Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2019

 

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

 

11-2928178

(State or other jurisdiction of incorporation or organization)

 

(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

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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)

 

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 for 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 ☐

 

Smaller reporting company ☒

Non-accelerated filer ☒

 

Emerging growth company ☐

Accelerated filer ☐

 

 

 

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 number of shares of the registrant’s common stock outstanding as of August 14, 2019 was 58,734,731.

 

 

 

 

 

Table of Contents

CENTRIC BRANDS INC.

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

 

Item Number

 

Page

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 

4

 

Condensed Consolidated Statements of Equity (Deficit) for the three and six months ended June 30, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2. 

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

28

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4. 

Controls and Procedures

47

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

48

Item 1A. 

Risk Factors

48

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 5. 

Other Information

48

Item 6. 

Exhibits

49

 

 

 

 

Signature Page

50

 

 

 

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.          Financial Statements

 

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2019

 

2018

 

 

(unaudited)

 

(Note 1)

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,298

 

$

29,519

Accounts receivable, net

 

 

24,667

 

 

27,910

Sold receivables, net

 

 

72,332

 

 

33,825

Inventories

 

 

416,210

 

 

342,952

Prepaid expenses and other current assets

 

 

84,700

 

 

48,378

Total current assets

 

 

612,207

 

 

482,584

Property and equipment, net

 

 

93,503

 

 

93,044

Goodwill

 

 

376,132

 

 

376,132

Intangible assets, net

 

 

858,714

 

 

897,470

Operating lease right-of-use assets

 

 

212,024

 

 

 —

Other assets

 

 

12,031

 

 

9,725

Total assets

 

$

2,164,611

 

$

1,858,955

 

 

 

 

 

 

 

LIABILITIES AND EQUITY (DEFICIT)

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

633,402

 

$

525,863

Current portion of operating lease liabilities

 

 

19,767

 

 

 —

Current portion of long-term debt

 

 

24,187

 

 

11,287

Revolving credit facilities

 

 

125,411

 

 

315

Total current liabilities

 

 

802,767

 

 

537,465

Convertible notes

 

 

38,198

 

 

36,235

Long-term debt, net of current portion

 

 

1,195,850

 

 

1,195,297

Operating lease liabilities, net of current portion

 

 

200,565

 

 

 —

Other non-current liabilities

 

 

127

 

 

6,581

Total liabilities

 

 

2,237,507

 

 

1,775,578

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

Common stock, $0.10 par value: 100,000 shares authorized, 58,734 and 58,364 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

5,873

 

 

5,836

Additional paid-in capital

 

 

223,504

 

 

218,240

Accumulated other comprehensive (loss) income

 

 

28

 

 

487

Accumulated deficit

 

 

(302,301)

 

 

(141,186)

Total equity (deficit)

 

 

(72,896)

 

 

83,377

Total liabilities and equity

 

$

2,164,611

 

$

1,858,955

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

    

2019

    

2018

    

2019

    

2018

Net sales

 

$

423,207

 

$

35,965

 

$

952,104

 

$

74,784

Cost of goods sold

 

 

311,555

 

 

21,485

 

 

721,506

 

 

44,103

Gross profit

 

 

111,652

 

 

14,480

 

 

230,598

 

 

30,681

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

102,967

 

 

18,670

 

 

216,132

 

 

33,963

Depreciation and amortization

 

 

23,615

 

 

1,412

 

 

46,571

 

 

2,874

Other operating expense, net

 

 

17,744

 

 

 —

 

 

34,842

 

 

 —

Total operating expenses

 

 

144,326

 

 

20,082

 

 

297,545

 

 

36,837

Operating loss

 

 

(32,674)

 

 

(5,602)

 

 

(66,947)

 

 

(6,156)

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

46,875

 

 

2,419

 

 

92,888

 

 

4,635

Other (income) expense, net

 

 

(202)

 

 

103

 

 

(244)

 

 

102

Total other expense, net

 

 

46,673

 

 

2,522

 

 

92,644

 

 

4,737

Loss before income taxes

 

 

(79,347)

 

 

(8,124)

 

 

(159,591)

 

 

(10,893)

Income tax provision (benefit)

