3.Business Combinations

On December 7, 2016, the Company entered into a SPA with Hi-Tec and simultaneous APAs with various third parties, pursuant to which Cherokee Global Brands acquired all of the issued and outstanding equity interests of Hi-Tec for $87,252 in cash, excluding non-interest bearing liabilities assumed and capitalized transaction costs. Cherokee created a legal entity entitled Irene Acquisition Company B.V. to execute the transaction. The Company has accounted for this transaction under Accounting Standards Update 2017-01.

The Company completed the Hi-Tec Acquisition with the objective of converting Hi-Tec into a licensing business that would align with Cherokee Global Brand’s core business. Thus, concurrently with the SPA, the Company entered into APAs with new operating partners of Hi-Tec, including Carolina Footwear Group, LLC (“CFG or Carolina”), Batra Limited (“BL or Batra”) and Sunningdale (“South Africa”). These agreements provided for the sale and transfer of certain manufacturing-related operating assets of Hi-Tec and its subsidiaries to these operating partners. Post-acquisition, consistent with Cherokee Global Brand’s planned conversion of the Hi-Tec business, the Company continues to own the intellectual property assets of Hi-Tec. The Company does not have any ownership interests in the CFG, BL or South Africa entities.

The Company completed the Hi-Tec Acquisition to gain entry into Hi-Tec markets and to provide Cherokee Global Brands with multiple cross-selling opportunities.

For the year ended January 28, 2017, transaction costs related to the Hi-Tec Acquisition totaled $11,498 consisting of legal, due diligence, integration and other, and are recorded in selling, general and administrative expense in the Consolidated Statements of Operations.

The Company also incurred restructuring charges of $3,782 related to the Hi-Tec Acquisition. Restructuring charges consisted of severance, contract termination and other restructuring-related costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under the contract for their remaining terms without economic benefit to the Company. A liability for lease obligations is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. A liability for other restructuring-related costs is measured at its fair value in the period in which the liability is incurred.



Restructuring Costs Accrued (amounts in thousands)	January 28, 2017
Contract termination costs	$	386
Leases, net of sublease		1,920
Severance costs		1,270
Service costs		206
Total Restructuring costs identified	$	3,782

The Consolidated Financial Statements include the operating results of assets acquired in the Hi-Tec Acquisition on December 7, 2016. The following table presents the preliminary allocation of the purchase consideration paid for the net tangible and intangible assets acquired based on their estimated fair values on the closing date of the Hi‑Tec Acquisition:


(amounts in thousands)		Purchase Price Allocation
Cash and cash equivalents	$	2,654
Accounts receivable		20,782
Inventory		1,327
Other current assets		2,373
Asset sales		11,337
Total current assets	$	38,473
Property and equipment, net		291
Intangibles		53,940
Favorable Lease		128
Total identifiable assets acquired	$	92,832
Accounts payable		4,729
Other current liabilities		5,868
Total current liabilities	$	10,597
Income tax liability		7,480
Income taxes payable—non-current		3,197
Net identifiable assets acquired	$	71,558
Goodwill		15,694
Total purchase consideration paid in cash	$	87,252

The subsidiaries acquired in the Hi-Tec Acquisition contributed $7,823 to consolidated revenue and ($4,088) to consolidated net loss during the year ended January 28, 2017. The Company further acquired $1,378 of goodwill deductible for tax purposes, which is reported at the Hi-Tec segment. Please see Note 12 for Segment Reporting.

The assets and liabilities recorded in the preliminary purchase price allocation above are provisional, as the Company has not yet obtained all available information necessary to finalize the measurement of such assets and liabilities. The measurement of acquired deferred income taxes has not been finalized as the Company is currently in the process of obtaining the necessary information to complete the analysis related to acquired net operating loss carryforwards, including the finalization of the assessment of available tax planning strategies. In addition, the Company is also waiting on information related to certain pre-acquisition income tax filing positions of Hi-Tec in various taxing jurisdictions that will assist the Company in finalizing the amounts to record for the acquired deferred income taxes. The Company is also waiting on information to assist the Company in finalizing the recording of any assumed uncertain income tax positions. The Company is also finalizing the required working capital true-up in accordance with the SPA, and finalizing the settlement statements in relation to the APA’s. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of acquisition.

