Note 2 – Business Combination

On January 17, 2018 PetIQ, Inc. completed the acquisition of VIP from VIP Holdings, LLC (“VIPH” or the “Sellers”). VIP is a provider of veterinary wellness and pet preventive services as well as a distributor of pet wellness products and medications. VIP provides a comprehensive suite of services at its community clinics and wellness centers hosted at local pet retailers across 31 states, which includes diagnostic tests, vaccinations, prescription medications, microchipping and wellness checks. The total purchase price was approximately $201 million, net of cash acquired and the effective settlement of pre-existing payables between the Company and VIP at cost which approximates fair value, and was funded through a combination of cash on hand, borrowings under a new $75 million term loan, a $10 million note payable, two $10 million contingent notes, payable upon the achievement of certain combined Company EBITDA targets, and equity consideration consisting of 4.2 million LLC interests of PetIQ Holdings, LLC (the “LLC Interests”) and 4.2 million shares of Class B common stock of the Company. As of March 31, 2018, the Company had issued 2.9 million shares of Class B common stock to the Sellers. The Company will issue the remaining 1.3 million shares of Class B common stock when it becomes available from either exchanges with Continuing LLC Owners or an amendment to the Articles of Incorporation.

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



$'s in 000's		Fair Value
Current assets	$	15,755
Property, plant, and equipment		8,857
Other assets, net		295
Intangible assets - Customer relationships (20 year useful life)		80,200
Intangible assets - Brand names (10 year useful life)		9,600
Goodwill		112,109
Total assets		226,816

Current liabilities		22,886
Capital lease obligations		3,032
Total liabilities		25,918

Estimated purchase price	$	200,898

Cash paid, net of cash acquired	$	91,987
LLC Interests and shares of Class B common stock		90,031
Guarantee note		10,000
Contingent notes		9,500
Preliminary post-closing working capital adjustment		(620)

Estimated fair value of total consideration transferred	$	200,898

The definite-lived intangibles primarily relate to customer relationships and brand names. The $89,800 thousand represents the fair value and will be amortized on a straight-line basis through January 2038. Amortization expense for these definite-lived intangible assets for the three months ended March 31, 2018 was $1,035 thousand and the estimated future amortization expense is approximately $3,728 thousand for the remainder of 2018, and $4,970 thousand annually thereafter.

Goodwill represents the future economic benefits that do not qualify for separate recognition and primarily includes the assembled workforce and other non-contractual relationships, as well as expected future synergies. The balance was allocated to the Products and Services segments and as shown in Note 4.

Pro Forma Combined Statements of Operations (Unaudited)

The following unaudited pro forma combined statements of operations presents the Company's operations as if the VIP Acquisition and related financing activities had occurred on January 1, 2017. The pro forma information includes the following adjustments (i) amortization of acquired definite-lived intangible assets; (ii) depreciation based on the fair value of acquired property and equipment; (iii) costs of goods sold based on the fair value of acquired inventory; (iv) interest expense incurred in connection with the term loan and guaranteed note borrowings used to finance the acquisition; (v) inclusion of equity-based compensation expense associated with equity awards granted to certain VIP employees in connection with the acquisition; (vi) elimination of acquisition expenses; and (vii) VIP’s operations for the periods from January 1, 2017 to March 31, 2017 and January 1, 2018 to January 16, 2018. The pro forma combined statements of operations are not necessarily indicative of the results of operations as they would have been had the VIP Acquisition been effected on the assumed date and are not intended to be a projection of future results:


		Three months ended March 31,
($'s in 000's, except per share data)		2018		2017
Net sales	$	118,162	$	98,992
Net income (loss)	$	(1,020)	$	5,448

Earnings (loss) per share:
Basic(1)	$	(0.07)	$	—
Diluted(1)	$	(0.07)	$	—

⁽¹⁾

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