Edgar Filing: Differential Brands Group Inc.

dfbg_current_folio_10Q

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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 March 31, 2017

☐ 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

DIFFERENTIAL BRANDS GROUP 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.)

1231 South Gerhart Avenue, Commerce, California		90022
(Address of principal executive offices)		(Zip Code)

(323) 890-1800

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ☒ Yes ☐ No

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

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☒
(Do not check if a smaller reporting company)		Emerging growth company ☐

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

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

The number of shares of the registrant’s common stock outstanding as of May 15, 2017 was 13,331,021.

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DIFFERENTIAL BRANDS GROUP INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2017, December 31, 2016 and March 31, 2016	3
	Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended March 31, 2017 and 2016	4
	Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2017 and 2016	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 6.	Exhibits	45

SIGNATURES		46

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

DIFFERENTIAL BRANDS GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)


	March 31,		December 31,		March 31,
	2017		2016		2016
	(unaudited)		(Note 1)		(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	4,038	$	6,476	$	11,351
Accounts receivable, net		22,723		20,225		19,981
Inventories, net		28,490		23,977		27,395
Prepaid expenses and other current assets		3,708		4,249		1,708
Total current assets		58,959		54,927		60,435
Property and equipment, net		10,170		10,620		13,505
Goodwill		8,284		8,271		7,046
Intangible assets, net		91,199		91,886		85,648
Other assets		467		467		726
Total assets	$	169,079	$	166,171	$	167,360

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and accrued expenses	$	20,810	$	19,930	$	22,955
Short-term convertible notes		13,308		13,137		—
Current portion of long-term debt		1,875		1,250		375
Liabilities from discontinued operations		—		—		892
Total current liabilities		35,993		34,317		24,222
Deferred rent		3,619		3,636		3,475
Line of credit		16,287		12,742		15,472
Convertible notes		12,947		12,660		11,946
Long-term debt, net of current portion		46,538		47,218		48,254
Deferred income taxes, net		11,054		11,074		10,904
Other liabilities		—		—		469
Total liabilities		126,438		121,647		114,742

Commitments and contingencies (Note 13)

Equity
Series A convertible preferred stock, $0.10 par value: 50,000 shares authorized, issued and outstanding at March 31, 2017, December 31, 2016 and March 31, 2016, respectively		5		5		5
Common stock, $0.10 par value: 100,000,000 shares authorized, 13,297,688, 13,239,125 and 12,379,000 shares issued and outstanding at March 31, 2017, December 31, 2016 and March 31, 2016, respectively		1,330		1,324		1,239
Additional paid-in capital		59,531		59,154		55,781
Accumulated other comprehensive loss		(137)		(221)		—
Accumulated deficit		(18,088)		(15,738)		(4,407)
Total equity		42,641		44,524		52,618
Total liabilities and equity	$	169,079	$	166,171	$	167,360

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

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DIFFERENTIAL BRANDS GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share data)

(unaudited)


	Three months ended March 31,
	2017		2016
				(Note 2)
Net sales	$	40,103	$	33,715
Cost of goods sold		21,499		17,378
Gross profit		18,604		16,337

Operating expenses
Selling, general and administrative		17,411		16,463
Depreciation and amortization		1,498		1,362
Retail store impairment		—		279
Total operating expenses		18,909		18,104
Operating loss from continuing operations		(305)		(1,767)
Interest expense, net		2,047		1,341
Other expense, net		24		—
Loss from continuing operations before income taxes		(2,376)		(3,108)
Income tax (benefit) provision		(26)		2,087
Loss from continuing operations		(2,350)		(5,195)
Loss from discontinued operations, net of tax		—		(1,286)
Net loss	$	(2,350)	$	(6,481)

Net loss	$	(2,350)	$	(6,481)
Other comprehensive income, net of tax:
Foreign currency translation adjustment		84		—
Other comprehensive income		84		—
Comprehensive loss	$	(2,266)	$	(6,481)

Loss per common share - basic
Loss from continuing operations	$	(0.18)	$	(0.46)
Loss from discontinued operations		-		(0.11)
Loss per common share - basic	$	(0.18)	$	(0.57)

Loss per common share - diluted
Loss from continuing operations	$	(0.18)	$	(0.46)
Loss from discontinued operations		-		(0.11)
Loss per common share - diluted	$	(0.18)	$	(0.57)

