing arrangements with the third party claiming infringement, which may not be available on commercially reasonable terms, or may not be available at all.

If any of the foregoing occurs, our ability to compete could be affected and our business, financial condition and results of operations may be materially adversely affected.

Adverse litigation judgments or settlements resulting from legal proceedings relating to our business operations could materially adversely affect our business, financial condition and results of operations.

From time to time, we are subject to allegations, and may be party to legal claims and regulatory proceedings, relating to our business operations. Such allegations, claims and proceedings may be brought by third parties, including our customers, employees, governmental or regulatory bodies or competitors. Defending against such claims and proceedings, regardless of their merits or outcomes, is costly and time consuming and may divert management’s attention and personnel resources from our normal business operations, and the outcome of many

 

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of these claims and proceedings cannot be predicted. If any of these claims or proceedings were to be determined adversely to us, a judgment, a fine or a settlement involving a payment of a material sum of money were to occur, or injunctive relief were issued against us, our reputation could be affected and our business, financial condition and results of operations could be materially adversely affected.

A failure of one or more key information technology systems, networks, or processes may materially adversely affect our ability to conduct our business.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our sales and marketing, accounting and financial and legal and compliance functions, engineering and product development tasks, research and development data, communications, supply chain, order entry and fulfillment and other business processes. We also rely on third parties and virtualized infrastructure to operate and support our information technology systems. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer.

In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyber-attacks and computer viruses. The failure of our information technology systems to perform as a result of any of these factors or our failure to effectively restore our systems or implement new systems could disrupt our entire operation and could result in decreased sales, increased overhead costs, excess inventory and product shortages and a loss of important information. Further, to the extent that we have customer information in our databases, any unauthorized disclosure of, or access to, such information could result in claims under data protection laws and regulations and could damage our reputation and result in lost sales. If any of these risks materialize, our reputation and our ability to conduct our business may be materially adversely affected.

We are subject to extensive and ongoing governmental regulation and we may incur material costs in order to comply with existing or future laws and regulations, and our failure to comply may result in enforcement, recalls and other adverse actions or significant penalties.

We are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and safety, natural resources and the environment. See “Business—Government Regulation.” Our operations are subject to extensive and ongoing regulation by the FDA, the U.S. Environmental Protection Agency (the “EPA”), the U.S. Department of Agriculture (the “USDA”), the Florida Department of Health and by various other federal, state, local and foreign authorities regarding the manufacturing, processing, packaging, storage, distribution, advertising, labeling and import and export of our products, including drug and food safety standards. Our operations also are subject to regulation regarding the availability and use of pesticides, emissions and discharges to the environment, and the treatment, handling, storage and disposal of materials and wastes. Many of these laws and regulations are becoming increasingly stringent and compliance with them is becoming increasingly expensive. Costs of compliance, and the impacts on us of any non-compliance, with any such laws and regulations could materially adversely affect our business, financial condition and results of operations.

Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

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restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

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fines, warning letters or holds on target animal studies;

 

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refusal by applicable regulatory authorities to approve pending applications or supplements to approved applications, or suspension or revocation of product approvals;

 

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product seizure or detention, or refusal to permit the import or export of products; and

 

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injunctions or the imposition of civil or criminal penalties.

Regulatory policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of any current or future product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business.

Our business is also affected by export, primarily with respect to Canada, and import controls and similar laws and regulations, both in the United States and elsewhere. Issues such as national security or health and safety, which may slow or otherwise restrict imports or exports, may adversely affect our business, financial condition and results of operations. Violations of or liability under any of these laws and regulations may result in administrative, civil or criminal fines or penalties against us, revocation or modification of applicable permits, environmental investigations or remedial activities, voluntary or involuntary product recalls, warning or untitled letters or cease and desist orders against or restrictions on operations that are not in compliance, among other things. Liability may be imposed under some laws and regulations regardless of fault or knowledge and regardless of the legality of the original action. These laws and regulations, or their interpretation, may change in the future and we may incur (directly, or indirectly through our contract manufacturers) material costs to comply with current or future laws and regulations or in any required product recalls.

An increase in the costs associated with maintaining our international operations could adversely affect our results of operations.

Certain factors may cause our international costs of doing business to exceed our comparable costs in North America. For example, in some countries, expanding our product offerings may require a close commercial relationship with one or more local banks, a shared ownership interest with a local entity or registration as a bank under local law. Such requirements may reduce our revenue, increase our costs or limit the scope of our activities in particular countries.

Further, because our international revenue is denominated in foreign currencies, we could become subject to increased difficulties in repatriating money without adverse tax consequences and increased risks relating to foreign currency exchange rate fluctuations. For example, the U.S. dollar has appreciated significantly against the Euro in recent periods. Further, we could be subject to the application of U.S. tax rules to acquired international operations and local taxation of our fees or of transactions on our websites.

We conduct portions of certain functions in regions outside of North America. Any factors that reduce the anticipated benefits, including cost efficiencies and productivity improvements, associated with providing these functions outside of North America, including increased regulatory costs associated with our international operations, could adversely affect our business.

 

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Our success depends on our ability to attract and retain key employees and the succession of senior management.

Our continued growth and success requires us to hire, retain and develop our leadership team. If we are unable to attract and retain talented, highly qualified senior management and other key executives, as well as provide for the succession of senior management, our growth and results of operations may be adversely impacted.

If our cash from operations is not sufficient to meet our current or future operating needs, expenditures and debt service obligations, our business, financial condition and results of operations may be materially adversely affected.

Our ability to generate cash to meet our operating needs, expenditures and debt service obligations will depend on our future performance and financial condition, which will be affected by financial, business, economic legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, competitive pressure and consumer preferences. If our cash flow and capital resources are insufficient to fund our debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. Our credit facility restricts our ability to take these actions and we may not be able to affect any such alternative measures on commercially reasonable terms or at all. If we cannot make scheduled payments on our debt, the lenders under our senior secured credit facilities can terminate their commitments to loan money, can declare all outstanding principal and interest to be due and payable and foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. In addition, any downgrade of our debt ratings by any of the major rating agencies, which could result from our financial performance, acquisitions or other factors, would also negatively impact our access to additional debt financing (including leasing) or refinancing on favorable terms, or at all. Even if we are successful in taking any such alternative actions, such actions may not allow us to meet our scheduled debt service obligations and, as a result, our business, financial condition and results of operations may be materially adversely affected.

Risks Related to Our Company and Our Organizational Structure

Our principal asset after the completion of this offering will be our interest in HoldCo, and, accordingly, we will depend on distributions from HoldCo to pay our taxes and expenses. HoldCo’s ability to make such distributions may be subject to various limitations and restrictions.

Upon the consummation of this offering, we will be a holding company and will have no material assets other than our ownership of LLC Interests of HoldCo. As such, we will have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of HoldCo and its subsidiaries and distributions we receive from HoldCo. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.

HoldCo will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of LLC Interests, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of HoldCo. Under the terms of the HoldCo Agreement, HoldCo will be obligated to make tax distributions to holders of LLC Interests, including us. These tax distributions will be funded from available cash of HoldCo and its subsidiaries. These tax distributions will be computed, for us, based on our actual tax liability as a result of the net taxable income allocated to us as a result of owning interests in Holdco and, for all other holders of LLC Interests,

 

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based on the net taxable income of Holdco allocated to such holder of LLC Interests multiplied by an assumed, combined tax rate equal to the maximum rate applicable to an individual resident in New York, New York (taking into account the deductibility of state and local taxes and other applicable adjustments). In addition to tax expenses, we will also incur expenses related to our operations. We intend, as its managing member, to cause HoldCo to make cash distributions to the owners of LLC Interests in an amount sufficient to (i) fund all or part of their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses. However, HoldCo’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which HoldCo is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering HoldCo insolvent. Our credit agreement does not currently restrict our ability to make tax distributions, nor do we expect that it (or any successor thereto) should do so after the consummation of the Transactions. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. See “Certain Relationships and Related Party Transactions—HoldCo Agreement—Distributions.” In addition, if HoldCo does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See “—Risks Related to This Offering and Ownership of Our Class A Common Stock” and “Dividend Policy.”

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of our ownership of HoldCo, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

As the sole managing member of HoldCo, we will control and operate HoldCo. On that basis, we believe that our interest in HoldCo is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of HoldCo, our interest in HoldCo could be deemed an “investment security” for purposes of the 1940 Act.

We and HoldCo intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws to become effective immediately prior to the consummation of this offering will contain provisions that may make the merger or acquisition of the Company more difficult without the approval of our board of directors. Among other things:

 

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a staggered board of directors;

 

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removal of directors, only for cause, by a supermajority of the voting power of stockholders entitled to vote;

 

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a provision denying stockholders the ability to call special meetings;

 

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a provision denying stockholders the ability to act by written consent;

 

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provisions waiving the corporate opportunity doctrine with respect to Certain Sponsors and their affiliates;

 

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advance notice requirements for stockholder proposals and nominations;

 

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amendment of our amended and restated charter by a supermajority of the voting power of stockholders entitled to vote; and

 

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the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management, and may discourage, delay or prevent a transaction involving a change of control of our company that is in the best interest of our stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they are viewed as discouraging future takeover attempts. In addition, because we are incorporated in Delaware, we have opted out of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”).

Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.

Our amended and restated certificate of incorporation authorizes our board of directors, without the approval of our stockholders, to issue shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our Class A common stock, which may reduce its value.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.

We are subject to taxes by the U.S. federal, state and local tax authorities, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

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changes in the valuation of our deferred tax assets and liabilities;

 

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expected timing and amount of the release of any tax valuation allowances;

 

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tax effects of stock-based compensation; or

 

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changes in tax laws, regulations or interpretations thereof.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state and local taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

 

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Risks Related to This Offering and Ownership of Our Class A Common Stock

Our equity sponsors and management team, individually or in the aggregate, will have significant influence over us and their respective interests may conflict with yours in the future.

After giving effect to the Transactions, our equity sponsors, Eos, Labore and Highland, will beneficially own approximately     %,     % and     %, respectively, of our outstanding Class A common stock, approximately     %,     % and     %, respectively, of our outstanding Class B common stock and approximately     %,     % and     %, respectively, of the total voting power. In addition, after giving effect to the Transactions, our management team collectively will own     % of our outstanding Class A common stock,     % of our outstanding Class B common stock and     % of the total voting power. As a result, our equity sponsors and founders have, individually or in the aggregate, the ability to significantly influence all matters submitted to our stockholders for approval, including:

 

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changes to the composition of our board of directors, which has the authority to direct our business and appoint and remove our officers;

 

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proposed mergers, consolidations or other business combinations; and

 

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amendments to our certificate of incorporation and bylaws, which govern the rights attached to our shares of common stock.

In addition, three of our directors (Mark First, David Krauser and James Clarke) are affiliated with our equity sponsors.

This concentration of ownership of shares of our Class A common stock could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of shares of our Class A common stock that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our Class A common stock. The interests of our equity sponsors may not always coincide with the interests of the other holders of our Class A common stock. This concentration of ownership may also adversely affect our stock price.

In the ordinary course of their business activities, any one of our equity sponsors and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will provide that none of our equity sponsors, any of their affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Each of our equity sponsors also may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. In addition, any one of our equity sponsors may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a newly public company, and our management will be required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run our business.

As a newly public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements and costs of recruiting and retaining non-executive directors. We also have incurred and will incur costs associated with the

 

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Sarbanes-Oxley Act and related rules implemented by the SEC and NASDAQ. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and, potentially, civil litigation.

There may not be an active trading market for shares of our Class A common stock, which may cause shares of our Class A common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained that would make it difficult for you to sell your shares of common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by agreement between us and the representatives of the underwriters and may not be indicative of the price at which shares of our Class A common stock will trade in the public market after this offering. The market price of our Class A common stock may decline below the initial offering price and you may not be able to sell your shares of our Class A common stock at or above the price you paid in this offering, or at all.