 

 

(95)

 

 

(2,440)

 

 

1,524

 

 

(1,124)

Net loss

 

$

(79,252)

 

$

(5,684)

 

$

(161,115)

 

$

(9,769)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(79,252)

 

$

(7,531)

 

$

(161,115)

 

$

(13,378)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(79,252)

 

$

(5,684)

 

$

(161,115)

 

$

(9,769)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(333)

 

 

(622)

 

 

(459)

 

 

141

Other comprehensive income (loss)

 

 

(333)

 

 

(622)

 

 

(459)

 

 

141

Comprehensive loss

 

$

(79,585)

 

$

(6,306)

 

$

(161,574)

 

$

(9,628)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic

 

$

(1.35)

 

$

(0.54)

 

$

(2.75)

 

$

(0.97)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - diluted

 

$

(1.35)

 

$

(0.54)

 

$

(2.75)

 

$

(0.97)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

58,649

 

 

13,980

 

 

58,588

 

 

13,766

Diluted

 

 

58,649

 

 

13,980

 

 

58,588

 

 

13,766

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4

Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

(in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Preferred Series A

 

Preferred Series A-1

 

Additional

 

Comprehensive

 

Accumulated

 

Total

 

    

Shares

    

Par Value

    

Shares

    

Par Value

    

Shares

    

Par Value

    

Paid-In Capital

    

Income (Loss)

    

Deficit

    

Equity/(Deficit)

Balance at March 31, 2018

 

13,599

 

$

1,360

 

 

50

 

$

 5

 

 

4,588

 

$

459

 

$

75,192

 

$

1,034

 

$

(21,506)

 

$

56,544

Issuance of Series A-1 convertible preferred stock

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

Stock-based compensation

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

870

 

 

 —

 

 

 —

 

 

870

Issuance of common stock, net of taxes withheld

 

480

 

 

48

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(386)

 

 

 —

 

 

 —

 

 

(338)

Foreign currency translation

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(622)

 

 

 —

 

 

(622)

Net loss

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

(5,684)

 

 

(5,684)

Balance, June 30, 2018

 

14,079

 

$

1,408

 

 

50

 

$

 5

 

 

4,588

 

$

459

 

$

75,676

 

$

412

 

$

(27,190)

 

$

50,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

58,570

 

$

5,857

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

221,522

 

$

361

 

$

(223,049)

 

$

4,691

Issuance of common stock, net of taxes withheld

 

164

 

 

16

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(338)

 

 

 —

 

 

 —

 

 

(322)

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,320

 

 

 —

 

 

 —

 

 

2,320

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(333)

 

 

 —

 

 

(333)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(79,252)

 

 

(79,252)

Balance, June 30, 2019

 

58,734

 

$

5,873

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

223,504

 

$

28

 

$

(302,301)

 

$

(72,896)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

(in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Preferred Series A

 

Preferred Series A-1

 

Additional

 

Comprehensive

 

Accumulated

 

Total

 

    

Shares

    

Par Value

    

Shares

    

Par Value

    

Shares

    

Par Value

    

Paid-In Capital

    

Income (Loss)

    

Deficit

    

Equity/(Deficit)

Balance at January 1, 2018

 

13,488

 

$

1,349

 

 

50

 

$

 5

 

 

 —

 

$

 —

 

$

61,314

 

$

271

 

$

(17,421)

 

$

45,518

Issuance of Series A-1 convertible preferred stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,588

 

 

459

 

 

13,305

 

 

 —

 

 

 —

 

 

13,764

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,507

 

 

 —

 

 

 —

 

 

1,507

Issuance of common stock, net of taxes withheld

 

591

 

 

59

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(450)

 

 

 —

 

 

 —

 

 

(391)

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

141

 

 

 —

 

 

141

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,769)

 

 

(9,769)

Balance, June 30, 2018

 

14,079

 

$

1,408

 

 

50

 

$

 5

 

 

4,588

 

$

459

 

$

75,676

 

$

412

 

$

(27,190)

 

$

50,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

58,364

 

$

5,836

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

218,240

 

$

487

 

$

(141,186)

 

$

83,377

Issuance of common stock, net of taxes withheld

 

