4. BUSINESS ACQUISITIONS

The Company accounts for its business acquisitions using the acquisition method as required by FASB ASC Topic 805, Business Combinations. The Company ascribes significant value to the synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value of these components is included within goodwill. The Company’s business acquisitions described below, except for a portion of LDI (defined below), were treated as asset purchases for income tax purposes and the related goodwill resulting from these business acquisitions is deductible for income tax purposes. The results of operations for acquired businesses are included in the Company’s consolidated financial statements from their respective acquisition dates. For the entities acquired by the Company during 2017 and 2016, their net sales following their acquisition dates and solely in the year acquired represented approximately 2 percent and 6 percent, respectively, of the Company’s consolidated net sales.The assets acquired and liabilities assumed in the business combinations described below, including identifiable intangible assets, were based on their estimated fair values as of the acquisition date. The excess of purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The allocation of the purchase price required management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values were based on information obtained from management of the acquired companies and historical experience and, with respect to the long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm. These estimates included, but were not limited to, the cash flows that an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset, discounted at rates commensurate with the risks and uncertainties involved. For acquisitions that involved contingent consideration, the Company recorded a liability equal to the fair value of the contingent consideration obligation as of the acquisition date. The estimate of fair value of a contingent consideration obligation required subjective assumptions regarding future business results, discount rates and probabilities assigned to various potential business result scenarios. These estimates are preliminary and subject to change up to one year following each acquired entity’s respective acquisition date. The measurement period related to the acquisitions discussed below has been closed.

LDI Holding Company LLC

On December 20, 2017, the Company acquired LDI Holding Company LLC, doing business as LDI Integrated Pharmacy Services ("LDI"). LDI is a full-service PBM based in St. Louis, Missouri. LDI's service offerings include URAC-accredited mail-order and specialty pharmacies, a national network of retail pharmacies and comprehensive clinical programs. The following table summarizes the consideration transferred to acquire LDI:


Cash	$	520,157
4,113,188 restricted common shares		79,088
	$	599,245

The above share consideration at closing is based on 4,113,188 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company's common stock as of December 19, 2017 ($20.24) and multiplied by 95 percent to account for the restricted nature of the shares.

Approximately $7,500 of the purchase consideration was deposited into an escrow account to satisfy any indemnification claims that may be made by the Company. Approximately $6,357 and $1,143 was released from escrow to the sellers and the Company, respectively, during 2018.

The Company incurred acquisition-related costs of $794 and $948 which were charged to SG&A during the years ended December 31, 2018 and 2017, respectively.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	780
Receivables		40,852
Inventories		2,857
Prepaid expenses and other current assets		750
Property and equipment		1,930
Capitalized software for internal use		1,325
Definite-lived intangible assets		201,523
Other noncurrent assets		148
Accounts payable		(16,409)
Rebates payable		(23,121)
Accrued expenses — compensation and benefits		(2,329)
Accrued expenses — other		(1,948)
Deferred income taxes		(31,434)
Total identifiable net assets		174,924
Goodwill		424,321
	$	599,245

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Customer relationships	10 years	$	184,973
Trade names and trademarks	4 years		16,550
		$	201,523

Pharmaceutical Technologies, Inc.

On November 27, 2017, the Company acquired Pharmaceuticals Technologies, Inc., doing business as National Pharmaceutical Services (“NPS”). NPS is a full-service PBM based in Omaha, Nebraska. The following table summarizes the consideration transferred to acquire NPS:


Cash	$	36,534
835,017 restricted common shares		12,753
	$	49,287

The above share consideration at closing is based on 835,017 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of November 24, 2017 ($16.97) and multiplied by 90 percent to account for the restricted nature of the shares.

Approximately $9,005 of the purchase consideration was deposited into an escrow account to be held for 18 to 36 months after the closing date to satisfy any indemnification claims that may be made by the Company.

The Company incurred acquisition-related costs of $555 and $804 which were charged to SG&A during the years ended December 31, 2018 and 2017, respectively.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	9,851
Accounts receivable		20,622
Inventories		200
Prepaid expenses and other current assets		650
Property and equipment		13,544
Capitalized software for internal use		1,800
Definite-lived intangible assets		6,720
Accounts payable		(14,968)
Rebates payable		(7,882)
Accrued expenses — compensation and benefits		(160)
Accrued expenses — other		(4,891)
Total identifiable net assets		25,486
Goodwill		23,801
	$	49,287

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Customer relationships	10 years	$	5,900
Trade names and trademarks	2 years		820
		$	6,720

Focus Rx Pharmacy Services Inc. and Focus Rx Inc.

On September 1, 2017, the Company acquired Focus Rx Pharmacy Services Inc. and Focus Rx Inc. (collectively, “Focus”), a specialty pharmacy focusing on infusion services located in Ronkonkoma, New York. The following table summarizes the consideration transferred to acquire Focus:


Cash	$	17,252
374,297 restricted common shares		5,643
Contingent consideration at fair value		2,080
	$	24,975

The above share consideration at closing is based on 374,297 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of August 31, 2017 ($16.75) and multiplied by 90 percent to account for the restricted nature of the shares.

