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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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

For the quarterly period ended March 31, 2016

OR

o                   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)

(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.  x Yes  o 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).  x  Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o  No x

The number of shares of the registrant’s common stock outstanding as of August 11, 2016 was 13,082,659.

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DIFFERENTIAL BRANDS GROUP INC. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q

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EXPLANATORY NOTE — RESTATEMENT OF FINANCIAL INFORMATION

Background and Effects of Restatement

Differential Brands Group Inc. (“we,” “us,” “our,” the “Company” or “Differential”) is filing this Amendment No. 1 to Form 10-Q (the “Amendment”) to amend and restate its quarterly report on Form 10-Q for the quarterly period ended March 31, 2016 (the “Original Form 10-Q”) filed with the United States Securities and Exchange Commission (the “SEC”) on May 16, 2016 (the “Original Filing Date”). In filing this Amendment, the Company restates its previously issued unaudited condensed consolidated financial statements, financial data and related disclosures for the quarterly period ended March 31, 2016 (the “Q1 2016 Financial Statements”) to: (i) reflect the correct accounting for classifying as discontinued operations the Company’s former Joe’s® retail business operations (the “Joe’s Business”), which were exited in the first quarter of 2016; (ii) correct errors related to the incorrect accrual of dividends on the Company’s preferred stock designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”); and (iii) correctly calculate earnings per share; (iv) reclassify cash advances received from customers; (v) include disclosures of non-cash information in the Company’s statements of cash flows; and (vi) include additional disclosures of accounting policies, earnings per share calculated under the two-class method, pro forma financial information, certain related party transactions, information regarding goodwill and intangible assets and the fair value of financial instruments.

As reported in the Company’s Current Report on Form 8-K filed with the SEC on August 16, 2016, on August 10, 2016, the board of directors of the Company (the “Board”), in consultation with management concluded that: (i) the Company’s previously issued Q1 2016 Financial Statements should no longer be relied upon due to errors identified therein; and (ii) the Q1 2016 Financial Statements required restatement. The errors were identified in the course of preparing the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2016, and were as follows:

·                  In the Q1 2016 Financial Statements, the Company reported the operating and cash flows results of 14 of its former Joe’s® brand retail stores as continuing operations. After the sale by the Company of certain intellectual property and operating assets of its Joe’s Business in 2015, the Company retained 32 of its Joe’s® retail brand stores, transferring 18 on January 28, 2016 and closing the other 14 on February 29, 2016. It was later determined that these 14 stores were required to be reported as discontinued operations pursuant to ASC 205-20, Presentation of Financial Statements—Discontinued Operations. Due to the incorrect classification, the Q1 2016 Financial Statements presented higher operating losses from continuing operations than the Company had actually incurred for the first quarter of fiscal 2016, overstating operating loss by $1.29 million and loss from continuing operations by $0.3 million, accounts payable and accrued expenses by $2.06 million, cost of goods sold by $1.15 million and operating expenses by $1.34 million. The incorrect classification also led to overstatements in net sales of $1.21 million and gross profit of $56,000 and understatements of liabilities from discontinued operations of $892,000, net cash provided by operating activities of $492,000, net cash used in discontinued operating activities of $492,000.

·      The Company did not properly classify cash advances from customers of $1.68 million as a separate line item in the liabilities section of the unaudited condensed consolidated balance sheet at March 31, 2016.  In addition, the Company improperly classified cash inflows of approximately $0.8 million relating to these advances during the three months ended March 31, 2016 as operating cash flows.  The correct classification should have been financing cash flows.

·                  The Company did not apply the correct accounting treatment to a dividend payable to holders of its Series A Preferred Stock. This led to an overstatement in other liabilities and accumulated deficit of $863,000.

·      The Company did not properly calculate its basic and diluted weighted average shares outstanding and loss per common share, resulting in a decrease of 1,041,000 shares in the basic and diluted weighted average shares outstanding and a corresponding increase in basic and diluted loss per share of $0.04.

·      The Company did not properly include disclosures for supplemental non-cash transactions in its statements of cash flows.

·      The Company did not properly include disclosures relating to accounting policies, earnings per share under the two-class method, pro forma financial information and the fair value of financial instruments in its notes to the unaudited condensed consolidated financial statements.

