Note 2 - Business Acquisitions

Our acquisitions are accounted for in accordance with ASC 805, Business Combinations (“ASC 805”). We record the acquired assets and assumed liabilities at their estimated fair values. We determine the estimated fair values with the assistance of appraisals or valuations performed by independent third-party specialists, discounted cash flow analyses, quoted market prices where available, and estimates by management. To the extent the consideration transferred exceeds the fair value of the net assets acquired in a transaction, such excess is assigned to goodwill.

Receivables and other assets, property and equipment, accounts payable and accrued and other liabilities and customer deposits are generally stated at historical carrying values given the short-term nature of these assets and liabilities. Liabilities are recorded at historical carrying values in accordance with ASC 805, which we believe approximates fair value.

We determine the fair value of land and other inventories on a lot-by-lot basis primarily using market comparable land and home sales transactions combined with our estimates related to expected average home selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. The fair values of identified intangible assets are determined using discounted cash flow models.

We engage a third-party valuation specialist to assist with the determination of the estimated fair value of intangible assets acquired. We estimate the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information available at that time. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change during the purchase price allocation period.

Savvy Homes Acquisition

On April 3, 2017, we acquired substantially all of the assets of Savvy Homes, LLC and certain of its affiliated entities (“Savvy Homes”) for approximately $43 million, which included an earn-out of $1.8 million, which was subject to customary post-closing adjustments. As of December 31, 2017, we revised our estimated earn-out payment to zero as we do not expect Savvy Homes to meet the required performance targets. The $1.8 million of income is included in selling, general and administrative expenses in the consolidated statements of operations. The assets acquired included substantially all of the real estate, land acquisition agreements and permits associated with the Savvy Homes business, and certain of its leases, contracts, commitments and purchase orders. We also assumed certain liabilities of Savvy Homes, including the liabilities and obligations relating to the acquired contracts, but excluding other liabilities including home warranty obligations relating to homes closed by Savvy Homes prior to the acquisition. Savvy Homes acquires raw and developed land, develops raw land and constructs single-family homes in the Raleigh, North Carolina area and enhances our position in a key growth market. The results of operations of Savvy Homes are included in our consolidated financial statements from the acquisition date of April 3, 2017. During the year ended December 31, 2017, Savvy Homes’ revenue and net loss included in our 2017 consolidated financial statements were $53.2 million and $4.0 million, respectively. The $4.0 million net loss does not include income of $1.8 million from the reversal of the earn-out liability, which is included in our corporate general and administrative expenses.

The following table summarizes the calculation of the fair value of the total consideration transferred to Savvy Homes and its allocation to the assets acquired and liabilities assumed as of the acquisition date (in thousands):


Fair value of consideration transferred:
Cash paid for Savvy Homes net assets	$	41,150
Contingent consideration (earn-out)		1,818
Total consideration transferred	$	42,968

Assets acquired and liabilities assumed:
Assets
Receivables and other assets	$	159
Land and other inventories		39,311
Property and equipment		168
Trade name		407
Goodwill		11,005
Total assets acquired		51,050

Liabilities
Accounts payable		7,692
Accrued and other liabilities		390
Total liabilities assumed		8,082
Total net assets acquired	$	42,968

The $0.4 million of acquired intangible assets relates to trade names that are being amortized over 2.75 years. Amortization expense for these assets was $0.1 million for the year ended December 31, 2017 and is included in selling, general and administrative expenses in the consolidated statements of operations.

Transaction and integration costs directly related to the Savvy Homes acquisition, including legal and accounting fees, were $1.0 million year ended December 31, 2017 and are included in selling, general and administrative expenses in the consolidated statements of operations. Such costs were expensed as incurred in accordance with ASC 805.

