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, 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:  0-18926

 

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)

 

(Zip Code)

 

(646)  582-6000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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 Exchange Act).  Yes ☐  No ☒

 

The number of shares of the registrant’s common stock outstanding as of November 14, 2018 was 58,335,575.

 

 

 


 

Table of Contents

CENTRIC BRANDS INC.

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

 

 

 

Page

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018, December 31, 2017 and September 30, 2017

3

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2018 and 2017 

4

 

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2018 and 2017

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2. 

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

36

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

49

Item 4. 

Controls and Procedures

49

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

50

Item 1A. 

Risk Factors

50

Item 5. 

Other Information

50

Item 6. 

Exhibits

51

 

 

 

SIGNATURES 

54

 

 

 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.          Financial Statements

 

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

September 30, 

 

 

2018

 

2017

 

2017

 

 

(unaudited)

 

(Note 1)

 

(unaudited)

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,514

 

$

8,250

 

$

2,792

Accounts receivable, net

 

 

21,490

 

 

22,246

 

 

23,732

Inventories

 

 

33,567

 

 

31,733

 

 

38,004

Prepaid expenses and other current assets

 

 

5,157

 

 

4,832

 

 

5,170

Total current assets

 

 

63,728

 

 

67,061

 

 

69,698

Property and equipment, net

 

 

7,281

 

 

8,417

 

 

9,287

Goodwill

 

 

8,406

 

 

8,380

 

 

8,471

Intangible assets, net

 

 

87,195

 

 

89,332

 

 

90,414

Other assets

 

 

2,255

 

 

484

 

 

515

Total assets

 

$

168,865

 

$

173,674

 

$

178,385

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

35,251

 

$

22,204

 

$

26,218

Short-term convertible note

 

 

 —

 

 

13,694

 

 

13,565

Current portion of long-term debt

 

 

3,438

 

 

2,813

 

 

2,188

Total current liabilities

 

 

38,689

 

 

38,711

 

 

41,971

Line of credit

 

 

24,414

 

 

21,254

 

 

20,819

Convertible notes

 

 

14,866

 

 

13,866

 

 

13,549

Long-term debt, net of current portion

 

 

42,309

 

 

44,896

 

 

45,444

Deferred income taxes, net

 

 

4,093

 

 

6,650

 

 

12,880

Other liabilities

 

 

3,732

 

 

3,554

 

 

3,591

Total liabilities

 

 

128,103

 

 

128,931

 

 

138,254

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.10 par value: 50,000 shares authorized, issued and outstanding at September 30, 2018, December 31, 2017 and September 30, 2017

 

 

 5

 

 

 5

 

 

 5

Series A-1 convertible preferred stock, $0.10 par value: 4,587,964,  0 and 0 shares authorized,  issued and outstanding at September 30, 2018, December 31, 2017 and September 30, 2017, respectively

 

 

459

 

 

 —

 

 

 —

Common stock, $0.10 par value: 100,000,000 shares authorized, 14,132,311,  13,488,366 and 13,330,849 shares issued and outstanding at September 30, 2018, December 31, 2017 and September 30, 2017, respectively

 

 

1,413

 

 

1,349

 

 

1,333

Additional paid-in capital

 

 

76,248

 

 

61,314

 

 

60,384

Accumulated other comprehensive income

 

 

408

 

 

271

 

 

740

Accumulated deficit

 

 

(37,771)

 

 

(18,196)

 

 

(22,331)

Total equity

 

 

40,762

 

 

44,743

 

 

40,131

Total liabilities and equity

 

$

168,865

 

$

173,674

 

$

178,385

 

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

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CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

   

2018

    

2017

   

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

39,831

 

$

42,389

 

$

114,614

 

$

118,944

Cost of goods sold

 

 

22,671

 

 

24,334

 

 

66,774

 

 

66,067

Gross profit

 

 

17,160

 

 

18,055

 

 

47,840

 

 

52,877

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

25,029

 

 

15,334

 

 

58,992

 

 

47,633

Depreciation and amortization

 

 

1,377

 

 

1,493

 

 

4,252

 