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The effect of the correction of the errors on the previously issued unaudited condensed consolidated balance sheet at March 31, 2016 and the statement of equity for the three months ended March 31, 2016 is as follows (in thousands):

The effect of the correction of the errors on the previously issued unaudited condensed consolidated statements of operations for the three months ended March 31, 2016 is as follows (in thousands, except per share data):

The effect of the correction of the errors on the previously issued unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2016 is as follows (in thousands):

Investors, analysts and other persons should not rely on the Q1 2016 Financial Statements included in the Company’s Original Form 10-Q, or any press releases, presentations or other communications relating thereto.

Disclosure Controls and Procedures

Management reevaluated its assessment of disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of March 31, 2016. As a result of that reassessment, management concluded that our disclosure controls and procedures were not effective as of March 31, 2016 due to several deficiencies in our internal controls, which represented, in the aggregate, two material weaknesses in the Company’s internal control over financial reporting. In particular, our internal controls failed to detect and prevent the errors and omitted disclosures including (i) the classification and accounting  for the discontinued operations of the Company’s former Joe’s® retail business operations (the “Joe’s Business”), which was exited in the first quarter of 2016; (ii) the incorrect accrual of dividends on the Company’s preferred stock designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”); (iii) the incorrect  calculation of earnings per share; (iv) the reclassification of cash advances received from customers; (v) the omission of disclosures of non-cash information in the Company’s statements of cash flows; and (vi) the omission of additional disclosures of accounting policies, earnings per share calculated under the two-class method, pro forma financial information, certain related party transactions, information regarding goodwill and intangible assets and the fair value of financial instruments. For further discussion of the material weaknesses and actions taken and to be taken to remediate them, see “Part I, Item 4. Controls and Procedures.”

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Items Amended in This Filing

For ease of reference, this Amendment sets forth the Original Form 10-Q in its entirety; however, the following items have been amended and restated principally as a result of, and to reflect, the restatement:

Conforming changes also occur throughout the document because of changes to the Q1 2016 Financial Statements. In accordance with applicable SEC rules, this Amendment includes certifications of the Company’s Principal Executive Officer and Principal Financial Officer re-executed as of the date of this Amendment as Exhibits 31.1, 31.2 and 32.1 hereto.

Except as noted above, no other changes have been made to the Original Form 10-Q. This Amendment speaks only as of the Original Filing Date and has not been updated or otherwise modified to reflect events that may have occurred subsequent to the Original Filing Date.

OVERVIEW

Differential Brands Group Inc. and subsidiaries (“we,” “us,” “our,” the “Company” or “Differential”) began operations in 1987 as Innovo, Inc. Since our founding, we have evolved from producing craft and accessory products to designing and selling apparel products bearing the Hudson® and Robert Graham®.  Prior to the Joe’s Asset Sale discussed below, we also designed and sold apparel products bearing the various Joe’s ® brand names.

As previously reported, on September 11, 2015, we completed the sale of certain of our operating and intellectual property assets related to the Joe’s Business to GBG USA Inc., a Delaware corporation (the “GBG”), and the sale of certain of our 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 proceeds of the Joe’s Asset Sale were used to repay all of our indebtedness outstanding under the term loan credit agreement, dated September 30, 2013 (the “Garrison Term Loan Credit Agreement”), with Garrison Loan Agency Services LLC (“Garrison”) and a portion of our indebtedness outstanding under our revolving credit agreement (the “CIT Revolving Credit Agreement”), dated September 30, 2013, as amended, with CIT Commercial Services, Inc. (“CIT”), a unit of CIT Group. In November 2014, we had received an initial notice of default and event of default and demand for payment of default interest from Garrison under the Garrison Term Loan Credit Agreement, which also triggered a default and event of default under the terms of the CIT Revolving Credit Agreement and our separate factoring facility with CIT. On February 10, 2015, we had received additional notices of default and events of default for failure to comply with certain financial and other covenants and a demand for continued payment of default interest from both Garrison and CIT. As a result of the repayment based on the proceeds of the Joe’s Asset Sale, the Garrison Term Loan Credit Agreement was paid in full and terminated on September 11, 2015, and we 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 and waived certain defaults that remained in effect until the closing of the RG Merger (as defined below).

