UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
|
x
|
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
|
For the quarterly period ended March 31,
2012
|
¨
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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 0-16075
SEQUENTIAL
BRANDS GROUP, INC.
(Exact Name of Registrant as Specified in
its Charter)
Delaware
(State or other jurisdiction of incorporation
or
organization)
|
86-0449546
(I.R.S. Employer Identification No.)
|
17383 Sunset Blvd., Suite A210
Pacific Palisades, CA 90272
(Address of principal executive offices)
(Zip Code)
(213) 745-2123
(Registrant’s telephone number, including
area code)
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
x
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
x
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
(Do not check if smaller reporting company)
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
As of May 15, 2012,
the issuer had 36,002,563 shares of common stock, par value $.001 per share, issued and outstanding.
SEQUENTIAL BRANDS GROUP, INC.
INDEX to
form 10-q
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|
Page
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PART I
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FINANCIAL INFORMATION
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3
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Item 1.
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Financial Statements
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3
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|
|
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Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011
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3
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Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2012 and March 31, 2011
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4
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Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2012 and March 31, 2011
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5
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Notes to Condensed Consolidated Financial Statements (unaudited)
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7
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Item 2.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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25
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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36
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Item 4.
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Controls and Procedures
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36
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PART II
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OTHER INFORMATION
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37
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Item 1.
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Legal Proceedings
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37
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Item 1A.
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Risk Factors
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37
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Item 6.
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Exhibits
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38
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
SEQUENTIAL
BRANDS GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
2012
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|
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December 31,
2011
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Assets
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|
(unaudited)
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|
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Current Assets:
|
|
|
|
|
|
|
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Cash and cash equivalents
|
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$
|
9,804,590
|
|
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$
|
242,791
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Restricted cash
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35,289
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35,268
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Prepaid expenses and other current assets
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|
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15,116
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50,000
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Current assets held for disposition from discontinued operations of wholesale business subsidiary
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421,532
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339,184
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Current assets held for disposition from discontinued operations of retail subsidiary
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48,955
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|
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60,883
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Total current assets
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10,325,482
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728,126
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Property and equipment, net of accumulated depreciation and amortization
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256,884
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300,049
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Trademarks, net of accumulated amortization
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383,259
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391,575
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Intangible asset
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428,572
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428,572
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Other assets
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37,339
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25,092
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Long-term assets held for disposition from discontinued operations of wholesale business
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8,500
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54,160
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Long-term assets held for disposition from discontinued operations of retail subsidiary
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236,431
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260,825
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Total assets
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$
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11,676,467
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$
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2,188,399
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Liabilities and Stockholders’ Deficiency
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Current Liabilities:
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Accounts payable and accrued expenses
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$
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1,037,926
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$
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1,618,374
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Deferred license revenue, current portion
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506,368
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1,325,500
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Note payable to related parties
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-
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750,000
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Note payable
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-
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1,000,000
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Current liabilities held for disposition from discontinued operations of wholesale business
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1,295,069
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|
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1,762,552
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Current liabilities held for disposition from discontinued operations of retail subsidiary
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243,535
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403,805
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Total current liabilities
|
|
|
3,082,898
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|
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6,860,231
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Long-Term Liabilities:
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Deferred license revenue, long-term portion
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111,799
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455,200
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Deferred lease obligations held for disposition from discontinued operations of retail subsidiary
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298,184
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288,765
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Senior secured convertible debentures
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13,438,119
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-
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Total long-term liabilities
|
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13,848,102
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743,965
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Total liabilities
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16,931,000
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7,604,196
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Stockholders’ deficiency:
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Preferred stock Series A, $0.001 par value, 19,400 shares authorized; 14,500 shares
issued and outstanding at March 31, 2012; no preferred shares issued or outstanding as
of December 31, 2011
|
|
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15
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-
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Common stock, $0.001 par value, 150,000,000 shares authorized; 36,002,563 shares
issued and outstanding at March 31, 2012 and December 31, 2011
|
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36,002
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|
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36,002
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Additional paid-in capital
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2,625,090
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|
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2,338,765
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Accumulated deficit
|
|
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(7,915,640
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)
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(7,790,564
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)
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Total stockholders’ deficiency
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|
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(5,254,533
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)
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|
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(5,415,797
|
)
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Total liabilities and stockholders’ deficiency
|
|
$
|
11,676,467
|
|
|
$
|
2,188,399
|
|
See Notes to Condensed Consolidated Financial Statements
SEQUENTIAL
BRANDS GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(
unaudited
)
|
|
Three Months Ended March 31, 2012
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Three Months Ended March 31, 2011
|
|
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|
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|
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Net revenue
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$
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1,372,533
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|
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$
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-
|
|
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|
|
|
|
|
|
|
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Operating expenses
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|
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1,038,224
|
|
|
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8,202
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|
|
|
|
|
|
|
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Income (loss) from operations
|
|
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334,309
|
|
|
|
(8,202
|
)
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|
