Acquisition of Pura Vida

9 Months Ended

Oct. 31, 2020

On July 16, 2019, the Company completed its acquisition of a seventy-five percent (75%) ownership interest in Creative Genius, Inc. or “Pura Vida” (the “Transaction”) in exchange for total cash consideration of approximately $75.0 million. During the third quarter of fiscal 2020, the Company provided additional cash consideration of approximately $3.0 million for a working capital adjustment. The Company also received a working capital reimbursement of $1.0 million during the first quarter of fiscal 2021. Additional measurement period adjustments were recorded for conditions that existed as of the acquisition date. Pura Vida, based in La Jolla, California, is a rapidly growing, digitally native, and highly engaging lifestyle brand that deeply resonates with its loyal consumer following. The Pura Vida brand has a differentiated and expanding offering of bracelets, jewelry, and other lifestyle accessories. The Company believes that the acquisition will strengthen the Company by providing increased product diversification and future growth opportunities partially as a result of resource and knowledge-sharing.

In accordance with the Interest Purchase Agreement, the Company also agreed to a contingent payment of up to $22.5 million payable during the first quarter of calendar year 2020 based on calendar year 2019 adjusted EBITDA of Pura Vida, as defined in the Interest Purchase Agreement. This contingent payment was made during the first quarter of fiscal 2021 totaling $18.7 million. The Company’s existing available cash, cash equivalents, and investments funded the purchase price due at the closing of the Transaction and subsequent to the closing. There were no transaction costs during the thirteen and thirty-nine weeks ended October 31, 2020 and the thirteen weeks ended November 2, 2019. Pre-tax transaction costs totaled $2.7 million for the thirty-nine weeks ended November 2, 2019. These costs are recorded within selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations and within corporate unallocated expenses.

On July 16, 2019, as contemplated by the Interest Purchase Agreement, the Company and certain of its subsidiaries and the owners of the remaining twenty-five percent (25%) ownership interest in Pura Vida which was not acquired by the Company entered into a Put/Call Agreement. Pursuant to the Put/Call Agreement, and subject to the terms and conditions thereof, the Sellers have the right to sell all of the Remaining Pura Vida Interest to the Company, and the Company has the right to purchase all of the Remaining Pura Vida Interests from Sellers, in each case generally at any time following the fifth anniversary of the closing date of the transaction until the tenth anniversary thereof. The purchase price for any Remaining Pura Vida Interest put to, or called by, the Company will be determined based on the arithmetic average of a multiple of adjusted EBITDA of Pura Vida and a multiple of adjusted EBITDA of the Company, as defined in the Put/Call Agreement, over the twelve-month period ending on the last day of the month immediately preceding the month in which an exercise notice is delivered by a relevant party. In the event of a change

in control of the Company, the parties may exercise a portion of their put and call rights prior to the fifth anniversary of the closing date (as defined in the Put/Call Agreement).

The following schedule summarizes the consideration paid for Pura Vida, the fair value of the assets acquired and liabilities assumed, the fair value of the noncontrolling interest, and the fair value of the contingent consideration related to the earn-out provision. The accounting for the acquisition is complete.


in thousands	Fair Value at Acquisition Date
Cash and cash equivalents	$	1,495
Accounts receivable, net(5)	7,680
Inventories(1)	27,654
Prepaid expenses and other current assets	1,537
Operating right of use asset	1,250
Property, plant, and equipment, net	751
Goodwill(2)	44,254
Intangible asset, brand(3)	36,668
Other intangible assets(4)	24,996
Total assets acquired	146,285

Accounts payable	6,818
Accrued employment costs	2,351
Other accrued liabilities(5)	6,637
Operating lease liability	1,637
Total liabilities assumed	17,443

Less:
Contingent consideration related to earn-out provision(6)	(20,098)
Redeemable noncontrolling interest	(32,210)
Cash acquired	(1,495)

Total closing consideration amount, net of cash acquired (7)	$	75,039

(1) Includes an $8.3 million step-up adjustment which was recognized in cost of sales within four months of the acquisition. Inventories were valued using the cost approach. The significant assumptions used for the valuation include inventory balances, projected gross and operating margins, and cost and time to dispose (sell) inventory on hand.
(2) Refer to Note 14 herein for additional information regarding goodwill.
(3) The brand intangible asset was valued using the relief-from-royalty method. The significant assumptions used for the valuation include the royalty rate, estimated projected revenues, long-term growth rate, and the discount rate. Refer to Note 14 herein for additional information regarding intangible assets.
(4) Other intangible assets include customer relationships and non-competition agreements. Customer relationships were valued using the multi-period excess earnings method. Significant assumptions used for the valuation include projected cash flows, the discount rate, and customer attrition rate. The non-competition agreements were valued using the with-or-without method. Significant assumptions used for the valuation include projected cash flows, probability of competition, impact of competition on business, and the discount rate. Refer to Note 14 herein for additional information regarding intangible assets.
(5) Includes $4.1 million related to an indemnified liability.
(6) Contingent consideration related to the earn-out provision was valued using a Monte Carlo simulation in order to forecast the value of the potential future payment. Significant assumptions used for the valuation include the discount rate, projected cash flows, and calculated volatility.
(7) Of the total $75.0 million closing consideration, $1.0 million was refunded to the Company through a working capital adjustment during the first quarter of fiscal 2021. Cash consideration paid during fiscal 2020 totaled $76.0 million.

The operations of Pura Vida are recorded in the Company's Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ending October 31, 2020, and only for the period beginning on July 17, 2019 in the prior year, which represents the first full day following the acquisition. As such, the Company's financial statements are not comparable with the prior-year period presented. Refer to Note 16 herein for segment-level financial information associated with Pura Vida.

The following pro forma financial information is intended to provide a sense for what the Company's operating results may have been if the Pura Vida acquisition had occurred at the beginning of fiscal 2019. The pro forma financial information is not indicative of the results that would have been reflected had the transaction actually occurred as of that date, nor is it necessarily indicative of the Company’s future results. The financial information includes expense related to supplemental officer wages and fully indemnified state sales tax matters for time periods before the acquisition date. The Company does not expect these items to have a continuing impact on its consolidated financial statements. The following adjustments have been made:

•Definite-lived intangible amortization that exceeds one year has been reflected as if it occurred at the beginning of fiscal 2019;

•Transaction costs have been excluded; and

•Tax expense has been estimated at an effective tax rate of 25.0%.


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
in thousands, except per share data	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Pro forma net revenues	$	124,849	$	133,109	$	325,903	$	382,199
Pro forma net income	10,028		6,042		5,938		10,290
Pro forma net income attributable to Vera Bradley, Inc.	9,552		5,324		3,756		10,063

Pro forma basic net income per share available to Vera Bradley, Inc. shareholders	$	0.29	$	0.16	$	0.11	$	0.30
Pro forma diluted net income per share available to Vera Bradley, Inc. shareholders	$	0.28	$	0.16	$	0.11	$	0.29