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F

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                         TO                   

 

 

Commission file number: 000‑18926

CENTRIC BRANDS INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

11‑2928178
(I.R.S. Employer
Identification No.)

 

350 5th Avenue, 6th Floor, New York, NY 10118

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (646) 582-6000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.10 per share

CTRC

The Nasdaq Stock Market LLC (Nasdaq Capital Market)

 

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐   No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer ☐

Non-accelerated filer ☒

 

Smaller reporting company ☒

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b‑2 of the Act.) Yes ☐  No ☒

The aggregate market value of common stock held by non-affiliates of the registrant based on the closing price of the registrant’s common stock on The Nasdaq Stock Market LLC as of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $42.9 million.

The number of shares of the registrant’s common stock outstanding as of May 15, 2019 was 58,542,641.

Documents incorporated by reference: None.

 

 

 

 

 


 

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CENTRIC BRANDS INC.

FORM 10-K ANNUAL REPORT

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018

Table of Contents

Item
Number

   

 

 

 

 

PART I

 

Item 1 

 

Business

5

Item 1A 

 

Risk Factors

17

Item 1B 

 

Unresolved Staff Comments

34

Item 2 

 

Properties

34

Item 3 

 

Legal Proceedings

35

Item 4 

 

Mine Safety Disclosure

35

 

 

PART II

 

Item 5 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

36

Item 6 

 

Selected Financial Data

36

Item 7 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

Item 7A 

 

Quantitative and Qualitative Disclosures About Market Risk

55

Item 8 

 

Financial Statements and Supplementary Data

56

Item 9 

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

104

Item 9A 

 

Controls and Procedures

104

Item 9B 

 

Other Information

105

 

 

PART III

 

Item 10 

 

Directors, Executive Officers and Corporate Governance

106

Item 11 

 

Executive Compensation

110

Item 12 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

117

Item 13 

 

Certain Relationships and Related Transactions, and Director Independence

121

Item 14 

 

Principal Accounting Fees and Services

127

 

 

PART IV

 

Item 15 

 

Exhibits, Financial Statement Schedules

128

Item 16 

 

Form 10-K Summary 

134

 

 

Signature Page

135

 

 

 

 

 

 

 

 

 

 

 

 


 

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PART I

Forward-Looking Statements

Statements contained in this Annual Report that are not purely historical facts are forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995 and are based on our management’s beliefs and assumptions and on information currently available to our management. Such forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words, “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will likely result,” and any variations of such words with similar meanings. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements.

Factors that would cause or contribute to such differences include, but are not limited to, the factors contained or referenced under the headings “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report. In particular, certain risks and uncertainties that we face include, but are not limited to:

·

our dependence on licensors, licensed products and our ability to extend or renew our key license agreements;

·

the risk associated with our substantial indebtedness, which could adversely affect our financial performance and impact our ability to service our indebtedness;

·

continued acceptance of our brands in the marketplace;

·

the seasonal nature of our business;

·

the risk that we will be unsuccessful in gauging fashion trends, changes in the business environment and changing consumer preferences;

·

potential changes in the retail store landscape in light of retail store closings and the bankruptcy of a number of prominent retailers;

·

the effects of competition in the markets in which we operate, including ecommerce retailers;

·

our ability to successfully implement our strategic plans;

·

our dependence on continued service of our key personnel;

·

costs and uncertainties with respect to expansion of our product offerings;

·

our ability to make strategic acquisitions and possible disruptions from acquisitions;

·

our ability to realize the anticipated benefits of recent acquisitions and any future acquisitions;

·

the risk that changes in general economic conditions, consumer confidence, or consumer spending patterns, including consumer demand for our products, will have a negative impact on our financial performance or strategies and our ability to generate cash flows from our operations to service our indebtedness;

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·

our ability to generate positive cash flow from operations;

·

our ability to manage our inventory effectively;

·

our ability to protect our trademarks and other intellectual property;

·

retail customer concentration and our reliance on a small number of large customers;

·

risks associated with leasing retail space and operating our own retail stores;

·

the risks associated with our reliance on service agreements providing certain accounting, warehousing and logistics, manufacturing, information technology, data privacy, cybersecurity, disaster recovery, and internal controls services, including the risks associated with certain services we are procuring under a transition services agreement;

·

the risks associated with the foreign sourcing of our products in light of potential changes in international trade relations between the United States and countries in which our products are sourced;

·

the risk that we pledged all our tangible and intangible assets as collateral under our financing agreements;

·

the risk that the credit ratings of the combined company or its subsidiaries may be different from what we expect;

·

our ability to continue to have access to sufficient sources of liquidity necessary to fund ongoing cash requirements of our operations or new acquisitions;

·

the significant increase in the amount of our goodwill and other intangibles;

·

the risk of cyber-attacks and other technology system risks;

·

the effect of regulations applicable to us as a United States public company; and

·

additional legislation and/or regulation in the United States and around the world.

Since we operate in a rapidly changing environment, new risk factors can arise and it is not possible for our management to predict all such risk factors, nor can our management assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance, events and circumstances reflected in the forward-looking statements will be achieved or will occur. Given these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements.

Any forward-looking statement in this Annual Report speaks only as of the date of this filing. We undertake no obligation to publicly update these forward-looking statements to reflect events, circumstances or the occurrence of unanticipated events that occur.

Available Information

We file with or submit to the SEC periodic and current reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934, as amended  (“Exchange Act”). We maintain a

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website at www.centricbrands.com and make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through our website at www.centricbrands.com (under the heading “Investor Relations”). Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information contained on our website to be part of this Annual Report on Form 10-K or any other report we file with the SEC. Information relating to our corporate governance, including copies of our Code of Ethics and Conduct, Audit, Compensation and Nominating and Corporate Governance Committee Charters, and other policies and guidelines, are available at our website under “Investor Relations.” Paper copies of these filings and corporate governance documents are available to stockholders free of charge by written request to Investor Relations, Centric Brands Inc. 350 5th Avenue, 6th Floor, New York, NY 10118. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information filed electronically by us with the SEC. Copies of these reports, proxy and information statements and other information may be obtained by electronic request at the following e-mail address: publicinfo@sec.gov.

ITEM 1.    BUSINESS

As used in this Annual Report on Form 10-K (“Annual Report”), unless the context indicates otherwise, the terms “Centric Brands,” “we,” “us,” “our,” and “the Company” refer to Centric Brands Inc. (formerly Differential Brands Group, Inc.) and our subsidiaries and affiliates. Centric Brands Inc. is a Delaware corporation that was incorporated in 1987.

Overview

Centric Brands is a leading lifestyle brands collective, bringing together creative minds from the worlds of fashion and commerce, sourcing, technology, marketing, digital and entertainment. We design, produce, merchandise, manage, and market kidswear, accessories, and men’s and women’s apparel under owned, licensed and private label brands and distribute our products across all retail and digital channels in North America and in international markets.

We license over 100 brands or produce private label products across our core product categories including kids, accessories, and men’s and women’s apparel. Licensed brands include Calvin Klein, Under Armour, Tommy Hilfiger, Nautica, Spyder, BCBG, Joe’s, Buffalo, Frye, Michael Kors, Kate Spade, AllSaints and Cole Haan, and entertainment properties including Disney, Marvel and Nickelodeon, among others. Our products are sold through a cross section of leading retailers such as Walmart, Macy’s, Kohl’s, TJX Companies, Costco, Nordstrom, Dillard’s, Ross, Target, JC Penney, and Amazon. We also sell our products over the web through retail partners such as Walmart.com, Macy’s.com and Nordstrom.com. We also distribute apparel and other products through our own retail stores, ecommerce websites, and partner shop-in-shops.

We began our operations in April 1987 as Innovo, Inc., a Texas corporation, in the consumer products industry. Since that time, we have changed our corporate name several times to reflect our evolution. Our corporate name has changed from Innovo Group Inc. in 1990, to Joe’s Jeans Inc. in 2007, to Differential Brands Group Inc. in 2016 and most recently, Centric Brands Inc. in October 2018. As part of this progression, in September 2013, we acquired the Hudson brand, which is a designer and marketer of men’s and women’s premium branded denim apparel. In January 2016, we acquired the Robert Graham brand, which is engaged in the design, development, sales and licensing of sophisticated, eclectic apparel products and accessories. In July 2016, we acquired the SWIMS brand, a Scandinavian-based business engaged in the design, development, sales and licensing of footwear, apparel and accessories. Most recently, in October 2018, we completed the acquisition of a significant portion of Global Brands Group Holding Limited’s (“GBG”) North American licensing business. Concurrent with the closing of the GBG Acquisition (as defined below), we changed our name to Centric Brands Inc., reflecting our position as a leading lifestyle brands collective platform.

GBG Acquisition

On October 29, 2018 (the “Closing Date”), we acquired from GBG and GBG USA Inc., a wholly-owned subsidiary of GBG (“GBG USA”), a significant part of GBG’s North American business, including the wholesale, retail and ecommerce operations, comprising all of their North American kids business, all of their North American accessories

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business and a majority of their West Coast and Canadian fashion businesses (the “GBG Business”) for a purchase price of approximately $1.18 billion (the “GBG Acquisition”). The GBG Business licenses brands such as Calvin Klein, Under Armour, Tommy Hilfiger, BCBG, Joe’s, Buffalo David Bitton, Frye, Michael Kors, Kate Spade, All Saints and Cole Haan, and entertainment properties including Disney, Marvel and Nickelodeon, among others. For more information on the financing transactions in connection with the GBG Acquisition, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources” and “Notes to Consolidated Financial Statements.”

SWIMS® Acquisition

On July 18, 2016, we completed the acquisition of all of the outstanding share capital of Norwegian private limited company (aksjeselskap) SWIMS AS. We purchased SWIMS for aggregate consideration of (i) $12.0 million in cash, (ii) 702,943 shares of our common stock and (iii) warrants to purchase an aggregate of 150,000 shares of our common stock with an exercise price of $5.47 per share.

Robert Graham® Merger

On January 28, 2016, we completed the acquisition of all of the outstanding equity interests of Robert Graham for an aggregate of $81.0 million in cash and 8,825,461 shares of our common stock (the “RG Merger”). Robert Graham is engaged in the design, development, sales and licensing of lifestyle apparel products and accessories that bear the brand name Robert Graham®.

Effective upon consummation of the RG Merger, we effected a reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock such that each 30 shares of our issued and outstanding common stock were reclassified into one share of our issued and outstanding common stock. The Reverse Stock Split did not change the par value or the amount of authorized shares of our common stock. The primary purpose of the Reverse Stock Split was to increase the per-share market price of our common stock in order to maintain our listing on The NASDAQ Capital Market maintained by The NASDAQ Stock Market LLC (“NASDAQ”). All share amounts in this Annual Report reflect the Reverse Stock Split.

Our Brands and Products

Our products are focused on kids’ products, accessories products, and men’s and women’s apparel. Historically, our principal business activity was the design, development and worldwide marketing of apparel, footwear and lifestyle products bearing the Hudson®, Robert Graham® and SWIMS® (“Owned Brands”) labels as described further below.

As a result of the GBG Acquisition, we now license, manage and operate a diversified portfolio of complementary consumer brands where we act as a licensee for certain trademarks owned by third parties and produce private label products for certain customers. We also acquired certain trademarks for other owned brands pursuant to the GBG Acquisition that we do not expect to be significant to our operating results. We strive to combine consumer insight with our design, marketing, and imaging skills to offer broad lifestyle collections with a unified vision. Due to the GBG Acquisition, we now benefit from a balanced mix of licensed brands anchored by the following licensed brands:

AllSaints®

AllSaints is a British fashion retailer headquartered in London. AllSaints sells menswear, apparel, footwear and accessories through its department store locations, stand-alone retail stores and its website. AllSaints launched its first comprehensive handbag line in September 2015. We sell AllSaints accessories related products to numerous retailers, including major department stores, specialty stores, AllSaints retail and ecommerce stores in the United States and Canada.

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BCBG®

Founded in Paris in 1989, BCBG is named for the popular French expression “Bon chic, bon genre,” the idea that a good attitude is the basis of good style. Since its inception, BCBG has infused west coast attitude into its distinctly European aesthetic to craft timeless designs that inspire women. BCBG products are sold in retail stores and department stores around the world. We sell women’s BCBG apparel and related accessories products in our BCBG retail stores, partner shop-in-shops, major department stores, specialty stores, ecommerce stores and our ecommerce website at www.bcbg.com.

bebe®

bebe is the go-to destination for chic, contemporary fashion. Founded by Manny Mashouf in 1976, he created one of the first contemporary fashion brands. Designed for the confident, sexy, modern woman, bebe is a global label that embodies a sensual, sophisticated lifestyle. We sell women’s bebe apparel and related accessories products in our own bebe retail store, specialty stores, and through www.bebe.com.

Buffalo David Bitton®

Buffalo David Bitton (Buffalo) is an iconic brand offering multiple denim styles and a full fashion collection. Buffalo is a lifestyle brand that translates across international boundaries. Founded in France and brought to Montreal more than 30 years ago, Buffalo now spans across 18 countries and more than 3,000 locations. We sell Buffalo men’s and women’s apparel to key accounts throughout the United States and Canada including major department stores, specialty stores,  and ecommerce stores in the United States and Canada.

Calvin Klein®

Calvin Klein is an American luxury fashion house established in 1968, which specializes in apparel, lifestyle accessories, home furnishings, perfumery, jewelry, watches and ready-to-wear. Calving Klein has substantial market share in retail and commercial lines as well haute couture garments. We sell Calvin Klein kids products and Calvin Klein men’s and women’s accessories related products to numerous retailers including major department stores, specialty stores, and ecommerce stores in the United States and Canada.

Cole Haan®

Cole Haan was founded in 1928 in Chicago, and was named after its founders Trafton Cole and Eddie Haan.  Cole Haan is a leading footwear label and has done collaborations with designers, athletes, and tastemakers expanding its product offering to include belts, hosiery, handbags, gloves, scarves, hats, outerwear, and sunglasses. We sell Cole Haan accessories related products in retail stores and department stores in the United States and Canada including Cole Haan retail stores and ecommerce stores.  

Fila®

Fila is a sportswear manufacturing company founded in Italy. Fila products are internationally recognized by athletes and the fashion conscious. Fila uses premium fabrics designed to radiate the sophistication of Italian craftsmanship, while allowing maximum flexibility and performance. We sell Fila accessories related products in the retail stores and department stores throughout the United States and Canada.

FRYE®

Founded in 1863 in Marlboro, Massachusetts by John A. Frye, the Frye brand is the oldest, continuously operating footwear brand in the nation and one of the most recognizable and highly esteemed of all American brands. Frye’s history spans over150 years, across cultural shifts and changes in fashion. Today, Frye products are accessorized and envied on city streets, worked and roughed upon country roads and chosen above all others for their inimitable style and

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uncompromising quality. We sell Frye accessories related products to numerous retailers, including major department stores, specialty stores, Frye retail stores and ecommerce stores in the United States and Canada.

Herve Leger®

Herve Leger was founded in 1985 by the designer Hervé Peugnet, the pioneer of the so-called “bandage” dress, which utilized materials traditionally associated with foundation garments to create dresses that would mold and shape the wearer's figure with its signature bandage-like strips.  Herve Leger was acquired by the BCBG Max Azria Group in 1998 and relaunched under the direction of Max Azria in 2007. We sell women’s Herve Leger apparel in our own Herve Leger retail stores, partner shop-in-shops, major department stores, specialty stores, ecommerce stores and our ecommerce website at www.herveleger.com.

Joe’s®

Founded in 2001 by Creative Director Joe Dahan, Joe's redefines everyday style with its inherently LA sensibility and distinctive rock n roll point-of-view. With an emphasis on offering the perfect fit for everybody, the brand takes a revolutionary approach to denim and sophisticated classics, incorporating the very latest in technology to offer product that is beautiful, innovative, and fits flawlessly. We sell Joe’s men’s and women’s apparel in our Joe’s retail stores, major department stores, specialty stores, ecommerce stores and our ecommerce website at www.joesjeans.com.

Kate Spade®

Kate Spade is an American luxury fashion design house founded in January 1993 by Kate and Andy Spade.  The company started out as a handbag company. The debut line infused classic shapes, colors and fabrics into iconic handbags.  The company then began manufacturing jewelry, glasses and other small accessories, before it launched a home collection brand in 2007. Kate Spade products are sold in retail stores and department stores around the world. We sell Kate Spade accessories related products to numerous retailers, including major department stores, specialty stores, Kate Spade retail stores and ecommerce stores in the United States and Canada.

Lucky Brand®

Lucky Brand is an American denim company founded in Vernon, California in 1990. Lucky Brand is also known for a wide range of other products, including activewear, outerwear, T-shirts, and professional attire. We sell Lucky Brand kids’ products and accessories related products throughout the United States and Canada to major department store chains including Bloomingdale’s, Macy’s, Lord  & Taylor, Nordstrom, Belk and Dillard’s, as well as small specialty chains like Buckle.

Michael Kors®

Michael Kors is a world-renowned, award-winning designer of luxury accessories and ready-to-wear. His namesake company, established in 1981, currently produces a range of products under his signature Michael Kors Collection and MICHAEL by Michael Kors labels. These products include accessories, footwear, watches, jewelry, men’s and women’s ready-to-wear, eyewear and a full line of fragrance products. We sell Michael Kors accessories to more than 550 stores and over 1,500 in-store boutiques in various countries, including major department stores, specialty stores, Michael Kors retail stores and ecommerce stores in the United States and Canada.

Marvel®

Marvel Entertainment, LLC, a wholly-owned subsidiary of The Walt Disney Company, is one of the world’s most prominent character-based entertainment companies, built on a proven library of more than 8,000 characters featured in a variety of media platforms. Marvel's many famous characters include Spider-Man, Avengers, Captain Marvel and Iron Man. We sell Marvel kids related products to numerous retailers, including major department stores, specialty stores, and through ecommerce websites in the United States and Canada.

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Nautica®

Nautica is a premium American apparel brand featuring men’s, women’s, kids apparel, and accessories as well as home, watches, and fragrances. Nautica is one of the most recognized American brands throughout the world, with over 35 categories available in more than 65 countries. Nautica currently operates 72 Nautica stores in the United States and 291 International stores, and over 1,400 Nautica branded shop-in-shops worldwide. We sell Nautica kids' products and accessories related products to numerous retailers, including major department and specialty stores throughout the United States and Canada.

Nickelodeon®

Nickelodeon is a recognized leader in kids and family entertainment, featuring leading original and licensed series for kids across animation, live-action and preschool genres. Shows aired on Nickelodeon include SpongeBob SquarePants, Rugrats, All That, and Kenan & Kel. We sell Nickelodeon kids related products to numerous retailers, including major department stores, specialty stores, and ecommerce stores in the United States and Canada.

Spyder®

Established in 1978, Spyder is widely known and highly respected throughout the outdoor community as one of the most technical and fashionable brands in the winter sports market. We sell Spyder kids' products and accessories to retail stores and department stores throughout the United States and Canada.

Timberland®

Timberland offers outdoor, adventure-inspired lifestyle footwear, apparel and accessories that combine performance benefits and versatile styling for men, women and children. We sell Timberland kids product and accessories related products throughout the United States and Canada to department and specialty stores, and Timberland retail stores.