|
|
|
|
|
|
|
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Interest expense, net
|
|
|
78,162
|
|
|
|
15,000
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Income (loss) before income taxes
|
|
|
256,147
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|
|
|
(23,202
|
)
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Provision for income taxes
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|
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10,000
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|
800
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|
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Income (loss) from continuing operations
|
|
|
246,147
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|
|
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(24,002
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)
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|
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Discontinued Operations:
|
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|
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(Loss) income from discontinued operations of wholesale business
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|
|
(215,958
|
)
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|
|
955,132
|
|
Loss from discontinued operations of retail subsidiary
|
|
|
(155,265
|
)
|
|
|
(330,406
|
)
|
Loss from discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
(262,563
|
)
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(Loss) income from discontinued operations
|
|
|
(371,223
|
)
|
|
|
362,163
|
|
|
|
|
|
|
|
|
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Net (loss) income
|
|
|
(125,076
|
)
|
|
|
338,161
|
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|
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|
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Noncontrolling interest in continued operations
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|
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-
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12,001
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Noncontrolling interest in discontinued operations of wholesale business
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|
|
|
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1,264,178
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Noncontrolling interest in discontinued operations of retail subsidiary
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|
|
-
|
|
|
|
165,203
|
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Noncontrolling interest in discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
131,281
|
|
|
|
|
-
|
|
|
|
1,572,663
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Net (loss) income attributable to common stockholders
|
|
$
|
(125,076
|
)
|
|
$
|
1,910,824
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
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Basic income (loss) from continuing operations
|
|
|
0.01
|
|
|
|
(0.00
|
)
|
Basic (loss) income from discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.05
|
|
Basic (loss) income attributable to common shareholders
|
|
|
(0.00
|
)
|
|
|
0.05
|
|
Basic weighted average common shares outstanding
|
|
|
36,002,563
|
|
|
|
36,002,563
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
Diluted income (loss) from continuing operations
|
|
|
0.01
|
|
|
|
(0.00
|
)
|
Diluted (loss) income from discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.05
|
|
Diluted (loss) income attributable to common shareholders
|
|
|
(0.00
|
)
|
|
|
0.05
|
|
Diluted weighted average common shares outstanding
|
|
|
36,002,563
|
|
|
|
36,002,563
|
|
See Notes to Condensed Consolidated Financial Statements
|
SEQUENTIAL
BRANDS GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(
unaudited
)
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(125,076
|
)
|
|
$
|
338,161
|
|
Adjustments to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss from discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
262,563
|
|
Loss (income) from discontinued operations of wholesale business
|
|
|
215,958
|
|
|
|
(955,132
|
)
|
Loss from discontinued operations of retail subsidiary
|
|
|
155,265
|
|
|
|
330,406
|
|
Depreciation and amortization
|
|
|
45,032
|
|
|
|
68,427
|
|
Stock based compensation
|
|
|
937
|
|
|
|
18,552
|
|
Amortization of valuation discount
|
|
|
62,757
|
|
|
|
-
|
|
Loss on disposal of fixed assets
|
|
|
6,448
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
34,884
|
|
|
|
-
|
|
Other assets
|
|
|
(12,247
|
)
|
|
|
-
|
|
Accounts payable and accrued expenses
|
|
|
(565,013
|
)
|
|
|
-
|
|
Deferred license revenue
|
|
|
(1,162,533
|
)
|
|
|
-
|
|
Income taxes payable
|
|
|
(10,447
|
)
|
|
|
800
|
|
Net cash flows used in (provided by) operating activities from continuing
operations
|
|
|
(1,354,035
|
)
|
|
|
63,777
|
|
Net cash flows provided by operating activities from discontinued
operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
1,385,776
|
|
Net cash flows used in operating activities from discontinued
operations of wholesale business
|
|
|
(720,129
|
)
|
|
|
(1,516,457
|
)
|
Net cash flows used in operating activities from discontinued
operations of retail subsidiary
|
|
|
(269,794
|
)
|
|
|
(195,986
|
)
|
Net cash flows used in operating activities
|
|
|
(2,343,958
|
)
|
|
|
(262,890
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
(21
|
)
|
|
|
121,092
|
|
Acquisition of trademarks
|
|
|
-
|
|
|
|
(17,496
|
)
|
Acquisition of property and equipment
|
|
|
-
|
|
|
|
(94,473
|
)
|
Net cash flows (used in) provided by investing activities from continuing
operations
|
|
|
(21
|
)
|
|
|
9,123
|
|
Net cash flows used in investing activities from discontinued
operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
(9,213
|
)
|
Net cash flows used in investing activities from discontinued
operations of wholesale business
|
|
|
-
|
|
|
|
(2,518
|
)
|
Net cash flows used in investing activities from discontinued
operations of retail subsidiary
|
|
|
-
|
|
|
|
(1,350
|
)
|
Net cash flows used in investing activities
|
|
|
(21
|
)
|
|
|
(3,958
|
)
|
Condensed Consolidated Statements of Cash Flows are continued on the following page
|
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY
PEOPLE’S LIBERATION, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of note payable
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
Net proceeds from senior secured convertible debentures
|
|
|
13,655,778
|
|
|
|
-
|
|
Repayment of note payable to related parties
|
|
|
(750,000
|
)
|
|
|
-
|
|
Net cash flows provided by financing activities from continuing operations
|
|
|
11,905,778
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,561,799
|
|
|
|
(266,848
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
242,791
|
|
|
|
1,184,743
|
|
Cash and cash equivalents, end of period
|
|
$
|
9,804,590
|
|
|
$
|
917,895
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
81,127
|
|
|
$
|
47,870
|
|
Income taxes paid
|
|
|
23,047
|
|
|
|
28,885
|
|
Noncash financing transaction:
|
|
|
|
|
|
|
|
|
Fair value of warrants issued in financing transaction
|
|
|
285,388
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
|
SEQUENTIAL
BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
1.
|
Presentation of Interim Information
|
The accompanying unaudited
consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles generally accepted in the United States
for complete financial statements. The accompanying unaudited consolidated condensed financial statements reflect all normal recurring
adjustments that, in the opinion of the management of Sequential Brands Group, Inc. (the “Company”) and subsidiaries
are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods
presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal
year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated
financial statements of the Company included in the Company’s Form 10-K for the year ended December 31, 2011.
|
|
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these
estimates. The significant assets and liabilities that require management to make estimates and assumptions that affect
the reported amounts in the consolidated financial statements included inventories, accounts receivable and due to factor, intangible
assets, deferred taxes, accrued expenses, income taxes, stock based compensation and noncontrolling interest. Management
is also required to make significant estimates and assumptions related to its disclosure of litigation and the recording of related
contingent assets or liabilities, if any.
|
|
2.
|
Organization and Nature of Operations
|
Overview
Since the Company’s
formation in 2005, the Company has been a designer, marketer and wholesale provider of branded apparel and apparel accessories.
Commencing in July 2008, the Company implemented a retail strategy and opened retail stores to sell its branded products. In the
second half of 2011, the Company decided to change its business model to focus on licensing and brand management. In connection
with the change in the Company’s business model, the Company is presently winding down the wholesale distribution of its
branded apparel and apparel accessories, liquidating its existing inventory and closing its remaining retail stores. The Company
expects to complete its transition from a wholesale and retail company to a licensing and brand management company during the second
or third quarter of 2012. To reflect the Company’s business transition, in March 2012, the Company’s corporate name
was changed from People’s Liberation, Inc. to Sequential Brands Group, Inc. The Company’s wholesale and retail operations
are referred to as “Historical Operations” in these notes to the Company’s Consolidated Condensed Financial Statements.
Licensing and Brand Management Business
As a licensing and
brand management company, the Company plans to promote, market, and license a portfolio of consumer brands. Presently, the Company’s
brands include
William Rast
® and
People’s Liberation
® and the Company intends to grow its portfolio
of brands by acquiring rights to additional brands. The Company has licensed and intends to license its brands in a variety of
categories to retailers, wholesalers and distributors in the United States and in certain international territories. In the Company’s
licensing arrangements, the Company’s licensing partners will be responsible for designing, manufacturing and distributing
the Company’s licensed products, subject to the Company’s continued oversight and marketing support. Currently,
the Company has one direct-to-retail and three traditional wholesale licenses. In its direct-to-retail license, the Company granted
JC Penney, a national retailer, the exclusive right to distribute William Rast branded apparel in a broad range of product categories
through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce distribution channels
which are targeted to consumers in the United States. In the Company’s traditional wholesale licenses, the Company grants
rights to a single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products
to multiple stores within an approved channel of distribution.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
Historical Operations
Wholesale Operations
Since the Company’s
inception in 2005, in the United States, the Company has distributed its William Rast branded merchandise and, through April 26,
2011, its J. Lindeberg branded merchandise to better specialty stores, boutiques and department stores, such as Nordstrom, Saks
Fifth Avenue and Neiman Marcus, as well as online at various websites including williamrast.com, jlindebergusa.com and Zappos.com.
In 2012, the Company decided to discontinue its wholesale operations completely. For the remainder of 2012, the Company will continue
to sell William Rast and People’s Liberation branded apparel on a limited basis through its domestic wholesale operations
in order to liquidate its existing inventory.
As part of the Company’s
Historical Operations, the Company also sold its William Rast branded apparel products internationally in select countries directly
and through agents and distributors to better department stores and boutiques. The Company’s distributors purchased products
at wholesale prices for resale in their respective territories and marketed, sold, warehoused and shipped William Rast branded
apparel products at their expense. The Company’s agents were paid a commission on net sales of the Company’s William
Rast products. In 2012, the Company expects to have an immaterial amount of sales of its William Rast and People’s Liberation
branded apparel from its international wholesale operations.
Retail Operations
The Company’s
Historical Operations also include the sale of William Rast branded apparel and accessories through its William Rast branded retail
stores and also through its William Rast branded outlet store. As part of the Company’s transition from a wholesale and retail
provider of apparel and apparel accessories to a brand management and licensing business, the Company closed its William Rast retail
stores located in Miami and San Jose in November 2011. The Company’s two remaining William Rast retail stores are expected
to be closed in 2012. The Company expects to have limited sales from these locations in 2012.
