2. Business Combinations and Other Investments

Formation of Joint Business Entity and Acquisition of Netsmart, Inc.

On March 20, 2016, we entered into a Contribution and Investment Agreement (the “Contribution Agreement”) with GI Netsmart Holdings LLC, a Delaware limited liability company (“GI Partners”) to form a joint business entity, Nathan Holding LLC, a Delaware limited liability company (“Nathan”). The formation of Nathan was completed on April 19, 2016. As a result, pursuant to, and subject to the terms and conditions of, the Contribution Agreement, Nathan issued to Allscripts Class A Common Units in exchange for Allscripts contributing its Homecare^TM business and cash to Nathan and issued to GI Partners Class A Preferred Units in exchange for cash.

The Nathan operating agreement provides that the Class A Preferred Units entitle the owners at any time and from time to time following the later of (A) the earlier of (I) the fifth anniversary of the effective date and (II) a change in control of Allscripts, and (B) the earlier of (I) the payment in full of the obligations under the Netsmart Credit Agreements and the termination of any commitments thereunder or (II) with respect to any proposed redemption, such earlier date for such redemption consented to in writing by the required lenders under each of the credit facilities under which obligations remain unpaid or under which commitments continue, to redeem all or any portion of their Class A Preferred Units for cash at a price per Unit equal to the Class A Preferred liquidation preference for each such Class A Preferred Unit as of the date of such redemption. The liquidation preference is equal to the greater of (i) a return of the original issue price plus a preferred return (accruing on a daily basis at the rate of 11% per annum and compounding annually on the last day of each calendar year) or (ii) the as-converted value of Class A Common Units in Nathan. The consolidated statement of operations for the year ended December 31, 2016 gives effect to the accretion of the 11% redemption preference as part of the calculation of net income (loss) attributable to Allscripts stockholders.

Also on April 19, 2016, Nathan acquired Netsmart, Inc., a Delaware corporation, pursuant to the Agreement and Plan of Merger, dated as of March 20, 2016 (the “Merger Agreement”), by and among Nathan Intermediate LLC, a Delaware limited liability company and a wholly-owned subsidiary of Nathan (“Intermediate”), Nathan Merger Co., a Delaware corporation and a wholly-owned subsidiary of Intermediate (“Merger Sub”), Netsmart, Inc. and Genstar Capital Partners V, L.P., as the equityholders’ representative. Pursuant to the Merger Agreement, on April 19, 2016, Merger Sub was merged with and into Netsmart, Inc., with Netsmart, Inc. surviving as a wholly-owned subsidiary of Intermediate (the “Merger”). As a result of these transactions (the “Netsmart Transaction” or “Netsmart Acquisition”), the establishment of Nathan combined the Allscripts Homecare^TM business with Netsmart, Inc. Throughout the rest of this Form 10-K, Nathan is referred to as “Netsmart”.

At the effective time of the Merger, shares of Netsmart, Inc.’s common stock issued and outstanding immediately prior to the effective time were converted into the right to receive a pro rata share of $950 million, reduced by net debt and subject to working capital and other adjustments (the “Purchase Price”). Each vested outstanding option to acquire shares of Netsmart, Inc.’s common stock became entitled to receive a pro rata share of the Purchase Price, less applicable exercise prices of the options. Certain holders of shares of Netsmart, Inc.’s common stock, who were members of Netsmart, Inc.’s management, exchanged a portion of such shares for equity interests in Nathan, in lieu of receiving their pro rata share of the Purchase Price, and certain holders of options to purchase shares of Netsmart, Inc.’s common stock, who were also members of Netsmart, Inc.’s management, invested a portion of such holder’s proceeds from the Merger in equity interests in Nathan (collectively, the “Rollover”). After the completion of the Merger and the Rollover, Allscripts owned 49.1%, GI Partners owned 47.2% and Netsmart’s management owned 3.7% of the outstanding equity interests in Netsmart, in each case on an as-converted basis. As part of the Netsmart Transaction, we deposited $15 million in an escrow account to be used by Netsmart to facilitate the integration of our Homecare^TM business within Netsmart over the next 5 years, at which time the restriction on any unused funds will lapse.