Tommy Hilfiger®

Tommy Hilfiger is a premium American clothing brand, which includes apparel, footwear, accessories, fragrances and home furnishings. The company was founded in 1985, and today is sold in department stores and over 1,400 freestanding retail stores in 90 countries. We sell Tommy Hilfiger kids related products to numerous retailers, including major department stores, specialty stores, and ecommerce stores in the United States and Canada.

Under Armour®

Under Armour was founded in 1996 and specializes in athletic apparel and protective gear. Under Armour’s apparel is engineered in many designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Under Armour products are sold worldwide and are worn by athletes at all levels on playing fields around the globe, as well as by consumers with active lifestyles. We sell Under Armour kids related products to numerous retailers, including major department stores, specialty stores, and ecommerce stores in the United States and Canada.

The Walt Disney Company®

The Walt Disney Company brings its stories and characters to life for families and fans of all ages through innovative products and experiences. The Walt Disney Company introduces new characters and stories alongside inspired retellings of classic tales. Walt Disney characters include icons such as Mickey Mouse, Minnie Mouse, Daffy Duck and Goofy. We sell Walt Disney kids related products to numerous retailers, including major department stores, specialty stores, and ecommerce stores throughout the United States and Canada.

Historically, our principal business activity was the design, development and worldwide marketing of apparel, footwear and lifestyle products bearing our Owned Brands described below:

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Hudson®

Hudson® was established in 2002 and is recognized as a premier designer and marketer of men's and women's premium branded denim apparel, an industry term for denim jeans with price points generally of $120 or more, known for its quality, fit and fashion forward designs. We sell our products to numerous retailers, which include major department stores, specialty stores, ecommerce stores in the United States, Canada and Europe and our ecommerce website at www.hudsonjeans.com. Our product line includes men's, women's and children's denim jeans, bottoms, tops, jackets and other related apparel.

Robert Graham®

Robert Graham principal business activity is the design, development, sales and licensing of lifestyle apparel products and accessories that bear the brand name Robert Graham® and Robert Graham Modern Americana®. Robert Graham offers a cohesive lifestyle collection that includes knits, polos, sport shirts, T-shirts, sweaters, sport coats, outerwear, jeans, bottoms, shorts, swimwear and accessories. We sell our products through our own retail stores, to numerous retailers, which include major department stores, specialty stores, and ecommerce stores in the United States, Canada and Europe and our ecommerce website at www.robertgraham.us.

SWIMS®

SWIMS’ principal business activity is the design, development, sales and licensing of footwear and apparel products and accessories that bear the brand name SWIMS®. Founded in Norway in 2006, SWIMS is a Scandinavian lifestyle brand best known for its range of fashion-forward, water-friendly footwear for men that artfully balances performance, comfort and style. SWIMS® product line includes men's and women's footwear, swimwear, outerwear, ready-to-wear, and accessories. We sell our products through our own retail stores, to numerous retailers, which include major department stores, specialty stores, and ecommerce stores in the United States, Canada and Europe and our ecommerce website at www.swims.com.

Reportable Segments

Prior to the GBG Acquisition, we organized our business into the following three reportable segments: Wholesale, Consumer Direct and Corporate and other. Upon completing the GBG Acquisition, we resegmented our reportable segments to reflect our expanded organizational structure, including the operations of the newly acquired GBG Business. Accordingly, we realigned our business into the following three reportable segments: Kids, Accessories, and Men’s & Women’s Apparel. This new segment structure is consistent with how our chief operating decision maker establishes our overall business strategy, allocates resources, and assesses performance. All prior period segment information has been reclassified to reflect the realignment of our segment reporting structure. We will continually evaluate changes in the structure of the organization to determine whether our operating segments have changed when events or circumstances necessitate such an exercise.

The results of operations of the GBG Acquisition were only included in our results of operations for the year ended December 2018 for the period from October 29, 2018 through December 31, 2018. Therefore, our 2018 results of operations and associated metrics are not necessarily indicative of future results, which will include the impact of the GBG Acquisition for the full periods presented. For more information see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Our Kids segment accounted for approximately 36.3% of our Fiscal 2018 net revenues and is comprised of over 350 brands sold to over 700 customers. Licensed brands in this category, include but are not limited to, Calvin Klein®, Lucky Brand®, Marvel®, Nautica®, Nickelodeon®, Spyder®, Tommy Hilfiger®, Under Amour® and Walt Disney®. Our top customers include large retailers such as, Costco, Kohl’s, Macy’s, Target, TJX Companies and Walmart.

Our Accessories segment, accounted for approximately 16.3% of our Fiscal 2018 net revenues, and is comprised of over 190 brands sold to over 600 customers. Licensed brands in this category include, but are not limited to, AllSaints, Calvin Klein, Cole Haan, Fila, Frye, Kate Spade, Michael Kors, Spyder, and Timberland. Our top customers include large retailers such as Dillard's, Kohl’s, Macys, Nordstrom, and Walmart.

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Our Men’s & Women’s Apparel segment accounted for approximately 47.4% of our Fiscal 2018 net revenues, and is comprised of our Owned Brands and five licensed brands: BCBG, bebe, Herve Leger, Joe’s and Buffalo. We sell Men’s and Women’s apparel to over 1,000 customers in North America and throughout the world. As of December 31, 2018, the Company operated a total of 89 retail stores as discussed in “Part I, Item 2. Properties” of this Annual Report.

Product Design, Development and Sourcing

Our product development is managed internally by designers. The designers lead the respective design teams responsible for the creation, development and coordination of the product group offerings. We typically develop four collections per year for (i) spring, (ii) summer, (iii) fall/back to school, and (iv) winter/holiday with certain core basic styles offered throughout the year. The key designers are an instrumental part of our design process. The loss of any key designer would not change any rights we have to the designs or intellectual property. We believe that if any key designers terminate their employment with us, alternative sources are available for the development and design of the product, as applicable.

Our products are primarily produced by, and purchased or procured from, third party manufacturing contractors, many of whom are located outside of the United States. For Fiscal 2018, substantially all of the products we purchased were attributable to manufacturing contractors located outside of the United States, with purchases primarily procured from manufacturing contractors located in countries such as China, Mexico, Cambodia, Vietnam and India among others. No single manufacturing contractor represented at least ten percent of our total purchases of our products for Fiscal 2018. We do not have a long-term supply agreement with any of our third-party manufacturers or contractors, and we believe that there are available resources of overseas and domestic contractors that could fulfill our requirements in the event that one of our existing manufacturers would not be able to do so. We procure production in order to ensure quality and timely deliveries. See “Part I, Item 1A. Risk Factors—Risks Related to our Business and Industry—We are dependent on third parties to source and manufacture products and any disruption in relationships with these parties or in their businesses may materially adversely affect our business” and “—Problems with the third-party distribution system could harm our ability to meet customer expectations, manage inventory, complete sales and achieve targeted operating efficiencies.”

We do not enter into any long term agreements with our suppliers, nor are we substantially dependent on any one of them. Currently, we utilize Li & Fung Group (“Li & Fung”) as a sourcing agent to source a portion of our products pursuant to the Transition Services Agreement. We expect to enter into a formal sourcing agreement with Li & Fung to source our products during 2019. We also explore sourcing strategies designed to improve our gross margins. However, there can be no assurance that any change in sourcing will result in enhanced profit margins, similar quality or timely deliveries, but we do believe that continuing to monitor this expense can be beneficial for growth. See “Part I, Item 1A. Risk Factors—Risks Related to our Business and Industry—Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability” and “—We are dependent on third parties to source and manufacture products and any disruption in relationships with these parties or in their businesses may materially adversely affect our business.”

In the event we terminate any of our relationships with third-party suppliers or the economic climate or other factors result in a significant reduction in the number of suppliers, our business could be negatively impacted. At this time, we believe that we would be able to find alternative sources for production if this were to occur; however, no assurances can be given that a transition would not involve a disruption to our business.

We generally purchase our products in United States dollars. However, because we use overseas or non-United States suppliers, the cost of these products may be affected by changes in the value of the relevant currencies. Certain of our apparel purchases in the international markets will be subject to the risks associated with the importation of these types of products. See “—Import and Export Restrictions and Other Governmental Regulations” below.

While we attempt to mitigate our exposure to manufacturing risks, the use of independent suppliers reduces our control over production and delivery and exposes us to customary risks associated with sourcing products from independent suppliers. Transactions with foreign manufacturers and suppliers are subject to the typical risks of doing business abroad, such as the cost of transportation and the imposition of import duties and restrictions. The countries in which our products are manufactured may, from time to time, impose new duties, tariffs or other restrictions, or adjust presently prevailing

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duties or tariff levels, which could affect our operations and our ability to import products at current or increased levels. We cannot predict the likelihood or frequency of any such events occurring. See “Part I, Item 1. Business—Import and Export Restrictions and Other Governmental Regulations.” Furthermore, the inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices. Due to the seasonality of our business, and the apparel and fashion business in particular, the dates on which customers require shipments of products from us are critical, as styles and consumer tastes change so rapidly. Because quality is a leading factor when customers and retailers accept or reject goods, any decline in quality by our third-party manufacturers could be detrimental, not only to a particular order, but also to our future relationship with that particular customer.

Trademarks and License Agreements

We own a variety of pending applications and registrations throughout the world for a variety of trademarks in addition to the common law rights associated therewith for our various Owned Brands as well as brands we acquired as a result of the GBG Acquisition. We regard our trademarks and other intellectual property rights as valuable assets of our business and important to the success of our brands in the marketplace. We vigorously protect our trademarks and other intellectual property rights against infringement.

For the trademarks that we own, we selectively license some of our brands for certain product categories or for retail stores in foreign jurisdictions. Licensing broadens and enhances the products available under the brand name or their availability in other geographical areas. We receive royalty payments on net sales or purchases of products for sale at the retail stores without incurring significant capital investments or incremental operating expenses. There are certain minimum net sales that the licensees are required to meet, and the agreements generally have renewal rights. See “Part I, Item 1A. Risk Factors—Our licensing arrangements may not be successful and may make us susceptible to the actions of third parties who may not comply with our product quality, manufacturing standards, marketing and other requirements, which may have an adverse effect on our brand equity, reputation or business and our trademark and other intellectual property rights may not be adequately protected and some of our products are targets of counterfeiting.”

As a result of the GBG Acquisition, we also act as a licensee for certain trademarks owned by third parties and acquired for numerous license agreements and the sale of licensed product has become an increasingly critical element of our growth strategy. Under our license agreements, we are generally required to achieve minimum net sales of licensed products, pay guaranteed minimum royalties, make specified royalty and advertising payments (usually based on a percentage of net sales of licensed products), and receive prior approval of the licensor as to all design and other elements of a product prior to production. See “Part I, Item 1A. Risk Factors—The failure to maintain our license agreements could cause us to lose significant revenues and have a material adverse effect on our results of operations.”

Our ability to renew the current term of a license agreement may be subject to the discretion of the licensor or to attaining minimum sales and/or royalty levels and to our compliance with the provisions of the agreement. Brand owners may be looking to consolidate the number of licensees they engage to develop product and to choose licensees who have a successful track record of developing brands, selling and resources. We continue to seek opportunities to enter into license agreements in order to expand our product offerings under well-known labels and broaden the markets that we serve.

Sales and Distribution

Wholesale

Our wholesale operations include sales of products licensed by us from third parties, as well as sales of products under our Owned Brands and private label brands. Our products are sold through a cross section of leading retailers such as Walmart, Macy's, Target, Burlington, Kohl's, TJX Companies, Costco, Nordstrom, Dillard's, Ross, Target, JC Penney, and Amazon. We also sell our products over the web through retail partners such as Walmart.com, Macy's.com and Nordstrom.com.

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We generally sell our products through our own showrooms. At our showrooms, retailers review the latest collections offered and place orders. We also sell a limited number of products internationally through distributors in various countries that are managed by us or through licensed stores. We continue to evaluate our options and review relationships in the marketplace to create a strategy to grow international sales.

Direct to Consumer

We sell our Owned Brands to consumers through 19 Robert Graham® brand full-price retail stores and 12 outlet stores. We sell SWIMS® products through one full-price retail store and two outlet stores. We also sell our Owned Brand products through our online ecommerce sites at www.hudsonjeans.com, www.robertgraham.us and www.swims.com.

In connection with the GBG Acquisition, we also assumed 41 leases operated under our BCBG name, 12 leases operated under the Joe’s Jeans name, one lease operated under the Herve Leger name, and one lease operated under the bebe name. Also in connection with the GBG Acquisition, we now own and operate the following online ecommerce sites: www.bcbg.com, www.herveleger.com, www.buffalojeans.com, www.joesjeans.com, and www.bebe.com

In addition, we utilize partner shop-in-shops for certain of our brands to enhance brand recognition, to permit more complete merchandising of our lines by department stores, and to differentiate the presentation of our products.

We have organized our retail store operations into geographic areas or districts that each have a district manager. District managers are responsible for several stores and monitor and supervise individual store managers. Each store manager is responsible for overseeing the daily operations of one of our stores. In addition to a store manager, the staff of a typical store includes a combination of some or all of the following positions: an assistant store manager and full and part-time sales associates.

An essential requirement for the success of our stores is our ability to attract, train and retain talented, highly motivated area managers, store managers and other key employees. In addition to management training programs for both newly hired and existing employees, we have a number of retention programs that offer qualitative and quantitative performance-based incentives to district-level managers, store managers and full-time sales associates.

Advertising, Marketing and Promotion

Our products are sold primarily to department, specialty and mass merchant retail stores in the United States. We sell to thousands of customers, ranging from national and regional chains to small specialty stores. We also distribute our products through our retail stores, our brand websites, and our retail partners’ websites.

For our Owned Brands and ecommerce websites that we operate, we utilize marketing tools through our websites, mobile applications, email campaigns, search engines, affiliates, influencers and various other social media. We refresh our marketing periodically to effect the most cutting edge changes in fashion and culture. We rely on these features, as well as the brand recognition criteria by our direct marketing activity, to draw customers to our distribution channels.

We believe we have developed awareness of our other owned or licensed labels primarily through our reputation, consumer acceptance and the fashion press. We primarily rely on our reputation and relationships to generate business in the private label portion of our business. We believe we have developed a significant customer following and positive reputation in the industry as a result of, among other things, our standards of quality control, on-time delivery, competitive pricing and merchandising of our products.

Brand name products sold by us pursuant to a license agreement are promoted by brand and product advertisements placed by the licensor. Our license agreements generally require us to pay the licensor a fee, based on percentage of net sales of licensed products, and to pay for a portion of these advertising costs. We may also be required to spend a specified percentage of net sales of a licensed product on advertising placed by us.

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Company Operations

Distribution 

We utilize the services of third-party logistics service providers across 16 facilities in California, Florida, New Jersey, and Canada, for approximately 2.4 million square feet of space in their respective facilities, which are used to distribute merchandise to our domestic customers. Operations at these facilities include direct to consumer and wholesale fulfillment services, including inventory warehousing, receiving, value added services and customer shipping.

We lease approximately 69,000 square feet and approximately 26,000 square feet of space in two fulfillment and distribution facilities in New Jersey and Sweden, respectively. Operations at these facilities support distribution to domestic and international customers and includes direct to consumer and wholesale fulfillment services, including inventory warehousing, receiving, value added services and customer shipping.

In connection with the GBG Acquisition, on October 29, 2018, we entered into a Transition Services Agreement with GBG USA (the “Transition Services Agreement”) providing us access to approximately 500,000 of additional square feet at GBG and third-party logistic facilities in California, Florida, and New Jersey. Operations at these facilities support distribution of the newly acquired GBG Business domestically and internationally and include direct to consumer and wholesale fulfillment services, inventory warehousing, receiving and customer shipping.

Information Systems

The Transition Services Agreement provides us with access and support on specific IT applications related to the operations of the GBG Business. This includes continued access and support on certain shared business applications, enterprise resource planning systems, product lifecycle management systems, workflow systems, procurement systems, time and expense reporting, retail reporting, vendor compliance, communications, data, data infrastructure, and network services. We are currently working on expanding our own IT infrastructure to integrate the GBG Business. The remainder of our business operates on our existing IT infrastructure.

Customers

Our products are sold to consumers through our own retail stores, partner shop-in-shops  and ecommerce websites, as well as major department stores, specialty stores, mass market retailers, other ecommerce websites primarily in the United States and Canada and select locations throughout the world. We do not enter into long term agreements with any of our customers. Instead, we receive individual purchase order commitments. A decision by the controlling owner of a group of stores or any other significant customer, including our private label customers, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us, to change their manner of doing business with us, to cancel orders previously placed in advance of shipment dates or a decision to cease carrying our products could have a material adverse effect on our financial condition and results of operations.

For Fiscal 2018, the ten largest customers and customer groups for our business, in the aggregate, accounted for approximately 47% of our net sales. During Fiscal 2018, only our largest customer represented over 10 percent of our net sales.

We believe that should we lose a major customer, it could impact our overall net sales. See “Part I, Item 1A. Risk Factors—A substantial portion of our net sales and gross profit is derived from a small number of large customers, and the loss of any of these large customers could have a material adverse effect on our financial condition and results of operations.

Order Book

A portion of our orders consist of short-term purchase orders from customers who place orders on an as-needed basis. Information relative to open purchase orders at any date may also be materially affected by, among other things, the

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timing of the initial showing of apparel to customers, as well as by the timing of recording of orders and shipments. As a result, we do not believe that disclosure of the amount of our unfilled customer orders at any time is meaningful.

The amount of outstanding customer purchase orders at a particular time is influenced by numerous factors, including the product mix, timing of the receipt and processing of customer purchase orders, shipping schedules for the product and specific customer shipping windows. Due to these factors, a comparison of outstanding customer purchase orders from period to period is not necessarily meaningful and may not be indicative of actual shipments.

Seasonality of Business and Working Capital

Products are designed and marketed primarily for the following principal selling seasons: spring, summer, fall/back-to-school and winter/holiday. We have historically experienced, and expect to continue to experience, seasonal fluctuations in our net sales. A significant amount of our net sales are realized during the third and fourth fiscal quarters when we ship orders taken during earlier months for the back-to-school and holiday seasons. For Fiscal 2018, we funded our liquidity needs through cash generated from operations, cash available under our financing agreements and entry into the financing arrangements described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” below. In Fiscal 2019, we plan to continue to fund our liquidity needs through the same sources. If sales are materially different from seasonal norms, our annual operating results could be materially affected. Accordingly, our results for the individual quarters are not necessarily indicative of the results to be expected for the entire year. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further discussion of our financing agreements and our liquidity position.

Credit and Collection

We currently extend credit to a majority of our larger customers, who purchase our products from us at wholesale prices. Our decision to extend credit is based on credit approval under our factoring arrangements, past credit history, and reputation of creditworthiness within our industry. The vast majority of our customers are guaranteed through credit insurance purchased through our factor securing the receivables sold to a financial institution. As such, we generally extend credit without requiring collateral. 