Through April 26, 2011,
the Company’s J. Lindeberg branded apparel and accessories were sold through its three full-price J. Lindeberg branded retail
stores. The Company sold its interest in its J. Lindeberg business to the Company’s joint venture partner in April 2011,
including its three retail stores.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
Corporate Structure
Sequential Brands Group,
Inc., formerly People’s Liberation Inc., is the parent holding company of Versatile Entertainment, Inc. (“Versatile”)
and Bella Rose, LLC (“Bella Rose”), both of which were consolidated under and became wholly-owned subsidiaries of People’s
Liberation on November 22, 2005.
Versatile conducts the Company’s
People’s Liberation brand business and the Company’s William Rast brand business is conducted through Bella Rose, LLC.
Structure of William
Rast Business
William Rast Sourcing,
LLC and William Rast Licensing, LLC are consolidated under Bella Rose, and through September 30, 2011 were each owned 50% by Bella
Rose and 50% by Tennman WR-T, Inc., an entity owned in part by Justin Timberlake.
Effective as of October
1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. As further described under Note
4 to the Company’s Consolidated Financial Statements, the recapitalization increased the ownership of Bella Rose in each
of William Rast Sourcing and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T (“TWR”)
as well as other consideration. Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by
TWR, and Bella Rose is entitled to all of the distributable cash from operations and all of the distributable cash from a sale
of William Rast Sourcing or William Rast Licensing that is not paid to TWR.
William Rast Retail,
LLC, a California limited liability company, was formed on August 26, 2009 and is a wholly-owned subsidiary of William Rast Sourcing.
William Rast Retail was formed to operate the Company’s William Rast retail stores. The operations of William Rast Retail
are shown as discontinued operations in the accompanying consolidated financial statements.
Structure of J.
Lindeberg Business
|
|
Prior to its sale on April 26, 2011, the Company’s J. Lindeberg brand
business was conducted through Bella Rose. From July 1, 2008 through April 26, 2011, J. Lindeberg USA, LLC was consolidated under
Bella Rose and was owned 50% by Bella Rose and 50% by J. Lindeberg USA Corp. an entity owned by J. Lindeberg AB, a Swedish corporation.
J. Lindeberg USA Retail, LLC, a California limited liability company, was formed on August 21, 2009 and is a wholly-owned subsidiary
of J. Lindeberg USA. J. Lindeberg Retail was formed to operate the Company’s J. Lindeberg retail stores. The operations of
J. Lindeberg are shown as discontinued operations in the accompanying consolidated financial statements.
|
3. Summary of Significant
Accounting Policies
Discontinued Operations
The Company accounted
for the sale of its 50% member interest in J. Lindeberg, USA and the decisions to close down its wholesale and retail operations
as discontinued operations in accordance with the guidance provided in FASB ASC 360,
Accounting for Impairment or Disposal of
Long-Lived Assets
, which requires that a component of an entity that has been disposed of or is classified as held for sale
and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for
sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, the
results of operations for the periods presented are reclassified into separate line items in the statements of operations. Assets
and liabilities are also reclassified into separate line items on the related balance sheets for the periods presented. The statements
of cash flows for the periods presented are also reclassified to reflect the results of discontinued operations as separate line
items.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
Earnings Per Share
Basic income (loss)
per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares
outstanding during the year. The diluted income (loss) per share calculation gives effect to all potentially dilutive common shares
outstanding during the year using the treasury stock method for warrants and options.
Warrants representing
33,261,428 shares of common stock at exercise prices ranging from $0.15 to $0.50 per share and stock options representing 6,772,000
shares of common stock at exercise prices ranging from $0.15 to $1.25 per share were outstanding as of March 31, 2012, but were
excluded from the average number of common shares outstanding in the calculation of diluted earnings per share for the three months
ended March 31, 2012 because the effect of including these shares would have been antidilutive.
Warrants representing
440,000 shares of common stock at exercise prices ranging from $0.40 to $0.50 per share and stock options representing 8,590,000
shares of common stock at exercise prices ranging from $0.15 to $1.25 per share were outstanding as of March 31, 2011, but were
excluded from the average number of common shares outstanding in the calculation of diluted earnings per share because the average
trading price of the Company’s common shares during the period was lower than the exercise price of any of outstanding equity
instruments, and therefore were antidilutive.
Customer and Supplier
Concentrations
During the three months
ended March 31, 2012 and 2011, one customer comprised greater than 10% of the Company’s net revenue. Revenue derived from
this customer amounted to 51.9% and 14.7% of net revenue for the three months ended March 31, 2012 and 2011, respectively. At March
31, 2012, there were no amounts due from this major customer. At March 31, 2011, the majority of receivables due from this customer
were sold to the factor and were included in the due to factor balance.
During the three months
ended March 31, 2012, there were no suppliers that comprised greater than 10% of our purchases. During the three months ended March
31, 2011, two suppliers comprised greater than 10% of the Company’s purchases. Purchases from these suppliers amounted to
33.9% and 25.5% for the three months ended March 31, 2011. At March 31, 2011, accounts payable and accrued expenses included an
aggregate of approximately $1.7 million, due to these vendors.
During the three months
ended March 31, 2011, the Company purchased all of its J. Lindeberg brand products from J. Lindeberg AB in Sweden, the beneficial
owner of 50% of the Company’s former subsidiary, J. Lindeberg USA. Total purchases from J. Lindeberg AB for the three months
ended March 31, 2011 amounted to approximately $1.7 million
Off Balance Sheet
Risk and Contingencies
The Company is subject
to certain legal proceedings and claims arising in connection with its business. In the opinion of management, except as described
in Note 13 to the consolidated financial statements and as provided for in the consolidated financial statements, there are currently
no additional claims that could have a material adverse effect on the Company’s consolidated financial position, results
of operations or cash flows.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
In accordance with
the bylaws of the Company, officers and directors are indemnified for certain events or occurrences arising as a result of the
officer or director serving in such capacity. The term of the indemnification period is for the lifetime of the officer or director.
The maximum potential amount of future payments the Company could be required to make under the indemnification provisions of its
bylaws is unlimited. At this time, the Company believes the estimated fair value of the indemnification provisions of its bylaws
is minimal and therefore, the Company has not recorded any related liabilities.
In addition to the
indemnification required by the Company’s Amended and Restated Certificate of Incorporation and bylaws, the Company has entered
into indemnity agreements with each of its current officers, former officers Darryn Barber and Thomas Nields, directors and key
employees. These agreements provide for the indemnification of the Company’s directors, officers, former officers and key
employees for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them
by reason of the fact that they are or were the Company’s agents. The Company believes these indemnification provisions and
agreements are necessary to attract and retain qualified directors, officers and employees.
The Company enters
into indemnification provisions under its agreements in the normal course of business, typically with suppliers, customers, distributors
and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered
or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified
party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations
made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination
of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these
indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related
to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has not recorded any related liabilities.
Recently
Issued Accounting Standards
In May 2011, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04,
“Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU No. 2011-4
does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices
outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The
Company adopted ASU No. 2011-04 effective January 1, 2012 and it did not affect the Company’s results of operations, financial
condition or liquidity.
In June 2011,
the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present
the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires
consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive
income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning
after December 15, 2011. The Company adopted ASU 2011-05 effective January 1, 2012 and it had no affect on the Company’s
disclosures in its financial statements.
In September 2011,
the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of
goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative
factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount
before performing the two step impairment review process. It also amends the examples of events or circumstances that would be
considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed
for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. The Company does
not believe that the adoption of this new accounting guidance will have a significant effect on its goodwill impairment assessments
in the future.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
In December 2011, the
FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This
ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements
to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is
effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption
of this standard to have a material impact on its consolidated financial statement disclosures.