Pursuant to the consolidation guidance in FASB Accounting Standards Codification (“ASC”) Topic 810, Consolidation, we performed a qualitative and quantitative assessment to determine whether Netsmart was a variable interest entity (“VIE”). Our assessment involved consideration of all facts and circumstances relevant to Netsmart’s structure, including its capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have the potential to be economically significant. Based on this analysis, we determined that Netsmart was not a VIE and that we, through our 49.1% interest in Netsmart and other contractual rights, including budgetary approval, have the power to direct the activities of Netsmart that most significantly impact its economic performance. As a result, we concluded that we will account for our investment in Netsmart on a consolidated basis and the financial results of Netsmart were consolidated with Allscripts starting on April 19, 2016.

The acquisition of Netsmart, Inc. by Nathan was completed for an aggregate consideration of $937 million. The consideration was funded by the sources of funds as described in the table below. The new Netsmart term loans are non-recourse to Allscripts and its wholly-owned subsidiaries. A portion of the debt proceeds were used to extinguish Netsmart, Inc.’s existing debt of $325 million, including accrued interest and fees of $2 million.

	(In thousands)
Cash contribution for redeemable convertible non-controlling interest in Netsmart - GI Partners	$	333,606
Exchange of Netsmart, Inc.'s common stock for redeemable convertible non-controlling interest in Netsmart - Netsmart, Inc. management		25,543
Cash contribution from borrowings under revolver in exchange for common stock in Netsmart - Allscripts		43,782
Net borrowings under new term loans - Netsmart		534,135
Total consideration for Netsmart, Inc.	$	937,066

Under the acquisition method of accounting, the fair value of consideration transferred for Netsmart, Inc. was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date with the remaining unallocated amount recorded as goodwill. During the three months ended December 31, 2016, we recorded several measurement period adjustments, which included $3.6 million decrease in accounts receivable, net, $0.3 million increase in prepaid expenses and other assets, $0.3 million decrease in other assets, $0.7 million increase in deferred taxes, net, $0.6 million decrease in other liabilities and $3.7 million increase in the residual allocation to goodwill.

The final allocation of the fair value of the consideration transferred, including measurement period adjustments through December 31, 2016, is shown in the table below.

	(In thousands)
Cash and cash equivalents	$	5,982
Accounts receivable, net		50,472
Prepaid expenses and other current assets		9,667
Fixed assets		26,829
Intangible assets		409,500
Goodwill		619,283
Other assets		6,540
Accounts payable		(14,151	)
Accrued expenses		(9,595	)
Deferred revenue		(18,843	)
Capital lease obligations		(17,833	)
Deferred taxes, net		(127,729	)
Other liabilities		(3,056	)
Net assets acquired	$	937,066

Allscripts’ contribution of its Homecare^TM business to Nathan was deemed to be a transaction between entities under common control and the net assets of the Homecare^TM business were contributed at carryover basis.

As noted above, the formation of Netsmart resulted in the merger of our Homecare^TM business with Netsmart, Inc.’s behavioral health technology business. As a result, Netsmart became one of the largest healthcare IT companies serving the health and human services sector, which includes behavioral health, public health and child and family services. Among the factors that contributed to a purchase price resulting in the recognition of goodwill were the expected growth and synergies that we believe will result from the integration of our Homecare^TM business with Netsmart, Inc.’s product offerings. The goodwill is not deductible for tax purposes.

The acquired intangible assets are being amortized over their useful lives, using a method that approximates the pattern of economic benefits to be gained by the intangible asset and consist of the following amounts for each class of acquired intangible asset:

	Useful Life	Fair Value
Description	(In years)	(In thousands)
Technology	10	$	144,000
Corporate Trademark	indefinite		27,000
Product Trademarks	10		8,500
Customer Relationships	12-20		230,000
		$	409,500

Acquisition costs related to the Netsmart Acquisition totaled $4.1 million and are included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2016.