The following represents the unaudited pro forma operating results as if Savvy Homes had been included in our consolidated statements of operations and as of the beginning of the fiscal year presented (in thousands, except per share data):


	Year Ended December 31,
	2017		2016
Revenue	$	860,723	$	850,937
Net income (loss)		(21,722)		150,195
Basic earnings (loss) per share		(0.97)		6.72
Diluted earnings (loss) per share		(0.97)		5.78

The supplemental pro forma operating results have been determined after adjusting the operating results of Savvy Homes to reflect additional expense that would have been recorded assuming the fair value adjustments to inventory and intangible assets had been applied as of January 1, 2016. These results may not be indicative of future operating results.

Bonterra Builders Acquisition

On July 1, 2015, we acquired substantially all of the assets and certain liabilities of Bonterra Builders, LLC (“Bonterra Builders”) for approximately $99.8 million. The earn-out was $5.7 million, which has been paid as of December 31, 2017. A portion of the aggregate consideration equal to $0.8 million was held back by us at the closing as security for Bonterra Builder’s indemnification and other potential obligations under the purchase agreement, which has been fully paid as of December 31, 2017. Bonterra Builders acquires raw and developed land, develops raw land and constructs single-family homes in the Charlotte, North Carolina area. With approximately 1,700 lots owned or controlled at the time of acquisition, Bonterra Builders significantly enhanced our position in a key growth market. The results of Bonterra Builders’ operations are included in our consolidated financial statements from the acquisition date of July 1, 2015.

We acquired substantially all of the assets of Bonterra Builders, including all of its real estate, land acquisition agreements and permits, and certain of its leases, contracts, commitments and purchase orders. We also assumed certain liabilities of Bonterra Builders, including the liabilities and obligations relating to the acquired contracts, but excluding certain home warranty obligations relating to homes closed by Bonterra Builders prior to the acquisition.

The following table summarizes the calculation of the fair value of the total consideration transferred to Bonterra Builders and the amounts of assets acquired and liabilities assumed as of the acquisition date (in thousands):


Fair value of consideration transferred:
Cash paid for Bonterra Builders net assets	$	40,818
Contingent consideration (earn-out)		6,000
Debt repaid at closing		52,941
Total consideration transferred	$	99,759

Assets acquired and liabilities assumed:
Assets
Receivables and other assets	$	574
Land and other inventories		91,632
Property and equipment		14
Trade name		1,400
Non-compete intangible asset		600
Goodwill		13,223
Total assets acquired		107,443

Liabilities
Accounts payable		5,071
Accrued and other liabilities		763
Customer deposits		1,850
Total liabilities assumed		7,684
Total net assets acquired	$	99,759

The $2.0 million of acquired intangible assets relates to trade names and non-compete agreements that are being amortized over five years and three years, respectively. Amortization expense for these assets totaled $0.5 million, $0.4 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively, which is included in the consolidated statements of operations within selling, general and administrative expenses.

During the year ended December 31, 2015, goodwill decreased by $1.7 million due to a post-closing purchase price adjustment and a revision of the valuation of the earn-out, as we finalized our acquisition accounting.

Transaction and integration costs directly related to the Bonterra Builders acquisition, including legal and accounting fees, totaled $0.9 million for the year ended December 31, 2015, the majority of which are included in the consolidated statements of operations within selling, general and administrative expenses. Such costs were expensed as incurred in accordance with ASC 805.

The following represents the unaudited pro forma operating results as if Bonterra Builders had been included in the Company’s consolidated statements of operations as of the beginning of the fiscal year presented (in thousands):


	Year Ended December 31,
	2015
Revenue	$	588,533
Net income		17,158

The supplemental pro forma operating results have been determined after adjusting the operating results of Bonterra Builders to reflect additional expense that would have been recorded assuming the fair value adjustments to inventory and intangible assets had been applied as of January 1, 2015. These results may not be indicative of future operating results.

The amount of revenue and net income of Bonterra Builders included in the consolidated statements of operations for 2017 is $168.8 million and $7.2 million, respectively. The amount of revenue and net income of Bonterra Builders included in the consolidated statements of operations for 2016 is $177.6 million and $7.9 million, respectively.