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~~March 31, 2019

☐ 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~~file number: 000-18926

~~Centric Brands Inc.~~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		~~10118~~
(Address of principal executive ~~offices)~~		~~(Zip Code)~~offices, including zip code)

~~(646) 582-6000~~

(Registrant’s telephone number, including area ~~code)~~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 ~~Exchange Act).~~Act.) Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of ~~November 14, 2018~~May 20, 2019 was ~~58,335,575.~~58,542,641.

Table of Contents

CENTRIC BRANDS INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q


Item Number		Page

~~PART I.~~	PART IFINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of ~~September 30, 2018,~~March 31, 2019 and December 31, ~~2017 and September 30, 2017~~2018	3
	Condensed Consolidated Statements of Operations and Comprehensive ~~(Loss) Income~~Loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~	4
	Condensed Consolidated Statements of Equity for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~	5
	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 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	3629
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4943
Item 4.	Controls and Procedures	4943

~~PART II.~~	PART IIOTHER INFORMATION

Item 1.	Legal Proceedings	5044
Item 1A.	Risk Factors	5044
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 5.	Other Information	5044
Item 6.	Exhibits	5145

	~~SIGNATURES~~Signature Page	5446

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)~~thousands)


	September 30,		December 31,		September 30,		March 31,		December 31,
	2018		2017		2017		2019		2018
	(unaudited)		(Note 1)		(unaudited)		(unaudited)		(Note 1)
ASSETS
Current assets
Cash and cash equivalents	$	3,514	$	8,250	$	2,792	$	25,218	$	29,519
Accounts receivable, net		21,490		22,246		23,732		26,373		27,910
Sold receivables, net								13,516		33,825
Inventories		33,567		31,733		38,004		294,243		342,952
Prepaid expenses and other current assets		5,157		4,832		5,170		76,641		48,378
Total current assets		63,728		67,061		69,698		435,991		482,584
Property and equipment, net		7,281		8,417		9,287		92,763		93,044
Goodwill		8,406		8,380		8,471		376,132		376,132
Intangible assets, net		87,195		89,332		90,414		878,055		897,470
Operating lease right-of-use assets								209,715		—
Other assets		2,255		484		515		9,320		9,725
Total assets	$	168,865	$	173,674	$	178,385	$	2,001,976	$	1,858,955

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and accrued expenses	$	35,251	$	22,204	$	26,218	$	485,207	$	525,863
Short-term convertible note		—		13,694		13,565
Current portion of operating lease liabilities								23,155		—
Current portion of long-term debt		3,438		2,813		2,188		18,929		11,602
Revolving credit facilities								40,000		—
Total current liabilities		38,689		38,711		41,971		567,291		537,465
Line of credit		24,414		21,254		20,819
Convertible notes		14,866		13,866		13,549		37,310		36,235
Long-term debt, net of current portion		42,309		44,896		45,444		1,195,904		1,195,297
Deferred income taxes, net		4,093		6,650		12,880		1,986		—
Other liabilities		3,732		3,554		3,591
Operating lease liabilities								193,782		—
Other non-current liabilities								1,012		6,581
Total liabilities		128,103		128,931		138,254		1,997,285		1,775,578

Commitments and contingencies (Note 14)

Commitments and contingencies
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
Common stock, $0.10 par value: 100,000 shares authorized, 58,570 and 58,364 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively								5,857		5,836
Additional paid-in capital		76,248		61,314		60,384		221,522		218,240
Accumulated other comprehensive income		408		271		740		361		487
Accumulated deficit		(37,771)		(18,196)		(22,331)		(223,049)		(141,186)
Total equity		40,762		44,743		40,131		4,691		83,377
Total liabilities and equity	$	168,865	$	173,674	$	178,385	$	2,001,976	$	1,858,955

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

Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE ~~(LOSS) INCOME~~LOSS

(in thousands, except per share data)

(unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017		Three months ended March 31,
									2019		2018
Net sales	$	39,831	$	42,389	$	114,614	$	118,944	$	528,897	$	38,818
Cost of goods sold		22,671		24,334		66,774		66,067		409,951		22,563
Gross profit		17,160		18,055		47,840		52,877		118,946		16,255
Operating expenses
Selling, general and administrative		25,029		15,334		58,992		47,633		113,165		15,348
Depreciation and amortization		1,377		1,493		4,252		4,526		22,956		1,463
Other operating expense, net										17,098		—
Total operating expenses		26,406		16,827		63,244		52,159		153,219		16,811
Operating (loss) income		(9,246)		1,228		(15,404)		718
Operating loss										(34,273)		(556)
Other expense, net
Interest expense		2,462		2,262		7,097		6,536		46,013		2,215
Other expense (income), net		21		(12)		124		(1)
Other (income) expense, net										(42)		(1)
Total other expense, net										45,971		2,214
Loss before income taxes		(11,729)		(1,022)		(22,625)		(5,817)		(80,244)		(2,770)
Income tax (benefit) provision		(1,150)		(839)		(2,275)		776
Income tax provision										1,619		1,315
Net loss	$	(10,579)	$	(183)	$	(20,350)	$	(6,593)	$	(81,863)	$	(4,085)

Net loss attributable to common stockholders (Note 11)	$	(12,471)	$	(1,565)	$	(25,898)	$	(10,692)
Net loss attributable to common stockholders									$	(81,863)	$	(5,847)

Net loss	$	(10,579)	$	(183)	$	(20,350)	$	(6,593)	$	(81,863)	$	(4,085)
Other comprehensive (loss) income, net of tax:
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(4)		615		137		961		(126)		763
Other comprehensive (loss) income		(4)		615		137		961
Comprehensive (loss) income	$	(10,583)	$	432	$	(20,213)	$	(5,632)
Other comprehensive income (loss)										(126)		763
Comprehensive loss									$	(81,989)	$	(3,322)

Loss per common share - basic	$	(0.89)	$	(0.12)	$	(1.87)	$	(0.80)
Loss per common share - basic									$	(1.40)	$	(0.43)

Loss per common share - diluted
Loss per common share - diluted	$	(0.89)	$	(0.12)	$	(1.87)	$	(0.80)	$	(1.40)	$	(0.43)

Weighted average shares outstanding
Basic		14,085		13,322		13,873		13,306		58,548		13,550
Diluted		14,085		13,322		13,873		13,306		58,548		13,550

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

Table of Contents

CENTRIC BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, unaudited)


														Accumulated																			Accumulated
														Other																			Other
	Common Stock			Preferred Series A				Preferred Series A-1				Additional		Comprehensive		Accumulated		Total		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		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
Balance, 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	—		—		—		—		—		—		—		—		775		775
Adjusted balance at January 1, 2018	13,488		1,349		50		5		—		—		61,314		271		(17,421)		45,518	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	—		—		—		—		4,588		459		13,305		—		—		13,764
Stock-based compensation	—		—		—		—		—		—		2,121		—		—		2,121	—		—		—		—		—		—		637		—		—		637
Issuance of restricted common stock, net of taxes withheld	644		64		—		—		—		—		(492)		—		—		(428)
Issuance of common stock, net of taxes withheld																				111		11		—		—		—		—		(64)		—		—		(53)
Foreign currency translation	—		—		—		—		—		—		—		137		—		137	—		—		—		—		—		—		—		763		—		763
Net loss	—		—		—		—		—		—		—		—		(20,350)		(20,350)	—		—		—		—		—		—		—		—		(4,085)		(4,085)
Balance, September 30, 2018	14,132	$	1,413		50	$	5		4,588	$	459	$	76,248	$	408	$	(37,771)	$	40,762
Balance, March 31, 2018																				13,599	$	1,360		50	$	5		4,588	$	459	$	75,192	$	1,034	$	(21,506)	$	56,544

Balance at January 1, 2019																				58,364	$	5,836		—	$	—		—	$	—	$	218,240		487	$	(141,186)	$	83,377
Issuance of common stock, net of taxes withheld																				206		21		—		—		—		—		(114)		—		—		(93)
Stock-based compensation																				—		—		—		—		—		—		3,396		—		—		3,396
Foreign currency translation																				—		—		—		—		—		—		—		(126)		—		(126)
Net loss																				—		—		—		—		—		—		—		—		(81,863)		(81,863)
Balance, March 31, 2019																				58,570	$	5,857		—	$	—		—	$	—	$	221,522	$	361	$	(223,049)	$	4,691

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

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


	Three months ended March 31,
	2019		2018
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations	$	(81,863)	$	(4,085)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		22,956		1,463
Amortization of deferred financing costs and discounts		4,392		289
Paid-in-kind interest		5,184		437
Stock-based compensation		3,396		637
Amortization of inventory step up		8,781		—
Amortization of lease expense		5,993		—
Other non-cash adjustments		1,263		98
Deferred income taxes, net		1,986		523
Changes in operating assets and liabilities:
Accounts receivable, net		(284,890)		(145)
Operating lease liability		(5,512)		—
Inventories		40,234		(2,365)
Prepaid expenses and other assets		(29,212)		(628)
Accounts payable and accrued expenses		(36,476)		(416)
Other liabilities		(3,348)		317
Net cash used in operating activities		(347,116)		(3,875)

CASH FLOWS FROM INVESTING ACTIVITIES
Collections of sold receivables		307,279		—
Purchases of property and equipment		(3,899)		(439)
Net cash provided by (used in) investing activities		303,380		(439)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt		—		(938)
Proceeds from line of credit, net		39,685		1,379
Taxes paid in lieu of shares issued for stock-based compensation		(93)		(53)
Net cash provided by financing activities		39,592		388

Effect of exchange rate changes on cash and cash equivalents		(157)		7

NET CHANGE IN CASH AND CASH EQUIVALENTS		(4,301)		(3,919)

CASH AND CASH EQUIVALENTS, at beginning of period		29,519		8,250
CASH AND CASH EQUIVALENTS, at end of period	$	25,218	$	4,331

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	34,170	$	3,021
Income taxes paid	$	—	$	6

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unpaid purchases of property and equipment	$	63	$	101
Beneficial interest obtained in exchange for securitized trade receivables	$	276,668	$	—
Conversion of short-term convertible notes	$	—	$	13,764

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

Table of Contents

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

~~The condensed consolidated balance sheet as of December 31, 2017 of~~ 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. Company owned brands include Hudson®, Robert Graham®, and SWIMS® (the “Owned Brands”). Additionally, the Company licenses brands or makes private label brands which are sold in various product categories primarily in North America. Licensed brands include Calvin Klein®, Tommy Hilfiger®, Nautica®, Under Armour®, BCBG®, Buffalo Jeans®, Joe’s Jeans®, and Michael Kors®. Centric and its subsidiaries (“we,are collectively referred to herein as the “Company,” “us,”~~the~~ ~~“Company~~“we,” ~~or “Centric Brands~~“us,”~~), formerly Differential Brands Group Inc., has been derived from audited financial statements of~~ “our,” and “ourselves,” unless 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 (“context indicates otherwise.~~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,~~October 29, 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,~~acquired from Global Brands Group Holding ~~Limited~~Limited’s (“GBG”) and GBG USA Inc., a ~~wholly owned~~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 (“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 ~~Acquisition~~Business”). ~~On October 29, 2018,~~Effective upon the ~~Company completed~~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 the Company. Accordingly, the Company realigned its business into the following three reportable segments: Kids, Accessories and 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 ~~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”~~rules and regulations of the ~~consolidated~~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, ~~2017.~~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.

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 months ended March 31, 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

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estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates.

~~Correction~~2. Summary of ~~an Immaterial Error~~Significant Accounting Policies

~~During~~Information regarding significant accounting policies is contained in “Note 2 - Summary of Significant Accounting Policies” of the ~~2017 year end close, the Company determined that basic and diluted Earnings per Share (“EPS”) had been incorrectly stated~~consolidated financial statements 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~~2018 10-K.

Revenue Recognition

The Company adopted Accounting Standards Codification (“ASC 606”) ~~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 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. 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~~$0.6 million 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~~Revenue for 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 immaterial adjustment to increase the opening accumulated deficit as of January 1, 2018, ~~an increase of $39 thousand,~~ to reflect the ~~change in accounting policy.~~impact on ecommerce shipments from adopting ASC 606. Ecommerce revenue iswas 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.~~

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. 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 increase the opening accumulated deficit as of January 1, 2018, ~~an increase of~~by $1.3 million, to reflect the ~~change in accounting policy.~~impact on licensing revenue from adopting ASC 606.

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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.~~loss. This accounting ~~policy~~treatment is consistent with the Company’s treatment of shipping and handling revenue prior to January 1, 2018.

The adoption of ASC 606 had no net impact on the Company's condensed consolidated statement of cash flows for the year ended December 31, 2018.

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 and cash equivalents with various financial institutions. The policy 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 recourse basis however 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 March 31, 2019, the net deferred purchase price of trade receivables sold pursuant to the RPA (as defined below) totaled $13.5 million. The RPA was not in place as of March 31, 2018. See “Note 4 –Accounts Receivables.”

The ~~following table summarizes~~Company provides an allowance for estimated losses to be incurred in the ~~impact~~collection of ~~adopting ASC 606 on~~accounts receivable based upon the ~~Company’s condensed consolidated balance sheet as~~aging 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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outstanding balances and other account monitoring analysis. 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.

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

March 31, 2019 and 2018, sales to customers or customer groups representing 10 percent or greater of net sales for such period are as follows:

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)


	Three Months Ended March 31,
	2019		2018
Customer A	15	%	—	%
Customer B	13	%	—	%

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)

—

(2,577)
Changes in operating assets and liabilities:

Accounts receivable

2,439

34

2,473
Inventories

(2,149)

118

(2,031)
Prepaid expenses and other assets

474

152

626
Accounts payable and accrued expenses

9,534

—

9,534
Other liabilities

125

(233)

(108)
Net cash provided by operating activities

(3,474)

—

(3,474)

Net cash used in investing activities

(976)

—

(976)

Net cash used in financing activities

(368)

—

(368)

Effect of exchange rate changes on cash and cash equivalents

82

—

82

Net change in cash and cash equivalents

(4,736)

—

(4,736)

Cash and cash equivalents, at beginning of period

8,250

—

8,250
Cash and cash equivalents, at end of period
$
3,514

$
—

$
3,514

Financial Accounting Standards Recently Adopted

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued ~~Accounting Standards Update~~ASC Topic 842, Leases (“~~ASU~~ASC 842”)~~No. 2014-09,~~ ~~Revenue from Contracts with Customers~~, ASC 606. This amendment prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The amendment supersedes the revenue recognition requirements in ASC Topic 605, ~~Revenue Recognition~~, and most industry-specific guidance throughout the Industry Topics of the Codification. For the Company’s annual and interim reporting periods the mandatory adoption date of ASC 606 was January 1, 2018, and two methods of adoption are allowed, either a full retrospective adoption or a modified retrospective adoption. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 to the first quarter of 2018. In March 2016, April 2016, May 2016, December 2016 and May 2017, the FASB issued ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, ASU No. 2016-20, and ASU No. 2017-10, respectively, as clarifications to ASU No. 2014-09. ASU No. 2016-08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent. ASU No. 2016-10 clarifies the existing guidance on identifying performance obligations and licensing implementation. ASU No. 2016-12 adds practical expedientsnew standard related to leases to increase transparency and comparability among organizations by requiring the ~~transition for contract modifications and further defines a completed contract, clarifies the objective~~recognition of the collectability assessment and how revenue is recognized if collectability is not probable, and when non-cash considerations should be measured. ASU No. 2016-20 corrects or improves guidance in 13 narrow focus aspects of the guidance. ASU No. 2017-10 clarifies that the grantor in a service concession arrangement is the operating entity’s customer for purposes of revenue recognition. The effective dates for these ASUs were the same as the effective date for ASU No. 2014-09, for

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the Company’s annual and interim periods beginning January 1, 2018. These ASUs also require enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows. The Company adopted the new revenue standards in the first quarter of 2018 using the modified retrospective approach. Please see above for a description of the changes.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~. ASU No. 2016-15 amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU No. 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. ASU No. 2016-15 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted for all entities. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company adopted ASU No. 2016-15 in the first quarter of 2018 and there was no impact on the condensed consolidated financial statements.

~~Recently Issued Financial Accounting Standards~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842), which affects the accounting for leases and in July 2018, the FASB issued ASU No. 2018-10 which amends certain guidance under Topic 842. The guidance requires lessees to recognize~~ROU assets and lease liabilities on the balance ~~sheet~~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 ~~rights and obligations created by all leases with terms~~standard, disclosures are required to meet the objective of ~~more than 12 months. The amendment also will require qualitative and quantitative disclosures designed~~enabling users of financial statements to ~~give financial statement users information on~~assess the amount, timing, and uncertainty of cash flows arising from leases. ~~This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within that reporting period. Early application is permitted.~~

The Company ~~is currently assessing~~adopted ASC 842 as of January 1, 2019, using the ~~impact of~~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 ~~standard on its condensed consolidated~~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 ~~but anticipates an increase in~~under previous GAAP under ASC 840, Leases (“ASC 840”). 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.

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For the accounting policy practical expedients, the Company elected the short-term lease exemption, under which any lease less than 12 months is excluded from recognition on the balance sheet. The Company elected not to recognize ROU assets and lease liabilities ~~due~~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 ~~required right-of-use asset~~standard, $6.7 million of pre-existing liabilities for deferred rent, unfavorable leases and ~~corresponding liability for all~~various lease ~~obligations that~~incentives were reclassified as a component of the ROU assets.

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 right-of-use 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 right-of-use 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 right-of-use 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 10 - Leases.”

Leases

In general, leases are ~~currently~~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 statement of cash flows.

The Company’s operating leases ~~such as real estate~~are included in operating lease right-of-use (“ROU”) assets, accounts payable and accrued expenses, and non-current lease liabilities on the condensed consolidated balance sheets. 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 most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on information available at the date of adoption 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 ~~corporate headquarters, administrative offices, retail stores,~~the Company’s credit rating and ~~showrooms as well as additional disclosure~~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 ~~all its lease obligations.~~a straight-line method over the term of the lease.

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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 ~~February~~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 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. ~~2018-02,~~ ~~Income Statement—Reporting Comprehensive Income~~2018-13, Fair Value Measurement (Topic ~~220)~~820): ~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU No. 2018-02 permits entities~~Disclosure Framework - Changes to ~~reclassify tax effects stranded~~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 ~~accumulated~~unrealized gains and losses for the period included in other comprehensive income ~~as a result~~for recurring Level 3 fair value measurements held at the end of ~~tax reform~~the reporting period and the range and weighted average of significant unobservable inputs used to ~~retained earnings.~~develop Level 3 fair value measurements. This ~~ASU gives entities the option to reclassify these amounts and requires~~ new ~~disclosures, regardless of whether they elect to do so. The~~ guidance is effective for ~~fiscal years~~the Company beginning ~~after December 15, 2018,~~on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and ~~interim periods within those fiscal years. Early adoption in any period is permitted.~~others on a prospective basis. The Company is currently ~~evaluating~~assessing the impact of the ~~adoption of ASU No. 2018-02 will have on its condensed consolidated financial statements.~~new guidance.

3. ~~Factored Accounts and Receivables~~ GBG Acquisition

~~A&R Factoring Agreement~~

~~In January 2016, in connection with~~On October 29, 2018, the ~~RG Merger,~~Company completed the GBG Acquisition. To finance the acquisition, the Company entered into the ~~A&R Factoring~~Credit Agreements (as defined below). The First Lien Credit Agreement (as defined below) provides for a senior secured asset based revolving credit facility with ~~CIT, through its subsidiaries, Robert Graham~~commitments in an aggregate principal amount of $150.0 million and ~~Hudson. Following~~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 ~~SWIMS~~terms of the Credit Agreements.

The GBG Acquisition qualified as a business combination and was accounted for under the acquisition ~~SWIMS became a party~~method of accounting. Business acquisitions are accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the ~~A&R Factoring Agreement pursuant to a joinder agreement dated November 16, 2016. The A&R Factoring Agreement provides~~excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with finite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized but are tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

The purchase price allocation is subject to adjustment until the Company ~~sell and assign to CIT certain domestic accounts receivable, including accounts arising from or related to sales of inventory~~has completed its analysis within the measurement period. The purchase price allocation is preliminary and the ~~rendition of services. Under the A&R Factoring Agreement, the~~

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~~Company pays various factoring rates depending on the credit risk associated with the nature~~finalization of the ~~account. The A&R Factoring Agreement~~Company's purchase price allocation may ~~be terminated by CIT upon 60 days’ written notice or immediately upon the occurrence of an event of default as defined~~result in changes in the ~~agreement.~~valuation of assets acquired and liabilities assumed. The ~~A&R Factoring Agreement may be terminated by~~Company will finalize the ~~Company upon 60 days’ written notice prior~~purchase price allocation as soon as practicable, but not to ~~December 31, 2020 or annually with 60 days’ written notice prior to December 31 of each~~exceed one year ~~thereafter. In connection with the GBG Acquisition, the A&R Factoring Agreement was amended and restated to, among other items, extend the term of the agreement until~~following October 29, ~~2023.~~

~~SWIMS Factoring Agreement~~

~~In connection with the acquisition of SWIMS, SWIMS has maintained a preexisting Credit Assurance and Factoring Agreement between SWIMS and DNB Bank ASA (“DNB”), dated August 26, 2013 (the “SWIMSFactoring Agreement~~”). The SWIMS Factoring Agreement is a combined credit assurance and factoring agreement, pursuant to which SWIMS is granted financing of up to 80% of its preapproved outstanding invoiced international receivables, with a credit limit of NOK 7.2 million. On September 3, 2018, the SWIMS Factoring Agreement was amended to increase the credit limit to NOK 10.7 million. DNB receives an annual commission based on invoiced revenues and a quarterly commission of the maximum financing amount plus other administrative costs. The SWIMS Factoring Agreement is secured with (a) first-priority lien on SWIMS’s (i) machinery and plant (up to NOK 10.0 million) and (ii) inventory (up to NOK 10.0 million) and (b) additional liens on SWIMS’s factoring in the amount of NOK 1.0 million (first lien), NOK 4.0 million (second lien), NOK 7.0 million (third lien) and NOK 2.5 million (fourth lien). The SWIMS Factoring Agreement may be terminated by SWIMS upon 14 days’ prior written notice for any reason and by DNB upon 14 days’ prior written notice for just cause. DNB may also terminate the SWIMS Factoring Agreement without any prior written notice in the event of a material breach by SWIMS. As of September 30, 2018, SWIMS had outstanding financing commitments on NOK 30.8 million (approximately $3.8 million as of September 30, 2018) of its preapproved outstanding invoiced receivables pursuant to the SWIMS Factoring Agreement.

~~Accounts receivable consists of the following (in thousands):~~

September 30, 2018

December 31, 2017

September 30, 2017
Non-recourse receivables assigned to factor

$
15,543

$
19,566

$
18,780
Client recourse receivables

4,336

1,473

4,244
Total receivables assigned to factor

19,879

21,039

23,024
Allowance for customer credits

(1,412)

(3,597)

(3,480)
Total factored accounts receivable, net

$
18,467

$
17,442

$
19,544

Non-factored accounts receivable

$
4,095

$
5,974

$
5,456
Allowance for customer credits

(288)

(863)

(1,065)
Allowance for doubtful accounts

(784)

(307)

(203)
Total non-factored accounts receivable, net

$
3,023

$
4,804

$
4,188

Total accounts receivable, net

$
21,490

$
22,246

$
23,732

Of the total amount of receivables sold by the Company as of September 30, 2018, December 31, 2017 and September 30, 2017, the Company holds the risk of payment of approximately $4.3 million, $1.5 million and $4.2 million, respectively, in the event of non-payment by the customers.

2018.

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The following table summarizes the allocation of the preliminary purchase price as of October 29, 2018 (in thousands):


	Purchase
	Price Allocation
Assets acquired and liabilities assumed:
Accounts receivable	$	65,106
Inventories		371,605
Prepaid expenses and other current assets		56,380
Property and equipment		86,971
Other assets		41
Accounts payable and accrued expenses		(589,849)

Intangible assets and liabilities acquired:
Goodwill		367,725
Leasehold interests		(2,310)
Customer relationships		824,000
Preliminary Purchase Price	$	1,179,669

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed in the GBG Acquisition based on their estimated fair values as of the acquisition date. The fair values of assets acquired and liabilities assumed represent management’s estimate of fair value based on information obtained from various sources, including management’s historical experience. As a result of the fair value assessment, inventory acquired was stepped up to fair value by the amount of $32.4 million. During the three months ended March 31, 2019, we recognized $8.8 million within cost of goods sold related to the stepped up fair value of inventory acquired. The estimated fair value of the acquired tangible and intangible assets and liabilities assumed were determined using multiple valuation approaches depending on the type of tangible or intangible asset acquired, including but not limited to the income approach, the excess earnings method, the with versus without method, net realizable value method and the relief from royalty method approach.

The amount of goodwill represents the excess of the GBG Acquisition purchase price over the net identifiable assets acquired and liabilities assumed. Goodwill primarily represents, among other factors, the value of synergies expected to be realized by integration with the Company and expected positive cash flow and return on capital projections from the integration. Goodwill arising from the acquisition of the GBG Business was determined as the excess of the purchase price over the net acquisition date fair values of the acquired assets and the liabilities assumed, and is not deductible for income tax purposes subject to certain tax elections that are currently being considered.