Acquisition of HealthMEDX

On October 27, 2016, Netsmart completed the acquisition of HealthMEDX, LLC, a Delaware limited liability company (“HealthMEDX”), for an aggregate consideration of $39.2 million. HealthMEDX is a provider of electronic medical record solutions for long-term and post-acute care including continuing care retirement communities, assisted living, independent living, skilled nursing and home care providers.

The aggregate consideration was funded by the sources of funds as shown in the table below and includes a contingent consideration payable to the HealthMEDX unitholders in 2018 of up to $3.5 million based on HealthMEDX achieving certain recurring revenue milestones in 2017. The fair value of such contingent consideration shown in the table below represents the maximum pay-out amount discounted at the weighted-average cost of capital rate used as part of the HealthMEDX valuation. The portion of the aggregate consideration that was paid in cash at closing was funded with borrowings under the Netsmart Credit Agreements.

	(In thousands)
Incremental term loan - Netsmart	$	36,195
Contingent consideration payable to former HealthMEDX owners		2,888
Deferred cash consideration		100
Total consideration for HealthMEDX, LLC	$	39,183

The allocation of the fair value of the consideration transferred as of the acquisition date of October 27, 2016 is shown in the table below. This allocation is preliminary and is subject to changes, which could be significant, as appraisals of tangible and intangible assets are finalized, and additional information becomes available:

	(In thousands)
Cash and cash equivalents	$	489
Accounts receivable, net		3,109
Prepaid expenses and other current assets		773
Fixed assets		603
Intangible assets		20,940
Goodwill		18,457
Other assets		45
Accounts payable		(703	)
Accrued expenses		(1,427	)
Deferred revenue		(1,792	)
Current maturities of capital lease obligations		(808	)
Long-term maturities of debt and capital lease obligations		(503	)
Net assets acquired	$	39,183

We believe that the HealthMEDX acquisition will complement the existing Homecare^TM business and result in higher future revenue and operating synergies. These factors contributed to a purchase price resulting in the recognition of goodwill. The goodwill is expected to be deductible for tax purposes.

The following table summarizes the estimated fair values of HealthMEDX’s identifiable intangible assets and their estimated useful lives:

	Useful Life	Fair Value
Description	(In years)	(In thousands)
Technology	10	$	11,410
Product Trademarks	10		680
Customer Relationships	15		8,850
		$	20,940

Supplemental Information

The supplemental pro forma results below were calculated after applying our accounting policies and adjusting the results of Netsmart and HealthMEDX to reflect (i) the additional depreciation and amortization that would have been charged resulting from the fair value adjustments to property, plant and equipment and intangible assets, (ii) the additional interest expense associated with Netsmart’s borrowings under the new term loans, and (iii) the additional amortization of the estimated adjustment to decrease the assumed deferred revenue obligations to fair value that would have been charged assuming both acquisitions occurred on January 1, 2015, together with the consequential tax effects. Supplemental pro forma results for the year ended December 31, 2016 were also adjusted to exclude acquisition-related and transaction costs incurred during this period. Supplemental pro forma results for the year ended December 31, 2015 were adjusted to include these items. The supplemental pro forma results for the year ended December 31, 2016 exclude expenses incurred by Netsmart immediately prior to the Netsmart Transaction related to the accelerated pay-out of outstanding equity awards and the payment of seller costs. The supplemental pro forma results for the year ended December 31, 2015 include a goodwill impairment expense of $23 million recognized by HealthMEDX. The effects of transactions between Allscripts and Netsmart during the periods presented have been eliminated in the supplemental pro forma data.

