NOTE 4 — MERGER CONSIDERATION

We closed the RG Merger on January 28, 2016. The RG Merger has been accounted for under the acquisition method of accounting with RG as the accounting acquirer. Under the acquisition method of accounting, the purchase price and the net assets acquired and liabilities assumed are recorded based on their estimated fair values as of the closing date of the RG Merger. The excess of purchase price over the net assets acquired is recorded as goodwill. The valuations of intangible assets, property and equipment, fair value of leases, income taxes and certain other items are preliminary. Management expects to finalize the purchase price allocations during fiscal 2016.

Business acquisitions are accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with finite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized but are tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

The stock price used to determine the preliminary estimated purchase price allocation is based on the closing price of our common stock as of January 28, 2016, which was $5.70. The equity consideration was based upon the assumption that 3,509,000 shares of common stock were outstanding, which included 2,342,000 shares of common stock outstanding and 1,167,000 total aggregate shares of common stock issued to convertible noteholders upon conversion of the convertible notes into shares of our common stock under the Rollover Agreement. As a result of the Rollover Agreement, immediately after giving effect to the RG Merger and related transactions, the holders of the Modified Convertible Notes owned approximately 14% of the combined company on an as-converted, fully diluted basis.

The assets acquired in this acquisition consisted of tangible and intangible assets and liabilities assumed. The differences between the fair value of the consideration paid and the estimated fair value of the assets and liabilities has been preliminarily recorded as goodwill. The significant factors that resulted in recognition of goodwill were: (a) the purchase price was based upon cash flow and return on capital projections assuming integrations of the companies; and (b) the calculation of the fair value of tangible and intangible assets acquired that qualified for recognition. We have determined on a preliminary basis that the useful life of the acquired trade name asset is indefinite, and therefore, no amortization expense will need to be recognized unless the useful life is determined not to be indefinite. The useful life of the acquired customer relationships are finite and will be amortized over their useful lives. However, we intend to test the assets for impairment if events or changes in circumstances indicate that the assets might be impaired. Additionally, a deferred tax liability has been established in the allocation of the purchase price with respect to the identified indefinite long-lived intangible assets acquired.

Under the acquisition method of accounting, the total purchase price is allocated to the preliminary assets acquired and liabilities assumed based on their estimated fair values. We may continue to adjust the preliminary estimated purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revision of preliminary estimates. The following is the total preliminary estimated purchase price allocation based on information available as of June 30, 2016 (in thousands, except share and per share data):


Assets acquired and liabilities assumed:
Cash and cash equivalents	$	2,092
Factored accounts receivable		6,719
Accounts receivable		336
Inventories		11,378
Prepaid expenses and other current assets		754
Property and equipment		356
Other assets		352
Accounts payable and accrued expenses		(15,417)
Customer cash advances		(893)
Line of credit		(4,683)
Deferred income tax liability		(9,453)
Other liabilities		(81)
Buy-out payable		(1,668)
Intangible assets acquired:
Trade name		32,300
Customer relationships		14,100
Total		36,192
Excess purchase price over net assets acquired		4,238

Total net assets acquired	$	40,430


Total purchase price:
Cash paid to existing holders of convertible notes	$	8,630
Fair value of Modified Convertible Notes transferred to the existing holders of convertible notes		11,800
Equity consideration to the Company's stockholders and existing holders of convertible notes
(3,508,747 common shares at $5.70)		20,000

Total Purchase Price	$	40,430

The preliminary estimated fair value of the Modified Convertible Notes was determined by a third-party valuation specialist. The face value of the Modified Convertible Notes in the amount of $16,473,000 was discounted by $4,673,000 to arrive at the fair value of the Modified Convertible Notes. The discount was calculated based on the present values of the contractual cash flows from the Modified Convertible Notes.

In addition, we incurred $3,636,000 of non-recurring expenses related to the RG Merger in the six months ended June 30, 2016.

Total revenue and income from continuing operations from Hudson since the date of the RG Merger included in the accompanying unaudited condensed consolidated financial statements is $34,681,000 and $4,406,000, respectively.

The following table presents our unaudited pro forma results (in thousands, except per share data) for the three and six months ended June 30, 2016 and 2015, respectively, as if the RG Merger had occurred on January 1, 2015. These results are not intended to reflect our actual operations had the acquisition occurred on January 1, 2015. Acquisition transaction costs have been excluded from the pro forma net (loss) income. Statutory rates were used to calculate income taxes.


	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015

Net sales	$	32,373	$	32,663	$	69,714	$	71,531
Net loss	$	(1,325)	$	(2,451)	$	(2,282)	$	(4,090)

Weighted average common shares outstanding		12,380		12,380		12,380		12,380
Loss per common share - basic and diluted	$	(0.11)	$	(0.20)	$	(0.18)	$	(0.33)