Note 2 – Business Combination

Perrigo Animal Health Acquisition

On July 8, 2019, PetIQ, Inc., through its subsidiary PetIQ, LLC, completed the acquisition of all the outstanding stock of Sergeant’s Pet Care Products, Inc. (“Sergeant’s”), d/b/a Perrigo Animal Health, including any assets related to Perrigo Company plc’s animal health business (the “Perrigo Animal Health Acquisition”). Sergeant’s is now an indirect wholly-owned subsidiary of the Company.

The fair value of the consideration is summarized as follows:


	Preliminary
	Estimated
$'s in 000's	Fair value
Inventories	$	17,998
Property, plant and equipment		18,207
Other current assets		13,048
Other assets		9,680
Indefinite-lived intangible assets		23,040
Definite-lived intangible assets - 13 year weighted average life		14,550
Goodwill		106,869
Total assets		203,392

Liabilities assumed		18,999

Purchase price	$	184,393

Cash paid, net of cash acquired	$	(185,090)
Post-closing working capital adjustment		697

Fair value of total consideration transferred	$	(184,393)

The definite-lived intangibles primarily relate to trademarks, customer relationships, developed technology and know-how and in-process research and development intangibles. The $14.6 million represents the fair value and will be amortized over the estimated useful lives of the assets through June 2039. Amortization expense for these definite-lived intangible assets for the three and nine months ended September 30, 2019 was $0.5 million, respectively.

The indefinite-lived intangibles primarily relate to trademarks and in-process research and development. We evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis and more frequently if an event occurs or circumstances change that would indicate impairment may exist.

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 $106.9 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment.

The estimate of fair value and purchase price allocation were based on information available at the time of closing the Perrigo Animal Health Acquisition. The Company is in process of finalizing the net working capital adjustment and valuation reports. 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 Perrigo Animal Health Acquisition. Transaction costs of $5.4 million were incurred in the nine months ended September 30, 2019, and are included in General and Administrative expenses on the Condensed Consolidated Statements of (loss) Income.

Pro Forma Combined Statements of Operations (Unaudited)

The following unaudited pro forma combined statements of operations presents the Company's operations as if the Perrigo Animal Health Acquisition and related financing activities had occurred on January 1, 2018. The pro forma information includes the following adjustments for nonrecurring charges (i) removal of costs of goods sold based on the step-up in fair value of acquired inventory of $2.4 million for the three months ended September 30, 2019; and (ii) elimination of acquisition expenses of $2.0 million and $5.4 million for the three and nine months ended September 30, 2019, respectively. Additionally the share count utilized and Net (Loss) Income do not account for non-controlling interests. The pro forma combined statements of operations are not necessarily indicative of the results of operations as they would have been had the Perrigo Animal Health Acquisition been effected on the assumed date and are not intended to be a projection of future results:


	Three months ended September 30,				Nine months ended September 30,
($'s in 000's, except per share data)	2019		2018		2019		2018
Net sales	$	186,025	$	151,788	$	597,012	$	494,381
Net (loss) income	$	(3,713)	$	(152,253)	$	4,235	$	(182,267)

(Loss) Earnings per share:
Basic	$	(0.16)	$	(8.99)	$	0.19	$	(11.51)
Diluted	$	(0.16)	$	(8.99)	$	0.19	$	(11.51)

For the nine months ended September 30, 2019, the acquired business had Product sales of $16.6 million and pre-tax net income of $1.7 million are included in the Condensed Consolidated Statements of (loss) Income.

HBH Enterprises

On October 17, 2018, the Company completed the acquisition of HBH Enterprises, LLC (“HBH”) (the “HBH Acquisition”). Total consideration, net of cash acquired, was approximately $14.7 million consisting of cash of $1.7 million and equity consideration of approximately $13.0 million. The equity consideration consisted of 400 thousand LLC interests of Holdco and 400 thousand shares of Class B common stock, $0.001 par value per share, of the Company.

The fair value of the consideration is summarized as follows:



$'s in 000's	Fair Value
Working Capital, net	$	1,676
Property, plant, and equipment		2,686
Intangible assets - Customer relationships		3,800
Goodwill		7,607
Total assets		15,769

Capital lease obligations		1,114
Total liabilities		1,114

Estimated purchase price	$	14,655

Cash paid, net of cash acquired	$	1,683
LLC Interests and shares of Class B common stock		12,972

Estimated fair value of total consideration transferred	$	14,655

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 $5.0 million of the $7.6 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 segment.

VIP Acquisition

On January 17, 2018, PetIQ, Inc. completed the VIP Acquisition.

The fair value of the consideration is summarized as follows:


$'s in 000's	Fair value
Current assets	$	15,617
Property, plant, and equipment		8,885
Other assets, net		295
Intangible assets - Customer relationships (20 year useful life)		77,200
Intangible assets - Brand names (10 year useful life)		9,600
Goodwill		112,643
Total assets		224,240

Current liabilities		22,908
Capital lease obligations		3,032
Total liabilities		25,940

Purchase price	$	198,300

Cash paid, net of cash acquired	$	92,082
LLC Interests and shares of Class B common stock		90,031
Guarantee note		10,000
Contingent notes		6,900
Post-closing working capital adjustment		(713)

Fair value of total consideration transferred	$	198,300

The definite-lived intangibles primarily relate to customer relationships and brand names. The $86.8 million represents the fair value and will be amortized over the estimated useful lives of the assets through January 2038. Amortization expense for these definite-lived intangible assets for the three months ended September 30, 2019 and 2018 was $1.1 million and $1.2 million, respectively, and $2.2 million for the nine months ended September 30, 2019 and 2018, respectively.

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 $49.8 million of the $112.6 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.