The revenue and earnings of Netsmart, since April 19, 2016, and HealthMEDX, since October 27, 2016, are included in our consolidated statement of operations for the year ended December 31, 2016 and the supplemental pro forma revenue and net loss of the combined entity, presented as if the acquisitions of both entities had occurred on January 1, 2015, are as follows:

	Year Ended December 31,
(In thousands, except per share amounts)	2016			2015
Actual from Netsmart since acquisition date of April 19, 2016:
Revenue ⁽¹⁾	$	173,361		$	0
Net loss ⁽¹⁾	$	(27,709	)	$	0

Actual from HealthMEDX since acquisition date of October 27, 2016:
Revenue	$	4,725		$	0
Net loss	$	602		$	0

Supplemental pro forma data for combined entity:
Revenue	$	1,644,004		$	1,579,848
Net loss attributable to Allscripts Healthcare Solutions, Inc. stockholders	$	(44,728	)	$	(133,467	)
Loss per share, basic and diluted	$	(0.24	)	$	(0.72	)

(1)

Amounts are not adjusted for the effects of transactions between Allscripts and Netsmart and include HealthMEDX actual results since October 27, 2016.

Acquisition of Oasis Medical Solutions Limited

On July 8, 2014, we acquired the entire capital stock of Oasis Medical Solutions Limited (“Oasis”), a privately-held, Patient Administration System and health informatics solutions provider headquartered in London, United Kingdom, for $20.6 million, in cash. The allocation of the fair value of the consideration transferred is as follows: $0.4 million of acquired cash; $5.4 million of accounts receivable and other current assets; $5.6 million of intangible assets related to technology; $0.3 million related to Oasis’ tradename; $6.5 million of intangible assets related to customer relationships; goodwill of $11.2 million; $0.2 million of fixed assets; $6.7 million of accounts payable, deferred revenue and accruals; and $2.3 million of net deferred tax liabilities. Goodwill was determined based on the residual difference between the fair value of the consideration transferred and the value assigned to tangible and intangible assets and liabilities, and is not deductible for tax purposes. Among the factors that contributed to a purchase price resulting in the recognition of goodwill were the expected synergies that we believe will result from the integration of our product offerings with those of Oasis. The acquired intangible assets relating to technology, customer relationships and the Oasis’ tradename will be amortized on a straight-line basis over estimated lives of 10 years, 12 years and 2 years, respectively.

The pro forma impact of the Oasis acquisition is not material. The results of operations of Oasis have been included in our consolidated results from the date of acquisition. We did not incur any significant acquisition and integration-related costs related to the Oasis acquisition.

Other Acquisitions and Investments

On December 2, 2016, we acquired a 100% interest in a third party based in Australia for an aggregate consideration of $5.1 million, net of cash acquired. The acquisition will broaden our clinical solutions portfolio. The financial results of this third party were consolidated with our financial results starting on the date of the transaction. The allocation of the estimated fair value of the aggregate consideration is as follows: $2.9 million of goodwill; $3.4 million of intangible assets related to customer relationships, $0.6 million of intangible assets related to technology; $1.2 million of deferred tax liabilities; and $0.6 million of net working capital and deferred revenue. The goodwill is not deductible for tax purposes. The acquired intangible assets relating to technology and customer relationships will be amortized on a straight-line basis over estimated lives of 8 years. The aggregate consideration included a contingent consideration payable to the third party owners of up to $2.5 million based on the achievement of certain profitability targets by 2018 and 2019. The fair value of $2.0 million accrued at December 31, 2016 was calculated based on probability-weighted simulations of potential target achievements. All amounts are based on the exchange rate between the United States dollar and the Australian dollar as of December 31, 2016. The results of operations of this third party were not material to our consolidated results of operations for the year ended December 31, 2016.

On October 14, 2016, we acquired a 100% interest in a third party for an aggregate consideration $24.0 million, net of cash acquired. The acquisition will broaden our population health solutions portfolio. The financial results of this third party were consolidated with our financial results starting on the date of the transaction. The allocation of the aggregate consideration is as follows: $16.2 million of goodwill; $11.5 million of intangibles assets related to technology, $0.2 million of intangible assets related to customer relationships; $3.7 million of deferred tax liabilities and $0.2 million of net working capital and deferred revenue. The goodwill is not deductible for tax purposes. The acquired intangible assets relating to technology and customer relationships will be amortized on a straight-line basis over estimated lives of 8 years. The results of operations of this third party were not material to our consolidated results of operations for the year ended December 31, 2016.