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Additionally, as previously reported, on January 28, 2016, we completed the acquisition (the “RG Merger”) of all of the outstanding equity interests of RG Parent LLC and its subsidiaries (“Robert Graham” or “RG”), a business engaged in the design, development, sales and licensing of apparel products and accessories that bear the brand name Robert Graham® (the “Robert Graham Business”), as contemplated by the Agreement and Plan of Merger, dated as of September 8, 2015 (the “RG Merger Agreement”), by and among RG, JJ Merger Sub, LLC (“RG Merger Sub”) and us, for an aggregate of $81.0 million in cash and 8,825,461 shares of our common stock, par value $0.10 per share (“common stock”) (after giving effect to the Reverse Stock Split (as defined below)). Pursuant to the RG Merger Agreement, among other things, RG Merger Sub was merged with and into RG, so that RG, as the surviving entity, became our wholly-owned subsidiary. 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 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, we changed our name from “Joe’s Jeans Inc.” to “Differential Brands Group Inc.” and our trading symbol from “JOEZ” to “DFBG,” and effected a reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock such that each 30 shares of our issued and outstanding common stock were reclassified into one share of our issued and outstanding common stock, which Reverse Stock Split did not change the par value or the amount of authorized shares of our common stock. The primary purpose of the Reverse Stock Split was to increase the per-share market price of our common stock in order to maintain our listing on The Nasdaq Capital Market maintained by The Nasdaq Stock Market LLC (“NASDAQ”). Unless otherwise indicated, all share amounts in this Amendment have been adjusted to reflect the Reverse Stock Split.

After the closing of the Joe’s Asset Sale on September 11, 2015, we retained and operated 32 Joe’s® brand retail stores, of which we 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 are reported as discontinued operations. GBG supplied Joe’s® branded merchandise to the retail stores for resale under a license from Joe’s Holdings until the stores were transferred or closed.

The RG Merger has been accounted for as a reverse merger and recapitalization. As a result of the RG Merger, RG is a wholly-owned subsidiary of the Company, the Company no longer owns certain assets and intellectual property of the Joe’s Business and the Company retains ownership of the businesses associated with its Hudson® brand (the “Hudson Business”). The former RG members own a majority of our issued and outstanding equity after the RG Merger. 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 Amendment prior to the RG Merger are those of RG and will be recorded at the historical cost basis and the Company’s future periodic reports will reflect RG’s historical financial condition and results of operations for comparative purposes. For the three months 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 accounting policies of the Company are similar in all material respects to those of RG, except as set forth in our accompanying notes to unaudited condensed consolidated financial statements.

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

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PART I — FINANCIAL INFORMATION

Item 1.             Financial Statements.

DIFFERENTIAL BRANDS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(1)         See “Note 3 — Correction of Errors” to the unaudited condensed consolidated financial statements in this Amendment.

See accompanying notes to unaudited condensed consolidated financial statements.

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DIFFERENTIAL BRANDS GROUP INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(1)   See “Note 3 — Correction of Errors” to the unaudited condensed consolidated financial statements in this Amendment.

See accompanying notes to unaudited condensed consolidated financial statements.

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DIFFERENTIAL BRANDS GROUP INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(1)         See “Note 3 — Correction of Errors” to the unaudited condensed consolidated financial statements in this Amendment.

See accompanying notes to unaudited condensed consolidated financial statements.

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DIFFERENTIAL BRANDS GROUP INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

(1)         See “Note 3 — Correction of Errors” to the unaudited condensed consolidated financial statements in this Amendment.

See accompanying notes to unaudited condensed consolidated financial statements.

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DIFFERENTIAL BRANDS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016, AS RESTATED

NOTE 1 — BASIS OF PRESENTATION

Our 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®, and the design, development, sales and licensing of apparel products and accessories bearing the brand name Robert Graham®. Our primary current operating subsidiaries are Robert Graham and Hudson Clothing, LLC (“Hudson”). In addition, we have other non-operating subsidiaries. All significant inter-company transactions have been eliminated in consolidation.