The market price of shares of our Class A common stock may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our Class A common stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly results of operations, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments and adverse publicity about our industry in or individual scandals, and in response the market price of shares of our Class A common stock could decrease significantly. You may be unable to resell your shares of common stock at or above the initial public offering price.

In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us, our industry and our business. Security and industry research analysts do not currently provide research coverage on us, and we cannot assure you that any research analysts will provide research coverage on us or our securities after this offering. If one or more of the analysts who cover us downgrades our Class A common stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our Class A common stock could decrease, which could cause our stock price and trading volume to decline.

Because we have no current plans to pay cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.

We have no current plans to pay cash dividends on our Class A common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our senior secured credit facilities and other indebtedness we may incur, and such other factors as our board of directors may deem relevant.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution of $             per share based on the initial public offering price of $             per share, which is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. In addition, you may also experience additional dilution, or potential dilution, upon future equity issuances to investors or to our employees and directors under our stock option and equity incentive plans. See “Dilution.”

You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately              shares of common stock authorized but unissued. Our amended and restated certificate of incorporation to become effective immediately prior to the consummation of this offering authorizes us to issue these shares of common stock and options relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved shares for issuance under the 2016 Plan. See “Executive Compensation.” Any common stock that we issue, including under the Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

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Future sales, or the perception of future sales, by us or our existing stockholders in the public market following this offering could cause the market price for our Class A common stock to decline.

The sale of substantial amounts of shares of our Class A common stock in the public market, or the perception that such sales could occur, including sales by any one of our equity sponsors, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon completion of this offering we will have a total of              shares of our Class A common stock outstanding. Of the outstanding shares, the shares              sold or issued in this offering (or              shares if the underwriters exercise their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 under the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining outstanding shares of common stock held by our existing owners after this offering will be subject to certain restrictions on resale. We, our executive officers, directors and all our existing stockholders, will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our Class A common stock and certain other securities held by them for 180 days following the date of this prospectus. Robert W. Baird & Co. Incorporated may, in its sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

Upon the expiration of the lock-up agreements described above, all of such              shares (or          shares if the underwriters exercise their option to purchase additional shares in full) will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that each of our equity sponsors will be considered an affiliate 180 days after this offering based on its expected share ownership (consisting of              shares), as well as its board nomination rights. Certain other of our stockholders may also be considered affiliates at that time.

In addition, the Continuing LLC Owners and Certain Sponsors hold registration rights for the sale of              and              shares of our Class A common stock, respectively. Once we register these shares, they will be eligible for resale in the public market, subject only to the lock-up agreements described above and the limitations under Rule 144.

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock issued pursuant to the 2016 Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover              shares of our Class A common stock.

As restrictions on resale end, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

 

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Future offerings of debt securities, which would rank senior to our Class A common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our Class A common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our Class A common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our Class A common stock. Preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our Class A common stock in this offering bear the risk of our future offerings reducing the market price of our Class A common stock and diluting their ownership interest in our Company.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” In particular, while we are an “emerging growth company” (i) we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (ii) we will be exempt from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements, (3) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (4) we will not be required to hold nonbinding advisory votes on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved. We currently intend to take advantage of the reduced disclosure requirements regarding executive compensation. If we remain an “emerging growth company” after 2015, we may take advantage of other exemptions, including the exemptions from the advisory vote requirements and executive compensation disclosures under the Dodd-Frank Wall Street Reform and Customer Protection Act and the exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, meaning that the company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We may remain an “emerging growth company” until the year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an “emerging growth company” earlier under certain circumstances, including (i) if we become a large accelerated filer, (ii) if our gross net sales exceeds $1.0 billion in any year or (3) if we issue more than $1.0 billion in non-convertible notes in any three-year period.

The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our Class A common stock less attractive if we rely on the exemptions

 

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and relief granted by the JOBS Act. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may decline and/or become more volatile.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Although we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties, such as statements about the Transactions, 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. Examples of forward-looking statements include, without limitation:

 

●

statements regarding our strategies, results of operations or liquidity;

 

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statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;

 

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statements of management’s goals and objectives; and

 

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assumptions underlying statements regarding us or our business.

Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and our dependency on a limited number of customers; our ability to implement our growth strategy effectively; our ability to achieve or sustain profitability; competition from veterinarians and others in our industry; failure of the FTPOA to become law; 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 successfully grow our business through acquisitions; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; risks related to our international operations; and our ability to keep and retain key employees. 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.

 

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THE TRANSACTIONS

The Transactions will be effectuated by the Recapitalization Agreement. See “—Organizational Structure Following This Offering” below for a chart depicting our organizational structure following the consummation of the Transactions and this offering. We refer to the consummation of the organizational transactions, including the Contributions and the Reclassification, each as described below, as the “Transactions.”

Prior to this offering and prior to the Contributions described below, the Continuing LLC Owners and the Sponsor Corps directly held all of the issued and outstanding interests in HoldCo, and Certain Sponsors held all of the issued and outstanding interests in the Sponsor Corps. Accordingly, Certain Sponsors had an indirect interest in HoldCo equal to the aggregate interest of the Sponsor Corps in HoldCo. The Sponsor Corps were formed in 2012, and they have no assets, liabilities or operations, other than as holding companies owning direct interests in HoldCo.

Contributions

Pursuant to a contribution agreement to be entered into prior to this offering, Certain Sponsors will contribute all of their interests in the Sponsor Corps to PetIQ. In exchange for this contribution of the Sponsor Corps to PetIQ, Certain Sponsors will receive Certain Sponsor Preference Notes payable by PetIQ in the aggregate amount of $33.7 million and an aggregate of 2,427,320 shares of Class A common stock (which shares represent the remaining value of each Certain Sponsor’s indirect interest in HoldCo immediately prior to the respective contribution after taking into consideration the amount of the applicable Certain Sponsor Preference Note and based on a hypothetical valuation of HoldCo agreed to by the Continuing LLC Owners and the Certain Sponsors). The Certain Sponsor Preference Notes will become due and payable upon the consummation of this offering and will accrue interest at a rate of two percent per annum. Immediately following the contribution of the Sponsor Corps, each Sponsor Corp will become a wholly owned subsidiary of PetIQ. The Contributions will be effected prior to the time our Class A common stock is registered under the Securities Act, and prior to the completion of this offering.

Reclassification

The equity interests of HoldCo currently consist of seven different classes of limited liability company units (Class A, Class B, Class C, Class D, Class E, Class F and Class P). Prior to the completion of this offering, the HoldCo Agreement will be amended and restated to, among other things, modify the capital structure of HoldCo to create a single new class of units, the LLC Interests.

The LLC Interests to be received in the Reclassification will be allocated to the Sponsor Corps and the Continuing LLC Owners. The number of LLC Interests to be allocated to the Sponsor Corps, and therefore indirectly to PetIQ, will be equal to the number of shares of Class A common stock that Certain Sponsors receive in the Contributions (2,427,320 shares of Class A common stock). The Continuing LLC Owners (i) will exchange certain LLC interests for the Continuing LLC Owner Preference Notes payable by PetIQ in the aggregate amount of $35.3 million and (ii) will receive from PetIQ LLC an aggregate of 3,804,573 LLC Interests (which LLC Interests represent the remaining value of each Continuing LLC Owner’s interest in HoldCo immediately prior to the Reclassification after taking into consideration the amount of the applicable Continuing LLC Owner Preference Note and based on a hypothetical valuation of HoldCo agreed to by the Continuing LLC Owners and the Certain Sponsors). The Continuing LLC Owner Preference Notes will become due and payable upon the consummation of this offering and will accrue interest at a rate of two percent per annum. As a result, following the Contributions and the Reclassification, LLC Interests will be held by the Continuing LLC Owners and by PetIQ, which will hold its interests indirectly through the Sponsor Corps. The Reclassification will be effected prior to the time our Class A common stock is registered under the Securities Act and prior to the completion of this offering.

 

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Following the Contributions and the Reclassification, PetIQ will issue to the Continuing LLC Owners one share of Class B common stock for each LLC Interest they hold. The shares of Class B common stock will have no right to receive distributions or dividends, whether cash or stock, but will entitle the holder to one vote per share on matters presented to stockholders of PetIQ. All of the shares of Class A common stock that will be outstanding following the Contributions and the Reclassification, but prior to completion of this offering, will be held by Certain Sponsors.

Pursuant to the HoldCo Agreement, PetIQ will be designated as the sole managing member of HoldCo. Accordingly, PetIQ will have the right to determine when distributions will be made by HoldCo to its members and the amount of any such distributions (subject to the requirements with respect to the tax distributions described below). If PetIQ authorizes a distribution by HoldCo, the distribution will be made to the members of HoldCo pro rata in accordance with the ownership of their respective LLC Interests.

The holders of LLC Interests will incur U.S. federal, state and local income taxes on their allocable share of any taxable income of HoldCo (as calculated pursuant to the HoldCo Agreement). Net profits and net losses of HoldCo will generally be allocated to its members pursuant to the HoldCo Agreement pro rata in accordance with the ownership of their respective LLC Interests. The HoldCo Agreement will provide for cash distributions to the holders of LLC Interests for purposes of funding their tax obligations in respect of the income of HoldCo that is allocated to them. These tax distributions will be funded from available cash of HoldCo and its subsidiaries. These tax distributions will be computed, for us, based on our actual tax liability as a result of the net taxable income allocated to us as a result of owning interests in Holdco and, for all other holders of LLC Interests, based on the net taxable income of Holdco allocated to such holder of LLC Interests multiplied by an assumed, combined tax rate equal to the maximum rate applicable to an individual resident in New York, New York (taking into account the deductibility of state and local taxes and other applicable adjustments).

Immediately following the Reclassification, we will be a holding company and our principal asset will be the LLC Interests we purchase from the Sponsor Corps and acquire from the Continuing LLC Owners. As the sole managing member of HoldCo, we will operate and control all of the business and affairs of HoldCo and, through HoldCo and its subsidiaries, conduct our business. Accordingly, although we will have a minority economic interest in HoldCo, we will have the sole voting interest in, and control the management of, HoldCo. As a result, we will consolidate the financial results of Holdco pursuant to the VIE accounting model, and a portion of our net income (loss) will be allocated to the non-controlling interest to reflect the entitlement of Continuing LLC Owners to a portion of Holdco’s net income (loss). See “Unaudited Pro Forma Condensed Consolidated Financial Information”.

Exchange Rights

Under the HoldCo Agreement, the Continuing LLC Owners (or certain permitted transferees thereof) will have the right, from time to time following this offering and subject to the terms of the HoldCo Agreement, to exchange their LLC Interests, along with a corresponding number of shares of our Class B common stock, for newly issued shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and similar transactions. Our board of directors, which will include directors who hold LLC Interests or are affiliated with holders of LLC Interests and may include such directors in the future, may, at its option, instead cause HoldCo to make a cash payment equal to the volume weighted average market price of one share of our Class A common stock for each LLC Interest exchanged (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the HoldCo Agreement. As a Continuing LLC Owner exchanges LLC Interests, along with a corresponding number of shares of our Class B common stock, for shares of Class A common stock (or receives a cash payment lieu of such Class A common stock), the number of LLC Interests held by PetIQ will be

 

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correspondingly increased as it acquires the exchanged LLC Interests and cancels a corresponding number of shares of Class B common stock. See “Certain Relationships and Related Party Transactions—HoldCo Agreement.”

Offering Transactions

In connection with the completion of this offering, we intend to use a portion of the net proceeds we receive to repay the Preference Notes and to purchase newly issued LLC Interests from HoldCo. See “Use of Proceeds.”

In connection with the Contributions and the Reclassification, we will also indirectly acquire LLC Interests in an amount equal to the number of shares of LLC Interests issued to the Sponsor Corps in the Reclassification as a result of us owning the Sponsor Corps following the Contributions. Accordingly, following this offering, we will hold a number of LLC Interests that is equal to the number of shares of Class A common stock (2,427,320 shares of Class A common stock) that we issued to Certain Sponsors and investors in this offering. HoldCo will reimburse PetIQ for all of the expenses of this offering.