The Company has determined the useful life of the acquired customer relationships are finite and will be amortized over their useful lives. However, the assets will be tested for impairment if events or changes in circumstances indicate that the assets might be impaired.

GBG USA, through various affiliates and third parties, currently provides a number of critical services to us, such as information technology services, financial systems, shared real estate and logistics support through a transition services agreement.

Unaudited pro forma financial information

The following table presents our unaudited pro forma results for the three months ended March 31, 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 intangible assets, and excludes other non-

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recurring transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.


	Three months ended March 31,
	2018
	(in thousands)
Net sales	$	599,121
Cost of goods sold		449,026
Gross margin		150,095
Gross margin % of net sales		25.1	%
Operating expenses
Selling, general and administrative		135,288
Depreciation and amortization		23,434
Total operating expenses		158,722
Operating loss		(8,627)
Interest expense		38,113
Gain on contingent consideration		(17,676)
Loss before income taxes		(29,064)
Income tax provision		1,316
Net loss	$	(30,380)

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 Receivables

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 an undivided ownership interest in 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.

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Accounts receivables consisted of the following (in thousands):


	March 31, 2019		December 31, 2018
Insured receivables sold	$	347,316	$	380,595
Uninsured receivables sold		31,982		43,630
Total receivables sold		379,298		424,225
Purchase price of sold receivables		(341,100)		(364,900)
Allowances and bad debt		(24,682)		(25,500)
Sold receivables, net		13,516		33,825

Accounts receivable, net	$	26,373	$	27,910

On April 25, 2019, the Company amended the PNC Receivables Facility to, among other things, increase the aggregate commitments under the it; see “Note 16 – Subsequent Events” below for additional information.

5. Inventories

Inventories are valued at the lower of cost or net realizable value with cost determined by the first-in, first-out method. Inventories consisted of the following (in thousands):

September 30, 2018

December 31, 2017

September 30, 2017
Finished goods

$
32,366

$
29,721

$
35,585
Finished goods consigned to others

673

1,524

1,908
Work in progress

190

218

267
Raw materials

338

270

244
Total inventories

$
33,567

$
31,733

$
38,004


	March 31, 2019		December 31, 2018
Finished goods	$	262,929	$	315,484
Raw materials and work in progress		31,314		27,468
Total inventories	$	294,243	$	342,952

~~5. Impairment of Long-Lived Assets~~

When the Company determines that the carrying value of long‑lived assets, such as property and equipment, may not be recoverable based upon the existence of one or more factors, and the carrying value exceeds the estimated undiscounted cash flows expected to be generated by the asset, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management. These cash flows are calculated by netting future estimated sales against associated merchandise costs and other related expenses such as payroll, occupancy and marketing. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows.

Future expected cash flows for retail store assets are based on management’s estimates of future cash flows over the remaining lease period or expected life, if shorter. The Company considers historical trends, expected future business trends and other factors when estimating each store’s future cash flow. The Company also considers factors such as: the local environment for each store location, including mall traffic and competition; the ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of goods sold and payroll, and in some cases, renegotiate lease costs. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the results of operations. There was no impairment charge recorded related to the retail stores during both the three and nine months ended September 30, 2018 and 2017.

6. Intangible Assets and Goodwill

Company’s intangible assets as of March 31, 2019 are comprised of trade names, customer relationships and non-compete agreements. Intangible assets are recorded at cost, less accumulated amortization. Amortization of intangible assets with finite lives is provided for over their estimated useful lives on a straight-line basis. The ~~lives~~life of the trade names are indefinite. ~~Intangible assets as of September 30, 2018 consisted of the following (in thousands):~~

Amortization

Gross

Accumulated

Net


Period

Amount

Amortization

Amount
Trade names

Indefinite

$
65,887

$
—

$
65,887
Customer relationships

7 to 15 Years

35,101

13,829

21,272
Non-compete agreements

3 Years

135

99

36
Total

$
101,123

$
13,928

$
87,195

~~Intangible assets as of December 31, 2017 consisted of the following (in thousands):~~

Amortization

Gross

Accumulated

Net


Period

Amount

Amortization

Amount
Trade names

Indefinite

$
65,812

$
—

$
65,812
Customer relationships

7 to 15 Years

35,081

11,629

23,452
Non-compete agreements

3 Years

133

65

68
Total

$
101,026

$
11,694

$
89,332

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~~Intangible assets as of September 30, 2017 consisted of the following (in thousands):~~

Amortization

Gross

Accumulated

Net


Period

Amount

Amortization

Amount
Trade names

Indefinite

$
66,087

$
—

$
66,087
Customer relationships

7 to 15 Years

35,150

10,905

24,245
Non-compete agreements

3 Years

138

56

82
Total

$
101,375

$
10,961

$
90,414

Amortization expense related to the intangible assets amounted to approximately ~~$0.7~~$19.5 million and $0.8 million for ~~both~~ the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017 and approximately $2.2 million for both the nine months ended September 30, 2018 and 2017.~~

~~As of September 30, 2018, the future amortization expense related to the finite-lived intangible assets is as follows (in thousands):~~

2018

Remainder of the year

$
748
2019

2,956
2020

2,936
2021

2,932
2022

2,932
Thereafter

8,804

$
21,308

~~Goodwill consisted of the following as of September 30, 2018, December 31, 2017 and September 30, 2017 (in thousands):~~

September 30, 2018

December 31, 2017

September 30, 2017
Beginning balance
$
8,380

$
8,271

$
8,271
Foreign currency adjustments

26

109

200
Ending balance
$
8,406

$
8,380

$
8,471

respectively.

There ~~was~~were no impairment ~~charge~~charges recorded related to intangible assets or goodwill during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

7. ~~Contracts with Customers~~Commitments and Contingencies

Litigation

~~The Company had contract assets and contract liabilities from customers~~In the ordinary course of ~~$1.5 million and $0.3 million, respectively, as of September 30, 2018. Upon adoption of ASC 606 as of January 1, 2018,~~business, the Company ~~recorded contract assets~~is subject to periodic claims, investigations and ~~contract liabilities~~lawsuits. Although the Company cannot predict with certainty the ultimate resolution of ~~$1.3 million~~claims, investigations and ~~$0.1 million, respectively (see Note 2 – “Summary~~lawsuits, asserted against the Company, it does not believe that any currently pending legal proceeding or proceedings to which it is a party could have a material adverse effect on its business, financial condition or results of Significant Accounting Policies” above for a further discussion on the adoption of ASC 606). Receivables from contracts with customers included in accounts receivable, net within the accompanying condensed consolidated balance sheet were $0.7 million and $0.3 million as of September 30, 2018 and January 1, 2018, respectively.

The contract assets relate to the Company’s right to consideration in exchange for the Company’s completed performance under the contract and granting the right to use the intellectual property, but not billed as of the reporting date. The contract assets are transferred to accounts receivable when the rights become unconditional. Receipt of payments from customers is based on minimum guarantee schedules as established in the contracts plus royalties earned on sales exceeding the minimum guarantee. The contract liabilities relate to the advance consideration received from customers for upfront license fees for which revenue is recognized on a straight-line basis over the term of the contract.operations.

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~~Significant changes in the contract assets and the contract liability balances during the nine months ended September 30, 2018 are as follows (in thousands):~~

Contract Assets

Contract Liabilities
Beginning balance at January 1, 2018
$
1,344

$
52
Revenue recognized from performance obligations satisfied in the current period

1,386

(39)
Transferred to accounts receivables from contract assets recognized at the beginning of the period

(1,145)

—
Contract liabilities recognized related to upfront license fees

—

300
Other

(89)

(28)
Ending balance at September 30, 2018
$
1,496

$
285

8. Debt

The Company evaluates contract assets and receivables from contracts with customers for impairment each period. There was no impairment of contract assets or receivables from contracts with customers during the three and nine months ended September 30, 2018.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018 (in thousands). Revenue expected to be recognized related to variable consideration for sales-based royalty promised in exchange for a license of intellectual property is not included in the table below. License arrangements in which royalty revenue is recognized based on actual sales extend through December 2023. Revenue recognized for variable consideration under license arrangements for the three and nine months ended September 30, 2018 was $0.5 million and $1.3 million, respectively.

Remainder of

2018

2019

2020

2021

2022

Total
Royalty license contracts with customers
$
469

1,760

1,743

1,035

283

$
5,290

~~8. Debt~~

~~The~~five-year payment schedule of the Company’s ~~line of credit, long-term~~ debt ~~and convertible notes~~ as of ~~September 30, 2018~~March 31, 2019 is as follows (in thousands):


	Payments Due by Period										Deferred		Original
	Remainder of										Financing		Issue		Carrying		Payment Due by Period														Original
	2018		2019		2020		2021		Total		Costs, Net		Discount, Net		Value		Remainder of														Issue (Discount)		Carrying
Line of credit	$	1,698	$	—	$	22,998	$	—	$	24,696	$	282	$	—	$	24,414
Long-term debt		625		3,750		5,000		37,000		46,375		628		—		45,747
																	2019		2020		2021		2022		2023		Thereafter		Total		Premium and Costs, Net		Value
Revolving facility																	$	40,000	$	—	$	—	$	—	$	—	$	—	$	40,000	$	—	$	40,000
1L Term Loan																		9,674		32,250		32,250		32,250		536,963		—		643,387		(17,168)		626,219
2L Term Loan																		—		—		—		—		—		677,888		677,888		(89,274)		588,614
Convertible notes		—		—		—		17,830		17,830		—		2,964		14,866		—		—		18,128		—		—		25,000		43,128		(5,818)		37,310
Total	$	2,323	$	3,750	$	27,998	$	54,830	$	88,901	$	910	$	2,964	$	85,027	$	49,674	$	32,250	$	50,378	$	32,250	$	536,963	$	702,888	$	1,404,403	$	(112,260)	$	1,292,143

~~Line of Credit and Long-Term Debt – ABL Credit Agreement and Term Credit Agreement~~

New Term Loans

On ~~January 28, 2016,~~October 29, 2018 (the “GBG Closing Date”), the Company and certain of its subsidiaries entered into a (i) first lien credit agreement with Ares Capital Corporation (“Ares”), as administrative agent, ACF FinCo I LP, as collateral agent, and certain other lenders party thereto (the “First Lien Credit Agreement”) and (ii) second lien credit agreement with U.S. Bank National Association, as administrative agent and collateral agent, and certain lenders party thereto (the “Second Lien Credit Agreement”, and together with the ~~ABL~~First Lien Credit ~~Agreement; (ii)~~Agreement, the ~~Term~~ “Credit ~~Agreement; and (iii) the A&R Factoring Agreement. See “Note 3 – Factored Accounts and Receivables” for a discussion of the A&R Factoring Agreement.~~

Agreements”).

The ~~ABL~~First Lien Credit Agreement ~~provided~~provides for a senior secured ~~asset-based~~asset based revolving credit facility ~~(the “Revolving Facility~~”) with commitments in an aggregate principal amount of ~~$40.0 million. The Term Credit Agreement provided for~~$150.0 million, which matures on April 29, 2023 (the “New Revolving Facility”) and a senior secured term loan credit facility ~~(the “Term Facility~~”) in an aggregate principal amount of ~~$50 million. The~~$645.0 million, which matures on October 29, 2023 (the “First Lien Term Loan Facility”, and together with the New Revolving Facility, ~~had a maturity date of October 30, 2020.~~are collectively referred to herein as “First Lien Facilities”). The Term Facility had a maturity date of January 28, 2021. The amount available to be drawn under the Revolving Facility was based on the borrowing base values attributed to eligible accounts receivable and eligible inventory. The availability under the Revolving Facility as of September 30, 2018 was $7.9 million. Borrowings under the Revolving Facility and the Term Facility totaled $23.0 million and $46.4 million as of September 30, 2018, respectively.

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~~Certain of the Company’s subsidiaries were co-borrowers under the ABL~~Second Lien Credit Agreement provides for a second lien term loan facility in an aggregate principal amount of $668.0 million, which matures on October 29, 2024 (the “Second Lien Term Loan Facility”, and together with the First Lien Term ~~Credit Agreement.~~Loan Facility are collectively referred to herein as the “Term Loan Facilities”). The obligations under the ~~ABL~~ Credit ~~Agreement and the Term Credit Agreement were~~Agreements are guaranteed by ~~all~~certain domestic subsidiaries of the ~~Company’s domestic subsidiaries~~Company and ~~were~~are secured by substantially all assets of the ~~Company’s assets, including the assets of~~Company and its domestic subsidiaries. Cumulative paid-in-kind interest (“PIK”) under the Credit Agreements totaled $9.9 million as of March 31, 2019.

The ~~ABL~~ Credit Agreement provided that, subject to customary conditions, the Company, and certain of its subsidiaries that were borrowers, may seek to obtain incremental commitments under the Revolving Facility in an aggregate amount not to exceed $10.0 million. The Term Credit Agreement provided that, subject to customary conditions, the Company, and certain of its subsidiaries that were borrowers, may seek to obtain incremental term loans under the Term Facility in an aggregate amount not to exceed $50.0 million. The Company did not have any commitments for such incremental loans under either facility as of September 30, 2018.

There were no scheduled payments under the Revolving Facility. The Revolving Facility was required to be prepaid to the extent extensions of credit thereunder exceed the applicable borrowing base. Outstanding loans under the Revolving Facility could be prepaid at any time at the Company’s option without premium or penalty, other than customary "breakage" costs with respect to LIBOR loans.

The Term Facility was subject to quarterly payments of principal as follows: (i) 0.25% for each of the first four fiscal quarters for the fiscal year beginning after January 1, 2016; (ii) 0.625% for each of the four fiscal quarters thereafter; (iii) 1.25% for each of the next following four fiscal quarters; (iv) 1.875% for each of the next following four fiscal quarters; and (v) 2.50% for each fiscal quarter thereafter, with the balance payable at maturity. The Term Facility included mandatory prepayments customary for credit facilities of its nature, including, subject to certain exceptions: (i) 100% of the net cash proceeds from issuances of debt that was not permitted and certain equity issuances; (ii) 100% of the net cash proceeds from certain non-ordinary course asset sales, subject to customary exceptions and reinvestment rights; (iii) 100% of certain insurance proceeds and condemnation recoveries, subject to customary exceptions and reinvestment rights; (iv) 100% of the net cash proceeds from certain extraordinary receipts; and (v) a variable percentage of excess cash flow, ranging from 50% to 0% depending on the Company’s senior leverage ratio. Outstanding loans under the Term Facility could be prepaid at any time at the Company’s option subject to customary “breakage” costs with respect to LIBOR loans. Subject to certain exceptions, prepayments of loans under the Term Facility were subject to a prepayment premium of 1.00% during the second year after the closing date of the Term Credit Agreement.

Borrowings under the ABL Credit Agreement and Term Credit Agreement were subject to interest at a rate equal to either, at the Company’s option, an adjusted base rate or the LIBOR (subject to a 0.50% floor for borrowings under the Term Facility), in each case plus an applicable margin. The applicable margins for borrowing under the Term Facility (which varied based the Company’s senior leverage ratio) ranged from 9.75% to 6.00% for base rate loans and 10.75% to 7.00% for LIBOR loans. The applicable margin for borrowings under the Revolving Facility was 0.50% for base rate loans and 1.75% for LIBOR loans. An unused commitment fee equal to 0.25% per annum of the average daily amount by which the total commitments under the Revolving Facility exceeds the outstanding usage under the Revolving Facility was payable monthly in arrears.

~~The ABL Credit Agreement and Term Credit Agreement contained~~Agreements contain customary representations and warranties, events of default and covenants, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness, create or permit liens on assets, engage in mergers or consolidations, dispose of assets, make prepayments of certain indebtedness, pay certain dividends and other restricted payments, make investments, and engage in transactions with affiliates. The Term ~~Credit Agreement required~~Loan Facilities require the Company to comply with ~~various~~ financial maintenance covenants to be ~~tested. If an event~~tested quarterly (beginning with the fiscal quarter ending March 31, 2019), consisting of ~~default under~~ a ~~credit agreement occurred~~maximum net first lien leverage ratio, a maximum net total leverage ratio and ~~continued, the commitments could be terminated and the principal amount outstanding, together with all accrued and unpaid interest and other amounts owed could be declared immediately due and payable.~~

~~To permit the acquisition~~a minimum fixed charge coverage ratio. As of ~~SWIMS, on July 18, 2016,~~March 31, 2019, the Company ~~entered into amendments~~was in compliance with these covenants.

The Company incurred debt issuance costs totaling $51.5 million related to the ~~ABL~~Term Loan Facilities. In accordance with ASU No. 2015-15, the debt issuance costs have been deferred and are presented as a contra-liability, offsetting the outstanding balance of the Term Loan Facilities, and are amortized using the effective interest method over the remaining life of the Term Loan Facilities.

The Company used the proceeds from the Credit Agreements to consummate the GBG Acquisition and repay existing debt.

On April 17, 2019, the Company amended its Credit Facilities to, among other things, increase the amount of indebtedness permitted under the First Lien Credit Agreement, increase the size of the New Revolving Facility and amend the Term Credit Agreement. Additionally, on March 27, 2017 and March 27, 2018, the Company entered into further amendments to these agreements to modify certain defined terms, add a liquidity covenant, revise certain other covenants and modify the applicable base and LIBOR rates.Company's consolidated fixed charge ratio covenant; see “Note 16-Subsequent Events” for additional information.

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New Revolving Facility

In addition to the First Lien Term Loan, the First Lien Credit Agreement provides for a senior secured asset based revolving credit facility with commitments in an aggregate principal amount of $150.0 million, which matures on April 29, 2023 (the “New Revolving Facility”). The amount available to be drawn under the New Revolving Facility is based on the borrowing base values attributed to eligible inventory. There are no scheduled periodic payments under the New Revolving Facility. The obligations under the Credit Agreements, including the New Revolving Facility, are guaranteed by certain domestic subsidiaries of the Company (the “Guarantors”) and are secured by substantially all assets of the Company and its domestic subsidiaries. The availability under the New Revolving Facility as of March 31, 2019 was $110.0 million. Borrowings under the New Revolving Facility as of March 31, 2019 were $40.0 million.

The annual interest rates for the New Revolving Facility is the lender’s alternate base rate (“ABR”) (with a 1.00% floor) plus 4.50% for base rate loans and adjusted LIBOR (with a 0.00% floor) plus 5.50% for LIBOR rate loans. The New Revolving Facility includes mandatory prepayments customary for credit facilities of this nature. Subject to certain exceptions, permanent reductions of the commitments under the New Revolving Facility are subject to a prepayment premium of (i) 3.00% during the first year after the GBG Closing Date, (ii) 2.00% during the second year after the GBG Closing Date and (iii) 1.00% during the third year after the GBG Closing Date, plus, if applicable, customary “breakage” costs with respect to LIBOR rate loans.

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

The Company incurred debt issuance costs totaling $6.8 million related to the New Revolving Facility. The debt issuance costs have been deferred and are presented in Other Assets and are amortized using the effective interest method over the life of the New Revolving Facility.

On April 17, 2019, the Company amended its New Revolving Facility to, among other things, increase the aggregate commitments thereunder; see “Note 16—Subsequent Events” for additional information.

The PNC Receivables Facility

On October 29, 2018, ~~in connection with the GBG Acquisition and entry into the Credit Agreements, as defined in “Note 16~~–~~Subsequent Events”, the ABL Credit Agreement and Term Credit Agreement were terminated and all outstanding obligations thereunder were repaid.~~ ~~For additional information, see “Note 16~~–~~Subsequent Events.”~~

~~Modified Convertible Notes~~

~~On September 8, 2015,~~ the Company entered into the ~~rollover~~PNC Receivables Facility. 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 to Spring on a revolving basis. Under the terms of the RPA, Spring sells to the Purchasers an undivided ownership interest in the Receivables for up to $450.0 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, ~~with~~subject to the ~~holders~~Originators generating sufficient eligible Receivables to sell to Spring in replacement of ~~convertible notes originally issued in~~collected balances. Advances under the RPA will accrue interest based on a variable rate plus a margin.

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In connection with the ~~acquisition~~PNC Receivables Facility, the Company incurred $2.4 million in deferred financing fees, including $1.6 million related to securitization closing fees, $0.5 million in legal fees, and $0.3 million in other fees. These deferred financing fees are included in other assets in the condensed consolidated balance sheet as of March 31, 2019.

On April 25, 2019, the Company amended its PNC Receivables Facility to, among other things, increase the aggregate commitments under the PNC Receivables Facility; see “Note 16—Subsequent Events” for additional information.

Convertible Notes

2024 Convertible Notes

On October 29, 2018, the Company issued convertible promissory notes (the “2024 Convertible Notes”) in an aggregate principal amount of $25.0 million to funds managed by GSO Capital Partners LP (“GSO”) and funds managed by Blackstone Tactical Opportunities Advisors L.L.C. (collectively, the “GSO/BTO Affiliates”). The 2024 Convertible Notes are convertible at the holder’s option beginning on or after October 29, 2019 until the earlier of (i) repayment in full of all principal and interest outstanding under the Second Lien Credit Agreement and (ii) October 29, 2024 (such earlier date, the “2024 Convertible Note Maturity Date”), into shares of the ~~Hudson business (“~~Company’s common stock at a conversion price of $8.00 per share, subject to customary adjustments as described in agreement. The 2024 Convertible Notes shall not initially bear interest. From and after April 29, 2019, the 2024 Convertible Notes shall bear interest at the rate of 12.0% per annum multiplied by the principal amount as of the previous interest payment date. From and after October 29, 2019, the 2024 Convertible Notes shall bear interest at the rate of 16.0% per annum multiplied by the principal amount as of the previous interest payment date. Interest payments are due each January 31, April 30, July 31, and October 31. To the extent that the Company is unable to pay cash interest on the 2024 Convertible Notes on each interest payment date because of restrictions in the Credit Agreements or other debt agreements of the Company, an amount equal to the unpaid interest then due shall be added to the principal amount of this Note (such additional amount, the ~~Rollover~~“PIK Principal”), without any action by the Company or a holder of a 2024 Convertible Note.

The Company may, at any time and at its sole option, elect to prepay the entirety of aggregate then-outstanding PIK Principal, plus any accrued and unpaid interest on such PIK Principal, at any time (an “Optional PIK Prepayment”). Optional PIK Prepayments may be paid in cash.

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

Also, on the GBG Closing Date, the Company and the Guarantors entered into a Subordinated Convertible Promissory Notes Guaranty Agreement~~”),~~ pursuant to which ~~on January 28, 2016,~~those subsidiaries agreed to guarantee the ~~holders~~obligations due under the 2024 Convertible Notes.

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The following table is a summary of the ~~notes contributed~~recorded value of the 2024 Convertible Notes as of March 31, 2019 and December 31, 2018 (in thousands):


	March 31, 2019		December 31, 2018
Convertible note - face value	$	25,000	$	25,000
Less: Original issue discount		(4,522)		(4,522)
Short-term convertible note recorded value on issue date		20,478		20,478
PIK interest issued		—		—
Accumulated accretion of original issue debt discount		1,321		534
Convertible note value	$	21,799	$	21,012

Modified Convertible Notes

On January 18, 2016, in partial satisfaction of certain outstanding convertible notes, to the Company ~~in exchange for 1,167,317 shares of common stock; a cash payment of approximately $8.6 million, before expenses; and~~issued an aggregate principal amount of approximately $16.5 million of modified convertible notes (the “Modified Convertible Notes”).

The Modified Convertible Notes are structurally and contractually subordinated to ~~the Company’s~~our senior debt and will mature on July 28, 2021. The Modified Convertible Notes accrue interest quarterly on the outstanding principal amount at a rate of 6.5% per annum (which increased to 7% as of October 1, 2016, with respect to the Modified Convertible Notes issued to Fireman Capital CPF Hudson Co-Invest LP (“Fireman”)) only), which is payable 50% in cash and 50% in additional paid-in-kind ~~notes; provided, however, that~~notes. However, the Company may ~~in its sole discretion,~~ elect to pay 100% of such interest in ~~cash. Beginning on January 28, 2016, the~~cash at its sole discretion. The Modified Convertible Notes are convertible ~~by each~~at the option of the holders into either shares of ~~our~~the Company’s common stock, cash, or a combination ~~of cash and common stock,~~thereof, at the Company’s election.

If the Company elects to issue only shares of common stock upon conversion of the Modified Convertible Notes, each of the Modified Convertible Notes would be convertible, in whole but not in part into a number of shares of the Company’s common stock equal to the “conversion amount” divided by the “market ~~price.”~~price”. The “conversion amount” is (a) the product of (i) the “market price”, multiplied by (ii) the quotient of (A) the principal amount, divided by (B) the conversion price, minus (b) the aggregate optional prepayment amounts paid to the holder. The “market price” is the average of the closing prices for our common stock over the 20-trading-day period immediately preceding the notice of conversion. If the Company elects to pay cash with respect to a conversion of the Modified Convertible Notes, the amount of cash to be paid per share will be equal to the conversion amount. The Company will have the right to prepay all or any portion of the principal amount of the Modified Convertible Notes at any time so long as the Company makes a pro rata prepayment on all of the Modified Convertible Notes.