On September 8, 2016, we acquired a 51% interest in a third party for $29.7 million, net of cash acquired. This acquisition broadens our financial analytics solutions portfolio. The financial results of this third party were consolidated with our financial results starting on the date of the transaction and were not material to our consolidated results of operations for the year ended December 31, 2016. The allocation of the fair value of the consideration transferred is as follows: $46.2 million in goodwill; $8.3 million intangible assets related to customer relationships, $10.3 million of intangible assets related to technology; $1.6 million related to tradename; $5.9 million of accounts receivable and other current assets; $0.6 million of deferred tax assets; $1.5 million of fixed assets; $6.0 million of accounts payable, deferred revenue and accruals; $8.5 million of deferred tax liabilities; $0.8 million of other long-term liabilities, and $29.4 million of non-controlling interest. The value of the non-controlling interest was based on its proportionate share of the implied total enterprise value of the third party at the time of the transaction. The goodwill is not deductible for tax purposes. The acquired intangible assets relating to technology, customer relationships and tradename will be amortized on a straight-line basis over estimated lives of 10 years, 13 years and 10 years, respectively. During the three months ended December 31, 2016, we recorded several measurement period adjustments, which included $1.2 million decrease in the value of customer relationship intangibles, $0.2 million decrease in deferred tax liability and $1.0 million increase in the residual allocation to goodwill. As part of this acquisition, Allscripts also obtained a call option to purchase all, but not less than all, of the remaining 49% equity share of the third party after the second and third anniversaries of the transaction date at pre-defined future enterprise values of the third party. Additionally, as part of this acquisition, the minority owners of the third party were granted a call option to repurchase the 51% equity share owned by Allscripts at the same pre-defined future enterprise value applicable to Allscripts call option for a period of 9 months after the third anniversary of the transaction date. Such call option can only be exercised in the event that Allscripts chooses not to exercise its call option after the third anniversary of the transaction date.

On April 17, 2015 we acquired a majority interest in a third party for $11.1 million, and provided a loan to the third party of $9.3 million to refinance its outstanding indebtedness. The financial results of this third party were consolidated with our financial results starting on the date of the transaction, with a proportionate share allocated to non-controlling interest. The allocations of the estimated fair value of the net assets of the third party to goodwill, intangibles and non-controlling interest were $22.3 million, $4.3 million and $11.0 million, respectively. The value of the non-controlling interest was based on its proportionate share of the implied total enterprise value of the third party at the time of the transaction. The goodwill is not deductible for tax purposes. The results of operations of this third party were not material to our consolidated results of operations for the year ended December 31, 2015.

The following table summarizes our other equity investments which are included in other assets in the accompanying consolidated balance sheets:

	Number of
	Investees		Original		Carrying Value at
(In thousands)	at December 31, 2016		Investment		December 31, 2016		December 31, 2015
Equity method investments ⁽¹⁾:
Nant Health, LLC ⁽²⁾		0	$	0	$	0	$	203,117
Other		3		1,658		2,436		2,436
Total equity method investments		3		1,658		2,436		205,553
Cost method investments		5		29,991		26,041		17,876
Total equity investments		8	$	31,649	$	28,477	$	223,429

(1)

Allscripts share of the earnings of our equity method investees is reported based on a one quarter lag.

(2)

As noted below, effective June 2, 2016, Nant Health, LLC is no longer accounted for under the equity method.