A small percentage of our customers are required to pay by either credit card or cash before delivery or are secured by a letter of credit, which is also based on considerations such as lack of credit history, reputation within our industry and/or prior payment history. For those customers to whom we extend credit, terms generally range from upon goods receipt to net 60 days. Based on industry practices, financial awareness of the customers with whom we conduct business, and business experience of our industry, our management exercises professional judgment in determining which customers will be extended credit. We are exposed to some collection risk for receivables which were factored with recourse where our factor did not accept the credit risk. However, the aggregate amount of exposure is generally low and, therefore, we believe that the credit risk associated with our extension of credit is minimal. We partner with our factor to ensure timely collections for all open accounts receivables. Retail and ecommerce sales carry no material credit risk as payment is tendered at or before product is taken or delivered by/to the customer.

Competition

The industries in which we operate are fragmented and highly competitive in the United States and on a worldwide basis. We compete for consumers with a large number of apparel companies. We do not hold a dominant competitive position, and our ability to sell our products is dependent upon the anticipated popularity of our designs and brand names, the price and quality of our products and our ability to meet our customers’ delivery schedules. We believe the design, merchandising, assortment, cost, quality and uniqueness of our designs differentiates us from our competitors, and we believe that we are competitive with companies producing goods of like quality and pricing. We believe that we can maintain our competitive position through new product development, creating product identity and brand awareness and competitive pricing. Many of our competitors may possess greater financial, technical and other resources, and the intense competition and the rapid changes in consumer preferences constitute significant risk factors in our operations. As we

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expand globally, we will continue to encounter additional sources of competition. See “Part I, Item 1A. Risk Factors—We face intense competition in the denim, footwear and premium lifestyle apparel industries, and if we are unable to compete effectively, our business, financial condition and results of operations may be negatively impacted.

Manufacturing and Distribution Relationships

We contract for the manufacture of our products and do not own or operate any production facilities. Approximately 350 different manufacturers worldwide produce our products, with no one manufacturer providing more than 10% of our total production during Fiscal 2018. We source both finished products and raw materials. Raw materials include fabric and trim. Finished products consist of products ready for shipment to our customers when purchased by us. In Fiscal 2018, over 95% of our products (by dollar value) were produced outside of the United States, primarily in China, Mexico, Cambodia, Vietnam, and India.

Most of our businesses must commit to the manufacturing of our products before we sell finished goods, whether to consumer direct channels or to wholesale customers. If we overestimate our primary customers' demand for a particular product, we primarily sell the excess products or garments at a discounted price in our factory stores or through other secondary distribution channels.

All products are produced according to our and our licensors’ or brands’ specifications and standards. Production and quality assurance staff monitor manufacturing at supplier facilities in order to correct problems prior to shipment of the final product. Procedures have been implemented under our vendor certification and compliance programs so that quality assurance is reviewed during the production process, allowing merchandise to be received at the distribution facilities and shipped to customers with minimal interruption.

Import and Export Restrictions and Other Governmental Regulations

Transactions with our foreign manufacturers and suppliers are subject to the general risks of doing business abroad. Imports into the United States are affected by, among other things, the cost of transportation and the imposition of import duties and restrictions. The countries in which our products might be manufactured may, from time to time, impose, duties, tariffs or other restrictions, or adjust present, duties or tariff levels, which could adversely affect our operations and our ability to import products at current or increased levels. We cannot predict the likelihood or frequency of any such events occurring. The United States government recently imposed tariffs on certain imports, and it is unclear what effects such tariffs (including any retaliatory tariffs imposed by other countries on United States exports) will have on retail markets. The enactment of any additional duties or restrictions could result in material increases in the cost of our products generally and may adversely affect our sales and profitability.

Our import operations are subject to international trade agreements and regulations such as the North American Free Trade Agreement (“NAFTA”) and other bilateral textile agreements between the United States and a number of foreign countries, including China, Hong Kong, India, Indonesia, Italy, Jordan, Korea, Morocco, Peru, Philippines, Portugal, Taiwan, Turkey and Vietnam. Some of these agreements impose restrictions on the amount and type of goods that can be imported into the United States from these countries. Such agreements also allow the United States to impose, at any time, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. Some of our imported products are also subject to United States customs duties and, in the ordinary course of business, we are from time to time subject to claims by the United States Customs Service for duties and other charges. In addition, exports of our products to certain countries are subject to certain duties, tariffs or other restrictions that could result in increases in the cost of our products generally and might adversely affect our sales and profitability. For more information, see “Part I, Item 1A. Risk Factors—Risks Related to our Business and Industry—Potential changes in international trade relations between the United States and countries in which our products are sourced could have a material adverse effect on our business, cash flows and operating results” and “—We are dependent on third parties to source and manufacture products and any disruption in relationships with these parties or in their businesses may materially adversely affect our business.”

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Employees

As of May 15, 2019, we have approximately 4,000 total employees, which includes approximately 2,500 full-time and approximately 1,500  part-time employees. None of our employees are covered by a collective bargaining agreement.

Executive Officers and Directors

The following table sets forth certain information regarding our executive officers and directors as of December 31, 2018:

Executive Officers

 

 

 

 

 

Name

    

Age

    

Position

Jason Rabin

 

49

 

Chief Executive Officer and Director of the Company (Principal Executive Officer)

Anurup S. Pruthi

 

50

 

Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

Jason Rabin was appointed Chief Executive Officer of the Company on October 29, 2018. Mr. Rabin was previously the President, North America of GBG from November 2015 until October 2018. Prior to that position, he was Chief Merchandising Officer of GBG from 2014 to 2017 overseeing GBG’s merchandising strategy and global brand portfolio. Mr. Rabin was formerly President of LF Asia Limited and managed its fashion and home distribution business in Asia, and was President of Kids Headquarters, a children’s and young men’s apparel manufacturer. Mr. Rabin joined the Li & Fung Group in 2009 when Kids Headquarters was acquired by the Li & Fung Group. Mr. Rabin graduated from the University of Miami with a bachelor of business administration in 1992. Mr. Rabin received awards on behalf of Kids Headquarters from the children’s clothing industry, including the Supplier Performance Award by Retail Category, the Ernie Awards and the International Licensing Industry Merchandisers’ Association (LIMA) Licensing Excellence Award. In 2017, Mr. Rabin received the Business Visionary Award at the 21st Annual Accessories Council Excellence Awards ceremony.

Anurup S. Pruthi has served as our Chief Financial Officer since November 5, 2018. Prior to serving as our Chief Financial Officer, Mr. Pruthi served as the Chief Financial Officer of The Children’s Place, Inc. from November 2014 through October 2018, and as Chief Financial Officer of Reliance Retail Ltd., a subsidiary of Reliance Industries Limited, from June 2013 through October 2014. Mr. Pruthi graduated from Bentley College with a bachelor’s and master’s degree in finance.

Board of Directors

For more information on our board of directors, see “Part III, Item 10. Directors, Executive Officers and Corporate Governance.”

 

ITEM 1A.    RISK FACTORS

The following risk factors should be read carefully in connection with evaluating our business and the forward‑looking statements contained in this Annual Report. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward‑looking statements are made in this Annual Report.

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Risks Related to our Business and Industry

We may be unable to successfully integrate the GBG Business and realize the anticipated benefits of the GBG Acquisition.

The GBG Acquisition materially changed the nature of our business. While we intend to continue to engage in our historic branded operating business, as a result of the GBG Acquisition our primary business is now a brand licensee model. Although we expect to receive synergistic benefits from acting as both a brand operator/licensor and licensee, the anticipated benefits we expect from the GBG Acquisition are, necessarily, based on projections and assumptions about the combined businesses of the Company and the GBG Business, which may not materialize as expected or which may prove to be inaccurate. The value of our common stock as well as our ability to service our financing arrangements could be adversely affected if we are unable to realize the anticipated benefits from the GBG Acquisition. Achieving the benefits of the GBG Acquisition will depend, in part, on our ability to integrate the GBG Business successfully and efficiently with our business. The challenges and risks involved in this integration, which will be complex and time-consuming, include the following:

·

inability to successfully managing relationships and retaining our key customers, suppliers, licensors, partners and employees;

·

the inability to successfully integrate the GBG Business in a manner that permits us to achieve the synergies and other benefits anticipated to result from the GBG Acquisition;

·

the challenge of integrating human resources, logistics, information, communication and other systems in a manner that minimizes any adverse impact on customers, suppliers, licensors, partners, employees and other constituencies;

·

our ability to develop internally or find third-party replacements for the services currently being provided by GBG USA to us under the Transition Services Agreement;

·

diversion of the attention of our management and other key employees;

·

the challenge of integrating our workforce and that of the GBG Business;

·

disruption of, or the loss of momentum in, our existing business;

·

unforeseen expenses or delays associated with the GBG Acquisition, including transition costs to integrate the two businesses that may exceed the costs that we currently anticipate;

·

adapting to the increased scale of our operations resulting from the GBG Acquisition;

·

assumption of liabilities not identified in due diligence; and

·

other unanticipated issues, expenses and liabilities.

If we do not successfully manage these issues and the other challenges inherent in integrating the GBG Business, then we may not achieve the anticipated benefits and our revenue, expenses, operating results and financial condition could be materially adversely affected.

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The failure to maintain our license agreements could cause us to lose significant revenues and have a material adverse effect on our results of operations.

We are dependent on sales of licensed products for a substantial portion of our revenues. Under many of our license agreements, we are generally required to achieve specified minimum net sales, make specified royalty and advertising payments and receive prior approval of the licensor as to all design and other elements of a product prior to production. These license agreements also may restrict our ability to enter into other license agreements for competing products, may restrict our ability to sell inventory through certain distribution channels, or acquire businesses that produce competing products without the consent of the licensor. If we do not satisfy any of these requirements or receive approval with respect to a restriction within the license, a licensor usually has the right to terminate our license. Even if a licensor does not terminate our license, the failure to achieve net sales sufficient to cover our required minimum royalty payments could have a material adverse effect on our results of operations. Even if we comply with all the terms of a license agreement, we cannot be sure that we will be able to extend or renew an agreement when it expires even if we desire to do so. The failure to maintain or renew our license agreements could cause us to lose significant revenue and have a material adverse effect on our results of operations.

The licensee market is competitive, and there is no guarantee we can obtain future licenses at all or upon terms favorable to us.

The licensee market is competitive, and there is no guarantee licensors will grant us licenses or upon terms favorable to us. Failure to obtain future licenses could limit our growth strategy. Failure to obtain licenses on terms favorable to us could have a material adverse effect on our results of operations. Also, licensors could decide not to grant licenses and instead to produce their own products and compete directly with us. As a result, our business and results of operations could be materially adversely affected.

Acquisitions of new licenses and brands may not be successful in achieving the intended benefits.

Our plans for future growth include potentially acquiring new licenses and/or brands. Our ability to acquire such new licenses or brands in the future, subject to certain limited exceptions, will require consent of our lenders under our debt financings. Prior to completing any such acquisition, our management team identifies the potential business opportunity and potential effect on our financial statements but, due to legal and business limitations, we may not have access to all necessary information. The process to integrate new brands and licenses into our business may be complex, costly and time-consuming, and if the acquisition does not provide the anticipated sales, our results of operations could be materially adversely affected.

Our success will be dependent on the strategies and reputation of our licensors.

We offer our products on a multiple brand, channel and price point basis. As a part of this strategy, we may license the names and brands of numerous recognized companies, designers and celebrities. In entering into these license agreements, our products may be targeted towards particular market segments based on consumer demographics, design, suggested pricing and channel of distribution. If any of our licensors decides to “reposition” its products under the brands we license from them, introduce similar products under similar brand names or otherwise change the parameters of design, pricing, distribution, target market or competitive set, we could experience a significant downturn in that brand’s business, adversely affecting our sales and profitability. In addition, as licensed products may be personally associated with designers or celebrities, our sales of those products could be materially and adversely affected if any of those individuals’ images, reputations or popularity were to be negatively impacted.

Our business depends on a strong brand image, and if we are not able to maintain or enhance our brands, particularly in new markets where we have limited brand recognition, we may be unable to sell sufficient quantities of our merchandise, which would harm our business and cause our results of operations to suffer.

Maintaining and enhancing our brands is critical to maintaining and expanding our customer base, and requires us to make substantial investments in areas such as visual merchandising, marketing and advertising, employee training

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and store operations. We anticipate that, as our business expands into new markets and new product classifications and further penetrates existing markets, and as the markets in which we operate become increasingly competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Certain of our competitors in the apparel industry have faced adverse publicity surrounding the quality, attributes and performance of their products. Our brand may similarly be adversely affected if our public image or reputation is tarnished by failing to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Maintaining and enhancing our brand will depend largely on our ability to be a leader in the contemporary apparel industry and to continue to provide high quality products. If we are unable to maintain or enhance our brand image, our results of operations may suffer and our business may be harmed.

We face risks associated with constantly changing fashion trends, including consumer response to and demand for our products. If we are unable to adapt to changing fashion trends as to our existing or new products, our business and financial condition could be adversely affected.

We attempt to minimize our risk associated with delivering items through early order commitments by retailers. We generally place production orders with manufacturers before we have received all of a season’s orders and orders may be cancelled by retailers before shipment. In addition, we take a position on inventory for replenishment and other sales programs which do not have orders from our customers in advance. As such, we bear the inventory and business risk associated with these programs. Therefore, if we fail to anticipate accurately and respond to consumer preferences, we could experience lower sales, excess inventories or lower profit margins, any of which could have a material adverse effect on our results of operations and financial condition.

We have a significant amount of indebtedness, which could adversely affect our financial performance and impact our ability to service our indebtedness.

As of December 31, 2018, we had approximately $1.3 billion in outstanding indebtedness. Subject to certain restrictions contained in our financing arrangements, the Company may incur additional indebtedness in the future. The high level of indebtedness of the Company could have important consequences for the Company and significant effects on the business of the Company and its subsidiaries. For example, the level of indebtedness of the Company and the terms of our financing arrangements:

·

require a substantial portion of our cash flows from operations be used for the payment of interest on our debt, thereby reducing the funds available to us for our operations or other capital needs;

·

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate because our available cash flow after paying principal and interest on our debt may not be sufficient to make the capital and other expenditures necessary to address these changes;

·

increase our vulnerability to general adverse economic and industry conditions because, during periods in which we experience lower earnings and cash flow, we will be required to devote a proportionally greater amount of our cash flow to paying principal and interest on our debt;

·

limit our ability to obtain additional financing in the future to fund working capital, acquisitions and general corporate requirements, particularly if (1) the ratings assigned to our debt securities by nationally recognized credit rating organizations are revised downward or (2) we seek capital during periods of turbulent or unsettled market conditions;

·

place us at a competitive disadvantage to other relatively less leveraged competitors that have more cash flow available to fund working capital, acquisitions, share repurchases, dividend payments and general corporate requirements;

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·

with respect to any borrowings we make at variable interest rates, including under our senior secured credit facilities, leave us vulnerable to increases in interest rates to the extent the borrowings are not subject to an interest rate swap agreement;

·

limit our ability to obtain additional financing for working capital or general corporate purposes, increases the risk that we will need to sell securities or assets, possibly on unfavorable terms, or take other unfavorable actions to meet payment obligations; and/or

·

increase the risk that we will not meet the financial covenants contained in our current or future debt agreements or timely make all required debt payments.

Our ability to make cash payments on and to refinance our indebtedness will depend on our ability to generate significant operating cash flow in the future. This ability is, to a significant extent, subject to general economic, financial, competitive and other factors that will be beyond our control. If we are unable to generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness, on or before maturity. We may not be able to refinance any indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying strategic acquisitions and investments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness will restrict our ability to sell assets and our use of the proceeds from such sales.

Additionally, if the PNC Receivables Facility (as defined below) is terminated without a replacement on substantially similar terms, we may experience material and adverse economic losses due to the loss of such factoring arrangement and the impact of such loss on our liquidity, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

The agreements that govern our indebtedness limit our operational flexibility. Furthermore, if we default on our obligations under such agreements, our operations may be interrupted and our business and financial results could be adversely affected.

The Credit Agreements (as defined below) restrict our ability to, among other things: incur indebtedness; create liens; consolidate, merge, liquidate or dissolve; sell, lease or otherwise transfer any assets; substantially change the nature of the business; make investments or acquisitions; pay dividends; enter into transactions with affiliates; amend material documents; and prepay indebtedness. Such agreements also require us to comply with various financial maintenance covenants. In addition, substantially all of our assets, including our trademarks, secure our obligations under such agreements. Any future debt agreements we enter into may contain similar or more restrictive covenants on our operational flexibility. For more information, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreements and Other Financing Arrangements.”

Any failure by us to comply with the various covenants contained in our debt agreements could have material adverse consequences. Such noncompliance may result in our inability to borrow under such agreements, which we utilize to access our working capital, and as a result may adversely affect our ability to finance our operations or pursue any expansion plans. An event of default under such agreements could also result in the acceleration of all of our indebtedness. If the financing under our material indebtedness becomes due and payable, we may be required to refinance, restructure, or otherwise amend some or all of such obligations, sell assets, or raise additional cash through the sale of our equity. We cannot make any assurances that we would be able to obtain such refinancing in a timely manner, on favorable terms or at all, or that such restructuring activities, sales of assets, or issuances of equity can be accomplished or, if accomplished, would raise sufficient funds to meet these obligations. Additionally, upon the occurrence of an “event of default” under such agreements, all of our assets could be subject to liquidation by the creditors, which liquidation could result in no assets being left for our stockholders until the creditors receive their required payment.

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Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.  

Borrowings under our Credit Agreements bear interest at a variable interest rate equal to a London Interbank Offered Rate (“LIBOR”) or base rate plus the applicable stated interest rate. Borrowings under the PNC Receivables Facility and CIT Factoring Agreement (each as defined below) also bear interest at a variable interest rate. We have exposure for the variable interest rate indebtedness under these debt instruments and, as a result, an increase in interest rates could result in a substantial increase in interest expense.

Uncertainty regarding the LIBOR may adversely impact our indebtedness under our credit and loan facilities

In July 2017, the U.K. Financial Conduct Authority announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Proposed alternative reference interest rates so far are based on overnight tenors only, while the most frequently used LIBOR rates are for one, three and six month tenors. Borrowings under our Credit Agreements and the PNC Receivables Facility are linked to LIBOR. When LIBOR ceases to exist, we may need to amend such financing arrangements based on a new standard that is established, if any. The basis of calculation of such standard is not yet agreed upon among market participants and as a result the cost of our borrowings may increase. In addition, any resulting differences in interest rate standards among our assets and our financing arrangements may result in interest rate mismatches between our assets and the borrowings used to fund such assets. There is no guarantee that a transition from LIBOR to an alternative reference interest rate will not result in financial market disruptions or significant increases in benchmark rates, or borrowing costs.

We face intense competition in the lifestyle apparel and accessories industries. If we are unable to compete effectively, our business, financial condition and results of operations may be negatively impacted.

We face a variety of competitive challenges from other domestic and foreign fashion‑oriented apparel producers, some of whom may be significantly larger and more diversified and have greater financial and marketing resources than we have. We do not currently hold a dominant competitive position in any market. We compete primarily on the basis of:

·

anticipating and responding to changing consumer demands in a timely manner,

·

maintaining favorable brand recognition,

·

developing innovative, high‑quality products in styles that appeal to consumers,

·

appropriately pricing products,

·

providing strong and effective marketing support,

·

creating an acceptable value proposition for retail customers,

·

ensuring product availability and optimizing supply chain efficiencies with manufacturers and retailers, and

·

obtaining sufficient retail floor space and effective presentation of our products at retail.