 

4,526

Total operating expenses

 

 

26,406

 

 

16,827

 

 

63,244

 

 

52,159

Operating (loss) income

 

 

(9,246)

 

 

1,228

 

 

(15,404)

 

 

718

Interest expense

 

 

2,462

 

 

2,262

 

 

7,097

 

 

6,536

Other expense (income), net

 

 

21

 

 

(12)

 

 

124

 

 

(1)

Loss before income taxes

 

 

(11,729)

 

 

(1,022)

 

 

(22,625)

 

 

(5,817)

Income tax (benefit) provision

 

 

(1,150)

 

 

(839)

 

 

(2,275)

 

 

776

Net loss

 

$

(10,579)

 

$

(183)

 

$

(20,350)

 

$

(6,593)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders (Note 11)

 

$

(12,471)

 

$

(1,565)

 

$

(25,898)

 

$

(10,692)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,579)

 

$

(183)

 

$

(20,350)

 

$

(6,593)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(4)

 

 

615

 

 

137

 

 

961

Other comprehensive (loss) income

 

 

(4)

 

 

615

 

 

137

 

 

961

Comprehensive (loss) income

 

$

(10,583)

 

$

432

 

$

(20,213)

 

$

(5,632)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic

 

$

(0.89)

 

$

(0.12)

 

$

(1.87)

 

$

(0.80)

Loss per common share - diluted

 

$

(0.89)

 

$

(0.12)

 

$

(1.87)

 

$

(0.80)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,085

 

 

13,322

 

 

13,873

 

 

13,306

Diluted

 

 

14,085

 

 

13,322

 

 

13,873

 

 

13,306

 

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

 

 

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Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Balance, January 1, 2017

 

13,239

 

$

1,324

 

 

50

 

$

 5

 

 

 —

 

$

 —

 

$

59,154

 

$

(221)

 

$

(15,738)

 

$

44,524

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,339

 

 

 —

 

 

 —

 

 

1,339

Issuance of restricted common stock, net of taxes withheld

 

92

 

 

 9

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(109)

 

 

 —

 

 

 —

 

 

(100)

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

961

 

 

 —

 

 

961

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,593)

 

 

(6,593)

Balance, September 30, 2017

 

13,331

 

$

1,333

 

 

50

 

$

 5

 

 

 —

 

$

 —

 

$

60,384

 

$

740

 

$

(22,331)

 

$

40,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018, as previously reported

 

13,488

 

$

1,349

 

 

50

 

$

 5

 

 

 —

 

$

 —

 

$

61,314

 

$

271

 

$

(18,196)

 

$

44,743

Impact of change in accounting policy

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

775

 

 

775

Adjusted 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 restricted 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

 

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

 

 

5


 

Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

    

2018

    

2017

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(20,350)

 

$

(6,593)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

4,252

 

 

4,526

Amortization of deferred financing costs

 

 

328

 

 

326

Amortization of convertible notes discount

 

 

568

 

 

516

Paid-in-kind interest

 

 

1,300

 

 

1,206

Stock-based compensation

 

 

2,121

 

 

1,339

Provision for bad debts

 

 

457

 

 

181

Loss on disposal of assets

 

 

 4

 

 

 —

Deferred taxes

 

 

(2,577)

 

 

1,648

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

2,439

 

 

(3,493)

Inventories

 

 

(2,149)

 

 

(13,823)

Prepaid expenses and other assets

 

 

475

 

 

(916)

Accounts payable and accrued expenses

 

 

9,534

 

 

7,943

Other liabilities

 

 

125

 

 

(38)

Net cash used in operating activities

 

 

(3,473)

 

 

(7,178)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Refund of security deposit

 

 

 —

 

 

 7

Purchases of property and equipment

 

 

(976)

 

 

(777)

Net cash used in investing activities

 

 

(976)

 

 

(770)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Repayment of long-term debt

 

 

(2,188)

 

 

(938)

Proceeds from line of credit, net

 

 

2,247

 

 

7,420

Payment of deferred financing costs

 

 

 —

 

 

(124)

