2. Business Combinations and Discontinued Operations

On December 7, 2016, the Company acquired Hi-Tec and simultaneously sold certain sales and distribution operations of Hi-Tec to third parties along with the related assets and liabilities (the “Hi-Tec Acquisition”). These third parties became licensees of the Company at that time and include Carolina Footwear Group, LLC (“Carolina”), Batra Limited (“Batra”) and Sunningdale (“South Africa”). On January 31, 2018, the Company sold its remaining Hi-Tec sales and distribution operations to International Brands Group (“IBG”). The business sold to IBG is reflected in the accompanying financial statements as discontinued operations. The Company does not have any ownership interests in Carolina, Batra, South Africa or IBG. After these transactions and consistent with the Company’s planned conversion of Hi-Tec, the Company continues to own the intellectual property of Hi-Tec. The Company completed the Hi-Tec Acquisition to access markets addressed by Hi-Tec with its Hi-Tec, Magnum, Interceptor and 50 Peaks brands, and provide cross-selling opportunities with the Company’s other brands.

Discontinued Operations

The Company’s core business is marketing and managing its portfolio of fashion and lifestyle brands. Accordingly, the Company’s Hi-Tec sales and distribution business, which operates in Latin America, the Middle East, Russia and Asia Pacific was sold to IBG during the fourth quarter of Fiscal 2018 for $3.1 million. Cash proceeds of $1.3 million were received during the fourth quarter of Fiscal 2018, and $1.8 million of cash proceeds were received by the Company in the first quarter of Fiscal 2019. The operating assets and liabilities of this business were sold to IBG in conjunction with the execution of a separate license agreement that grants IBG certain sales and distribution rights for Hi-Tec products in those territories. The discontinued sales and distribution business was previously included in the Company’s Hi-Tec reporting segment.

The net (loss) income from discontinued operations in the consolidated statement of operations includes the following:


	Year Ended
	February 3,		January 28,
(In thousands)	2018		2017
Product sales and royalty revenues	$	19,492	$	6,599
Cost of goods sold		15,106		5,083
Selling, general and administrative expenses		4,384		688
Depreciation and amortization		167		—
Pretax (loss) income from discontinued operations		(165)		828
Gain on disposal of discontinued operations		37		—
Total pretax (loss) income from discontinued operations		(128)		828
Income tax (benefit) provision		—		—
Net (loss) income from discontinued operations	$	(128)	$	828

The carrying amounts of assets and liabilities included in discontinued operations comprise the following:


	February 3,		January 28,
(In thousands)	2018		2017
Accounts receivable and amounts due from sale of business	$	1,868	$	10,465
Inventories		—		1,567
Current assets of discontinued operations		1,868		12,032
Intangible asset—Distributor relationships		—		492
Goodwill		—		400
Property and equipment		—		11
Noncurrent assets of discontinued operations		—		903
Current liabilities of discontinued operations		1,103		4,083
Net assets of discontinued operations	$	765	$	8,852

Restructuring Charges

The Company incurred restructuring charges of $3.8 million in Fiscal 2017 and an additional $1.1 million in Fiscal 2018 related to the Hi-Tec Acquisition and its integration into the Company’s ongoing operations (the “Hi-Tec Plan”). In addition, restructuring charges of $1.0 million were incurred in the fourth quarter of Fiscal 2018 as the Company’s staff was realigned to appropriately support its current business (the “Cherokee Global Brands Plan”).

Restructuring charges comprise the following:


	Year Ended
	February 3,		January 28,
(In thousands)	2018		2017
Severance costs	$	2,080	$	1,270
Contract termination costs		—		386
Leases, net of sublease		—		1,920
Service costs		—		206
	$	2,080	$	3,782

Payments against the restructuring plan obligations were as follows:


(In thousands)	Cherokee Global Brands Plan		Hi-Tec Plan
Balance, January 28, 2017	$	—	$	3,782
Restructuring charges		1,031		1,049
Payments during the period		—		(2,330)
Balance, February 3, 2018	$	1,031	$	2,501

Allocation of Purchase Price

The Hi Tec Acquisition was accounted for under the acquisition method and Accounting Standards Update 2017-01, and the financial statements of the Company include the operating results of Hi-Tec as of the acquisition date, December 7, 2016. The following table presents the allocation of purchase price to the net tangible and intangible assets acquired based on their estimated fair values on the acquisition date. Provisional amounts that were initially recorded have been adjusted based on additional information the Company has obtained about facts and circumstances that existed as of the acquisition date.