We cannot be certain that we will be able to compete successfully against current and future competitors, or that competitive pressure will not have a material adverse effect on our business, financial condition or results of operations.

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If we are unable to timely and appropriately respond to changing consumer demand, the value and images of our licensed or owned brands may be impaired.

If we are unable to timely and appropriately respond to changing consumer demand, the value and images of our licensed or owned brands may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brands’ images to be outdated or associate our brands with styles that are no longer popular. In addition, brand value is based in part on consumer perceptions on a variety of qualities, including merchandise quality and corporate integrity. Negative claims or publicity regarding us, our brands or our products could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative claims. Our businesses may be similarly affected in the future.

Our success depends on our ability to anticipate, gauge and respond to changing consumer demand and fashion trends in a timely manner, both as to existing products and as to other product classifications we may initiate. Any failure on our part to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect the acceptance of our existing or new products and leave us with a substantial amount of unsold inventory or missed opportunities in the marketplace. If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow-moving inventory, which may negatively affect our ability to achieve profitability. At the same time, a focus on tight management of inventory may result, from time to time, in our not having an adequate supply of products to meet consumer demand and may cause us to lose sales.

If our customers change their buying patterns, request additional allowances, develop their own private label brands or enter into agreements with national brand manufacturers to sell their products on an exclusive basis, our sales to these customers could be materially adversely affected.

Our customers’ buying patterns, as well as the need to provide additional allowances to customers, could have a material adverse effect on our business, results of operations and financial condition. Customers’ strategic initiatives, including developing their own private label brands, selling national brands on an exclusive basis or reducing the number of vendors they purchase from, could also impact our sales to these customers.

A decision by any of our major customers to decrease significantly the amount of merchandise purchased from us or to change their manner of doing business with us or our licensing or other partners, could substantially reduce our revenue and materially adversely affect our profitability.

Our business is substantially dependent on our ten largest customers and customer groups. The ten largest customers accounted for approximately 47% of our net sales in Fiscal 2018, and those ten largest customers may comprise a significant part of our net sales on an ongoing basis. Also, during Fiscal 2018, our largest customer represented over 10 percent of our net sales. Consolidation in the retail industry could increase the concentration of sales to our largest customers. We generally do not have long-term agreements with any customers, and purchases generally occur on an order-by-order basis that may be subject to cancellation or rescheduling by the customer. A decision by any of our major customers, whether motivated by marketing strategy, competitive conditions, financial difficulties or otherwise, to decrease significantly the amount of merchandise purchased from us or our licensing or other partners, or to change their manner of doing business with us or our licensing or other partners, could substantially reduce our revenue and materially adversely affect our profitability. During the past several years, the retail industry has experienced a great deal of consolidation and other ownership changes, as well as management changes and store closing programs, and we expect such changes to be ongoing. In addition, store closings by our customers, such as those described above, decrease the number of stores carrying our products, while the remaining stores may purchase a smaller amount of our products and may reduce the retail floor space designated for our brands. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target markets or marketing strategies. Any of these types of actions could decrease the number of stores that carry our products or increase the ownership concentration within the retail industry. These changes could decrease our opportunities in the market, increase our reliance on a smaller number of large customers and decrease our negotiating strength with our customers. These factors could have a material adverse effect on our financial condition and results of operations.

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We are dependent on third parties to source and manufacture products and any disruption in relationships with these parties or in their businesses may materially adversely affect our business.

Our business relies upon independent third parties for the manufacturing of its apparel and accessories products. Currently, we utilize Li & Fung as a sourcing agent to source a  portion of our products pursuant to the Transition Services Agreement. We expect to enter into a formal sourcing agreement with Li & Fung to source our products during 2019. The failure of our suppliers to ship products to us in a timely manner or to meet required quality standards could cause us to miss the delivery date requirements of our customers for those products. As a result, customers could cancel their orders, refuse to accept deliveries or demand reduced prices. Any of these actions taken by our customers could have a material adverse effect on our revenue and, consequently, our results of operations.

Any of the following could materially and adversely affect our ability to produce or deliver products and, as a result, have a material adverse effect on our business, financial condition and results of operations:

·

political or labor instability or military conflict involving any of the countries in which we, our contractors, or our suppliers operate, which could cause a delay in the transportation of our products and raw materials to us and an increase in transportation costs;

·

heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundments of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands;

·

a significant decrease in availability or increase in cost of raw materials or the inability to use raw materials produced in a country that is a major provider due to political, human rights, labor, environmental, animal cruelty or other concerns;

·

a significant decrease in factory and shipping capacity or increase in demand for such capacity;

·

a significant increase in wage and shipping costs;

·

natural disasters, which could result in closed factories and scarcity of raw materials;

·

disease epidemics and health-related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;

·

migration and development of manufacturers, which could affect where our products are or are planned to be produced;

·

imposition of regulations, quotas and safeguards relating to imports and our ability to adjust timely to changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed;

·

imposition of duties, taxes and other charges on imports; and

·

restrictions on transfers of funds out of countries where our foreign licensees are located.

Additionally, we compete with other companies for the production capacity of our manufacturers. Some of these competitors have greater financial and other resources than we have, and thus may have an advantage in the competition for production capacity. If we experience a significant increase in demand, or if an existing manufacturer of ours must be replaced, we may have to expand our third-party manufacturing capacity. We cannot provide assurance that this additional

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capacity will be available when required on terms that are acceptable to us or similar to any existing terms which we have with our manufacturers, either from a production standpoint or a financial standpoint.

If an independent manufacturer of ours fails to use acceptable labor practices, our business could suffer.

While we require our independent manufacturers to operate in compliance with applicable laws and regulations, we have no control over the ultimate actions of our independent manufacturers. We have internal and vendor operating guidelines to promote ethical business practices and our staff, as well as third parties we may contract with, periodically visit and monitor the operations of our independent manufacturers. We also use the services of third parties to conduct on site audits where required by labor laws to help minimize our risk and exposure to unacceptable labor practice violations. The violation of labor or other laws by one of our independent manufacturers or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical in the United States, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations.

Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.

The principal fabrics used in our business are cotton, blends, synthetics wools, and leather. The prices we pay our suppliers for our products are dependent in part on the market price for the raw materials—primarily cotton, synthetics and leather—used to produce them. The price and availability of our raw materials may fluctuate substantially, depending on a variety of factors, including demand, crop yields, weather, supply conditions, transportation costs, work stoppages, government regulation, economic climates and other unpredictable factors. Increases in raw material costs, together with other factors, could result in a decrease of our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of raw materials could impair our ability to meet our production requirements in a timely manner, which could adversely affects our revenues and working capital requirements.

We are dependent on our relationships with our vendors.

We purchase our raw materials through various suppliers. While we are not reliant exclusively on one or more particular vendor for the supply of the raw materials or component parts required to meet our manufacturing needs, we depend on our relationships and these vendors to ensure our supply of these raw materials or component parts. Any problems or disputes with these vendors could result in us having to source these raw materials or component parts from another vendor, which could delay production, and in turn have a material adverse effect on our financial condition and results of operations.

Our inability to procure similar services being contracted for under the Transition Services Agreement may adversely impact our ability to integrate the GBG Business and/or operate its business.

GBG USA, through various of its 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 though the Transition Services Agreement. There is no assurance, however, that upon termination or expiration of the Transition Services Agreement, these services will be sustained at the same levels as they were when we received such services from GBG USA’s affiliates and other third parties or that we will obtain the same benefits, even if such services are then provided by such parties. We may not be able to replace services and arrangements in a timely manner or on terms and conditions, including cost, as favorable as those we previously received. Certain of these agreements between us and GBG USA and/or its affiliates previously entered into were entered into in the context of a related party or parent/subsidiary relationship, and we may have to pay higher prices for similar services from other unaffiliated third parties in the future. Moreover, if we are required to establish our own information technology services, legal compliance, financial reporting, real estate and logistics support functions or integrate them with any such functions provided by us, we may not be able to establish or integrate such functions in a timely, efficient or cost-effective manner and, as a result, our business operations may be adversely impacted.

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Problems with the third party distribution system could harm our ability to meet customer expectations, manage inventory, complete sales and achieve targeted operating efficiencies.

We rely on distribution facilities operated by third parties. Our ability to meet the needs of our wholesale partners and our own retail stores depends on the proper operation of these distribution facilities. These third parties will continue to provide distribution services until both parties elect to mutually terminate such services. There can be no assurance that we will be able to enter into other contracts for alternate or replacement distribution centers on acceptable terms or at all. Such an event could disrupt our operations. In addition, because substantially all of our products are distributed from a limited number of locations, our operations could also be interrupted by labor difficulties, or by floods, fires, earthquakes or other natural disasters near such facilities. We maintain business interruption insurance; however, this coverage may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve targeted operating efficiencies could be harmed. Any of the foregoing factors could have a material adverse effect on our business, financial condition and operating results.

Potential changes in international trade relations between the United States and countries in which our products are sourced, including the imposition of tariffs, could have a material adverse effect on our business, cash flows and operating results.

Our products are primarily produced by, and purchased or procured from, independent manufacturing contractors, many of whom are located outside of the United States, such as China, Cambodia, Vietnam, India and Mexico. Due to these high levels of foreign sourcing, our import operations are subject to international trade regulations, including import charges, and free trade agreements such as NAFTA and other bilateral textile agreements among the United States and its trading partners, including China. Recently, members of the United States government and other international governments have indicated that they may advocate and/or enact key policy shifts in diplomatic and commercial relations among the United States and other countries where our manufacturing contractors are based. These include the renegotiation of proposed and existing trade agreements, the implementation of tariffs or other measures affecting United States trade relations.

It remains unclear what any government may do with respect to these trade agreements and other restrictive measures, and we cannot predict whether quotas, duties, taxes, or other similar restrictions will be imposed by or on the United States or other countries upon the import or export of our products in the future. The United States government recently imposed tariffs on certain imports, and it is unclear what effects such tariffs (including any retaliatory tariffs imposed by other countries on United States exports) will have on retail markets. If the United States were to withdraw from or materially modify international trade agreements to which it is a party, or if tariffs or other import charges were raised on foreign-sourced goods that we sell, it could substantially affect our ability to source goods at commercially attractive prices, thus having a material adverse effect on our business and results of operations. Increased restrictions on fund transfers to or from foreign countries and quotas imposed by bilateral textile agreements between the United States and foreign countries could also hurt the economic viability of our foreign sourcing or cause our foreign counterparties to terminate their relationships with us, thus increasing our cost of goods sold or exposing us to additional capital expenses if we must find replacement manufacturing contractors or repatriate certain production to the United States. Changes in regulatory or geopolitical policies and other factors may adversely affect our business in the future or may require us to modify our current business practices.

We are subject to risks associated with leasing retail space, which are generally long-term non-cancelable leases requiring us to make substantial lease payments. Any failure to make these lease payments when due would likely harm our business, profitability and results of operations.

We do not own any of our retail stores, but instead lease all of our retail stores under retail store leases and are subject to all of the risks associated with leasing real estate. Our lease terms generally range from three to ten years with an option to renew.  Most of our leases require a fixed annual rent and/or payment of additional “percentage” rent if store sales exceed a negotiated amount. Partner shop-in-shops leases are generally based on a contractually defined percent of net sales agreed to by the parties for each specific location. Most of the retail store leases are “net” leases, which require

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us to pay all of the cost of insurance, taxes, maintenance and utilities. Additionally, certain of the leases may allow the lessor to terminate the lease or not renew if we do not achieve a specified sales threshold in a particular year. We cannot be certain that we will achieve any of these thresholds. Any loss of our store locations due to underperformance may harm our results of operations, stock price and reputation.

If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term if we cannot negotiate a mutually acceptable termination payment. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. If we are unable to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close, our business, profitability and results of operations may be harmed.

Our ability to attract customers to our stores depends heavily on successfully placing our stores in suitable locations and any impairment of a store location, including any decrease in customer traffic, could cause our sales to be less than expected.

Our approach to identifying locations for our retail stores typically favors street and mall locations near retailers that we believe are consistent with our key customers’ demographics and shopping preferences. Sales at these stores are derived, in part, from the volume of foot traffic in these locations. Changes in areas around our existing retail locations that result in reductions in customer foot traffic or otherwise render the locations unsuitable could cause our sales to be less than expected and the related leases are generally noncancelable. Store locations may become unsuitable due to, and our sales volume and customer traffic generally may be harmed by, among other things:

·

economic downturns in a particular area;

·

competition from nearby retailers selling similar product;

·

changing consumer demographics in a particular market;

·

changing preferences of consumers in a particular market;

·

the closing or decline in popularity of other businesses located near our store; and

·

store impairments due to acts of God, natural disasters, climate change or terrorism.

In addition, our ability to successfully open and operate new retail stores depends on many factors, including, among others, our ability to:

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identify new markets where our products and brand image will be accepted or the performance of our retail stores will be successful;

·

obtain desired locations, including store size and adjacencies, in targeted malls or streets;

·

negotiate acceptable lease terms, including desired rent and tenant improvement allowances, to secure suitable store locations;

·

achieve brand awareness, affinity and purchase intent in the new markets;

·

hire, train and retain store associates and field management;

·

assimilate new store associates and field management into our corporate culture;

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·

source and supply sufficient inventory levels; and

·

successfully integrate new retail stores into our existing operations and information technology systems.

Lack of availability, of desired store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to capital restraints, difficulties in staffing and operating new store locations or a lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores. There can be no assurance that we will open new stores in Fiscal 2019 or thereafter. Any failure to successfully open and operate new stores may adversely affect our business, financial condition and operating results.

We may be unable to grow comparable store sales or average sales per square foot in our retail stores, which could cause our sales  to decline.

We may not be able to grow our comparable store sales or average sales per square foot in our retail stores. If our future comparable store sales or average sales per square foot decline, the price of our overall net sales could decline. In addition, the aggregate results of operations through our wholesale partners and at our retail locations have fluctuated in the past may continue to fluctuate in the future. A variety of factors affect both comparable store sales and average sales per square foot, including, among others, consumer spending patterns, fashion trends, competition, current economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our product assortment, the success of marketing programs and weather conditions. If we misjudge the market for our products, we may incur excess inventory for some of our products and miss opportunities for other products. These factors may cause our comparable store sales results and average sales per square foot in the future to be materially lower than recent periods or our expectations, which could harm our results of operations and result in a decline in the price of our common stock.

Uncertain economic conditions in the United States and other parts of the world can affect consumer confidence and consumer spending patterns and our business could be negatively impacted by the financial health of our retail customers.

The economy in the United States and abroad continues to be in the midst of uncertainty. The apparel industry has historically been subject to cyclical variations, recessions in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits. Negative impacts to our customers’ buying patterns, as well as the need to provide additional allowances to customers, could have a material adverse effect on our business, the carrying value of our tangible and intangible assets, results of operations and financial condition.

Our business depends on the general economic environment and levels of consumer spending that affect not only the ultimate consumer, but also retailers, our largest direct customers. Purchases of apparel and accessories tend to decline in periods of recession or uncertainty regarding future economic prospects, when consumer spending, particularly on discretionary items, and disposable income decline. Many factors affect the level of consumer spending in the apparel industry, including, among others: prevailing economic conditions, levels of employment, salaries and wage rates, energy costs, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new retail stores, or maintain or improve our earnings from operations as a percentage of net sales.

In addition, we sell our products primarily to retail and distribution companies in the United States, Canada and Europe based on pre‑qualified payment terms. Financial difficulties of a customer could cause us to curtail business with that customer. We may also assume more credit risk relating to that customer’s receivables. We are dependent primarily on lines of credit that we establish from time to time with customers, and should a substantial number of customers become unable to pay to us their respective debts as they become due, we may be unable to collect some or all of the monies owed by those customers. In particular, because of the concentration of our customer and customer groups, our results of operations could be adversely affected if any one of these customers fails to satisfy its payment obligations to us when due.

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In recent years, the retail industry has experienced consolidation, restructurings, reorganizations, bankruptcies, and other ownership changes that have resulted in one entity controlling several different stores or the elimination of stores. This consolidation can result in fewer customers for our products or the closing of some stores or the number of “doors” which carry our products. As a result, the potential for consolidation or ownership changes, closing of retail outlets and fewer customers could negatively impact sales of our products and have a material adverse effect on our financial condition and results of operations.

Economic conditions have also led to a highly promotional environment and strong discounting pressure from both our wholesale partners and retail customers, which could lead to a negative impact on our revenues and profitability. The domestic and international political situation also affects consumer confidence. The threat, outbreak or escalation of terrorism, military conflicts, civil unrest or other hostilities around the world could lead to further decreases in consumer spending.

Our plans to improve and expand our product offerings may not be successful, and the implementation of these plans may divert our operational, managerial and administrative resources, which could harm our competitive position and reduce our net revenue and profitability.

We plan to grow our business by improving and expanding our product offerings. We will continue to evaluate our plan to develop and introduce new product categories and pursue additional licensing opportunities.

The expansion into new products and classifications may require the establishment of new sourcing relationships, increasing our sourcing risk. See "—We are dependent on third parties to source and manufacture products and any disruption in relationships with these parties or in their businesses may materially adversely affect our business.” As we expand our licensing activities, we increase risks associated with our ability to conduct quality checks on merchandise, which could affect product quality.

In addition, our ability to successfully carry out our plans to improve and expand our product offerings may be affected by economic and competitive conditions, changes in consumer spending patterns and changes in consumer preferences and style trends. These plans could be abandoned, could cost more than anticipated and could divert our operational, managerial and administrative resources from other areas of our business, any of which could impact our competitive position and reduce our net sales and profitability.

If we are unable to manage our operations at our current size or are unable to manage any future growth effectively, our business results and financial performance may suffer.

We have made and are making investments to support our near and longer-term growth. If our operations continue to grow over the longer term, of which there can be no assurance, we will be required to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes, and to obtain more space for our expanding administrative support and other headquarters personnel. As noted above, the integration of the GBG Business could strain our existing resources. As a result, we could experience operating difficulties, including obtaining sufficient raw materials at acceptable prices, securing manufacturing capacity to produce our products and experiencing delays in production and shipments. These difficulties would likely lead to a decrease in net revenue, income from operations and the price of our common stock, and such decreases could be significant.

Our trademark rights and other intellectual property rights may not be adequately protected and some of our products are targets of counterfeiting.

We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We may, however, experience conflict with various third parties who acquire or claim ownership rights in certain trademarks as we expand our product offerings and expand the number of countries where we sell our products. We cannot ensure that any actions taken to establish and protect these trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of their trademarks and proprietary rights. Also, we cannot assure that others will not assert rights in, or ownership of,

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trademarks and other proprietary rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States.

Our products are sometimes the target of counterfeiters. As a result, there are often products that are imitations or “knock-offs” of our products that can be found in the marketplace or consumers can find products that are confusingly similar to ours. We intend to continue to vigorously defend our trademarks and products bearing our trademarks, however, we cannot assure you that our efforts will be adequate to prosecute and block all sales of infringing products from the marketplace.