The following table is a summary of the recorded value of the Modified Convertible Notes as of ~~September 30,~~March 31, 2019 and December 31, 2018 (in thousands). The value of the ~~convertible notes~~Modified Convertible Notes reflects the present value of the contractual cash flows from the Modified Convertible Notes and resulted in an original issue discount of $4.7 million that was recorded on January 28, 2016, the issuance date.


	September 30, 2018		March 31, 2019		December 31, 2018
Modified Convertible Notes - face value	$	16,473
Modified convertible notes - face value			$	16,473	$	16,473
Less: original issue discount		(4,673)		(4,673)		(4,673)
Modified Convertible Notes recorded value on issue date		11,800
Modified convertible notes recorded value on issue date				11,800		11,800
PIK interest issued		1,357		1,655		1,505
Accumulated accretion of original issue debt discount		1,709		2,056		1,918
Modified Convertible Notes value	$	14,866
Modified convertible notes value			$	15,511	$	15,223

Short-Term Convertible Note

In connection with the acquisition of SWIMS® inon July 18, 2016, the Company entered into certain financing arrangements with Tengram ~~Capital~~Partners Fund II, L.P. (“Tengram II”), ~~an entity affiliated with the holder of the Company’s Series A Convertible Preferred Stock, TCP Denim, LLC,~~a related party, including a convertible note issued to Tengram II on July 18, 2016 (the “SWIMS Convertible Note”). The SWIMS Convertible Note accrued interest at a rate

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of 3.75% per annum, compounding on the first day of each month starting August 1, 2016, and was convertible, at Tengram II’s option or on the revised maturity date of January 18, 2018, which had an original maturity date of January 18, 2017, if not already repaid in cash on or prior to that date, into newly issued shares of our Series A-1 ~~preferred stock, par value $0.10 per~~

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~~share (the “Series A-1~~ Preferred Stock~~”),~~ at a conversion price of $3.00 per share.

On January 18, 2018, the SWIMS Convertible Note matured and automatically converted into newly issued shares of the Company’s Series A-1 Preferred Stock, at a conversion price of $3.00 per share. The outstanding balance of the SWIMS Convertible Note, together with any accrued and unpaid interest thereon, converted into 4,587,964 shares of Series A-1 Preferred Stock. Upon the issuance of such shares of Series A-1 Preferred Stock by the Company to Tengram II, the SWIMS Convertible Note was settled in its entirety. The Series A-1 Preferred Stock was convertible into shares of the Company’s common stock, par value $0.10 per share, ~~(the “Common Stock”),~~ at an initial price of $3.00 per share (subject to adjustment), was entitled to dividends at a rate of 10% per annum payable quarterly in arrears, was senior to the common stock upon liquidation and had voting rights on an as-converted basis alongside its common stock.

On October 29, 2018, the 4,587,964 shares of the Company’s Series A-1 Preferred Stock converted into 4,951,177 newly issued shares of ~~Common Stock~~common stock in accordance with the terms of the Series A-1 Preferred ~~Stock (the “Series A-1 Conversion”). For additional information, see “Note 16~~–~~Subsequent Events.”~~

~~SWIMS Overdraft Agreement~~

~~In connection with the acquisition of SWIMS, SWIMS has maintained a preexisting Overdraft Facility Agreement between SWIMS and DNB, dated January 27, 2016 (the “SWIMSOverdraft Agreement~~”). The SWIMS Overdraft Agreement is an overdraft facility that provides SWIMS with access to up to NOK 6.0 million (approximately $0.7 million as of September 30, 2018) in total, divided between (a) an ordinary credit of NOK 3.5 million at an interest rate of 7.4% plus an additional quarterly fee of 0.4% on the outstanding principal in frame commissions and (b) an additional credit of NOK 2.5 million at an interest rate of 4.9% plus an additional quarterly fee of 0.5% on the outstanding principal in frame commissions. The SWIMS Overdraft Agreement is secured with (a) first-priority liens on SWIMS’s (i) machinery and plant (up to NOK 10.0 million) and (ii) inventory (up to NOK 10.0 million) and (b) additional liens on SWIMS’s factoring in the amount of NOK 1.0 million (first lien), NOK 4.0 million (second lien), NOK 7.0 million (third lien) and NOK 2.5 million (fourth lien). For more information on the SWIMS Factoring Agreement, see “Note 3 – Factored Accounts and Receivables.” The SWIMS Overdraft Agreement may be terminated by SWIMS upon 14 days’ prior written notice for any reason and by DNB upon 14 days’ prior written notice for just cause. DNB may also terminate the SWIMS Overdraft Agreement without any prior written notice in the event of a material breach by SWIMS. As of September 30, 2018, the outstanding balance on the facility governed by the SWIMS Overdraft Agreement and the SWIMS Factoring Agreement, as described in “Note 3–Factored Accounts and Receivables”, was NOK 13.8 million (approximately $1.7 million). Stock.

Total Interest Expense

The following table is a summary of total interest expense recognized (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2018		2017		2018		2017		2019		2018
Contractual coupon interest	$	2,154	$	1,984	$	6,201	$	5,694	$	36,047	$	1,926
Amortization of discounts and deferred financing costs		308		278		896		842
Non-cash interest expense (including amortization of discounts and deferred financing costs)										9,966		289
Total interest expense	$	2,462	$	2,262	$	7,097	$	6,536	$	46,013	$	2,215

9. Fair Value Measurement of Financial Instruments

The Company’s assets measured at fair value ~~of financial instruments held (which consist of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses) do not differ materially from their recorded amounts because of~~on a nonrecurring basis include long-lived assets. The Company reviews the ~~relatively short period of time between origination of the instruments and their expected realization. The~~ carrying amounts of such assets when events indicate that their carrying amounts may not be recoverable. Any resulting asset impairment would require that the ~~line of credit and long-term debt approximate~~asset be recorded at its fair value. The resulting fair value ~~because~~measurements of the ~~variable interest rates.~~ assets are considered to be Level 3 inputs. There were no impairments of long-lived assets during the three months ended March 31, 2019 and 2018.

The carrying value of the 2024 Convertible Notes and the Modified Convertible Notes at March 31, 2019 was $37.3 million which approximates their fair value at March 31, 2019. The Company estimates the fair value of the ~~convertible notes is~~2024 Convertible Notes and the Modified Convertible Notes using commonly accepted valuation methodologies and unobservable inputs based on the ~~amount~~low volume of ~~future cash flows associated with~~similar market activity (Level 3). The Company carries the ~~instrument discounted~~2024 Convertible Notes and the Modified Convertible Notes at face value less unamortized debt discount and issuance costs on its condensed consolidated balance sheets. For further information on the 2024 Convertible Notes and the Modified Convertible Notes, see “Note 8—Debt.”

10. Leases

The Company adopted ASC 842 on January 1, 2019. Because the Company adopted ASC 842 using the ~~incremental borrowing rate, which~~transition method that allowed the Company to initially apply ASC 842 as of January 1, 2019 and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, prior year financial statements were not recast under the new standard and, therefore, those prior year amounts are ~~considered Level 3 liabilities.~~not presented below.

The Company has commitments under operating leases for retail stores, corporate offices, administrative offices and showrooms expiring on various dates through January 2029. The Company leases certain equipment under finance lease agreements expiring on various dates through January 2022. As of March 31, 2019, the Company’s finance leases

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were not material to the condensed consolidated balance sheets, condensed consolidated statements of operations or statement of cash flows.

Lease agreements for office and showroom facilities expire on various dates through December 2028, and are generally non-cancelable. Initial lease terms for retail store leases generally range from three to ten years with an option to extend or renew the leases for 1 to 10 years. In most instances, at the commencement of the lease, the Company has determined that it is not reasonably certain to exercise either of these options; accordingly, these options are generally not considered in determining the initial lease term.

Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Most of the retail store leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume when specific sales volumes are exceeded. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis from the possession date.

The components of lease cost for the quarter ended March 31, 2019 are as follows (in thousands):


	Three months ended
	March 31, 2019
Lease cost
Operating lease cost	$	10,694
Short-term lease cost		2,132
Variable lease cost (1)		3,435
Total lease cost	$	16,261

(1)

Variable components of the lease payments such as utilities, taxes and insurance, parking and maintenance costs.

Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent.

Amounts reported in the condensed consolidated balance sheet for the quarter ended March 31, 2019 are as follows (in thousands):


	Three months ended,
	March 31, 2019
Operating Leases:
Operating lease right-of-use assets	$	209,715
Operating lease liabilities		193,782
Current portion of operating lease liabilities		23,155
Total operating lease liabilities	$	216,937

Weighted-average remaining lease term
Operating leases		7.9 Years

Weighted-average discount rate
Operating leases		8.20	%

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~~Under ASC~~ ~~820~~, ~~Fair Value Measurements and Disclosures,~~ ~~fair value is defined~~Cash flow information related to operating leases for the quarter ended March 31, 2019 are as ~~the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.~~ ~~ASC~~ ~~820~~also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

~~Level 1—Quoted prices in active markets for identical assets or liabilities~~

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

~~Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities~~

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

~~The following table presents the fair value hierarchy for liabilities measured at fair value on a non-recurring basis as of September 30, 2018, December 31, 2017 and September 30, 2017~~follows (in thousands):

Carrying Value

Fair Value

September 30,

December 31,

September 30,

September 30,

December 31,

September 30,

Financial Instrument

Level

2018

2017

2017

2018

2017

2017

Convertible note - short-term

3

$
—

$
13,694

$
13,565

$
—

$
13,694

$
13,565

Convertible notes - long-term

3

14,866

13,866

13,549

11,700

11,700

11,250

$
14,866

$
27,560

$
27,114

$
11,700

$
25,394

$
24,815


	Three months ended,
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9,956

Future minimum lease payments under non-cancellable leases as of the quarter ended March 31, 2019 are as follows (in thousands):


2019 (excluding the three months ended March 31, 2019)	$	29,833
2020		39,621
2021		37,576
2022		35,445
2023		31,112
Thereafter		125,861
Total undiscounted lease payments		299,448
Less: imputed interest		(82,511)
Total lease liabilities	$	216,937

Reported as:
Current portion of operating lease liabilities	$	23,155
Operating lease liabilities		193,782
Total lease liabilities	$	216,937

The ~~key assumptions for determining the fair value at September 30, 2018 included the remaining time~~Company does not have any additional operating leases that commenced subsequent to ~~maturity of 2.87 years, volatility of 60%, and the risk-free interest rate of 2.88%.~~March 31, 2019.

~~10.~~11. Equity

~~Stock Incentive Plans~~

Amended and Restated 2004 Stock Incentive Plan

In 2004, the Board of Directors adopted, and the Company’s shareholders approved the 2004 Stock Incentive Plan. In ~~September~~October 2011, the Board of Directors adopted, and ~~in October 2011,~~ the Company’s shareholders approved, the Amended and Restated 2004 Stock Incentive Plan (the ““Amended and Restated ~~Plan”~~Plan”) to update the 2004 Stock Incentive Plan with respect to certain provisions and changes in the ~~Internal Revenue Code of 1986~~tax code since its original adoption.

2016 Stock Incentive Plan

On October 5, 2016, the Board of Directors adopted the ~~Differential Brands Group Inc.~~ 2016 Stock Incentive Compensation Plan (the “2016 Stock Incentive Plan”) which was approved by the Company’s shareholders on November 7, 2016. Under the 2016 Stock Incentive Plan, 3,529,109 shares of common stock ~~were~~have been reserved for issuance in connection with grants of nonqualified stock options, incentive stock options, stock appreciation rights, (“~~SARs”),~~

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restricted stock, restricted stock units (“RSUs”), performance-based compensation awards, other stock-based awards, dividend equivalents and cash-based awards. ~~The Company has granted RSUs, stock options and performance share units (“PSUs”) to its officers, non-employee directors, employees and consultants pursuant to the 2016 Plan. On~~Effective October 29, 2018, the 2016 Stock Incentive Plan was amended to increase the ~~number~~reservation of the total shares available for issuance to 12,725,963 ~~and change the references throughout~~shares of common stock. The maximum number of shares with respect to which awards may be granted to any participant in any calendar year under the 2016 Stock Incentive Plan ~~from Differential Brands Group Inc.~~may not exceed 500,000 shares.

In 2018, the Company granted RSUs, performance stock units (“PSUs”) and stock options to ~~Centric Brands Inc.~~its officers, non-employee directors and employees pursuant to the 2016 Stock Incentive Plan or as “inducement grants,” as permitted under NASDAQ rules. The RSUs, PSUs and stock options represent the right to receive one share of common stock for each unit on the vesting date provided that the individual meets the applicable vesting criteria. The exercise price of stock options granted under the 2016 Stock Incentive Plan are determined by the Compensation and Stock Option Committee (the

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“Compensation Committee”) of the Board of Directors or by any other committee designated by the Board of Directors, but may not be less than the fair market value of the Company's shares of common stock on the date the option is granted. In general, unvested stock options are forfeited when a participant terminates employment or service with the Company or its affiliates.

Shares underlying awards that are forfeited, cancelled, terminated or expire unexercised, or settled in cash in lieu of issuance of shares, shall be available for issuance pursuant to future awards to the extent that such shares are forfeited, repurchased or not issued under any such award. Any shares tendered to pay the exercise price of an option or other purchase price of an award, or withholding tax obligations with respect to an award, shall be available for issuance pursuant to future awards. In addition, if any shares subject to an award are not delivered to a participant because (i) such shares are withheld to pay the exercise price or other purchase price of such award, or withholding tax obligations with respect to such award (or other award), or (ii) a payment upon exercise of an SAR is made in shares, the number of shares subject to the exercised or purchased portion of any such award that are not delivered to the participant shall be available for issuance pursuant to future awards.

As of ~~September 30, 2018,~~March 31, 2019, shares reserved for future issuance under the incentive plans include: (i) 444 shares of common stock issuable upon ~~the~~ exercise of stock options granted under the Amended and Restated Plan; ~~and~~ (ii) ~~1,200,570~~2,364,393 shares of common stock issuable upon vesting of RSUs, PSUs and exercise of stock options granted under the 2016 Stock Incentive Plan, (ii) 5,200,000 shares of common stock issuable upon vesting of RSUs and PSUs granted pursuant to “inducement grants” to certain of our officers, and 8,435,562 shares of common stock available for future grant under the 2016 Stock Incentive Plan. As of ~~September 30, 2018,~~March 31, 2019, the Company no longer granted shares ~~remained available for grant~~ under the Amended and Restated Plan.

Stock Options

The following table summarizes stock option activity by incentive plan for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 (in actual amounts):


	Amended and	2016 Stock	Total Number	Amended and	2016 Stock	Total Number
	Restated Plan	Incentive Plan	of Shares	Restated Plan	Incentive Plan	of Shares
Outstanding at January 1, 2018	444	70,277	70,721
Outstanding at January 1, 2019				444	320,277	320,721
Granted	—	—	—	—	—	—
Exercised	—	—	—	—	—	—
Forfeited / Expired	—	—	—	—	—	—
Outstanding at September 30, 2018	444	70,277	70,721
Outstanding at March 31, 2019				444	320,277	320,721

The following table summarizes stock option activity for all incentive plans for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 (in actual amounts):


		Weighted		Weighted Average	Aggregate			Weighted		Weighted Average	Aggregate
		Average		Remaining Contractual	Intrinsic			Average		Remaining Contractual	Intrinsic
	Options	Exercise Price		Life (Years)	Value		Options	Exercise Price		Life (Years)	Value
Outstanding at January 1, 2018	70,721	$	4.07
Outstanding at January 1, 2019							320,721	$	4.19	8.45	$	103,733
Granted	—		—				—		—	—		—
Exercised	—		—				—		—	—		—
Expired	—		—				—		—	—		—
Forfeited	—		—				—		—	—		—
Outstanding at September 30, 2018	70,721	$	4.07	3.80	$	2,811
Exercisable at September 30, 2018	70,721	$	4.07	3.80	$	2,811
Outstanding at March 31, 2019							320,721	$	4.19	8.20	$	103,733
Exercisable at March 31, 2019							70,721	$	4.07	3.30	$	103,733

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There were no options exercised during the three months ended March 31, 2019. The following table summarizes exercise prices for options exercisable as of March 31, 2019 (in actual amounts):


		Options Exercisable
			Weighted-Average
			Remaining Contractual
	Exercise Price	Number of Shares	Life (Years)
$	4.02	70,277	5.2
$	11.40	444	5.8
		70,721

For all stock compensation awards that contain graded vesting with time‑based service conditions, the Company has elected to apply a straight‑line recognition method to account for these awards. ~~A total of $0 and $(7) thousand stock-based~~Stock-based compensation expense related to stock options was ~~recognized~~immaterial during the three months ended September 30, 2018 and 2017, respectively. A total of $0 and $7 thousand stock-based compensation expense related to stock options was recognized during the nine months ended September 30, 2018 and 2017, respectively.March 31, 2019. As of ~~September 30, 2018,~~March 31, 2019, there was no$0.6 million of unrecognized compensation cost related to unvested stock options.

~~The stock~~Stock option awards are measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility over the option’s expected term, the risk-free interest rate over the option’s expected term and the expected annual dividend yield, if any. The Company accounts for forfeitures as they occur. Shares of common stock will be issued when the options are exercised.

~~Table of Contents~~

Restricted Stock Units

The following table summarizes RSU activity for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 (in actual amounts):


	Restricted Stock Units			Restricted Stock Units
	Number Of Units		Weighted Average Grant Date Fair Value	Number Of	Weighted Average Grant
Outstanding at January 1, 2018	745,702	$	3.68
				Units	Date Fair Value
Outstanding at January 1, 2019				5,820,560	$	4.06
Granted	1,023,485		1.23	—		—
Vested	952,046		1.84	205,557		3.28
Forfeited	60,000		1.87	—		—
Outstanding at September 30, 2018	757,141	$	2.83
Outstanding at March 31, 2019				5,615,003	$	4.09

A total of ~~$0.6~~$2.5 million and ~~$0.4~~$0.6 million of stock-based compensation expense was recognized related to RSUs during the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively. A total of $2.1 million and $1.3 million of stock-based compensation expense was recognized related to RSUs during the nine months ended September 30, 2018 and 2017,~~ respectively. As of ~~September 30, 2018,~~March 31, 2019, there was ~~$1.0~~$20.5 million of total unrecognized compensation cost related to unvested ~~Restricted Stock Units.~~RSUs. The unrecognized compensation cost is expected to be recognized over a weighted‑average of ~~1.4~~2.6 years.

Performance Share Units

~~The~~In the first quarter of 2019, the Company ~~has granted 563,678~~did not grant any PSUs. 55,556 performance share units ~~which vest if~~were forfeited during the performance targets set by the Compensation Committee are met. If less than 80 percent of the performance targets are reached, zero percent of the performance share units will vest. For certain performance share units,period ended March 31, 2019 and 1,350,000 unvested performance ~~share units~~shares are outstanding as of March 31, 2019. Stock compensation expense in any completed year will be eligible for vesting in subsequent years if the subsequent year performance target is exceeded and the excess is sufficient to make up for the prior year shortfall. As of September 30, 2018, 111,111 performance share units have been forfeited and 452,567 unvested performance share units are outstanding. As of September 30, 2018, no performance share units have vested, and no expense has been recognized.

~~Series A Preferred Stock~~

In connection with the RG Merger, the Company entered into the RG Stock Purchase Agreement with TCP Denim, LLC pursuant to which the Company issued and sold to TCP Denim, LLC an aggregate of 50,000 shares of the Company’s Series A Convertible Preferred Stock, par value $0.10 per share (the “~~Series A Preferred Stock”) for an aggregate purchase price of $50.0 million in cash. The proceeds from the sale of Series A Preferred Stock were used to consummate the RG Merger.~~

On October 29, 2018, fifty thousand (50,000) shares of the Company’s Series A Preferred Stock converted into 5,852,142 newly issued shares of Common Stock in accordance with the terms of the Series A Preferred Stock (the “~~Series A Conversion”). For additional information, see “Note 16–Subsequent Events.”~~

Under the form of certificate of designation for the Series A Preferred Stock, each share of Series A Preferred Stock entitled the holder to receive cumulative dividends when, as and if declared by the Board of Directors or a duly authorized committee thereof, payable quarterly, at an annual rate of 10%, plus accumulated and accrued dividends thereon through such date. Additionally, if the Board of Directors declared or paid a dividend on the common stock, then each holder of the Series A Preferred Stock was entitled to receive a cash dividend on an as-converted basis. Each holder of the Series A Preferred Stock was entitled to vote on an as-converted basis and together with the holders of common stock as a single class, subject to certain limitations.

For so long as a to-be-determined percentage of the shares of the Series A Preferred Stock remained outstanding, the holders of the Series A Preferred Stock, exclusively and as a separate class, were entitled to elect three members of the Board of Directors, each of whom could only have been removed without cause by the affirmative vote

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of the holders of a majority of the shares of Series A Preferred Stock. The holders of the Series A Preferred Stock had separate class voting rights with respects to certain matters affecting their rights. Upon any liquidation event, holders of the Series A Preferred Stock were entitled to receive the greater of the liquidation preference on the date of determination and the amount ~~that would be payable to the holders~~ of ~~the Series A Preferred Stock had such holders converted their shares~~$0.8 million was recognized as of Series A Preferred Stock into shares of common stock immediately prior to such liquidation event. Each share of the Series A Preferred Stock was convertible, at the option of the holder thereof, at any time and without the payment of additional consideration by the holder, at an initial conversion price of $11.16.March 31, 2019.

~~Series A-1 Preferred Stock~~

On January 18, 2018, the SWIMS Convertible Note originally issued on July 18, 2016 to Tengram II, as amended, with a principal amount of $13.0 million, matured and automatically converted into newly issued shares of Series A-1 Preferred Stock, at a conversion price of $3.00 per share. The outstanding balance of the SWIMS Convertible Note, together with any accrued and unpaid interest thereon, converted into 4,587,964 shares of Series A-1 Preferred Stock. The Series A-1 Preferred Stock was convertible on a one-to-one basis into shares of Common Stock. Under the form of certificate of designation for the Series A-1 Preferred Stock, each share of Series A-1 Preferred Stock entitled the holder to receive cumulative dividends when, as and if declared by the Board of Directors or a duly authorized committee thereof, payable quarterly, at an annual rate of 10%, plus accumulated and accrued dividends thereon through such date. Additionally, if the Board of Directors declared or paid a dividend on the common stock, then each holder of the Series A Preferred Stock was entitled to receive a cash dividend on an as-converted basis. Each holder of the Series A Preferred Stock was entitled to vote on an as-converted basis and together with the holders of common stock as a single class, subject to certain limitations. The Series A-1 Preferred Stock was senior to the Common Stock upon a liquidation and had as-converted voting rights alongside the Common Stock.

On October 29, 2018, 4,587,964 shares of the Company’s Series A-1 Preferred Stock were converted at the election of the holders thereof into 4,951,177 newly issued shares of Common Stock in accordance with the terms of the Series A-1 Preferred Stock. For additional information, see “~~Note 16~~–~~Subsequent Events.”~~

~~Warrants~~

~~The Company issued warrants in conjunction with the acquisition and financing of SWIMS that are currently exercisable and have been classified as equity.~~

~~In connection with the SWIMS acquisition, the Company issued to Tengram II a warrant for the purchase of 500,000 shares of common stock at an exercise price of $3.00 per share (the “SWIMS Warrant~~”) and has an estimated fair value of $465 thousand. The Company determined the fair value of the warrant at the date of grant using the Black-Scholes option pricing model based on the market value of the underlying common stock, an exercise price of $3.00 per share, an expected life (term) of 5 years, a volatility rate of 50%, based upon the expected volatility in market traded stock over the same period as the remaining term of the warrants, zero dividends, and a risk free interest rate of 1.14%. In addition, a 20% discount for lack of marketability was applied based upon the Rule 144 six-month restriction period. The SWIMS Warrant expires on July 18, 2021.

~~Also in connection with the SWIMS acquisition, the Company issued to the shareholders of SWIMS (the “SWIMS Sellers~~”) warrants for the purchase of 150,000 shares of common stock with an exercise price of $5.47 per share that have an estimated fair value of $45 thousand. The Company determined the fair value of the warrants at the date of grant using the Black-Scholes option pricing model based on the market value of the underlying common stock, an exercise price of $5.47 per share, an expected life (term) of 3 years, a volatility rate of 45%, based upon the expected volatility in market traded stock over the same period as the remaining term of the warrants, zero dividends, and a risk free interest rate of 0.85%. In addition, a 10% discount for lack of marketability was applied based upon the Rule 144 six-month restriction period. The SWIMS Sellers warrants expire on July 18, 2019.

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~~11.~~Management Incentive Plan

On October 29, 2018, the Company entered into a letter agreement with GSO (the “MIP Letter”). Under the MIP Letter, the Company agreed to create a new stock incentive compensation plan for the amount of 1,776,500 shares of common stock (the “MIP Plan”), which will be allocated by the Board in accordance with the Stockholder Agreement. The parties are in process of finalizing an amendment to the MIP Letter, pursuant to which the Company expects the shares to be allocated under its 2016 Stock Incentive Plan instead of a newly created plan and such grants would be subject to the same terms as the 2016 Stock Incentive Plan. Upon the forfeit of any awards granted at the direction of the Special Committee under the 2016 Stock Incentive Plan, the Company expects to issue the equivalent amount of shares of common stock to GSO for no additional consideration.