370

 

 

37

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(452)

 

 

 —

 

 

 —

 

 

(415)

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,716

 

 

 —

 

 

 —

 

 

5,716

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(459)

 

 

 —

 

 

(459)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(161,115)

 

 

(161,115)

Balance, June 30, 2019

 

58,734

 

$

5,873

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

223,504

 

$

28

 

$

(302,301)

 

$

(72,896)

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

6

Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

    

2019

    

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(161,115)

 

$

(9,769)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

46,571

 

 

2,874

Amortization of deferred financing costs and discounts

 

 

10,101

 

 

588

Paid-in-kind interest

 

 

9,861

 

 

828

Stock-based compensation

 

 

5,716

 

 

1,507

Amortization of inventory step up

 

 

9,036

 

 

 —

Amortization of operating lease right-of-use assets

 

 

13,676

 

 

 —

Deferred income taxes, net

 

 

(482)

 

 

(1,318)

Other non-cash adjustments

 

 

1,494

 

 

100

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(354,210)

 

 

6,176

Operating lease liability

 

 

(12,125)

 

 

 —

Inventories

 

 

(82,188)

 

 

88

Prepaid expenses and other assets

 

 

(40,290)

 

 

(1,426)

Accounts payable and accrued expenses

 

 

112,259

 

 

321

Other liabilities

 

 

(4,233)

 

 

183

Net cash provided by (used in) operating activities

 

 

(445,929)

 

 

152

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Collection of deferred purchase price of sold receivables

 

 

319,137

 

 

 —

Purchases of property and equipment

 

 

(6,339)

 

 

(770)

Net cash provided by (used in) investing activities

 

 

312,798

 

 

(770)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Repayment of long-term debt

 

 

(3,226)

 

 

(938)

Proceeds from (payments on) line of credit, net

 

 

125,096

 

 

(1,354)

Repayment of finance leases

 

 

(1,685)

 

 

 —

Payment of deferred financing costs

 

 

(1,500)

 

 

 —

Taxes paid in lieu of shares issued for stock-based compensation

 

 

(415)

 

 

(391)

Net cash provided by (used in) financing activities

 

 

118,270

 

 

(2,683)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(360)

 

 

80

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(15,221)

 

 

(3,221)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, at beginning of period

 

 

29,519

 

 

8,250

CASH AND CASH EQUIVALENTS, at end of period

 

$

14,298

 

$

5,029

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

Interest paid

 

$

71,055

 

$

3,252

Income taxes paid

 

$

138

 

$

170

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

Unpaid purchases of property and equipment

 

$

20

 

$

41

Beneficial interest obtained in exchange for securitized trade receivables

 

$

381,437

 

$

 —

Conversion of short-term convertible notes

 

$

 —

 

$

13,764

Additions to operating lease liabilities

 

$

232,497

 

$

 —

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

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CENTRIC BRANDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands (unless otherwise indicated) except share and per share data)

(unaudited)

 

1.    Business Description and Basis of Presentation

Centric Brands Inc. (“Centric” or the “Company”) is a leading lifestyle brands collective, bringing together creative minds from the worlds of fashion and commerce, sourcing, technology, marketing, digital and entertainment. The Company designs, produces, merchandises, manages and markets kidswear, accessories, and men’s and women’s apparel under owned, licensed and private label brands. The Company’s distinctive image has been developed across an expanding number of products, brands, sales channels and markets. The Company licenses over 100 brands or produces private label products across 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. The Company’s 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. The Company also sell products over the web through retail partners such as Walmart.com, Macy’s.com and Nordstrom.com. The Company also distributes apparel and other products through Company-owned retail stores, ecommerce websites, and partner shop-in-shops.

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 global movement, and SWIMS®, a Scandinavian lifestyle brand best known for its range of fashion-forward, water-friendly footwear, apparel and accessories (collectively, the “Owned Brands”).

Centric and its subsidiaries are collectively referred to herein as the “Company,” “we,” “us,” “our,” and “ourselves,” unless the context indicates otherwise.