As a licensor for certain categories for our Owned Brands, we may not be successful and our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements, which may have an adverse effect on our brand equity, reputation or business.

We are a licensor for certain product categories for our Owned Brands.  Under these arrangements, we license to third parties certain manufacturing, marketing and distribution rights for certain product categories and in certain geographic areas.  We believe this will broaden and enhance the products available under these brand names. From time to time, these licensing arrangements may not be successful and may make us susceptible to the actions by licensees over whom we have limited control.

Although we have taken and will continue to take steps to select potential licensing partners carefully and to monitor the activities of our licensees  (through, among other things, approval rights over product design, production quality, packaging, merchandising, marketing, distribution and advertising), such arrangements may not be successful. Our licensees may fail to fulfill their obligations under their license agreements or have interests that differ from or conflict with our own, such as the pricing of our products and the offering of competitive products.

The inability of any of our licensees to successfully market our products or otherwise conduct business, may result in loss of revenue and competitive harm to our operations and reputation in regions or product categories.

Any potential future acquisitions, strategic investments or mergers may subject us to significant risks, any of which may harm our business and may lead to substantial dilution or negative effects on the market price of our common stock.

Our strategy includes identifying and acquiring, investing in or merging with suitable candidates on acceptable terms in order to grow or complement our business. Acquisitions would involve a number of risks and present financial, managerial and operational challenges, including:

·

diversion of management attention from running our existing business;

·

possible material weaknesses in internal controls over financial reporting;

·

increased expenses including legal, administrative and compensation expenses related to newly hired employees;

·

increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with us;

·

potential exposure to material liabilities not discovered in the due diligence process, including cyber security risks;

·

potential adverse effects on our reported operating results due to possible write‑down of goodwill and other intangible assets associated with acquisitions;

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·

acquisition financing may not be available on reasonable terms or at all; and

·

any acquired business, technology, service or product may significantly under‑perform relative to our expectations, and we may not achieve the benefits we expect from the acquisition.

For any or all of these reasons, our pursuit of an acquisition, investment or merger may cause our actual results to differ materially from those anticipated. In addition, the success of our strategy to pursue potential future acquisitions will depend on our ability to achieve savings from the elimination of duplicative expenses or the realization of other efficiencies associated with such acquisitions. Failure to implement our strategic plan with success, including our ability to achieve anticipated savings in connection with any potential future acquisitions, could result in increased costs and could adversely affect our business, financial condition, operating results and prospects.

The seasonal nature of our business makes management more difficult, severely reduces cash flow and liquidity during parts of the year and could force us to curtail our operations.

Our business is seasonal with the greatest volume of shipments and sales typically occurring in our third and fourth fiscal quarters. Accordingly, our cash flow is typically strongest in the third and fourth fiscal quarters. Conversely, we build-up inventories during our first and second fiscal quarters and as such, our cash flow is generally weaker in the first and second fiscal quarters. Unfavorable economic conditions affecting retailers during the fall and holiday seasons in any year could have a material adverse effect on our results of operations for the year. We are likely to experience periods of negative cash flow throughout each year, including, a drop-off in business commencing each December, which could force us to curtail operations if adequate liquidity is not available. We cannot be certain that the effects of such seasonality will diminish in the future.

Our success is largely dependent on the continued service of our key personnel.

Our success is largely dependent upon the continued service of our key personnel, including personnel acquired in the GBG Acquisition and Jason Rabin, our Chief Executive Officer. The loss of the services of Mr. Rabin and any negative market or industry perception arising from the loss of his services could have a material adverse effect on us and the market price of our common stock. Our other executive officers and key personnel have substantial experience and expertise in our business and have made significant contributions to our success. The unexpected loss of services of one or more of these individuals or the inability to attract key personnel could also adversely affect us.  Furthermore, turnover at the senior management level may create instability within the Company and our employees may terminate their employment, which could further impede our ability to maintain day-to-day operations. Such instability could also impede our ability to fully implement our business plan, which would harm our business and prospects.

Computer system disruption and cyber security threats, including a privacy or data security breach, could damage our relationships with our customers, harm our reputation, expose us to litigation and adversely affect our business. We may also incur an increase in costs in an effort to minimize those risks.

We depend on technology systems such as ERP systems, EDI communication with our retail customers and other technology applications. We also depend on IT systems and networks for a significant portion of our direct-to-consumer sales, including sales of our products via ecommerce channels, retail business credit and debit card transaction authorizations and processing at our retail stores. Information technology systems are integral to other aspects of our business, such as corporate email communications to and from employees, customers and retail stores, the design, manufacture and distribution of our apparel products, digital marketing efforts, collection and retention of customer data and employee information, and our interaction with the public in the social media space. Given the nature of our ecommerce presence and digital strategy, it is imperative that we and our ecommerce partners maintain uninterrupted operation of our computer hardware, software systems, customer marketing databases, and email servers.

The retail industry, in particular, has been the target of many recent cyber attacks, and a security breach could expose us to a risk of loss or misuse of this information, litigation, and potential liability. We have confidential security measures in place to protect both our physical facilities and digital systems from attacks. However, we may not have the

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resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Additionally, although many of our third-party service providers use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in the future either at their location or within their systems. Attacks may be targeted at us, our customers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur costs to deploy additional personnel and protection technologies, train employees, and engage third party experts and consultants. Advances in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

Laws on privacy continue to evolve and further limits on how we collect or use customer information could adversely affect our business.

We collect and store customer information primarily for marketing purposes and to improve the services we provide. The use or retention of certain customer information is subject to applicable privacy laws. These laws and the judicial interpretation of such laws are evolving on a frequent basis. If we fail to comply with these laws, we may be subject to fines or penalties, which could impact our business, financial condition and results of operations. Any limitations imposed on the use of such customer information by federal, state or local governments, could have an adverse effect on our future marketing activities. Governmental focus on data security and/or privacy may lead to additional legislation or regulations. As a result, we may have to modify our business with the goal of further improving data security, which would result in increased expenses and operating complexity. To the extent our or our business partners' security procedures and protection of customer information prove to be insufficient or inadequate, we may become subject to litigation or other claims, which could expose us to liability and cause damage to our reputation, brand and results of operations.

Risks Related to our Common Stock

Ownership of our common stock is concentrated among affiliates of Tengram Capital Partners (the “Tengram Affiliates”), GSO Capital Partners LP, Blackstone Tactical Opportunities Advisors L.L.C., and certain other large holders, which substantially reduces the ability of other stockholders to influence management, including through the election of directors, and may result in decisions that do not always coincide with the interests of other stockholders.

As of May 15, 2019, based upon the Amendment No. 4 to Schedule 13D dated October 29, 2018, and based upon our records, the largest beneficial owners of our common stock, funds managed by GSO Capital Partners LP and Blackstone Tactical Opportunities Advisors L.L.C. (together, the "GSO/BTO Affiliates") and the Tengram Affiliates, beneficially own in the aggregate a majority of our common stock and voting power. This includes, in addition to shares of common stock owned outright by various GSO/BTO Affiliates and Tengram Affiliates, shares of common stock issuable upon exercise of the Warrant held by Tengram Partners Fund II, L.P. (“Tengram II”) to purchase 500,000 shares of common stock for $3.00 received in connection with the acquisition of SWIMS (the “SWIMS Warrant”). Our Amended and Restated Bylaws (the "Bylaws") permit any action required or permitted to be taken by stockholders at a meeting to be effected by written consent by a majority of our stockholders for certain matters.

Our largest shareholders, and particularly the GSO/BTO Affiliates and the Tengram Affiliates, are thus in a position to exert significant control over us and have the ability to substantially influence all matters submitted to our stockholders for approval, including the election and removal of directors, any merger, consolidation or sale of all or substantially all of our assets, an increase in the number of shares authorized for issuance under our stock option plans, and to exert significant control over our management and affairs. The GSO/BTO Affiliates and the Tengram Affiliates each have the right to appoint two directors to our board of directors. This concentration of beneficial ownership may have the effect of delaying, deferring or preventing a change in or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would be beneficial to other stockholders. Additionally, the GSO/BTO Affiliates hold our 2024 Convertible Notes (as defined below) and are lenders under our Second Lien Credit Facility (as defined below), and their interests as a lender may differ from your interests as

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a shareholder. For more information, see “Part III, Item 12. Security “Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Our common stock price is volatile and may decrease.

The market price of our common stock may continue to fluctuate and investors in our common stock could lose the value of their investment. In addition, the stock market has experienced significant price and volume fluctuations in recent times, which could have a material adverse effect on the market for, or liquidity of, our common stock, regardless of our actual operating performance.

The trading price and volume of our common stock has historically been subject to fluctuations in response to factors such as the following, some of which are beyond our control:

·

annual and quarterly variations in actual or anticipated operating results;

·

operating results that vary from the expectations of securities analysts and investors;

·

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

·

changes in market valuations of other apparel companies;

·

announcements of new product lines by us or our competitors, announcements by us or our competitors of significant contracts, acquisitions or dispositions of assets, strategic partnerships, joint ventures or capital commitments;

·

additions or departures of key personnel or members of our board of directors;

·

changes in governmental regulation applicable to us and our products; and

·

general conditions in the apparel industry.

In the 52 week period prior to the filing of this Annual Report, the closing price of our common stock has ranged from $0.83 to $6.89.  In addition, stock markets generally have experienced price and volume trading volatility in recent years. This volatility has had an effect on the market prices of securities of many companies for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may negatively affect the market price of our common stock.

If we do not meet the expectations of equity research analysts, if they do not continue to publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our results of operations or financial condition are below the estimates or expectations of public market analysts and investors, our share price could decline. Moreover, the price of our common stock could decline if one or more securities analysts downgrade our common stock or if those analysts issue other unfavorable commentary or do not publish research or reports about us or our business.

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The market price of our common stock could be negatively affected by future sales of our common stock.

Sales by us or holders of a substantial percentage of our common stock in the public market, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. If we or our existing stockholders, particularly our largest stockholders, our directors, their affiliates, or our executive officers, sell a substantial number of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that we or these stockholders might sell our common stock could also depress the market price of our common stock and could impair our future ability to obtain capital, especially through an offering of equity securities. Certain of our large stockholders, including the GSO/BTO Affiliates and the Tengram Affiliates, have demand rights to require us to register their common stock for public sale. For more information on these agreements, see “Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

If our common stock’s closing bid price falls and subsequently remains below the minimum price of $1.00 per share, our common stock may be delisted from the NASDAQ.

As recently as June 26, 2018, immediately prior to the announcement of the GBG Acquisition, the closing price of our common stock fell below $1.00 per share. If our common stock were to trade below $1.00 per share, which is the minimum closing bid price required for continued listing on NASDAQ, for 30 consecutive business days, we will receive a notification letter from NASDAQ and will have 180 calendar days (subject to extension in some circumstances) to regain compliance with the minimum bid price rule.  To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days (or such longer period of time as the NASDAQ may require in some circumstances). If we fail to regain compliance with the minimum bid price rule or fail to maintain compliance with all other applicable NASDAQ continued listing requirements, NASDAQ may determine to delist our common stock, at which time our common stock would be quoted on the over-the-counter (OTC) markets. The delisting of our common stock could adversely impact us by, among other things, reducing the liquidity and market price of our common stock, reducing the number of investors willing to hold or acquire our common stock, limiting our ability to issue additional securities in the future, and limiting our ability to fund our operations.

Due to the delayed filing with the SEC of our Form 10-K for the year ended December 31, 2018, and our Form 8-K/A due January 11, 2019, we are not currently eligible to use a registration statement on Form S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.

As a result of the delayed filing with the SEC of our Annual Report on Form 10-K for the year ended December 31, 2018, and our Form 8-K/A due January 11, 2019, we will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until we have timely filed all periodic reports required under the Securities Exchange Act of 1934 for one year, and there can be no assurance that we will be able to file all such reports in a timely manner in the future. Should we wish to register the offer and sale of additional securities to the public, our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our business, strategic plan and financial condition. Furthermore, if we were to experience delays in making our future periodic filings with the SEC, it could subject us to delisting of our common stock from trading on the NASDAQ. The delisting of our common stock could adversely affect the market price of and hinder our stockholders’ ability to trade in our common stock, and could also affect our ability to access the capital markets or complete acquisitions. If our shares of common stock were delisted, there could be no assurance of it again being listed for trading on NASDAQ or any other exchange.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

We relocated our executive offices to 350 Fifth Avenue in New York City. For almost all of our space in this building, our lease expires in October 31, 2028. We currently lease approximately 305,000 square feet of office and

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showroom space in this building. Prior to the GBG Acquisition, our principal place of business was located in Commerce, Los Angeles County, California, where we have a lease that expires on August 31, 2019 for approximately 31,000 square feet located at 1231 South Gerhart Avenue, Commerce, California.

In connection with the GBG Acquisition, we lease or occupy six other office and showroom spaces located in Los Angeles, California; Greensboro, North Carolina; Seattle, Washington, Toronto and Montreal, Canada. Lease agreements for these facilities expire on various dates through 2029, and are generally non-cancelable. 

We utilize the services of third party logistics service providers across 16 facilities in California, Florida, New Jersey, and Canada, for approximately 2.4 million square feet of space in their respective facilities, which are used to distribute merchandise to our customers. We also lease approximately 69,000 square feet and approximately 26,000 square feet of space in two fulfillment and distribution facilities in New Jersey and Sweden, respectively. Additionally, in connection with the GBG Acquisition, we executed a Transition Services Agreement with GBG USA providing us access to approximately 500,000 of additional square feet at GBG and third party logistic facilities in California, Florida, and New Jersey.

Retail Stores

We operate retail store locations under operating lease agreements expiring on various dates through 2029, which are generally non-cancelable. Our retail square footage as of May 15, 2019 was approximately 240,000 gross square feet in the aggregate. Our retail stores range in size from 750 to 4,250 gross square feet with an average of approximately 2,725 gross square feet. 

As of May 15, 2019, we had 31 Robert Graham® brand stores, which consisted of 19 full price stores and 12 outlet stores in the United States, and three SWIMS® brand outlet stores which consisted of one full price store and two outlet stores. In connection with the GBG Acquisition we also assumed 55 store leases with a total retail square footage of approximately 190,000 gross square feet in the aggregate. Leases assumed consisted of 41 BCBG® brand stores, which consisted of 32 full price stores and nine outlet stores in the United States, 12 Joe’s Jeans® brand stores, which consisted of two full price stores and ten outlet stores in the United States, one full price Herve Leger retail store in the United States, and one bebe retail store in the United States.

For more information on our operating leases, see “Part I, Item 1A. Risk Factors—Risks Related to our Business and Industry—We are subject to risks associated with leasing retail space, which are generally long-term non-cancelable leases requiring us to make substantial lease payments.” and “Notes to Consolidated Financial Statements—Note 11—Commitments and Contingencies.”

ITEM 3.      LEGAL PROCEEDINGS

(a) We are a party to lawsuits and other contingencies in the ordinary course of our business. We do not believe that we are currently a party to any material pending legal proceedings. Additionally, in the opinion of management, based upon advice of legal counsel, the likelihood is remote that the impact of any pending legal proceedings and claims, either individually or in the aggregate, would have a material adverse effect on our consolidated financial condition, results of operations or cash flows. For more information, see “Notes to Consolidated Financial Statements—Note 11—Commitments and Contingencies.”

(b)

None

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is currently traded under the symbol “CTRC” on The Nasdaq Capital Market maintained by NASDAQ.

Holders

As of May 15, 2019, there were approximately 740 record holders of our common stock. This does not include beneficial owners of our common stock whose stock is held in nominee or “street name.”

Dividends

We have never declared or paid a cash dividend and do not anticipate paying cash dividends on our common stock in the foreseeable future. In deciding whether to pay dividends on our common stock in the future, our board of directors (the “Board” or the “Board of Directors”) will consider certain factors it may deem relevant, including our earnings and financial condition and our capital expenditure requirements.

Equity Compensation Plan Information

See “Part III, Item 12—Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters—Equity Compensation Plan Information.”

Sales of Unregistered Equity Securities by the Issuer

There are no transactions that have not been previously included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Purchases of Equity Securities by Issuer

Pursuant to the Company's practice, we withhold shares of stock awards on the vesting date and make payments to taxing authorities as required by law to satisfy the minimum withholding tax requirements of award recipients who are employees. Shares repurchased totaled 451,072 and 100,900 for the years ending December 31, 2018 and December 31, 2017, respectively.

The following table presents shares repurchased for the fourth quarter of fiscal 2018:

 

 

 

 

 

 

 

    

Total

    

Weighted

 

 

Number of 

 

Average Price Paid

 

 

Shares Purchased

 

per Share

October 1, 2018 – October 31, 2018

 

127,802

 

$

4.22

November 1, 2018 – November 1, 2018

 

2,435

 

 

5.46

December 1, 2018 – December 31, 2018

 

12,741

 

 

3.43

Total

 

142,978

 

 

4.17

 

ITEM 6.    SELECTED FINANCIAL DATA

Not applicable. The registrant is relying on smaller reporting company disclosure requirements.

 

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

As we are a smaller reporting company, this discussion and analysis summarizes the significant factors affecting our results of operations and financial conditions during the Fiscal Years ended December 31, 2018 and 2017, respectively. This discussion should be read in conjunction with our Consolidated Financial Statements, Notes to Consolidated Financial Statements and supplemental information in Item 8 of this Annual Report. The discussion and analysis contains statements that may be considered forward-looking. These statements contain a number of risks and uncertainties, as discussed under the heading “Forward Looking Statements” of this Annual Report that could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Our future results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements. We do not undertake to publicly update these forward looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

The results of operations of the GBG Acquisition (as defined below) were only included in our results of operations for the year ended December 2018 for the period from October 29, 2018 through December 31, 2018. Therefore our 2018 results of operations and associated metrics are not necessarily indicative of future results. Actual events, results, and outcomes from the GBG Acquisition may differ materially from our expectations due to competition and other factors. As such, we have presented our results of operations for the years ended December 31, 2018 and 2017 as well as the unaudited pro forma combined results of operations for years ended December 31, 2018 and 2017. For more information, see section titled “Supplemental Unaudited Pro Forma Combined Financial Information.”

Recent Acquisitions

On October 29, 2018, we completed the acquisition of the GBG Business for approximately $1.18 billion in cash. The GBG Business licenses brands such as Calvin Klein, Under Armour, Tommy Hilfiger, BCBG, Joe’s, Buffalo, Frye, Michael Kors, Kate Spade, AllSaints and Cole Haan, and entertainment properties including Disney, Marvel and Nickelodeon, among others.

Under the acquisition method, we determined the Company to be the accounting acquirer for financial reporting purposes, with the GBG Business being viewed as the accounting acquiree. As a result, the assets, liabilities and operations reflected in the historical consolidated financial statements and elsewhere in this Annual Report prior to the GBG Acquisition are those of the Company recorded at the historical cost basis and do not reflect the GBG Business historical financial condition and results of operations.