12. Disaggregation of Revenue

In accordance with ASC 606, the Company elected to disclose its net sales by segment. Each segment presents its own characteristics with respect to the timing of revenue recognition and type of customer. Prior to the GBG Acquisition, the Company organized its business into the following three reportable segments: (1) Wholesale, (2) Consumer Direct and (3) Corporate and other. Following the GBG Acquisition, the Company implemented significant organizational changes that have impacted the manner in which it manages the Company, and realigned its business into the following three reportable segments: (1) Kids, (2) Accessories, and (3) Men’s and Women’s Apparel, to better reflect its internal organization, management and oversight structure.

The following tables disaggregate our operating segment net sales by product category and sales channel, which the Company believes provides a meaningful depiction of how the nature, timing and uncertainty of net sales are affected by economic factors:


	Three Months Ended March 31, 2019						Three Months Ended March 31, 2018
	Wholesale &			Direct to			Wholesale &			Direct to
	Licensing		Consumer		Total		Licensing		Consumer		Total
Kids	$	232,745	$	—	$	232,745	$	—	$	—	$	—
Accessories		97,011		—		97,011		—		—		—
Men’s & Women’s Apparel		142,335		56,806		199,141		29,454		9,364		38,818
	$	472,091	$	56,806	$	528,897	$	29,454	$	9,364	$	38,818

International sales were $19.8 million for the three months ended March 31, 2019 and immaterial for the three months ended March 31, 2018.

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13. Loss per Share

Loss per share is computed using weighted average common shares and dilutive common equivalent shares outstanding. Potentially dilutive ~~shares~~securities consist of outstanding stock options, unvested RSUs, unvested PSUs, warrants, convertible Series A Preferred Stock ~~convertible Series A-1 Preferred Stock~~ and shares issuable upon the assumed conversion of the ~~Modified~~2024 Convertible Notes and the ~~SWIMS~~Modified Convertible Note. Loss per share for the three and nine months ended September 30, 2017 has been corrected to include the effect of the preferred dividends, see “Note 2 – Summary of Significant Accounting Policies” for additional information.Notes, as applicable. A reconciliation of the numerator and denominator of basic and diluted loss per share is as follows (in thousands, except per share data):.


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2018		2017		2018		2017		2019		2018
Basic loss per share computation
Numerator:
Net loss	$	(10,579)	$	(183)	$	(20,350)	$	(6,593)	$	(81,863)	$	(4,085)
Less: preferred dividends		(1,892)		(1,382)		(5,548)		(4,099)		—		(1,762)
Net loss attributable to common stockholders	$	(12,471)	$	(1,565)	$	(25,898)	$	(10,692)	$	(81,863)	$	(5,847)
Denominator:
Weighted average common shares outstanding		14,085		13,322		13,873		13,306		58,548		13,550

Loss per common share - basic	$	(0.89)	$	(0.12)	$	(1.87)	$	(0.80)
Net loss									$	(1.40)	$	(0.43)
Net loss per common share - basic									$	(1.40)	$	(0.43)

Diluted loss per share computation
Numerator:
Net loss	$	(10,579)	$	(183)	$	(20,350)	$	(6,593)	$	(81,863)	$	(4,085)
Less: preferred dividends		(1,892)		(1,382)		(5,548)		(4,099)		—		(1,762)
Net loss attributable to common stockholders	$	(12,471)	$	(1,565)	$	(25,898)	$	(10,692)	$	(81,863)	$	(5,847)
Denominator:
Weighted average common shares outstanding		14,085		13,322		13,873		13,306		58,548		13,550
Effect of dilutive securities:
Options, RSUs, PSUs, warrants, Series A, Series A-1, convertible notes		—		—		—		—
Options, RSUs, PSUs, warrants, Series A, convertible notes										—		—
Dilutive common shares		14,085		13,322		13,873		13,306		58,548		13,550

Loss per common share - diluted	$	(0.89)	$	(0.12)	$	(1.87)	$	(0.80)
Net loss									$	(1.40)	$	(0.43)
Net loss per common share - diluted									$	(1.40)	$	(0.43)

The following ~~potential~~potentially dilutive shares of common stock were excluded from diluted EPS as the Company had a net loss for the ~~period (in thousands):~~periods ended:


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2018		2017		2018		2017		2019		2018
Outstanding stock options		71		150		71		150		321		71
Unvested RSUs		757		1,060		757		1,060		5,615		849
Unvested PSUs		453		458		453		458		1,350		403
Outstanding warrants		650		650		650		650		650		650
Convertible Series A Preferred Stock		4,480		4,480		4,480		4,480		—		4,480
Convertible Series A-1 Preferred Stock		4,588		—		4,588		—		—		4,588
Modified Convertible Notes		1,278		1,237		1,278		1,237		1,299		1,258
SWIMS Convertible Note		—		4,522		—		4,522
2024 Convertible Notes										3,125		—

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Loss per Share under Two−Class Method

The Series A ~~and Series A-1 Convertible~~ Preferred Stock had the non-forfeitable right to participate on an as converted basis at the conversion rate then in effect in any common stock dividends declared and as such, ~~are~~was considered

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a participating ~~securities. Both the~~security. The Series A ~~and Series A-1 Convertible~~ Preferred Stock ~~are~~was included in the computation of basic and diluted loss per share for the three months ended March 31, 2019 pursuant to the two-class method. Holders of the Series A ~~and Series A-1 Convertible~~ Preferred Stock did not participate in undistributed net losses because they were not contractually obligated to do so.

The computation of diluted loss per share attributable to common stockholders reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock that are dilutive were exercised or converted into shares of common stock (or resulted in the issuance of shares of common stock) and would then share in the Company’s earnings. During the periods in which the Company record a loss from continuing operations attributable to common stockholders, securities would not be dilutive to net loss per share and conversion into shares of common stock is assumed not to occur.

The following table provides a reconciliation of net loss to preferred ~~stockholders~~shareholders and common stockholders for purposes of computing net loss per share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 ~~and 2017~~ (in thousands, except per share ~~amounts)~~data):

Three months ended September 30,

Nine months ended September 30,


2018

2017

2018

2017
Net loss

$
(10,579)

$
(183)

$
(20,350)

$
(6,593)
Less: preferred dividends

(1,892)

(1,382)

(5,548)

��
(4,099)
Net loss attributable to stockholders

(12,471)

(1,565)

(25,898)

(10,692)
Participating securities - Series A and Series A-1 Convertible Preferred Stock

—

—

—

—
Net loss attributable to common stockholders

$
(12,471)

$
(1,565)

$
(25,898)

$
(10,692)

Denominator:

Weighted average common shares outstanding

14,085

13,322

13,873

13,306

Loss per common share - basic and diluted under two-class method

$
(0.89)

$
(0.12)

$
(1.87)

$
(0.80)


	Three months ended March 31,
	2018
Net loss	$	(4,085)
Less: preferred dividends		(1,762)
Net loss attributable to common stockholders	$	(5,847)

Denominator:
Weighted average common shares outstanding		13,550

Loss per common share - basic and diluted under two-class method	$	(0.43)

There were no preferred dividends for the three months ended March 31, 2019.

~~12.~~

14. Income Taxes

The ~~Company accounts~~provision for income taxes ~~under~~for the ~~asset~~three months ended March 31, 2019 was approximately $1.6 million, or an effective tax rate of 2.0%. The Company has incurred U.S. operating losses and liability method; under this method, deferred assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that arehas not incurred any other income taxes. As a result, the Company is not expected to incur material income taxes in the current year, but is recording a deferred expense relating to the valuation allowance in the amount of $1.6 million, or 2.0%.

The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in ~~effect when the differences are expected to reverse.~~

~~On December 22, 2017,~~ the U.S. ~~government enacted comprehensive tax legislation commonly referred~~and certain foreign jurisdictions. Due to asuncertainties surrounding the ~~Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that may affect the Company’s financial results, including, but not limited to: (1) a reduction~~realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all of its net deferred tax assets. When the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period such determination is made.

The Company has applied ASC 740, Income Taxes, and has determined that it has uncertain positions that resulted in a tax reserve of $0.1 million. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company is subject to U.S. federal ~~corporate~~ tax ~~rate from 34% to 21%; (2) limitation of~~authority and U.S. state tax authority examinations for all years with the deduction for interest expense; (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax global intangible low-taxed income (“~~GILTI”); (5) limitations on the deductibility of certain executive compensation;~~net operating loss and ~~(6) limitations on the use of Federal Tax Credit to reduce the U.S. income tax liability.~~

~~The SEC staff issued Staff Accounting Bulletin 118, (“SAB 118”) and the FASB issued ASU No. 2018-05,~~ ~~Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118~~, which provide guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.credit carryforwards.

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Table of Contents

~~Effective January 1, 2018,~~15. Segment Information

Segment Reporting

Prior to the ~~Tax Act creates~~GBG Acquisition, the Company organized its business into the following three reportable segments: Wholesale, Consumer Direct and Corporate and other. Upon completing the GBG Acquisition, it resegmented its reportable segments to reflect the organizational structure of the Company, including the operations of the GBG Business. Accordingly, it realigned its business into the following three reportable segments: Kids, Accessories, and Men’s and Women’s Apparel. This new segment structure is consistent with how the Company establishes our overall business strategy, allocate resources, and assess performance.

All prior period segment information has been recast to reflect the realignment of our segment reporting structure on a ~~new requirement to include in U.S. income global intangible low-taxed income (GILTI). The FASB Staff Q&A, Topic 740, No. 5,~~ ~~Accounting for GILTI~~, states that an entity can make an accounting policy election to either (1) treat taxes due on future U.S. inclusions related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company selected the period cost method to record the tax effects of GILTI in its financial statements. For the three and nine months ended September 30, 2018, GILTI related to current-year operations only is included in the estimated annual effective tax rate.comparable basis.

The effective tax rate from operations was a benefit of 10% for the three months ended September 30, 2018 compared to 82% for the three months ended September 30, 2017. The effective tax rate from operations was a benefit of 10% for the nine months ended September 30, 2018 compared to an expense of 13% for the nine months ended September 30, 2017. The difference in the effective tax rate for the three and nine months ended September 30, 2018, as compared to the three and nine months ended September 30, 2017, was primarily due to a change in the ratio of year-to-date losses to forecasted losses. The projected tax expense for the year predominately consists of current state and foreign tax expenses and deferred taxes associated with the Company’s foreign subsidiary and the Company’s deferred tax liability for indefinite lived intangible assets.

A valuation allowance is required if, based on the weight of available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. Quarterly, management reassesses the need for a valuation allowance. Realization of deferred income tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. Because of our lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance, excluding a portion of the deferred tax liabilities for long-lived intangibles, unless they can be scheduled to reverse against deferred tax assets with unlimited carryforward periods. The Company has not provided for U.S. taxes on unremitted earnings of its foreign subsidiary, as the Company does not expect to remit earnings and profits for such subsidiary to the U.S. As a result, deferred taxes were not provided related to the cumulative translation adjustments.

Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The net operating losses are presented net of any expirations associated with such limitations.


	Three months ended March 31,
	2019		2018
	(in thousands)
Net sales:
Kids	$	232,745	$	—
Accessories		97,011		—
Men’s & Women’s Apparel		199,141		38,818
	$	528,897	$	38,818
Gross profit:
Kids	$	37,174	$	—
Accessories		15,648		—
Men’s & Women’s Apparel		66,124		16,255
	$	118,946	$	16,255

Selling, general and administrative:
Kids	$	28,478	$	—
Accessories		12,458		—
Men’s & Women’s Apparel		72,229		15,348
	$	113,165	$	15,348

Depreciation and Amortization:
Kids	$	9,825	$	—
Accessories		9,259		—
Men’s & Women’s Apparel		3,872		1,463
	$	22,956	$	1,463

Other operating expense:
Kids	$	6,117	$	—
Accessories		6,058		—
Men’s & Women’s Apparel		4,923		—
	$	17,098	$	—

Operating income (loss):
Kids	$	(7,246)	$	—
Accessories		(12,127)		—
Men’s & Women’s Apparel		(14,900)		(556)
	$	(34,273)	$	(556)

~~At September 30, 2018, December 31, 2017 and September 30, 2017, the Company had $0.~~1 million of certain unrecognized tax benefits included as a component of accounts payable and accrued expenses within the accompanying condensed consolidated balance sheets. Interest and penalties related to uncertain tax positions, if any, are recorded in income tax expense. ~~With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examination by taxing authorities for years prior to 2014.~~

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Table of Contents

~~13. Segment Reporting~~16. Subsequent Events

~~The following table contains summarized financial information by reportable segment (in thousands):~~

Three months ended September 30,

Nine months ended September 30,


2018

2017

2018

2017
Net sales:

Wholesale

$
28,410

$
32,393

$
80,808

$
88,910
Consumer Direct

10,434

9,188

31,128

27,959
Corporate and other

987

808

2,678

2,075

$
39,831

$
42,389

$
114,614

$
118,944
Gross profit:

Wholesale

$
9,724

$
11,655

$
25,817

$
33,210
Consumer Direct

6,455

5,592

19,351

17,592
Corporate and other

981

808

2,672

2,075

$
17,160

$
18,055

$
47,840

$
52,877
Operating expenses:

Wholesale

$
3,586

$
3,428

$
9,951

$
11,053
Consumer Direct

5,870

5,981

17,761

18,364
Corporate and other

16,950

7,418

35,532

22,742

$
26,406

$
16,827

$
63,244

$
52,159
Operating (loss) income:

Wholesale

$
6,138

$
8,227

$
15,866

$
22,157
Consumer Direct

585

(389)

1,590

(772)
Corporate and other

(15,969)

(6,610)

(32,860)

(20,667)

$
(9,246)

$
1,228

$
(15,404)

$
718
Capital expenditures:

Wholesale

$
26

$
249

$
182

$
264
Consumer Direct

93

24

270

318
Corporate and other

213

81

542

308

$
332

$
354

$
994

$
890


September 30, 2018

December 31, 2017

September 30, 2017
Total assets:

Wholesale

$
54,573

$
53,958

$
61,536
Consumer Direct

7,043

7,633

8,241
Corporate and other

107,249

112,083

108,608

$
168,865

$
173,674

$
178,385

New Credit Agreements Amendments

~~14. Commitments and Contingencies~~

~~Litigation~~

The Company is party to legal proceedings and claims in the ordinary course of business, including proceedings to protect its intellectual property rights. As part of the Company’s monitoring program for its intellectual property rights, from time to time, the Company files lawsuits in the United States and abroad for acts of trademark counterfeiting, trademark infringement, trademark dilution, patent infringement or breach of other state or foreign laws. These actions often result in seizure of counterfeit merchandise and negotiated settlements with defendants. Defendants sometimes raise the invalidity or unenforceability of the Company’s proprietary rights as affirmative defenses or counterclaims.

In the opinion of management, based upon advice of legal counsel, the likelihood is remote that the impact of any pending proceedings and claims, either individually or in the aggregate, would have a material adverse effect on the

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consolidated financial condition, results of operations or cash flows. However, because the ultimate outcome of legal proceedings and claims involves judgments, estimates and inherent uncertainties, actual outcomes of these proceedings and claims may materially differ from current estimates. It is possible that resolution of one or more of the proceedings currently pending or threatened could result in losses material to the consolidated results of operations, liquidity or financial condition.

On a quarterly basis, the Company reviews its legal proceedings and claims to determine if an unfavorable outcome is considered “remote,” “reasonably possible” or “probable” as defined by U.S. GAAP. If it is determined that an unfavorable outcome is probable and is reasonably estimable, potential litigation losses are accrued for. The liability the Company may ultimately incur with respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts accrued for, if at all. If it is determined an unfavorable outcome is not probable or reasonably estimable, no accrual is made.

~~15. Related Party Transactions~~

~~Peter Kim~~

The Company entered into several agreements, including a stock purchase agreement, a convertible note, a registration rights agreement, an employment agreement and a non-competition agreement with Peter Kim, the Founder and Vice Chairman of Hudson, in connection with the acquisition of Hudson. Additionally, in connection with the RG Merger,April 17, 2019, the Company entered into ~~a Rollover Agreement pursuant to which~~ the ~~convertible notes were exchanged for a combination of cash, stock~~first amendment and Modified Convertible Notes, and a new employment and non-competition agreement with Mr. Kim. Mr. Kim’s employment agreement was amended on June 16, 2017. Mr. Kim also has rights under the Registration Rights Agreement described below with respect to shares of common stock issuable upon conversion of his Modified Convertible Notes. See “Note 8 – Debt.” As of September 30, 2018, the amount outstanding under the convertible note payable to Mr. Kim was $9.1 million with accrued interest of $149 thousand.

Under the non-competition agreement with Differential Brands Group Inc. and Hudson, which became effective as of the closing date of the RG Merger, Mr. Kim has agreed not to engage in, compete with or permit his name to be used by or in connection with any premium denim apparel business outside his role with Hudson that is competitive to Differential Brands Group Inc., Hudson or the Company’s respective subsidiaries for a period of up to three years from, as a result of the amendment to his employment agreement, June 16, 2017. The amendment to Mr. Kim’s employment agreement also involved (i) a change to his annual bonus opportunity, (ii) a modification of his severance arrangement, and (iii) a change to the definition of “Restricted Business” as set forth in the employment agreement.

~~Registration Rights Agreement~~

~~On the closing date of the RG Merger, the Company entered into a registration rights agreement~~waiver (the “~~Registration Rights Agreement~~1L Amendment”) ~~with TCP Denim, LLC and certain of its affiliates, who are one of the major stockholders of the Company, the noteholders party~~ to the Rollover Agreement (including Mr. Kim and Fireman) and Michael Buckley, the Company’s Chief Executive Officer. Pursuant to the Registration Rights Agreement, and subject to certain limitations described therein, the Company is required to provide certain demand and piggyback registration rights to the parties to the Registration Rights Agreement. In particular, if demanded, the Company is required to prepare and file a registration statement on Form S-1 or S-3 (or any similar form or successor thereto) for the registration under the Securities Act of shares of our common stock (i) issued to the parties to the Registration Rights Agreement in connection with the RG Merger Agreement and the Rollover Agreement and (ii) issuable upon conversion of the Series A Convertible Preferred Stock and the Modified Convertible Notes. Prior to the closing date of the RG Merger, the Company had a substantially similar registration rights agreement with the holders of the original convertible notes, which included Fireman and Mr. Kim. The Registration Rights Agreement was amended on October 29, 2018, in connection with the consummation of the GBG Acquisition. For additional information, see “Note 16–Subsequent Events.”

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~~Employment Agreements with Officers~~

The Company entered into employment agreements with Mr. Buckley, Mr. Kim and Mr. Ross, the Company’s Chief Financial Officer. The agreements have varying initial terms, but Mr. Buckley’s and Mr. Ross’s contain automatic one-year renewals, unless terminated by either party, and provide for minimum base salaries adjusted for annual increases, incentive bonuses based upon the attainment of specified goals, and severance payments in the event of termination of employment, as defined in the employment contracts.

~~On June 28, 2018, the Company announced it determined not to extend its employment agreement, dated as of January 28, 2016 (the “Buckley Agreement~~”), with Michael Buckley, the Company’s Chief Executive Officer and a member of the Board, beyond its current term expiring on December 31, 2018 and, in accordance with the terms of the Buckley Agreement, delivered a notice of non-renewal to Mr. Buckley. On October 29, 2018, the Company entered into a separation and release agreement with Michael Buckley (the “~~Separation Agreement~~”) and terminated the Buckley Agreement pursuant to which Mr. Buckley resigned as a director of the Company and from all positions with the Company and any of its subsidiaries. Additionally, in October 2018, the Company entered into employment agreements with a new chief executive officer, Jason Rabin, and a new chief financial officer, Anurup Pruthi. For additional information, see “~~Note 16~~–~~Subsequent Events.”~~

~~Payments to Tengram Capital Partners, LP~~

From time to time, we expect to reimburse Tengram Capital Partners, LP, an entity that is affiliated with the Company’s largest stockholders, for certain travel and other related expenses of its employees related to services performed on the Company’s behalf and at the Company’s request. For the three months ended September 30, 2018 and 2017, the Company did not incur any reimbursement related expenses. For the nine months ended September 30, 2018 and 2017, the Company incurred expenses of $59 thousand and $62 thousand related to reimbursement of expenses, respectively.

~~SWIMS® Transaction~~

In connection with the acquisition of SWIMS in July 2016, the Company entered into certain financing arrangements with Tengram II, an entity affiliated with the holder of the Series A Preferred Stock, TCP Denim, LLC. On January 18, 2018, the SWIMS Convertible Note matured and automatically converted into newly issued shares of the Company’s Series A-1 Preferred Stock, at a conversion price of $3.00 per share. The outstanding balance of the SWIMS Convertible Note, together with any accrued and unpaid interest thereon, converted into 4,587,964 shares of Series A-1 Preferred Stock. Upon the issuance of such shares of Series A-1 Preferred Stock by the Company to Tengram II, the SWIMS Convertible Note was settled in its entirety. On October 29, 2018, 4,587,964 shares of the Company’s Series A-1 Preferred Stock converted into 4,951,177 newly issued shares of Common Stock in accordance with the terms of the Series A-1 Preferred Stock. For additional information, see “Note 16–Subsequent Events.”

~~GSO Capital Partners, LP and Blackstone Tactical Opportunities Advisors L.L.C.~~

In connection with the GBG Acquisition, affiliates of GSO Capital Partners LP and Blackstone Tactical Opportunities Advisors L.L.C. became related parties of the Company. For additional information, see “Note 16–Subsequent Events.”

~~16. Subsequent Events~~

~~The GBG Acquisition~~

~~On October 29, 2018 (the “GBG Closing Date”), the Company~~ ~~completed the GBG Acquisition~~ ~~pursuant to the GBG Purchase Agreement for approximately $1.21 billion in cash, subject to certain adjustments.~~

The consideration paid by the Company for the GBG Acquisition was funded with proceeds from borrowings under the Credit Agreements (as defined below) and a portion of the proceeds from the Private Placement (as defined below).

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On the GBG Closing Date, in connection with the entry into the Credit Agreements, (i) the credit and security agreement between the Company and Wells Fargo Bank, National Association, as lender; and (ii) the credit and security agreement by and among the Company, TCW Asset Management Company, as agent, and the lenders party thereto, each dated as of January 28, 2016 and as amended, modified or restated, were terminated and all outstanding obligations thereunder were repaid.

~~The Company has not yet completed the initial accounting of the GBG Acquisition.~~

~~Credit Agreements~~

~~On the GBG Closing Date, the Company and certain of its subsidiaries entered into a (i) first lien credit agreement with Ares Capital Corporation (“Ares”), as administrative agent, ACF FinCo I LP, as collateral agent, and certain other lenders party thereto (the “First Lien Credit Agreement”) and (ii) second lien credit agreement with U.S. Bank National Association, as administrative agent and collateral agent, and certain lenders party thereto (the “Second Lien Credit Agreement”, and together with~~ the First Lien Credit Agreement ~~collectively,~~to, among other things: (i) increase the “~~Credit Agreements”).~~

~~The First Lien Credit Agreement provides for a senior secured asset based revolving credit facility with commitments in an~~ aggregate ~~principal amount of $150 million, which matures four and a half years from the GBG Closing Date (the “New Revolving Facility”) and a senior secured term loan credit facility in an aggregate principal amount of $645 million, which matures five years from the GBG Closing Date (the “First Lien Term Loan Facility”, and together with the New Revolving Facility, collectively, the “First Lien Facilities”). The Second Lien Credit Agreement provides for a second lien term loan facility in an aggregate principal amount of $668 million, which matures six years from the GBG Closing Date (the “Second Lien Term Loan Facility”, and together with the First Lien Term Loan Facility, collectively, the “Term Loan Facilities”). The amount available to be drawn under the New Revolving Facility will be based on the borrowing base values attributed to eligible inventory.~~

~~The obligations under the Credit Agreements are guaranteed by certain domestic subsidiaries of the Company (the “Guarantors”) and are secured by substantially all assets of the Company and its domestic subsidiaries.~~

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

The Term Facilities include mandatory prepayments customary for credit facilities of their nature. Subject to certain exceptions, prepayments of loans under the First Lien Term Loan Facility and permanent reductions of the commitments under the New Revolving Facility in each case, are subject to a prepayment premium of (i) 3.00% during the first year after the GBG Closing Date, (ii) 2.00% during the second year after the GBG Closing Date and (ii) 1.00% during the third year after the GBG Closing Date, plus, if applicable, customary “breakage” costs with respect to LIBOR rate loans. Subject to certain exceptions, prepayments of loans under the ~~Second~~First Lien ~~Term Loan Facility are subject~~Credit Agreement from $150.0 million aggregate principal amount to ~~a prepayment premium of (i) with respect to~~$200.0 million; (ii) increase the ~~first $175 million of aggregate prepayments (the “Initial Prepayment Amount~~”), (a) 3.00% during the first year after the GBG Closing Date, (b) 2.00% during the second year after the GBG Closing Date and (c) 1.00% during the third year after the GBG Closing Date and (ii) with respect to any amount ~~in excess~~ of the Initial Prepayment Amount, (a) subject to certain exceptions, a customary make-whole amount during the first or second year after the GBG Closing Date, (b) 4.00% during the third year after the GBG Closing Date, (c) 2.00% during the fourth year after the GBG Closing Date and (d) 1.00% during the fifth year after the GBG Closing Date.