On October 29, 2018, the Company acquired from Global Brands Group Holding Limited (“GBG”) and GBG USA Inc., a wholly-owned subsidiary of GBG (“GBG USA”), a significant part of GBG’s North American business (“GBG Acquisition”), including the wholesale, retail and e-commerce operations comprising all of their North American kids business, all of their North American accessories business and a majority of their West Coast and Canadian fashion businesses (the “GBG Business”). Effective upon the consummation of the GBG Acquisition, the Company changed its name from Differential Brands Group Inc. to Centric Brands Inc. and changed its trading symbol on NASDAQ from DFBG to CTRC.

Prior to the GBG Acquisition, the Company organized its business into the following three reportable segments: Wholesale, Consumer Direct and Corporate and other. Subsequent to the GBG Acquisition, the Company implemented organizational changes that have impacted the manner in which it manages itself. Accordingly, the Company realigned its business into the following three reportable segments: (i) Kids, (ii) Accessories and (iii) Men’s & Women’s Apparel. See “Note 15 – Segment Information.”

The Company continues to be a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited financial statements and footnotes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“2018 10-K”)  filed on May 16, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations.

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The condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position,  its results of operations and cash flows for the interim periods presented. The operating results for the three and six months ended June  30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year 2019 or for any other interim period. The December 31, 2018 consolidated balance sheet is condensed from the audited financial statements as of that date. 

The condensed consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements.  Actual results may differ from those estimates.

 

2.    Summary of Significant Accounting Policies

Information regarding significant accounting policies is contained in “Note 2 – Summary of Significant Accounting Policies” of the consolidated financial statements in the 2018 10-K.

Revenue Recognition

The Company accounts for its revenues in accordance with Accounting Standards Codification, Revenue from Contracts with Customers, (“ASC 606”).

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 the Company’s warehouse, and recorded at the transaction price based on the amount the Company expects 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. The Company 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. A refund liability is included in accounts payable and accrued expenses within the accompanying condensed consolidated balance sheets. Also, the Company records a return asset receivable in prepaid expenses and other current assets within the accompanying condensed consolidated balance sheets. The return asset receivable is evaluated for impairment each period.

Retail store revenue is recognized at the time the customer takes possession of the related merchandise. Revenue for ecommerce sales of products ordered through the Company’s retail internet sites are recognized at the point of shipment to the customer. Retail store revenue and ecommerce revenue exclude sales taxes collected from the customer.

Revenue from licensing arrangements is recognized based on actual sales when the Company expects royalties to exceed the minimum guarantee. For licensing arrangements in which the Company does 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 condensed 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.

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 condensed consolidated statements of operations and comprehensive loss.

Concentration of Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, accounts receivable and factored accounts receivable. The Company maintains cash

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and cash equivalents with various financial institutions, which is designed to limit exposure to any one institution. Periodic evaluations are performed of the relative credit rating of those financial institutions that are considered in the Company’s investment strategy. The vast majority of trade receivables from sales to customers are subsequently sold to a financial institution pursuant to a trade receivables securitization facility. The sale of trade receivables are made on a non-recourse basis; however, such sales are guaranteed through credit insurance purchased from an unrelated financial institution. When insured, the Company is not at risk if a customer fails to pay. For trade receivables not sold to a financial institution, the Company generally does not require collateral. As of June 30, 2019, the net deferred purchase price of trade receivables sold pursuant to the RPA (as defined below) totaled $72.3  million. The RPA was not in place as of June 30, 2018.  See “Note 4 – Accounts Receivables.”

The Company provides an allowance for estimated losses to be incurred in the collection of accounts receivable based upon the aging of outstanding balances, margin support and other dilution-related items. The net carrying value approximates the fair value for these assets. Such losses have historically been within management’s expectations. Uncollectible accounts are written off once collection efforts are deemed by management to have been exhausted.