Due to the GBG Acquisition, the financial information for the year ended December 31, 2018 is not comparable to the full year ended December 31, 2017. As such, we have presented our results of operations for the years ended December 31, 2018 and 2017 as well as the unaudited pro forma combined results of operations for years ended December 31, 2018 and 2017. For more information, see section titled “Supplemental Unaudited Pro Forma Combined Financial Information”.

Executive Overview

Centric Brands is a leading lifestyle brands collective, bringing together creative minds from the worlds of fashion and commerce, sourcing, technology, marketing, digital and entertainment. We design, produce, merchandise, manage, and market kidswear, men’s and women’s apparel, and accessories under owned, licensed and private label brands and distribute our products across all retail and digital channels in North America and in international markets.

Our legacy company-owned brands include Hudson®, a designer and marketer of men's and women's premium, branded denim and apparel; Robert Graham®, a sophisticated, eclectic apparel and accessories brand seeking to inspire a

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global movement, and SWIMS®, a Scandinavian lifestyle brand best known for its range of fashion-forward, water-friendly footwear, apparel and accessories.

We also license over 100 brands or produce private label products across our core product categories including kids products, accessories products, and men’s and women’s apparel. Licensed brands include Calvin Klein, Under Armour, Tommy Hilfiger, Nautica, Spyder, BCBG, Herve Leger, Joe’s, Buffalo, Frye, Michael Kors, Kate Spade, AllSaints and Cole Haan, and entertainment properties including Disney, Marvel, Universal Studios, Warner Brothers and Nickelodeon, among others. We also produce private label products for certain retail customers. Our products are sold through a cross section of leading retailers such as Walmart, TJX Companies, Costco, Target, Burlington, Macy’s, Kohl’s, Ross, Target, JC Penney, and Nordstrom. We also sell our products over the web through retail partners such as Walmart.com, Macys.com and Nordstrom.com. We also distribute apparel and other products through our own retail stores, partner shop-in-shops and ecommerce sites. As of December 31, 2018, we operated 89 retail stores and 347 partner shop-in-shops.

Our business is seasonal. The majority of the marketing and sales orders take place from late fall to late spring. The greatest volume of shipments and actual sales are generally made from summer through early fall, which coincides with our third and fourth fiscal quarters and, accordingly, our cash flow is strongest in those quarters. Due to the seasonality of our business, as well as the evolution and changes in our business and product mix, including the timing of the GBG Acquisition, our quarterly or yearly results are not necessarily indicative of future results.

We have acquired businesses that have broadened our product offerings, expanded our ability to serve different tiers of distributions and expanded the retail component of our business. Our acquisitions are part of our strategy to expand our offerings and increase the portfolio of licensed and private label brands that we offer through different tiers of retail distribution. As part of our business strategy, we are seeking to create a platform that focuses on brands and/or branded operating companies in the premium apparel, footwear and accessories sectors. Our focus is on organically growing our brands through a global, omni-channel distribution strategy while continuing to seek opportunities to acquire accretive, complementary, premium brands.

Upon completing the GBG Acquisition, we resegmented our reportable segments to reflect our expanded organizational structure, including the operations of the newly acquired GBG Business. Accordingly, we realigned our business into the following three reportable segments: Kids, Accessories, and Men’s & Women’s Apparel. This new segment structure is consistent with how our chief operating decision maker establishes our overall business strategy, allocates resources, and assesses performance. Accordingly, we have realigned our segments to align with these organizational changes as discussed further within the section titled Reportable Segments.

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Results of Operations

This table should be read in conjunction with the discussion that follows:

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2018

 

2017

    

 

 

(in thousands)

 

Net sales

 

$

596,602

 

$

164,053

 

Cost of goods sold

 

 

435,867

 

 

92,303

 

Gross profit

 

 

160,735

 

 

71,750

 

Gross margin % of net sales

 

 

26.9

%  

 

43.7

%  

Operating expenses

 

 

 

 

 

 

 

Selling, general and administrative

 

 

145,136

 

 

62,030

 

Depreciation and amortization

 

 

19,351

 

 

6,061

 

Other operating expense (income)

 

 

87,807

 

 

2,583

 

Total operating expenses

 

 

252,294

 

 

70,674

 

Operating income (loss)

 

 

(91,559)

 

 

1,076

 

Operating Income (Loss) % of Net Sales

 

 

(15.3)

%  

 

0.7

%  

Interest expense

 

 

38,327

 

 

8,844

 

Other expense (income), net

 

 

(193)

 

 

21

 

Loss before income taxes

 

 

(129,693)

 

 

(7,789)

 

Income tax benefit

 

 

5,927

 

 

5,331

 

Net loss

 

$

(123,766)

 

$

(2,458)

 

 

Net Sales and Gross Profit

Net sales increased to $596.6 million for Fiscal 2018 from $164.1 million for Fiscal 2017, reflecting a $432.5 million year over year increase. Increase in net sales attributable to the newly acquired GBG Business totaled approximately $436.1 million, while our continuing businesses were approximately flat for the year.

Gross profit increased to $160.7 million for Fiscal 2018 from $71.8 million for Fiscal 2017, reflecting a $88.9 million year over year increase. The increase in gross profit attributable to the newly acquired GBG Business was $85.2 million. Gross profit for our continuing businesses increased to $75.5 million for Fiscal 2018 from $71.8 million for Fiscal 2017, reflecting a $3.7 million increase year over year.

Gross margin as a percent of net sales was 26.9% for Fiscal 2018, compared to 43.7% for Fiscal 2017. The decrease in the gross margin as a percent of net sales is largely driven by the lower gross margin on the GBG Business’ operations as compared to the continuing business.

For more information, see sections titled “Reportable Segments” and “Supplemental Unaudited Pro Forma Combined Financial Information."

Operating Expenses

Operating expenses include (i) selling, general and administrative expenses related to employee and employee benefits, sales commissions, advertising, acquisition related costs, professional fees and factor and bank fees, (ii) depreciation and amortization, (iii) retail store impairment and (iv) other operating expense/income.

In connection with the closing of the GBG Acquisition, we entered into a Transition Services Agreement with GBG USA wherein each will provide the other party, certain corporate services including information technology, finance, human resources, legal, sourcing, tax and facilities for a period of up to three years from October 29, 2018 to ensure and facilitate an orderly transfer of business operations. Payments to each party will vary in amount and length of time as

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specified in the Transition Services Agreement. The charges for such services are generally intended to allow the service provider to recover all of its direct and indirect costs, generally without profit. 

Selling, general and administrative expenses increased to $145.1 million for Fiscal 2018 from $62.0 million for Fiscal 2017. The $83.1 million increase was attributable to operating costs of the GBG Business, and costs related to the consummation of the GBG Acquisition.

In addition, depreciation and amortization expenses increased to $19.4 million from $6.1 million for Fiscal 2018 and Fiscal 2017, respectively. Increase in depreciation and amortization expense was primarily attributable to the GBG Acquisition.

Other operating expenses include (i) acquisition related expenses, (ii) reorganization and integration expenses, (iii) termination fee of discontinued license, (iv) stock based compensation expense, and (v) retail store impairment. Other operating expenses totaled approximately $87.8 million and $2.6 million for Fiscal 2018 and Fiscal 2017, respectively.

Interest Expense and Other expense (income), net

Interest expense includes costs incurred by the Company for borrowed funds as well as amortization of deferred financing fees relating to our term loans, revolving credit facilities and convertible notes. Interest expense increased to $38.3 million for Fiscal 2018 from $8.8 million for Fiscal 2017. Increase in interest expense was largely driven by the increase in aggregate outstanding borrowings under the new credit facilities entered into in connection with the GBG Acquisition, the issuance of the 2024 Convertible Notes and the increased amortization of debt issuance cost.

Income Tax Benefit

Our effective tax rate was a benefit of 4.6% of loss before income taxes for Fiscal 2018 compared to a benefit of 68.4% for fiscal 2017. The difference in the effective tax rate for Fiscal 2018, as compared to Fiscal 2017, was primarily due to the impact of the Tax Cuts and Jobs Act (the “Tax Act”). In connection with its initial analysis of the impact of the Tax Act, the Company recorded a provisional one-time net tax benefit of $6.3 million for the year ended December 31, 2017. This net tax benefit primarily consists of a $3.8 million net tax benefit from the corporate rate reduction from 34% to 21% and a tax benefit for the reversal of a portion of the valuation allowance related to the indefinite deferred tax liability of $2.5 million. See “Notes to Consolidated Financial Statements—Note 18—Income Taxes” for additional details.

Unaudited Additional Supplemental Non-GAAP Disclosures

The financial information provided throughout this report, including our Consolidated Financial Statements and the notes thereto, has been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, we present Adjusted EBITDA, a non-GAAP financial measure, in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding our ongoing operating results. (“Adjusted EBITDA”) is a non-GAAP measure defined by us as net loss plus interest expense, income tax benefit, amortization of inventory fair value step up, results of discontinued license, depreciation and amortization expense and other operating expense, net.

Management has historically used Adjusted EBITDA when evaluating operating performance because we believe that the inclusion or exclusion of certain recurring and non-recurring items is necessary to provide a full understanding of our core operating results and as a means to evaluate period-to-period results. We also believe that Adjusted EBITDA is a useful measure, in part, because certain investors and analysts use both historical and projected Adjusted EBITDA, in addition to other GAAP and non-GAAP measures, as factors in determining the estimated fair value of shares of our common stock. In addition, from time to time our Board uses Adjusted EBITDA to define certain performance targets under our compensation programs. We do not use Adjusted EBITDA to measure liquidity, but instead to measure operating performance. This non-GAAP measure may not be comparable to similarly titled measures reported by other companies. Also, the definition of Adjusted EBITDA may not be the same as the definitions used in any of our financing arrangements.

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Because this measure excludes many items that are included in our financial statements, it does not provide a complete measure of our operating performance. Accordingly, investors are encouraged to use GAAP measures when evaluating our financial performance.

The following table presents a reconciliation of net loss to Adjusted EBITDA (in millions):

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

Net loss

 

$

(123.8)

 

$

(2.5)

Interest expense

 

 

38.3

 

 

8.8

Income tax benefit

 

 

(5.9)

 

 

(5.3)

Amortization of inventory fair value step up

 

 

23.6

 

 

 —

Results of discontinued license

 

 

3.3

 

 

 —

Depreciation and amortization

 

 

19.4

 

 

6.1

Other operating expense, net

 

 

87.8

 

 

2.6

Adjusted EBITDA

 

$

42.7

 

$

9.7

 

The following table presents a reconciliation of other operating income (expense) (in millions):

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

Acquisition related expenses

 

$

39.8

 

$

 —

Reorganization and integration expenses

 

 

30.9

 

 

 —

Termination fee of discontinued license

 

 

12.0

 

 

 —

Stock-based compensation expense

 

 

5.1

 

 

2.4

Retail store impairment

 

 

 —

 

 

0.2

Other operating expense, net

 

$

87.8

 

$

2.6

 

“Adjusted Operating Cash Flow” is a non-GAAP measure defined by us as net cash used in operating activities plus collections of sold receivables. Collections of sold receivables are classified as an investing activity on the accompanying Consolidated Statement of Cash Flows. Collections of sold receivables differ from collections of accounts receivable only with respect to the timing of cash receipts through our factoring arrangements. We believe the foregoing non-GAAP measure is useful to investors and analysts because it presents additional information on our financial performance and cash flows. Investors, analysts, our management, and our Board of Directors utilize this non-GAAP measure, in addition to GAAP measures, to track our financial and operating performance and compare our performance to  peer companies. Adjusted Operating Cash Flow, has material limitations, and therefore, may not be comparable to similarly titled measures of other companies and should not be considered in isolation, or as a substitute for analysis of our operating results in accordance with GAAP. In order to compensate for these potential limitations we also review the related GAAP measures.

The following table presents a reconciliation of cash flow from operating activities to Adjusted Operating Cash Flow (in millions).

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

2018

 

2017

Net cash used in operating activities, as reported

    

$

(397.6)

    

$

(1.7)

Collections of sold receivables

 

 

313.0

 

 

 —

Adjusted operating cash flow

 

$

(84.6)

 

$

(1.7)

 

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Reportable Segments

Prior to the GBG Acquisition, we organized our business into the following three reportable segments: Wholesale, Consumer Direct, and Corporate and other. Upon completing the GBG Acquisition, we resegmented our reportable segments to reflect our expanded organizational structure, including the operations of the newly acquired GBG Business. Accordingly, we realigned our business into the following three reportable segments: Kids, Accessories, and Men’s & Women’s Apparel. This new segment structure is consistent with how our chief operating decision maker establishes our overall business strategy, allocates resources, and assesses performance. We will continually evaluate changes in the structure of the organization to determine whether its operating segments have changed when events or circumstances necessitate such an exercise.

Operational results include expenses directly attributable to the segment as well as corporate overhead, which include executive, finance, legal, information technology, and human resource related expenses. Corporate overhead is allocated to each reporting segment, generally based on the percent of units shipped for each respective segment. We manage, evaluate and aggregate our operating segments for segment reporting purposes primarily on the basis of business activity and operations. All prior period segment information has been reclassified to reflect the realignment of our segment reporting structure on a comparable basis.

Kids

Our Kids segment is comprised of sales of products to full-price retail stores, off-price or outlet department stores, boutiques, trade shows and ecommerce sales. Kids products are sold to over 700 customers and are comprised of over 350 licensed brands. Key licensed brands, include Calvin Klein®, Under Amour®, Tommy Hilfiger®, Nautica® and Disney®. Our top customers include large retailers such as Walmart, Kohl’s, Target, Burlington, Macy’s, and TJX Companies. We design, produce and sell goods to Walmart as a private label business under the George® and Faded Glory® names. Our Kids segment accounted for approximately 36.3% of our Fiscal 2018 net revenues. Domestically, we sell Kids products through our own showrooms. At the showrooms, retailers review the latest collections offered and place orders. The showroom representatives provide us with purchase orders from the retailers and other customers they call upon.

The Kids segment is new to our business and was acquired as a component of the GBG Business. In addition to integrating the Kids segment successfully and efficiently with our existing business, our go-forward strategy includes driving sales by improving productivity in existing accounts/doors and selectively expanding into new accounts.

Accessories

Our Accessories segment is comprised of sales of products to full-price retail stores, off-price or outlet department stores, boutiques and ecommerce sales. Accessories products are sold to over 600 customers and are comprised of over 85 licensed, owned and private label brands. Key licensed brands, include Calvin Klein®, Frye®, Fila®, Michael Kors®, Kate Spade® and AllSaints®. Our top customers include large retailers such as Walmart, Kohl’s, Macys, Dillard's and Nordstrom Companies. Our Accessories segment accounted for approximately 16.3% of our Fiscal 2018 net revenues. Domestically, we sell Accessories products through our own showrooms. At the showrooms, retailers review the latest collections offered and place orders. We sell our accessories products to customers in the United States, and Canada.

The Accessories segment is new to our business and was acquired as a component of the GBG Business. In addition to integrating the Accessories segment successfully and efficiently with our existing business, our go-forward strategy includes driving sales by improving productivity in existing accounts/doors, and selectively expanding into new accounts.

Men’s & Women’s Apparel

Our Men’s & Women’s Apparel segment is comprised of (i) sales to premium nationwide department stores, specialty retailers, ecommerce, boutiques and select off-price retailers of our Owned Brands; (ii) sales of licensed branded products bearing the brand names of BCBG®, Herve Leger, Buffalo®, Joe’s Jeans®, bebe® (collectively referred to herein

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as Core Licensed Brands) to premium nationwide department stores, specialty retailers, ecommerce stores, boutiques and select off-price retailers; (iii) full-price and outlet retail store sales owned and operated by us bearing the brands of Robert Graham®, SWIMS®, BCBG®, bebe®, and Joe’s Jeans®; (iv) ecommerce sales through our own and our retail partners’ ecommerce sites; and (v) royalty revenue generated through the licensing of our Robert Graham® and Hudson® brands to third parties for the right to use our various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods.

Our Men’s & Women’s Apparel segment, accounted for approximately 47.4% of our Fiscal 2018 net revenues. Owned Brand sales include net royalty revenue earned from our licensing arrangements. Royalty revenues are generated through the licensing of our Robert Graham® and Hudson® brands to third parties for the right to use our various trademarks in connection with the manufacture and sale of designated products for the following product categories and geographical areas: men’s shoes, belts, small leather goods, dress shirts, neckwear, tailored clothing, headwear, eyewear, jewelry, hosiery, underwear, loungewear, kids, and fragrances, and for distribution of our products in Canada and Europe. Our products are sold to over 1,000 retail customers in North America and throughout the world including our own retail stores and ecommerce websites. As of December 31, 2018, we operated a total of 89 retail stores and 369 partner shop-in-shops. For more information relating to our retail locations, see “Item 2 – Properties.”

We do not evaluate performance or allocate resources based on segment asset data, and therefore total segment assets are not presented. All prior period segment information has been reclassified to reflect the realignment of our segment reporting structure on a comparable basis. The following table sets forth certain statements of operations data by our reportable segments for the periods as indicated:

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2018

 

2017

 

    

(in thousands)

Net sales:

 

 

 

 

 

 

Kids

 

$

216,298

 

$

 —

Accessories

 

 

97,299

 

 

 —

Men’s & Women’s Apparel

 

 

283,005

 

 

164,053

 

 

$

596,602

 

$

164,053

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

Kids

 

$

33,530

 

$

 —

Accessories

 

 

10,246

 

 

 —

Men's & Women's Apparel

 

 

116,959

 

 

71,750

 

 

$

160,735

 

$

71,750

 

 

 

 

 

 

 

Operating income (loss)

 

$

(24,872)

 

$

 —

Kids

 

 

(44,202)

 

 

 —

Accessories

 

 

(22,485)

 

 

1,076

Men’s & Women’s Apparel

 

$

(91,559)

 

$

1,076

 

 

Supplemental Unaudited Pro Forma Combined Financial Information

As described above, we completed the GBG Acquisition on October 29, 2018. For comparative purposes, we are presenting supplemental unaudited pro forma combined statements of operations for the years ended December 31, 2018 and 2017, and we discuss such unaudited pro forma combined results as well as our actual results of operations for the years ended December 31, 2018 and 2017. The unaudited pro forma combined statements of operations for these periods present our consolidated results of operations giving pro forma effect to the GBG Acquisition as if it had occurred on January 1, 2017. The pro forma combined adjustments give effect to the items identified in the unaudited pro forma combined tables below in connection with the GBG Acquisition, as well as the Financing Transactions.

The Financing Transactions are, collectively, the Private Placement (as defined below), the issuance of the 2024 Convertible Notes and the transactions consummated under the Credit Agreements (as defined below).

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The unaudited pro forma combined adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma combined basis, the impact of the GBG Acquisition on our historical financial information, as applicable.

The GBG Acquisition was accounted for using the acquisition method of accounting. The preliminary fair values of the acquired assets and assumed liabilities as of the Closing Date are based on the consideration paid including our estimates and assumptions as explained in more detail in Note 3—GBG Acquisition in the accompanying Notes to the Consolidated Financial Statements. The total purchase price to acquire the GBG Business has been allocated to the assets acquired and assumed liabilities of the acquired business, based upon the fair values as of the Closing Date. We utilized third-party valuation specialists to assist our management in determining the fair values of the acquired assets and liabilities assumed.

