BUSINESS COMBINATION

On April 26, 2018 (the “Acquisition Date”), following a series of transactions, the Company acquired substantially all of the assets and assumed certain liabilities of GHO Homes Corporation and its affiliates (“GHO”) through a newly formed subsidiary, GRBK GHO Homes, LLC (“GRBK GHO Homes”), in which the Company holds an 80% controlling interest. The owner of GHO contributed $8.3 million of net assets to GRBK GHO Homes in an exchange for a 20% interest in GRBK GHO Homes. The minority partner of GRBK GHO Homes serves as the president of GRBK GHO Homes.

GRBK GHO Homes operates primarily in the Vero Beach, Florida market and is engaged in land and lot development, as well as all aspects of the homebuilding process. The acquisition allowed the Company to expand its operations into a new geographic market.

The Company consolidates the financial statements of GRBK GHO Homes as the Company owns 80% of the outstanding voting shares of the builder. The noncontrolling interest attributable to the 20% minority interest owned by our Florida based partner is included as redeemable noncontrolling interest in equity of consolidated subsidiary in the Company’s condensed consolidated financial statements. In addition, under the terms of the purchase agreement, the Company may be obligated to pay the contingent consideration if certain annual performance targets are met over the three-year period following the Acquisition Date.

The original consideration of $42.2 million consisted of $33.2 million in cash paid by the Company to the owner of GHO, $8.3 million of assets contributed by the owner of GHO, and an estimated $0.6 million of contingent consideration. Following completion of the audit of the balance sheet of GHO as of the Acquisition Date, the purchase price was adjusted by $2.0 million that was paid by the Company in cash, and the value of contributed assets from the minority partner was increased by $0.5 million. Contingent consideration was adjusted to $0.5 million based on finalization of valuation procedures. Thus, the final total consideration was $44.6 million. Total consideration for the Company's 80% interest in GRBK GHO Homes was $35.8 million.

In accordance with ASC 805, all material assets and liabilities, including contingent consideration, were measured and recognized at fair value as of the date of the acquisition to reflect the purchase price.

The following is a summary of fair value of assets acquired and liabilities assumed (in thousands):



Assets acquired
Cash	$	8,399
Inventory	45,070
Property and equipment	1,462
Intangible assets - trade name	850
Intangible assets - home construction contracts	290
Goodwill ⁽¹⁾	680
Other assets	833
Total assets	$	57,584
Liabilities assumed
Note payable	$	300
Accrued expenses and other liabilities	5,486
Customer deposits	9,073
Total liabilities	$	14,859
Redeemable noncontrolling interest	$	6,951
Net assets acquired ⁽²⁾	$	35,774


(1)	Goodwill is expected to be fully deductible for tax purposes.


(2)	Contingent consideration of $0.5 million is included in the fair value of net assets acquired.

The final purchase price allocation reflected above is based upon estimates and assumptions. The Company engaged a valuation firm to assist in the allocation of the purchase price, and valuation procedures related to the acquired assets and assumed liabilities have been completed. The estimated cash flows and ultimate valuation have been significantly affected by estimated discount rates, estimates related to expected average selling prices and sales incentives, expected sales pace and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs and may vary significantly between communities.

Adjustments to the fair value of inventory based on the completion of valuation procedures resulted in the Company recording $0.2 million of cost of residential units during the three months ended September 30, 2018 which related to the period from April 26, 2018 through June 30, 2018.

The valuation of redeemable noncontrolling interest is based on a market approach, considering the equity contribution made by the 20% partner, adjusted for control and marketability factors.

Acquired inventory consists of both land under development and work in process inventory, as well as completed homes held for sale. The estimated fair value of real estate inventory was determined on a community-by-community basis, primarily using the income approach which derives a value using a discounted cash flow for income-producing real property. The values of work in process and completed home inventory were estimated based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining construction and sales and marketing efforts through the sale of the homes. The stage of production, as of the acquisition date, ranged from recently started lots to fully completed homes. A sales comparison approach was used for land for which significant lot development had not yet begun as of the Acquisition Date. An income approach was also utilized to value mechanics lien home construction contracts acquired.

The estimated fair values of the acquired trade name, GHO Homes, and the home construction contracts, were determined using the relief-from-royalty method under the income approach, which involved assumptions related to revenue growth, market awareness and useful life.

The allocation to goodwill represents the excess of the purchase price, including contingent consideration, over the estimated fair value of assets acquired and liabilities assumed. Goodwill results primarily from operational synergies expected from the business combination. The decrease in goodwill during the three months ended September 30, 2018 relates solely to the finalization of purchase price allocation.

GRBK GHO Homes’ results of operations, which include homebuilding revenues of $29.8 million and income before tax of $3.0 million, are included in the accompanying condensed consolidated statements of income for the period from April 26, 2018 through September 30, 2018.

The supplemental pro forma information for revenue and earnings of the Company as though the business combination had occurred as of January 1, 2017 is impractical to provide due to the fact that consolidated reporting for the specific group of entities acquired had not existed prior to the acquisition.

As of September 30, 2018, we had incurred transaction costs of approximately $0.5 million related to the business combination, which have been expensed as incurred and are included in selling, general and administrative expense.