On January 28, 2016, we completed the RG Merger.  We refer you to the “Explanatory Note — Restatement of Financial Information” on page 1 and “Overview” on page 3 for the definitions of the capitalized terms used in this Amendment.  Following the RG Merger, RG became a wholly-owned subsidiary of the Company and RG’s former members own a majority of our issued and outstanding equity. Additionally, the Company owns the Robert Graham Business, no longer owns the Joe’s Business and has retained ownership of the Hudson Business. The RG Merger has been accounted for as a reverse merger and recapitalization, such that, under the acquisition method, RG has been deemed the accounting acquirer for financial reporting purposes, with the Company, as the legal acquirer, 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 Amendment prior to the RG Merger are those of RG and are recorded at the historical cost basis. For the three months 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; and (ii) from and after the RG Merger’s closing date on January 28, 2016, the results of continuing operations and cash flows and, as applicable, the assets and liabilities and of the combined company, comprising the Company’s Hudson Business and Robert Graham Business; (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 the GBG but that closed as of February 29, 2016.

In connection with the RG Merger, we changed our fiscal year end to December 31 and report our results with RG as the accounting acquirer. Certain reclassifications have been made to prior year amounts within the accompanying unaudited condensed consolidated balance sheets and condensed consolidated statements of cash flows to conform to the current period presentation.

Our reportable business segments are Wholesale, Consumer Direct and Corporate and other. Because RG has been accounted for as the accounting acquirer as a result of the RG Merger, we have adopted RG’s three subdivisions as our reportable segments for all operations of our combined Company for periods after the RG Merger’s closing date. For periods before the RG Merger’s closing date, our discussion of reportable segments reflects only the operations of RG.  We manage, evaluate and aggregate our operating segments for segment reporting purposes primarily on the basis of business activity and operation. Our Wholesale segment is comprised of sales of our products to premium department stores, boutiques, retailers, specialty stores and international customers, and records expenses from sales and customer service departments, trade shows, warehouse distribution, product samples and customer service departments. Our Consumer Direct segment is comprised of sales to consumers through our Robert Graham® brand full-price retail stores and outlet stores and through our online retail sites at www.hudsonjeans.com and www.robertgraham.us. Our 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, accounting, human resources, design and production departments and general brand marketing and advertising expenses associated with our brands.

Our unaudited condensed consolidated financial statements, which comprise the accounts of our wholly-owned subsidiaries (including Hudson from the date of the completion of the RG Merger), for the quarterly period ended March 31, 2016 and 2015 and the related footnote information have been prepared on a basis consistent with our audited consolidated financial statements as of December 31, 2015 and 2014 and for the three-year period ended December 31, 2015 (filed as Exhibit 99.1 to Amendment No. 1 to our Current Report on Form 8-K/A, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2016).

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These unaudited 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. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements  as of December 31, 2015 and 2014 and for the three-year period ended December 31, 2015 contained in Exhibit 99.1 to Amendment No. 1 to our Current Report on Form 8-K/A, filed with the SEC on March 30, 2016. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments), which management considers necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. The results for the quarterly period ended March 31, 2016 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2016. 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.

NOTE 2 — ACCOUNTING POLICIES

Our accounting policies are described in the December 31, 2015 financial statements of RG filed as Exhibit 99.1 to Amendment No. 1 to our Current Report on Form 8-K/A, filed with the SEC on March 30, 2016.  The following accounting policies have become effective in the three months ended March 31, 2016:

Discontinued Operations

In accordance with the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”), ASC 205-20, Presentation of Financial Statements — Discontinued Operations, the results of operations of a component of an entity or a group or component of an entity that represents a strategic shift that has, or will have, a major effect on the reporting company’s operations that has either been disposed of or is classified as held for sale are required to be reported as discontinued operations in a company’s consolidated financial statements. In order to be considered a discontinued operation, both the operations and cash flows of the discontinued component must have been (or will be) eliminated from the ongoing operations of the company and the company will not have any significant continuing involvement in the operations of the discontinued component after the disposal transaction. The accompanying unaudited condensed consolidated financial statements reflect the results of operations of our Joe’s Business as discontinued operations.

Stock-Based Compensation

We measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). An entity may elect either an accelerated recognition method or a straight-line recognition method for awards subject to graded vesting based on a service condition, regardless of how the fair value of the award is measured. For all stock-based compensation awards that contain graded vesting based on service conditions, we have elected to apply a straight-line recognition method to account for these awards.