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $1,500 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending September 30, 2018 and 2019. The maximum additional cash payout is $3,000. The fair value of this liability as of December 31, 2018 and 2017 was $1,420 and $2,600, respectively. Based upon Focus' actual results for the 12-month period ended September 30, 2018, the Company paid $1,500 in cash to Focus' former owners in November 2018.

Approximately $1,200 of the purchase consideration was deposited into an escrow account to be held for 12 months after the closing date to satisfy any of the Company’s indemnification claims. The full amount was released to the sellers from escrow in October 2018.

The Company incurred acquisition-related costs of $329 which were charged to SG&A during the year ended December 31, 2017.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	1,809
Accounts receivable		5,123
Inventories		261
Definite-lived intangible assets		7,100
Other noncurrent assets		22
Accounts payable		(5,122)
Accrued expenses — compensation and benefits		(156)
Total identifiable net assets		9,037
Goodwill		15,938
	$	24,975

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Patient relationships	7 years	$	3,700
Non-compete employment agreements	3 years		2,200
Trade names and trademarks	3 years		1,200
		$	7,100

Accurate Rx Pharmacy Consulting, LLC

On July 5, 2017, the Company acquired Accurate Rx Pharmacy Consulting, LLC (“Accurate”), a specialty pharmacy focusing on infusion services located in Columbia, Missouri. The following table summarizes the consideration transferred to acquire Accurate:


Cash	$	9,408
131,108 restricted common shares		1,776
Contingent consideration at fair value		1,980
	$	13,164

The above share consideration at closing is based on 131,108 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of July 3, 2017 ($15.05) and multiplied by 90 percent to account for the restricted nature of the shares.

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $3,600 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending July 31, 2018 and 2019. The maximum additional cash payout is $7,200. The fair value of this liability as of December 31, 2018 and 2017 was $1,715 and $1,600, respectively. Based upon Accurate's actual results for the 12-month period ended July 31, 2018, the Company paid $1,800 in cash to Accurate's former owners in November 2018.

Approximately $1,000 of the purchase consideration was deposited into an escrow account to be held for 15 months after the closing date to satisfy any of the Company’s indemnification claims. The full amount was released to the sellers from escrow in October 2018.

The Company incurred acquisition-related costs of $218 which were charged to SG&A during the year ended December 31, 2017.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	1,295
Accounts receivable		2,196
Inventory		936
Prepaid expenses and other current assets		34
Definite-lived intangible assets		3,420
Other noncurrent assets		3
Accounts payable		(3,303)
Accrued expenses — compensation and benefits		(152)
Accrued expenses — other		(6)
Total identifiable net assets		4,423
Goodwill		8,741
	$	13,164

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Patient relationships	7 years	$	2,100
Non-compete employment agreements	5 years		670
Trade names and trademarks	4 years		650
		$	3,420

WRB Communications, LLC

On May 8, 2017, the Company acquired WRB Communications, LLC (“WRB”), a communications and contact center company based in Chantilly, Virginia that specializes in relationship management programs for leading pharmaceutical manufacturers and service organizations. The following table summarizes the consideration transferred to acquire WRB:


Cash	$	26,804
299,325 restricted common shares		4,291
Contingent consideration at fair value		530
	$	31,625

The above share consideration at closing is based on 299,325 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of May 5, 2017 ($15.93) and multiplied by 90 percent to account for the restricted nature of the shares.

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $500 per performance period based upon the achievement of certain earnings before interest, taxes, depreciation and amortization targets in each of the 12-month periods ending May 31, 2018 and 2019. During the fourth quarter of 2017, the Company guaranteed a full payout to allow for the acceleration of certain integration activities. The formers owners received $1,000 in cash in January 2018.

Approximately $1,950 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims. The full amount was released to the sellers from escrow in November 2018.

The Company incurred acquisition-related costs of $259 which were charged to SG&A during the year ended December 31, 2017.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	1,018
Accounts receivable		2,593
Prepaid expenses and other current assets		179
Property and equipment		498
Definite-lived intangible assets		7,730
Other noncurrent assets		24
Accounts payable		(100)
Accrued expenses — other		(498)
Total identifiable net assets		11,444
Goodwill		20,181
	$	31,625

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Customer relationships	7 years	$	5,200
Non-compete employment agreements	4 years		1,530
Trade names and trademarks	2 years		1,000
		$	7,730

Comfort Infusion, Inc.