The unaudited pro forma combined financial information contains a variety of adjustments, assumptions and estimates, and is subject to numerous other uncertainties, assumptions, and adjustments as described in the accompanying notes hereto and therefore should not be relied upon as being indicative of our results of operations for any future period.

In addition to the other information in this Annual Report on Form 10-K, the unaudited pro forma combined statements of operations should be read in conjunction with the audited combined financial statements of the GBG Business as of December 31, 2017 and October 28, 2018 and the notes relating thereto, included as Exhibit 99.1 to the Amendment No. 1 to the Company’s Current Report on Form 8-K filed on May 15, 2019 (the “GBG Business Financial Statements”);

The historical financial statements of GBG related to the GBG Business and the Company have been adjusted in the pro forma financial information to give effect to events that are (1) directly attributable to the GBG Acquisition or the Financing Transactions (as defined below), (2) factually supportable, and (3) expected to have a continuing impact on the combined company.

The fair value estimates of the assets acquired and liabilities assumed used in the unaudited pro forma condensed combined financial information are preliminary and subject to further adjustments. Accordingly, the final acquisition accounting adjustments may be materially different from the preliminary unaudited adjustments presented herein.

The unaudited pro forma condensed combined financial information has been prepared in a manner consistent with the accounting policies adopted by the Company. As more information becomes available, the combined company will perform a more detailed review of the accounting policies of GBG (as historically applied to the GBG Business) and the Company. As a result of that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the combined financial statements.

The unaudited pro forma combined financial information has been prepared for informational purposes only and is not necessarily indicative of or intended to represent what the combined company’s financial position or results of operations actually would have been had the GBG Acquisition occurred as of the dates indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company. The unaudited pro forma adjustments are based on information available at the time of the preparation of the unaudited pro forma combined financial information. 

The unaudited pro forma combined financial information does not reflect cost savings, synergies or revenue enhancements that the Company may achieve with respect to combining the companies or costs to integrate the GBG Business or the impact of any non-recurring activity and any one-time transaction related costs. Synergies and integration costs have been excluded from consideration because they do not meet the criteria for unaudited pro forma adjustments.

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Unaudited Pro Forma Results of Operations

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma financial statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2018

 

Year ended December 31, 2017

 

 

 

Centric

 

Acquired

 

Pro Forma

 

Pro Forma

 

Centric

 

Acquired

 

Pro Forma

 

Pro Forma

 

 

  

  (a)

  

Business (b)

  

Adjustments

  

Combined

  

(a)

  

Business (b)

  

Adjustments

  

Combined

 

Net sales

 

$

596,602

 

$

1,705,593

 

$

 —

 

$

2,302,195

 

$

164,053

 

$

2,080,551

 

$

 —

 

$

2,244,604

 

Cost of goods sold (c), (d)

 

 

435,867

 

 

1,311,536

 

 

38,468

 

 

1,785,871

 

 

92,303

 

 

1,530,578

 

 

68,318

 

 

1,691,199

 

Gross profit

 

 

160,735

 

 

394,057

 

 

(38,468)

 

 

516,324

 

 

71,750

 

 

549,973

 

 

(68,318)

 

 

553,405

 

Profit margin

 

 

26.9

%

 

23.1

%

 

 

 

 

22.4

%

 

43.7

%

 

26.4

%

 

  

 

 

24.7

%

Operating expenses

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Selling, general and administrative (c), (e)

 

 

232,943

 

 

481,070

 

 

(144,287)

 

 

569,726

 

 

64,613

 

 

424,436

 

 

(65,414)

 

 

423,635

 

Depreciation and amortization (f), (g)

 

 

19,351

 

 

19,552

 

 

51,339

 

 

90,242

 

 

6,061

 

 

26,608

 

 

59,642

 

 

92,311

 

Total operating expenses

 

 

252,294

 

 

500,622

 

 

(92,948)

 

 

659,968

 

 

70,674

 

 

451,044

 

 

(5,772)

 

 

515,946

 

Operating (loss) income

 

 

(91,559)

 

 

(106,565)

 

 

54,480

 

 

(143,644)

 

 

1,076

 

 

98,929

 

 

(62,546)

 

 

37,459

 

Interest expense (h)

 

 

38,134

 

 

9,677

 

 

108,518

 

 

156,329

 

 

8,844

 

 

10,390

 

 

132,848

 

 

152,082

 

Gain on contingent consideration

 

 

 —

 

 

(17,675)

 

 

 —

 

 

(17,675)

 

 

21

 

 

(18,708)

 

 

 —

 

 

(18,687)

 

(Loss) income before income taxes

 

 

(129,693)

 

 

(98,567)

 

 

(54,038)

 

 

(282,298)

 

 

(7,789)

 

 

107,247

 

 

(195,394)

 

 

(95,936)

 

Income tax benefit

 

 

5,927

 

 

 —

 

 

 —

 

 

5,927

 

 

5,331

 

 

 —

 

 

 —

 

 

5,331

 

Net (loss) income

 

$

(123,766)

 

$

(98,567)

 

$

(54,038)

 

$

(276,371)

 

$

(2,458)

 

$

107,247

 

$

(195,394)

 

$

(90,605)

 


(a)

Represents the results of operations of the Company for the year ended December 31, 2018 or 2017, respectively.

(b)

Represents the results of operations of the GBG Business for the period ended October 28, 2018 and the year ended December 31, 2017, respectively, in the GBG Business Financial Statements.

(c)

Represents an increase to cost of goods sold of $62.1 million and $68.3 million for the twelve months ended December 31, 2018 and December 31, 2017, respectively, and a decrease to selling, general and administrative expenses of $61.6 million and $65.4 million for the twelve months ended December 31, 2018 and December 31, 2017, respectively, related to the capitalization and reclassification of certain production related overhead costs to conform with the accounting policies of the Company.

(d)

Represents a decrease to costs of goods sold of $23.6 million for the twelve months ended December 31, 2018 related to the removal of purchase accounting adjustments on inventory sold during the period.

(e)

Represents the elimination of $82.7 million in GBG Acquisition-related costs paid by the Company during the twelve months ended December 31, 2018 that are non-recurring and will not have a continuing impact.

(f)

Represents additional depreciation expense of $8.3 million and $11.1 million for the twelve months ended December 31, 2018 and December 31, 2017, respectively, related to the fair value of the property, plant, and equipment acquired in the GBG Acquisition. The adjustment in depreciation is based on the estimated fair value and useful lives of 3 to 8 years, and is calculated using the straight-line method.

(g)

Represents additional amortization expense of $43.0 million and $48.5 million for the twelve months ended December 31, 2018 and December 31, 2017, respectively, related to the fair value of intangible assets resulting from the GBG Acquisition. The intangible assets represent customer relationships and certain above or below market leases with an estimated useful life of 11 years and 6 years, respectively, which the Company will amortize on a straight-line basis.

(h)

Represents the net increase in interest expense of $108.5 million and $132.8 million for the twelve months ended December 31, 2018 and December 31, 2017, respectively, in connection with gross borrowings under the 2024 Convertible Notes and the Credit Agreements and amortization of the related deferred fees and discount.

 

Liquidity and Capital Resources

Sources of Liquidity and Outlook

Our primary sources of liquidity are: (i) cash proceeds from customer wholesale trade receivables and trade receivables sold to a financial institution; (ii) cash proceeds from direct to consumer sales tendered in cash, credit card, debit card or gift card; (iii) cash proceeds for licenses collected from licensees via check or wire transfer; and (iv) cash proceeds from borrowings under various credit facilities described below. Cash is used to make payments of debt and interest, royalties and for payroll and operating disbursements including inventories, operating expenses and capitalized property, software and equipment.

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Our primary capital needs are for: (i) working capital; (ii) debt principal and interest; and (iii) trade credit to our customers.  We anticipate funding our operations through working capital by generating cash flows from operations and utilization of available lines of credit under our existing credit facilities.

At December 31, 2018 and 2017, our cash and cash equivalent balances were $29.5 million and $8.3 million, respectively. Based on our cash on hand and expected cash flows from operations, the expected borrowing availability under our existing credit facilities and other financing arrangements, we believe that we have the working capital resources necessary to meet our projected operational needs beyond the next 12 months from the filing date of this Annual Report. However, if we require more capital for growth and integration or if we experience a decline in sales and/or operating losses, we believe that it will be necessary to obtain additional working capital through additional credit arrangements, debt and/or equity issuances and/or other strategic transactions.

We believe that the rate of inflation over the past few years has not had a significant adverse impact on our net sales or income from operations.

Cash Flows for the Years Ended December 31, 2018 and December 31, 2017

Cash flows used in operating activities for the years ended December 31, 2018 and 2017 were $397.6 million and $1.7 million, respectively. Our operating cash flows result primarily from cash received from our consumers, offset by cash payments we make for inventory, employee compensation, transaction costs, operating leases, professional services, and interest payments on our long-term obligations. Cash received from our customers generally corresponds to our net sales. In 2018, we entered into a receivables purchase arrangement to sell our receivables, which results in the cash collected on the deferred purchase price of our sold receivables to be classified as investing cash flows. The decrease in operating cash flows from 2017 to 2018 is primarily driven by the increase in net loss, excluding non-cash charges such as depreciation, amortization, and stock based compensation, and the impact of changes in working capital accounts. Working capital at any specific point is subject to many different variables, including seasonality, inventory management, the impact of our factoring arrangements, the timing of cash receipts and payments, and vendor payment terms.

Cash flows used in investing activities for the years ended December 31, 2018 and 2017 were $868.2 million and $1.1 million, respectively. Cash used in investing activities corresponds with cash capital expenditures, including leasehold improvements, incentives received from property and equipment vendors, cash outlays for acquisitions, investments in other companies and intellectual property rights. The decrease in investing cash flows from 2017 to 2018 is primarily driven by the GBG acquisition, offset by collections on the deferred purchase price of our sold receivables.

Cash flows provided by financing activities for the years ended December 31, 2018 and 2017 were $1,287.1 million and $4.7 million, respectively. The increase in cash flows from financing activities was primarily driven by new financing facilities entered into to consummate the GBG Acquisition, which are discussed further below, as well as proceeds from the issuance of the 2024 Convertible Notes and the private placement of 10.0 million shares of common stock. Proceeds from the credit facilities and private placement were partially offset by repayment of our prior credit facilities.

 

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Credit Agreements and Other Financing Arrangements

In connection with the GBG Acquisition, consideration paid to GBG was funded through proceeds received by entering into (i) a new first lien credit and collateral agreement entered into with Ares Capital Corporation (Ares”), as agent, and the lenders party thereto, (ii) a new second lien credit and collateral agreement entered into with U.S. Bank National Association, as agent, and the lenders party thereto, and (iii) a new revolving line of credit agreement entered into with Ares Commercial Finance, as revolving agent, and the lenders party thereto.  In addition, we also entered into new convertible promissory notes issued to the GSO/BTO Affiliates, completed a private placement of our common stock, and entered into a receivables purchase agreement with PNC Bank National Association, as administrative agent, and the lenders party thereto, to sell certain receivables acquired. The aggregate cash consideration received from the above sources was used to repay outstanding loans and indebtedness under our existing credit agreements which included (i) the payoff of all outstanding loans and indebtedness relating to our existing term loans with TCW Asset Management Company and (ii) the payoff of all outstanding balances relating to the revolving line of credit facility with Wells Fargo Bank, National Association.

New Term Loans

On October 29, 2018, we, along with certain of our subsidiaries, entered into a (i) first lien credit agreement with Ares, as administrative agent, ACF FinCo I LP, as collateral agent, and certain other lenders party thereto (the “First Lien Credit Agreement”) and (ii) second lien credit agreement with U.S. Bank National Association, as administrative agent and collateral agent, and certain lenders party thereto (the “Second Lien Credit Agreement”, and together with the First Lien Credit Agreement, collectively, 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, which matures on April 29, 2023 (the “New Revolving Facility”) and a senior secured term loan credit facility in an aggregate principal amount of $645 million, which matures on October 29, 2023 (the “First Lien Term Loan Facility”, and together with the New Revolving Facility, are collectively referred to herein as “First Lien Facilities”). The Second Lien Credit Agreement provides for a second lien term loan facility in an aggregate principal amount of $668 million, which matures on October 29, 2024 (the “Second Lien Term Loan Facility”, and together with the First Lien Term Loan Facility are collectively referred to herein as the “Term Loan Facilities”). 

The obligations under the Credit Agreements are guaranteed by certain of our domestic subsidiaries and are secured by substantially all of our assets.

The First Lien Term Loan Facility is subject to quarterly payments of principal as follows: (i) 0.25% of the initial principal amount for each of the fiscal quarters ending March 31, 2019 and June 30, 2019; (ii) 0.625% of the initial principal amount for each of the fiscal quarters ending September 30, 2019 and December 31, 2019; and (iii) 1.25% of the initial principal amount or each fiscal quarter thereafter, with the balance payable at maturity. There are no scheduled periodic payments under the Second Lien Term Loan Facility or the New Revolving Facility.

The Term Facilities include mandatory prepayments customary for credit facilities of their nature. Subject to certain exceptions, prepayments of loans under the First Lien Term Loan Facility is subject to a prepayment premium of (i) 3.00% during the first year after the Closing Date, (ii) 2.00% during the second year after the Closing Date and (ii) 1.00% during the third year after the Closing Date, plus, if applicable, customary “breakage” costs with respect to LIBOR rate loans. Subject to certain exceptions, prepayments of loans under the Second Lien Term Loan Facility are subject to a prepayment premium of (i) with respect to the first $175 million of aggregate prepayments (the “Initial Prepayment Amount”), (a) 3.00% during the first year after the Closing Date, (b) 2.00% during the second year after the Closing Date and (c) 1.00% during the third year after the Closing Date and (ii) with respect to any amount in excess of the Initial Prepayment Amount, (a) subject to certain exceptions, a customary make-whole amount during the first or second year after the Closing Date, (b) 4.00% during the third year after the Closing Date, (c) 2.00% during the fourth year after the Closing Date and (d) 1.00% during the fifth year after the Closing Date.

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The annual interest rates for the Term Loan Facilities are as follows:

·

For the First Lien Term Loan: ABR (with a 2.50% floor) plus 5.00% for base rate loans or adjusted LIBOR (with a 1.50% floor) plus 6.00% for LIBOR Rate Loans, with two 0.25% step downs upon achieving and maintaining a first lien leverage ratio equal to or less than 2.75 to 1.00 and 2.25 to 1.00, respectively.

·

For the Second Lien Term Loan Facility: ABR (with a 2.50% floor) plus 6.00% for base rate loans or adjusted LIBOR (with a floor of 1.50%) plus 7.00%, plus 2.75% payment-in-kind interest (“PIK”) from the Closing Date until December 31, 2019, and ABR (with a 2.50% floor) plus 7.00% for base rate loans or adjusted LIBOR (with a 1.50% floor) plus 8.00%, plus 1.25% PIK thereafter (subject to certain adjustments and compliance with certain leverage ratios).

The Credit Agreements contain customary representations and warranties, events of default and covenants, including, among other things and subject to certain exceptions, covenants that restrict our ability to incur additional indebtedness, create or permit liens on assets, engage in mergers or consolidations, dispose of assets, make prepayments of certain indebtedness, pay certain dividends and other restricted payments, make investments, and engage in transactions with affiliates. The Term Loan Facilities require us to comply with financial maintenance covenants to be tested quarterly (beginning with the fiscal quarter ending March 31, 2019), consisting of a maximum net first lien leverage ratio, a maximum net total leverage ratio and a minimum fixed charge coverage ratio. As of December 31, 2018, we were in compliance with these covenants.

On October 29, 2018, in connection with the GBG Acquisition and entry into the Credit Agreements, we terminated our prior credit agreements and all outstanding obligations thereunder were repaid. See “Notes to Consolidated Financial Statements—Note 12—Debt” to our consolidated financial statements in “Part II, Item 8” of this Annual Report for additional information related to these historical credit agreements.

On April 17, 2019, the Company amended its Credit Agreements to, among other things, increase the amount of indebtedness under the First Lien Credit Agreement and amend the Company’s consolidated fixed charge ratio covenant; see “Notes to Consolidated Financial Statements—Note 21—Subsequent Events” to our consolidated financial statements in “Part II, Item 8” of this Annual Report for additional information.

New Revolving Facility

In addition to the First Lien Term Loan, 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, which matures on April 29, 2023 (the “New Revolving Facility”). The amount available to be drawn under the New Revolving Facility is based on the borrowing base values attributed to eligible inventory. There are no scheduled periodic payments under the New Revolving Facility. The obligations under the Credit Agreements, including the New Revolving Facility, are guaranteed by certain of our domestic subsidiaries and are secured by substantially all of our assets.

The annual interest rates for the New Revolving Facility is the lender’s alternate base rate (“ABR”) (with a 1.00% floor) plus 4.50% for base rate loans and adjusted LIBOR (with a 0% floor) plus 5.50% for LIBOR rate loans. The New Revolving Facility includes mandatory prepayments customary for credit facilities of this nature. Subject to certain exceptions, permanent reductions of the commitments under the New Revolving Facility are subject to a prepayment premium of (i) 3.00% during the first year after the GBG Closing Date, (ii) 2.00% during the second year after the GBG Closing Date and (ii) 1.00% during the third year after the GBG Closing Date, plus, if applicable, customary “breakage” costs with respect to LIBOR rate loans.

The New Revolving Facility, contain customary representations and warranties, events of default and covenants, including, among other things and subject to certain exceptions, covenants that restrict our to incur additional indebtedness, create or permit liens on assets, engage in mergers or consolidations, dispose of assets, make prepayments of certain indebtedness, pay certain dividends and other restricted payments, make investments, and engage in transactions with affiliates. The Credit Agreements, inclusive of the provisions of the New Revolving Facility, require us to comply with financial maintenance covenants to be tested quarterly (beginning with the fiscal quarter ending March 31, 2019),

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consisting of a maximum net first lien leverage ratio, a maximum net total leverage ratio and a minimum fixed charge coverage ratio. As of December 31, 2018, we were in compliance with these covenants.

On April 17, 2019, the Company amended its New Revolving Facility to, among other things,  increase the aggregate commitments; see “Notes to Consolidated Financial Statements—Note 21—Subsequent Events” to our consolidated financial statements in “Part II, Item 8” of this Annual Report for additional information.

PNC Receivables Facility

On the Closing Date, we entered into a three-year trade receivables securitization facility (the “PNC Receivables Facility”) pursuant to (i) a Purchase and Sale Agreement, among certain of our subsidiaries, as “Originators,” and Spring Funding, LLC, our wholly owned, bankruptcy-remote special purpose subsidiary, as Buyer (the “PSA”) and (ii) a Receivables Purchase Agreement among Spring, as Seller, the Company, as initial Servicer, certain purchasers party thereto, PNC Bank, National Association, as Administrative Agent, and PNC Capital Markets LLC, as Structuring Agent (the “RPA”). Other subsidiaries may later enter into the PNC Receivables Facility. At the end of the initial three year term, the Purchasers may elect to renew their commitments under the RPA.