Weighted average shares outstanding
Basic		13,287		11,325
Diluted		13,287		11,325

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

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DIFFERENTIAL BRANDS GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, unaudited)


										Accumulated
										Other
	Common Stock			Preferred Series A				Additional		Comprehensive		Accumulated		Common Members				Preferred Members				Total
	Shares	Par Value		Shares		Par Value		Paid-In Capital		Loss		Deficit		Units		Amount		Units		Amount		Equity
Balance, January 1, 2016	—	$	—		—	$	—	$	—	$	—	$	—		4,900	$	22,743		5,100	$	24,798	$	47,541
Net loss through RG Merger date	—		—		—		—		—		—		—		—		(1,016)		—		(1,058)		(2,074)
Redemption of Robert Graham unit holders	—		—		—		—		—		—		—		—		(28,905)		—		(29,313)		(58,218)
Contribution of Robert Graham in exchange for common shares	8,825		883		—		—		(13,634)		—		—		(4,900)		7,178		(5,100)		5,573		—
Reverse acquisition with Robert Graham	3,509		351		—		—		19,649		—		—		—		—		—		—		20,000
Issuance of Series A convertible preferred stock, net of offering costs of $931	—		—		50		5		49,064		—		—		—		—		—		—		49,069
Stock-based compensation	—		—		—		—		204		—		—		—		—		—		—		204
Issuance of restricted common stock, net of taxes withheld	45		5		—		—		498		—		—		—		—		—		—		503
Net loss post RG Merger date	—		—		—		—		—		—		(4,407)		—		—		—		—		(4,407)
Balance, March 31, 2016	12,379	$	1,239		50	$	5	$	55,781	$	—	$	(4,407)		—	$	—		—	$	—	$	52,618

Balance, January 1, 2017	13,239	$	1,324		50	$	5	$	59,154	$	(221)	$	(15,738)		—	$	—		—	$	—	$	44,524
Stock-based compensation	—		—		—		—		439		—		—		—		—		—		—		439
Issuance of restricted common stock, net of taxes withheld	59		6		—		—		(62)		—		—		—		—		—		—		(56)
Foreign currency translation	—		—		—		—		—		84		—		—		—		—		—		84
Net loss	—		—		—		—		—		—		(2,350)		—		—		—		—		(2,350)
Balance, March 31, 2017	13,298	$	1,330		50	$	5	$	59,531	$	(137)	$	(18,088)		—	$	—		—	$	—	$	42,641

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

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DIFFERENTIAL BRANDS GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)


	Three months ended March 31,
	2017		2016
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations	$	(2,350)	$	(5,195)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization		1,498		1,362
Retail store impairment		—		279
Amortization of deferred financing costs		103		66
Amortization of convertible notes discount		194		146
Paid-in-kind interest		425		—
Stock-based compensation		439		707
Provision for bad debts		187		93
Amortization of inventory step up		—		192
Deferred taxes		8		929
Changes in operating assets and liabilities:
Accounts receivable		(2,685)		(7,043)
Inventories		(4,510)		(856)
Prepaid expenses and other assets		547		236
Accounts payable and accrued expenses		2,785		(5,715)
Deferred rent		(10)		(93)
Net cash used in continuing operating activities		(3,369)		(14,892)
Net cash used in discontinued operating activities		—		(492)
Net cash used in operating activities		(3,369)		(15,384)

CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in reverse acquisition with Robert Graham, net of cash acquired		—		(6,538)
Purchases of property and equipment		(337)		(809)
Net cash used in investing activities		(337)		(7,347)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A convertible preferred stock, net of offering costs		—		49,881
Proceeds from term debt		—		50,000
Repayment of long-term debt		—		(125)
Proceeds from line of credit, net		3,350		16,092
Repayment of terminated line of credit and loan payable		—		(23,348)
Payment of deferred financing costs		(124)		(1,584)
Redemption of unit holders		—		(58,218)
(Repayment of) proceeds from customer cash advances		(1,707)		784
Payment of accrued distribution to members		—		(1,366)
Taxes paid in lieu of shares issued for stock-based compensation		(223)		—
Net cash provided by financing activities		1,296		32,116

Effect of exchange rate changes on cash and cash equivalents		(28)		—

NET CHANGE IN CASH AND CASH EQUIVALENTS		(2,438)		9,385

CASH AND CASH EQUIVALENTS, at beginning of period		6,476		1,966
CASH AND CASH EQUIVALENTS, at end of period	$	4,038	$	11,351