Financial Accounting Standards Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC Topic 842, Leases (“ASC 842”), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASC 842 as of January 1, 2019, using the modified retrospective approach. The Company elected the ‘comparatives under ASC 840 option’ as a transitional practical expedient, which allows the Company to initially apply the new lease requirements at the effective date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. It also allows the Company to report comparative periods in the financial statements under previous GAAP under ASC 840, Leases (“ASC 840”). There was no cumulative-effect adjustment recorded in connection with our adoption of ASC 842.  The Company also elected the ‘package of practical expedients’ permitted under the transition guidance, which allowed the Company to (i) carry forward the historical lease classification, (ii) forgo reassessment of whether any expired or existing contracts contain leases, and (iii) forgo reassessment of whether any previously unamortized initial direct costs continue to meet the definition of initial direct costs under ASC 842. However, any initial direct costs after the effective date will be included within the ROU asset under ASC 842. The Company did not elect the ‘hindsight’ practical expedient to reassess the lease term for existing leases.

For the accounting policy practical expedients, the Company elected not to recognize ROU assets and lease liabilities for short-term leases which have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Additionally, the Company elected the non-separation of lease and non-lease components, and as a result, the Company does not need to account for lease components (e.g., fixed payments including rent) separately from the non-lease components (e.g., common-area maintenance costs) for all leases.

The adoption of ASC 842 resulted in the recognition of ROU assets of $214.0 million with corresponding lease liabilities of $220.7 million. As a result of adopting the standard, $6.7 million of pre-existing liabilities for deferred rent, unfavorable leases and various lease incentives were reclassified as a component of the ROU assets.

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There was no adjustment to the opening balance of retained earnings upon adoption of ASC 842 given the nature of the impacts and the other transition practical expedients elected by the Company. Adoption of ASC 842 impacted the Company’s results on January 1, 2019, as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments due

 

 

 

    

December 31, 2018

    

to ASC 842

    

January 1, 2019

Operating lease ROU assets  (1) (2) (4)

 

$

 —

 

$

214,000

 

$

214,000

 

 

 

 

 

 

 

 

 

 

Current portion of operating lease liabilities (3)

 

$

 —

 

$

20,883

 

$

20,883

Accounts payable and accrued expenses (1)

 

 

525,863

 

 

(367)

 

 

525,496

Operating lease liabilities (3)

 

 

 —

 

 

199,857

 

 

199,857

Other non-current liabilities (4)

 

 

6,581

 

 

(6,373)

 

 

208

Total

 

$

532,444

 

$

214,000

 

$

746,444


(1)

Represents the reclassification of deferred rent, unfavorable leases and lease incentives to operating lease ROU assets. 

(2)

Represents capitalization of operating lease assets.

(3)

Represents recognition of operating lease liabilities.

(4)

Represents reclassification of deferred rent, unfavorable leases and lease incentives to operating lease ROU assets.

The standard did not materially impact the Company’s consolidated net earnings and had no material impact on the condensed consolidated statement of cash flows. For further information regarding leases, see “Note 10Leases.”

Leases

In general, leases are evaluated and classified as either operating or finance leases. The Company has finance leases, however, finance leases are not material to the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive loss or condensed consolidated statements  of cash flows.

The assets related to the Company’s operating leases are included in operating lease ROU assets, and the current and long-term portions of liabilities related to the Company’s operating leases are included in current portion of operating lease liabilities and operating lease liabilities, respectively, on the condensed consolidated balance sheet as of June 30, 2019. Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company cannot determine the implicit rate in its leases, the Company uses its estimated incremental borrowing rate based on information available at the date of the commencement of the lease in calculating the present value of its existing lease payments. The incremental borrowing rate is determined using the U.S. Treasury rate adjusted to account for the Company’s credit rating and the collateralized nature of operating leases. The operating lease asset also includes any lease payments made and unamortized lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line method over the term of the lease.

Recently Issued Financial Accounting Standards

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses — Measurement of Credit Losses on Financial Instruments, an accounting standards update that introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. This includes accounts receivable, trade receivables, loans, held-to-maturity debt securities, net investments in leases and certain off-balance sheet credit exposures.  The guidance also modifies the impairment model for available-for-sale debt securities. The update is effective for fiscal years beginning after December 15, 2019 and interim periods within that reporting period.  The Company is currently assessing the potential effects this update may have on its condensed consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from

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the goodwill impairment test. Under this guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This standard is effective beginning in the first quarter of 2020, with early adoption permitted. The Company is currently assessing the impact of the new guidance.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The Company is currently assessing the impact of the new guidance.