As a result of the Transactions and this offering, upon completion of this offering:

 

●

the investors in this offering will collectively own              shares of our Class A common stock (or              shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing     % of the voting power in the Company (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and, through PetIQ,     % of the economic interest in HoldCo (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

●

Certain Sponsors will collectively own 2,427,320 shares of our Class A common stock, representing     % of the voting power in the Company (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and, through PetIQ,     % of the economic interest in HoldCo (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

●

the Continuing LLC Owners will collectively own 3,804,573 shares of our Class B common stock, representing             % of the voting power in the Company (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and             % of the economic interest in HoldCo (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

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Organizational Structure Following This Offering

The diagram below depicts our organizational structure immediately following this offering, after giving effect to the Transactions, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions, will be approximately $         million, assuming the shares are offered at $         per share (the midpoint of the price range listed on the cover page of this prospectus). A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions. Similarly, an increase or decrease of          shares in the number shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, would increase or decrease our net proceeds from this offering by approximately $         million, assuming no changes in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions.

We intend to use the net proceeds of this offering to (i) pay off the Preference Notes in the aggregate amount of $69.0 million and (ii) purchase          newly issued LLC Interests from HoldCo at a purchase price per interest equal to the initial public offering price per share of Class A common stock, less underwriting discounts and commissions. The Preference Notes will accrue interest at a rate of two percent per annum and will be due and payable immediately upon the consummation of this offering.

We intend to cause HoldCo to use such proceeds to pay fees and expenses of approximately $         million in connection with the Transactions and this offering and for general corporate purposes.

 

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DIVIDEND POLICY

Except for the distributions described under “The Transactions,” we currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our Class A common stock. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. Any future determination to pay dividends to holders of Class A common stock will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by HoldCo and its subsidiaries. Our ability to pay dividends may also be restricted by any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and capitalization as of March 31, 2016 of:

 

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OpCo and its subsidiaries on a historical basis;

 

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PetIQ and its subsidiaries as adjusted to give effect to the Transactions; and

 

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PetIQ and its subsidiaries on a pro forma basis to give effect to the Transactions, the issuance and sale of shares of Class A common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range listed on the cover page of this prospectus, after (i) deducting the estimated underwriting discounts and commissions and (ii) the application of the estimated net proceeds from the offering as described under “Use of Proceeds.”

This information should be read in conjunction with “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

		As of March 31, 2016
		Historical OpCo					PetIQ As Adjusted Before Offering					Pro Forma PetIQ
(in thousands, except share and per share data)
Cash and cash equivalents			$	1,704				$					$
Indebtedness:
			$	29,150				$					$
Total indebtedness
Total equity:
Members’ equity
Class A common stock, par value $0.001 per share; no shares authorized, issued and outstanding on a historical basis;          shares authorized, issued and outstanding on a pro forma basis
Class B common stock, par value $0.001 per share; no shares authorized, issued and outstanding on a historical basis;          shares authorized, issued and outstanding on a pro forma basis
Additional paid-in capital
Total members’ equity/stockholders’ equity				45,649
Noncontrolling interest				(21	)
Total capitalization			$	45,628				$					$

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions. Similarly, an increase or decrease of          shares in the number shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, would increase or decrease our net proceeds from this offering by approximately $         million, assuming no changes in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions.

 

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DILUTION

The Continuing LLC Owners will maintain LLC Interests in HoldCo after the Transactions and this offering. Because the Continuing LLC Owners will not own any Class A common stock or have any right to receive distributions from PetIQ, we have presented dilution in pro forma net tangible book value per share after this offering assuming that all of the holders of LLC Interests (other than those held by PetIQ through the Sponsor Corps) had their LLC Interests exchanged for newly issued shares of Class A common stock on a one-for-one basis (rather than for cash) and the cancellation for no consideration of all of their shares of Class B common stock (which are not entitled to receive distributions or dividends, whether in cash or stock from PetIQ) in order to more meaningfully present the dilutive impact on the investors in this offering. We refer to the assumed exchange of all LLC Interests for shares of Class A common stock as described in the previous sentence as the “Assumed Exchange.”

Dilution is the amount by which the offering price paid by the purchasers of the Class A common stock in this offering exceeds the pro forma net tangible book value per share of Class A common stock after the offering. OpCo’s net tangible book value as of March 31, 2016 was $         million. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding at that date.

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.

Pro forma net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock, after giving effect to the Transactions and this offering and the Assumed Exchange. Our pro forma net tangible book value as of March 31, 2016 would have been approximately $         million, or $         per share of Class A common stock. This amount represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $         per share to investors purchasing shares of Class A common stock in this offering. Similarly, an increase or decrease of          shares in the number of Class A common stock offered by us, as set forth on the cover page of this prospectus, would increase or decrease the pro forma as net tangible book value after giving effect to this offering by $         , or $         per share, and would increase or decrease the dilution in pro form net tangible book value per share to investors in this offering by $         , based on the assumption above.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share								$
Pro forma net tangible book value (deficit) per share as of March 31, 2016 before giving effect to this offering			$
Increase in net tangible book value per share attributable to investors in this offering
Pro forma net tangible book value per share after giving effect to this offering
Dilution in pro forma net tangible book value per share to investors in this offering								$

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, as applicable, pro forma net tangible book value per share after giving effect to this offering by $         million, or $         per share, and would

 

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increase or decrease the dilution in pro forma net tangible book value per share to investors in this offering by $         , based on the assumptions set forth above.

The following table summarizes as of March 31, 2016 on the pro forma basis described above, the number of shares of Class A common stock purchased, the total consideration paid and the average price per share paid by investors in this offering, based upon an assumed initial public offering price of $         per share, the midpoint of the initial public offering price range on the cover page of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

		Shares purchased										Total consideration										Average price per share
		Number					Percent					Amount					Percent
Existing stockholders										%			$							%			$
New investors
Total									100	%									100	%			$

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the total consideration paid by new investors and the total consideration paid by all shareholders by $         million, based on the assumptions set forth above. Similarly, an increase or decrease of          shares in the number of Class A common stock offered by us as set forth on the cover page of this prospectus would increase or decrease the total consideration paid by new investors and the total consideration paid by all shareholders by $         , based on the assumptions set forth above.

Except as otherwise indicated, the discussion and tables above assume the number of shares offered by us remains the same, no exercise of the underwriters’ option to purchase additional shares and no exercise of any outstanding options. If the underwriters’ option to purchase additional shares is exercised in full, our existing stockholders would own approximately     % and purchasers in this offering would own approximately     % of the total number of shares of our Class A common stock outstanding after this offering. If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share after this offering would be $         per share, and the dilution in the pro forma net tangible book value per share to purchasers in this offering would be $         per share.

The tables and calculations above are based on          shares of Class A common stock outstanding as of March 31, 2016 and assume no exercise by the underwriters of their option to purchase up to an additional          shares from us. This number excludes, as of March 31, 2016, an aggregate of          shares of Class A common stock reserved for issuance under the Omnibus Incentive Plan that we intend to adopt in connection with this offering.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma information reflects the impact of this offering, after giving effect to the Transactions discussed in the section of this prospectus entitled “The Transactions.” The following unaudited pro forma consolidated statement of operations for the year ended December 31, 2015 and the three months ended March 31, 2016 give effect to the Transactions and this offering as if the same had occurred on January 1, 2015. The unaudited pro forma balance sheet as of December 31, 2015 and March 31, 2016 give effect to the Transactions and this offering as if the same had occurred on such date.

We have derived the unaudited pro forma consolidated balance sheet and statement of operations as of and for the year ended December 31, 2015 from the audited consolidated financial statements of OpCo as of and for the year ended December 31, 2015 included elsewhere in this prospectus. We have derived the unaudited pro forma consolidated balance sheet and statement of operations as of and for the three months ended March 31, 2016 from the unaudited consolidated financial statements of OpCo as of and for the three months ended March 31, 2016 included elsewhere in this prospectus. The pro forma financial information is qualified in its entirety by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

The pro forma adjustments related to the Transactions, which we refer to as the Transaction Adjustments, are described in the notes to the unaudited pro forma consolidated financial information, and principally include the following:

 

●

the amendment and restatement of the limited liability company agreement of HoldCo to, among other things, (i) modify the capital structure of HoldCo to create a single new class of units, the LLC Interests, (ii) exchange all of the HoldCo existing membership interests for LLC Interests and (iii) appoint PetIQ as the sole managing member of HoldCo;

 

●

the amendment and restatement of PetIQ’s certificate of incorporation to, among other things, (i) provide for Class A common stock and Class B common stock and (ii) issue shares of Class B common stock to the Continuing LLC Owners, on a one-to-one basis with the number of LLC Interests they own;

 

●

the contribution by Certain Sponsors of all of the Sponsor Corps to PetIQ in exchange for the issuance of the Certain Sponsor Preference Notes payable by PetIQ and shares of Class A common stock to Certain Sponsors;

 

●

the exchange by the Continuing LLC Owners of certain LLC Interests for the Continuing LLC Owner Preference Notes;

 

●

the Continuing LLC Owners retaining the remaining LLC Interests;

 

●

a         -for-         stock split of our Class A common stock and Class B common stock; and

 

●

a provision for income taxes and deferred taxes reflected PetIQ as a taxable corporation at an effective rate of        % for the three months ended March 31, 2016 and     % for the year ended December 31, 2015.

The pro forma adjustments related to this offering, which we refer to as the Offering Adjustments, are described in the notes to the unaudited pro forma consolidated financial information, and principally include the following:

 

●

the issuance of shares of our Class A common stock in this offering in exchange for net proceeds of approximately $         (the midpoint of the price range listed on the cover page of this prospectus), after deducting underwriting discounts and commission but before offering expenses;

 

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●

the repayment of the Preference Notes in the aggregate amount of $69.0 million;

 

●

the purchase by PetIQ of        newly issued LLC Interests from HoldCo at purchase price per interest equal to the initial public offering price per share of Class A common stock, less underwriting discounts and commissions; and

 

●

the changes in equity related to the purchase of LLC Interests and the related noncontrolling interest not owned by PetIQ.

The historical consolidated financial position and results of operations of PetIQ have not been presented in the accompanying unaudited pro forma consolidated financial information as PetIQ is a newly incorporated entity as of February 29, 2016, has had no business transactions or activities to date, and had no material assets, liabilities, revenues or expenses during the periods presented in this section. The Transactions and designation of PetIQ as the sole managing member of HoldCo will be accounted for as the combination of entities under common control. HoldCo is the sole member of OpCo and has no operations and no assets other than the equity interests of OpCo. As a result, OpCo will be considered our predecessor for accounting purposes. This will result in the presentation of OpCo’s historical financial statements as the historical financial statements of PetIQ and PetIQ will account for OpCo’s assets and liabilities at their historical carrying amounts.

As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these steps and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses. We have not included any pro forma adjustments relating to these costs.

The pro forma adjustments are based upon available information and methodologies that are factually supportable and directly related to the Transactions and this offering. The unaudited pro forma consolidated financial information includes various estimates that are subject to material change and may not be indicative of what our operations or financial position would have been had the Transactions and this offering taken place on the dates indicated, or that may be expected to occur in the future. For further discussion of these matters, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes included elsewhere in this prospectus.

 

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PetIQ, Inc.