On March 22, 2017, the Company acquired Comfort Infusion, Inc. (“Comfort”), a specialty pharmacy and infusion services company based in Birmingham, Alabama that specializes in intravenous immune globulin therapy to support patients’ immune systems. The following table summarizes the consideration transferred to acquire Comfort:


Cash	$	10,613
Contingent consideration at fair value		3,800
	$	14,413

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $2,000 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending March 31, 2018, 2019 and 2020. The maximum payout of contingent consideration is $6,000. The fair value of this liability as of December 31, 2018 and 2017 was $3,760 and $4,300, respectively. Based upon Comfort's actual results for the 12-month period ended March 31, 2018, the Company paid $2,000 in cash to Comfort's former owners in July 2018.

Approximately $1,050 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims. The full amount was released to the sellers from escrow in September 2018.

The Company incurred acquisition-related costs of $204 which were charged to SG&A during the year ended December 31, 2017.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	104
Accounts receivable		575
Inventories		118
Prepaid expenses and other current assets		15
Definite-lived intangible assets		2,400
Other noncurrent assets		5
Accounts payable		(372)
Accrued expenses - other		(101)
Total identifiable net assets		2,744
Goodwill		11,669
	$	14,413

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Physician relationships	7 years	$	1,200
Non-compete employment agreements	5 years		1,200
		$	2,400

Affinity Biotech, Inc.

On February 1, 2017, the Company acquired Affinity Biotech, Inc. (“Affinity”), a specialty pharmacy and infusion services company based in Houston, Texas that provides treatments and nursing services for patients with hemophilia. The following table summarizes the consideration transferred to acquire Affinity:


Cash	$	17,228
Contingent consideration at fair value		35
	$	17,263

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners an additional cash payout based upon the achievement of a certain earnings before interest, taxes, depreciation and amortization target in the 12-month period ending February 28, 2018. The maximum payout of contingent consideration was $4,000. The fair value of this liability as of December 31, 2017 was $2,600. Based upon Affinity’s actual results for the 12-month period ended February 28, 2018, the Company paid $2,269 in cash to Affinity’s former owners in June 2018.

Approximately $2,000 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims. Approximately $1,851 and $149 was released from escrow to the sellers and the Company, respectively, in August 2018.

The Company incurred acquisition-related costs of $204 which were charged to SG&A during the year ended December 31, 2017.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	1,043
Accounts receivable		3,433
Inventories		79
Prepaid expenses and other current assets		74
Definite-lived intangible assets		5,100
Other noncurrent assets		5
Accounts payable		(1,075)
Accrued expenses - compensation and benefits		(144)
Accrued expenses - other		(25)
Total identifiable net assets		8,490
Goodwill		8,773
	$	17,263

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Patient relationships	7 years	$	4,000
Non-compete employment agreements	5 years		1,100
		$	5,100

Valley Campus Pharmacy, Inc.

On June 1, 2016, the Company acquired Valley Campus Pharmacy, Inc., doing business as TNH Advanced Specialty Pharmacy (“TNH”). TNH, a specialty pharmacy based in Van Nuys, California, provides medication management programs for individuals with complex chronic diseases, including oncology, hepatitis and immunology. The following table summarizes the consideration transferred to acquire TNH:


Cash	$	70,117
324,244 restricted common shares		9,507
	$	79,624

The above share consideration at closing is based on 324,244 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company's common stock as of May 31, 2016 ($32.58) and multiplied by 90 percent to account for the restricted nature of the shares.

Approximately $3,800 of the purchase consideration was deposited into an escrow account to be held for 12 months after the closing date to satisfy any indemnification claims that may be made by the Company. Approximately $3,650 and $150 was released from escrow to the sellers and the Company, respectively, during the first half of 2018.

The Company incurred acquisition-related costs of $410 which were charged to SG&A during the year ended December 31, 2016.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:


Cash	$	2,114
Accounts receivable		16,271
Inventories		4,740
Prepaid expenses and other current assets		46
Property and equipment		200
Capitalized software for internal use		14,000
Definite-lived intangible assets		13,890
Other noncurrent assets		21
Accounts payable		(29,773)
Accrued expenses - compensation and benefits		(400)
Accrued expenses - other		(1,962)
Total identifiable net assets		19,147
Goodwill		60,477
	$	79,624

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:


	Useful
	Life	Amount
Physician relationships	10 years	$	7,700
Non-compete employment agreements	5 years		4,490
Trade names and trademarks	1 year		1,700
		$	13,890

Unaudited Pro Forma Operating Results

The following unaudited pro forma summary presents consolidated financial information as if the Accurate, Affinity, Comfort, Focus, LDI, NPS and WRB acquisitions had occurred on January 1, 2016. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as amortization expense resulting from intangible assets acquired and adjustments to reflect the Company’s borrowings and the related income tax effect of such adjustments. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of the as if date or of results that may occur in the future.


	Year Ended
	December 31,
	2017
Net sales	$	4,954,494
Net income attributable to Diplomat Pharmacy, Inc.	$	6,733
Income per common share — basic and diluted	$	0.09