ACQUISITIONS

CarePoint Partners Holdings LLC

On August 23, 2013, the Company closed on the acquisition of substantially all of the assets and assumption of certain liabilities that constituted the home infusion business (the “CarePoint Business”) of CarePoint Partners Holdings LLC, a Delaware limited liability company, and its subsidiaries (collectively “CarePoint”). CarePoint was a provider of home and alternate-site infusion therapy for patients with complex, acute and chronic illnesses. CarePoint serviced approximately 20,500 patients annually through 28 sites of service in nine states in the East Coast and Gulf Coast regions.

The cash purchase price paid at closing was $211.1 million. The purchase agreement contemplated a targeted level of net working capital. Subsequent to the closing, the Company and the sellers agreed that additional net working capital adjustments of approximately $1.8 million were due to the Company primarily related to the value of accounts receivable and prepaid expenses as of the date of acquisition. The Company received payment for these amounts in June 2014.

In addition, the purchase agreement provides that the purchase price could be increased by contingent consideration of $10.0 million if the CarePoint Business achieves a specified level of product gross profit during the one-year period following the closing date. If the specified level of product gross profit is not achieved, no contingent consideration will be due to the sellers. The Company reported actual product gross profit for the measurement period from September 1, 2013 to August 31, 2014 to the sellers on October 15, 2014. The report indicated that the requisite level of product gross profit was not achieved during the measurement period. Should the sellers disagree with the Company’s report, the purchase agreement provides for the dispute to be settled through arbitration.

At the date of acquisition, the fair value of the $10.0 million contingent consideration was estimated at $9.8 million. The fair value of the contingent consideration was determined using Level 3 inputs based on the present value of various payout scenarios, weighted on the basis of probability. The most important factor in determining the probability of payout was the remaining 2013 forecast and the 2014 budget for the CarePoint Business standalone and merged market sites.

As of September 30, 2014, the fair value of the contingent consideration was remeasured considering that the required product gross profit was not achieved during the measurement period and the uncertainties around the potential arbitration process. The Company believes it will prevail if arbitration is required, however some uncertainty is inherent in any arbitration process. As a result, the fair value of the contingent consideration was maintained at $5.0 million as of September 30, 2014. Should an arbitrator rule against the Company, an additional expense of $5.0 million will be recorded over and above the accrual of $5.0 million estimated at September 30, 2014. Should an arbitrator rule for the Company, the liability for contingent consideration will be reversed and, as a result, additional income of $5.0 million will be recorded. The liability for the contingent consideration is included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.

The $0.0 million and $4.8 million of income resulting from the reduction of the fair value of the contingent consideration for the three months and nine months ended September 30, 2014, respectively, is included in the change in fair value of contingent consideration in the accompanying Unaudited Consolidated Statements of Operations

The Company funded the cash payment at closing with a combination of cash on hand and $150.0 million in borrowings under the Senior Credit Facilities (see Note 9 - Debt).

The table below summarizes the Company’s assessment of the fair values of the assets acquired and liabilities assumed as of the date of closing of the acquisition of the CarePoint Business (in thousands):



	Fair Value
Cash	$	14
Accounts receivable	15,917
Inventories	3,184
Other current assets	215
Property and equipment	3,266
Identifiable intangible assets⁽¹⁾	16,700
Current liabilities	(8,697		)
Non-current liabilities	(721		)
Total identifiable net assets	29,878
Goodwill	189,214
Total cash and fair value of contingent consideration	$	219,092


(1)	The following table summarizes the amounts and useful lives assigned to identifiable intangible assets (in thousands):



	Weighted- Average Useful Lives	Amounts Recognized as of the Closing Date
Customer relationships	2 - 4 years	$	13,600
Trademarks	2 years	2,600
Non-compete agreements	5 years	500
Total identifiable intangible assets acquired		$	16,700

The excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of goodwill represents the value the Company expects to be created by combining the various operations of the CarePoint Business with the Company’s operations, including the expansion into new infusion markets, the opportunity to consolidate and upgrade certain existing facilities, access to new patients and potential cost savings and synergies. The CarePoint transaction was structured such that the amount allocated to goodwill will be deductible for income tax purposes in accordance with applicable tax rules.

The accompanying Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2014 include revenues of $36.5 million and $116.4 million and loss from continuing operations of $2.1 million and $1.1 million for the CarePoint Business, respectively. The accompanying Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2013 include revenues of $14.0 million and income from continuing operations of $1.1 million for the period from the date of acquisition through September 30, 2013.

HomeChoice Partners, Inc.

On February 1, 2013, the Company acquired 100% of the ownership interest in HomeChoice Partners, Inc., a Delaware corporation (“HomeChoice”). Prior to the Company’s acquisition, HomeChoice was a provider of alternate-site infusion pharmacy services that serviced approximately 15,000 patients annually and had 14 infusion pharmacy locations in Pennsylvania; Washington, DC; Maryland; Virginia; North Carolina; South Carolina; Georgia; Missouri; and Alabama.

The cash purchase price of the HomeChoice acquisition was $72.9 million paid at the closing date. In addition, the purchase agreement provides that the purchase price could be increased by contingent consideration of up to $10.0 million if HomeChoice were to attain certain performance milestones in the first year following the closing and an additional $10.0 million if HomeChoice were to attain certain performance milestones in the second year following the closing, for total possible contingent consideration of up to $20.0 million.

At the date of acquisition, the fair value of the potential contingent consideration, using Level 3 inputs, was estimated at $8.0 million. The $20.0 million maximum contingent consideration was established using aggressive growth targets meant to achieve operating results in excess of transaction valuation model assumptions. Given the aggressiveness of the earnout target threshold, the Company assigned less than 50% probability of payout among the various payout scenarios considered.