Other recent accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission
(the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated
financial statements.
|
4.
|
William Rast Ownership Recapitalization
|
Effective as of October
1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. The recapitalization increased the
ownership of Bella Rose in each of William Rast Sourcing, LLC (“WRS”) and William Rast Licensing, LLC (“WRL”)
in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as other consideration.
As
a result of the recapitalization, both WRS and WRL are now owned 82% by Bella Rose and 18% by TWR, and Bella Rose is entitled
to all of the distributable cash from operations and all of the distributable cash from a sale of WRS or WRL that is not paid
to TWR. In connection with the ownership recapitalization, TWR, WRS and WRL entered into a Royalty Agreement. Pursuant to
the Royalty Agreement, WRS is obligated to pay TWR a royalty in the amount of 5.0% of its wholesale net sales, plus 2.5% of its
retail net sales and 25.0% of its sublicensee gross consideration during the period commencing July 1, 2011 and continuing until
the earlier of (i) the date that WRS pays a liquidating payment to TWR or (ii) the date that TWR or any of its affiliates no longer
owns Class B membership interests in WRS. During the term of the agreement, WRS is obligated to pay TWR a guaranteed minimum royalty
of $200,000 for the calendar year ended December 31, 2011 and $400,000 for each calendar year thereafter. The Royalty Agreement
also provides that WRL shall pay to TWR an amount equal to 50.0% of all gross receipts of WRL in respect of royalties or other
compensation earned with respect to the license by WRL of rights to the William Rast mark, subject to certain offsets, during
the period commencing July 1, 2011 and continuing until the earlier of (i) the date that WRL pays a liquidating payment to TWR
or (ii) the date that TWR or any of its affiliates no longer owns Class B membership interests in WRL. During the three months
ended March 31, 2012, the Company recorded approximately $327,000 in royalty expense related to royalties due under the Royalty
Agreement.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
5. Charlotte Russe Litigation
Beginning October of
2009, the Company had been in litigation with Charlotte Russe and its affiliates in relation to an exclusive distribution agreement
between the parties. On February 3, 2011, the Company (along with the other parties to the litigation) settled its litigation with
Charlotte Russe. Pursuant to the settlement agreement, the Company received $3.5 million, after the distribution of amounts owed
under the terms of an asset purchase agreement entered into by the Company with two related parties pursuant to which the Company
sold 50% of the net proceeds, after contingent legal fees and expenses, that may be received by the Company as a result of the
litigation. The settlement included the dismissal with prejudice of all claims pending between the parties as well as mutual releases,
without any admission of liability or wrongdoing by any of the parties to the actions. The settlement amount of $3.5 million is
included in loss from operations of wholesales business included in the Company’s statement of operations for the three months
ended March 31, 2011.
6. License Agreements
The Company has entered
into various trade name license agreements that provide revenues based on minimum royalties and design fees and additional revenues
based on a percentage of defined sales. Minimum royalty and design fee revenue is recognized on a straight-line basis over each
period, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during
the period corresponding to the licensee's sales. Payments received as consideration of the grant of a license or advanced royalty
payments are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated
balance sheet under the caption of “Deferred License Revenue.” Revenue is not recognized unless collectability is reasonably
assured. For the three months ended March 31, 2012, the Company recorded total license revenue related to its license agreements
of approximately $1.4 million. There was no license revenue earned during the three months ended March 31, 2011. Deferred revenue
as of March 31, 2012 amounted to approximately $618,000.
Future annual minimum
royalty and design fee revenue is summarized as follows:
Years Ending December 31,
|
|
|
|
|
2012 (nine months)
|
|
$
|
3,397,500
|
|
2013
|
|
|
5,650,000
|
|
2014
|
|
|
5,281,663
|
|
2015
|
|
|
5,121,668
|
|
2016
|
|
|
426,668
|
|
Thereafter
|
|
|
1,625,001
|
|
|
|
$
|
21,502,500
|
|
Exclusive License Agreement –
JC Penney
In November 2011, the
Company entered into an exclusive license agreement with JC Penney pursuant to which the Company granted JC Penney a license to
use its William Rast trademark in connection with the manufacture, sale and marketing of men’s apparel and accessories, women’s
apparel, handbags, footwear, sunglasses, watches and luggage. The product categories are subject to certain exceptions as outlined
in the license agreement. The Company will provide design, marketing and branding support for William Rast branded apparel and
apparel accessories to JC Penney under the terms of the contract.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The license granted
to JC Penney is exclusive (subject to certain exceptions) with respect to JC Penney’s right to sell and market William Rast
branded products through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce distribution
channels which are targeted to consumers in the United States. During the term of the agreement, the Company agrees to refrain
from selling or authorizing any other party to sell, with certain exception as outlined in the agreement, any line of William Rast
branded apparel products in the United States through any distribution channel; provided, however, that the Company continues to
have the right to sell William Rast branded products without restriction until June 30, 2012.
The agreement with
JC Penney will continue through January 30, 2016 and JC Penney may elect to extend the term of the agreement for one additional
renewal term of five years.
During each royalty
period during the term, JC Penney has agreed to pay the Company royalties based upon a percentage of JC Penney’s net sales
of William Rast branded products and has also agreed to pay the Company minimum annual royalties and design fees.
Product License Agreements
The Company has three
agreements for the license of its William Rast products as follows:
VIVA Optique:
Effective December 3, 2009, the Company entered into a license agreement with Viva Optique, Inc. for the worldwide license of William
Rast branded eyewear for men and women. The initial term of the license agreement ends on December 31, 2013 and includes an option
to renew for an additional three-year term through December 2016. The license agreement provides for the payment of royalties based
on net sales at a negotiated rate and minimum royalty amounts for each contract year.
RGA Leatherworks:
Effective April 14, 2011, the Company entered into a multi-year licensing agreement with RGA Leatherworks to design, produce and
distribute in the United States and Canada William Rast branded leather goods. Product categories include men’s wallets,
small leather goods, messenger bags, totes, belts, travel kits and electronic cases. The license agreement expires on December
31, 2014. The license agreement provides for the payment of royalties based on net sales at a negotiated rate and minimum royalty
amounts for each contract year.
How Fashions International:
Effective September 9, 2011, the Company entered into a multi-year licensing agreement with How Fashions International Inc.
to design, produce and distribute in Canada William Rast branded apparel. Product categories include men’s and women’s
denim, knit tops, woven shirts and outerwear. The William Rast branded apparel collection is available in upscale department stores
and specialty retailers in Canada. The initial term of the license agreement ends on September 30, 2026 and includes an option
to renew for an additional five-year term through September 2031. The license agreement provides for the payment of royalties based
on net sales at a negotiated rate and minimum royalty amounts for each contract year.
7. Discontinued Operations of Wholesale
Business
In 2012, the Company’s
Board of Directors decided to discontinue its wholesale business completely and as a result, will no longer sell its People’s
Liberation and William Rast brands to wholesale and retail customers. For the remainder of 2012, the Company will continue to sell
William Rast and People’s Liberation branded apparel on a limited basis through its domestic wholesale operations in order
to liquidate its existing inventory.