Repayment of customer cash advances

 

 

 —

 

 

(1,707)

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

 

 

(428)

 

 

(267)

Net cash (used in) provided by financing activities

 

 

(369)

 

 

4,384

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

82

 

 

(120)

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(4,736)

 

 

(3,684)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, at beginning of period

 

 

8,250

 

 

6,476

CASH AND CASH EQUIVALENTS, at end of period

 

$

3,514

 

$

2,792

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

6,624

 

$

4,381

Income taxes paid

 

$

172

 

$

147

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

Conversion of Short-Term Convertible Note

 

$

13,764

 

$

 —

Unpaid purchases of property and equipment

 

$

58

 

$

256

 

 

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

 

6


 

Table of Contents

CENTRIC BRANDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except share and per share data)

(unaudited)

 

1.    Business Description and Basis of Presentation

 

The condensed consolidated balance sheet as of December 31, 2017 of Centric Brands Inc. and its subsidiaries  (we,” “us,” the “Company” or “Centric Brands”), formerly Differential Brands Group Inc., has been derived from audited financial statements of the Company. The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 and 2017 and the related footnote information have been prepared on a basis consistent with the consolidated financial statements as of and for the years ended December 31, 2017 and 2016. In addition, these condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and thus should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) that management considers necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2018. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates.

 

The Company began operations in 1987 as Innovo, Inc. Since the Company’s founding, the Company has evolved from producing craft and accessory products to designing and selling apparel products. As of September 30, 2018, the Company’s principal business activities involved the design, development and worldwide marketing of: (i) apparel products, which include denim jeans, related casual wear and accessories bearing the brand name Hudson®; (ii) apparel products and accessories bearing the brand name Robert Graham®; and (iii) footwear, apparel and accessories bearing the brand name SWIMS®. As of September 30, 2018 our primary operating subsidiaries were Hudson Clothing, LLC (“Hudson”), Robert Graham Designs, LLC and Robert Graham Retail, LLC (collectively “Robert Graham or “RG”), and DFBG Swims, LLC (“Swims”). In addition, we have other non-operating subsidiaries.

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

In connection with the acquisition of all of the outstanding equity interests of RG Parent LLC and its subsidiaries on January 28, 2016 (the “RG Merger”), we entered into (i) a credit and security agreement (as later amended, the “ABL Credit Agreement”) with Wells Fargo Bank, National Association, as lender, (ii) a credit and security agreement with TCW Asset Management Company, as agent, and the lenders party thereto (as later amended, the “Term Credit Agreement”), and (iii) an amended and restated deferred purchase factoring agreement with CIT Commercial Services, Inc. (“CIT”), a unit of CIT Group (the “A&R Factoring Agreement”). 

 

On July 18, 2016, the Company completed the acquisition of all of the outstanding share capital of Norwegian private limited company SWIMS AS (“SWIMS”).

 

On June 27, 2018, the Company entered into that certain Purchase and Sale Agreement (the “GBG Purchase Agreement”), dated as of June 27, 2018, by and among the Company, Global Brands Group Holding Limited (“GBG”) and GBG USA Inc., a wholly owned subsidiary of GBG (“GBG USA”), pursuant to which the Company agreed to acquire a significant part of GBG’s and its subsidiaries’ North American business, 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 Acquisition”). On October 29, 2018,  the Company completed the GBG Acquisition pursuant to the GBG Purchase Agreement for a purchase price of

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approximately $1.21 billion in cash, subject to certain adjustments.  See “Note 16—Subsequent Events” for further details.

