BUSINESS ACQUISITIONS AND DIVESTITURES

We completed several acquisitions and divestitures in recent years that we describe below. Generally, we acquire businesses that we believe will provide a strategic fit for our existing operations, cost savings and revenue synergies, or enable us to expand our capabilities in our Adjacent Services segment. We divest assets or businesses that we no longer find strategically aligned with our service offerings.

We allocate the total purchase price in a business acquisition to the fair value of identified assets acquired and liabilities assumed based on the fair values at the acquisition date, and record amounts exceeding the fair values as goodwill. If the fair value of the assets acquired exceeds the purchase price, we record this excess as a gain on bargain purchase. We determine the estimated fair values of intangible assets acquired using our estimates of future discounted cash flows to be generated by the acquired business over the estimated duration of those cash flows. We base the estimated cash flows on our projections of future revenue, cost of revenue, capital expenditures, working capital needs and tax rates. We estimate the duration of the cash flows based on the projected useful life of the assets and business acquired. We determine the discount rate based on specific business risk, cost of capital and other factors.

Etesius Limited

In February 2010, the Company’s U.K. subsidiary acquired all the issued and outstanding capital stock of Etesius Limited (“Etesius”), a privately-held European provider of purchasing and payables technologies and spend analytics based in Chelmsford, United Kingdom. We have included the results of operations of Etesius in our Adjacent Services segment results of operations since the acquisition date as we acquired Etesius with the intention of expanding our capabilities in this segment.

The financial terms of the Etesius share purchase agreement (“SPA”) required an initial payment to the Etesius shareholders of $2.8 million and a $0.3 million payment for obligations on behalf of Etesius shareholders which resulted in a total estimated purchase price value of approximately $3.1 million.

The SPA required deferred payments of $1.2 million over four years from the date of the SPA to certain selling shareholders who are now our employees. The SPA also provided for potential additional variable payments (“earn-out”) to these selling shareholders/employees over the same four-year period based on the financial performance of certain of the Company’s services lines, up to a maximum of $3.8 million. Because we were not obligated to make the deferred and earn-out payments upon the termination of employment of these employees under certain circumstances, we recognized these payments as compensation expense as earned. From the acquisition date to December 31, 2014, we paid $1.4 million of deferred payments and variable consideration. This amount consisted of the final $0.7 million of deferred payments paid in February 2014 and $0.2 million of variable consideration paid in August 2014. We currently estimate that we will not pay any additional variable consideration relating to these provisions resulting in no remaining amounts payable relating to this acquisition as of December 31, 2016.

Business Strategy, Inc.

In December 2011, we acquired BSI, based in Grand Rapids, Michigan, for a purchase price valued at $11.9 million. BSI was a provider of recovery audit and related procure-to-pay process improvement services for commercial clients, and a provider of customized software solutions and outsourcing solutions to improve back office payment processes. We have included the results of operations of Business Strategy, Inc. in our Recovery Audit Services – Americas segment and the results of operations of the affiliated company in our Adjacent Services segment results of operations since the acquisition date. These amounts aggregated $0.8 million of revenue and $0.1 million of net income in 2011 and $10.9 million of revenue and $1.5 million of net income in 2012. We acquired BSI with the intention of expanding our commercial recovery audit capabilities and to expand the services we offer to our clients.

The purchase price included an initial cash payment of $2.8 million and 640,614 shares of our common stock having a value of $3.7 million. An additional payment of approximately $0.7 million was due and paid in the first half of 2012 for working capital received in excess of a specified minimum level. We were subject to additional variable consideration of up to $5.5 million, payable via a combination of cash and shares of our common stock, based on the performance of the acquired businesses over a two-year period from the date of acquisition. We were also subject to additional consideration of up to $8.0 million, payable in cash over a period of two years, based on certain net cash fee receipts from a particular recovery audit claim at a specific client. We recorded an additional $4.9 million payable as of the acquisition date based on management’s estimate of the fair value of the variable consideration payable. We adjusted the $12.2 million initial estimates of the fair value of the assets and liabilities in 2012, resulting in reductions to goodwill of $0.2 million, and the fair value of the purchase price of $0.2 million, and recorded this change retroactively to 2011. The final goodwill amount of $7.6 million includes $1.5 million that is deductible for income tax purposes.

The final allocation of the fair values of the assets acquired and purchase price is summarized as follows (in thousands):



Fair values of net assets acquired:	Final Allocation
Equipment	$	70
Intangible assets, primarily customer relationships	4,041
Working capital, including work in progress	1,967
Deferred tax liabilities	(1,736		)
Goodwill	7,577
Fair value of net assets acquired	$	11,919
Fair value of purchase price	$	11,919

From the acquisition date to December 31, 2014, we paid $6.3 million of the earn-out liability consisting of cash payments of $3.6 million and 404,775 shares of our common stock having a value of $2.7 million. We also recorded accretion and other adjustments of the earn-out liability of $1.4 million, resulting in no remaining earn-out payable as of December 31, 2014.