On June 26, 2015 we purchased 59,099,908 Series G Units of Nant Health, LLC, a cloud-based information technology company that offers comprehensive genomic and protein-based molecular diagnostic testing, for $200.0 million and incurred $5.4 million of transaction-related expenses, resulting in a total investment of $205.4 million. This investment represented a 10% ownership stake, excluding authorized but unissued common units of Nant Health, LLC, and was accounted for under the equity method. Additionally, the carrying amount of our investment at December 31, 2015 exceeded the amount of our share of underlying equity in net assets of Nant Health, LLC at September 30, 2015 by $180 million. The excess carrying value over the underlying equity in net assets of Nant Health, LLC is primarily comprised of amortizable intangible assets and nonamortizable goodwill. During the six months ended December 31, 2015, we recorded a loss of $2.3 million representing our share of equity loss of Nant Health, LLC based on a one quarter reporting lag and the amortization of cost basis differences associated with the amortizable intangible assets. The carrying value of our investment in Nant Health, LLC is included in other assets in the accompanying consolidated balance sheet as of December 31, 2015.

Effective June 1, 2016, in preparation for an IPO of its equity securities, Nant Health, LLC converted from an LLC into a Delaware corporation under the name of NantHealth, Inc. (“NantHealth”). We received 14,285,714 shares of common stock in the new corporation in replacement of our Series G Units of the former Nant Health, LLC, representing a 12.6% ownership interest in NantHealth immediately prior to the IPO. On June 2, 2016, NantHealth completed its IPO of 6,500,000 shares and its stock began trading on the NASDAQ under the ticker symbol “NH”. The issuance of the IPO shares initially diluted our ownership interest to 11.8%. Also on June 2, 2016, we purchased an additional 714,286 shares at the IPO price of $14 per share for an additional investment in NantHealth of $10 million. This additional share purchase brought our total voting interest in NantHealth to 15,000,000 shares or 12.4% of the voting common stock.

Based on the guidance under FASB ASC Topic 323, Investments – Equity Method and Joint Ventures, and given our ownership percentage of 12.4% and lack of significant influence over NantHealth’s operations, we concluded that we should no longer account for our investment in NantHealth as an equity method investment subsequent to June 2, 2016. The carrying amount of our Nant Health, LLC investment immediately after the IPO was $205.6 million, which became the initial cost of our investment in NantHealth common stock. This amount includes the recognition of our equity in the net earnings of NantHealth and the amortization of cost basis adjustments through June 2, 2016, which totaled $7.5 million during year ended December 31, 2016.

In accordance with FASB ASC Topic 320, Investments – Debt and Equity Securities and Topic 820, Fair Value Measurement, we began accounting prospectively for our investment in NantHealth’s common stock as an available for sale marketable security with unrealized gains and losses due to the changes in the fair value of the investment recorded as part of accumulated other comprehensive loss (“AOCI”) in stockholders’ equity. If we determine that a decline in fair value below cost is other than temporary, we will recognize an impairment charge in current period earnings for the difference between cost and fair value. As of December 31, 2016, the fair value of our investment, based on the closing price as quoted on the NASDAQ, was $149.1 million, resulting in a cumulative unrealized loss of $56.5 million recognized in AOCI.

During 2016, we acquired a $1.0 million non-marketable convertible note of a third party with which we have an existing license and distribution agreement. This investment is accounted as a non-marketable available-for-sale security with changes in fair value recorded in accumulated other comprehensive loss. The fair value of the convertible note was $1.2 million as of December 31, 2016 and was included in other assets in the accompanying consolidated balance sheet as of December 31, 2016.

During 2016, we also acquired certain non-marketable equity securities of two third parties and entered into new commercial agreements with each of those third parties to license and distribute their products and services, for a total consideration of $10.2 million. Both of these equity investments are accounted for under the cost method. The carrying value of these investments was $10.2 million as of December 31, 2016 and is included in other assets in the accompanying consolidated balance sheet as of December 31, 2016. During 2016, we recognized an impairment charge of $2.1 million relating to one of our other cost method investments.

As of December 31, 2016, it is not practicable to estimate the fair value of our equity investments primarily because of their illiquidity and restricted marketability. The factors we considered in trying to determine fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and the issuer’s subsequent or planned raises of capital.