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~~The annual interest rates~~permitted securitization facility under the ~~Credit Agreements are as follows:~~

~~For the New Revolving Credit Facility: the lender’s alternate~~RPA from $550.0 million to $600.0 million; (iii) increase the borrowing base ~~rate (“ABR”) (with a 1.00% floor) plus 4.50% for base rate loans and adjusted LIBOR (with a 0% floor) plus 5.50% for LIBOR rate loans.~~

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

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

The Credit Agreements contain customary representations and warranties, events of default and covenants, including, among other things and subject to certain exceptions, covenants that restrict the ability of the ~~Company~~First Lien Credit Agreement as set forth in the 1L Amendment; and its subsidiaries to incur additional indebtedness, create or permit liens on assets, engage in mergers or consolidations, dispose of assets, make prepayments of certain indebtedness, pay certain dividends and other restricted payments, make investments, and engage in transactions with affiliates. The Credit Agreements require(iv) amend the Company to comply with financial maintenance covenants to be tested quarterly (beginning with the fiscal quarter ending March 31, 2019), consisting of a maximum net first lien leverage ratio, a maximum net total leverage ratio and a minimumCompany’s consolidated fixed charge ~~coverage ratio.~~

~~The Receivables Facility~~

ratio covenant.

On ~~the GBG Closing Date,~~April 17, 2019, the Company entered into ~~a three-year trade receivables securitization facility~~the first amendment and waiver (the “~~Receivables Facility~~2L Amendment”) to the Second Lien Credit Agreement to, among other things, increase the amount of amount of indebtedness under the First Lien Credit Agreement from $795.0 million to $845.0 million.

In connection with the 1L Amendment, the Company paid the lenders under the New Revolving Facility a fee of $1.5 million. Also, on or around April 15, 2019, the Company received consents under the First Lien Credit Agreement, the Second Lien Credit Agreement and under the RPA to, among other things, extend the deadline for the Company to complete and publicly file its 2018 year-end financial statements until May 15, 2019. The Company completed and filed its 2018 year-end financial statements on May 15, 2019.

RPA/PSA Amendments

On April 25, 2019, the Company entered an amendment to its PNC Receivables Facility pursuant to (i) ~~a Purchase and Sale Agreement (“PSA”), 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 and (ii) a Receivables Purchase Agreement~~an amendment to (the “~~RPA~~PSA Amendment”) ~~among Spring, as Seller,~~ the ~~Company, as initial Servicer, certain purchasers party thereto~~PSA and (ii) an amendment to (the “~~Purchasers~~RPA Amendment”), PNC Bank, National Association, as Administrative Agent, and PNC Capital Markets LLC, as Structuring Agent. Other subsidiaries of the Company may later enter into the 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 Amendment, 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 Amendment, Spring sells to the Purchasers an undivided ownership interest in the Receivables for up to ~~$450~~$600.0 million in cash ~~proceeds.~~ proceeds, an increase of $150.0 million.

NASDAQ Notice

On April 18, 2019, the Company received a notice (the “Notice”) from NASDAQ stating that because the Company had not yet filed its 2018 10-K, the Company is no longer in compliance with NASDAQ Listing Rule 5250(c)(1). NASDAQ Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports with the Securities and Exchange Commission.

The ~~proceeds~~Notice states that the Company has 60 calendar days, or until June 17, 2019, to submit to NASDAQ a plan to regain compliance with the NASDAQ Listing Rules. If NASDAQ accepts the Company’s plan, then NASDAQ may grant the Company up to 180 days from the ~~Purchasers’ investment are used~~prescribed due date for filing the 2018 10-K (as extended pursuant to ~~finance Spring’s purchase~~Rule 12b-25 under the Securities Exchange Act of 1934, as amended), or until October 14, 2019, to regain compliance. If NASDAQ does not accept the ~~Receivables from~~Company’s plan, then the ~~Originators. Spring may also use~~Company will have the ~~proceeds from~~opportunity to appeal that decision to a ~~subordinated loan made by~~NASDAQ Hearings Panel. The Company filed its Form 10-K with the ~~Originators to Spring to finance purchases of the Receivables from the Originators. Rather than remitting~~Securities and Exchange Commission prior to the ~~Purchasers~~due date of such plan to regain compliance with 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.NASDAQ Listing Rules.

Bylaws Amendment

~~The GSO Convertible Notes~~

~~On the GBG Closing Date,~~Effective May 15, 2019, the Company ~~issued convertible promissory notes (the “GSO Convertible Notes”) in an aggregate principal amount~~amended and restated its Bylaws to, among other things, update its name and to add Section 3.6, requiring the Company to consult with its board of ~~$25.0 million~~directors prior to ~~funds managed by GSO Capital Partners LP and funds managed by Blackstone Tactical Opportunities Advisors L.L.C. (collectively, “GSO~~”). The GSO Convertible Notes will convert at the holder’s option beginning on or after October 29, 2019 until the earlier to occur of (x) repayment in full of all principal and interest outstanding under the Second Lien Credit Agreement and (y) October 29, 2024 (such earlier date, the “~~GSO Convertible NoteMaturity Date~~”), into shares of the Company’s Common Stock at a conversion price of $8.00 per share, subject to adjustment. The GSO Convertible Notes shall not initially bear interest. From and after April 29, 2019, the GSO Convertible Notes shall bear interest at the rate of 12.0% per annum. From and after October 29,voluntarily commencing bankruptcy proceedings.

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2019, the GSO Convertible Notes shall bear interest at the rate of 16.0% per annum. Interest payments are due each January 31, April 30, July 31, and October 31. To the extent that the Company is unable to pay cash interest on the GSO Convertible Notes on an interest payment date because of restrictions in the Credit Agreements or other debt agreements of the Company, an amount equal to the unpaid interest then due shall be added to the principal amount of the GSO Convertible Notes.

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

~~Also, on the GBG Closing Date, the Company and the Guarantors entered into a Subordinated Convertible Promissory Notes Guaranty Agreement (the “Convertible Notes Guaranty Agreement”) pursuant to which those subsidiaries agreed to guarantee the obligations due under the GSO Convertible Notes.~~

~~The Private Placement~~

~~On the GBG Closing Date, the Company completed a private placement (the “Private Sale~~”) of 10,000,000 shares of Common Stock to certain members of management, to affiliates of Ares and to funds managed by GSO at $8.00 per share for total consideration of $80.0 million in cash. Additionally, in connection with and in consideration of funds managed by GSO entering into the Second Lien Term Facility and providing loans to the Company thereunder, the Company issued to certain funds managed by GSO 23,094,501 shares of Common Stock for no additional consideration (together with the Private Sale, the “~~Private Placement”).~~

~~Stockholder Agreement~~

On the GBG Closing Date, TCP Denim, LLC, Tengram Capital Partners Fund II, L.P., Tengram Capital Partners Gen2 Fund, L.P., Tengram Capital Associates, LLC and RG II Blocker, LLC (collectively, with TCP Denim, LLC, Tengram Capital Partners Fund II, L.P., Tengram Capital Partners Gen2 Fund, L.P. and Tengram Capital Associates, LLC, the “~~Tengram Stockholders”) entered into a stockholder agreement (the “Stockholder Agreement~~”) by and among the Tengram Stockholders, the Company, GSO Capital Opportunities Fund III LP, GSO CSF III Holdco LP, GSO Aiguille des Grand Montets Fund II LP, GSO Credit Alpha II Trading (Cayman) LP, GSO Harrington Credit Alpha Fund (Cayman) L.P., BTO Legend Holdings L.P. and Blackstone Family Tactical Opportunities Investment Partnership III (Cayman) – NQ – ESC L.P. (collectively, with GSO Capital Opportunities Fund III LP, GSO CSF III Holdco LP, GSO Aiguille des Grand Montets Fund II LP, GSO Credit Alpha II Trading (Cayman) LP, GSO Harrington Credit Alpha Fund (Cayman) L.P. and BTO Legend Holdings L.P., the “~~GSO Stockholders”, and, together with the Tengram Stockholders, the “Tengram/GSOStockholders”). The Stockholder Agreement contains a number of agreements and restrictions with respect to securities of the Company held by the Stockholders and obligations of the Company.~~

~~Pursuant to the Stockholder Agreement, the size of the Board of Directors of the Company (the “Board~~”) is set at 8 members. For so long as the Tengram Stockholders beneficially own (i) at least 50% of the shares held by the Tengram Stockholders on a fully diluted basis as of October 29, 2018, the Tengram Stockholders may nominate two directors to the Board; and (ii) at least 5% of the shares held by the Tengram Stockholders on a fully diluted basis as of October 29, 2018, the Tengram Stockholders may nominate one director to the Board. The Tengram Stockholders appointed directors are Mr. Eby and Mr. Sweedler (collectively, with their respective successors and replacements, the “~~Tengram Directors”). Similarly, for so long as the GSO Stockholders beneficially own (i) at least 50% of the shares~~

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held by the GSO Stockholders on a fully diluted basis as of October 29, 2018, GSO Capital Partners LP (on behalf of the GSO Stockholders) may nominate two directors to the Board; and (ii) at least 5% of the shares held by the GSO Stockholders on a fully diluted basis as of October 29, 2018, GSO Capital Partners LP (on behalf of the GSO Stockholders) may nominate one director to the Board. The GSO Capital Partners appointed directors are Randall Kessler and Robert Petrini (collectively, with their respective successors and replacements, the “~~GSO Directors~~”). The Stockholders also agreed to cause the removal of the GSO Directors upon the request of GSO Capital Partners LP and the Tengram Directors upon the request of the Tengram Stockholders. Upon the written request of the Tengram Stockholders to GSO or GSO Stockholders to the Tengram Stockholders, respectively, to remove an independent director of the Company, the Tengram/GSO Stockholders have agreed to use their best efforts to cause such independent director to be removed as a director of the Company.

~~Subject to the qualifications discussed below, the nominating and corporate governance committee of the Board (the “Nominating Committee~~”) shall consist of one member appointed by the Tengram Stockholders, one member appointed by GSO Capital Partners LP (on behalf of the GSO Stockholders), and one independent director. For so long as the Tengram Stockholders beneficially own at least 5% of the outstanding shares of Common Stock of the Company on a fully diluted basis held by the Tengram Stockholders as of October 29, 2018, the Tengram Stockholders may nominate one member of the Nominating Committee. For so long as the GSO Stockholders beneficially own at least 5% of the outstanding shares of Common Stock of the Company on a fully diluted basis held by the GSO Stockholders as of October 29, 2018, GSO Capital Partners LP (on behalf of the GSO Stockholders) may nominate one member of the Nominating Committee.

The Tengram/GSO Stockholders agreed that they will not support the election of any independent director unless that individual is mutually acceptable to the Tengram Stockholders and the GSO Stockholders and to support the election of the chief executive officer of the Company to the Board.

The Tengram/GSO Stockholders agreed that, prior to the “Restriction Expiration Time,” which is defined as the earliest to occur of October 29, 2020, the date of a change of control of the Company and otherwise by agreement between the Company and the Tengram/GSO Stockholders, subject to certain limited exceptions described therein, the Tengram/GSO Stockholders may not transfer their shares of Common Stock or securities convertible into Common Stock (the “Restriction Shares”) or enter into voting arrangement or grant a proxy on their Restriction Shares other than in accordance with the Stockholder Agreement.

The Tengram Stockholders also granted each of Ares Capital Corporation and HPS Investment Partners, LLC a lockup on the Tengram Stockholders’ holdings of Common Stock prior to the Restriction Expiration Time, subject to certain limited exceptions described therein.

The Stockholders agreed to grant each other a binding right of first offer on the sale of their holdings of Common Stock until October 29, 2020 (subject to certain limited exceptions). Also, the Stockholders agreed to give the Company prior written notice of the transfer of Restricted Securities prior to certain transfers of such Restricted Securities.

~~Registration Rights Agreements~~

~~On the GBG Closing Date, the Company entered into a registration rights agreement with the GSO Stockholders (the “GSO RRA”) and a registration rights agreement with Ares and its certain of its affiliates (the “Ares RRA”, and, together with the GSO RRA, the “RRAs~~”). Pursuant to the RRAs, and subject to the limitations described therein, the Company will provide certain demand and piggy back registration rights with respect to shares of Common Stock (or securities convertible into Common Stock) held by the GSO Stockholders and by Ares and its affiliates who hold securities of the Company.

~~On January 28, 2016, the Company entered into a registration rights agreement (the “Tengram Registration Rights Agreement~~”) with the TCP Denim, LLC, a Delaware limited liability company, and certain of its affiliates, and certain other investors. Pursuant to the Tengram Registration Rights Agreement, and subject to the limitations described

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therein, the Company will provide certain demand and piggy back registration rights with respect to shares of Common Stock issued to the parties to the Tengram Registration Rights Agreement. In connection with the transactions described above and in order to effect the Private Placement, the Company entered into an amendment (the “~~RRA Amendment”) to the Tengram Registration Rights Agreement on the GBG Closing Date.~~

Additionally, pursuant to Jason Rabin’s subscription agreement with the Company to purchase Common Stock in the Private Placement, dated as of October 29, 2018, the Company agreed to provide certain piggy back registration rights with respect to shares of Common Stock (or securities convertible into Common Stock) held by Mr. Rabin.

~~The Conversion~~

On the GBG Closing Date, (i) fifty thousand (50,000) shares of the Company’s Series A Preferred Stock were converted at the election of the holders hereof into 5,852,142 newly issued shares of Common Stock in accordance with the terms of the Series A Preferred Stock, and (ii) 4,587,964 shares of the Company’s Series A-1 Preferred Stock were converted at the election of the holders thereof into 4,951,177 newly issued shares of Common Stock in accordance with the terms of the Series A-1 Preferred Stock (such conversions, the “~~Conversion”).~~

~~Jason Rabin Employment Agreement and Inducement Grant~~

~~On the GBG Closing Date, the Company entered into an employment agreement with Jason Rabin in connection with the Company’s employment of Mr. Rabin as its Chief Executive Officer.~~

As an inducement to accept his appointment as Chief Executive Officer of the Company, on the GBG Closing Date, the Company granted Mr. Rabin 4,100,000 RSUs with respect to the Common Stock and 500,000 PSUs with respect to the Common Stock. These inducement grants were made as an inducement award and were not granted under the Company’s 2016 Stock Incentive Plan, but are subject in all material respects to the same terms and conditions as the 2016 Stock Incentive Plan.

~~Anurup Pruthi Employment Agreement and Inducement Grant~~

On October 30, 2018, the Company entered into an employment agreement with Anurup S. Pruthi in connection with the Company’s employment of Mr. Pruthi as its Chief Financial Officer. On the Effective Date, Bob Ross ceased to serve as Chief Financial Officer of the Company. Mr. Ross remains an employee of the Company.

As an inducement to accept his appointment as Chief Financial Officer of the Company, the Company granted Mr. Pruthi an inducement grant of 600,000 RSUs with respect to the Common Stock. The inducement grant was made as an inducement award and was not granted under the Company’s 2016 Stock Incentive Plan, but is subject to the same terms and conditions as provided in the 2016 Stock Incentive Plan.

~~Buckley Separation Agreement~~

~~On June 28, 2018, the Company announced it~~ determined not to extend its employment agreement, dated as of January 28, 2016, with Michael Buckley, beyond its current term expiring on December 31, 2018 and, in accordance with the terms of the Buckley Agreement, delivered a notice of non-renewal to Mr. Buckley. On the GBG Closing Date, the Company entered into a separation and release agreement with Michael Buckley and terminated the Buckley Agreement pursuant to which Mr. Buckley resigned as a director of the Company and from all positions with the Company and any of its subsidiaries.

~~Management Incentive Plan~~

~~On the GBG Closing Date, the Company entered into a letter agreement with the GSO Stockholders (the “MIP Letter”). Under the MIP Letter, the Company agreed to create a new stock incentive compensation plan for the amount of 1,776,500 shares of Common Stock (the “MIP Plan”), which will be allocated by a Special Committee of the Board in accordance with the Stockholder Agreement (such shares of Common Stock, the “Special Equity Allocation Pool”).~~

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In the event the MIP Plan is not approved by the requisite consent of the stockholders of the Company and implemented within ninety (90) days of the GBG Closing Date, or that any shares of the Special Equity Allocation Pool are not awarded within 180 days following the GBG Closing Date, or any awards under the MIP Plan are forfeited by the awardees at any time, the equivalent amount of shares of Common Stock of the Company shall be delivered to the GSO Stockholders pursuant to the terms of the MIP Letter.

~~Plan Amendment~~

~~The amendment (the “Plan Amendment”) to the 2016 Plan to increase the reservation of the total shares available for issuance under the 2016 Plan to 12,725,963 shares of Common Stock became effective as of the GBG Closing Date.~~

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q for the period ended March 31, 2019 (“Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of Exchange Act, which represent our management’s beliefs and assumptions concerning future events based on information currently available to us. When used in this Quarterly Report, the words and phrases “may,” “will,” “expect,” “anticipate,” “intend,” “estimate,” “continue,” “believe,” “plan,” “project,” “will be,” “will continue,” “will likely result,” “indicates,” “forecast,” “guidance,” “outlook,” “targets” and similar expressions and the negatives of such words and phrases are intended to identify ~~forward-looking~~forward- looking statements. Similarly, statements that describe our future expectations, objectives and goals or contain projections of our future results of operations or financial condition are also forward-looking statements.

These statements are not guarantees of future performance and are subject to certain risks and uncertainties, which are difficult to predict and which could cause actual results to differ materially, including, without limitation: ~~the anticipated benefits of the GBG Acquisition~~ our dependence on ~~our financial results, business performance~~licensors, licensed products and ~~product offerings,~~ our ability to ~~successfully integrate GBG’s business and realize cost savings and any other synergies;~~extend or renew our key license agreements; the risk that the credit ratings of the combined company or its subsidiaries may be different from what we expect; the risk of intense competition in the denim and premium lifestyle apparel industries; the risks associated with our ~~foreign sourcing of~~substantial indebtedness, which could adversely affect our ~~products~~financial performance and ~~the implementation of foreign production for certain of~~impact our ~~products, including in light of potential changes in international trade relations proposed~~ability to ~~be implemented by the U.S. government; risks associated with~~service our ~~third-party distribution system;~~indebtedness; continued acceptance of our ~~product, product demand, competition, capital adequacy, general economic conditions and~~brands in the ~~potential inability to raise additional capital if required;~~marketplace; the seasonal nature of our business; the risk that we will be unsuccessful in gauging fashion trends, changes in the business environment and changing ~~customer~~consumer preferences; potential changes in the retail store landscape in light of retail store closings and the bankruptcy of a number of prominent retailers; the effects of competition in the markets in which we operate, including ecommerce retailers; our ability to successfully implement our strategic plans; our dependence on continued service of our key personnel; costs and uncertainties with respect to expansion of our product offerings; our ability to make strategic acquisitions and possible disruptions from acquisitions; our ability to realize the anticipated benefits of recent acquisitions and any future acquisitions; the risk that changes in general economic conditions, consumer confidence, or consumer spending patterns, including consumer demand for ~~denim and premium lifestyle apparel,~~our products, will have a negative impact on our financial performance or strategies and our ability to generate cash flows from our operations to service our indebtedness; ~~the highly competitive nature of our business in the United States and internationally and our dependence on consumer spending patterns, which are influenced by numerous other factors;~~ our ability to ~~respond~~generate positive cash flow from operations; our ability to ~~the business environment~~manage our inventory effectively; our ability to protect our trademarks and ~~fashion trends; continued acceptance of our brands in the marketplace; risks related to~~other intellectual property; retail customer concentration and our reliance on a small number of large customers; risks ~~related to~~associated with leasing retail space and operating our ~~ability to implement successfully any growth or strategic plans;~~own retail stores; the risks ~~related to~~associated with our ~~ability to manage~~reliance on service agreements providing certain accounting, warehousing and logistics, manufacturing, information technology, data privacy, cybersecurity, disaster recovery, and internal controls services, including the risks associated with certain services we are procuring under a transition services agreement; the risks associated with the foreign sourcing of our ~~inventory effectively;~~products in light of potential changes in international trade relations between the United States and countries in which our products are sourced; the risk that we pledged all our tangible and intangible assets as collateral under our financing agreements; the risk that the credit ratings of ~~cyber-attacks and other system risks; risks related to~~the combined company or its subsidiaries may be different from what we expect; our ability to continue to have access ~~on favorable terms~~ to sufficient sources of liquidity necessary to fund ongoing cash requirements of our operations or new acquisitions; ~~risks related to our ability to continue to have access on favorable terms to sufficient sources of liquidity necessary to fund ongoing cash requirements~~the significant increase in the amount of our ~~operations~~ goodwill and other intangibles; the risk of cyber-attacks and other technology system risks; the effect of regulations applicable to us as a United States public company; and additional legislation and/or new acquisitions; risks related to our pledge of all our tangible and intangible assets as collateral under our financing agreements; risks related to our ability to generate positive cash flow from operations; risks related to a possible oversupply of denimregulation in the ~~marketplace;~~ United States and around the world.and the other risk factors contained in our reports filed with the SEC pursuant to the Exchange Act, including our annual report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018 (the “~~2017~~2018 Form 10-K”) and subsequent quarterly reports on Form 10-Q and Form 8-K should be read in conjunction with those reports, together with all of the Company’s other filings.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Since we operate in a rapidly changing environment, new risk factors can arise and it is not possible for our management to predict all such risk factors, nor can our management assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our future results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements. We do not undertake any obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events, except as may be required by law.

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Introduction

~~This management’s~~As we are a smaller reporting company, this discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017.~~respectively. This discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto and information contained in Item 1 of this Quarterly Report.

Due to the GBG Acquisition (defined below), the financial information for the three months ended March 31, 2019 is not comparable to the three months ended March 31, 2018. As such, we have presented comparative results of operations for the three months ended March 31, 2019 compared to the pro forma combined three months ended March 31, 2018. For more information, see section titled “Supplemental Unaudited Pro Forma Combined Financial Information.”

Executive Overview

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

AsWe license over 100 brands or produce private label products across our core product categories including kids, accessories, and men’s and women’s apparel. Licensed brands include Calvin Klein, Under Armour, Tommy Hilfiger, Nautica, Spyder, BCBG, Joe’s, Buffalo, Frye, Michael Kors, Kate Spade, AllSaints and Cole Haan, and entertainment properties including Disney, Marvel and Nickelodeon, among others. Our products are sold through a cross section of ~~September 30, 2018,~~leading retailers such as Walmart, Macy’s, Kohl’s, TJX Companies, Costco, Nordstrom, Dillard’s, Ross, Target, JC Penney, and Amazon. We also sell our ~~principal business activity is~~products over the ~~design, development~~web through retail partners such as Walmart.com, Macy’s.com and ~~worldwide marketing of~~Nordstrom.com. We also distribute apparel and other products ~~that bear the brand names,~~through our own retail stores, ecommerce websites, and partner shop-in-shops.

Our legacy company-owned brands include Hudson®, ~~Robert Graham® and SWIMS®. Hudson®, established in 2002, is~~ a designer and marketer of ~~women's~~men's and ~~men's~~women's premium, branded denim and ~~apparel.~~apparel; Robert Graham®, ~~established in 2001, is~~ a sophisticated, eclectic apparel and accessories brand seeking to inspire a global ~~fashion movement.~~movement, and SWIMS®, ~~established in 2006, is~~ a Scandinavian lifestyle brand best known for its range of fashion-forward, water-friendly footwear, apparel and accessories. Because we focus on design, development and marketing, we rely on third parties to directly manufacture our apparel products. We sell our products through our own retail stores, our websites and to numerous retailers, which include major department stores, specialty stores, and ecommerce stores inaccessories (collectively, the ~~U.S., Canada and Europe.~~

Our Hudson® product line includes women’s, men’s and children’s denim jeans, bottoms, tops, jackets and other related apparel and accessories, and we continue to evaluate offering a range of new products under the Hudson® brand name. Our Robert Graham® product line includes premium priced men’s sport shirts, polos, denim jeans, bottoms, shorts, sweaters, knits, t shirts, sport coats, outerwear and swimwear. RG also offers a line of women’s apparel, mainly in its own retail stores. Additionally, men’s shoes belts, small leather goods, dress shirts, neckwear, tailored clothing, headwear, eyewear, hosiery, underwear, loungewear and fragrances are produced by third parties under various license agreements and RG receives royalty payments based upon net sales from licensees. Our SWIMS® product line includes men’s and women’s footwear, outerwear and accessories.

~~We operate retail stores for our Robert Graham® and SWIMS® brands. As of November 14, 2018, we operated 30 Robert Graham~~“®Owned Brands brand stores, which consisted of 18 full price stores and 12 outlet stores, and 3 SWIMS® brand stores, which consisted of 1 full price store which opened in September 2018 and 2 outlet stores. We also license the SWIMS® brand name and products for sale in 8 SWIMS® branded retail stores internationally. We also acquired retail stores in the GBG Acquisition, see further below.”).

~~As part of our business strategy, we~~ are seeking to create a platform that focuses on lifestyle brands in the apparel and accessories sectors. Our focus is on organically growing our brands through new licenses and acquisitions across strategic verticals.

