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. 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 will report actual product gross profit for the measurement period of September 1, 2013 to August 31, 2014 to the sellers by October 15, 2014. Should the sellers disagree with the Company’s report, the purchase agreement provides for the dispute to be settled through arbitration.

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.

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. Certain disynergies were expected due to adoption of national contract pricing and conformance to the Company’s revenue accounting policies. These disynergies were expected to be offset by volume based purchasing synergies and access to higher patient volumes through our national managed care contract platform. During the first three months of 2014, the acquired sites delivered less than targeted product gross profit and the forecast indicated that the probability of payout was still highly likely but had declined. As such, the fair value of contingent consideration was reduced to $8.9 million as of March 31, 2014.

During the three months ended June 30, 2014, the CarePoint Business sites once again delivered less than targeted product gross profit. At June 30, 2014, the fair value of the contingent consideration was remeasured using the actual operating results during 2013 and 2014 and forecasted operating results for the remainder of the measurement period in 2014. As a result of this remeasurement, the fair value of the contingent consideration was reduced to $5.0 million. The liability for the contingent consideration is included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.

The Company believes the likelihood of contingent consideration payout is as likely as non-payment as of June 30, 2014. The required product gross profit target will be difficult for these branches to attain in the remaining measurement period due to revenue cycle disynergies and volume reduction in certain markets. The Company expects to achieve volume recovery in these markets over time. Should the sellers of the CarePoint Business earn the contingent consideration during the twelve month measurement period ending August 31, 2014, an additional expense of $5.0 million will be recorded over and above the accrual of $5.0 million estimated at June 30, 2014. The $4.0 million and $4.8 million of income resulting from the reduction of the fair value of the contingent consideration for the three months and six months ended June 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 current assessment of the estimated fair values of the assets acquired and liabilities assumed as of the date of closing of the acquisition of the CarePoint Business. The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the date of the closing may result in retrospective adjustments to the provisional amounts recognized. These changes could be significant. The Company will finalize these amounts in the third quarter of 2014.



	Estimated Fair Value (in thousands)
Cash	$	14
Accounts receivable	15,918
Inventories	3,342
Other current assets	272
Property and equipment	3,266
Identifiable intangible assets⁽¹⁾	16,700
Current liabilities	(8,521		)
Non-current liabilities	(721		)
Total identifiable net assets	30,270
Goodwill	188,822
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:



	Weighted- Average Useful Lives	Amounts Recognized as of the Closing Date (in thousands)
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.

The accompanying Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2014 include revenues of $39.9 million and $79.9 million and income (loss) from continuing operations of $(0.2) million and $1.1 million for the CarePoint Business, respectively.

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 June 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. At June 30, 2014, the fair value of the contingent consideration was again remeasured at fair value using actual operating results through June 30, 2014 and forecasted operating results for the remainder of 2014. As a result of this remeasurement, the fair value of the contingent consideration was reduced to $0.1 million, and is included in other non-current liabilities in the accompanying Consolidated Balance Sheets. The $0.7 million and $2.0 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 six months ended June 30, 2014.

The accompanying Unaudited Consolidated Statements of Operations include revenues of $21.4 million and $17.6 million and income from continuing operations of $2.3 million, and $0.3 million related to HomeChoice for the three months ended June 30, 2014 and 2013, respectively. The accompanying Unaudited Consolidated Statements of Operations include revenues of $42.5 million and $28.7 million and income (loss) from continuing operations of $6.0 million and $(0.3) million for the six months ended June 30, 2014 and for the period from the date of acquisition to June 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 increase up to an additional $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.

As of December 31, 2013, the total 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 $3.0 million. As of June 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

Acquisition and integration expenses in the accompanying Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2014 and 2013 include the following costs related to the CarePoint Business, HomeChoice Partners, and InfuScience acquisitions (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Legal, financial advisory and professional fees	$	1,571	$	1,946	$	2,546	$	2,956
Employee costs including redundant salaries and benefits and severance	430		342		1,580		1,477
Facilities consolidation and discontinuation	353		864		658		1,023
Change in revenue reserves related to acquired accounts receivable	2,118		—		5,420		—
Legal settlement	8		—		333		2,300
Other	853		360		1,295		379
Total	$	5,333	$	3,512	$	11,832	$	8,135

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 six months ended June 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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	247,125		$	211,576		$	486,418		$	437,027
Loss from continuing operations, net of income taxes	$	(18,611	)	$	(8,342	)	$	(43,867	)	$	(16,788	)
Basic loss per share from continuing operations	$	(0.27	)	$	(0.13	)	$	(0.64	)	$	(0.28	)
Diluted loss per share from continuing operations	$	(0.27	)	$	(0.13	)	$	(0.64	)	$	(0.28	)

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 six months ended June 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 six months ended June 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 June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Interest expense	$	—	$	827		$	—	$	1,331
Amortization expense	$	—	$	238		$	—	$	(362	)
Income tax benefit (expense)	$	—	$	(878	)	$	—	$	(2,163	)

Expenses incurred to integrate acquisitions are recorded in acquisition and integration expenses of the Unaudited Consolidated Statements of Operations. These costs include legal and financial advisory fees associated with acquisitions and integration costs to convert to common policies, procedures, and information systems.