Supplemental disclosures of cash flow information:
Interest paid	$	111	$	136
Income taxes paid	$	4	$	310

Supplemental disclosures of non-cash investing and financing activities:
Common stock issued in reverse acquisition with Robert Graham	$	—	$	20,000
Issuance of convertible notes	$	—	$	16,473
Debt discount recorded in connection with convertible notes	$	—	$	4,673
Contribution of Robert Graham in exchange for common shares	$	—	$	12,751
Reclassification of other assets to offering costs	$	—	$	812
Reclassification of other assets to deferred financing costs	$	—	$	349
Non-cash investing activities: accrued capital expenditures	$	62	$	—

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

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DIFFERENTIAL BRANDS GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except share and per share data)

(unaudited)

1. Business Description and Basis of Presentation

The condensed consolidated balance sheet as of December 31, 2016 has been derived from audited financial statements. The condensed consolidated financial statements for the quarters ended March 31, 2017 and 2016 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, 2016 and 2015. In addition, these condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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. generally accepted accounting principles 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, 2016. In the opinion of management, the accompanying condensed financial statements contain all adjustments (consisting of normal recurring adjustments), which 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 quarterly period ended March 31, 2017 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2017. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates.

Differential Brands Group Inc. and subsidiaries (“we,” “us,” the “Company” or “Differential”) 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 bearing the Hudson®, Robert Graham® and SWIMS® brand names.

The Company’s principal business activity involves the design, development and worldwide marketing of: apparel products, which include denim jeans, related casual wear and accessories bearing the brand name Hudson®; apparel products and accessories bearing the brand name Robert Graham®; footwear, apparel and accessories bearing the brand name SWIMS®. Our primary operating subsidiaries are Hudson Clothing, LLC (“Hudson”), Robert Graham Designs, LLC and Robert Graham Retail, LLC (collectively “Robert Graham”), 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.

As previously reported, on September 11, 2015, the Company completed the sale of certain operating and intellectual property assets related to the business operated under the brand names “Joe’s Jeans,” “Joe’s,” “Joe’s JD” and “else” (the “Joe’s Business”) to GBG USA Inc., a Delaware corporation (“GBG”), and the sale of certain intellectual property assets related to the Joe’s Business to Joe’s Holdings LLC, a Delaware limited liability company (“Joe’s Holdings”), for an aggregate purchase price of $80 million (the “Joe’s Asset Sale”). The Company also entered into the amended and restated revolving credit agreement (the “CIT Amended and Restated Revolving Credit Agreement”), dated September 11, 2015, which provided for a maximum credit availability of $7.5 million.

On January 28, 2016, the Company completed the acquisition (the “RG Merger”) of all of the outstanding equity interests of RG Parent LLC and its subsidiaries (“Robert Graham” or “RG”), for an aggregate of $81.0 million in cash and 8,825,461 shares of the Company’s common stock, par value $0.10 per share (after giving effect to the Reverse Stock Split, as defined below). The aggregate cash consideration was used to repay $19.0 million of RG’s outstanding loans and indebtedness under its revolving credit agreement with J.P. Morgan Chase Bank, N.A. On the RG Merger’s closing date, all outstanding loans under the CIT Amended and Restated Revolving Credit Agreement were repaid and it was terminated in connection with entering into (i) a new credit and security agreement (as later amended, the “ABL Credit Agreement”) with Wells Fargo Bank, National Association, as lender, (ii) a new credit and security

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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.

Effective upon consummation of the RG Merger, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding common stock such that each 30 shares of issued and outstanding common stock were reclassified into one share of issued and outstanding common stock, which Reverse Stock Split did not change the par value or the amount of authorized shares of common stock. The primary purpose of the Reverse Stock Split was to increase the per-share market price of the Company’s common stock in order to maintain its listing on The Nasdaq Capital Market maintained by The Nasdaq Stock Market LLC. Unless otherwise indicated, all share amounts in this Quarterly Report on Form 10-Q (this “Quarterly Report”) have been adjusted to reflect the Reverse Stock Split.

