5. RG Merger Consideration

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.

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 purchase price allocation is based on the closing price of the 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 Merger 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 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. The Company has determined that the useful life of the acquired trade name asset is indefinite, and therefore, no amortization expense will be recognized until 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, the assets will be tested 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 assets acquired and liabilities assumed based on their estimated fair values. The following is the total purchase price allocation as of December 31, 2016 (in thousands, except share and per share data):


	Preliminary Purchase		Measurement Period		Final Purchase
	Price Allocation		Adjustments (1)		Price Allocation
Assets acquired and liabilities assumed:
Cash and cash equivalents	$	2,092	$	—	$	2,092
Factored accounts receivable		6,719		—		6,719
Accounts receivable		336		—		336
Inventories		11,378		—		11,378
Prepaid expenses and other current assets		754		1,524		2,278
Property and equipment		356		—		356
Other assets		352		—		352
Accounts payable and accrued expenses		(15,417)		—		(15,417)
Customer cash advances		(893)		—		(893)
Line of credit		(4,683)		—		(4,683)
Deferred income tax liability		(9,453)		(224)		(9,677)
Other liabilities		(81)		—		(81)
Buy-out payable		(1,668)		—		(1,668)
Intangible assets acquired:
Trade name		32,300		—		32,300
Customer relationships		14,100		(700)		13,400
Total		36,192		600		36,792
Excess purchase price over net assets acquired		4,238		(600)		3,638

Total net assets acquired	$	40,430	$	—	$	40,430

Total purchase price:
Cash paid to existing holders of convertible notes	$	8,630	$	—	$	8,630
Fair value of Modified Convertible Notes transferred to the existing holders of convertible notes		11,800		—		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		—		20,000

Total purchase price	$	40,430	$	—	$	40,430

(1) The measurement period adjustments were due to the finalization of the valuation related to intangible assets and a tax analysis, and resulted in the following: a decrease to customer relationships, an increase to prepaid expenses and other current assets related to a tax receivable and an increase in long-term deferred tax liabilities, with a corresponding decrease to goodwill. The measurement period adjustments did not have a significant impact on the Company’s consolidated statement of operations and comprehensive (loss) income for the year ended December 31, 2016.

As a result of the fair value assessment, inventory acquired was stepped up to fair value by the amount of $0.4 million which was sold in fiscal 2016, and is included in cost of goods sold within the accompanying consolidated statement of operations and comprehensive (loss) income for the year ended December 31, 2016 and is a non-recurring expense.

The fair value of the Modified Convertible Notes was determined with the assistance of a third-party valuation specialist. The face value of the Modified Convertible Notes in the amount of $16.5 million was discounted by $4.7 million 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.

The Company incurred $3.0 million of non-recurring acquisition-related transaction costs and $1.6 million of non-recurring restructuring expenses (see “Note 22 – Restructuring”) related to the RG Merger during the year ended December 31, 2016, which are included in selling, general and administrative expense within the accompanying consolidated statement of operations and comprehensive (loss) income.

Total net sales and operating income from continuing operations from Hudson since the date of the RG Merger included in the accompanying consolidated statement of operations and comprehensive (loss) income is $72.9 million and $7.4 million, respectively.

See “Note 3 – Acquisition of SWIMS” for a presentation of our unaudited pro forma results for years ended December 31, 2016 and 2015, respectively, as if the RG Merger and SWIMS acquisition had occurred on January 1, 2015. These results are not intended to reflect our actual operations had the acquisition occurred on January 1, 2015.