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

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

GBG Acquisition

On October 29, 2018 ~~we completed the acquisition~~ (the “GBG ~~Acquisition~~Closing Date”), we acquired from GBG and GBG USA Inc., a wholly-owned subsidiary of GBG (“GBG USA”), a significant part of ~~Global Brands Group Holding Limited’s (“GBG”) and its subsidiaries’~~GBG’s North American business, including the wholesale, retail and ~~e-commerce~~ecommerce 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 ~~for approximately $1.21 billion in cash, subject to certain adjustments. We completed the GBG Acquisition pursuant to the Purchase and Sale Agreement~~ (the “GBG ~~Purchase Agreement~~Business”)~~, dated as~~ for a purchase price of ~~June 27, 2018, by and among the Company, GBG and GBG USA Inc., a wholly owned subsidiary of GBG (“~~approximately $1.18 billion (the “GBG ~~USA~~Acquisition”). The GBG Business licensed brands described above that we now license and operate as part of our combined company. For more information on the financing transactions entered into in

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~~Concurrent~~connection with the ~~closing~~GBG Acquisition, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and “Notes to Condensed Consolidated Financial Statements - Note 8 - Debt” and “Notes to Condensed Consolidated Financial Statements - Note 3 - GBG Acquisition” for a further discussion.

Reportable Segments

Prior to the GBG Acquisition, we ~~changed~~organized our ~~name to Centric Brands Inc., reflecting our position as a leading lifestyle brands collective platform. Centric Brands is listed publicly on the NASDAQ under the ticker symbol CTRC.~~

As a result of the GBG Acquisition, it is anticipated that Centric Brands will generate revenue with branded product distribution to a diversified base of consumers across all retail and digital channels. The new Centric Brands platform is expected to enable us to seamlessly add new licenses and company-owned brands to our portfolio, leveraging our expertise and capabilities to design, produce, manage and market a broad array of products. Centric Brands is headquartered in New York City with offices in Greensboro, Los Angeles, and Montreal.

The purchase price for the GBG Acquisition was paid in cash. Fully committed debt financing for the GBG Acquisition was provided by affiliates of and/or funds managed by Ares Capital Management LLC, HPS Investment Partners, LLC, GSO Capital Partners LP and Blackstone Tactical Opportunities. Upon the closing of the GBG Acquisition, Tengram and its affiliates converted all of its holdings of the Company’s Series A and Series A-1 Convertible Preferred Stockbusiness into the ~~Company’s common stock. See “Note 16—Subsequent Events” for further details.~~

~~Correction of an Immaterial Error~~

During the 2017 year end close, we determined that basic and diluted 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 ASC 260, ~~Earnings per Share~~, income available to common stockholders shall be computed by deducting the dividends accumulated for the period on cumulative preferred stock. The Series A Preferred Stock entitled 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 Preferred Stock is otherwise reacquired by the Company. The amount of the cumulative dividend on the Series A Preferred Stock has been disclosed previously in the Company’s filings. We have corrected the calculation of basic and diluted EPS to include the 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 presentation and disclosures, and has no impact on our financial position, results of operations and cash flows. Accordingly, no amendments to previously filed reports were required. However, we 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 thefollowing 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.

~~Reportable Segments~~

~~As of September 30, 2018, our~~ reportable ~~business segments were~~segments: Wholesale, Consumer Direct and Corporate and other. Upon completing the GBG Acquisition, we resegmented our reportable segments to reflect our expanded organizational structure, including the operations of the newly acquired GBG Business. Accordingly, we realigned our business into the following three reportable segments: Kids, Accessories, and Men’s and Women’s Apparel. This new segment structure is consistent with how our chief operating decision maker establishes our overall business strategy, allocates resources, and assesses performance. All prior period segment information has been reclassified to reflect the realignment of our segment reporting structure. We will continually evaluate changes in the structure of the organization to determine whether our operating segments have changed when events or circumstances necessitate such an exercise.

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

Kids

Our ~~Wholesale~~Kids segment ~~was~~is comprised of sales of products to ~~better nationwide~~full-price retail stores, off-price or outlet department stores, boutiques, ~~specialty retailers,~~trade shows and ~~select off-price and international~~ecommerce sales. Kids products are sold to over 700 customers and ~~includes expenses from sales~~are comprised of over 350 licensed brands. Key licensed brands include Calvin Klein®, Under Amour®, Tommy Hilfiger®, Nautica® and ~~customer service departments, trade shows, warehouse distribution,~~Disney®. Our top customers include large retailers such as Walmart, Kohl’s, Target, Burlington, Macy’s, and TJX Companies. We design, produce and ~~production,~~sell goods to Walmart as a private label business under the George® and ~~product samples.~~Faded Glory® names. Our ~~Consumer Direct~~Kids segment accounted for approximately 44.0% of our first quarter 2019 net revenues. We sell our Kids products through our own showrooms where retailers review the latest collections and place orders.

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

Accessories

Our Accessories segment is comprised of sales of products to ~~consumers through our Robert Graham® and SWIMS® brand~~ full-price retail stores, off-price or outlet department stores, boutiques and ~~outlet stores,~~ecommerce sales. Accessories products are sold to over 600 customers and are comprised of over 85 licensed, owned and private label brands. Key licensed brands include Calvin Klein®, Frye®, Fila®, Michael Kors®, Kate Spade® and AllSaints®. Our top customers include large retailers such as Walmart, Kohl’s, Macys, Dillard’s and Nordstrom companies. Our Accessories segment accounted for approximately 18.3% of our first quarter 2019 net revenues. We sell our Accessories products through our ~~ecommerce sites at~~ ~~www.hudsonjeans.com~~, ~~www.robertgraham.us~~ own showrooms where retailers review the latest collections and ~~www.swims.com.~~place orders.

The ~~information contained on, or that can be accessed through, these websites is not a part of this Quarterly Report and is not incorporated by reference herein. The Corporate and other~~Accessories segment was ~~comprised~~acquired as a component of ~~revenue from trademark licensing agreements~~the GBG Business. In addition to integrating the Accessories segment successfully and ~~overhead from corporate operations, which include the executive, finance, legal, information technology,~~efficiently with our existing business, our go-forward strategy includes driving sales by improving productivity in existing accounts/doors, and ~~human resources departments.~~selectively expanding into new accounts.

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~~Wholesale~~Men’s and Women’s Apparel

~~As of September 30, 2018, our Wholesale~~Our Men’s and Women’s Apparel segment ~~was~~is comprised of (i) sales to premium nationwide department stores, specialty retailers, ecommerce, boutiques and select off-price retailers of our Hudson®, Robert Graham® and Swims® brands; (ii) sales of ~~Robert Graham®~~licensed products bearing the brand names of BCBG®, ~~Hudson® and SWIMS® products~~Herve Leger, Buffalo®, Joe’s Jeans®, bebe® (collectively, referred to herein as “Core Licensed Brands”) to premium nationwide department stores, specialty retailers, ecommerce stores, boutiques and select off-price ~~retailers~~retailers; (iii) full-price and ~~international customers. In addition, SWIMS® products are sold to international licensed~~outlet retail store ~~operators. Our Wholesale segment included expenses from our~~ sales owned and ~~customer service departments, trade shows, warehouse distribution, design and production, and product samples associated with our~~operated by us bearing the brands of Robert Graham®, ~~Hudson®~~SWIMS®, BCBG®, bebe®, and ~~SWIMS® product lines for the respective periods described above. Domestically, we sell our Robert Graham®, Hudson® and SWIMS® products~~Joe’s Jeans®; (iv) e-commerce sales through our own ~~showrooms, as well as, in~~and our retail partners’ ecommerce sites; and (v) royalty revenue generated through the ~~case~~licensing of our Robert Graham® ~~products, with independent sales representatives who may have their own showrooms. At the showrooms, retailers review the latest collections offered~~ and ~~place orders. The showroom representatives provide us with purchase orders from the retailers and other specialty store buyers. Internationally, we sell our products to customers in various countries.~~

We measure performance of our Wholesale segment primarily based on the diversity of product classifications and number of retail “doors” that sell our products within existing accounts as well as our ability to selectively expand into new accounts having retail customers carrying similar premium-priced products. While our Wholesale segment has slightly declined we have focused on growing our higher margin Consumer Direct segment.

~~Consumer Direct~~

As of September 30, 2018, our Consumer Direct segment was comprised of sales of our Robert Graham® products directly to consumers in the United States through full-price retail stores, outlet stores, our ecommerce site, ~~www.robertgraham.us~~ ~~and through the circulation of over 700,000 catalogs distributed seasonally throughout the United States~~. As this segment generates higher gross margin rates and provides us greater control of our brand product mix and distribution, we have grown from one Robert Graham® brand retail store in 2011 to 30 retail stores as of November 14, 2018, including 18 full price stores and 12 outlet stores. We have expanded the ecommerce part of the Consumer Direct segment through direct digital, creating a larger customer database and generating repeat customer sales through our Collector’s Club Loyalty Program. Additionally, our Consumer Direct segment was comprised of sales of our Hudson® ~~products to consumers through our ecommerce site at~~ ~~www.hudsonjeans.com,~~ ~~and sales of our SWIMS® products to consumers through our ecommerce site at~~ ~~www.swims.com~~ ~~and our 2 Company operated outlet stores and 1 Company operated full price store.~~

We measure performance of our Consumer Direct segment primarily based on the profitability of our stores and websites, as well as our ability to acquire and retain customers in our ecommerce business and the site traffic and conversion rates on our websites.

~~Corporate and other~~

~~As of September 30, 2018, our Corporate and other segment was comprised of licenses~~brands to third parties for the right to use our various trademarks in connection with the manufacture and sale of designated ~~Robert Graham®~~ products in specified geographical areas for specified periods.

Our Men’s and Women’s Apparel segment, accounted for approximately 37.7% of our first quarter 2019 net revenues. Our net sales also include net royalty revenue generated through the licensing ~~revenues for~~of our Robert Graham® and Hudson® brands to third parties for the right to use our various trademarks in connection with the manufacture and sale of designated products ~~stem primarily from~~for the following product categories and geographical areas: men’s shoes, belts, small leather goods, dress shirts, neckwear, tailored clothing, headwear, eyewear, jewelry, hosiery, underwear, loungewear, kids, and fragrances, and for distribution of our products in Canada. Our ~~Corporate~~Men’s and ~~other segment also included licensing revenue from~~Women’s Apparel products are sold to over 1,000 retail customers in North America and throughout the ~~sale by~~world including our ~~licensee~~own retail stores and ecommerce websites. As of ~~our Hudson® children’s product line~~March 31, 2019, we operated a total of 90 retail stores and men’s and women’s apparel in Europe. Our Corporate and other segment also encompassed our corporate operations, including the general brand marketing and advertising, information technology, finance, executive, legal, and human resources departments associated with our Robert Graham®, Hudson® and SWIMS® product lines for the respective periods described above. Similar to our Wholesale segment, we measure performance of our Corporate and other segment primarily based on our licensees’ ability to profitably sell our products in multiple categories to their existing wholesale customers and to add new licensees in brand relevant categories. Goodwill and intangible assets are included within the Corporate and other segment.

~~Table of Contents~~

369 partner shop-in-shops.

Results of Operations

The following tables set forth, for the periods indicated, selected information from our statements of operations and statements of operations by our reportable segments. These tables should be read in conjunction with the discussion that follows:


	Three months ended September 30,										Three months ended March 31,
	2018			2017			$ Change		% Change		2019			2018
	(unaudited, in thousands)										(unaudited, in thousands)
Net sales	$	39,831		$	42,389		$	(2,558)	(6)	%	$	528,897		$	38,818
Cost of goods sold		22,671			24,334			(1,663)	(7)			409,951			22,563
Gross profit		17,160			18,055			(895)	(5)			118,946			16,255
Gross margin		43	%		43	%
Gross margin % of sales												22.5	%		41.9	%
Operating expenses
Selling, general and administrative		25,029			15,334			9,695	63			113,165			15,348
Depreciation and amortization		1,377			1,493			(116)	(8)			22,956			1,463
Other operating expense, net												17,098			—
Total operating expenses		26,406			16,827			9,579	57			153,219			16,811
Operating (loss) income		(9,246)			1,228			(10,474)	(853)
Operating loss												(34,273)			(556)
Operating loss % of net sales												(6.48)	%		(1.43)	%
Interest expense		2,462			2,262			200	9			46,013			2,215
Other expense (income), net		21			(12)			33	(275)
Other expense, net												(42)			(1)
Loss before income taxes		(11,729)			(1,022)			(10,707)	1,048			(80,244)			(2,770)
Income tax benefit		(1,150)			(839)			(311)	37
Income tax provision												1,619			1,315
Net loss	$	(10,579)		$	(183)		$	(10,396)	5,681	%	$	(81,863)		$	(4,085)

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Three months ended  September 30,


2018

2017

$ Change

% Change

(unaudited, in thousands)

Net sales:

Wholesale

$
28,410

$
32,393

$
(3,983)

(12)
%
Consumer Direct

10,434

9,188

1,246

14

Corporate and other

987

808

179

22

$
39,831

$
42,389

$
(2,558)

(6)
%
Gross profit:

Wholesale

$
9,724

$
11,655

$
(1,931)

(17)
%
Consumer Direct

6,455

5,592

863

15

Corporate and other

981

808

173

21

$
17,160

$
18,055

$
(895)

(5)
%
Operating expenses:

Wholesale

$
3,586

$
3,428

$
158

5
%
Consumer Direct

5,870

5,981

(111)

(2)

Corporate and other

16,950

7,418

9,532

128

$
26,406

$
16,827

$
9,579

57
%
Operating (loss) income:

Wholesale

$
6,138

$
8,227

$
(2,089)

(25)
%
Consumer Direct

585

(389)

974

(250)

Corporate and other

(15,969)

(6,610)

(9,359)

142

$
(9,246)

$
1,228

$
(10,474)

(853)
%

Net sales increased to $528.9 million for the three months ended March 31, 2019 from $38.8 million for three months ended March 31, 2018, reflecting a $490.1 million year over year increase. The increase in net sales was attributable to the newly acquired GBG Business.

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~~Three Months Ended September 30, 2018 Compared~~Gross profit increased to ~~Three Months Ended September 30, 2017~~

~~Net Sales~~

~~Net sales decreased by 6% to $39.8~~$118.9 million for the three months ended ~~September 30, 2018~~March 31, 2019 from $42.4 million for the same quarter last year. The $2.6 million net sales decrease was driven by a 12% decrease in our Wholesale segment that more than offset a 14% increase in our Consumer Direct segment. By brand, an overall net sales decline of 17% at Hudson, impacted primarily by declines within Womens, offset overall net sales gains of 15% at SWIMS and flat net sales at Robert Graham. All channels within SWIMS, as well as Consumer Direct net sales at Robert Graham, improved robustly during the quarter ended September 30, 2018.

~~Wholesale segment net sales declined by 12% to $28.4~~$16.3 million for the three months ended ~~September 30,~~March 31, 2018, ~~from $32.4~~reflecting a $102.6 million for the same quarter in the prior year. The $4.0 million decrease primarily related to less net sales from the Hudson brand as sales to off-price customers dipped 22%. Hudson made a strategic decision in the third quarter of 2018 to maintain its historical market ‘premium’ status by shifting from an off-price to a full-price selling focus in order to reduce overall penetration of its product into the discounted off-price markets. As well, Hudson’s full price business fell 6% as major department store volume dropped due to a shift in business from higher comparable unit volumes at customers’ brick-and-mortar channels to lower unit volumes at their ecommerce channels. This shift in focus, coupled with lower comparable department store ‘doors’, accounted for a majority of the Hudson decline. Robert Graham Wholesale net sales also declined by 11% primarily due to a 32% reduction in net sales to off-price customers. Robert Graham full-price net sales were up 3% versus the comparable quarter last year. Improvements in Robert Graham net sales during the first half of the year ~~and the successful clearance of prior season product in the second quarter of this~~over year left less product available for sale to off-price customers during the third quarter this year versus the same quarter last year. These Wholesale segment declines offset robust Wholesale net sales gains of 10% at our SWIMS brand during the quarter ended September 30, 2018. increase.

~~Consumer Direct net sales increased by 14% to $10.4 million~~Gross margin was 22.5% for the three months ended September 30, 2018 from $9.2 million for the same quarter in the prior year. The $1.2 million increase was driven by 9% comparable store net sales increases. Robert Graham retail outlet stores were up 16% and full price stores were up 5%. Comparable store increases at Robert Graham were driven by improvements in customer conversion even though foot traffic in our stores was flat to the same quarter last year. In addition, during the third quarter of 2018, SWIMS retail store sales increased 7% including sales related to a new store that opened in September 2018. Ecommerce net sales improved 21% during the quarter. Robert Graham and SWIMS ecommerce net sales increases of 16% and 72%, respectively, offset Hudson ecommerce declines of 2%. Robert Graham ecommerce improvements were driven by improved traffic to its website and a higher average order value. SWIMS ecommerce improvements were attributable to an increase in site traffic and conversion rates. Hudson ecommerce declines were driven by lower conversion rates, partially offset by a higher average order value, as we strategically were less promotional in the third quarter this yearMarch 31, 2019, compared to ~~the same quarter last year.~~

~~Corporate and other net sales rose 22%~~41.9% for the three months ended ~~September 30, 2018 to $1.0 million from $0.8 million for the same quarter last year. Corporate and other net sales consists of licensing revenue.~~

~~Gross Profit~~

~~Gross profit declined by $0.9 million, or 5%, to $17.2 million for the three months ended September 30, 2018 from $18.1 million for the same quarter last year.~~March 31, 2018. The decrease in the gross ~~profit was attributable to~~margin as a ~~6% decline in~~percent of net sales ~~during~~reflects the ~~quarter, which was partially offset by~~impact of increased wholesale penetration as a ~~higher gross profit margin. Gross profit margin was 43.1% for~~result of the three months ended September 30, 2018 versus 42.6% for the same quarter in the prior year. Improvements in gross profit margin were attributable to the improved penetration of full-price sales at the Wholesale segment as well as the improved penetration of Consumer Direct relative to total sales as described above. Inventory levels at September 30, 2018 are down 12% compared to inventory levels at the same date in the prior year, reflecting less inventory produced specifically for off-price customersGBG Acquisition.

For more information, see sections titled “Reportable Segments” and ~~less leftover prior season product. Current inventory levels are expected to be appropriate to fuel planned Wholesale full-price and Consumer Direct net sales in the fourth quarter of 2018.~~

~~Table of Contents~~

~~Corporate and other gross profit increased by 21% to $1.0 million for the third quarter of fiscal 2018, compared to $0.8 million in the same quarter last year due to an increase in licensing revenue.~~“Supplemental Unaudited Pro Forma Combined Financial Information.”

Operating Expenses

Operating expenses include (i) selling, general and administrative expenses related to employee and employee benefits, sales commissions, advertising, professional fees ~~stock-based compensation,~~and factor and bank fees, ~~acquisition costs and other costs including supplies and services purchased, and~~ (ii) depreciation and ~~amortization.~~amortization, (iii) other operating expense.

In connection with the closing of the GBG Acquisition, we entered into a transition services agreement with GBG USA wherein each will provide the other party, certain corporate services including information technology, finance, human resources, legal, sourcing, tax and facilities for a period of up to 3 years from October 29, 2018 to ensure and facilitate an orderly transfer of business operations. Payments to each party will vary in amount and length of time as specified in the transition services agreement. The charges for such services are generally intended to allow the service provider to recover all of its direct and indirect costs, generally without profit.

~~Operating~~Selling, general and administrative expenses increased to ~~$26.4~~$113.2 million for the three months ended ~~September 30, 2018~~March 31, 2019 from ~~$16.8~~$15.3 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The ~~$9.6~~$97.9 million increase ~~in operating expenses~~ was ~~primarily~~ attributable to ~~$9.6 million in acquisition related~~operating costs ~~incurred in the third quarter~~ of ~~2018 related to~~ the GBG Acquisition. Excluding GBG Acquisition related expenses, selling, general and administrative expense rates increased to 38.8% from 36.2% in the third quarter of 2017. Operating expense increases, excluding GBG Acquisition related costs, primarily relate to a higher volume of Robert Graham direct store labor appropriate for the increase in Robert Graham comparable store sales.

Business.

Depreciation and amortization ~~expense, as a percent of net sales, was 3.5% for both the third quarter of fiscal 2018 and 2017.~~

~~Interest Expense~~

~~Interest expense~~expenses increased to ~~$2.5~~$23.0 million for the three months ended ~~September 30, 2018~~March 31, 2019 from ~~$2.3~~$1.5 million for the three months ended ~~September 30, 2017, due~~March 31, 2018. Increase in depreciation and amortization expense was attributable to ~~higher interest rates related~~the GBG Acquisition.

Other operating expenses primarily include reorganization and integration expenses. Other operating expenses totaled $17.1 million for the three months ended March 31, 2019. There were no other operating expenses in the three months ended March 31, 2018.

Interest Expense

Interest expense includes costs incurred by us for borrowed funds as well as amortization of deferred financing fees relating to our term loans and revolving credit facilities. Interest expense increased to $46.0 million for the three months ended March 31, 2019 from $2.2 million for the three months ended March 31, 2018. Increase in interest expense was largely driven by the increase in aggregate outstanding borrowings under the new credit facilities entered into in connection with the GBG Acquisition, the issuance of the 2024 Convertible Notes and ~~the~~ amortization of debt ~~discounts and deferred financing costs related to those facilities and the convertible notes.~~

issuance cost.

Income Tax ~~(Benefit) Provision~~ Benefit

~~Our~~The effective tax rate from operations was ~~a benefit of 10%~~2.0% for the three months ended ~~September 30, 2018~~March 31, 2019 compared to ~~82%~~a rate of 47.5% for the three months ended ~~September 30, 2017.~~March 31, 2018. The difference in the effective tax rate for the three months ended ~~September 30, 2018,~~March 31, 2019, as compared to the three months ended ~~September 30, 2017,~~March 31, 2018, was primarily due to operating at a ~~change~~loss position with a full valuation allowance projection against such losses.

Unaudited Additional Supplemental Non-GAAP Disclosures

The financial information provided throughout this report, including our condensed consolidated financial statements and the notes thereto, has been prepared in conformity with accounting principles generally accepted in the ~~ratio of year-to-date losses to forecasted loss.~~

~~Net Loss~~

~~We generated a net loss of $10.6 million for the three months ended September 30, 2018, compared to a net loss of $0.2 million for the three months ended September 30, 2017.~~

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United States of America (“GAAP”). However, we present Adjusted EBITDA, a non-GAAP financial measure, in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding our ongoing operating results. (“Adjusted EBITDA”) is a non-GAAP measure defined by us as net loss plus interest expense, income tax benefit, amortization of inventory fair value step up, results of discontinued license, depreciation and amortization expense and other operating expense, net.

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

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


			Non GAAP Adjustments
			(in thousands)
			Stock-based		Inventory Step Up		Reorganization &		Discontinued
	As Reported		Compensation		Amortization		Integration		License		Adjusted
Net sales	$	528,897	$	—	$	—	$	—	$	(10,306)	$	518,591
Cost of goods sold		409,951		—		(8,782)		—		(6,805)		394,364
Gross profit		118,946		—		8,782		—		(3,501)		124,227

Operating expenses:
Selling, general and administrative		113,165		(3,396)		—		—		(7,962)		101,807
Depreciation and amortization		22,956		—		—		—		—		22,956
Other operating expense, net		17,098		—		—		(17,098)		—		—
Total operating expenses		153,219		(3,396)		—		(17,098)		(7,962)		124,763
Total other expense, net		45,971		—		—		—		—		45,971
Loss before income taxes		(80,244)		3,396		8,782		17,098		4,461		(46,507)
Income tax provision		1,619		—		—		—		—		1,619
Net loss	$	(81,863)	$	3,396	$	8,782	$	17,098	$	4,461	$	(48,126)

Nine months ended September 30,

2018

2017

$ Change

% Change

(unaudited, in thousands)

Net sales

$
114,614

$
118,944

$
(4,330)

(4)
%
Cost of goods sold

66,774

66,067

707

1

Gross profit

47,840

52,877

(5,037)

(10)

Gross margin

42
%

44
%

Operating expenses

Selling, general and administrative

58,992

47,633

11,359

24

Depreciation and amortization

4,252

4,526

(274)

(6)

Total operating expenses

63,244

52,159

11,085

21

Operating (loss) income

(15,404)

718

(16,122)

(2,245)

Interest expense

7,097

6,536

561

9

Other expense (income), net

124

(1)

125

(12,500)

Loss before income taxes

(22,625)

(5,817)

(16,808)

289

Income tax (benefit) provision

(2,275)

776

(3,051)

(393)

Net loss

$
(20,350)

$
(6,593)

$
(13,757)

209
%

Nine months ended  September 30,

2018

2017

$ Change

% Change

(unaudited, in thousands)

Net sales:








Wholesale

$
80,808

$
88,910

$
(8,102)

(9)
%
Consumer Direct

31,128

27,959

3,169

11

Corporate and other

2,678

2,075

603

29

$
114,614

$
118,944

$
(4,330)

(4)
%
Gross profit:

Wholesale

$
25,817

$
33,210

$
(7,393)

(22)
%
Consumer Direct

19,351

17,592

1,759

10

Corporate and other

2,672

2,075

597

29

$
47,840

$
52,877

$
(5,037)

(10)
%
Operating expenses:

Wholesale

$
9,951

$
11,053

$
(1,102)

(10)
%
Consumer Direct

17,761

18,364

(603)

(3)

Corporate and other

35,532

22,742

12,790

56

$
63,244

$
52,159

$
11,085

21
%
Operating (loss) income:

Wholesale

$
15,866

$
22,157

$
(6,291)

(28)
%
Consumer Direct

1,590

(772)

2,362

(306)

Corporate and other

(32,860)

(20,667)

(12,193)

59

$
(15,404)

$
718

$
(16,122)

(2,245)
%

Liquidity and Capital Resources

Sources of Liquidity and Outlook

Our primary sources of liquidity are: (i) cash proceeds from customer wholesale trade receivables and trade receivables sold to a financial institution; (ii) cash proceeds from direct to consumer sales tendered in cash, credit card,

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~~Nine months Ended September 30, 2018 Compared to Nine months Ended September 30, 2017~~

~~Net Sales~~

Net sales decreased by 4% to $114.6 million for the nine months ended September 30, 2018 from $118.9 million for the same period last year. The $4.3 million net sales decrease was driven by a 9%, or $8.1 million, decline of net sales at our Wholesale segment. This decrease more than offset an 11%, or $3.2 million, net sales increase in the Consumer Direct segment attributable to a retail store net sales increase of 11% across Robert Graham and SWIMS full price and outlet stores, as well as an 11% ecommerce net sales increase.