(In thousands)	Purchase Price Allocation
Cash and cash equivalents	$	2,654
Accounts receivable		20,445
Inventories		1,327
Other current assets		2,453
Assets sold to third parties		11,147
Total current assets		38,026
Property and equipment		291
Intangible assets		53,940
Goodwill		16,652
Total identifiable assets acquired		108,909
Accounts payable		5,112
Other current liabilities		5,868
Total current liabilities		10,980
Deferred income taxes		7,480
Long-term income taxes payable		3,197
Net assets acquired	$	87,252

The intangible assets acquired comprise trademarks of $53.4 million and distributor relationships of $0.5 million, which were valued using the income approach using various methods. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The fair value of the trademarks was determined using discounted cash flows, which is an income approach to fair value measurement that requires a specific intangible asset to be valued from the asset grouping’s overall cash flow stream. The fair value of distributor relationships was determined using the lost profits method. The fair value of acquired leasehold agreements was determined based on the differences between the contract rent and market rent for each remaining year of the leases, discounted to present value at an appropriate rate of return. The fair value of acquired finished goods inventories was determined based on the net retail value of the inventory less operating expenses and a reasonable profit allowance, determined on an aggregate basis. The fair value amounts for the intangible assets were determined using inputs observed at Level 3 in the fair value hierarchy, while leases and inventory were observed at Level 2. Goodwill primarily resulted from the synergies the Company expects to realize from the combination of Hi-Tec with Cherokee Global Brands, the assembled workforce and the deferred tax liability related to the intangibles acquired.

The fair value of assets acquired that were simultaneously sold to third parties was $11.1 million. Accounts receivable of $8.7 million were sold to Carolina with recourse and required the Company to pay Carolina a 10% premium for amounts collected during the 210 days following the acquisition date. The uncollected accounts are included in accounts receivable in the accompanying balance sheet, and a liability for the remaining amounts due to Carolina is included within other current liabilities, amounting to $0.8 million and $6.8 million at February 3, 2018 and January 28, 2017, respectively. The premiums for amounts collected were $0.2 million and $0.6 million for Fiscal 2018 and Fiscal 2017, respectively, and are included as other expense in the statement of operations. Proceeds and payments pertaining to this arrangement are included as financing activities in the statement of cash flows.

The subsidiaries acquired in the Hi-Tec Acquisition contributed $7.8 million to consolidated revenue and generated a net loss of $4.1 million during Fiscal 2017. The Company further acquired $1.4 million of goodwill deductible for tax purposes, which is reported at the Hi-Tec segment. Please see Note 13 for Segment Reporting.

Business acquisition and integration costs totaled $7.5 million and $11.5 million for Fiscal 2018 and Fiscal 2017, respectively, consisting of legal, due diligence, integration and other costs and are classified as business acquisition and integration costs in the operating expenses section of the statement of operations.

Unaudited Pro Forma Financial Information

The Company assessed the acquisition under both Securities and Exchange Commission (the “SEC”) and US GAAP accounting guidance, and treated the transaction as an asset acquisition under SEC Regulation S-X-3-05 and as a business combination under Accounting Standards Update 2017-01.

The following table presents the unaudited pro forma combined historical results of operations as if the Company had consummated the Hi-Tec Acquisition as of February 1, 2015:


	Year Ended
(amounts in thousands)	January 28, 2017		January 30, 2016
Gross Income	$	51,468	$	54,290
Net Income	$	8,053	$	11,909
Basic EPS	$	0.62	$	0.92
Diluted EPS	$	0.62	$	0.91

The unaudited pro forma financial information set forth above is derived from the Company’s historical financial information and the financial information of Hi-Tec for the portion of the periods presented in which Hi-Tec was a subsidiary of the Company, consisting of the period from December 7, 2016 to January 28, 2017 (the “Post-Acquisition Period”). The Company calculated the pro forma amounts for Hi-Tec by applying the Company’s accounting policies and retroactively forecasting and pro-rating for the periods presented the results of Hi-Tec during the Post-Acquisition Period. For purposes of these adjustments, non-recurring expenses, consisting of restructuring and other transaction costs, were removed. The amounts of such non-recurring adjustments are $3.8 million and $10.6 million for restructuring costs and other transaction costs, respectively. In addition, Hi-Tec’s financial results during the Post-Acquisition Period reflect the Company’s transition of Hi-Tec’s business from a full spectrum distribution model, in which one group of affiliated companies owned the Hi-Tec brands and manufactured the Hi-Tec products prior to completion of the Hi-Tec Acquisition, to a brand licensing model consistent with the Company’s business. As a result, the above pro forma financial information applies royalty rates from Hi-Tec’s current license agreements to historical wholesale product sales to calculate licensing revenues, and excludes Hi-Tec’s historical operating costs relating to its former distribution business, including its product sales, marketing, purchasing and distribution costs. Additionally, interest expense included in the above pro forma financial information is based upon the Company’s current debt agreements and excludes any interest based upon the Company’s former debt agreements.

The unaudited pro forma information of the Company is presented for informational purposes only, as an aid to understanding the entities’ combined financial results. This unaudited pro forma condensed combined financial information should not be considered a substitute for the historical financial information prepared in accordance with GAAP, as presented in the Company’s reports on Form 10-Q and Form 10-K and other filings with the SEC. The unaudited pro forma condensed combined financial information disclosed in this report is for illustrative purposes only and is not indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or of the Company’s future consolidated results of operations.