The discontinuation
of the Company’s wholesale business has been accounted for as a discontinued operation and, accordingly, all prior periods
presented in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted to conform
to this presentation.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The following table
summarizes certain selected components of the discontinued operations of the Company’s wholesales business for the periods
ended March 31, 2012 and 2011:
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
444,726
|
|
|
$
|
1,837,076
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(215,958
|
)
|
|
$
|
955,132
|
|
Noncontrolling interest
|
|
$
|
-
|
|
|
$
|
1,264,178
|
|
Net (loss) income attributable to discontinued operations
|
|
|
(215,958
|
)
|
|
$
|
2,219,310
|
|
|
|
|
|
|
|
|
|
|
Basis and diluted (loss) income
per share from discontinued operations
|
|
|
(0.01
|
)
|
|
$
|
0.06
|
|
The following table
summarizes certain selected components of the discontinued operations of the Company’s wholesale business as of March 31,
2012 and December 31, 2011, the periods covered by this report:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
Current assets
|
|
$
|
421,532
|
|
|
$
|
339,184
|
|
Long-term assets
|
|
$
|
8,500
|
|
|
$
|
54,160
|
|
Current liabilities
|
|
$
|
1,295,069
|
|
|
$
|
1,762,552
|
|
|
|
|
|
|
|
|
|
|
8. Discontinued Operations of Retail
Subsidiary
In the second half
of 2011, the Company’s Board of Directors decided to transition the Company’s business from a wholesale and retail
provider of branded apparel and apparel accessories to a brand management and licensing business. As a result, the Company’s
retail operations included in the Company’s subsidiary, William Rast Retail, LLC, which consisted of four retail stores were
discontinued. As of December 31, 2011, the Company had closed two of its retail stores and the remaining two stores are expected
to be closed in the second and third quarters of 2012.
The closing of the
Company’s retail stores has been accounted for as a discontinued operation and, accordingly, all prior periods presented
in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted to conform to this
presentation.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The following table
summarizes certain selected components of the discontinued operations of William Rast Retail for the three months ended March 31,
2012 and 2011:
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
265,184
|
|
|
$
|
477,364
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(155,265
|
)
|
|
$
|
(330,406
|
)
|
Noncontrolling interest
|
|
$
|
-
|
|
|
$
|
165,203
|
|
Net loss attributable to discontinued operations
|
|
|
(155,265
|
)
|
|
$
|
(165,203
|
)
|
|
|
|
|
|
|
|
|
|
Basis and diluted loss per share from discontinued operations
|
|
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
The following table
summarizes certain selected components of the discontinued operations of William Rast Retail as of March 31, 2012 and December
31, 2011, the periods covered by this report:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
Current assets
|
|
$
|
48,955
|
|
|
$
|
60,883
|
|
Long-term assets
|
|
$
|
236,431
|
|
|
$
|
260,825
|
|
Current liabilities
|
|
$
|
243,535
|
|
|
$
|
403,805
|
|
Long-term liabilities
|
|
$
|
298,184
|
|
|
$
|
288,765
|
|
|
|
|
|
|
|
|
|
|
As a result of the
expected closure of the Company’s two remaining retail stores and other costs to be incurred in future periods related to
the winding down of William Rast Retail’s operations, the Company expects to incur additional expenses for the remainder
of 2012 ranging from $350,000 to $450,000. The expected losses include costs to close the Company’s stores, store rent, lease
termination settlements and fees, fixed asset write-offs, employee severance costs, litigation costs, if any, and related professional
fees. The Company recognizes costs incurred to close its retail stores in the period in which each retail store is closed.
9. Discontinued Operations of J.
Lindberg USA, LLC Subsidiaries
On April 26, 2011,
the Company and its wholly owned subsidiary, Bella Rose, LLC, completed the sale of Bella Rose’s 50% membership interest
in J. Lindeberg USA, LLC (“Lindeberg USA”) to J. Lindeberg USA Corp. (“Buyer”) pursuant to the terms of
a Unit Purchase Agreement entered into by the parties on April 7, 2011. Prior to the closing of the transaction and
since July 1, 2008, Lindeberg USA was owned 50% by Bella Rose and 50% by Buyer.
In consideration for
Bella Rose’s 50% membership interest in Lindeberg USA, Buyer agreed to pay to the Company an aggregate of $1,650,000, of
which $900,000 was paid upon the closing of the transaction and $750,000 was received in the form of a receivable that was non-interest
bearing and to be paid on the six month anniversary of the closing of the transaction.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The divestiture of
the Company’s membership interest in Lindeberg USA has been accounted for as a discontinued operation and, accordingly, all
prior periods presented in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted
to conform to this presentation.
The Company recorded
a gain in the second quarter of 2011 related to this divestiture as follows:
|
|
|
|
|
Carrying value of net assets of J. Lindeberg USA
|
|
$
|
(1,501,404
|
)
|
Noncontrolling interest on date of divestiture
|
|
|
1,863,727
|
|
Carrying value of net assets attributable to J. Lindeberg USA
|
|
|
362,323
|
|
Cash proceeds received at closing
|
|
|
900,000
|
|
Receivable from Buyer
|
|
|
750,000
|
|
Gain on sale of member interest in subsidiary
|
|
$
|
2,012,323
|
|
|
|
|
|
|
The following table
summarizes certain selected components of the discontinued operations of J. Lindeberg USA for the three months ended March 31,
2011:
|
|
|
|
|
Net Revenue
|
|
$
|
2,641,474
|
|
|
|
|
|
|
Net loss
|
|
$
|
(262,563
|
)
|
Noncontrolling interest
|
|
$
|
131,281
|
|
Net loss attributable to discontinued operations
|
|
$
|
(131,282
|
)
|
|
|
|
|
|
Basis and diluted loss per share from discontinued operations
|
|
$
|
(0.00
|
)
|
10. Stock Based Compensation
Stock Options
On January 5, 2006,
the Company adopted its 2005 Stock Incentive Plan (the “Plan”), which authorized the granting of a variety of stock-based
incentive awards. The Plan is administered by the Board of Directors, or a committee appointed by the Board of Directors, which
determines the recipients and terms of the awards granted. The Plan provides for a total of 5,500,000 shares of common stock to
be reserved for issuance under the Plan.
The Company recognizes
stock-based compensation costs on a straight-line basis over the vesting period of each award, which is generally between one to
four years.
During the three months
ended March 31, 2012, the Company did not grant any options. During the three months ended March 31, 2011, the Company granted
1,030,000 options to employees and an officer within the Plan at an exercise price of $0.15 and 5,000,000 options to two employees
and an officer outside the Plan, also at an exercise price of $0.15. Plan options to purchase 2,647,218 and 2,503,890 shares were
exercisable as of March 31, 2012 and 2011, respectively. Options granted outside the Plan to purchase 3,000,000 shares were exercisable
as of March 31, 2012 and 2011. Total stock based compensation expense for the three months ended March 31, 2012 and 2011 was approximately
$1,000 and $19,000, respectively. There were no stock options or warrants exercised during the three months ended March 31, 2012
and 2011.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The fair value of options
is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes pricing
model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors. Stock price volatility is estimated based on a peer group of public companies
and expected term is estimated using the “safe harbor” provisions provided in accordance with generally accepted accounting
principles. The safe harbor provisions were extended beyond December 31, 2007 for companies that did not have sufficient historical
data to calculate the expected term of their related options. The Company does not have sufficient historical data to calculate
expected term and the safe harbor provisions were used to calculate expected term for options granted during the periods. The weighted-average
assumptions the Company used as inputs to the Black-Scholes pricing model for options granted during the three months ended March
31, 2011 included a dividend yield of zero, a risk-free interest rate of 2.2%, expected term of 5.8 years and an expected volatility
of 64%.
For stock-based awards
issued to employees, directors and officers, stock-based compensation is attributed to expense using the straight-line single option
method. Stock-based compensation expense recognized in the Statement of Operations for the three months ended March 31, 2012 and
2011 is included in operating expenses and is based on awards ultimately expected to vest. ASC Topic 718 requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
For the three months ended March 31, 2011, the Company used historical data to calculate the expected forfeiture rate.