Two-Class Earnings Per Share

We calculate basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. Our participating securities consist of convertible preferred shares that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common stockholders.

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Preferred Share Dividend

Cumulative dividends on preferred stock are only accrued for when the board of directors declares a dividend.  The board of directors has not declared a dividend through March 31, 2016.

Concentration of Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, accounts receivable and factor accounts receivable. We maintain cash and cash equivalents with various financial institutions. The policy is designed to limit exposure to any one institution. We perform periodic evaluations of the relative credit rating of those financial institutions that are considered in our investment strategy.

We do not require collateral for trade accounts receivable. However, we sell a portion of our accounts receivable to CIT on a non-recourse basis (see “Note 7 — Factored Accounts and Receivables, Net”). In that instance, we are no longer at risk if the customer fails to pay. For accounts receivable that are not sold to CIT or sold on a recourse basis, we continue to be at risk if these customers fail to pay. We provide an allowance for estimated losses to be incurred in the collection of accounts receivable based upon the aging of 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.

For the three months ended March 31, 2016 and 2015, sales to customers or customer groups representing greater than 10 percent of net sales are as follows:

As of March 31, 2016 and December 31, 2015, these customers represented in the aggregate approximately 50% and 47%, respectively, of our factored accounts receivable in the accompanying condensed consolidated balance sheets.

NOTE 3 —CORRECTION OF ERRORS

As discussed above in “Explanatory Note — Restatement of Financial Information,” in the course of preparing our quarterly report on Form 10-Q for the quarterly period ended June 30, 2016, certain errors were identified in our previously issued Q1 2016 Financial Statements included in our Original Form 10-Q. On August 10, 2016, our Board, in consultation with management, concluded that the Q1 2016 Financial Statements should no longer be relied upon and required restatement.

We previously reported certain information related to our operations, accrued dividends and the related footnote disclosures on our Original Form 10-Q on the Original Filing Date. In the Q1 2016 Financial Statements included in the Original Form 10-Q, we reported the operating results, liabilities and cash flows from operating activities from 14 Joe’s® brand retail stores which closed on February 29, 2016 as continuing operations. This Amendment corrects that treatment by reporting these 14 stores as discontinued operations pursuant to ASC 205-20, Presentation of Financial Statements—Discontinued Operations.  In addition, the balance sheet in our Original Form 10-Q incorrectly reflected accrued dividends on the Company’s preferred stock designated as Series A Preferred Stock; therefore, in this Amendment, we are correcting this error.  The disclosures in the notes to the unaudited condensed consolidated financial statements in our Original Form 10-Q incorrectly omitted the calculation of earnings per share under the two-class method, non-cash supplemental cash flow information, several accounting policies, pro forma financial information, certain related party transactions and information pertaining to goodwill and intangibles assets and the fair value of financial instruments.  In this Amendment, we have included all of these disclosures.

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The correction of these errors impacts various line items in our unaudited condensed consolidated balance sheet as of March 31, 2016, our related unaudited condensed consolidated statements of operations, equity and cash flows for the three months ended March 31, 2016, as well as our notes to unaudited condensed consolidated financial statements included in our Original Form 10-Q, as follows:

·                  Due to the incorrect classification of the 14 Joe’s® brand retail stores as continuing operations, the Q1 2016 Financial Statements overstated operating loss by $1.29 million and loss from continuing operations by $0.3 million, accounts payable and accrued expenses by $2.06 million, cost of goods sold by $1.15 million and operating expenses by $1.34 million. The incorrect classification also led to overstatements in net sales of $1.21 million and gross profit of $56,000 and understatements in cash advances from customers of $1.68 million, liabilities from discontinued operation of $892,000, net cash provided by operating activities of $492,000 and net cash used in discontinued operating activities of $492,000. See “Note 18 - Discontinued Operations.”

·      Due to the error related to the misclassification of cash advances from customers, $1.68 million has been identified as a separate line item in the liabilities section of the unaudited condensed consolidated balance sheet at March 31, 2016, and accounts payable and accrued expenses have been reduced by $1.68 million.  In addition, $0.8 million has been removed from operating cash flows and has been included in financing cash flows in the Company’s unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2016.