Unaudited Pro Forma Consolidated Balance Sheet Data as of March 31, 2016

 

               

		Historical OpCo					Transaction Adjustments					As Adjusted Before Offering					Offering Adjustments					Pro Forma PetIQ
(dollars in thousands)
Current assets
Cash and cash equivalents			$	1,704
Accounts receivable, net of allowance for doubtful accounts				18,762
Inventories				39,132
Supplier prepayments				3,507
Other current assets				2,323
Total current assets				65,428
Property, plant and equipment, net				13,205
Restricted cash and deposits				250
Other non-current assets				753
Intangible assets, net of accumulated amortization				5,208
Goodwill				5,416
Total assets			$	90,260
Liabilities and member’s equity
Current liabilities
Accounts payable			$	11,703
Accrued wages payable				616
Accrued interest payable				300
Other accrued expenses				327
Current portion of long-term debt and capital leases				3,034
Total current liabilities				15,980
Non-current liabilities
Long-term debt				25,728
Obligations under capital leases, less current installments				409
Deferred acquisition liability				2,154
Other non-current liabilities				361
Total non-current liabilities				28,652
Commitments and contingencies
Equity
Member’s equity				46,034
Accumulated other comprehensive (loss) income				(385	)
Total member’s equity				45,649
Non-controlling interest				(21	)
Total equity				45,628
Total liabilities and equity			$	90,260

 

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PetIQ, Inc.

Unaudited Pro Forma Consolidated Statement of Operations for the Quarter Ended March 31, 2016

 

		Historical OpCo					Transaction Adjustments					As Adjusted Before Offering					Offering Adjustments					Pro Forma PetIQ
(dollars in thousands)
Net sales			$	52,298
Cost of sales				42,526
Gross profit				9,772
Operating expenses
General and administrative expenses				8,063
Operating income				1,709
Interest expense				(901	)
Foreign currency loss, net				(121	)
Loss on debt extinguishment				(993	)
Other income, net				2
Total other expense, net				(2,013	)
Net loss			$	(304	)
Net income attributable to noncontrolling interest			$	1
Net loss attributable to member			$	(305	)
Pro forma weighted average shares of Class A common stock outstanding:(1)
Basic
Diluted
Pro forma net loss per Class A common share:(2)
Basic
Diluted

 

(1)

The shares of Class B common stock do not share in our earnings and therefore are not included in the weighted average shares outstanding or net loss per share. The pro forma weighted average shares outstanding and net loss per share give effect to the Transactions and the issuance and sale of shares of Class A common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range listed on the cover page of this prospectus.

 

(2)

The basic and diluted pro forma net loss per share of Class A common stock represents net loss attributable to PetIQ divided by the combination of shares of Class A common stock owned by the Sponsor Corps after giving effect to the Transactions and the issuance and sale of shares of Class A common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range listed on the cover page of this prospectus.

 

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PetIQ, Inc.

Unaudited Pro Forma Consolidated Balance Sheet Data as of December 31, 2015

 

               

		Historical OpCo					Transaction Adjustments					As Adjusted Before Offering					Offering Adjustments					Pro Forma PetIQ
(dollars in thousands)
Current assets
Cash and cash equivalents			$	3,250
Accounts receivable, net of allowance for doubtful accounts				14,512
Inventories				33,685
Supplier prepayments				7,501
Other current assets				1,370
Total current assets				60,318
Property, plant and equipment, net				12,960
Restricted cash and deposits				7,144
Other non-current assets				757
Intangible assets, net of accumulated amortization				5,576
Goodwill				5,580
Total assets			$	92,335
Liabilities and member’s equity
Current liabilities
Accounts payable			$	9,210
Accrued wages payable				1,203
Accrued interest payable				270
Other accrued expenses				329
Current portion of long-term debt and capital leases				153
Total current liabilities				11,165
Non-current liabilities
Long-term debt				32,052
Obligations under capital leases, less current installments				395
Deferred acquisition liability				2,053
Other non-current liabilities				395
Total non-current liabilities				34,895
Commitments and contingencies
Equity
Member’s equity				46,339
Accumulated other comprehensive (loss) income				(42	)
Total member’s equity				46,297
Non-controlling interest				(22	)
Total equity				46,275
Total liabilities and equity			$	92,335

 

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PetIQ, Inc.

Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2015

 

		Historical OpCo					Transaction Adjustments					As Adjusted Before Offering					Offering Adjustments					Pro Forma PetIQ
(dollars in thousands)
Net sales			$	205,687
Cost of sales				166,529
Gross profit				39,158
Operating expenses
General and administrative expenses				35,588
Operating income				3,570
Interest expense				(3,545	)
Foreign currency gain, net				75
Loss on debt extinguishment				(1,449	)
Total other expense, net				(4,919	)
Net loss			$	(1,349	)
Net loss attributable to noncontrolling interest			$	(7	)
Net loss attributable to member			$	(1,342	)
Pro forma weighted average shares of Class A common stock outstanding:(1)
Basic
Diluted
Pro forma net loss per Class A common share:(2)
Basic
Diluted

 

(1)

The shares of Class B common stock do not share in our earnings and therefore are not included in the weighted average shares outstanding or net loss per share. The pro forma weighted average shares outstanding and net loss per share give effect to the Transactions and the issuance and sale of shares of Class A common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range listed on the cover page of this prospectus.

 

(2)

The basic and diluted pro forma net loss per share of Class A common stock represents net loss attributable to PetIQ divided by the combination of shares of Class A common stock owned by the Sponsor Corps after giving effect to the Transactions and the issuance and sale of shares of Class A common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range listed on the cover page of this prospectus.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present the selected historical consolidated financial and other data for OpCo and its subsidiaries. OpCo is the predecessor of the issuer, PetIQ, for financial reporting purposes.

The selected consolidated statement of operations data for each of the years in the two-year period ended December 31, 2015 and the selected consolidated balance sheet data as of December 31, 2015 and 2014 are derived from the audited consolidated financial statements of OpCo and its subsidiaries included elsewhere in this prospectus. The selected consolidated statement of operations data for the fiscal quarters ended March 31, 2016 and 2015 and the selected consolidated balance sheet data as of March 31, 2016 are derived from the unaudited consolidated financial statements of OpCo included elsewhere in this prospectus.

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full year. The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus.

The selected historical consolidated financial and other data of PetIQ have not been presented as PetIQ is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

		Historical OpCo
		Three Months Ended March 31,										Year ended December 31,
		2016					2015					2015					2014
(dollars in thousands, except per share data)
Consolidated statement of operations data:
Net sales			$	52,298				$	55,570				$	205,687				$	161,491
Cost of sales				42,526					43,209					166,529					138,754
Gross profit				9,772					12,361					39,158					22,737
Operating expenses
General and administrative expenses				8,063					6,701					35,588					32,858
Operating income (loss)				1,709					5,660					3,570					(10,121	)
Other expense
Other income (expense), net				2					—					—					(12	)
Loss on debt extinguishment				(993	)				(1,449	)				(1,449	)				—
Foreign currency (loss) gain, net				(121	)				261					75					122
Interest expense				(901	)				(762	)				(3,545	)				(980	)
Total other expense				(2,013	)				(1,950	)				(4,919	)				(870	)
Net (loss) income				(304	)				3,710				$	(1,349	)			$	(10,991	)
Pro forma weighted average shares used for computation of (unaudited):(1)
Basic
Diluted
Pro forma net (loss) income per common share (unaudited):(1)
Basic													$					$
Diluted													$					$

 

(1)	Gives effect to the Transactions and this offering. See “Unaudited Pro Forma Consolidated Financial Information” for a detailed presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments.

 

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		Historical OpCo
		As of March 31,					As of December 31,
		2016					2015					2014
(dollars in thousands)
Consolidated balance sheet data:
Cash and cash equivalents			$	1,704				$	3,250				$	1,370
Total assets				90,260					92,335					70,586
Total debt				29,150					32,935					14,486
Total liabilities				44,632					46,060					22,447
Total members’/stockholders’ equity				45,628					46,275					48,139

 

		Historical OpCo
Other Data(a)		Three Months Ended March 31,										Year Ended December 31,
		2016					2015					2015					2014
(dollars in thousands)
EBITDA			$	1,345				$	5,065				$	4,773				$	(7,713	)
Adjusted EBITDA				3,806					7,025					11,381					(5,386	)
Capital Expenditures				753					372					1,550					7,664

 

(a)	EBITDA and Adjusted EBITDA are non-GAAP financial measures. The following table reconciles net loss, the most comparable GAAP measure, to EBITDA and Adjusted EBITDA for the periods presented:

 

		Three Months Ended March 31,										Year Ended December 31,
		2016					2015					2015					2014
(dollars in thousands)
Net (loss) income			$	(304	)			$	3,710				$	(1,349	)			$	(10,991	)
Non-GAAP adjustments:
Depreciation				476					454					1,842					1,456
Amortization				272					139					735					842
Interest				901					762					3,545					980
EBITDA				1,345					5,065					4,773					(7,713	)
Loss on debt extinguishment(1)				993					1,449					1,449					—
Litigation expenses(2)				1,349					310					2,622					1,867
Costs associated with becoming a public company				—					86					626					—
Supplier receivable write-off(3)				—					—					1,449					—
Management fees(4)				119					115					462					460
Adjusted EBITDA			$	3,806				$	7,025				$	11,381				$	(5,386	)

 

(1)	Loss on debt extinguishment reflects costs relating to the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees and termination fees.

 

(2)	These litigation expenses relate to cases involving the Company that were favorably resolved in the second quarter of 2016. The Company expects litigation expenses to decline in 2017.

 

(3)

During 2015 the Company terminated its relationship with a supplier in accordance with a supply agreement, resulting in the Company writing off the full amount of cash advanced to the supplier as a supplier prepayment on the procurement of inventory as of December 31, 2015. Subsequent to December 31, 2015, the Company initiated litigation to attempt to collect the cash advanced to the supplier.

 

(4)

Represents annual fees paid pursuant to our management agreements with Eos, Highland and Labore. The management agreements will terminate in connection with this offering; however, we will pay fees to members of our board of directors following the offering. See “Certain Relationships and Related Party Transactions.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Risk Factors” and “Forward-Looking Statements.” The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus, as well as the information presented under “Prospectus Summary—Summary Consolidated Financial Data” and “Selected Consolidated Financial and Other Data.” All references to years, unless otherwise noted, refer to our fiscal year, which ends on December 31st. All references to the first quarter, unless otherwise noted, refer to our fiscal quarter which ends on March 31st.

Overview

PetIQ is a rapidly growing pet medication and wellness company and the industry leader in bringing a broad portfolio of Rx and veterinarian-recommended OTC pet medications to national retail stores. Formed in 2010, PetIQ is one of the first companies to deliver pet Rx medications, OTC medications and wellness products at a significantly greater value to both pet owners and retail partners. We provide retail stores leading third-party brands, previously available only from veterinarians, at a savings to pet owners of typically 20% to 30%. We also provide our retail partners a portfolio of our proprietary value-branded products that contain the same active ingredients, at a savings of up to 50%. In addition, we have created proprietary wellness brands, such as Minties, Betsy Farms, VetIQ and Delightibles, that offer pet owners innovation and value.

We manufacture and sell our proprietary value-branded products, which generally are alternative versions of leading third-party branded pet Rx medications and OTC medications. We also distribute a suite of leading branded pet Rx medications and OTC medications manufactured by third parties, such as Frontline Plus^®, Heartgard Plus^® and K9 Advantix^® II. Our gross margins on our proprietary value-branded products are higher than on our distributed products and, accordingly, our strategy has been to increase net sales of proprietary value-branded products. In 2012, proprietary value-branded products comprised less than 10% of our net sales. In contrast, consistent with our strategy, proprietary value-branded products comprised more than 41% of our net sales in the first quarter of 2016.

We operate facilities in Daytona Beach, Florida and Springville, Utah. Our facility in Daytona Beach, Florida engages in, among other things, packaging services for products produced by others that we distribute. Our facility in Springville, Utah manufactures certain of our proprietary value-branded pet treats, such as Delightibles, Betsy Farms jerky treats, VetIQ pill treats and wellness supplements. We also utilize third parties to manufacture our proprietary value-branded products for us. Our product lines include more than 400 SKUs of the most popular pet medications that were previously available primarily from veterinarians.