Options awarded to
non-employees are charged to expense when the services are performed and benefit is received as provided by FASB ASC Topic 505-50.
The following table
summarizes the activity in the Plan:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – January 1, 2012
|
|
|
3,772,000
|
|
|
|
0.42
|
|
..... Granted
|
|
|
-
|
|
|
|
-
|
|
..... Exercised
|
|
|
-
|
|
|
|
-
|
|
..... Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – March 31, 2012
|
|
|
3,772,000
|
|
|
$
|
0.42
|
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
A summary of the changes
in the Company’s unvested stock options within the Plan is as follows:
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Unvested stock options – January 1, 2012
|
|
|
1,277,083
|
|
|
|
0.01
|
|
..... Granted
|
|
|
-
|
|
|
|
-
|
|
..... Vested
|
|
|
(152,301
|
)
|
|
|
(0.01
|
)
|
..... Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unvested stock options – March 31, 2012
|
|
|
1,124,782
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity
outside of the Plan:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
Options outstanding – January 1, 2012
|
|
|
3,000,000
|
|
|
|
0.15
|
|
..... Granted
|
|
|
-
|
|
|
|
-
|
|
..... Exercised
|
|
|
-
|
|
|
|
-
|
|
..... Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – March 31, 2012 (all vested)
|
|
|
3,000,000
|
|
|
$
|
0.15
|
|
Additional information
relating to stock options outstanding and exercisable at March 31, 2012, summarized by exercise price, is as follows:
|
|
|
|
Outstanding Weighted Average
|
|
Exercisable
Weighted Average
|
|
|
|
|
|
|
Life
|
|
Exercise
|
|
|
|
Exercise
|
Exercise Price
|
|
Per Share
|
|
Shares
|
|
(years)
|
|
Price
|
|
Shares
|
|
Price
|
$0.15
|
|
(options)
|
|
3,780,000
|
|
8.9
|
|
$0.15
|
|
3,360,738
|
|
$0.15
|
$0.20
|
|
(options)
|
|
853,000
|
|
9.5
|
|
$0.20
|
|
148,313
|
|
$0.20
|
$0.30
|
|
(options)
|
|
30,000
|
|
6.3
|
|
$0.30
|
|
30,000
|
|
$0.30
|
$0.31
|
|
(options)
|
|
24,000
|
|
5.3
|
|
$0.31
|
|
24,000
|
|
$0.31
|
$0.38
|
|
(options)
|
|
240,000
|
|
5.4
|
|
$0.38
|
|
240,000
|
|
$0.38
|
$0.40
|
|
(options)
|
|
450,000
|
|
6.3
|
|
$0.40
|
|
450,000
|
|
$0.40
|
$0.46
|
|
(options)
|
|
385,000
|
|
5.3
|
|
$0.46
|
|
385,000
|
|
$0.46
|
$0.50
|
|
(options)
|
|
570,000
|
|
5.7
|
|
$0.50
|
|
569,167
|
|
$0.50
|
$1.25
|
|
(options)
|
|
440,000
|
|
4.3
|
|
$1.25
|
|
440,000
|
|
$1.25
|
|
|
|
|
6,772,000
|
|
7.9
|
|
$0.30
|
|
5,647,218
|
|
$0.30
|
As of March 31, 2012,
there were 2,647,218 of vested stock options within the Plan and 3,000,000 of vested options outside the Plan. As of March 31,
2012, there was approximately $6,000 of total unrecognized compensation expense related to share-based compensation arrangements
granted within the Plan. The cost is expected to be recognized on a weighted-average basis over the next three years. There was
no unrecognized related to share-based compensation arrangements granted outside the Plan as of March 31, 2012. The aggregate intrinsic
value of stock options outstanding was approximately $886,000 at March 31, 2012. The aggregate intrinsic value of stock options
outstanding was zero at March 31, 2011 as the market value of the options was lower than the exercise value.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
Warrants
The following table
summarizes the Company’s outstanding warrants:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – January 1, 2012
|
|
|
16,690,000
|
|
|
|
0.12
|
|
..... Granted
|
|
|
16,571,428
|
|
|
|
0.18
|
|
..... Exercised
|
|
|
-
|
|
|
|
-
|
|
..... Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – March 31, 2012 (fully vested)
|
|
|
33,261,428
|
|
|
$
|
0.15
|
|
Additional information
relating to warrants outstanding and exercisable at March 31, 2012, summarized by exercise price, is as follows:
|
|
|
|
Outstanding Weighted Average
|
|
Exercisable
Weighted Average
|
|
|
|
|
|
|
Life
|
|
Exercise
|
|
|
|
Exercise
|
Exercise Price
|
|
Per Share
|
|
Shares
|
|
(years)
|
|
Price
|
|
Shares
|
|
Price
|
$0.080
|
|
(warrants)
|
|
12,500,000
|
|
4.4
|
|
$0.080
|
|
12,500,000
|
|
$0.080
|
$0.175
|
|
(warrants)
|
|
16,571,428
|
|
4.9
|
|
$0.175
|
|
16,571,428
|
|
$0.175
|
$0.200
|
|
(warrants)
|
|
3,750,000
|
|
4.3
|
|
$0.200
|
|
3,750,000
|
|
$0.200
|
$0.400
|
|
(warrants)
|
|
150,000
|
|
0.6
|
|
$0.400
|
|
150,000
|
|
$0.400
|
$0.500
|
|
(warrants)
|
|
290,000
|
|
0.7
|
|
$0.500
|
|
290,000
|
|
$0.500
|
|
|
|
|
33,261,428
|
|
4.5
|
|
$0.146
|
|
33,261,248
|
|
$0.146
|
The aggregate intrinsic
value of warrants outstanding was approximately $6.8 million at March 31, 2012. The aggregate intrinsic value of warrants outstanding
was zero at March 31, 2011 as the market value of the warrants was lower than the exercise value.
11. Securities Purchase Agreement
and Repayment of Indebtedness
Entry into Securities Purchase Agreement
On February 2, 2012,
the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with TCP WR Acquisition, LLC (“TCP”).
Pursuant to the Purchase Agreement, the Company sold to TCP a total of $14,500,000 in principal amount of Debentures, issued to
TCP Warrants to purchase 16,571,428 shares of common stock and issued to TCP 14,500 shares of Series A Preferred Stock. The Debentures
are convertible into 82,857,142 shares of common stock. Aggregate net proceeds from this transaction amounted to approximately
$13.7 million after the payment of legal and other fees.
Pursuant to the terms
of the Purchase Agreement, the Company sold $14,500,000 in principal amount of Variable Rate Senior Secured Convertible Debentures
(the “Debentures”), convertible into shares of the Company’s common stock, $0.001 par value per share (“Common
Stock”), at an initial conversion price of $0.175 per share (the “Conversion Price”). The Debentures have an
interest rate of LIBOR, and in the event payment on the Debentures is accelerated as a result of an event of default, the rate
of interest will increase to the lesser of 18% per annum or the maximum amount permitted under applicable law. Interest on the
Debentures is payable, at the Company’s option, in cash or in Common Stock upon conversion of a Debenture (with respect to
the principal amount then being converted) and on their maturity date. The Debentures are payable on or before January 31, 2015
and a Debenture may not be prepaid without the consent of the holder of the Debenture.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
At any time after their
issuance, the Debentures are convertible at the Conversion Price into shares of Common Stock at the option of a Debenture holder.