·      Due to the error related to the accounting treatment for the dividend payable on the Company’s preferred stock designated as Series A Preferred Stock, the Q1 2016 Financial Statements overstated accumulated deficit and other liabilities by $863,000 ( See “Note 2 – Accounting Policies”);

·      Due to the error related to the calculation of basic and diluted weighted average shares outstanding, both the basic and diluted weighted average shares outstanding have decreased by 1,041,000 shares, with a corresponding increase in basic and diluted loss per share of $0.04 in the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2016.   

·      Due to the omission of disclosures for supplemental non-cash transactions in its unaudited condensed consolidated statements of cash flows, the Company has disclosed the following relating to its cash flows for the three months ended March 31, 2016 in the unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2016:

·      Reclassification of other assets to offering costs of $0.8 million;

·      Reclassification of other assets to deferred financing costs of $0.3 million;

·      Issuance of modified convertible notes of $16.5 million; and

·      Common stock issued in reverse acquisition of $20 million.

·      Due to erroneous omission of the following required disclosures, the Company has included them in the notes to the unaudited condensed consolidated financial statements:

·      the calculation of earnings per share under the two-class method (see “Note 11 – Earnings Per Share”);

·      pro forma financial information relating to the RG Merger (see “Note 5- Merger Consideration);

·      non-cash supplemental cash flow information (see unaudited condensed consolidated statements of cash flows);

·      accounting policies for discontinued operations, two-class earnings per share, stock-based compensation and preferred share dividends (see “Note 2 – Accounting Policies”);

·      related party transactions with a stockholder (see “Note 10 – Related Party Transactions”);

·      information relating to goodwill and intangible assets (see “Note 9 – Long-Lived and Intangible Assets and Goodwill”); and

·      information relating to the fair value of financial instruments (see “Note 17 – Fair Value Measurement of Financial Instruments”).

Due to error related to the disclosure of earnings per share disclosure under the two-class method, the Q1 2016 Financial Statements, the Company did not disclose its earnings per share under this method.  The two-class method is described further in “Note 11 — Earnings Per Share” to the notes to the unaudited condensed consolidated financial statements in this Amendment.

The effect of the correction of the errors on the previously issued unaudited condensed consolidated balance sheet at March 31, 2016 and the statement of equity for the three months ended March 31, 2016 is as follows (in thousands):

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The effect of the correction of the errors on the previously issued unaudited condensed consolidated statements of operations for the three months ended March 31, 2016 is as follows (in thousands, except per share data):

The effect of the correction of the errors on the previously issued unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2016 is as follows (in thousands):

There were no assets from the discontinued operations as of March 31, 2016.  See “Note 18 — Discontinued Operations.”

NOTE 4 — MERGER AND RELATED TRANSACTIONS

Effective upon consummation of the RG Merger, we changed our name to “Differential Brands Group Inc.” and effected the Reverse Stock Split. The Reverse Stock Split did not change the par value or the amount of authorized shares of our common stock.  In connection with the RG Merger, on January 28, 2016, we completed the issuance and sale of an aggregate of fifty thousand (50,000) shares of our preferred stock designated as Series A Preferred Stock, for an aggregate purchase price of $50 million in cash, as contemplated by the stock purchase agreement, dated as of September 8, 2015 (the “RG Stock Purchase Agreement”), by and between us and TCP Denim, LLC.

We used the proceeds from the RG Stock Purchase Agreement and the debt financing provided by the credit facilities under the ABL Credit and Term Credit Agreement (see “Note 16 — Debt and Preferred Stock”) to consummate the RG Merger and the transactions contemplated by the RG Merger Agreement.

Also in connection with the completion of the RG Merger, on January 28, 2016, we completed the exchange of $38.1 million in the aggregate principal amount of outstanding convertible notes for (i) 1,167,317 shares of common stock (after giving effect to the Reverse Stock Split); (ii) a cash payment of approximately $8.6 million; and (iii) an aggregate principal amount of approximately $16.5 million of modified convertible notes (the “Modified Convertible Notes”), as contemplated by the rollover agreement, dated September 8, 2015 (the “Rollover Agreement”), between us and the holders of the convertible notes.