Global Edge

In December 2015, we acquired the SIM business of Global Edge for a purchase price valued at $0.7 million. The purchase price included an initial cash payment of $0.5 million and additional variable cash consideration based on the performance of the acquired businesses over a two year period from the date of acquisition valued at $0.2 million.

Lavante

In October 2016, we acquired Lavante, a SaaS-based supplier of SIM and recovery audit services firm for a net purchase price of $3.7 million. Lavante’s assets consist primarily of its proprietary software applications.

We have recorded Lavante's assets acquired and liabilities assumed based on our preliminary estimates of their fair values at the acquisition date. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of Lavante's assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as we finalize our fair value analysis. We expect to complete our fair value determinations no later than the fourth quarter of 2017. We do not currently expect our fair value determinations to change materially; however, there may be differences compared to those amounts reflected in our consolidated financial statements as of December 31, 2016 as we finalize our fair value analysis and such changes could be material.

Based on our preliminary estimates, the purchase price exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities at the acquisition date by $2.1 million, which amount has been allocated and recognized as goodwill within our Adjacent Service business segment. None of the goodwill associated with the acquisition is deductible for income tax purposes and, as such, no deferred taxes have been recorded related to goodwill.

The preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed is presented below:



As of October 31, 2016
Cash and cash equivalents	$	28
Account receivables	207
Other Current Assets	92
Goodwill	2,146
Intangible Assets	6,178
Fixed Assets	98
Total Assets	8,749
Accounts payable	121
Deferred revenue	370
Other current liabilities	757
Total Liabilities	1,248
Total purchase price	$	3,669

Our estimates of the fair values of identifiable intangible assets are presented below:



	Fair values at October 31, 2016		Remaining useful lives (in months)
Trademarks	$	163	48
Patents	114		12
Software	5,901		48
Total intangible assets	$	6,178

In general, intangible assets include trade names, trademarks, copyrights, patents, customer contacts and/or relationships, developed technology (computer software), technological know-how, and brand names. When estimating the value of such assets, we consider the future income stream associated with the specific asset, taking into account the asset's estimated remaining life, average annual anticipated rate of return, and market rates of return. Often, an income approach such as a multi-period excess earnings model or distributor model will be used.

We may also consider the market price of comparable assets recently sold or the asking prices for similar assets currently for sale. This methodology involves researching the industry to determine if comparable companies pay or receive royalties for rights associated with the use of the asset. The royalty rates charged or received are then used as valuation benchmarks. The relief from royalty method is often used in the valuation of assets involving fair royalty rates (e.g., trademarks, patents, etc.).

The cost approach analyzes the current cost to re-create or duplicate an asset minus the decrease in value due to the passage of time or obsolescence. For example, when valuing a trademark (when it is not the primary asset acquired), we calculate the costs that would have been incurred over the years in establishing consumer recognition and perception of quality, service and reliability. We also consider the legal costs incurred in registering the asset.

We are still reviewing the valuation of the Lavante acquisition, in particular the value of any potential earnout due to Lavante, the useful lives of the long-lived assets acquired from Lavante and any potential deferred tax assets or liabilities associated with the valuation.

The revenue and loss from continuing operations of Lavante from the acquisition date through December 31, 2016 are presented below and included in our consolidated statements of operations. These amounts are not necessarily indicative of the results of operations that Lavante would have realized if it had continued to operate as a stand-alone company during the period presented, primarily due to costs that are now reflected in our unallocated corporate costs and not allocated to Lavante.



	From October 31, 2016 to December 31, 2016
Revenue	$	383
Loss from continuing operations	$	(891	)

As required by ASC 805, the following unaudited pro forma statements of operations for the years ended December 31, 2016 and 2015 give effect to the Lavante acquisition as if it had been completed on January 1, 2015. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been during the periods presented had the Lavante acquisition been completed during the periods presented. In addition, the unaudited pro forma financial information does not purport to project future operating results. This information is preliminary in nature and subject to change based on final purchase price adjustments. The pro forma statements of operations do not reflect: (1) any anticipated synergies (or costs to achieve synergies) or (2) the impact of non-recurring items directly related to the Lavante acquisition.



	December 31, 2016		December 31, 2015
Revenue from continuing operations (pro forma)	143,198		140,994
Loss from continuing operations (pro forma)	(3,418	)	(5,516	)

Divestitures

In October 2014, we divested certain assets within our Adjacent Services segment that were related to our Chicago, Illinois-based consulting business. These assets, previously acquired in November 2010 from TJG Holdings LLC, were sold to Salo, LLC, a Minnesota limited liability company. We received an initial cash payment of $1.1 million in connection with the closing of the transaction and recognized a loss on the sale of less than $0.1 million, which we recognized in Other loss in the Consolidated Statements of Operations. We have also received payment for working capital transferred to the buyer. In addition, we received $0.8 million in earn-out payments based on certain revenue recognized by the buyer in relation to the acquired business during the year following the closing date of the divestiture.

In August 2015, we divested certain assets from a document service offering purchased as part of the Business Strategy, Inc. acquisition in 2011.We did not receive any initial cash payments at closing of the transaction and recognized a loss on the sale of $1.6 million, which we recognized in Other loss in the Consolidated Statements of Operations.