On the maturity date, the Company may, in whole or in part, convert the then outstanding principal amount of each Debenture into
shares of Common Stock at the Conversion Price. The Conversion Price is subject to adjustment in the case of stock splits, stock
dividends, combinations of shares and similar recapitalization transactions. The Conversion Price is also subject to adjustment
based on the occurrence of certain events as further described in the Purchase Agreement.
In connection with
the sale of the Debentures, the Company issued to TCP warrants to purchase 16,571,428 shares of the Company’s Common Stock
(the “Warrants”). The Warrants are exercisable immediately after issuance and have a term of five years. The Warrants
may be exercised at an initial exercise price per share of $0.175, which is subject to adjustment in the case of stock splits,
stock dividends, combinations of shares and similar recapitalization transactions. The warrants were valued at approximately $285,000
using the Black-Scholes pricing model. The assumptions the Company used as inputs to the Black-Scholes pricing model for the valuation
of the warrants included a dividend yield of zero, a risk-free interest rate of 1.4%, expected term of five years and an expected
volatility of 64%.
Also in connection
with the sale of the Debentures, the Company agreed to issued one share of Series A Preferred Stock, par value $0.001 per share
(“Series A Preferred Stock”), for every $1,000.00 of principal amount of Debentures purchased by TCP. The Series A
Preferred Stock is designed to give holders of the Debentures certain voting rights while the Debentures remain outstanding and
each share of Series A Preferred Stock is entitle to vote 5,714 votes.
The Company has recorded
a valuation discount of approximately $1.1 million related to legal and other fees associated with the financing and the valuation
of the warrants issued in the financing. The valuation discount is being amortized to interest expense over the term of the debentures
based upon the effective interest method. The unamortized amount of the valuation discount has been presented as an offset to the
face amount of the Debentures in the Company’s consolidated balance sheet. Included in interest expense for the three months
ended March 31, 2012 is approximately $63,000 of amortization related to the valuation discount.
The components of the
Senior Secured Convertible Notes as of March 31, 2012 are as follows:
Face value of the senior secured convertible notes
|
|
$
|
14,500,000
|
|
Valuation discount
|
|
|
(1,066,868
|
)
|
Accrued interest
|
|
|
4,987
|
|
|
|
$
|
13,438,119
|
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
Description of Subsidiary Guarantee
and Security Agreement
In connection with
the financing, the Company’s subsidiaries, Versatile Entertainment, Bella Rose, William Rast Sourcing, William Rast Licensing
and William Rast Retail executed a Subsidiary Guarantee in favor of TCP pursuant to which such subsidiaries guarantee the Company’s
obligations under the Debentures (the “Subsidiary Guarantee”). In addition, the Company and the above mentioned subsidiaries
entered into a security agreement (the “Security Agreement”) with TCP pursuant to which such parties granted to TCP
a first priority security interest in all of their assets to secure the Company’s obligations under the Debentures and such
subsidiaries’ obligations under the Subsidiary Guarantee.
Termination of Material Agreements
The proceeds received
from the financing were used in part to repay the following indebtedness of the Company and its subsidiaries:
Rosenthal Indebtedness
All indebtedness owed
by William Rast Sourcing under its factoring facility with Rosenthal & Rosenthal. In connection with the repayment, the following
agreements were terminated: (i) Factoring Agreement effective as of October 7, 2010 by and between Rosenthal & Rosenthal, Inc.
and William Rast Sourcing; (ii) Inventory Security Agreement effective as of October 7, 2010 by William Rast Sourcing in favor
of Rosenthal & Rosenthal, Inc.; (iii) Assignment Agreement effective as of October 7, 2010 by and between William Rast Licensing
and Rosenthal & Rosenthal, Inc.; and (iv) guarantees of the Company, Bella Rose, Versatile and Colin Dyne in favor of Rosenthal.
Mobility Indebtedness
All indebtedness owed
by William Rast Licensing to Mobility Special Situations I, LLC (“Mobility”), pursuant to that certain promissory note
in the original aggregate principal amount of $750,000 issued to Mobility. Prior to its repayment, the promissory note was secured
by the assets of William Rast Licensing and was guaranteed by the Company, William Rast Sourcing, William Rast Retail, Bella Rose
and Versatile. In connection with the repayment, the following agreements were terminated (other than with respect to obligations
that survive the termination of such agreements): (i) the Promissory Note entered into on August 13, 2010 by William Rast Licensing
in favor of Mobility; (ii) Borrower Security Agreement entered into on August 13, 2010 by William Rast Licensing in favor of Mobility;
(iii) Guarantor Security Agreement entered into on August 13, 2010 by People’s Liberation, Versatile, Bella Rose, William
Rast Sourcing and William Rast Retail in favor of Mobility; (iv) Guaranty dated August 13, 2010 granted in favor of Mobility by
People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William Rast Retail. Mobility is an entity owned in
part by Mark Dyne, the brother of the Company’s Chief Executive Officer, Colin Dyne, and New Media Retail Concepts, LLC,
an entity owned by Gerard Guez, a significant beneficial owner of the Company’s Common Stock.
Monto Indebtedness
All indebtedness owed
by William Rast Licensing to Monto Holdings (Pty) Ltd. (“Monto”), pursuant to that certain promissory note in the original
aggregate principal amount of $1,000,000. Prior to its repayment, the promissory note was secured by the assets of William Rast
Licensing and was guaranteed by the Company, William Rast Sourcing, William Rast Retail, Bella Rose, and Versatile. In connection
with the repayment, the following agreements were terminated (other than with respect to obligations that survive the termination
of such agreements): (i) the Promissory Note entered into on August 18, 2011 by William Rast Licensing in favor of Monto; (ii)
Borrower Security Agreement entered into on August 18, 2011 by William Rast Licensing in favor of Monto; (iii) Guarantor Security
Agreement entered into on August 18, 2011 by People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William
Rast Retail in favor of Monto; (iv) Guaranty dated August 18, 2011 granted in favor of Monto by People’s Liberation, Versatile,
Bella Rose, William Rast Sourcing and William Rast Retail.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
Other terms
The Purchase Agreement
provides TCP with piggyback registration rights with respect to TCP’s shares of common stock, requires the Company to seek
approval from its stockholders to amend the Company’s certificate of incorporation to increase the authorized number of shares
of the Company’s Common Stock to at least 300 million, requires the Company to pay TCP at the second closing a fee of $362,500
plus all legal and other fees and expenses incurred by TCP in connection with the Purchase Agreement, and requires the Company
to pay TCP an annual monitoring fee of $250,000 at the second closing and on each one year anniversary of such date so long as
TCP has the right under the Stockholders Agreement to nominate one or more directors to the Company’s Board.
In addition, the Purchase
Agreement contains negative covenants that prohibit the Company and its subsidiaries from taking certain actions without TCP’s
prior consent until the later of February 3, 2014 and the date that TCP’s beneficial ownership of Common Stock is less than
40% of the Company’s fully diluted Common Stock. The negative covenants apply to, with certain exceptions, issuing debt or
equity securities; acquiring assets or equity interests of third parties, disposing of assets or equity interests of subsidiaries,
entering into joint ventures, or engaging in other types of mergers and acquisitions transactions; paying or declaring dividends;
settling litigation; entering into transactions with affiliates; dissolving or commencing bankruptcy proceedings; or changing the
Company’s principal lines of business.
12. Preferred Stock
On February 3, 2012, the Company amended
its certificate of incorporation by creating a new series of preferred stock designated Series A Preferred Stock, by filing with
the Delaware Secretary of State a Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock.