The fair value of intangible assets acquired of $53,940 consists of brands with an estimated fair value of $53,400 and distributor relationships with an estimated fair value of $500. The income approach was used to determine the various acquired brand names. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. More specifically, the fair value of the brand assets was determined using the excess earnings method. The excess earnings method is an income approach to fair value measurement attributable to a specific intangible asset being valued from the asset grouping’s overall cash flow stream. The fair value of distributor relationships was also determined using the income approach under the lost profits method. The fair value of the leasehold agreements was determined based on the income approach, whereby the difference between the contract rent and market rent was calculated for each remaining year of the lease. Renewal options were considered when contract rent was shown to be below market rent. The future rent differences were then discounted back to present value at an appropriate rate of return. Fair value of the finished goods inventory was fair valued based on historical and projected financial data utilizing the income approach. For finished goods inventory, the income approach estimates the fair value of the finished goods inventory based on the net retail value of the inventory less operating expenses and a reasonable profit allowance. The analysis calculates the net realizable value for the Company’s inventory on an aggregate basis. Assembled work force was valued by estimating the value of the employees in place as of the date of valuation. This estimation was performed by determining on a replacement cost basis, the costs to locate, screen, interview, hire and train new employees in their new positions. Fair value amounts for the intangible assets were determined using inputs observed at the level 3 fair value hierarchy, and leases and inventory were observed at level 2.

Under the APAs, Cherokee Global Brand’s sold or transferred the manufacturing and operating assets and activities of Hi-Tec as of the close of the acquisition simultaneously with the execution of the SPA. The net assets recorded at fair value on the opening balance sheet pertained to the inventory subsequently sold.

The values of these sold assets at Acquisition Date had an estimated fair value of $11,337. Under the APA with CFG, Hi-Tec transferred trade receivables to CFG for $8,701 but remained wholly responsible for the full collection and remittance of the receivable balances to CFG. The receivable balances were transferred with a fee payable to CFG. Such fee is contractually determined as a 10% premium added to amounts collected by the Company during the 210 days following the closing date. A liability for remaining amounts due to CFG totaling $6,815 is recorded within other current liabilities for the year ended January, 28, 2017. Included within the accrual is $570 of collection fee, which has been classified as other expenses. No portion of this collection fee has yet been remitted to CFG. Proceeds and payments pertaining to this arrangement are reflected within the financing activities of the cash flow statement.

The recorded goodwill primarily results from the synergies the Company expects to realize from the combination of the entities and the assembled workforce, and the deferred tax liability in relation to the intangibles the Company acquired in connection with the Hi-Tec Acquisition.

Unaudited Pro Forma Financial Information

The Company assessed the acquisition under both SEC and US GAAP accounting guidance, and treated the transaction as an asset acquisition under SEC Regulation S-X-3-05 and as a business combination under Accounting Standards Update 2017-01.

The following table presents the unaudited pro forma combined historical results of operations as if the Company had consummated the Hi-Tec Acquisition as of February 1, 2015:



	Year ended
(amounts in thousands)	January 28, 2017		January 30, 2016
Gross Income		51,468		54,290
Net Income		8,053		11,909
Basic EPS	$	0.62	$	0.92
Diluted EPS	$	0.62	$	0.91

The unaudited pro forma financial information set forth above is derived from the Company’s historical financial information and the financial information of Hi-Tec for the portion of the periods presented in which Hi-Tec was a subsidiary of the Company, consisting of the period from December 7, 2016 to January 28, 2017. For purposes of this discussion, such period is referred to as the “Post-Acquisition Period.” The Company calculated the pro forma amounts for Hi-Tec by applying the Company’s accounting policies and retroactively forecasting and pro-rating for the periods presented the results of Hi-Tec during the Post-Acquisition Period. For purposes of these adjustments, non-recurring expenses, consisting of restructuring and other transaction costs, were removed. The amounts of such non-recurring adjustments are $3,782 and $10,555 for restructuring costs and other transaction costs, respectively. In addition, Hi-Tec’s financial results during the Post-Acquisition Period reflect the Company’s transition of Hi-Tec’s business from a full spectrum distribution model, in which one group of affiliated companies owned the Hi-Tec brands and manufactured the Hi-Tec products prior to completion of the Hi-Tec Acquisition, to a brand licensing model consistent with the Company’s business. As a result, the above pro forma financial information applies royalty rates from Hi-Tec’s current license agreements to historical wholesale product sales to calculate licensing revenues, and excludes Hi-Tec’s historical operating costs relating to its former distribution business, including its product sales, marketing, purchasing and distribution costs. Additionally, interest expense included in the above pro forma financial information is based upon the Company’s current debt agreements and excludes any interest based upon the Company’s former debt agreements.

The unaudited pro forma information of the Company is presented for informational purposes only, as an aid to understanding the entities’ combined financial results. This unaudited pro forma condensed combined financial information should not be considered a substitute for the historical financial information prepared in accordance with GAAP, as presented in the Company’s reports on Form 10-Q and Form 10-K and other filings with the Securities and Exchange Commission (the “SEC”). The unaudited pro forma condensed combined financial information disclosed in this report is for illustrative purposes only and is not indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or of the Company’s future consolidated results of operations.