Wholesale segment net sales declined by 9% to $80.8 million for the nine months ended September 30, 2018 from $88.9 million for the same period in the prior year. This $8.1 million decrease primarily related to less revenue from our Hudson brand as sales to major department stores dropped due to a shift in business from brick-and-mortar to online channels and less sales to off-price customers as a strategic approach to improving full-price business over the long term as the brand re-gains its roots as a ‘premium’ denim offering. Navigation of this shift is on-going for Hudson as it is selling into less department store ‘doors’ but increasing volume to the respective department stores’ on-line channels. In addition, Hudson strategically discontinued the majority of its European distribution to better concentrate on US opportunities. While the European volume overall is not material to the segment as a whole, the impact was a decrease of $1.9 million net sales for the nine months ended September 30, 2018 versus the same period last year. Robert Graham and SWIMS wholesale net sales increased $0.1 million and $1.2 million for the nine months ended September 30, 2018, respectively, compared to the same period last year, primarily due to each brand selling more unit volume into off-price channels than in the same period last year.

Consumer Direct net sales increased by 11% to $31.1 million for the nine months ended September 30, 2018 from $28.0 million for the same period in the prior year. The increase was driven by an 11% increase in both overall retail store net sales and ecommerce sales. The store increase was attributable to an 8% increase at full price stores and a 16% increase at off price stores. Robert Graham store increases were driven by improvements in conversion rates and average transaction value. In addition, during the first nine months of 2018, SWIMS retail store sales increased 28% both from improved volume in its comparable store, the inclusion of a non-comparable store that was not open during the full nine months last year and the addition of a new full-price store that opened in September 2018. Ecommerce net sales improved 11% during the nine months ended September 30, 2018. Robert Graham and SWIMS ecommerce net sales increases of 18% and 55%, respectively, more than offset Hudson ecommerce declines of 20%. Robert Graham ecommerce improvements were driven by increased site traffic and a higher average order value. SWIMS ecommerce improvements were attributable to an increase in site traffic and conversion rates. Hudson ecommerce declines were primarily driven by less site traffic and conversion while average order values increased double digits as the brand was strategically less promotional than in the same period last year.

Corporate and other net sales increased by 29% for the nine months ended September 30, 2018 to $2.7 million from $2.1 million in the same period last year. Corporate and other net sales consists of licensing revenue.

~~Gross Profit~~

Gross profit declined by $5.0 million, or 10%, to $47.8 million for the nine months ended September 30, 2018 from $52.9 million for the same period last year. The decrease in gross profit was attributable to a 4% decline in net sales during the nine months and the impact of a one-time benefit of $1.4 million recorded in the comparable period last year. The one-time benefit in the prior year’s nine month period related to a change in inventory valuation. Gross profit margin was 41.7% for the nine months ended September 30, 2018 versus 44.5% for same period in the prior year. Declines in gross profit margin were attributable to last year’s one-time benefit and the change in mix of net sales into the various distribution channels versus the same period last year. In the first nine months of 2018, wholesale selling increased into off-price channels, and the associated margin reductions more than offset margin increases from increased sales into consumer direct channels. At September 30, 2018, inventory decreased 12% relative to the same period in the prior year.

Corporate and other gross profit increased by 29% to $2.7 million for the first nine months of fiscal 2018, compared to $2.1 million in the same period for the prior year, due to an increase in licensing revenue.

~~Table of Contents~~

~~Operating Expenses~~

Operating expenses include (i) selling, general and administrative expenses related to employee and employee benefits, sales commissions, advertising, professional fees, stock-based compensation, factor and bank fees, acquisition costs and other costs including supplies and services purchased, and (ii) depreciation and amortization.

Operating expenses increased by 21% to $63.2 million for the nine months ended September 30, 2018 from $52.2 million for the nine months ended September 30, 2017. The $11.1 million increase in operating expenses was attributable to additional stock compensation expense of $0.8 million compared to the same period last year and $14.1 million in GBG Acquisition related costs incurred in 2018. This was partially offset by significant cost savings including a $1.5 million decrease in selling expenses, a $0.6 million decrease in administrative expenses, a $0.2 million decrease in direct retail store costs and $0.1 million savings on ecommerce fixed infrastructure. The decrease in operating expenses is also attributable to $0.9 million of restructuring costs incurred in fiscal 2017.

~~Depreciation and amortization expense, as a percent of net sales, was 3.7% from 3.8% for the nine months ended September 30, 2018 compared to the same period last year.~~

~~Interest Expense~~

Interest expense increased to $7.1 million for the nine months ended September 30, 2018 from $6.5 million for the nine months ended September 30, 2017, due to higher interest rates related to our credit facilities and the amortization of debt discounts and deferred financing costs related to those facilities and the convertible notes.

~~Income Tax (Benefit) Provision~~

Our effective tax rate from operations was a benefit of 10% for the nine months ended September 30, 2018 compared to an expense of 13% for the nine months ended September 30, 2017. The difference in the effective tax rate for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to a change in the ratio of year-to-date losses to forecasted loss.

~~Net Loss~~

~~We generated a net loss of $20.4 million for the nine months ended September 30, 2018, compared to a net loss of $6.6 million for the nine months ended September 30, 2017.~~

~~Liquidity and Capital Resources~~

~~Sources of Liquidity and Outlook~~

As of September 30, 2018, our primary sources of liquidity were: (i) cash proceeds from Wholesale operations sold on account, both managed and insured through factors and internal credit management resources; (ii) cash proceeds from sales through our Consumer Direct segment tendered in cash, credit card, debit card or gift card; (iii) cash proceeds ~~from~~for licenses collected from licensees via check or wire transfer; and (iv) cash proceeds from ~~borrowing~~borrowings under various credit facilities described below. Cash ~~was~~is used to make payments of debt and interest, royalties and for payroll and operating disbursements, including inventories, operating expenses and capitalized property, software and equipment.

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

As of March 31, 2019 and December 31, 2018, our cash and cash equivalent balances were $25.2 million and $29.5 million, respectively. Based on our cash on hand and expected cash flows from operations, the expected borrowing availability under our existing credit facilities and other financing arrangements, we believe that we have the working capital resources necessary to meet our projected operational needs beyond the next 12 months from the filing date of this Quarterly Report. However, if we require more capital for growth and integration or if we experience a decline in sales and/or operating losses, we believe that it will be necessary to obtain additional working capital through additional credit arrangements, debt and/or equity issuances and/or other strategic transactions.

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

Cash Flows for the Three Months Ended March 31, 2019 and 2018

Cash flows used in operating activities for the three months ended March 31, 2019 and 2018 were $347.1 million and $3.9 million, respectively. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, transaction costs, operating leases, professional services, and interest payments on our long-term obligations. Cash received from our customers generally corresponds to our net sales. In 2018, we entered into a receivables purchase arrangement to sell certain of our receivables, which results in the cash collected on the deferred purchase price of our sold receivables to be classified as investing cash flows. The decrease in operating cash flows during the comparative periods is primarily driven by the increase in net loss, excluding non-cash charges such as depreciation, amortization, and stock based compensation, and the impact of changes in working capital accounts. Working capital at any specific point is subject to many different variables, including seasonality, inventory management, the impact of certain of our factoring arrangements, the timing of cash receipts and payments, and vendor payment terms.

Cash flows provided by investing activities for the three months ended March 31, 2019 were $303.4 million. Cash flows used in investing activities for the three months ended March 31, 2018 were $0.4 million. Cash flows from investing activities correspond with cash capital expenditures, including leasehold improvements, incentives received from property and equipment vendors, investments in other companies and intellectual property rights. The increase in investing cash flows during the comparative periods is primarily driven by collections of sold receivables.

Cash flows provided by financing activities for the three months ended March 31, 2019 and 2018 were $39.6 million and $0.4 million, respectively. The increase in cash flows from financing activities was primarily driven by new financing facilities entered into to consummate the GBG Acquisition, which are discussed further below, as well as proceeds from the issuance of the 2024 Convertible Notes and the Private Placement (as defined below) of 10.0 million shares of common stock. Proceeds from the Credit Facilities and Private Placement were partially offset by repayment of our prior Credit Facilities.

“Adjusted Operating Cash Flow” is a non-GAAP measure defined by us as net cash used in operating activities plus collections of sold receivables. Collections of sold receivables are classified as an investing activity on the accompanying condensed consolidated statement of cash flows. Collections of sold receivables differ from collections of accounts receivable only with respect to the timing of cash receipts through our factoring arrangements. We believe the foregoing non-GAAP measure is useful to investors and analysts because it presents additional information on our financial performance and cash flows. Investors, analysts, our management, and our Board of Directors utilize this non-GAAP measure, in addition to GAAP measures, to track our financial and operating performance and compare our performance

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to peer companies. Adjusted operating cash flow, has material limitations, and therefore, may not be comparable to similarly titled measures of other companies and should not be considered in isolation, or as a substitute for analysis of our operating results in accordance with GAAP. In order to compensate for these potential limitations we also review the related GAAP measures.

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


	For the three months ended March 31,
	2019		2018
Net cash used in operating activities, as reported	$	(347,116)	$	(3,875)
Collections of sold receivables		307,279		—
Adjusted operating cash flow	$	(39,837)	$	(3,875)

Credit Agreements and Other Financing Arrangements

In connection with the GBG Acquisition, consideration paid to GBG was funded through proceeds received by entering into (i) a new first lien credit and collateral agreement entered into with Ares Capital Corporation (“Ares”), as agent, and the lenders party thereto, (ii) a new second lien credit and collateral agreement entered into with U.S. Bank National Association, as agent, and the lenders party thereto, and (iii) a new revolving line of credit agreement entered into with Ares Commercial Finance, as revolving agent, and the lenders party thereto. In addition, we also entered into the 2024 Convertible Notes (as defined below) issued to the GSO/BTO Affiliates (as defined below), completed a private placement of our common stock, and entered into a receivables purchase agreement with PNC Bank National Association, as administrative agent, and the lenders party thereto, to sell certain receivables acquired. The aggregate cash consideration received from the above sources was used to repay outstanding loans and indebtedness under our existing credit agreements which included (i) the payoff of all outstanding loans and indebtedness relating to our existing term loans with TCW Asset Management Company and (ii) the payoff of all outstanding balances relating to the revolving line of credit facility with Wells Fargo Bank, National Association.

New Term Loans

On October 29, 2018, we, along with certain of our subsidiaries, entered into a (i) first lien credit agreement with Ares, as administrative agent, ACF FinCo I LP, as collateral agent, and certain other lenders party thereto (the “First Lien Credit Agreement”) and (ii) second lien credit agreement with U.S. Bank National Association, as administrative agent and collateral agent, and certain lenders party thereto (the “Second Lien Credit Agreement”, and together with the First Lien Credit Agreement, collectively, the “Credit Agreements”).

The First Lien Credit Agreement provides for a senior secured asset based revolving credit facility with commitments in an aggregate principal amount of $150.0 million, which matures on April 29, 2023 (the “New Revolving Facility”) and a senior secured term loan credit facility in an aggregate principal amount of $645.0 million, which matures on October 29, 2023 (the “First Lien Term Loan Facility”, and together with the New Revolving Facility, are collectively referred to herein as “First Lien Facilities”). The Second Lien Credit Agreement provides for a second lien term loan facility in an aggregate principal amount of $668.0 million, which matures on October 29, 2024 (the “Second Lien Term Loan Facility”, and together with the First Lien Term Loan Facility are collectively referred to herein as the “Term Loan Facilities”).

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

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(i) 3.00% during the first year after the GBG Closing Date, (ii) 2.00% during the second year after the GBG Closing Date and (ii) 1.00% during the third year after the GBG Closing Date, plus, if applicable, customary “breakage” costs with respect to LIBOR rate loans. Subject to certain exceptions, prepayments of loans under the Second Lien Term Loan Facility are subject to a prepayment premium of (i) with respect to the first $175 million of aggregate prepayments (the “Initial Prepayment Amount”), (a) 3.00% during the first year after the GBG Closing Date, (b) 2.00% during the second year after the GBG Closing Date and (c) 1.00% during the third year after the GBG Closing Date and (ii) with respect to any amount in excess of the Initial Prepayment Amount, (a) subject to certain exceptions, a customary make-whole amount during the first or second year after the GBG Closing Date, (b) 4.00% during the third year after the GBG Closing Date, (c) 2.00% during the fourth year after the GBG Closing Date and (d) 1.00% during the fifth year after the GBG Closing Date. The obligations under the Credit Agreements are guaranteed by certain of our domestic subsidiaries and are secured by substantially all of our assets.

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

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

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

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

On October 29, 2018, in connection with the GBG Acquisition and entry into the Credit Agreements, ~~as defined in “Note 16~~–~~Subsequent Events”, the ABL Credit Agreement and Term Credit Agreement were~~we terminated our prior credit agreements and all outstanding obligations thereunder were repaid. ~~For~~ See “Notes to Condensed Consolidated Financial Statements—Note 8—Debt” for additional information ~~see “Note 16~~–~~Subsequent Events.”~~related to these historical credit agreements.

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~~Cash Flows for~~On April 17, 2019, we amended the ~~Nine months Ended September 30, 2018 and September 30, 2017~~

For the nine months ended September 30, 2018, net cash used in operating activities was $3.5 million. Cash flows used in investing activities during the nine months ended September 30, 2018 totaled $1.0 million for the purchase of property and equipment. Cash flows used in financing activities during the nine months ended September 30, 2018 totaled $0.4 million. These cash flows from financing activities primarily consisted of proceeds from our line of credit under the ABL Credit Agreement of $2.2 million, offset by repayment of principal payments under our Term Credit Agreement of $2.2 million and taxes paid in lieu of shares issued for stock-based compensation of $0.4 million.

~~For the nine months ended September 30, 2017, we used $7.2 million of cash flows in operating activities~~Agreements to, fund our working capital. Cash flows used in investing activities during the nine months ended September 30, 2017 totaled $0.8 million primarily for the purchase of property and equipment. Cash flows from financing activities during the nine months ended September 30, 2017 totaled $4.4 million. These cash flows from financing activities primarily consisted of a $7.4 million drawn down on our line of credit under the ABL Credit Agreement offset by repayment of customer cash advances inamong other things, increase the amount of ~~$1.7 million, repayment of principal payments~~indebtedness under ~~our Term Credit Agreement of $0.9 million and taxes paid in lieu of shares issued for stock-based compensation of $0.3 million.~~

~~Credit Agreements and Other Financing Arrangements~~

~~ABL~~the First Lien Credit Agreement and amend our consolidated fixed charge ratio covenant; see “Notes to Condensed Consolidated Financial Statements—Note 16—Subsequent Events” for additional information.

New Revolving Facility

In addition to the First Lien Term Loan, the First Lien Credit Agreement

On January 28, 2016, we and certain of our subsidiaries entered into (i) the ABL Credit Agreement and accompanying security agreement with Wells Fargo Bank, National Association, as lender, and (ii) the Term Credit Agreement and accompanying security agreement with TCW Asset Management Company, as agent, and the lenders party thereto.

~~The ABL Credit Agreement provided~~ provides for ~~the Revolving Facility, an asset-based~~a senior secured asset based revolving credit facility with commitments in an aggregate principal amount of ~~$40.0 million. The Term Credit Agreement provided for the Term Facility, a senior secured term loan facility with commitments in an aggregate principal amount of $50.0 million. The~~$150.0 million, which matures on April 29, 2023 (the “New Revolving Facility ~~had a maturity date of October 30, 2020. The Term Facility had a maturity date of January 28, 2021.~~”). The amount available to be drawn under the New Revolving Facility ~~was~~is based on the borrowing base values attributed to eligible ~~accounts receivable and eligible~~ inventory. ~~Our availability~~There are no scheduled periodic payments under the New Revolving ~~Facility as of September 30, 2018 was $7.9 million.~~

~~Certain domestic subsidiaries of the Company were co-borrowers under the ABL Credit Agreement and the Term Credit Agreement.~~Facility. The obligations under the ~~ABL~~ Credit ~~Agreement and Term Credit Agreement were~~Agreements, including the New Revolving Facility, are guaranteed by ~~all~~certain of our domestic subsidiaries and ~~were~~are secured by substantially all of our ~~assets, including~~assets.

The annual interest rates for the ~~assets~~New Revolving Facility is the lender’s alternate base rate (“ABR”) (with a 1.00% floor) plus 4.50% for base rate loans and adjusted LIBOR (with a 0% floor) plus 5.50% for LIBOR rate loans. The New Revolving Facility includes mandatory prepayments customary for credit facilities of ~~our domestic subsidiaries.~~

~~To permit~~this nature. Subject to certain exceptions, permanent reductions of the ~~acquisition of SWIMS, on July 18, 2016,~~commitments under the ~~Company entered into amendments~~New Revolving Facility are subject to the ABL Credit Agreement and the Term Credit Agreement. Additionally, on March 27, 2017 and March 27, 2018, the Company entered into further amendments to these agreements to modify certain defined terms, add a ~~liquidity covenant, revise certain other covenants and modify the applicable base and LIBOR rates.~~

~~On October 29, 2018,~~prepayment ~~in connection with the GBG Acquisition and entry into the Credit Agreements, as defined in “Note 16~~–~~Subsequent Events”, the ABL Credit Agreement and Term Credit Agreement were terminated and all outstanding obligations thereunder were repaid.~~ ~~For additional information, see “Note 16~~–~~Subsequent Events.”~~

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premium of (i) 3.00% during the first year after the GBG Closing Date, (ii) 2.00% during the second year after the GBG Closing Date and (ii) 1.00% during the third year after the GBG Closing Date, plus, if applicable, customary “breakage” costs with respect to LIBOR rate loans.

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

On April 17, 2019, we amended the New Revolving Facility to, among other things, increase the aggregate commitments; see “Notes to Condensed Consolidated Financial Statements—Note 16—Subsequent Events” for additional information.

PNC Receivables Facility

In October 29, 2018, we entered into a three-year trade receivables securitization facility (the “PNC Receivables Facility”) pursuant to (i) a Purchase and Sale Agreement, among certain of our subsidiaries, as “Originators,” and Spring Funding, LLC, our wholly owned, bankruptcy-remote special purpose subsidiary, as Buyer (the “PSA”) and (ii) a Receivables Purchase Agreement among Spring, as Seller, the Company, as initial Servicer, certain purchasers party thereto (the “Purchasers”), PNC Bank, National Association, as Administrative Agent, and PNC Capital Markets LLC, as Structuring Agent (the “RPA”). Other subsidiaries may later enter into the PNC Receivables Facility. At the end of the initial three year term, the Purchasers may elect to renew their commitments under the RPA.

Under the terms of the PSA, the Originators sell or contribute certain of their trade accounts receivable, related collections and security interests the (the “Receivables”) to Spring on a revolving basis. Under the terms of the RPA, Spring sells to the Purchasers an undivided ownership interest in the Receivables for up to $450.0 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, we amended the PNC Receivables Facility to, among other things, increase the maximum amount allowable for sale to PNC; see “Notes to Condensed Consolidated Financial Statements—Note 16—Subsequent Events” for additional information.

CIT Factoring Agreement

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

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2024 Convertible Notes

On October 29, 2018, we issued convertible promissory notes (the “2024 Convertible Notes”) in an aggregate principal amount of $25.0 million to the GSO/BTO Affiliates. The 2024 Convertible Notes are convertible at the holder’s option beginning on or after October 29, 2019 until the earlier to occur of (x) repayment in full of all principal and interest outstanding under the Second Lien Credit Agreement and (y) October 29, 2024 (such earlier date, the “2024 Convertible Note Maturity Date”), into shares of our common stock at a conversion price of $8.00 per share, subject to adjustment. The 2024 Convertible Notes do not initially bear interest. From and after April 29, 2019, the 2024 Convertible Notes bear interest at the rate of 12.0% per annum. From and after October 29, 2019, the 2024 Convertible Notes bear interest at the rate of 16.0% per annum. Interest payments are due each January 31, April 30, July 31, and October 31. To the extent that we are unable to pay cash interest on the ~~A&R Factoring Agreement, see “Note 3 – Factor Accounts and Receivables”~~2024 Convertible Notes on an interest payment date because of restrictions in the Credit Agreements or other debt agreements, an amount equal to ~~our unaudited condensed financial statements.~~

~~SWIMS Factoring Agreement~~

~~In connection with~~ the ~~acquisition of SWIMS, SWIMS has maintained its preexisting Factoring Agreement between SWIMS and DNB, dated August 26, 2013 (the “SWIMS Factoring Agreement”). The SWIMS Factoring Agreement is a combined credit assurance and factoring agreement, pursuant~~unpaid interest then due will be added to ~~which SWIMS is granted financing of up to 80% of its preapproved outstanding invoiced receivables, with a credit limit of NOK 7.2 million. On September 3, 2018,~~ the ~~SWIMS Factoring Agreement was amended to increase the credit limit to NOK 10.7 million. DNB receives an annual commission based on invoiced revenues and a quarterly commission~~principal amount of the ~~maximum financing amount plus other administrative costs. The SWIMS Factoring Agreement~~2024 Convertible Notes.

From and after October 29, 2018 until October 29, 2019, upon consummation of any sales of common stock by us for cash, we may, ~~be terminated by SWIMS upon 14~~on at least ten (10) days’ prior written notice ~~for~~to the holder of a 2024 Convertible Note, prepay such 2024 Convertible Note in whole but not in part solely with the net proceeds of such sale of common stock in an amount equal to the greater of (x) the principal amount of such 2024 Convertible Note, together with accrued interest through and including the date of prepayment, or (y) the value equal to (i) the number of shares of common stock that would be received upon conversion of such 2024 Convertible Note on the repayment date multiplied by the market value of the common stock as of such date, plus (ii) any ~~reason and by DNB~~accrued but unpaid interest that has not been added to the principal amount of such 2024 Convertible Note on the date of such prepayment (such greater amount, the “Prepayment Amount”). Also, the 2024 Convertible Notes shall be prepayable in whole but not in part at the Prepayment Amount: (A) from October 29, 2019 through October 29, 2021 only upon ~~14 days’~~a change in control or a liquidation, or (B) from October 29, 2021 until the 2024 Convertible Note Maturity Date, in each case on at least ten (10) days' prior written notice ~~for just cause. DNB may also terminate~~to the SWIMS Factoring Agreement without any prior written notice in the event of a material breach by SWIMS. For additional information on the SWIMS Factoring Agreement, see “Note 3 – Factored Accounts and Receivables” to our unaudited condensed financial statements.holder.

The Private Placement

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

Modified Convertible Notes and Rollover Agreement

~~The Company issued~~On September 8, 2015, we entered into the rollover agreement with the holders of convertible notes originally issued in connection with the acquisition of the Hudson ~~with different interest rates and conversion features for Hudson’s management stockholders, including Peter Kim and~~ business (the “~~Fireman Capital CPF Hudson Co-Invest LP. On September 8, 2015, the Company entered into the~~ Rollover Agreement ~~with the holders of those convertible notes,~~”), pursuant to which, on January 28, 2016, the holders of the notes contributed their notes to ~~the Company~~us in exchange for ~~1.2 million shares of common stock; a cash payment of approximately $8.6 million, before expenses; and an aggregate principal amount of approximately $16.5 million of Modified Convertible Notes.~~the following:

1.2 million shares of common stock;

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

an aggregate principal amount of approximately $16.5 million of Modified Convertible Note (the “Modified Convertible Notes”)

The Modified Convertible Notes are structurally and contractually subordinated to our senior debt and ~~will~~ mature on July 28, 2021. The Modified Convertible Notes accrue interest quarterly on the outstanding principal amount at a rate of 6.5% per annum ~~(which increased~~(increased to 7% as of October 1, ~~2016~~2017 with respect to the Modified Convertible Notes issued to Fireman Capital CPF Hudson Co-Invest LP) only), which is payable 50% in cash and 50% in additional paid-in-kind notes; provided, however, that ~~the Company~~we may, in ~~its~~our sole discretion, elect to pay 100% of such interest in cash. ~~Beginning on January 28, 2016, the~~The Modified Convertible Notes are convertible by each of the holders into shares of our common stock, cash, or a combination of cash and common stock, at our election.

