Note 2 – Business Combinations

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:




$'s in 000's	Fair Value
Inventories	$	17,998
Property, plant and equipment		19,568
Other current assets		13,048
Other assets		9,680
Indefinite-lived intangible assets		23,040
Definite-lived intangible assets - 13 year weighted average life		14,480
Goodwill		105,838
Total assets		203,652

Liabilities assumed		19,259

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, and developed technology and know-how. 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 at December 31, 2019 was $1.1 million.

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 $105.8 million of goodwill is expected to be deductible for tax purposes. Goodwill was allocated to the Products segment.

Transaction costs of $6.1 million were incurred in the year ended December 31, 2019, and are included in General and Administrative expenses on the 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 $4.8 million; and (ii) elimination of acquisition expenses of $6.1 million. Additionally the share count utilized and Net (Loss) Income do not account for non-controlling interest. 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:


	Year ended December 31,
($'s in 000's, except per share data)	2019		2018
Net sales	$	751,348	$	618,678
Net (loss) income	$	(6,888)	$	(184,744)

(Loss) Earnings per share:
Basic	$	(0.30)	$	(10.73)
Diluted	$	(0.30)	$	(10.73)

For the twelve months ended December 31, 2019, the acquired business had Product sales of $28.9 million and pre-tax net income of $1.2 million included in the Consolidated Statements of (Loss) Income.

HBH Enterprises

On October 17, 2018, the Company completed the acquisition of HBH Enterprises, LLC (“HBH”) (the “HBH Acquisition”).

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 (15 year useful life)		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 year ended December 31, 2019 and 2018 was $4.3 million and $4.7 million, 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.