While the acquisition has generated revenues as expected in the transaction valuation model, revenues through September 30, 2014 have not exceeded the aggressive earnout performance pace required. Specifically, revenue generating opportunities through various potential business relationships have not come to fruition and thus the probability of attaining the high level of growth required to achieve the earnout has been diminishing over the past year resulting in a lower probability of a future payout of contingent consideration. As of September 30, 2014, the fair value of the contingent consideration was again remeasured at fair value using actual operating results through September 30, 2014 and forecasted operating results for the remainder of 2014. As a result of this remeasurement, the probability of the payment of any contingent consideration appeared negligible. As a result, the fair value of the contingent consideration was reduced to $0.0 million. The $0.1 million and $2.1 million of income resulting from the reduction in the fair value of the contingent liability is included in change in fair value of contingent consideration in the accompanying Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2014.

The accompanying Unaudited Consolidated Statements of Operations include revenues of $22.2 million and $18.9 million and income from continuing operations of $1.2 million, and $1.1 million related to HomeChoice for the three months ended September 30, 2014 and 2013, respectively. The accompanying Unaudited Consolidated Statements of Operations include revenues of $64.7 million and $47.5 million and income from continuing operations of $7.3 million and $0.8 million for the nine months ended September 30, 2014 and for the period from the date of acquisition to September 30, 2013, respectively.

InfuScience, Inc.

On July 31, 2012, the Company acquired 100% of InfuScience, Inc. (“InfuScience”) for a cash payment of $38.3 million. The terms of the agreement provided that the purchase price could be increased by contingent consideration of up to $3.0 million based on the results of operations during the 24 month period through July 31, 2014. InfuScience historically acquired, developed and operated businesses providing alternate site infusion pharmacy services through five infusion centers located in Eagan, Minnesota; Omaha, Nebraska; Chantilly, Virginia; Charleston, South Carolina; and Savannah, Georgia.

At the date of acquisition, the fair value of the potential contingent consideration, determined using Level 3 inputs based on the present value of various payout scenarios and weighted on the basis of probability, was estimated at $2.9 million. During the nine months ended September 30, 2013, the Company made payments of $1.4 million related to the contingent consideration. As of September 30, 2013, the fair value of the contingent consideration was remeasured at fair value using actual operating results through September 30, 2013 and forecasted operating results for the remainder of 2013. As a result of this remeasurement, the fair value of the remaining contingent consideration was reduced to $1.1 million and is included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets at September 30, 2013. The $0.4 million of income resulting from the reduction in the fair value of the contingent liability is included in change in fair value of contingent consideration in the accompanying Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2013. As of September 30, 2014, the Company has made contingent payments of $3.0 million based on the achievement of expected operating results and as a result, the contingent consideration has been fully paid.

Acquisition and Integration Costs

Expenses incurred to integrate acquisitions are recorded in acquisition and integration expenses of the accompanying Unaudited Consolidated Statements of Operations. These costs include legal and financial advisory fees associated with acquisitions; employee severance related to staff rationalization; temporary redundant costs and integration costs to convert to common policies, procedures, and information systems. The following table summarizes the acquisition and integration expenses for the three months and nine months ended September 30, 2014 and 2013 related to the CarePoint Business, HomeChoice Partners, and InfuScience acquisitions (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Legal and professional fees	$	1,689	$	1,130	$	4,235	$	4,089
Financial advisory fees	—		2,413		—		2,413
Employee costs including redundant salaries and benefits and severance	312		876		1,892		2,353
Facilities consolidation and discontinuation	364		198		1,022		1,214
Change in revenue reserves related to acquired accounts receivable	451		—		5,871		—
Legal settlement	1		—		334		2,300
Other	105		273		1,400		656
Total	$	2,922	$	4,890	$	14,754	$	13,025

The change in revenue reserves includes adjustments to the allowance for doubtful accounts and allowance for contractual discounts related to accounts receivable acquired in connection with the CarePoint Business and HomeChoice acquisitions that are no longer deemed collectible. These acquired accounts receivable and contractual discounts were reserved at historical collection rates as of December 31, 2013. Based on lower than expected collections in 2014, the Company no longer expects to achieve historical collection rates on the acquired accounts receivable.

Pro Forma Impact of Acquisitions

The following shows summarized unaudited pro forma consolidated results of operations for the three months and nine months ended September 30, 2014 and 2013 as if the CarePoint and HomeChoice acquisitions had occurred as of January 1, 2013 (in thousands except per share data):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues	$	243,959		$	214,317		$	730,377		$	651,344
Loss from continuing operations, net of income taxes	$	(37,575	)	$	(24,834	)	$	(81,442	)	$	(41,622	)
Basic and diluted loss per share from continuing operations	$	(0.55	)	$	(0.37	)	$	(1.19	)	$	(0.66	)

The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company, CarePoint and HomeChoice. Except to the extent realized in the three months and nine months ended September 30, 2013, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the expenses to be incurred to achieve these savings, operating synergies and other benefits. In addition, except to the extent recognized in the three months and nine months ended September 30, 2013, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with CarePoint or HomeChoice.

The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the CarePoint and HomeChoice acquisitions been completed on January 1, 2013. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information primarily reflects the following adjustments to the historical results of the acquired entities prior to acquisition (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Interest expense	$	—	$	247		$	—	$	1,578
Amortization expense	$	—	$	(504	)	$	—	$	(866	)
Income tax benefit (expense)	$	—	$	(622	)	$	—	$	(2,785	)