3. GBG Acquisition

On October 29, 2018, the Company completed the GBG Acquisition. To finance the acquisition, the Company entered into the Credit Agreements. The First Lien Credit Agreement provides for a senior secured asset based revolving credit facility with commitments in an aggregate principal amount of $150 million and a senior secured term loan credit facility in an aggregate principal amount of $645 million. The Second Lien Credit Agreement provides for a second lien term loan facility in an aggregate principal amount of $668 million. See “Note 12 – Debt” for a discussion of the terms of the Credit Agreements.

The GBG Acquisition qualified as a business combination and was accounted for under the acquisition method of accounting. 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 purchase price allocation is subject to adjustment until the Company has completed its analysis within the measurement period. The purchase price allocation is preliminary and the finalization of the Company's purchase price allocation may result in changes in the valuation of assets acquired and liabilities assumed. The Company will finalize the purchase price allocation as soon as practicable, but not to exceed one year following October 29, 2018.

The following table summarizes the allocation of the preliminary purchase price for the GBG Acquisition as of October 29, 2018 (in thousands):


	Purchase
	Price Allocation
Assets acquired and liabilities assumed:
Accounts receivable	$	65,106
Inventories		371,605
Prepaid expenses and other current assets		56,380
Property and equipment		86,971
Other assets		41
Accounts payable and accrued expenses		(589,849)

Intangible assets and liabilities acquired:
Goodwill		367,725
Leasehold interests		(2,310)
Customer relationships		824,000
Preliminary purchase price	$	1,179,669

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed in the GBG Acquisition based on their estimated fair values as of the acquisition date. The fair values of assets acquired and liabilities assumed represent management’s estimate of fair value based on information obtained from various sources, including management’s historical experience. As a result of the fair value assessment, inventory acquired was stepped up to fair value by the amount of $32.4 million. During the year ended December 31, 2018 we recognized $23.6 million within cost of goods sold related to the stepped up fair value of inventory acquired. The estimated fair value of the acquired tangible and intangible assets and liabilities assumed were determined using multiple valuation approaches depending on the type of tangible or intangible asset acquired, including but not limited to the income approach, the excess earnings method, the with versus without method, net realizable value method and the relief from royalty method approach.

The amount of goodwill represents the excess of the GBG Acquisition purchase price over the net identifiable assets acquired and liabilities assumed. Goodwill primarily represents, among other factors, the value of synergies expected to be realized by integration with the Company and expected positive cash flow and return on capital projections from the integration. Goodwill arising from the acquisition of the GBG Business was determined as the excess of the purchase price over the net acquisition date fair values of the acquired assets and the liabilities assumed, and is not deductible for income tax purposes subject to certain tax elections that are currently being considered.

The Company has determined 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.

The Company incurred $39.8 million in non-recurring acquisition-related transaction costs related to the acquisition of the GBG Business during the year ended December 31, 2018, which is included in selling, general, and administrative expense within the accompanying consolidated statement of operations and comprehensive loss.

GBG USA, through various affiliates and third parties, currently provides a number of critical services to us, such as information technology services, financial systems, shared real estate and logistics support through a transition services agreement.

Pro forma financial information (unaudited)

The following table presents our unaudited pro forma results (in thousands, except per share data) for the years ended December 31, 2018 and 2017, respectively, as if the GBG Acquisition had occurred on January 1, 2017. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired tangible and intangible assets, and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.


	Year ended December 31,
	2018			2017
	(in thousands)
Net sales	$	2,302,195		$	2,244,604
Cost of goods sold		1,785,871			1,691,199
Gross margin		516,324			553,405
Gross margin % of net sales		22.4	%		24.7	%
Operating expenses
Selling, general and administrative		569,726			423,392
Depreciation and amortization		90,241			92,554
Total operating expenses		659,967			515,946
Operating (loss) income		(143,643)			37,459
Interest expense		156,329			152,082
Gain on contingent consideration		(17,675)			(18,687)
Loss before income taxes		(282,297)			(95,936)
Income tax benefit		5,927			5,331
Net loss	$	(276,370)		$	(90,605)
Loss per common share – basic	$	(4.75)		$	(1.58)
Loss per common share – diluted	$	(4.75)		$	(1.58)
Weighted average shares outstanding basic and diluted		58,143			57,516

The unaudited pro forma financial information as presented above is for information purposes only and is not necessarily indicative of the actual results that would have been achieved had the GBG Acquisition occurred at the beginning of the earliest period presented or the results that may be achieved in future periods.