 

 

3.    GBG Acquisition

On October 29, 2018, the Company completed the GBG Acquisition for a preliminary purchase price of $1.2 billion. To finance the acquisition, the Company entered into the Credit Agreements (as defined below). The First Lien Credit Agreement (as defined below) provides for a senior secured asset based revolving credit facility with commitments in an aggregate principal amount of $150.0 million, which subsequently increased to $200.0 million, and a senior secured term loan credit facility in an aggregate principal amount of $645.0 million. The Second Lien Credit Agreement (as defined below) provides for a second lien term loan facility in an aggregate principal amount of $668.0 million. See “Note 8 – Debt” for a discussion of the terms of the Credit Agreements and amendments thereto.

The purchase price allocation is subject to adjustment until the Company has completed its analysis within the measurement period. The purchase price allocation is preliminary and the finalization of the Company’s purchase price allocation may result in changes in the valuation of assets acquired and liabilities assumed. The Company will finalize the purchase price allocation as soon as practicable, but not to exceed one year following October 29, 2018. No material changes were made to the preliminary purchase price allocation during the three months ended June 30, 2019.

Unaudited pro forma financial information

The following table presents our unaudited pro forma results for the three months ended June 30, 2018 and six months ended June  30, 2018, as if the GBG Acquisition had occurred on January 1, 2018. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired tangible and

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intangible assets, and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees.

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

    

2018

 

2018

    

 

 

(in thousands)

 

(in thousands)

 

Net sales

 

$

381,346

 

$

980,467

 

Cost of goods sold

 

 

305,954

 

 

754,980

 

Gross margin

 

 

75,392

 

 

225,487

 

Gross margin % of net sales

 

 

19.8

%

 

23.0

%

Operating expenses

 

 

 

 

 

 

 

Selling, general and administrative

 

 

144,596

 

 

279,884

 

Depreciation and amortization

 

 

22,915

 

 

46,349

 

Total operating expenses

 

 

167,511

 

 

326,233

 

Operating loss

 

 

(92,119)

 

 

(100,746)

 

Interest expense

 

 

37,952

 

 

76,065

 

Other (income) expense, net

 

 

103

 

 

(17,573)

 

Loss before income taxes

 

 

(130,174)

 

 

(159,238)

 

Income tax provision (benefit)

 

 

(2,439)

 

 

(1,123)

 

Net loss

 

$

(127,735)

 

$

(158,115)

 

 

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

 

4.    Accounts Receivable

PNC Receivables Facility

In October 2018, in connection with the GBG Acquisition, the Company entered into a three-year trade receivables securitization facility (the PNC Receivables Facility) pursuant to (i) a Purchase and Sale Agreement, among certain subsidiaries of the Company, as “Originators,” and Spring Funding, LLC (“Spring”), a wholly owned, bankruptcy-remote special purpose subsidiary of the Company, as “Buyer” (the “PSA”) and (ii) a Receivables Purchase Agreement among Spring, as “Seller”, the Company, as initial “Servicer”, certain purchasers party thereto (the “Purchasers”), PNC Bank, National Association, as Administrative Agent, and PNC Capital Markets LLC, as Structuring Agent (the “RPA”). Other subsidiaries of the Company 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 (the “Receivables”) to Spring on a revolving basis. Under the terms of the RPA, Spring sells to the Purchasers the Receivables for up to $450.0 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 pursuant to (i) an amendment to the PSA (“PSA Amendment”) and (ii) an amendment to the RPA (“RPA Amendment”).

Under the terms of the PSA Amendment, the Originators continue to sell or contribute certain of their Receivables to Spring on a revolving basis. However, the PSA Amendment redefined Originators to include an additional subsidiary

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of the Company. Under the terms of the RPA Amendment, Spring can sell the Receivables for up to $600.0 million in cash proceeds to Purchasers, an increase of $150.0 million.

Accounts receivable consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

    

June 30, 2019

    

December 31, 2018

Insured receivables sold

    

$

296,623

    

$

380,595

Uninsured receivables sold

 

 

45,706

 

 

43,630

Total receivables sold

 

 

342,329

 

 

424,225

Purchase price of sold receivables

 

 

(245,700)