Under the terms of the PSA, the Originators sell or contribute certain of their trade accounts receivable, related collections and security interests to Spring on a revolving basis. Under the terms of the RPA, Spring sells to the Purchasers an undivided ownership interest in the Receivables for up to $450 million in cash proceeds. The proceeds from the Purchasers’ investment are used to finance Spring’s purchase of the Receivables from the Originators. Spring may also use the proceeds from a subordinated loan made by the Originators to Spring to finance purchases of the Receivables from the Originators. Rather than remitting to the Purchasers the amount received upon payment of the Receivables, Spring reinvests such Receivables payments to purchase additional Receivables from the Originators through the term of the agreement, subject to the Originators generating sufficient eligible Receivables to sell to Spring in replacement of collected balances. Advances under the RPA will accrue interest based on a variable rate plus a margin.

On April 25, 2019, the Company amended its PNC Receivables Facility to, among other things, increase the maxium amount allowable for sale to PNC; see “Notes to Consolidated Financial Statements—Note 21—Subsequent Events” to our consolidated financial statements in “Part II, Item 8” of this Annual Report for additional information.

CIT Factoring Agreement

In January 2016, we entered into the CIT Factoring Agreement pursuant to which we sell or assign to CIT certain of our accounts receivable, including accounts arising from or related to sales of inventory and the rendering of services. Under the CIT Factoring Agreement, we pay factoring rates based on service type and credit profile of our customers. In connection with entering into the GBG Acquisition, we further amended and restated the CIT Factoring Agreement to, among other things, extend the term of the CIT Factoring Agreement. The CIT Factoring Agreement may be terminated by either party upon 60 days’ written notice prior to October 29, 2023, annually with 60 days’ written notice prior to October 29 of each year thereafter, or immediately upon the occurrence of an event of default as defined in the agreement.

SWIMS Factoring Agreement

In connection with the acquisition of SWIMS, SWIMS has maintained its preexisting SWIMS Factoring Agreement between SWIMS and DNB, dated August 26, 2013. The SWIMS Factoring Agreement is a combined credit assurance and factoring agreement, pursuant to which SWIMS is granted financing of up to 80% of its preapproved outstanding invoiced receivables. DNB receives an annual commission based on invoiced revenues and a quarterly commission of the maximum financing amount plus other administrative costs. The SWIMS Factoring Agreement may be terminated by SWIMS upon 14 days’ prior written notice for any reason and by DNB upon 14 days’ prior written notice for just cause. DNB may also terminate the SWIMS Factoring Agreement without any prior written notice in the event of a material breach by SWIMS.

2024 Convertible Notes

On October 29, 2018, we issued convertible promissory notes (the “2024 Convertible Notes”) in an aggregate principal amount of $25.0 million to the GSO/BTO Affiliates. The 2024 Convertible Notes are convertible at the holder’s

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option beginning on or after October 29, 2019 until the earlier to occur of (x) repayment in full of all principal and interest outstanding under the Second Lien Credit Agreement and (y) October 29, 2024 (such earlier date, the “2024 Convertible Note Maturity Date”), into shares of our common stock at a conversion price of $8.00 per share, subject to adjustment. The 2024 Convertible Notes shall not initially bear interest. From and after April 29, 2019, the 2024 Convertible Notes bear interest at the rate of 12.0% per annum. From and after October 29, 2019, the 2024 Convertible Notes shall bear interest at the rate of 16.0% per annum. Interest payments are due each January 31, April 30, July 31, and October 31. To the extent that we are unable to pay cash interest on the 2024 Convertible Notes on an interest payment date because of restrictions in the Credit Agreements or other debt agreements, an amount equal to the unpaid interest then due shall be added to the principal amount of the 2024 Convertible Notes.

From and after October 29, 2018 until October 29, 2019, upon consummation of any sales of common stock by us for cash, we may, on at least ten (10) days’ prior written notice to the holder of a 2024 Convertible Note, prepay such 2024 Convertible Note in whole but not in part solely with the net proceeds of such sale of common stock in an amount equal to the greater of (x) the principal amount of such 2024 Convertible Note, together with accrued interest through and including the date of prepayment, or (y) the value equal to (i) the number of shares of common stock that would be received upon conversion of such 2024 Convertible Note on the repayment date multiplied by the market value of the common stock as of such date, plus (ii) any accrued but unpaid interest that has not been added to the principal amount of such 2024 Convertible Note on the date of such prepayment (such greater amount, the “Prepayment Amount”). Also, the 2024 Convertible Notes shall be prepayable in whole but not in part at the Prepayment Amount: (A) from October 29, 2019 through October 29, 2021 only upon a change in control or a liquidation, or (B) from October 29, 2021 until the 2024 Convertible Note Maturity Date, in each case on at least ten (10) days' prior written notice to the holder.

The Private Placement

On October 29, 2018, we completed a private placement (the “Private Sale”) of 10,000,000 shares of common stock to certain members of management, affiliates of Ares  and the GSO/BTO Affiliates at $8.00 per share for total consideration of $80.0 million. Additionally, in connection with and in consideration of the GSO/BTO Affiliates entering into the Second Lien Term Facility and providing loans thereunder, we issued to the GSO/BTO Affiliates 23,094,501 shares of common stock for no additional consideration (together with the Private Sale, the “Private Placement”).

Modified Convertible Notes and Rollover Agreement

On September 8, 2015, we entered into the rollover agreement with the holders of convertible notes originally issued in connection with the acquisition of the Hudson business (the “Rollover Agreement”), pursuant to which, on January 28, 2016, the holders of the notes contributed their notes to us in exchange for the following:

·

1.2 million shares of common stock;

·

a cash payment of approximately $8.6 million, before expenses; and

·

an aggregate principal amount of approximately $16.5 million of Modified Convertible Notes.

The Modified Convertible Notes are structurally and contractually subordinated to our senior debt and will mature on July 28, 2021. The Modified Convertible Notes accrue interest quarterly on the outstanding principal amount at a rate of 6.5% per annum (increased to 7% as of October 1, 2017 with respect to the Modified Convertible Notes issued to Fireman Capital CPF Hudson Co-Invest LP only), which is payable 50% in cash and 50% in additional paid-in-kind notes; provided, however, that we may, in our sole discretion, elect to pay 100% of such interest in cash. The Modified Convertible Notes are convertible by each of the holders into shares of our common stock, cash, or a combination of cash and common stock, at our election.

If we elect to issue only shares of common stock upon conversion of the Modified Convertible Notes, each of the Modified Convertible Notes would be convertible, in whole but not in part, into a number of shares equal to the conversion amount divided by the market price. The conversion amount is (a) the product of (i) the market price, multiplied by (ii) the

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quotient of (A) the principal amount, divided by (B) the conversion price, minus (b) the aggregate optional prepayment amounts paid to the holder. The market price is the average of the closing prices for our common stock over the 20 trading day period immediately preceding the notice of conversion.  If we elect to pay cash with respect to a conversion of the Modified Convertible Notes, the amount of cash to be paid per share will be equal to the conversion amount. We will have the right to prepay all or any portion of the principal amount of the Modified Convertible Notes at any time so long as we make a pro rata prepayment on all of the Modified Convertible Notes.

SWIMS Overdraft Agreement

In connection with the acquisition of SWIMS, our SWIMS subsidiary has maintained a preexisting Overdraft Agreement between SWIMS and DNB, dated January 27, 2016. The Overdraft Agreement is an overdraft facility that provides SWIMS with access to up to NOK 6.0 million (approximately $0.7 million as of December 31, 2017) in total, divided between (a) an ordinary credit of NOK 3.5 million at an interest rate of 7.4% plus an additional quarterly fee of 0.4% on the outstanding principal in frame commissions and (b) an additional credit of NOK 2.5 million at an interest rate of 4.9% plus an additional quarterly fee of 0.5% on the outstanding principal in frame commissions.

Off Balance Sheet Arrangements

As a part of our working capital management, we sell certain accounts receivable through a third party financial institution in off-balance sheet arrangements. The amount sold varies each month based on the amount of underlying receivables and cash flow needs. As of December 31, 2018, we had $424.2 million of receivables outstanding under receivable purchase agreements entered into by various locations. Costs incurred on the sale of receivables was $1.7 million for the year ended December 31, 2018. These amounts are recorded in interest expense, net in the consolidated statements of net income.

 

As of December 31, 2017, the Company did not have any off balance sheet receivables outstanding nor did it incur any costs associated with off-balance sheet arrangements.

The Company did not have any other material off-balance sheet arrangements as of December 31, 2018, and December 31, 2017.

Contractual Obligations 

Not applicable. The registrant is relying on smaller reporting company disclosure requirements.

Management’s Discussion of Critical Accounting Policies

We believe that the accounting policies discussed below are important to an understanding of our financial statements because they require management to exercise judgment and estimate the effects of uncertain matters in the preparation and reporting of financial results. Accordingly, we caution that these policies and the judgments and estimates they involve are subject to revision and adjustment in the future. While they involve less judgment, management believes that other accounting policies discussed in “Notes to Consolidated Financial Statements—Note 2—Summary of Significant Accounting Policies” included in Item 8 of this Annual Report are also important to an understanding of our financial statements. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, with a date of initial application of January 1, 2018. As a result, we have changed our accounting policy for revenue recognition as described below. We applied ASC 606 using the modified retrospective approach – i.e. by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted in our financial statements for the periods prior to January 1, 2018 and continues to be reported under ASC 605. The details of the significant changes and quantitative impact of the changes are

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set out below. We applied the modified retrospective approach only to contracts that were not complete as of the date of the initial application, January 1, 2018.

Effective January 1, 2018, wholesale revenues are recorded when a contract with the customer is agreed to by both parties and product has been transferred, which generally occurs at the point of shipment from our warehouse, and recorded at the transaction price based on the amount we expect to receive. Collection is probable as the majority of shipments occur to reputable credit worthy businesses and through factored relationships which guarantee payment. Estimated reductions to revenue for customer allowances are recorded based upon history as a percentage of sales and current outstanding chargebacks. We may allow for returns based upon pre-approval or in the case of damaged goods. Such returns are estimated based on historical experience and also specific claims filed by the customer. Beginning January 1, 2018, a return liability is included in accounts payable and accrued expenses within the accompanying consolidated balance sheet, which was previously recorded net of accounts receivable. Also, effective January 1, 2018, we record a return asset receivable in prepaid expenses and other current assets within the accompanying consolidated balance sheet. Prior to January 1, 2018, inventory expected to be returned was recorded within inventories. The return asset receivable is evaluated for impairment each period. We recorded a decrease of $569 thousand to our accumulated deficit as of January 1, 2018 to record the return asset receivable and related impairment charge.

Retail store revenue is recognized at the time the customer takes possession of the related merchandise. Revenue for ecommerce sales of products ordered through our retail internet sites is recognized at the point of shipment to the customer. Prior to January 1, 2018, revenue for ecommerce sales was recorded at the point of delivery to the customer. We recorded an adjustment to our accumulated deficit as of January 1, 2018, an increase of $39 thousand, to reflect the change in accounting policy. Ecommerce revenue is reduced by an estimate for returns based on the historical rate of return as a percent of sales. Retail store revenue and ecommerce revenue exclude sales taxes.

Revenue from licensing arrangements is recognized based on actual sales when we expect royalties to exceed the minimum guarantee. For licensing arrangements in which we do not expect royalties to exceed the minimum guarantee, an estimate of the transaction price is recognized on a straight-line basis over the term of the contract. A contract asset is recorded for revenue recognized in advance of the contract payment terms, which is included in other assets within the accompanying consolidated balance sheet. Nonrefundable upfront fees are recorded as a contract liability and revenue is recognized straight-line over the term of the contract. Contract liabilities are included in other liabilities within the accompanying condensed consolidated balance sheet. Prior to January 1, 2018, revenue from licensing arrangements was recognized when earned in accordance with the terms of the underlying agreements and deemed collectible, generally based upon the higher of (a) the contractually guaranteed minimum royalty or (b) actual net sales data received from licensees. We recorded an adjustment to our accumulated deficit as of January 1, 2018, an increase of $1.3 million, to reflect the change in accounting policy.

Amounts related to shipping and handling that are billed to customers are considered to be activities to fulfill a promise to transfer the goods and are reflected in net sales, and the related costs are reflected in cost of goods sold within the accompanying consolidated statements of operations and comprehensive (loss) income. This accounting policy is consistent with our treatment of shipping and handling revenue prior to January 1, 2018.

Accounts Receivable, Factored Accounts Receivable and Allowance for Bad Debts, Sales Allowances, and Customer Chargebacks

We evaluate the ability to collect accounts receivable, factor accounts receivable with recourse and charge‑backs (customer disputes) based upon a combination of factors. Reserves for charge‑backs are recognized based on historical collection experience. A specific reserve for bad debts is taken against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Whether a receivable is past due is based on how recently payments have been received and in certain circumstances when we are aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial downgrading of credit sources, etc.). Amounts are written off against the reserve once it is established that it is remote such amounts will be collected. We also reserve for potential sales returns and allowances based on historical trends.

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Inventories

Inventory is valued at the lower of cost or net realizable value with cost determined by the first‑in, first‑out method. Inventory consists of finished goods, work-in-process and raw materials. We continually evaluate our inventory by assessing slow moving current product. Net realizable value of non‑current inventory is estimated based on historical sales trends, the impact of market trends, an evaluation of economic conditions and the value of current orders relating to future sales. Inventory reserves establish a new cost basis for inventory. Such reserves are not reversed until the related inventory is sold or otherwise disposed. Costs capitalized in inventory include the purchase price of raw materials and contract labor, plus in‑bound transportation costs and import fees and duties.

Impairment of Long‑Lived Assets, Intangible Assets and Goodwill

We assess the impairment of long‑lived assets, identifiable intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, we assess goodwill and indefinite lived intangible assets for impairment annually. Factors considered important that could trigger an impairment review other than on an annual basis include the following:

·

A significant underperformance relative to historical or projected future operating results;

·

A significant change in the manner of the use of the acquired asset or the strategy for the overall business; or

·

A significant negative industry or economic trend.

Impairment of Long-Lived Assets and Intangible Assets Subject to Amortization

When we determine that the carrying value of long‑lived assets, such as property and equipment and intangible assets subject to amortization, may not be recoverable based upon the existence of one or more of the aforementioned factors and the carrying value exceeds the estimated undiscounted cash flows expected to be generated by the asset, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management. These cash flows are calculated by netting future estimated sales against associated merchandise costs and other related expenses such as payroll, occupancy and marketing. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. The estimated cash flows used for this nonrecurring fair value measurement are considered a Level 3 input as defined in “Note 13 – Fair Value Measurement of Financial Instruments” in Item 8 hereto.

Future expected cash flows for retail store assets are based on management’s estimates of future cash flows over the remaining lease period or expected life, if shorter. We consider historical trends, expected future business trends and other factors when estimating each store’s future cash flow. We also consider factors such as: the local environment for each store location, including mall traffic and competition; the ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll, and in some cases, renegotiate lease costs. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the results of operations.

Intangible assets subject to amortization, such as customer relationships, are amortized over their estimated useful lives.

Goodwill and Indefinite Lived Intangible Assets

Goodwill and intangible assets with indefinite lives, such as trademarks, are not amortized, but are tested at least annually for impairment on December 31 of each year or when circumstances indicate their carrying value may not be recoverable. Goodwill is evaluated for impairment by determining the fair value of each reporting unit and comparing this value to its carrying value. If the fair value exceeds the carrying value, including goodwill, no further work is required and no impairment loss would be recognized. If the carrying value exceeds the fair value of the assets, goodwill impairment is

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recorded for the amount that the reporting unit's carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We review indefinite lived intangible assets for impairment on an annual basis, or when circumstances indicate their carrying value may not be recoverable. We calculate the value of the indefinite lived intangible assets using a discounted cash flow method, based on the relief from royalty method. There was no impairment charge recorded related to indefinite lived intangible assets or goodwill during the years ended December 31, 2018 and 2017. 

Stock‑Based Compensation

The cost of all employee stock-based compensation awards is measured based on the grant date fair value of those awards and recorded as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). The cost of all non-employee stock-based compensation awards is measured based on the grant date fair value of those awards and revalued each reporting period, and is recorded as compensation expense over the service period. An entity may elect either an accelerated recognition method or a straight-line recognition method for awards subject to graded vesting based on a service condition, regardless of how the fair value of the award is measured. For all stock-based compensation awards that contain graded vesting based on service conditions, we have elected to apply a straight-line recognition method to account for these awards.

We recognize stock-based compensation expense based on the fair value of the stock-based awards on the grant date, reduced by an estimate for future forfeited awards. As such, stock-based compensation expense is only recognized for those awards that are expected to ultimately vest. The fair value of stock-based awards is recognized in net income on a straight-line basis over the requisite service period. The grant date fair value for stock options is estimated using the Black-Scholes option-pricing model. The determination of the assumptions used in the Black-Scholes model required us to make significant judgments and estimates, which include the expected life of an option, the expected volatility of our common stock over the estimated life of the option, a risk-free interest rate, and the expected dividend yield. Judgment was also required in estimating the amount of stock-based awards that may be forfeited. Stock-based compensation expense associated with performance-based stock awards is based on actual financial results for targets established (up to three years in advance). The cumulative effect on current and prior periods of a change in the estimated number of performance share awards, or estimated forfeiture rate, is recognized as an adjustment to earnings in the period of the revision. If actual results differ significantly from estimates, our stock-based compensation expense and consolidated results of operations could be impacted.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred taxes are determined based on the temporary differences between the net book values and tax bases of assets and liabilities using enacted tax rates.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in the expected realization of these assets depends on our ability to generate sufficient future taxable income. The ability to generate enough taxable income to utilize the deferred tax assets depends on many factors, among which is our ability to deduct tax loss carry-forwards against future taxable income, the effectiveness of tax planning strategies and reversing deferred tax liabilities.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon a full knowledge of the facts and the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based upon the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Our policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense within the accompanying consolidated statements of operations and comprehensive income (loss).

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Recently Issued Financial Accounting Standards

For more information, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies—Financial Standards Recently Adopted” and “—Other Recently Issued Financial Accounting Standards.”

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable. The registrant is relying on smaller reporting company disclosure requirements.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

 

 

Audited Consolidated Financial Statements:

 

Report of Independent Registered Public Accounting Firm 

57

Consolidated Balance Sheets at December 31, 2018 and 2017 

58

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018 and 2017 

59

Consolidated Statements of Equity for the years ended December 31, 2018 and 2017 

60

Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 

61

Notes to Consolidated Financial Statements 

62

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Centric Brands Inc. 

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Centric Brands Inc. (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ CohnReznick LLP

We have served as the Company’s auditor since 2016.

New York, New York

May 15, 2019

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CENTRIC BRANDS INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

    

December 31,

    

December 31,

 

 

2018

 

2017

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,519

 

$

8,250

Accounts receivable, net

 

 

27,910

 

 

22,246

Sold receivables, net

 

 

33,825

 

 

 —

Inventories

 

 

342,952

 

 

31,733

Prepaid expenses and other current assets

 

 

48,378

 

 

4,832

Total current assets

 

 

482,584

 

 

67,061

Property and equipment, net