After the closing of the Joe’s Asset Sale on September 11, 2015, the Company retained and operated 32 Joe’s® brand retail stores, of which the Company transferred 18 retail stores to GBG on January 28, 2016 for no additional consideration. As of February 29, 2016, the remaining 14 Joe’s® brand retail stores were closed and as a result are reported as discontinued operations.

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

The RG Merger has been accounted for as a reverse merger and recapitalization and as a result of the RG Merger, the former RG members own a majority of the Company’s issued and outstanding equity. Under the acquisition method, RG is deemed the accounting acquirer for financial reporting purposes, with the Company, as the legal acquirer, being viewed as the accounting acquiree. As a result, the assets, liabilities and operations reflected in the historical condensed consolidated financial statements and elsewhere in this Quarterly Report prior to the RG Merger are those of RG and are recorded at the historical cost basis and reflect RG’s historical financial condition and results of operations for comparative purposes. For the quarter ended March 31, 2016, the Company’s condensed consolidated financial statements include: (i) from January 1, 2016 up to the day prior to the closing of the RG Merger on January 28, 2016, the results of operations and cash flows of RG; (ii) from and after the RG Merger’s closing date on January 28, 2016, the results of continuing operations, cash flows and, as applicable, the assets and liabilities of the combined company, comprising the Company’s Hudson Business and RG; and (iii) from and after the RG Merger’s closing date on January 28, 2016, the results of the discontinued operations from the Joe’s® brand retail stores that were not transferred to GBG but that closed as of February 29, 2016.

Prior to the RG Merger, RG and the Company had different fiscal year ends, with RG’s fiscal year ending on December 31 and the Company’s fiscal year ending on November 30. In connection with the RG Merger, the Company changed its fiscal year end to December 31.

The Company’s reportable business segments are Wholesale, Consumer Direct and Corporate and other. For periods before the RG Merger’s closing date, the discussion of reportable segments reflects only the operations of RG. The Company manages, evaluates and aggregates its operating segments for segment reporting purposes primarily on the basis of business activity and operation. The Wholesale segment is comprised of sales of products to premium nationwide department stores, boutiques, specialty retailers, and select off-price and international customers. The Wholesale segment also includes expenses from sales and customer service departments, trade shows, warehouse distribution, design and production, and product samples. The Consumer Direct segment is comprised of sales to consumers through the Robert Graham® brand full-price retail stores and outlet stores, through the SWIMS® brand outlet store in Oslo, Norway and through the online ecommerce sites at www.hudsonjeans.com, www.robertgraham.us and www.swims.com. 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 segment is comprised of revenue from trademark licensing agreements and expenses from corporate operations, which include the executive, finance, legal, information technology and human resources departments and general brand marketing and advertising expenses associated with the Company’s brands.

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2. Summary of Significant Accounting Policies

Information regarding significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Inventory and Reclassification

During the three months ended March 31, 2017, the Company included certain production overhead costs allocated to inventory that were previously excluded. This modification resulted in additional capitalization of $1.4 million of production overhead to the standard cost of inventory from production expenses. These production expenses previously were included in cost of goods sold and selling, general and administrative expenses. These costs are now included in production overhead costs to better reflect the costs incurred to bring our inventory to a saleable condition after the recent change in the Company’s processes of sourcing inventory.

The increase in inventories resulted in a $1.4 million non-cash benefit (or $0.11 per diluted share), which was comprised of a $0.3 million decrease in cost of goods sold and a $1.1 million decrease in selling, general and administrative expenses. This modification has been accounted for on a prospective basis from January 1, 2017.

In addition, the Company has reclassified delivery expenses, design costs, warehousing and handling costs and other inventory acquisition related costs to cost of goods sold, which were previously included in selling, general and administrative expenses. The classification of these costs in cost of goods sold more accurately reflects the cost of producing and distributing products. Additionally, this presentation enhances the comparability of our financial statements with industry peers. The change has been reflected in the condensed consolidated statements of operations in the prior period to conform to the presentation in the current period. The impact of the reclassification resulted in an increase to cost of goods sold and a decrease to selling, general and administrative expenses in the amount of $3.6 million and $4.0 million for the three months ended March 31, 2017 and 2016, respectively.

