Business Combinations

12 Months Ended

Jan. 30, 2016

Business Combinations

Business Combinations

3.Business Combinations

Merger with FFS Holdings, LLC

On October 13, 2015, Cherokee entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FFS Holdings, LLC, a Delaware limited liability company (“FFS”), FFS Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of Cherokee (“Merger Sub”), and Darin Kraetsch, solely in his capacity as the representative of the FFS equityholders. Flip Flop Shops is a franchise retail chain dedicated to offering the hottest brands and latest styles of flip flops, casual footwear and accessories.

Pursuant to the Merger Agreement, Merger Sub merged with and into FFS, with FFS continuing as the surviving corporation and a wholly owned subsidiary of Cherokee (the “Merger”).

Cherokee acquired FFS for the base purchase price of $12,000, comprised of $6,000 in cash on hand and $6,000 of proceeds from borrowings under the Company’s credit agreement, which is subject to certain adjustments and escrow arrangements. (See Note 9 for additional information about our credit facility with JPMorgan.) The Merger was treated as a business combination accounted for using the acquisition method of accounting. The Company has incurred legal, accounting, banking and other professional costs relating to the Merger in the amount of approximately $700 and has included these costs in selling, general and administrative expenses in Fiscal 2016. Trademarks have been treated as indefinite‑lived and no amortization has been recorded. Trademarks are evaluated for the possibility of impairment at least annually. Franchise agreements have been treated as finite-lived with corresponding amortization expense. Goodwill primarily relates to the excess cash flows to be generated as the Flip Flop Shops franchise grows through the opening of new stores and the generation of new franchisees. Franchise agreements and Goodwill are evaluated for the possibility of impairment at least annually. The total amount of goodwill that is expected to be deductible for tax purposes is $100. The amounts of revenue and earnings of FFS since the completion of the Merger are included in the consolidated statements of income included herein and totaled approximately $459 and ($217) for the reporting period.

Purchase Price Allocation

As of October 31, 2015, the initial accounting for the Merger was disclosed as preliminary. During the three months ended January 30, 2016, the Company finalized the purchase price allocation related to the merger. The following table summarizes the final fair value of the assets and liabilities assumed in the Merger:

	Purchase Price
	Allocation, as
	Adjusted
Cash paid to seller by Cherokee	$	12,000
Allocation of purchase price to trademarks		11,500
Allocation of purchase price to goodwill		100
Allocation of purchase price to franchise agreements		1,300
Allocation of purchase price to deferred revenue		(1,495)
Allocation of purchase price to deferred tax asset		543
Allocation of purchase price to working capital		52
Total	$	12,000

Supplemental information on an unaudited pro forma basis, as if the acquisition had been completed as of February 2, 2014, is as follows:

	Year Ended		Year Ended
(amounts in thousands)	January 30, 2016		January 31, 2015
Revenues		35,913		36,802
Net Income/Loss		8,103		9,217
Basic EPS	$	0.93	$	1.09
Diluted EPS	$	0.91	$	1.08

Everyday California® Brand

On May 14, 2015, Cherokee completed an asset acquisition with Everyday California Holdings, LLC, under which it acquired various assets related to the Everyday California® brand and related trademarks. As consideration for the acquired assets Cherokee paid $1,000 in cash upon completion of the acquisition and agreed to pay up to an additional $300 in cash dependent upon performance of the assets during Cherokee’s fiscal years ending in 2017 and 2018. The acquired trademarks have been treated as indefinite-lived and no amortization has been recorded. Trademarks are evaluated for the possibility of impairment at least annually.

Hawk and Tony Hawk Brands

On January 10, 2014, Cherokee entered into an asset purchase agreement with Quiksilver, Inc. and Hawk Designs, Inc., pursuant to which Cherokee acquired various assets related to the “Hawk” and “Tony Hawk” signature apparel brands and related trademarks. The acquisition was treated as a business combination accounted for using the acquisition method of accounting. As consideration for the acquisition, Cherokee paid a cash purchase price equal to $19,000. These trademarks have been treated as indefinite‑lived and no amortization has been recorded. Trademarks are evaluated for the possibility of impairment at least annually.