We believe that we were the first, and remain the only, company to sell pet Rx medications nationally in the retail channel. We sell our products through the following retail channels: mass, food and drug, club, pet specialty, pharmacies and, recently, e-commerce. A majority of our net sales is to national retailers, such as Wal-Mart, Sam’s Club, Costco, Petco, PetSmart, Kroger, Target, BJ’s Wholesale Club and Amazon, among others. Our two largest retail customers, Wal-Mart and Sam’s Club, accounted for 30% and 29%, respectively, of our first quarter 2016 net sales, compared to 36% and 26%, respectively, of our first quarter 2015 net sales. In the fourth quarter of 2015, we stopped selling our PetAction Plus product to Wal-Mart as a result of Wal-Mart’s proposed price reduction, which reduced our total sales to Wal-Mart in the first quarter of 2016. We expect our sales to Wal-Mart and Sam’s Club likely will proportionately decline as our customer concentration becomes more diverse. Our new

 

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customers in the first quarter of 2016 included T.J. Maxx and in 2015 included Phillips Pet Food & Supplies, Petsmart and Amazon. We began direct e-commerce sales in December 2015 through Amazon and we expect our e-commerce sales to grow significantly. In addition, we sell our products to our distribution partner, Anda, which distributes our products to pharmacies that have placed orders for products with Anda. Anda purchases products from us only when it has orders from its retail customers for such products. Through Anda we serve more than 30,000 retail pharmacy locations, including chains such as Rite Aid, with same and/or next-day service in mass retail, club and independent pharmacies.

Our sales occur predominantly in the U.S. and Canada. Approximately 98% of our first quarter 2016 and fiscal 2015 net sales were generated from customers located in the United States and Canada, with the remaining sales generated from other foreign locations. We have two reporting segments: (i) U.S. and Canada; and (ii) other. This is based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. In our judgment, because our operations in the U.S. and Canada comprise 98% of our net sales, it is appropriate to view our operations as a whole, which is the approach we follow in this section. Our corporate headquarters are located in Eagle, Idaho. For additional information on our operating segments, see Note 10, “Segments,” to our audited financial statements included elsewhere in this prospectus.

Corporate History

Our net sales have grown to $206 million in 2015, reflecting a CAGR of 59% since our inception in 2010. In 2012, we broadened our distribution network by successfully adding new accounts with leading third-party brands. In 2013, we expanded our proprietary value-branded product lines for both Rx medication and OTC medications by introducing our VetIQ brand. In 2014, we opened facilities in Springville, Utah, in order to manufacture certain of our proprietary value-branded pet treats, and in Daytona Beach, Florida, to serve our expanding distribution network. From 2012 to the present, we have focused on (i) expanding our proprietary value-branded and distributed product portfolios, (ii) diversifying our customer base, in order to minimize customer concentration, and (iii) shifting our distributed/proprietary product mix in order to increase our gross margins.

Key Industry Trends and Developments

We believe the following industry trends and developments are important and favorable to our Company.

Humanization of Pets

There has been a trend toward the humanization of pets, in the sense that more pet owners consider their pets to be their family members, which, in turn, increases the demand for higher quality yet affordable pet health and wellness products available through channels where pet owners shop for their other family members.

Growing Market

Two-thirds of American households own at least one dog or cat with the U.S. market serving approximately 164 million dogs and cats according to the APPA. From 2008 to 2014, the percentage of U.S. homes with dogs or cats increased from 49.7% to 51.1%. Since 2001, Americans’ overall spending on their pets has doubled and a significant portion of that spending has been devoted to products we provide, such as Rx medications and OTC medications. Consumers spent approximately $74 billion on their pets in 2014, and it is estimated they spent $7.0 billion on Rx medications and OTC medications for dogs and cats in 2015 (not including human medications dispensed for the treatment of household pets). Significant improvements in traditional pet treatments for flea, tick and heartworm, as well as the introduction of new treatments for chronic conditions in pets, have contributed to the increase in spending.

 

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In addition, pets are living longer and, as a result, have increasing medication needs. The AVMA reports the percentage of households owning dogs aged six and older rose from 42% in 1987 to 48% in 2011, with comparable figures rising from 34% to 50% for cats. Chronic pet disease is increasingly prevalent in dogs and cats. In 2014, it was reported that more than 50% of dogs and cats are overweight and approximately 75% of older dogs and predisposed breeds have heart disease.

Migration of Sales from Veterinarians to Retailers

Historically, substantially all the major manufacturers of pet Rx medications and OTC medications have sold such medications and products predominantly through veterinarian channels rather than through the retail and e-commerce channels that we serve. However, over the last few years, manufacturers and distributors have begun to shift a portion of sales to retail and e-commerce channels. From 2011 to 2015, the percentage of estimated total U.S. dog and cat pet medication sales through the veterinarian channel dropped from 63% to 59%. We believe that the market share historically enjoyed by veterinarians will steadily decline—and ours will increase—as a result of the price savings and convenience afforded by the retail channels we serve.

Lower Prices in Retail Channel

Consumers receive significant savings when buying value-branded pet Rx and OTC medications through the retail channel. For example, according to a recent PetIQ survey, a prominent branded flea and tick product, which is sold without a prescription, has an average selling price of $58.85 per box when purchased from a veterinarian’s office, but a $38.95 per box selling price when purchased from a retailer. We offer consumers even greater savings as our own proprietary value-branded flea and tick product, which has the same active ingredients as those sold by veterinarians, sells for only $19.66 per box. As more consumers become aware of these pricing disparities, we believe sales of pet medications will continue to grow in the retail channel and decline in the veterinarian channel.

Fairness to Pet Owners Act of 2015

The FTPOA, which is currently pending in Congress, is intended to address the issues of prescription portability, just as the Fairness to Contact Lens Consumers Act did for the contact lens industry. Prior version of the FTPOA were introduced in 2011 and again in 2014, but were not enacted. If enacted, the FTPOA, if enacted, would require veterinarians in every U.S. state to give a pet owner a copy of his or her pet’s prescription, whether the pet owner asks for it or not, which the pet owner could fill through the retail channel rather than through the veterinarian channel. The FTPOA would help consumers save money by increasing competition and giving pet owners the freedom to choose where they buy pet Rx medications. We believe that the FTPOA, if enacted, would increase consumer demand for pet medications in the retail channel. Enactment of the FTPOA would enhance our ability to serve the retail channel, but also could increase the competition we face as other companies discover and try to address the market opportunity we helped create. The Fairness to Contact Lens Consumers Act greatly accelerated the migration of contact lens sales from eye care professionals to retail channels and since its enactment in 2003, sales of contact lenses have more than doubled. We believe enactment of the FTPOA would have a similar effect on the pet medication category.

Our Strategy

We believe there are significant opportunities to grow our brand awareness, increase our net sales and deliver shareholder value by executing on the following initiatives:

 

●

Grow consumer awareness of our products in the retail channel;

 

●

Increase shelf space with existing retailers;

 

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●

Deliver innovation in pet health and wellness at great value; and

 

●

Enhance margins.

Components of our Results of Operations

Net Sales

Our net sales consist of our total sales net of product returns, allowances (discounts), trade promotions and incentives. We offer a variety of trade promotions and incentives to our customers, such as cooperative advertising programs and in-store displays. We recognize revenue when persuasive evidence of an arrangement exists, in accordance with the terms of our contracts, which generally occurs upon shipment of product, when the price is fixed or determinable and when collectability is reasonably assured. These trade promotions are used to increase our aggregate net sales. Our net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives.

Historically, our net sales have primarily been driven by our distribution of leading third-party brand pet Rx medications and OTC brands; however, sales of our own proprietary value-branded products, including wellness products, have increasingly become an important component of our growth in net sales and margin. Our strategy has been, and will continue to be, to increase our net sales by anticipating retailers’ and consumers’ needs and determining if we can profitably provide products to fill those needs. Then, we secure the products through our expansive supplier networks and distribute to our key retailers. Next, we broaden distribution to other retailers and eventually develop our own proprietary value-branded version of the product that we can sell, at higher margin and at lower pricing, to the retailers that originally purchased the distributed product. In this way we are able to transfer distributed product sales to our higher margin proprietary value-branded products and grow our and our retailers’ overall sales.

Key factors that may affect our future sales growth include: new product introductions; expansion into e-commerce and other customer bases; the willingness of retail stores and pharmacies to carry our product lines and to maintain pricing levels necessary for profitability; aggressive pricing by our competitors; and whether we can maintain and develop positive relationships with key retail customers, such as Wal-Mart and Sam’s Club.

In addition, the industry trends and developments referenced above (see “—Key Industry Trends and Developments”) have significantly affected our sales growth since our inception and we expect these trends to continue to significantly affect our sales growth in the future. From 2014 to 2015, our net sales increased by 27.4% as compared to the overall pet health and wellness product sales, as measured by Packaged Facts, which increased by 6.8%.

While most of our products are sold consistently throughout the year, we experience seasonality in the form of increased retailer demand for our flea and tick product offerings in the first two quarters of the year in preparation for increased consumer demand during the summer months.

Our products are primarily consumables and, as such, they experience a replenishment cycle.

Gross Profit

Gross profit is our net sales less cost of sales. Our cost of sales consists primarily of costs of raw goods, packaging materials, manufacturing and purchasing the products we sell, shipping and handling costs and costs associated with our warehouses and distribution network. Gross margin measures our gross profit as a percentage of net sales. With respect to our proprietary products, we have a manufacturing network that includes leased manufacturing facilities where we manufacture finished goods, as well as third-party contract manufacturing facilities from which we purchase finished products predominately on a dollar-per-unit basis. Since

 

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our inception in 2010, we have worked closely with our contract manufacturers to negotiate lower costs through increased volume of purchases and price negotiations. The gross margin on our proprietary value-branded products is higher than on our distributed products. For distributed products, our costs are driven largely by veterinarian pricing suggested by manufacturers (“vet list”). Consistent with our strategy, proprietary value-branded products accounted for an increased percentage of our net sales in 2015 as compared with 2014, continuing a trend that began in 2012.

General and Administrative Expenses

Our general and administrative expenses primarily consist of employee compensation and benefits expenses, sales and merchandizing expenses, advertising and marketing expenses, rent and lease expenses, IT and utilities expenses, professional fees, insurance costs, R&D costs and consulting fees. General and administrative expenses as a percentage of net sales have increased from 12.1% in the first quarter of 2015 to 15.4% in the first quarter of 2016, primarily driven by decreasing net sales and litigation expenses. In the future, we expect our general and administrative expenses, except for litigation expenses, to grow at a slower rate than our net sales growth as we leverage our past investments. In addition, we expect that after the consummation of this offering there will be an increase in our general and administrative expenses of approximately $1.6 million each year as a result of the additional reporting and compliance costs associated with being a public reporting company. Pending litigation resulted in legal expenses of $2.6 million in 2015 and we expect that it will result in similar legal expenses in 2016.

Our advertising and marketing expenses primarily consist of national television media, digital marketing, social media and loyalty programs geared towards building brand awareness and the value of our proprietary value-branded offerings. These expenses may vary from quarter to quarter but typically they are higher in the second and third quarters, during the flea and tick season. We expect our marketing and advertising expenses to decrease as a percentage of net sales as we continue to concentrate campaigns to relevant markets, as well as shift spending towards in-store marketing and customer trade-supported programs.

As noted above, we experience seasonality in the form of increased demand for our flea and tick product offerings in the first two quarters of the year in preparation for the spring and summer seasons and, as a result, the sales and merchandizing expenses component of our general and administrative expenses generally increases in the second and third quarters due to promotional spending relating to our flea and tick product lines.

To continue to grow our pet Rx medications, OTC medications and wellness products, we invest in R&D on an ongoing basis. In addition to our own in-house R&D innovation specialists, we have also leveraged our market position to emerge as an attractive partner for outside R&D scientists developing new products and technologies in the pet health and wellness field. We believe these outside R&D scientists seek us out to partner on innovative products due to our proprietary value-branded manufacturing experience and relationships with key retail channel contacts. As our proprietary value-branded product lines continue to expand, we expect our R&D costs, and therefore our general and administrative expenses, could increase in the immediate future, but not necessarily as an overall percentage of net sales.

Net Income (Loss)

Our net income (loss) for future periods will be affected by the various factors described above.