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Following is a reconciliation of the reclassification of costs from selling, general and administrative to cost of goods sold discussed above for the three months ended March 31, 2017 and 2016 (in thousands):


	Three months ended March 31, 2017						Three months ended March 31, 2016
	Before				After		As Previously				After
	Reclass		Reclass		Reclass		Reported		Reclass		Reclass

Net sales	$	40,103	$	—	$	40,103	$	33,715	$	—	$	33,715
Cost of goods sold		17,850		3,649		21,499		13,412		3,966		17,378
Gross profit		22,253		(3,649)		18,604		20,303		(3,966)		16,337

Operating expenses
Selling, general and administrative		21,060		(3,649)		17,411		20,429		(3,966)		16,463
Depreciation and amortization		1,498		—		1,498		1,362		—		1,362
Retail store impairment		—		—		—		279		—		279
Total operating expenses		22,558		(3,649)		18,909		22,070		(3,966)		18,104
Operating loss from continuing operations		(305)		—		(305)		(1,767)		—		(1,767)
Interest expense, net		2,047		—		2,047		1,341		—		1,341
Other expense, net		24		—		24		—		—		—
Loss from continuing operations before income taxes		(2,376)		—		(2,376)		(3,108)		—		(3,108)
Income tax (benefit) provision		(26)		—		(26)		2,087		—		2,087
Loss from continuing operations		(2,350)		—		(2,350)		(5,195)		—		(5,195)
Loss from discontinued operations, net of tax		—		—		—		(1,286)		—		(1,286)
Net loss	$	(2,350)	$	—	$	(2,350)	$	(6,481)	$	—	$	(6,481)

Cost of Goods Sold

Cost of goods sold includes the following: the cost of merchandise; customs related taxes and duties; production costs; delivery expense; in-bound and outbound freight; obsolescence and shrink provisions; design costs; warehousing and handling costs and other inventory acquisition related costs.

Financial Accounting Standards Recently Adopted

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements To Employee Share-Based Payment Accounting, which amends ASC Topic 718, relating to employee share-based payment accounting. This guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within that reporting

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period. The Company adopted this standard in the first quarter of 2017 and there was no material impact on our condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles —Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350), currently requires an entity to perform a two-step test to determine the amount, if any, of goodwill impairment. ASU No. 2017-04 removes the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The ASC amendments are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. The Company adopted this standard in the first quarter of 2017 and there was no impact on our condensed consolidated financial statements.

Recently Issued Financial Accounting Standards

In April and March 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, and ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), respectively. ASU No. 2016-10 clarifies the implementation guidance on licensing and the identification of performance obligations considerations included in ASU No. 2014-09. ASU No. 2016-08 provides amendments to clarify the implementation guidance on principal versus agent considerations included in ASU No. 2014-09. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09. ASU No. 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The effective date of this pronouncement is for fiscal years beginning after December 15, 2017 with early adoption permitted as of the original effective date. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Customers with Contracts (Topic 606) Narrow-Scope Improvements and Practical Expedients. ASU No. 2016-12 amends certain aspects of ASU No. 2014-09, Revenue from Customers with Contracts (Topic 606). The amendments include the following:

Collectibility – ASU No. 2016-12 clarifies the objective of the entity’s collectibility assessment and contains new guidance on when an entity would recognize as revenue consideration it receives if the entity concludes that collectibility is not probable.

Presentation of sales tax and other similar taxes collected from customers – Entities are permitted to present revenue net of sales taxes collected on behalf of governmental authorities (i.e., to exclude from the transaction price sales taxes that meet certain criteria).

Noncash consideration – An entity’s calculation of the transaction price for contracts containing noncash consideration would include the fair value of the noncash consideration to be received as of the contract inception date. Further, subsequent changes in the fair value of noncash consideration after contract inception would be subject to the variable consideration constraint only if the fair value varies for reasons other than its form.

Contract modifications and completed contracts at transition – The ASU establishes a practical expedient for contract modifications at transition and defines completed contracts as those for which all (or substantially all) revenue was recognized under the applicable revenue guidance before the new revenue standard was initially adopted.

Transition technical correction – Entities that elect to use the full retrospective transition method to adopt the new revenue standard would no longer be required to disclose the effect of the change in accounting principle on the period of adoption (as is currently required by ASC No. 250-10-50-1(b)(2)); however, entities would still be required to disclose the effects on preadoption periods that were retrospectively adjusted.

