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 September 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 November 14, 2019 was 59,056,743.

 

 

 

 

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 September 30, 2019 and December 31, 2018

3

 

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

4

 

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

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

29

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4. 

Controls and Procedures

48

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

49

Item 1A. 

Risk Factors

49

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3. 

Defaults upon Senior Securities

49

Item 4. 

Mine Safety Disclosures

49

Item 5. 

Other Information

49

Item 6. 

Exhibits

50

 

 

 

 

Signature Page

51

 

 

 

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)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2019

 

2018

 

 

(unaudited)

 

(Note 1)

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,986

 

$

29,519

Accounts receivable, net

 

 

18,197

 

 

27,910

Sold receivables, net

 

 

85,450

 

 

33,825

Inventories

 

 

443,303

 

 

342,952

Prepaid expenses and other current assets

 

 

83,437

 

 

48,378

Total current assets

 

 

649,373

 

 

482,584

Property and equipment, net

 

 

91,478

 

 

93,044

Goodwill

 

 

356,814

 

 

376,132

Intangible assets, net

 

 

838,690

 

 

897,470

Operating lease right-of-use assets

 

 

206,096

 

 

 —

Other assets

 

 

12,222

 

 

9,725

Total assets

 

$

2,154,673

 

$

1,858,955

 

 

 

 

 

 

 

LIABILITIES AND EQUITY (DEFICIT)

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

707,069

 

$

525,863

Current portion of operating lease liabilities

 

 

28,059

 

 

 —

Current portion of long-term debt

 

 

28,219

 

 

11,287

Revolving credit facilities

 

 

46,360

 

 

315

Total current liabilities

 

 

809,707

 

 

537,465

Convertible notes

 

 

39,965

 

 

36,235

Long-term debt, net of current portion

 

 

1,197,636

 

 

1,195,297

Operating lease liabilities, net of current portion

 

 

186,680

 

 

 —

Other non-current liabilities

 

 

131

 

 

6,581

Total liabilities

 

 

2,234,119

 

 

1,775,578

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

Common stock, $0.10 par value: 100,000 shares authorized, 58,738 and 58,364 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

5,873

 

 

5,836

Additional paid-in capital

 

 

226,461

 

 

218,240

Accumulated other comprehensive (loss) income

 

 

(500)

 

 

487

Accumulated deficit

 

 

(311,280)

 

 

(141,186)

Total equity (deficit)

 

 

(79,446)

 

 

83,377

Total liabilities and equity

 

$

2,154,673

 

$

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 September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

Net sales

 

$

712,429

 

$

39,830

 

$

1,664,533

 

$

114,614

Cost of goods sold

 

 

534,172

 

 

22,671

 

 

1,255,678

 

 

66,774

Gross profit

 

 

178,257

 

 

17,159

 

 

408,855

 

 

47,840

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

99,318

 

 

25,029

 

 

315,450

 

 

58,992

Depreciation and amortization

 

 

25,121

 

 

1,378

 

 

71,692

 

 

4,252

Other operating expense, net

 

 

14,121

 

 

 —

 

 

48,963

 

 

 —

Total operating expenses

 

 

138,560

 

 

26,407

 

 

436,105

 

 

63,244

Operating income (loss)

 

 

39,697

 

 

(9,248)

 

 

(27,250)

 

 

(15,404)

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

48,808

 

 

2,462

 

 

141,696

 

 

7,097

Other (income) expense, net

 

 

(182)

 

 

22

 

 

(426)

 

 

124

Total other expense, net

 

 

48,626

 

 

2,484

 

 

141,270

 

 

7,221

Loss before income taxes

 

 

(8,929)

 

 

(11,732)

 

 

(168,520)

 

 

(22,625)

Income tax provision (benefit)

 

 

50

 

 

(1,151)

 

 

1,574

 

 

(2,275)

Net loss

 

$

(8,979)

 

$

(10,581)

 

$

(170,094)

 

$

(20,350)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(8,979)

 

$

(12,473)

 

$

(170,094)

 

$

(25,898)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,979)

 

$

(10,581)

 

$

(170,094)

 

$

(20,350)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(528)

 

 

(4)

 

 

(987)

 

 

137

Other comprehensive income (loss)

 

 

(528)

 

 

(4)

 

 

(987)

 

 

137

Comprehensive loss

 

$

(9,507)

 

$

(10,585)

 

$

(171,081)

 

$

(20,213)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic

 

$

(0.15)

 

$

(0.89)

 

$

(2.90)

 

$

(1.87)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - diluted

 

$

(0.15)

 

$

(0.89)

 

$

(2.90)

 

$

(1.87)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

58,736

 

 

14,085

 

 

58,638

 

 

13,873

Diluted

 

 

58,736

 

 

14,085

 

 

58,638

 

 

13,873

 

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 June 30, 2018

 

14,079

 

$

1,408

 

 

50

 

$

 5

 

 

4,588

 

$

459

 

$

75,676

 

$

412

 

$

(27,190)

 

$

50,770

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

614

 

 

 —

 

 

 —

 

 

614

Issuance of common stock, net of taxes withheld

 

53

 

 

 5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(42)

 

 

 —

 

 

 —

 

 

(37)

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4)

 

 

 —

 

 

(4)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,581)

 

 

(10,581)

Balance, September 30, 2018

 

14,132

 

$

1,413

 

 

50

 

$

 5

 

 

4,588

 

$

459

 

$

76,248

 

$

408

 