 

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Results of Operations

The following tables set forth our consolidated statements of operations in dollars and as a percentage of net sales for the periods presented:

 

		Three Months Ended March 31,										% of Net Sales										Year Ended December 31,										% of Net Sales
		2016					2015					2016					2015					2015					2014					2015					2014
(dollars in thousands, except for percentages and per share data)
Net sales			$	52,298				$	55,570					100	%				100	%			$	205,687				$	161,491					100	%				100	%
Cost of sales				42,526					43,209					81.3					77.8					166,529					138,754					81.0					85.9
Gross profit				9,772					12,361					18.7					22.2					39,158					22,737					19.0					14.1
Operating expenses
General and administrative expenses				8,063					6,701					15.4					12.1					35,588					32,858					17.3					20.3
Operating income (loss)				1,709					5,660					3.3					10.2					3,570					(10,121	)				1.7					(6.3	)
Other income (expense)
Other income (expense), net				2					—					—					—										(12	)				—					—
Loss on debt extinguishment				(993	)				(1,449	)				—					—					(1,449	)									—					—
Foreign currency (loss) gain, net				(121	)				261					—					—					75					122					—					—
Interest expense				(901	)				(762	)				—					—					(3,545	)				(980	)				—					—
Total other expense				(2,013	)				(1,950	)				—					—					(4,919	)				(870	)				—					—
Net (loss) income			$	(304	)			$	3,710					—					—				$	(1,349	)			$	(10,991	)				—					—
Pro forma weighted average shares used for computation of: (unaudited)(1)
Basic														—					—															—					—
Diluted														—					—															—					—
Pro forma net loss per common share (unaudited)(1)
Basic			$					$						—					—				$					$					$	—					—
Diluted			$					$						—					—				$					$					$	—					—

 

(1)	Gives effect to the Transactions and this offering. See “Unaudited Pro Forma Consolidated Financial Information” for a detailed presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments.

Three Months ended March 31, 2016 Compared With Three Months ended March 31, 2015

Net Sales

Net sales decreased $3.3 million, or 5.9%, to $52.3 million for the three months ended March 31, 2016, compared to $55.6 million for the three months ended March 31, 2015, primarily because first quarter net sales in 2015 were increased by a one-time inventory build-up by our customers resulting from our successful launch of our PetAction Plus and because sales of PetAction Plus to Wal-Mart ceased the fourth quarter of 2015 as the result of our decision not to meet Wal-Mart’s demand for lower prices. Excluding the impact of Wal-Mart sales of PetAction

 

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Plus in the first quarter of 2015, net sales for the first quarter of 2016 increased 11.0% as compared to the first quarter of 2015. Excluding the impact of Wal-Mart sales of PetAction Plus and one-time inventory build-up by our customers associated with the successful launch of PetAction Plus in the first quarter of 2015, net sales for the first quarter of 2016 increased 12.8% as compared to the first quarter of 2015. In addition, there were increased sales of other products during the first quarter of 2016, partially off-setting the decrease in sales of Pet-Action Plus at Wal-Mart as well as the one-time inventory build-up in the first quarter of 2015 that did not reoccur in the first quarter of 2016.

Gross Profit

Gross profit decreased $2.6 million, or 21%, to $9.8 million for the three months ended March 31, 2016, compared to $12.4 million for the three months ended March 31, 2015 and gross margin decreased to 18.7% for the three months ended March 31, 2016, from 22.2% for the three months ended March 31, 2015. These decreases were driven primarily by decreased sales of PetAction Plus to Wal-Mart as well as one-time inventory build-up for PetAction Plus in the first quarter of 2015 that did not reoccur in 2016. The decrease in gross profit was further driven by lower sales prices and gross profits on certain of our proprietary value-branded products as a result of increased competition for such products in addition to an increase in the sale of distributed products, which carry a lower gross margin than our proprietary value-branded products.

General and Administrative Expenses

General and administrative expenses were $8.1 million for the three months ended March 31, 2016, up $1.4 million from $6.7 million for the three months ended March 31, 2015. The increase primarily reflects:

 

●

increased audit and professional fees and legal fees of approximately $1.2 million, primarily due to ongoing litigation expenses; and

 

●

increased compensation expenses for the addition of finance and administrative support of approximately $0.3 million.

As a percentage of net sales, our general and administrative expenses increased to 15.4% for the three months ended March 31, 2016 from 12.1% for the three months ended March 31, 2015. Excluding costs related to litigation, general and administrative costs would have only increased from 12.1% to 12.8%, driven by lower net sales.

Other Expense

Other expense was $2.0 million for each of the three months ended March 31, 2016 and 2015.

Net Loss

As a result of the factors above, net income decreased by $4.0 million to a loss of $0.3 million for the three months ended March 31, 2016, compared to income of $3.7 million for the three months ended March 31, 2015.

Year ended December 31, 2015 Compared With Year ended December 31, 2014

Net Sales

Net sales increased $44.2 million, or 27.4%, to $205.7 million for 2015, compared to $161.5 million for 2014. Increased sales of proprietary value-branded products accounted for approximately 61.5% of the increase in net sales and increased sales of distributed products was responsible for the remainder, driven by new product

 

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introductions, customer acquisitions and additional SKU placement. We expect that our net sales growth going forward will be comprised largely of growth in proprietary value-branded products sales, as in 2015.

Gross Profit

Gross profit increased $16.4 million, or 72.2%, to $39.2 million for 2015, compared to $22.7 million for 2014 and gross margin increased to 19.0% for 2015, from 14.1% for 2014. These increases were driven primarily by increased sales of our proprietary value-branded products, which have higher gross margins than our distributed products.

General and Administrative Expenses

General and administrative expenses were $35.6 million for 2015, up $2.7 million from $32.9 million for 2014. The increase primarily reflects:

 

●

increased audit and professional fees and legal fees of approximately $1.8 million; and

 

●

increased compensation expenses for the addition of finance and administrative support and increased incentive compensation related to improving operations of approximately $1.8 million.

As a percentage of net sales, our general and administrative expenses decreased to 17.3% in 2015 from 20.3% in 2014, representing a savings of $6.2 million.

Other Expense

Other expense increased by $4.0 million to $4.9 million in 2015, compared $0.9 million in 2014. Of the $4.9 million of other expense in 2015:

 

●

loss on debt extinguishment was $1.4 million in 2015, compared to no loss in 2014, reflecting costs relating to the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees and termination fees;

 

●

foreign currency gain, net, was $0.1 million in each of 2015 and 2014; and

 

●

interest expense was $3.5 million in 2015, up $2.6 million from $1.0 million in 2014, primarily due to increased borrowings incurred to fund our growth and higher interest rates.

Net Loss

As a result of the factors above, net loss improved by $9.6 million to a loss of $1.3 million for 2015, compared to a loss of $11.0 million for 2014.

Non-GAAP Financial Measures

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 loss on debt extinguishment, litigation expenses, costs associated with becoming a public company, and a supplier receivable write-off. Adjusted EBITDA adjusts for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management’s performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies. The Company presents EBITDA because it is a necessary component for computing Adjusted EBITDA.

 

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We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA 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 EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate EBITDA and Adjusted EBITDA in the same manner.

Our management does not, and you should not, consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:

 

●

EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

●

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

●

EBITDA does not reflect the interest expenses, or the cash requirements necessary to service interest or principal payments, on our debts;

 

●

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

●

Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing core operations; and

 

●

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally. You should review the reconciliations of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

 

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The following table reconciles net loss to EBITDA and Adjusted EBITDA for the periods presented:

 

		Three Months Ended March 31,										Year Ended December 31,
		2016					2015					2015					2014
(dollars in thousands)
Net (loss) income			$	(304	)			$	3,710				$	(1,349	)			$	(10,991	)
Non-GAAP adjustments:
Depreciation				476					454					1,842					1,456
Amortization				272					139					735					842
Interest				901					762					3,545					980
EBITDA				1,345					5,065					4,773					(7,713	)
Loss on debt extinguishment(1)				993					1,449					1,449					—
Litigation expenses(2)				1,349					310					2,622					1,867
Costs associated with becoming a public company				—					86					626					—
Supplier receivable write-off(3)				—					—					1,449					—
Management fees(4)				119					115					462					460
Adjusted EBITDA			$	3,806				$	7,025				$	11,381				$	(5,386	)

 

(1)	Loss on debt extinguishment reflects costs relating to the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees and termination fees.

 

(2)	These litigation expenses relate to cases involving the Company that were favorably resolved in the second quarter of 2016. The Company expects litigation expenses to decline in 2017.

 

(3)

During 2015 the Company terminated its relationship with a supplier in accordance with a supply agreement, resulting in the Company writing off the full amount of cash advanced to the supplier as a supplier prepayment on the procurement of inventory as of December 31, 2015. Subsequent to December 31, 2015, the Company initiated litigation to attempt to collect the cash advanced to the supplier.

 

(4)

Represents annual fees paid pursuant to our management agreements with Eos, Highland and Labore. The management agreements will terminate in connection with this offering; however, we will pay fees to members of our board of directors following the offering. See “Certain Relationships and Related Party Transactions.”

Quarterly Financial Data

The following table presents selected quarterly data through March 31, 2016. This quarterly information has been prepared using our unaudited interim condensed consolidated financial statements and includes all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of the results of interim periods.

 

		Fiscal Quarter Ended
		March 31, 2016					December 31, 2015					September 30, 2015					June 30, 2015					March 31, 2015
(dollars in thousands)				(unaudited)
Selected Financial Data:
Net sales			$	52,298				$	39,337				$	48,590				$	62,190				$	55,570
Gross profit				9,772					7,016					8,612					11,169					12,361
Net income (loss)				(304	)				(2,076	)				(1,570	)				(1,414	)				3,710
EBITDA(1)				1,345					(465	)				(13	)				185					5,065
Adjusted EBITDA(1)				3,806					2,106					1,028					1,221					7,026

 

(1)	The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the quarterly periods presented:

 

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		Fiscal Quarter Ended
		March 31, 2016					December 31, 2015					September 30, 2015					June 30, 2015					March 31, 2015
(dollars in thousands)				(unaudited)
Net income (loss)			$	(304	)			$	(2,076	)			$	(1,570	)			$	(1,414	)			$	3,710
Non-GAAP adjustments:
Depreciation				476					467					458					462					454
Amortization				272					250					182					164					139
Interest Expense				901					894					916					973					762
EBITDA				1,345					(465	)				(13	)				185					5,065
Loss on debt extinguishment(1)				993					—					—					—					1,449
Litigation expenses(2)				1,349					788					778					746					310
Costs associated with becoming a public company				—					218					147					175					86
Supplier receivable write-off(3)				—					1,049					400
Management fees(4)				119					117					115					115					115
Adjusted EBITDA			$	3,806				$	1,706				$	1,428				$	1,221				$	7,026

 

(1)	Loss on debt extinguishment reflects costs relating to the refinancing of our prior credit facility, including a write-off of unamortized loan fees, legal fees and termination fees.

 

(2)	These litigation expenses relate to cases involving the Company that were favorably resolved in the second quarter of 2016. The Company expects litigation expenses to decline in 2017.

 

(3)

During 2015 the Company terminated its relationship with a supplier in accordance with a supply agreement, resulting in the Company writing off the full amount of cash advanced to the supplier as a supplier prepayment on the procurement of inventory as of December 31, 2015. Subsequent to December 31, 2015, the Company initiated litigation to attempt to collect the cash advanced to the supplier.

 

(4)

Represents annual fees paid pursuant to our management agreements with Eos, Highland and Labore. The management agreements will terminate in connection with this offering; however, we will pay fees to members of our board of directors following the offering. See “Certain Relationships and Related Party Transactions.”

