Note 2 – Business Combination

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

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



$'s in 000's		Preliminary Estimated Fair Value		Adjustments		As Retrospectively Adjusted
Current assets	$	15,755	$	—	$	15,755
Property, plant, and equipment		8,857		—		8,857
Other assets, net		295		—		295
Intangible assets - Customer relationships (20 year useful life)		80,200		(3,900)		76,300
Intangible assets - Brand names (10 year useful life)		9,600		—		9,600
Goodwill		112,109		1,300		113,409
Total assets		226,816		(2,600)		224,216

Current liabilities		22,886		75		22,961
Capital lease obligations		3,032		—		3,032
Total liabilities		25,918		75		25,993

Estimated purchase price	$	200,898	$	(2,675)	$	198,223

Cash paid, net of cash acquired	$	91,987	$	96	$	92,083
LLC Interests and shares of Class B common stock		90,031		—		90,031
Guarantee note		10,000		—		10,000
Contingent notes		9,500		(2,600)		6,900
Preliminary post-closing working capital adjustment		(620)		(171)		(791)

Estimated fair value of total consideration transferred	$	200,898	$	(2,675)	$	198,223

During the period we adjusted purchase price allocation as a result of receiving certain information, which existed as of the date of acquisition. This information impacted our working capital adjustment as well as the projected operating results used in estimating the fair value of intangible assets and contingent notes. We are currently waiting for a final valuation report and other information needed to finalize our purchase price allocation. Additionally, we are waiting for information needed to finalize our working capital adjustment which could affect the recorded purchase consideration and goodwill

The definite-lived intangibles primarily relate to customer relationships and brand names. The $85.9 million 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 and six months ended June 30, 2018 was $1.2 million and $2.2 million, respectively. The estimated future amortization expense is approximately $2.4 million for the remainder of 2018, and $4.8 million 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. Approximately $54 million of the $113.4 million of goodwill will not be tax deductible, and the remaining balance is expected to be deductible for tax purposes. Goodwill 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 June 30, 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 June 30,				Six months ended June 30,
($'s in 000's, except per share data)		2018		2017		2018		2017
Net sales	$	171,142	$	141,622	$	289,305	$	240,614
Net income	$	5,549	$	7,718	$	4,531	$	13,166

Earnings per share:
Basic(1)	$	0.36	$	—	$	0.30	$	—
Diluted(1)	$	0.36	$	—	$	0.30	$	—

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