$

(37,771)

 

$

40,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

58,734

 

$

5,873

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

223,504

 

$

28

 

$

(302,301)

 

$

(72,896)

Issuance of common stock, net of taxes withheld

 

 4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,957

 

 

 —

 

 

 —

 

 

2,957

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(528)

 

 

 —

 

 

(528)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,979)

 

 

(8,979)

Balance, September 30, 2019

 

58,738

 

$

5,873

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

226,461

 

$

(500)

 

$

(311,280)

 

$

(79,446)

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine 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

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,121

 

 

 —

 

 

 —

 

 

2,121

Issuance of common stock, net of taxes withheld

 

644

 

 

64

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(492)

 

 

 —

 

 

 —

 

 

(428)

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

137

 

 

 —

 

 

137

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,350)

 

 

(20,350)

Balance, September 30, 2018

 

14,132

 

$

1,413

 

 

50

 

$

 5

 

 

4,588

 

$

459

 

$

76,248

 

$

408

 

$

(37,771)

 

$

40,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

58,364

 

$

5,836

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

218,240

 

$

487

 

$

(141,186)

 

$

83,377

Issuance of common stock, net of taxes withheld

 

374

 

 

37

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(452)

 

 

 —

 

 

 —

 

 

(415)

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,673

 

 

 —

 

 

 —

 

 

8,673

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(987)

 

 

 —

 

 

(987)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(170,094)

 

 

(170,094)

Balance, September 30, 2019

 

58,738

 

$

5,873

 

 

 —

 

$

 —

 

 

 —

 

$

 —

 

$

226,461

 

$

(500)

 

$

(311,280)

 

$

(79,446)

 

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)

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

    

2019

    

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(170,094)

 

$

(20,350)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

71,692

 

 

4,252

Amortization of deferred financing costs and discounts

 

 

14,891

 

 

896

Amortization of operating lease right-of-use assets

 

 

20,077

 

 

 —

Paid-in-kind interest

 

 

16,575

 

 

1,300

Stock-based compensation

 

 

8,673

 

 

2,121

Deferred taxes

 

 

(446)

 

 

(2,577)

Amortization of inventory step up

 

 

9,546

 

 

 —

Other non-cash adjustments

 

 

611

 

 

461

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(539,631)

 

 

2,439

Operating lease liability

 

 

(18,108)

 

 

 —

Inventories

 

 

(88,223)

 

 

(2,149)

Prepaid expenses and other assets

 

 

(39,234)

 

 

475

Accounts payable and accrued expenses

 

 

184,450

 

 

9,534

Other liabilities

 

 

(4,229)

 

 

125

Net cash used in operating activities

 

 

(533,450)

 

 

(3,473)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Collection of deferred purchase price of sold receivables

 

 

499,527

 

 

 —

Termination fees paid on leases

 

 

(346)

 

 

 —

Purchases of property and equipment

 

 

(10,074)

 

 

(976)

Net cash provided by (used in) investing activities

 

 

489,107

 

 

(976)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Repayment of long-term debt

 

 

(7,256)

 

 

(2,188)

Proceeds from line of credit, net

 

 

46,045

 

 

2,247

Repayment of finance leases

 

 

(2,561)

 

 

 —

Payment of deferred financing costs

 

 

(1,500)

 

 

 —

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

 

 

(415)

 

 

(428)

Net cash provided by (used in) financing activities

 

 

34,313

 

 

(369)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(503)

 

 

82

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(10,533)

 

 

(4,736)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, at beginning of period

 

 

29,519

 

 

8,250

CASH AND CASH EQUIVALENTS, at end of period

 

$

18,986

 

$

3,514

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

Interest paid

 

$

108,548

 

$

6,624

Income taxes paid

 

$

138

 

$

172

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

Unpaid purchases of property and equipment

 

$

368

 

$

58

Beneficial interest obtained in exchange for securitized trade receivables

 

$

642,661

 

$

 —

Conversion of short-term convertible notes

 

$

 —

 

$

13,764

Additions to operating lease liabilities

 

$

241,951

 

$

 —

 

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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Table of Contents

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 nine months ended September  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 (“ASC”), 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 sold receivables, net. The Company maintains cash and cash

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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 September 30, 2019, the deferred purchase price of trade receivables sold pursuant to the RPA (as defined below) totaled $102.7 million. As of December 31, 2018, the deferred purchase price of trade receivables sold pursuant to the RPA totaled $59.3 million.  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 September 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, 2022 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 during the fourth quarter of 2019.

During the three months ended September 30, 2019, the Company obtained additional information regarding the fair value of certain acquired assets and liabilities based on facts that existed at the date of acquisition. The following table sets forth the current allocation of the purchase price to the net assets acquired and liabilities assumed, including measurement period adjustments (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Preliminary Purchase

    

Measurement Period

    

Revised Purchase

 

 

Price Allocation

 

Adjustments

 

Price Allocation

Assets acquired and liabilities assumed:

 

 

  

 

 

  

 

 

  

Accounts receivable

 

$

65,106

 

$

328

 

$

65,434

Inventories

 

 

371,605

 

 

21,698

 

 

393,303

Prepaid expenses and other current assets

 

 

56,380

 

 

 —

 

 

56,380

Property and equipment

 

 

86,971

 

 

 —

 

 

86,971

Other assets

 

 

41

 

 

 —

 

 

41

Accounts payable and accrued expenses

 

 

(589,849)

 

 

(2,708)