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

Correction of an Immaterial Error

 

During the 2017 year end close, the Company determined that basic and diluted Earnings per Share (“EPS”) had been incorrectly stated in the prior period financial statements. Historically, cumulative preferred dividends for the period were not included in the Company’s calculation of EPS. However, in accordance with Accounting Standards Codification (“ASC”) 260, Earnings per Share, income available to common stockholders is to be computed by deducting the dividends accumulated for the period on cumulative preferred stock. The Company’s Series A Convertible Preferred Stock entitles the holder to receive cumulative dividends when, as and if declared by the Board of Directors, payable at an annual rate of 10% through the date on which the liquidation preference is paid to the holder in connection with the liquidation of the Company or the date on which such Series A Convertible Preferred Stock is otherwise re-acquired by the Company. The amount of the cumulative dividend accrued on the Series A Convertible Preferred Stock has been disclosed previously in the Company’s filings. The Company has corrected the calculation of basic and diluted EPS to include the accrued cumulative preferred dividends for the period. Management evaluated the materiality of the error from a quantitative and qualitative perspective and concluded that this adjustment was not material to the Company’s presentation and disclosures, and has no impact on the Company’s financial position, results of operations and cash flows. Accordingly, no amendments to previously filed reports are required. However, the Company has elected to revise the historical condensed consolidated financial information presented herein to reflect the correction of this error for the prior periods presented and to conform to the current period presentation. As a result of this correction, for the three months ended September 30, 2017, basic and diluted loss per common share was corrected from a loss of $0.01 per share to a loss of $0.12 per share and for the nine months ended September 30, 2017, basic and diluted loss per common share was corrected from a loss of $0.50 per share to a loss of $0.80 per share. On October 29, 2018, all of the Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock shares were converted into shares of the Company’s common stock, which comprised all such preferred stock that was issued and outstanding. Refer to “Note 16—Subsequent Events” for further details.

 

Revenue Recognition

 

The Company adopted ASC 606, Revenue from Contracts with Customers, with a date of initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as described below. The Company 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 and continues to be reported under ASC 605. The details of the significant changes and quantitative impact of the changes are set out below. The Company 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 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. Beginning January 1, 2018, a refund liability is included in accounts payable and accrued expenses within the accompanying condensed consolidated balance sheet, which was previously recorded net of accounts receivable. Also, effective January 1, 2018, the Company records a return asset receivable in prepaid expenses and other current assets

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within the accompanying condensed 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. The Company recorded a decrease of $569 thousand to opening 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. Ecommerce sales of products ordered through the Company’s retail internet sites known as www.hudsonjeans.com,  www.robertgraham.us and www.swims.com are 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. The Company recorded an adjustment to opening 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 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. 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. The Company recorded an adjustment to opening 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 condensed consolidated statements of operations and comprehensive (loss) income. This accounting policy is consistent with the Company’s treatment of shipping and handling revenue prior to January 1, 2018.

 

The following table summarizes the impact of adopting ASC 606 on the Company’s condensed consolidated balance sheet as of January 1, 2018:

 

 

 

 

 

 

 

 

 

 

Impact of changes in accounting policies

 

Balances with adoption of ASC 606

 

Adjustments

 

Balances without adoption of ASC 606

Accounts receivable, net

$

24,398

 

$

2,152

 

$

22,246

Inventories

 

31,389

 

 

(344)

 

 

31,733

Prepaid expenses and other current assets

 

5,584

 

 

752

 

 

4,832

Other assets

 

1,828

 

 

1,344

 

 

484

Accounts payable and accrued expenses

 

25,281

 

 

3,077

 

 

22,204

Other liabilities

 

3,606

 

 

52

 

 

3,554

Accumulated deficit

 

(17,421)

 

 

775

 

 

(18,196)

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The following tables summarize the impact of adopting ASC 606 on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations

Impact of changes in accounting policies

 

for the three months ended September 30, 2018

 

for the nine months ended September 30, 2018

 

As reported

 

Adjustments

 

Balances without adoption of ASC 606

 

As reported

 

Adjustments

 

Balances without adoption of ASC 606

Net sales

$

39,831

 

$

45

 

$

39,876

 

$

114,614

 

$

(136)

 

$

114,478

Cost of goods sold

 

22,671

 

 

59

 

 

22,730

 

 

66,774

 

 

(65)

 

 

66,709

Gross profit

 

17,160

 

 

(14)

 

 

17,146

 

 

47,840

 

 

(71)

 

 

47,769

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

25,029

 

 

 —

 

 

25,029

 

 

58,992

 

 

 —

 

 

58,992

Depreciation and amortization

 