Financial Condition, Liquidity and Capital Resources

Overview

Historically, our primary sources of liquidity have been cash flow from operations and equity contributions. In addition, we have a $48 million credit facility to provide us with an additional source of liquidity. As of March 31, 2016 and December 31, 2015, our cash and cash equivalents were $1.7 million and $3.3 million, respectively, compared to cash and cash equivalents as of March 31, 2015 and December 31, 2014 of $8.5 and $1.4 million, respectively. As of March 31, 2016, we had $20.0 million outstanding Term A Loans, $3.0 million outstanding Term B Loans and $6.2 million outstanding under the revolving credit facility and the interest rate on the Term A Loans was the LIBOR rate plus 9.75%, the interest rate on the Term B Loans was the LIBOR rate plus 3.25% and the interest rate on the revolving credit facility was the LIBOR rate plus 3.00%. See “—Description of Indebtedness.”

Our primary cash needs are for working capital. Our maintenance capital expenditures have typically been less than 1.0% of net sales, but we may make additional capital expenditures as necessary to support our growth. Our primary working capital requirements are to carry inventory levels necessary to support our increased net sales. Fluctuations in working capital are primarily driven by the timing of new product launches. As of March 31, 2016 and December 31, 2015, we had working capital (current assets less current liabilities) of $49.4 million and $49.2 million, respectively, and $39.3 million as of December 31, 2014. We believe that our operating cash flow, cash on

 

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hand, debt proceeds from our borrowings under our credit facility and the proceeds of this offering will be adequate to meet our operating, investing and financing needs for the foreseeable future. Additionally, we borrow funds under our revolving credit facility to finance liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds, although we can provide no assurance that these sources of funding will be available on reasonable terms.

Cash Flows

Cash Used in Operating Activities

Net cash used in operating activities was $3.6 million for the first quarter of 2016, compared to $9.7 million for the first quarter of 2015. The reduction in cash used in operating activities primarily relates to less cash utilized to increase inventory as a result of the PetAction Plus inventory build-up in the first quarter of 2015 as well as decreased net sales.

Net cash used in operating activities was $6.4 million for 2015, compared to $7.9 million for 2014. The reduction in cash used in operating activities primarily reflects improved operations driven by increased sales, improved margins and economies of scale relative to General and Administrative expenses, resulting in a smaller net loss for 2015 compared to 2014, offset by growth in working capital. Working capital growth was driven by inventory increases to provide for increased sales and allowed for by our new credit agreement. We are reliant on external financing to fund working capital growth and we believe such financing will continue to be available on similar or improved terms based on improving operations of the Company.

Cash Used in Investing Activities

Net cash used in investing activities was $0.8 million for the first quarter of 2016, compared to $0.4 million for the first quarter of 2015. This increase resulted from increased capital investment, primarily in production equipment.

Net cash used in investing activities was $1.5 million for 2015, compared to $7.7 million for 2014. This decrease in cash used resulted primarily from a decrease in our capital expenditures. In 2014, we expanded our facilities in Daytona Beach, Florida and Springville, Utah, with no comparable expansion in 2015.

Cash Provided by Financing Activities

In the first quarter of 2016, net cash provided by financing activities was $2.9 million, consisting primarily of net borrowings under our credit facilities to finance operations. In the first quarter of 2015, net cash provided by financing activities was $17.1 million, consisting primarily of net borrowings under our credit facility to finance the inventory build-up associated with the launch of PetAction Plus. See “—Description of Indebtedness”.

In 2015, net cash provided by financing activities was $9.8 million, consisting primarily of net borrowings under our credit facilities. See “—Description of Indebtedness”. In 2014, net cash provided by financing activities was $14.2 million, consisting primarily of equity investments, offset by net debt repayments.

Description of Indebtedness

On March 16, 2015, OpCo entered into a Credit Agreement (the “Original Credit Agreement”) with Crystal Financial LLC (“Crystal”), as the administrative agent, which provides for a term loan and revolving credit facility.

 

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The Original Credit Agreement provided for secured financing of $40.0 million in the aggregate, consisting of (i) $33.0 million in aggregate principal amount of term loans and (ii) a $7.0 million revolving credit facility maturing on March 16, 2018. As of December 31, 2015, there were no outstanding borrowings under the revolving credit facility and $32.9 million of outstanding term loans under the term loan facilities. As of December 31, 2015, the interest rate on each of the revolving credit facility and the term loan facilities was the LIBOR rate, plus 9%. The Company was in compliance with its financial debt covenants in the Original Credit Agreement as of December 31, 2015.

On March 24, 2016, OpCo refinanced its credit facilities under the Original Credit Agreement pursuant to that certain Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with Crystal, as the administrative agent and East West Bank, as the revolver agent, which provides for two term loan facilities and a revolving credit facility. The A&R Credit Agreement provides for secured financing of $48.0 million in the aggregate, consisting of (i) $3.0 million in aggregate principal amount of term loans maturing on August 31, 2016 (the “Term B Loans”), (ii) $20.0 million in aggregate principal amount of term loans (the “Term A Loans”) maturing on March 16, 2018 and (iii) a $25.0 million revolving credit facility maturing on March 16, 2018 (the “revolving credit facility”). As of March 31, 2016, we had $20.0 outstanding Term A Loans, $3.0 outstanding Term B Loans and $6.2 outstanding under the revolving credit facility and the interest rate on the Term A Loans was the LIBOR rate plus 9.75%, the interest rate on the Term B Loans was the LIBOR rate plus 3.25% and the interest rate on the revolving credit facility was the LIBOR rate plus 3.00%.

All obligations under the A&R Credit Agreement are unconditionally guaranteed by HoldCo, each of our domestic wholly owned direct subsidiaries and, subject to certain exceptions, each of our material current and future domestic wholly owned subsidiaries. All obligations under our senior secured credit facilities, and the guarantees of those obligations, are secured by substantially all of our assets and the assets of each guarantor, subject to certain exceptions.

The A&R Credit Agreement contains a number of covenants that, among other things, restrict our and our subsidiaries’ ability to (subject to certain exceptions): (i) make investments, loans or advances; (ii) incur additional indebtedness; (iii) create liens on assets; (iv) enter into sale and leaseback transactions; (v) engage in mergers or consolidations and/or sell assets; (vi) pay dividends and distributions or repurchase our equity interests; (vii) repay subordinated indebtedness; (viii) make certain acquisitions; and (ix) other restrictions typical for a credit agreement of this type. The A&R Credit Agreement does not currently restrict our ability to make tax distributions, nor do we expect that it (or any successor thereto) should do so after the consummation of the Transactions.

The A&R Credit Agreement also contains certain customary affirmative covenants and events of default (including change of control). In addition, the A&R Credit Agreement includes maintenance covenants that require compliance with certain financial covenants, including compliance with periodic measurements of earnings and fixed charge coverage. The availability of certain baskets and the ability to enter into certain transactions (including our ability to pay dividends to HoldCo) may also be subject to compliance with secured leverage ratios. The Company was in compliance with its financial debt covenants in the A&R Credit Agreement as of March 31, 2016.

 

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of March 31, 2016:

 

		Payments Due by Period
		Total					2016					2017-2018					2019-2020					Thereafter
(dollars in thousands)
Long-term debt(1)			$	29,150				$	3,000				$	26,150				$					$	—
Interest on debt(2)				4,693					1,836					2,857					—					—
Operating lease obligations				5,427					1,249					3,440					640					98
Capital lease obligations				473					48					128					122					175
Product purchase obligations(3)				9,271					9,271					—					—					—
Deferred acquisition liability				2,454					300					2,154					—					—
Total contractual obligations			$	51,468				$	15,705				$	34,729				$	762				$	273

 

 

(1)	Does not reflect any excess cash flow payments.

 

(2)	Reflects interest expense calculated using the current interest rates for the term loans and revolving credit facility

 

(3)	Reflects our estimate of open purchase orders placed with suppliers

Critical Accounting Policies and Estimates

Our consolidated financial statements included elsewhere in this prospectus have been prepared in accordance with GAAP. The preparation of our consolidated financial statements 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. While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this prospectus, we believe that the following accounting policies and estimates are critical to our business operations and understanding of our financial results.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, in accordance with the terms of our contracts, which generally occurs upon shipment of product, when the price is fixed or determinable and when collectability is reasonably assured. A sales return allowance is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, returned goods and other items.

We offer a variety of trade promotions and incentives to our customers, such as cooperative advertising programs and in-store displays. Sales are recorded net of trade promotion spending, which is recognized at the later of the date on which we recognize the related revenue or the date on which we offer the incentive. Our net sales are periodically influenced by the timing, extent and amount of such trade promotions and incentives. Accruals for expected payouts under these programs are included in our other accrued expenses.

Goodwill

Goodwill is the excess of the consideration paid over the fair value of specifically identifiable assets, liabilities and contingent liabilities in a business combination and relates to the future economic benefits arising from assets, which are not capable of being individually identified and separately recognized.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized but is reviewed for impairment annually in our fourth quarter or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

 

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We utilize the two-step impairment test. Step one in the test compares book value of net assets to the fair value of the reporting unit, if fair value is less than book value, we would then perform the second step. An income approach (discounted cash flow analysis) and a market approach were utilized to estimate the fair value of PetIQ. We determined that the fair value of the reporting units exceeded book value, thus a second step to compute the amount of impairment was not performed. No impairment charge was recorded during the years ended December 31, 2015 and 2014.

Goodwill impairment analysis and measurement is a process that requires significant judgment. If there are significant changes in market conditions or a future downturn in our business, or a future annual goodwill impairment test indicates an impairment of our goodwill, we may have to recognize impairment of our goodwill.

Intangible Assets

Indefinite lived intangible assets consist primarily of trademarks. Trademarks represent costs paid to legally register phrases and graphic designs that identify and distinguish products sold by us. Trademarks are not amortized, rather potential impairment is considered on an annual basis, or more frequently upon the occurrence of an event or when circumstances indicate that the book value of trademarks are greater than their fair value. No impairment charge was recorded for the quarters ended March 31, 2016 or 2015 or years ended December 31, 2015 and 2014.

Definite-lived intangible assets consist of a distribution agreement, production certifications, patents and processes, customer relationships, and brand names. The assets are amortized on either a straight-line basis over the expected useful life or proportionately to the benefits derived from those relationships. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. Useful lives range from 2 to 15 years.

Inventories

Inventories are stated at the lower of cost or market. Cost is typically determined using the first-in first-out (“FIFO”) method, however at times we utilize specific identification for certain pharmaceutical products. We maintain reserves for estimated obsolete or unmarketable inventory based on the 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 were as follows:

 

		As of March 31,										As of December 31,
		2016					2015					2015					2014
Raw materials and work in progress			$	4,532				$	4,217				$	4,292				$	3,738
Finished goods				34,600					26,397					29,393					19,600
Total inventories			$	39,132				$	30,614				$	33,685				$	23,338

Litigation

We are 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. We consult with both internal and external legal counsel related to litigation.

 

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BUSINESS

Overview

PetIQ is a rapidly growing pet medication and wellness company and the industry leader in bringing a broad portfolio of Rx and veterinarian-recommended OTC pet medications to national retail stores. Formed in 2010, PetIQ is one of the first companies to deliver premium quality pet Rx medications, OTC medications and wellness products at a significantly greater value to both pet owners and retail partners. PetIQ’s mission is to deliver pet owners a pipeline of innovative products that combine leading technology with affordability, choice and convenience.

We have successfully introduced our products across consumer retail channels including mass, food and drug, club, pet specialty, pharmacies and, recently, e-commerce. We provide retail stores leading third-party brands previously available only from veterinarians, thus enabling pet owners to buy these products at typically 20% to 30% savings compared to the prices charged by veterinarians. We also provide our retail partners a portfolio of our own proprietary value-branded products, with the same active ingredients, that offer consumers savings of up to 50%. We believe our proprietary value-branded products offer consumers outstanding value and these products complement the products we distribute to our retail partners. Our distributed products allow us to magnify consumer savings and value when they are merchandised next to our proprietary value-branded offerings. We began e-commerce sales in December 2015 through Amazon and expect our e-commerce sales to grow significantly in the future.