ASU No. 2016-12 is effective for annual and interim periods beginning on or after December 15, 2017, and early adoption is permitted as of the original effective date of December 31, 2016. The Company has not selected a transition model. The Company is still completing the assessment of the impact these ASUs will have on its condensed consolidated financial statements; however at the current time the Company does not expect that the adoption of these ASUs will have a material impact on its consolidated financial condition or results of operations. The adoption of these ASUs will require additional disclosure.

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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which affects the accounting for leases. The guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The amendment also will require qualitative and quantitative disclosures designed to give financial statement users information on 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 the impact of the new standard on its condensed consolidated financial statements, but anticipates an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, such as real estate leases for corporate headquarters, administrative offices, retail stores, and showrooms as well as additional disclosure on all our lease obligations. The income statement recognition of lease expense is not expected to significantly change from the current methodology.

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 is currently evaluating the impact the adoption of ASU No. 2016-15 will have on its condensed consolidated financial statements.

3. Factored Accounts and Receivables

RG’s Former Factoring Agreement with CIT

In December 2013, RG entered into a deferred purchase factoring arrangement and loan agreement with CIT. Under the agreement, RG assigned trade accounts receivable to a commercial factor with recourse, while retaining ownership of the assigned accounts receivable until the occurrence of a specified triggering event. In January 2016, in connection with the RG Merger, the Company terminated the deferred purchase factoring arrangement and loan agreement and entered into the A&R Factoring Agreement.

A&R Factoring Agreement

In January 2016, in connection with the RG Merger, the Company entered into the amended and restated deferred purchase factoring agreement with CIT, through its subsidiaries, Robert Graham Designs LLC and Hudson (the “A&R Factoring Agreement”), which replaced all prior agreements relating to factoring and inventory security. The A&R Factoring Agreement provides that the Company sell and assign to CIT certain accounts receivable, including accounts arising from or related to sales of inventory and the rendition of services. Under the A&R Factoring Agreement, the Company pays various factoring rates depending on the credit risk associated with the nature of the account. The A&R Factoring Agreement may be terminated by CIT upon 60 days’ written notice or immediately upon the occurrence of an event of default as defined in the agreement. The A&R Factoring Agreement may be terminated by the Company upon 60 days’ written notice prior to December 31, 2020 or annually with 60 days’ written notice prior to December 31 of each year thereafter.

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 “SWIMS Factoring 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 receivables. DNB receives an annual commission based on invoiced revenues and a quarterly commission of the maximum financing amount plus other administrative costs. The Factoring Agreement is secured with (a) first-priority lien on SWIMS’ (i) machinery and

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plant (up to NOK 10.0 million) and (ii) inventory (up to NOK 10.0 million) and (b) additional liens on SWIMS’ 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 Factoring Agreement may be terminated by SWIMS upon fourteen days’ prior written notice for any reason and by DNB upon fourteen days’ prior written notice for just cause. DNB may also terminate the Factoring Agreement without any prior written notice in the event of a material breach by SWIMS. As of March 31, 2017, SWIMS had outstanding financing commitments on NOK 21.2 million (approximately $2.5 million as of March 31, 2017) of its preapproved outstanding invoiced receivables pursuant to the SWIMS Factoring Agreement.

Accounts receivables consist of the following (in thousands):


	March 31, 2017		December 31, 2016		March 31, 2016
Non-recourse receivables assigned to factor	$	20,504	$	20,226	$	20,564
Client recourse receivables		3,103		1,634		740
Total receivables assigned to factor		23,607		21,860		21,304

Allowance for customer credits		(4,424)		(5,157)		(4,090)
Factor accounts receivable, net	$	19,183	$	16,703	$	17,214

Non-factored accounts receivable	$	4,783	$	4,743	$	4,127
Allowance for customer credits		(1,041)		(1,031)		(1,240)
Allowance for doubtful accounts		(202)		(190)		(120)
Non-factored accounts receivable, net	$	3,540	$	3,522	$	2,767

Total accounts receivable, net	$	22,723	$	20,225	$	19,981

Of the total amount of receivables sold by the Company as of March 31, 2017, December 31, 2016 and March 31, 2016, the Company holds the risk of payment of $3.1 million, $1.6 million and $0.1 million, respectively, in the event of non-payment by the customers.

4. Inventories

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


	March 31, 2017		December 31, 2016		March 31, 2016
Finished goods	$	26,426	$	22,537	$	25,611
Finished goods consigned to others		1,439		1,179		1,311
Work in progress		389		42		229
Raw materials		236		219