11. BUSINESS COMBINATIONS

Seventh Wave Laboratories LLC acquisition

Overview

On July 2, 2018, in order to provide broader solutions and greater scientific expertise to clients and to capitalize on collective skill sets and expertise to create a comprehensive portfolio, the Company, through its wholly-owned subsidiary Cardinal Laboratories LLC (the “Purchaser”), acquired (the “Acquisition”) substantially all of the assets of Seventh Wave Laboratories LLC (the “Seller”), a consulting-based contract research laboratory located in Maryland Heights, Missouri providing integrated services for discovery and preclinical drug development, under the terms and conditions of an Asset Purchase Agreement, dated July 2, 2018, among the Purchaser, the Company, the Seller and certain members of the Seller. The total consideration for the Acquisition was approximately $9,234, which consisted of $6,759 in cash, including an indemnity escrow of $750, and 1,500,000 of the Company’s common shares valued at $2,475, using the closing price of the Company’s common shares on June 29, 2018. Seventh Wave Laboratories, LLC is being operated as a wholly-owned subsidiary of the Company. The Company funded the cash portion of the purchase price for the Acquisition with cash on hand and the net proceeds from the refinancing of its credit arrangements with FIB, as described in Note 7.

Accounting for the Transaction

The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill. Results are included in the Company’s results from the acquisition date of July 2, 2018.

The Company’s allocation of the $9,234 purchase price to Seventh Wave’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of July 2, 2018, is included in the table below. Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. The purchase price allocation as of September 30, 2018 is as follows:


	Allocation as of
	September 30,
	2018
Assets acquired and liabilities assumed:
Receivables	$	1,431
Property and equipment		2,015
Prepaid expenses		89
Client relationships		1,980
Trademarks		1,170
Noncompete agreements		190
Backlog		143
Goodwill		3,034
Accounts payable		(160)
Accrued expenses		(266)
Customer advances		(335)
Capital leases		(57)
Balance at end of year	$	9,234

The allocation of the purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date. The acquired noncompete agreements, client relationships, trademarks and backlog have weighted average amortization periods of 4.0 years, 8.0 years, 15.0 and 0.5 years, respectively and the total weighted average life of the acquired intangible assets is 9.8 years. Amortization expense associated with these intangible assets amounted to $444 and $165 for fiscal years ended September 30, 2019 and 2018, respectively. Goodwill from this transaction has been allocated to the Company’s Services segment.

The Company incurred transaction costs of $130 and $395, respectively, for the years ended September 30, 2019 and 2018 related to the Acquisition. These costs were expensed as incurred and were primarily recorded as selling, general, and administrative expenses on the Company’s consolidated statements of operations and comprehensive income (loss). Seventh Wave recorded revenues of $2,852 and break even net income for the period beginning from the acquisition date of July 2, 2018 and ending on September 30, 2018. For the fiscal year ended September 30, 2019, Seventh Wave recorded revenues of $12,070 and net income of $163.

Smithers Avanza Toxicology Services LLC acquisition

Overview

On May 1, 2019, the Company, through its wholly-owned subsidiary BASi Gaithersburg LLC (f/k/a Oriole Toxicology Services LLC) (the “ Smithers Avanza Purchaser”), acquired (the “Smithers Avanza Acquisition”) from Smithers Avanza Toxicology Services LLC (the “Smithers Avanza Seller”), a consulting-based contract research laboratory located in Gaithersburg, Maryland, substantially all of the assets used by the Smithers Avanza Seller in connection with the performance of in-vivo mammalian toxicology CRO services for pharmaceuticals (small molecules and biologics), vaccines, agro and industrial chemicals, under the terms and conditions of an Asset Purchase Agreement, dated May 1, 2019, among the Smithers Avanza Purchaser, the Company, the Smithers Avanza Seller and the member of the Smithers Avanza Seller (the “Smithers Avanza Purchase Agreement”). The total consideration for the Smithers Avanza Acquisition was $2,595, which consisted of $1,271 in cash, subject to certain adjustments and an indemnity escrow of $125, 200 of the Company’s common shares valued at $394 using the closing price of the Company’s common shares on April 30, 2019 and an unsecured promissory note in the initial principal amount of $810 made by the Smithers Avanza Purchaser and guaranteed by the Company. The promissory note bears interest at 6.5%. The Smithers Avanza Purchaser is operated as a wholly-owned subsidiary of the Company. The Company funded the cash portion of the purchase price for the Smithers Avanza Acquisition with cash on hand and the net proceeds from the refinancing of its credit arrangements with FIB, as described in Note 7.

The Smithers Avanza Purchase Agreement contains customary representations, warranties, covenants (including non-competition requirements applicable to the selling parties for a 5-year period) and indemnification provisions. As contemplated by the Smithers Avanza Purchase Agreement, on May 1, 2019 the Smithers Avanza Purchaser assumed amended lease arrangements for certain premises in Gaithersburg, Maryland (the “Lease Arrangements”). Under the Lease Arrangements, the Smithers Avanza Purchaser agreed to lease the premises for a term of 5 years and 8 months, with two 5 year extensions at the Smithers Avanza Purchaser’s option. Annual minimum rental payments under the initial term of the Lease Arrangements range from $400 to $600, provided that the Lease Arrangements provide the Smithers Avanza Purchaser with the option to purchase the premises. The Lease Arrangements include customary rights upon a default by landlord or tenant.

Accounting for the Transaction

The Company’s allocation of the $2,595 purchase price to Smithers Avanza’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of May 1, 2019, is included in the table below. Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. The purchase price allocation as of September 30, 2019 is as follows:


	Allocation as of
	September 30,
	2019
Assets acquired and liabilities assumed:
Receivables	$	1,128
Property and equipment		1,564
Prepaid expenses		147
Goodwill		545
Accrued expenses		(219)
Customer advances		(570)
	$	2,595

The allocation of the purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date. Goodwill from this transaction is allocated to the Company’s Services segment.

The Company incurred transaction costs of $439 for the year ended September 30, 2019 related to the Smithers Avanza Acquisition. These costs were expensed as incurred and were primarily recorded as selling, general, and administrative expenses on the Company’s consolidated statements of operations and comprehensive income (loss). Smithers Avanza recorded revenues of $4,267 and net income of $195 for the period beginning from the acquisition date of May 1, 2019 and ending on September 30, 2019.

Pro Forma Results

The Company’s unaudited pro forma results of operations for the years ended September 30, 2018 assuming the Seventh Wave Acquisition and the Smithers Avanza Acquisition had occurred as of October 1, 2017 are presented for comparative purposes below. These amounts are based on available information of the results of operations of the Seventh Wave Seller’s operations and the Smithers Avanza Seller’s operations prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the Seventh Wave Acquisition and the Smithers Avanza Acquisition been completed on October 1, 2017.

The unaudited pro forma information is as follows:


	Fiscal Year Ended
	September 30, 2018

Total revenues	$	43,245
Net loss		(2,419)

Pro forma basic net loss per share	$	(0.27)
Pro forma diluted net loss per share	$	(0.27)