1,377

 

 

 —

 

 

1,377

 

 

4,252

 

 

 —

 

 

4,252

Total operating expenses

 

26,406

 

 

 —

 

 

26,406

 

 

63,244

 

 

 —

 

 

63,244

Operating loss

 

(9,246)

 

 

(14)

 

 

(9,260)

 

 

(15,404)

 

 

(71)

 

 

(15,475)

Interest expense

 

2,462

 

 

 —

 

 

2,462

 

 

7,097

 

 

 —

 

 

7,097

Other expense, net

 

21

 

 

 —

 

 

21

 

 

124

 

 

 —

 

 

124

Loss before income taxes

 

(11,729)

 

 

(14)

 

 

(11,743)

 

 

(22,625)

 

 

(71)

 

 

(22,696)

Income tax benefit

 

(1,150)

 

 

 —

 

 

(1,150)

 

 

(2,275)

 

 

 —

 

 

(2,275)

Net loss

$

(10,579)

 

$

(14)

 

$

(10,593)

 

$

(20,350)

 

$

(71)

 

$

(20,421)

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet

Impact of changes in accounting policies

as of September 30, 2018

As reported

 

Adjustments

 

Balances without adoption of ASC 606

Cash and cash equivalents

$

3,514

 

$

 —

 

$

3,514

Accounts receivable, net

 

21,490

 

 

(2,031)

 

 

19,459

Inventories

 

33,567

 

 

327

 

 

33,894

Prepaid expenses and other current assets

 

5,157

 

 

(669)

 

 

4,488

Property and equipment, net

 

7,281

 

 

 —

 

 

7,281

Goodwill

 

8,406

 

 

 —

 

 

8,406

Intangible assets, net

 

87,195

 

 

 —

 

 

87,195

Other assets

 

2,255

 

 

(1,496)

 

 

759

Total assets

$

168,865

 

$

(3,869)

 

$

164,996

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

35,251

 

$

(2,738)

 

$

32,513

Short-term convertible note

 

 —

 

 

 —

 

 

 —

Current portion of long-term debt

 

3,438

 

 

 —

 

 

3,438

Line of credit

 

24,414

 

 

 —

 

 

24,414

Convertible notes

 

14,866

 

 

 —

 

 

14,866

Long-term debt, net of current portion

 

42,309

 

 

 —

 

 

42,309

Deferred income taxes, net

 

4,093

 

 

 —

 

 

4,093

Other liabilities

 

3,732

 

 

(285)

 

 

3,447

Total liabilities

 

128,103

 

 

(3,023)

 

 

125,080

 

 

 

 

 

 

 

 

 

Series A convertible preferred stock

 

 5

 

 

 —

 

 

 5

Series A-1 convertible preferred stock

 

459

 

 

 —

 

 

459

Common stock

 

1,413

 

 

 —

 

 

1,413

Additional paid-in capital

 

76,248

 

 

 —

 

 

76,248

Accumulated other comprehensive income

 

408

 

 

 —

 

 

408

Accumulated deficit

 

(37,771)

 

 

(846)

 

 

(38,617)

Total equity

 

40,762

 

 

(846)

 

 

39,916

Total liabilities and equity

$

168,865

 

$

(3,869)

 

$

164,996

 

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Condensed Consolidated Statement of Cash Flows

Impact of changes in accounting policies

for the nine months ended September 30, 2018

As reported

 

Adjustments

 

Balances without adoption of ASC 606

Net loss

$

(20,350)

 

$

(71)

 

$

(20,421)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

 

4,252

 

 

 —

 

 

4,252

Amortization of deferred financing costs

 

328

 

 

 —

 

 

328

Amortization of convertible notes discount

 

568

 

 

 —

 

 

568

Paid-in-kind interest

 

1,300

 

 

 —

 

 

1,300

Stock-based compensation

 

2,121

 

 

 —

 

 

2,121

Provision for bad debts

 

457

 

 

 —

 

 

457

Loss on disposal of assets

 

 4

 

 

 —

 

 

 4

Deferred taxes

 

(2,577)

 

 

 —