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If we elect to issue only shares of common stock upon conversion of the Modified Convertible Notes, each of the Modified Convertible Notes would be convertible, in whole but not in part, into a number of shares equal to the ~~“conversion amount”~~conversion amount divided by the ~~“market price”.~~market price. The ~~“conversion amount”~~conversion amount is (a) the product of (i) the ~~“market price”,~~market price, multiplied by (ii) the quotient of (A) the principal amount, divided by (B) the conversion price, minus (b) the aggregate optional prepayment amounts paid to the holder. The market price is the average of the closing prices for our common stock over the ~~20-trading-day~~20 trading day period immediately preceding the notice of conversion. If we elect to pay cash with respect to a conversion of the Modified Convertible Notes, the amount of cash to be paid per share will be equal to the ~~“conversion amount”.~~conversion amount. We will have the right to prepay all or any portion of the principal amount of the Modified Convertible Notes at any time so long as we make a pro rata prepayment on all of the Modified Convertible Notes.

~~Short-Term Convertible~~Supplemental Unaudited Pro Forma Combined Financial Information

As described above, we completed the GBG Acquisition on October 29, 2018. The unaudited pro forma combined statements of operations for the three months ended March 31, 2018 present our condensed consolidated results of operations giving pro forma effect to the GBG Acquisition as if it had occurred on January 1, 2018. The unaudited pro forma combined adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma combined basis, the impact of the GBG Acquisition on our historical financial information, as applicable. These statements contain a number of risks and uncertainties, as discussed under the heading “Forward‑Looking Statements” of this Quarterly Report that could cause actual results to differ materially. Our future results, performance or achievements could differ materially from those expressed or implied in these statements as such, readers are cautioned not to place undue reliance on these. We do not undertake to publicly update these statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

The GBG Acquisition was accounted for using the acquisition method of accounting. The preliminary fair values of the acquired assets and assumed liabilities as of October 29, 2018, are based on the consideration paid including our estimates and assumptions, as explained in more detail in Note 3 in the accompanying Notes to the Condensed Consolidated Financial Statements. The total purchase price to acquire the GBG Business has been allocated to the assets acquired and assumed liabilities of the acquired business, based upon the fair values as of October 29, 2018. We utilized third-party valuation specialists to assist our management in determining the fair values of the acquired assets and liabilities assumed.

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

~~On July 18, 2016, we issued a convertible promissory note~~The unaudited pro forma combined financial information also does not project our results of operations for any future period or date. The unaudited pro forma combined financial information for the three months ended March 31, 2018 includes results of the GBG Acquisition and its related operations from January 1, 2018 through March 31, 2018. The pro forma combined adjustments give effect to ~~Tengram II, with principal of $13.0 million~~the items identified in the unaudited pro forma combined table below in connection with the GBG Acquisition.

In addition to the other information in this Quarterly Report on Form 10-Q, the unaudited pro forma combined statements of operations should be read in conjunction with the audited combined financial statements of the GBG Business as of December 31, 2017 and October 28, 2018 and the notes relating thereto, included as Exhibit 99.1 to the Amendment No. 1 to the Company’s Current Report on Form 8-K filed on May 16, 2019 (the “GBG Business Financial Statements”).

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

The fair value estimates of the assets acquired and liabilities assumed used in the unaudited pro forma condensed consolidated financial information are preliminary and subject to further adjustments. Accordingly, the final acquisition ~~of SWIMS, referred to as~~accounting adjustments may be materially different from the ~~SWIMS Convertible Note. As discussed further below, the~~preliminary unaudited adjustments presented herein.

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~~SWIMS Convertible Note was fully converted into shares~~

The unaudited pro forma condensed consolidated financial information has been prepared in a manner consistent with the accounting policies adopted by the Company. As more information becomes available, the combined company will perform a more detailed review of ~~Series A-1 Preferred Stock in January 2018. The SWIMS Convertible Note accrued interest at~~the accounting policies of GBG (as historically applied to the GBG Business) and the Company. As a ~~rate~~result of ~~3.75% per annum, compounding~~that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the ~~first day~~combined financial statements.

The unaudited pro forma combined financial information has been prepared for informational purposes only and is not necessarily indicative of ~~each month starting August 1, 2016, and was convertible, at Tengram II’s option~~ or intended to represent what the combined company’s financial position or results of operations actually would have been had GBG Acquisition occurred as of the dates indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company. The unaudited pro forma adjustments are based on the ~~extended maturity date~~information available at the time of ~~January 18, 2018 (which had an original maturity date~~the preparation of ~~January 18, 2017) if~~the pro forma combined financial information.

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

Unaudited Pro Forma Results of Operations

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in ~~cash on or prior to that date, into newly issued shares of our Series A-1 Preferred Stock at a conversion price of $3.00 per share. Additionally,~~ the Series A-1 Preferred Stock will itself was convertible into shares of our common stock at an initial price of $3.00 per share (subject to adjustment), was entitled to dividends at a rate of 10% per annum payable quarterly in arrears, was senior to the common stock upon liquidation and had voting rights on an as-converted basis alongside our common stock.unaudited pro forma financial statements:


	Three months ended March 31, 2018
	Centric			Acquired			Pro Forma		Pro Forma
	(a)			Business (b)			Adjustments		Combined
Net sales	$	38,818		$	560,303		$	—	$	599,121
Cost of goods sold (c)		22,563			407,845			18,618		449,026
Gross profit		16,255			152,458			(18,618)		150,095
Profit margin		41.9	%		27.2	%		—		25.1	%
Operating expenses		—			—			—		—
Selling, general and administrative (c)		15,348			143,113			(23,173)		135,288
Depreciation and amortization (d)		1,463			6,548			15,423		23,434
Total operating expenses		16,811			149,661			(7,750)		158,722
Operating (loss) income		(556)			2,797			(10,868)		(8,627)
Interest expense, net (e)		2,215			3,077			32,821		38,113
Other income (expense)		1			17,675					17,676
(Loss) income before income taxes		(2,770)			17,395			(43,689)		(29,064)
Income tax expense (benefit)		1,315			1			—		1,316
Net (loss) income	$	(4,085)		$	17,394		$	(43,689)	$	(30,380)

~~On January 18, 2018, the SWIMS Convertible Note matured and automatically converted into newly issued shares~~


Adjusted pro forma EBITDA reconciliation:
Interest expense, net		38,113
Income tax expense		1,316
Depreciation and amortization		23,434
Other (income) expense		(17,676)
Discontinued license		4,062
Adjusted pro forma EBITDA	$	18,869

(a)

Represents the unaudited results of operations of the Company for the three months ended March 31, 2018.

(b)

Represents the unaudited results of operations of the GBG Business for the three months ended March 31, 2018 derived from the GBG Business Financial Statements.

(c)

Represents an increase to cost of goods sold of $18.6 million for the three months ended March 31, 2018 and a decrease to selling, general and administrative expenses of $23.2 million for the three months ended March 31, 2018 related to the capitalization and reclassification of certain production related overhead costs.

(d)

Represents additional depreciation and amortization expense of $15.4 million for the three months ended March 31, 2018 related to the fair value of the property, plant, and equipment acquired in the GBG Acquisition. The adjustment in depreciation is based on the estimated fair value and useful lives of 3 to 8 years, and is calculated using the straight-

Table of the Company’s Series A-1 Preferred Stock, at a conversion price of $3.00 per share. The outstanding balance of the SWIMS Convertible Note, together with any accrued and unpaid interest thereon, converted into 4,587,964 shares of Series A-1 Preferred Stock. Upon the issuance of such shares of Series A-1 Preferred Stock by the Company to Tengram II, the Convertible Note was settled in its entirety.Contents

line method. The intangible assets represent customer relationships and certain above or below market leases with an estimated useful life of 11 years and 6 years, respectively, which the Company will amortize on a straight-line basis.

(e)

Represents the net increase in interest expense of $32.8 million for the three months ended March 31, 2018 in connection with the gross borrowings under the 2024 Convertible Notes, the Credit Agreements and amortization of the related deferred fees and discount.

On October 29, 2018, 4,587,964 shares of the Series A-1 Preferred Stock converted into 4,951,177 newly issued shares of Common Stock in accordance with the terms of the Series A-1 Preferred Stock (the “~~Series A-1 Conversion”). For additional information, see “Note 16~~–~~Subsequent Events.”~~

~~SWIMS Overdraft Agreement~~

Off Balance Sheet Arrangements

As a part of our working capital management, we sell certain accounts receivable through a third party financial institution in off-balance sheet arrangements. The amount sold varies each month based on the amount of underlying receivables and cash flow needs. As of March 31, 2019, we had $378.1 million of receivables outstanding under receivable purchase agreements entered into by various locations. Costs incurred on the sale of receivables were $3.7 million for the three months ended March 31, 2019. These amounts are recorded in interest expense, net in the condensed consolidated statements of net income.

As of ~~September 30,~~March 31, 2018, we did not have any off balance sheet receivables outstanding nor did we incur any costs associated with off-balance sheet arrangements.

We did not have any other material off-balance sheet arrangements as of March 31, 2019 and 2018.

Contractual Obligations

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

Critical Accounting Policies and Use of Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with ~~accounting principles generally accepted in the United States (“U.S. GAAP”).~~GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates from the information provided in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management’s Discussion of Critical Accounting Policies” included in our ~~2017~~2018 Form 10-K, except as provided in “Note 2 – Summary of Significant Accounting Policies” to our condensed consolidated financial statements above.

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Recent Accounting Pronouncements

See ~~“Note~~“Notes to Condensed Consolidated Financial Statements - Note 2 –- Summary of Significant Accounting Policies” to our unaudited condensed consolidated financial statements above regarding new accounting pronouncements.

The Company adopted ASC ~~606,~~842, ~~Revenue from Contracts with Customers~~Leases, with a date of initial application of January 1, ~~2018.~~2019. As a result, the Company has changed its accounting policy for ~~revenue recognition,~~leases, see “Notes to Condensed Consolidated Financial Statements - Note 2 ~~– “Summary~~- Summary of Significant Accounting Policies” ~~above~~ for a discussion on the adoption of ASC ~~606.~~842.

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Where You Can Find Other Information

Our corporate website is ~~www.centricbrands.com~~.www.centricbrands.com. The information contained on, or that can be accessed through, our website is not a part of this Quarterly Report and is not incorporated by reference herein. We make available on or through our website, without charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are electronically submitted to the SEC. ~~Our~~The SEC ~~filings, including exhibits~~maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information filed ~~or furnished therewith, are also available for at~~electronically by us with the ~~SEC’s website at~~ ~~www.sec.gov. In addition, any materials filed with, or furnished to, the SEC~~SEC. Copies of these reports, proxy and information statements and other information may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or viewed online at www.sec.gov. Information regarding the operation of the Public Reference Room can be obtained by ~~calling~~electronic request at the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.following e-mail address: publicinfo@sec.gov.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~We maintain~~The Company carried out an evaluation, as required by Rule 13a-15(b) under the Exchange Act, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) ~~and Rule 15d-15(e) under~~of the Exchange ~~Act. Disclosure~~Act, as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures ~~are those controls and procedures designed~~were effective to ~~ensure~~provide reasonable assurance that information required to be disclosed by the Company in ~~our~~ reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the ~~SEC’s rules and forms. In addition, disclosure controls and procedures include, without limitation, controls and procedures designed~~communication to ~~ensure that~~ the ~~information required to be disclosed by us in our reports under the Exchange Act is accumulated and communicated to our~~Company’s management, including ~~our~~the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report, our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. ~~Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.~~

Changes in Internal Control over Financial Reporting

~~There~~Except as described below, the Company’s management, including the Company’s Chief Executive Officer and principal financial officer, has determined that there were no changes in ~~our~~the Company’s internal control over financial reporting ~~(as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2018~~ that have materially affected, or ~~that~~ are reasonably likely to materially affect, ~~our~~these internal controls over financial reporting during the period covered by the report.

During the fiscal year ended December 31, 2018, the Company acquired the GBG Business, and during the first quarter ended March 31, 2019, we continued to integrate the acquired GBG Business into the Company’s financial reporting processes and procedures and internal control over financial reporting. Additionally, during the first quarter of 2019, the Company implemented internal controls relating to the new lease accounting standard, ASC 842, which was adopted by the Company on January 1, 2019.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to lawsuits and other contingencies in the ordinary course of our business. We do not believe that we are currently a party to any material pending legal proceedings. Additionally, in the opinion of management, based upon advice of legal counsel, the likelihood is remote that the impact of any pending legal proceedings and claims, either individually or in the aggregate, would have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows. For more information, see ~~“Note 14~~“Notes to Condensed Consolidated Financial Statements- Note 7 – Commitments and Contingencies” to our unaudited condensed consolidated financial statements in “Part I, Item 1” of this Quarterly Report.

Item 1A. Risk Factors

~~Refer to Form 8-K filed on November 2, 2018 for additional risk factors~~There have not been any material changes from the Risk Factors as previously disclosed ~~that supplement and update the risk factor disclosure contained~~ in ~~the~~our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2017,~~2018, filed with the SEC on May 16, 2019.

Item 2. Unregistered Sales of Equity Securities and ~~Exchange Commission~~Use of Proceeds

Purchases of Equity Securities by Issuer

Pursuant to our practice, we withhold shares of stock awards on ~~April 2, 2018.~~the vesting date and make payments to taxing authorities as required by law to satisfy the minimum withholding tax requirements of award recipients who are employees.

The following table presents shares repurchased during the three months ended March 31, 2019:


	Total	Weighted
	Number of	Average Price Paid
	Shares Purchased	per Share
January 1, 2019 – January 31, 2019	29,526	$	3.15
February 1, 2019 –February 28, 2019	—		—
March 1, 2019 –March 31, 2019	—		—
Total	29,526		3.15

Item 5. Other Information

None.

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Item 6. Exhibits.

~~Exhibit No.~~	~~Description~~	Document if Incorporated by Reference

~~2.1~~Exhibit Number	Description	Document if Incorporated by Reference
31.1	~~Purchase and Sale Agreement, dated as of June 27, 2018, by and among Global Brands Group Holding Limited, GBG USA Inc. and Differential Brands Group Inc.~~	~~Exhibit 2.1 to Current Report on Form 8-K filed on July 3, 2018~~
~~2.2~~	Omnibus Closing Letter Agreement, dated as of October 29, 2018, by and among Global Brands Group Holding Limited, GBG USA Inc. and Differential Brands Group Inc.*	~~Exhibit 2.2 to Current Report on Form 8-K filed on November 2, 2018~~
~~3.1~~	~~Certificate of Amendment to the Company’s Certificate of Incorporation, dated October 29, 2018~~	~~Exhibit 3.1 to Current Report on Form 8-K filed on November 2, 2018~~
~~4.1~~	~~Form of Convertible Note~~	~~Exhibit 4.1 to Current Report on Form 8-K filed on November 2, 2018~~
~~4.2~~	~~Subordinated Convertible Promissory Notes Guaranty Agreement, dated as of October 29, 2018, by and among the Company and the Guarantors party thereto~~	~~Exhibit 4.2 to Current Report on Form 8-K filed on November 2, 2018~~
~~4.3~~	~~Specimen Common Stock Certificate of Centric Brands Inc.~~	~~Exhibit 4.3 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.1~~	First Lien Credit Agreement, dated as of October 29, 2018, by and among Differential Brands Group Inc., as borrower, the lenders party thereto, Ares Capital Corporation, as Joint Lead Arranger, Bookrunner and Administrative Agent, ACF Finco I LP, as revolving agent and collateral agent, and HPS Investment Partners, LLC, as Joint Lead Arranger, Bookrunner and Documentation Agent*	~~Exhibit 10.1 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.2~~	First Lien Collateral Agreement, dated as of October 29, 2018, by and among ACF Finco I LP, as First Lien Collateral Agent, Differential Brands Group Inc. and certain of its subsidiaries*	~~Exhibit 10.2 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.3~~	First Lien Guaranty Agreement, dated as of October 29, 2018, by and among Ares Capital Corporation, as Administrative Agent, Differential Brands Group Inc. and certain of its subsidiaries*	~~Exhibit 10.3 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.4~~	Second Lien Credit Agreement, dated as of October 29, 2018, by and among Differential Brands Group Inc., as borrower, the lenders party thereto, and U.S. Bank National Association, as Administrative Agent and Collateral Agent*	~~Exhibit 10.4 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.5~~	Second Lien Collateral Agreement, dated as of October 29, 2018, by and among U.S. Bank National Association, as Second Lien Collateral Agent, Differential Brands Group Inc. and certain of its subsidiaries*	~~Exhibit 10.5 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.6~~	Second Lien Guaranty Agreement, dated as of October 29, 2018, by and among U.S. Bank National Association, as Administrative Agent, Differential Brands Group Inc. and certain of its subsidiaries*	~~Exhibit 10.6 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.7~~	Receivables Purchase Agreement, dated as of October 29, 2018, by and among Spring Funding, LLC, as seller, the purchasers from time to time party thereto, PNC Bank, National Association, as Administrative Agent, Differential Brands Group Inc., as initial Servicer, and PNC Capital Markets LLC, as Structuring Agent*	~~Exhibit 10.7 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.8~~	Purchase and Sale Agreement, dated as of October 29, 2018, among certain subsidiaries of Differential Brands Group Inc., as Originators, and Spring Funding, LLC, a wholly owned, bankruptcy-remote special purpose subsidiary of Differential Brands Group Inc., as Buyer	~~Exhibit 10.8 to Current Report on Form 8-K filed on November 2, 2018~~

~~Table of Contents~~

~~10.9~~	Form of Subscription Agreement for the Issuance of Common Stock*	~~Exhibit 10.9 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.10~~	Form of Subscription Agreement for the Issuance of Common Stock and Convertible Notes to GSO Capital Opportunities Fund III LP, GSO CSF III Holdco LP, GSO Aiguille des Grand Montets Fund II LP, GSO Credit Alpha II Trading (Cayman) LP, GSO Harrington Credit Alpha Fund (Cayman) L.P., BTO Legend Holdings L.P. and Blackstone Family Tactical Opportunities Investment Partnership III (Cayman) - NQ - ESC L.P *	~~Exhibit 10.10 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.11~~	Form of Subscription Agreement for the Issuance of Common Stock to GSO Capital Opportunities Fund III LP, GSO CSF III Holdco LP, GSO Aiguille des Grand Montets Fund II LP, GSO Credit Alpha II Trading (Cayman) LP, GSO Harrington Credit Alpha Fund (Cayman) L.P., BTO Legend Holdings L.P. and Blackstone Family Tactical Opportunities Investment Partnership III (Cayman) - NQ - ESC L.P *	~~Exhibit 10.11 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.12~~	Stockholder Agreement by and among Differential Brands Group Inc., TCP Denim, LLC, Tengram Capital Partners Fund II, L.P., Tengram Capital Partners Gen2 Fund, L.P., Tengram Capital Associates, LLC, RG II Blocker, LLC, GSO Capital Opportunities Fund III LP, GSO CSF III Holdco LP, GSO Aiguille des Grand Montets Fund II LP, GSO Credit Alpha II Trading (Cayman) LP, GSO Harrington Credit Alpha Fund (Cayman) L.P., BTO Legend Holdings L.P. and Blackstone Family Tactical Opportunities Investment Partnership III (Cayman) - NQ - ESC L.P., dated as of October 29, 2018	~~Exhibit 10.12 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.13~~	Registration Rights Agreement, dated as of October 29, 2018, by and among Differential Brands Group Inc. and GSO Capital Opportunities Fund III LP, GSO CSF III Holdco LP, GSO Aiguille des Grand Montets Fund II LP, GSO Credit Alpha II Trading (Cayman) LP, GSO Harrington Credit Alpha Fund (Cayman) L.P., BTO Legend Holdings L.P. and Blackstone Family Tactical Opportunities Investment Partnership III (Cayman) - NQ - ESC L.P.	~~Exhibit 10.13 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.14~~	~~Registration Rights Agreement, dated as of October 29, 2018, by and among Differential Brands Group Inc. and the investors party thereto~~	~~Exhibit 10.14 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.15~~	~~Amendment No. 1 to Registration Rights Agreement, dated as of October 29, 2018, by and among Differential Brands Group Inc. and the consenting investors party thereto.~~	~~Exhibit 10.15 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.16~~	Registration Rights Agreement, dated as of January 28, 2016, by and among Differential Brands Group Inc. and the investors named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed on January 29, 2016)	~~Exhibit 10.16 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.17~~	Employment Agreement, dated as of October 29, 2018, by and between Differential Brands Group Inc. and Jason Rabin**	~~Exhibit 10.17 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.18~~	Employment Agreement, dated as of January 28, 2016, by and between Differential Brands Group Inc. and Michael Buckley (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K filed on February 29, 2016)**	~~Exhibit 10.18 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.19~~	Separation Agreement, dated as of October 29, 2018, by and between Differential Brands Group Inc. and Michael Buckley**	~~Exhibit 10.19 to Current Report on Form 8-K filed on November 2, 2018~~

~~Table of Contents~~

~~10.20~~	Letter Agreement dated October 29, 2018 by and among Differential Brands Group Inc., GSO Capital Opportunities Fund III LP, GSO CSF III Holdco LP, GSO Aiguille des Grand Montets Fund II LP, GSO Credit Alpha II Trading (Cayman) LP, GSO Harrington Credit Alpha Fund (Cayman) L.P., BTO Legend Holdings L.P. and Blackstone Family Tactical Opportunities Investment Partnership III (Cayman) - NQ - ESC L.P.	~~Exhibit 10.20 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.21~~	Amendment to the Differential Brands Group Inc. 2016 Stock Incentive Compensation Plan, dated October 29, 2018**	~~Exhibit 10.2 to Current Report on Form 8-K filed on November 2, 2018~~
~~10.22~~	Employment Agreement, dated as of October 30, 2018, by and between Centric Brands Inc. and Anurup Pruthi**	~~Exhibit 10.1 to Current Report on Form 8-K filed on November 9, 2018~~
31.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2*31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1*32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes-Oxley~~Sarbanes Oxley Act of 2002	Furnished herewith
101.INS	XBRL Instance Document	Filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

* Furnished herewith.

** Management contract and/or compensatory arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CENTRIC BRANDS INC.

~~November 14, 2018~~May 20, 2019	By:	/s/ Jason Rabin
		Jason Rabin
		Chief Executive Officer (~~Principal~~ and Director (Principal
		Executive ~~Officer~~)Officer)

May 20, 2019
~~November 14, 2018~~By:	/s/ Anurup Pruthi
		Anurup Pruthi
		Chief Financial Officer (~~Principal~~ (Principal Financial Officer
		and Principal Accounting ~~Officer~~)Officer)

5446


	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)


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


	September 30, 2018		December 31, 2017		September 30, 2017
Non-recourse receivables assigned to factor	$	15,543	$	19,566	$	18,780
Client recourse receivables		4,336		1,473		4,244
Total receivables assigned to factor		19,879		21,039		23,024
Allowance for customer credits		(1,412)		(3,597)		(3,480)
Total factored accounts receivable, net	$	18,467	$	17,442	$	19,544

Non-factored accounts receivable	$	4,095	$	5,974	$	5,456
Allowance for customer credits		(288)		(863)		(1,065)
Allowance for doubtful accounts		(784)		(307)		(203)
Total non-factored accounts receivable, net	$	3,023	$	4,804	$	4,188

Total accounts receivable, net	$	21,490	$	22,246	$	23,732


	Amortization	Gross		Accumulated		Net
	Period	Amount		Amortization		Amount
Trade names	Indefinite	$	65,887	$	—	$	65,887
Customer relationships	7 to 15 Years		35,101		13,829		21,272
Non-compete agreements	3 Years		135		99		36
Total		$	101,123	$	13,928	$	87,195


2018	Remainder of the year	$	748
2019			2,956
2020			2,936
2021			2,932
2022			2,932
Thereafter			8,804
		$	21,308


	Contract Assets		Contract Liabilities
Beginning balance at January 1, 2018	$	1,344	$	52
Revenue recognized from performance obligations satisfied in the current period		1,386		(39)
Transferred to accounts receivables from contract assets recognized at the beginning of the period		(1,145)		—
Contract liabilities recognized related to upfront license fees		—		300
Other		(89)		(28)
Ending balance at September 30, 2018	$	1,496	$	285


		Carrying Value						Fair Value
		September 30,		December 31,		September 30,		September 30,		December 31,		September 30,
Financial Instrument	Level	2018		2017		2017		2018		2017		2017
Convertible note - short-term	3	$	—	$	13,694	$	13,565	$	—	$	13,694	$	13,565
Convertible notes - long-term	3		14,866		13,866		13,549		11,700		11,700		11,250
		$	14,866	$	27,560	$	27,114	$	11,700	$	25,394	$	24,815

Adjusted EBITDA reconciliation:

Depreciation and amortization

Total other expense, net

Income tax provision

Adjusted EBITDA