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After the sale of our Joe’s® brand in September 2015, we retained and operated 32 Joe’s® brand retail stores. Pursuant to the terms of a separate agreement, we transferred 18 Joe’s® brand retail stores to the purchaser of the operating assets of our Joe’s® brand on January 28, 2016 for no additional consideration and closed the remaining 14 Joe’s® brand retail stores as of February 29, 2016.  The results of operations from the Joe’s® brand have been reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements.

In addition, in connection with the consummation of the RG Merger, we entered into (i) the ABL Credit Agreement with Wells Fargo Bank, National Association, as lender, (ii) the Term Credit Agreement with TCW Asset Management Company, and (iii) the A&R Factoring Agreement (as defined below) with CIT.  See “Note 16 — Debt and Preferred Stock” for additional information about the ABL Credit Agreement and Term Credit Agreement and “Note 7 — Factored Accounts and Receivables, Net” for additional information about the factoring agreement.

NOTE 5 — MERGER CONSIDERATION

We closed the RG Merger on January 28, 2016.  The RG Merger has been accounted for under the acquisition method of accounting with RG as the accounting acquirer. Under the acquisition method of accounting, the purchase price and the net assets acquired and liabilities assumed are recorded based on their estimated fair values as of the closing date of the RG Merger. The excess of purchase price over the net assets acquired is recorded as goodwill. The valuations of intangible assets, property and equipment, fair value of leases, income taxes and certain other items are preliminary. Management expects to finalize the purchase price allocations during fiscal 2016.  As of March 31, 2016, we were in the process of completing the amounts assigned to the assets and liabilities, acquired intangible assets and the related impact on goodwill for the acquisition.

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 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 stock price used to determine the preliminary estimated purchase price allocation is based on the closing price of our common stock as of January 28, 2016, which was $5.70. The equity consideration was based upon the assumption that 3,509,000 shares of common stock were outstanding, which included 2,342,000 shares of common stock outstanding and 1,167,000 total aggregate shares of common stock issued to convertible noteholders upon conversion of the convertible notes into shares of our common stock under the Rollover Agreement.  As a result of the Rollover Agreement, immediately after giving effect to the RG Merger and related transactions, the holders of the Modified Convertible Notes owned approximately 14% of the combined company on an as-converted, fully diluted basis.

The assets acquired in this acquisition consisted of tangible and intangible assets and liabilities assumed. The differences between the fair value of the consideration paid and the estimated fair value of the assets and liabilities has been preliminarily recorded as goodwill. The significant factors that resulted in recognition of goodwill were: (a) the purchase price was based upon cash flow and return on capital projections assuming integrations of the companies; and (b) the calculation of the fair value of tangible and intangible assets acquired that qualified for recognition. We have determined on a preliminary basis that the useful life of the acquired trade name asset is indefinite, and therefore, no amortization expense will need to be recognized unless the useful life is determined not to be indefinite. The useful life of the acquired customer relationships are finite and will be amortized over their useful lives. However, we intend to test the assets for impairment if events or changes in circumstances indicate that the assets might be impaired. Additionally, a deferred tax liability has been established in the allocation of the purchase price with respect to the identified indefinite long-lived intangible assets acquired.

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Under the acquisition method of accounting, the total purchase price is allocated to the preliminary assets acquired and liabilities assumed based on their estimated fair values. We may continue to adjust the preliminary estimated purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revision of preliminary estimates. The following is the total preliminary estimated purchase price allocation based on information available as of March 31, 2016 (in thousands, except share and per share data):

The preliminary estimated fair value of the Modified Convertible Notes was determined by a third-party valuation specialist. The face value of the Modified Convertible Notes in the amount of $16,473,000 was discounted by $4,673,000 to arrive at the fair value of the Modified Convertible Notes. The discount was calculated based on the present values of the contractual cash flows from the Modified Convertible Notes.

In addition, we incurred $3,280,000 of non-recurring expenses related to the RG Merger in the three months ended March 31, 2016.

Total revenues and income from continuing operations from Hudson since the date of the RG Merger included in the accompanying unaudited condensed consolidated financial statements is $16,934,000 and $3,883,000, respectively.