Our broad product portfolio spans the most popular health categories for dogs and cats:

 

●

Rx Medications: includes heartworm preventatives such as Heartgard Plus®, arthritis treatments such as Rimadyl® and heart disease treatments such as Vetmedin®; and our proprietary value-branded products such as heartworm preventative Heart Shield Plus and arthritis treatment TruProfen.

 

●

OTC Medications and Supplies: includes flea and tick control products such as Frontline Plus® and K9 Advantix® II; and our proprietary value-branded flea and tick control products such as PetAction Plus, PetLock Plus and Advecta II.

 

●

Wellness Products: includes multiple lines of our proprietary value-branded vitamins, treats, nutritional supplements, hygiene products and supplies under the Delightibles, Betsy Farms, Vera and VetIQ brand names.

Our network of retailers includes Wal-Mart, Sam’s Club, Costco, Petco, PetSmart, Kroger, Target, BJ’s Wholesale Club and Amazon, among others, and more than 30,000 retail pharmacy locations, including chains such as Rite Aid. We market products under multiple brands to address channel-specific requirements including product differentiation amongst our retail partners. We believe our product offerings provide retailers with a comprehensive category solution and offer consumers newfound choice and convenience when purchasing pet medications and wellness products.

Industry trends suggest that pet owners, seeking savings and convenience when purchasing pet medications, are increasingly migrating from veterinarians’ offices to the retail channels we serve. Although the majority of the estimated $7 billion U.S. pet owners spend annually on pet medications for dogs and cats is spent in the veterinary channel, the estimated percent of total pet medications sold by veterinarians decreased from 63% to 59% from 2011 to 2015. We believe that the market share historically enjoyed by veterinarians will continue to decline—and ours will increase—as a result of the price savings and convenience that our product offerings provide. We are well positioned to capitalize on this trend as we currently serve the vast majority of leading retailers’ locations.

 

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We are well positioned to rapidly develop, manufacture and introduce innovative new products to retailers and consumers. Our current pipeline of products results from a combination of in-house specialists and third-party consultants with insights and skills in market analysis, product development, packaging, marketing and industry regulations. These internal and external resources enable us to expand our portfolio of proprietary value-branded products and develop next-generation versions of our existing pet products. We have found that our retail expertise and strong market position makes us an attractive partner for scientists and entrepreneurs developing new products in the pet health and wellness field. A combination of our internal expertise and industry leading relationships have produced several of our top selling products and brands, including VetIQ, PetLock Plus, PetAction Plus and TruProfen.

Our success is reflected in the strong growth we have delivered to date. Our net sales increased from $32 million in 2011 to $206 million in 2015, representing a CAGR of 59%. PetIQ currently has an estimated 3% market share of the U.S. retail pet medications market, indicating significant opportunity for strong future growth with small incremental market share gains.

 

PetIQ Net Sales ($ millions)				PetIQ Estimated Share of 2015 U.S. Retail Market for Pet Medications for Dogs and Cats(1)
				(1)        Includes sales in retail channels and the veterinarian channel.

Our Industry

In 2014, approximately 63 million U.S. households (51% of total U.S. households) owned a dog or a cat, according to Packaged Facts. According to the APPA, Americans spent $58.0 billion on pet products and services in 2014, more than double their 2001 spending of $28.5 billion. U.S. retail sales of pet medications for dogs and cats have grown from $5.8 billion in 2011 to an estimated $7.0 billion in 2015 and are estimated to reach $8.9 billion by 2019, representing a CAGR of 6% between 2015 and 2019, according to Packaged Facts. Additionally, our innovative pet treats compete in the U.S. dog and cat treat market, which has grown every year since 2010, was $4.5 billion in 2015 and is estimated to reach $6.0 billion of retail sales by 2020, representing a CAGR of 6.4%, according to Euromonitor International.

 

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Total Dog and Cat Pet Medication Sales ($ billions)                Total Pet Treat Sales ($ billions)                

 

Source: Packaged Facts, “Pet Medications in the U.S. 4th Edition;” October 2015, Table 1-1 and Table 2-1									Source: Euromonitor International 2016

 

According to a January 2013 survey from Trone Brand Energy, as published by DVM360 Magazine, pet medications are marked up an average of 150% by veterinarians; 59% of pet owners believe they pay more for medications at the veterinarian; and 87% would like veterinarians to give them all of their options rather than just dispensing the medications in the office. In Packaged Facts’ August 2015 Pet Owner Survey, over half of dog owners and cat owners agree that veterinarian spot-on flea and tick products are too expensive; more than half agree that they would trust value-branded or store-brand products if they contained the same active ingredients as brand name versions; and more than half agree that the spot-on flea and tick products sold in retail stores are just as effective as those available through veterinarians.

We believe the following trends are driving sustainable growth in the large pet industry:

 

●

Pet Humanization: According to Packaged Facts, in the United States, an estimated 87% of dog owners and 82% of cat owners view their pets as family members. As pets are increasingly viewed as companions, friends, and family members, pet owners are being transformed into “pet parents” with a strong affinity for spending disposable income to meet all of their pets’ needs during all economic cycles.

 

●

Increasing Consumer Focus on Pet Health and Wellness: Consumers are exhibiting greater interest in improved health for their pets and, as a result, increasingly purchasing pet products and supplies focused on their pet’s health and wellness.

 

●

Increasing Pet Age and Incidents of Pet Disease: Pets are living longer and, as a result, have increasing medication needs. The AVMA reports that percentage of households owning dogs aged six and older rose from 42% in 1987 to 48% in 2011, with comparable figures rising from 29% to 50% for cats. Chronic pet disease is increasingly prevalent in dogs and cats. In 2014, it was reported that more than 50% of dogs and cats are overweight and approximately 75% of older dogs and predisposed breeds have heart disease.

 

●

Rising Pet Ownership: From 2008 to 2014, the percentage of U.S. households with dogs or cats (or both) increased from 49.7% to 51.1%, according to the APPA. Based on the 2010 U.S. Census, more U.S. households today have pets than have children, which we believe to be a result of demographic shifts and changing attitudes toward pets that are highly beneficial for us.

 

●

Migration to Retail. We believe the market for pet medication and wellness products in the retail channel is likely to outpace growth in the broader pet industry. In 2015, an estimated 59% of pet medications were sold through the veterinary channel, indicating a large opportunity for retail growth. This migration away from the veterinary channel has already begun as the estimated veterinarian share

 

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of the U.S. pet medication industry declined from 63% in 2011 to 59% in 2015 while the estimated retail channel share increased from 12% to 21% over the same period.

We believe that migration will continue in the future because of the significant cost savings that retail channels can deliver. For example, according to a recent PetIQ survey, a prominent branded flea and tick product, which is sold without a prescription, has an average selling price of $58.85 per box when purchased from a veterinarian’s office, but only $38.95 per box at retail. Moreover, our own proprietary value-branded flea and tick product, which has the same active ingredients as the branded product sold by veterinarians, is $19.66 per box, far less expensive than the price charged by veterinarians. We believe sales of pet medications will continue to grow in the retail channel as more consumers become aware of the available cost savings.

 

Percentage of U.S. Retail Sales of Pet Medications by Channel 2011 vs. 2015

Note: 2011 chart data excludes 2% related to other channels. Mass Market includes supercenters, mass merchandisers, supermarkets, warehouse clubs, drugstores, farm/feed stores and other channels. 2015 retail sales are estimates.

Additionally, we believe that the current legislative and regulatory environment has potential to accelerate retail channel growth of prescription pet products. In May 2015, the FTC published a report titled “Competition in the Pet Medications Industry,” which concluded that giving consumers prescriptions on demand would likely enhance competition. In addition, the FTPOA is currently pending before Congress, which would guarantee that pet owners would receive a copy of their pet’s prescriptions without having to ask, pay a prescription release fee or sign a liability waiver. Because a prescription is required to purchase many of our medications, we believe that the FTPOA, if enacted, would significantly boost retail sales of pet medications and our net sales and profits. For example, 67% of prescription heartworm medications purchased by dog owners are purchased from veterinarians, according to Packaged Facts. We believe automatic receipt of portable prescriptions will enable pet owners to fill prescription medications in the retail channel at discounts comparable to those of pet OTC medications at retail. Illustrative is the enactment in 2003 of the Fairness to Contact Lens Consumers Act, which requires eye care professionals to give consumers contact lens prescriptions that can be filled through many of the same retail channels. As a result of this statute, upon which the FTPOA was modeled, contact lens users are no longer required to buy contact lenses from the eye care professionals who write their prescriptions and now purchase a significant amount of contact lenses online and at retail outlets for prices far less than the prices formerly charged by the eye care professionals when they were the sole source of supply. Since 2003, the contact lens industry has more than doubled in size primarily as a result of more customers entering the market due to lower prices and previous customers replacing their lenses more often. The FTPOA, if enacted, similarly has the potential to spark significant growth in the market for pet medications as more pet owners will be able to afford veterinarian-recommended products.

 

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Our Competitive Strengths

The following strengths form the foundation for our future growth:

Leader in, and Category Creator of, the Rx and OTC Pet Medications Market in the Retail Channel. PetIQ is the leading provider of a broad portfolio of veterinarian-recommended pet Rx medications and OTC flea and tick medications sold in national retail stores. Previously, most veterinarian-recommended flea and tick products were not sold in national retail stores. The category grew significantly after PetIQ brought leading veterinary brands to the national retail sector. We believe that through our development, manufacturing and distribution capabilities, we have enabled retailers to enter and grow the market for high quality pet medications. Category growth has continued as a result of continued innovation and new product offerings by PetIQ. Packaged Facts predicts that pet medications will be one of the highest growth areas of pet products at retail during the next decade, as retailers of human medications increasingly add animal medications to their product offerings. We believe that our “first mover” momentum, including our established relationships with leading retailers, provides us a significant competitive advantage that will facilitate future growth.

Broad Product Portfolio of Highly Recognized Brands. Our broad product portfolios consists of nine primary brands: VetIQ, PetIQ, PetAction Plus, Advecta II, TruProfen, Minties, Betsy Farms, Vera and Delightibles. We believe our brands are comparable in quality and safety to leading third-party brands as they contain the same active ingredients as leading third-party brands. Our brands are highly recognizable through targeted marketing campaigns and in-store merchandising. We also provide our retailers with numerous well-known third-party pet medication brands, such as Frontline Plus^®, Heartgard Plus^® and K9 Advantix^®. By offering a broad product portfolio, we offer retailers a “one-stop shop” solution for pet Rx and OTC medications and wellness products.

Premium Quality, Low Price Value Proposition. Our premium quality, low price value proposition offers consumers increased affordability, choice and convenience. Consumers now have access to a wider array of premium quality pet products and can realize typical savings of 20% to 30% on distributed products and up to 50% on our proprietary value-branded products compared to the prices charged by veterinarians. We believe that as consumer awareness and acceptance of our proprietary value-branded products and their economic benefits increases, more retailers and pet owners will convert to PetIQ’s product portfolio. In addition, retailers benefit by increasing their share of the estimated $8 billion addressable market of pet medications and wellness products for dogs and cats that was previously largely served through the veterinary channel.

Rapid and Innovative Product Development Capabilities. PetIQ has a sophisticated product team with expertise in market analysis, product development, packaging, marketing and industry regulations. These cross-functional skills provide us with ongoing competitive advantages and have resulted in the development of our most successful products and brands, including VetIQ, PetLock Plus, PetAction Plus and TruProfen. Given PetIQ’s track record of successfully launching new products, we have become an attractive commercial partner for leading development companies and R&D scientists and entrepreneurs from around the world. PetAction Plus is an example of a flea and tick product that leveraged our internal expertise and third-party relationships, resulting in enhanced margins for us and retailers and lower prices for our consumers.

Strong Relationships with Leading Retailers. We have the necessary scale to support a broad set of large blue-chip retailers and are increasingly regarded as a leading provider to the nation’s top pet product retailers, including Wal-Mart, Sam’s Club, Costco, Target, Petco and PetSmart. Before partnering with PetIQ, these and other retailers had limited access to veterinarian-recommended pet medic