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Business Combinations

3 Months Ended

Mar. 31, 2019

2.	Business Combinations

On December 9, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Nutrisystem, a provider of weight management products and services, and Sweet Acquisition, Inc., a wholly-owned subsidiary of Tivity Health (“Merger Sub”). The Merger Agreement provided that Merger Sub would merge with and into Nutrisystem, with Nutrisystem surviving as a wholly-owned subsidiary of Tivity Health (the “Merger”). The Merger was completed on March 8, 2019 (“Closing”). At Closing, except for certain excluded shares, each share of Nutrisystem common stock outstanding immediately prior to Closing was converted into the right to receive $38.75 in cash, without interest, and 0.2141 of a share of Tivity Health Common Stock (“Exchange Ratio”) (with cash payable in lieu of any fractional shares). Nutrisystem shares excluded from the conversion were those shares held by Nutrisystem as treasury stock and shares with respect to which appraisal rights have been properly exercised in accordance with the General Corporation Law of the State of Delaware.

The acquisition of Nutrisystem enables us to offer, at scale, an integrated portfolio of fitness, nutrition and social engagement solutions to support overall health and wellness and to address weight management, chronic conditions, and social isolation. The fair value of consideration transferred at Closing was $1.3 billion (“Merger Consideration”), which includes cash consideration, the fair value of the stock consideration, and the fair value of the consideration for Nutrisystem equity awards assumed by Tivity Health that related to pre-combination services (see Note 8). The following table summarizes the components of the Merger Consideration:

(In thousands)
Cash paid for outstanding Nutrisystem shares ⁽¹⁾	$	1,138,143
Value of Tivity Health Common Stock issued in the merger ⁽²⁾		132,838
Value of Nutrisystem stock options ⁽³⁾		6,020
Value of Tivity Health replacement awards attributable to pre-combination service ⁽⁴⁾		9,107
Total Merger Consideration	$	1,286,108

(1)

Represents the total cash paid to former Nutrisystem stockholders as cash consideration. This amount is based on the 29,370,594 shares of Nutrisystem common stock issued and outstanding as of Closing and cash consideration of $38.75 per share, plus cash payable in lieu of fractional shares.

(2)

Represents the fair value of 6.3 million shares of Tivity Health Common Stock issued for outstanding Nutrisystem shares as stock consideration. This amount is based on (a) 29,370,594 Nutrisystem common shares issued and outstanding as of Closing, times (b) the Exchange Ratio of 0.2141, times (c) $21.12, which is equal to the volume-weighted averages of the trading price per share of our Common Stock for the five consecutive trading days up to and including March 6, 2019.

(3)

Represents the fair value of the cash consideration paid for the net settlement of approximately 204,000 Nutrisystem stock options vested and outstanding as of the closing date. In accordance with the Merger Agreement, each vested and outstanding Nutrisystem stock option was cancelled, and the holder received a cash payment per option equal to approximately $43.27 minus the applicable exercise price of the stock option.

(4)

Unvested restricted stock awards and performance stock units held by Nutrisystem employees were assumed by Tivity Health and converted into time-vesting restricted stock awards and time-vesting restricted stock units, respectively (“Replacement Awards”). The value in the table represents the portion of the fair value of the Replacement Awards that relates to pre-combination services.

We performed a valuation analysis of the fair market value of Nutrisystem’s assets and liabilities as of Closing. The following table sets forth an allocation of the Merger Consideration to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill. This allocation of the Merger Consideration may be subject to revision if new facts and circumstances arise over the measurement period, which may extend up to one year from Closing.

(In thousands)
Cash, cash equivalents, and short-term investments	$	81,217
Accounts receivable		22,639
Inventory		38,494
Prepaid expenses and other current assets		12,345
Property and equipment		31,233
Right-of-use assets		22,145
Intangible assets		948,000
Other assets/liabilities		7,161
Accounts payable		(58,253	)
Accrued salaries and benefits and other liabilities		(8,695	)
Deferred revenue		(13,339	)
Lease liabilities		(22,145	)
Deferred tax liabilities, net		(220,365	)
Total identifiable assets and liabilities acquired	$	840,437
Goodwill ⁽¹⁾		445,671
Total Merger Consideration	$	1,286,108

(1)

Goodwill represents the excess of merger consideration over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Nutrisystem and synergies expected to be achieved from the combined operations of Tivity Health and Nutrisystem.

We consolidated Nutrisystem’s operating results into our financial statements beginning on March 8, 2019. Refer to Note 16 for revenue and profit recognized from the Nutrition segment during the three months ended March 31, 2019.

The following financial information presents the pro forma combined company results as if the acquisition of Nutrisystem had occurred on January 1, 2018:

(In thousands)	Three Months Ended March 31,
	2019			2018
Revenue	$	347,542		$	360,860
Net loss	$	(4,635	)	$	(29,842	)

The above pro forma results are based on assumptions and estimates, which we believe to be reasonable. They are not the operating results that would have been realized had the acquisition actually closed on January 1, 2018 and are not necessarily indicative of our ongoing combined operating results. The pro forma results include adjustments related to purchase accounting, acquisition and integration costs, financing, and amortization of intangible assets. Material non-recurring pro forma adjustments reflected in the pro forma results for the three months ended March 31, 2019 include: (1) the operating results of Nutrisystem from January 1, 2019 to March 7, 2019, (2) acquisition, integration, and restructuring costs decrease of $33.4 million, and (3) income tax expense decrease of $2.7 million (see Note 9). For the three months ended March 31, 2018, material non-recurring pro forma adjustments reflected in the pro forma results include: (1) cost of revenue increase of $2.8 million due to the purchase accounting mark-up of inventory, (2) acquisition, integration, and restructuring costs increase of $38.7 million, and (3) income tax increase of $2.7 million (see Note 9).