The Certificate of Designation sets forth the rights, preferences, privileges and restrictions of the Series A Preferred Stock,
which include the following:
|
·
|
The authorized number of shares of Series A Preferred Stock is 19,400,
having a par value $0.001 per share and a stated value of $1,000.00 per share (“
Stated Value
”).
|
|
·
|
Holders of Series A Preferred Stock are not entitled to dividends
or any liquidation preference.
|
|
·
|
Series A Preferred Stock may only be transferred by a holder of such
stock to a transferee if such transfer also includes a transfer to the transferee of $1,000.00 in principal amount of Debentures
for each one share of transferred Series A Preferred Stock.
|
|
·
|
The holders of Series A Preferred Stock vote together as a single
class with the holders of Common Stock on all matters requiring approval of the holders of Common Stock, except that each share
of Preferred Stock is entitled to 5,714 votes per share (which is the number of shares of Common Stock a Debenture holder would
receive if it converted $1,000.00 in principal amount of Debentures into Common Stock at a conversion price of $0.175), which number
of votes per share is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization
transactions relating to the Company’s Common Stock.
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
|
·
|
As
long as any shares of Series A Preferred Stock are outstanding, the Company will not, without the affirmative vote of the holders
of a majority of the then outstanding shares of the Series A Preferred Stock, (a) alter or change adversely the powers, preferences
or rights given to the Series A Preferred Stock or alter or amend the Certificate of Designation, (b) amend the Company’s
certificate of incorporation or other charter documents in any manner that adversely affects any rights of such holders, (c) increase
the number of authorized shares of Series A Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
|
|
·
|
Upon conversion of the principal amount of a Debenture, in whole or
in part, into shares of Common Stock or upon the repayment of the principal amount of a Debenture, in whole or in part, by the
Company, the Company has the right to and will redeem from the Debenture holder at a price of $0.001 per share, a number of shares
of Series A Preferred Stock determined by dividing (i) the outstanding principal amount of the Debenture that has been repaid or
converted into Common Stock, as applicable by (ii) the Stated Value.
|
13. Shareholder
Derivative Complaint
On January 17, 2012,
plaintiff RP Capital, LLC filed a shareholders’ derivative complaint in the Superior Court of the State of California, County
of Los Angeles, Case Number BC477118 against Colin Dyne, Kenneth Wengrod, Susan White, Dean Oakey and the Company. The case alleges
that the defendants (i) breached their fiduciary duties to the Company for failing to properly oversee and manage the Company,
(ii) were unjustly enriched, (iii) abused their control, (iv) grossly mismanaged the Company, (v) wasted corporate assets, (vi)
engaged in self-dealing, and (vii) breached their fiduciary duties by disseminating false and misleading information. The plaintiffs
seek (i) judgment against the defendants in favor of the Company for the amount of damages sustained by the Company as a result
of the defendants’ alleged breaches of their fiduciary duties; (ii) judgment directing the Company to take all necessary
actions to reform and improve its corporate governance and internal procedures to comply with applicable laws; (iii) an award to
the Company of restitution from the defendants and an order from the court to disgorge all profits, benefits and other compensation
obtained by the defendants from their alleged wrongful conduct and alleged fiduciary breaches and (iv) an award of costs and disbursements
of the action, including reasonable fees for profession services. The Company believes, in consultation with legal counsel, that
these claims are without merit or substance, and intends to vigorously defend against these claims. The derivative complaint is
in the early stages of discovery and the Company, in consultation with legal counsel, is unable to determine the outcome, whether
favorable or unfavorable, or a range of possible loss, if any, to the Company.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
information contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) is intended to update the
information contained in our Annual Report on Form 10-K for the year ended December 31, 2011 (our “2011 Annual
Report”) and presumes that readers have access to, and will have read, the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and other information contained in our 2011 Annual Report. The
following discussion and analysis also should be read together with our consolidated financial statements and the notes to
the consolidated financial statements included elsewhere in this Quarterly Report.
This
discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity
and cash flows of Sequential Brands Group, Inc. for the three months ended March 31, 2012 and the three months ended March 31,
2011. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements generally are identified by the words “believe,” “project,”
“expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,”
“opportunity,” “plan,” “may”, “should,” “will,” “would,”
“will be,” “will continue,” “will likely result” and similar expression. Forward-looking statements
involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Forward-looking
statements are based on current expectations and assumptions and actual results could differ materially from those projected in
the forward-looking statements as a result of, among other things, those factors set forth in “Risk Factors” contained
in Item 1A of our 2011 Annual Report and
Part II, Item 1A of this Quarterly Report.
Overview
Since our formation
in 2005, we have been a designer, marketer and wholesale provider of branded apparel and apparel accessories. Commencing in July
2008, we implemented a retail strategy and opened retail stores to sell our branded products. In the second half of 2011, we decided
to change our business model to focus on licensing and brand management. In connection with the change in our business model, we
are presently winding down the wholesale distribution of our branded apparel and apparel accessories, liquidating our existing
inventory and closing our remaining retail stores. We expect to complete our transition from a wholesale and retail company to
a licensing and brand management company during the second or third quarter of 2012. To reflect our business transition, in March
2012, we changed our corporate name from People’s Liberation, Inc. to Sequential Brands Group, Inc. In this report, we refer
to our wholesale and retail operations as our Historical Operations.
Licensing and Brand Management Business
As a licensing and
brand management company, we plan to promote, market, and license a portfolio of consumer brands. Presently, our brands include
William Rast
® and
People’s Liberation
® and we intend to grow our portfolio of brands by acquiring rights
to additional brands. We have licensed and intend to license our brands in a variety of categories to retailers, wholesalers and
distributors in the United States and in certain international territories. In our licensing arrangements, our licensing partners
will be responsible for designing, manufacturing and distributing our licensed products, subject to our continued oversight and
marketing support. Currently, we have one direct-to-retail and three traditional wholesale licenses. In our direct-to-retail
license, we granted JC Penney, a national retailer, the exclusive right to distribute William Rast branded apparel in a broad range
of product categories through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce
distribution channels which are targeted to consumers in the United States. In our traditional wholesale licenses, we grant rights
to a single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to
multiple stores within an approved channel of distribution.
Historical Operations
Wholesale Operations
Since our inception
in 2005, in the United States, we have distributed our William Rast branded merchandise and, through April 26, 2011, our J. Lindeberg
branded merchandise to better specialty stores, boutiques and department stores, such as Nordstrom, Saks Fifth Avenue and Neiman
Marcus, as well as online at various websites including williamrast.com, jlindebergusa.com and Zappos.com. In 2012, we decided
to discontinue its wholesale operations completely. For the remainder of 2012, we will continue to sell William Rast and People’s
Liberation branded apparel on a limited basis through our domestic wholesale operations in order to liquidate our existing inventory.
As part of our Historical
Operations, we also sold our William Rast branded apparel products internationally in select countries directly and through agents
and distributors to better department stores and boutiques. Our distributors purchased products at wholesale prices for resale
in their respective territories and marketed, sold, warehoused and shipped William Rast branded apparel products at their expense.
Our agents were paid a commission on net sales of our William Rast products. In 2012, we expect to have an immaterial amount of
sales of our William Rast and People’s Liberation branded apparel from our international wholesale operations.
Retail Operations
Our Historical Operations
also include the sale of William Rast branded apparel and accessories through our William Rast branded retail stores and also through
our William Rast branded outlet store. As part of our transition from a wholesale and retail provider of apparel and apparel accessories
to a brand management and licensing business, we closed our William Rast retail stores located in Miami and San Jose in November
2011. Our two remaining William Rast retail stores are expected to be closed in 2012. We expect to have limited sales from these
locations in 2012.
Through April 26, 2011,
our J. Lindeberg branded apparel and accessories were sold through our three full-price J. Lindeberg branded retail stores. We
sold our interest in our J. Lindeberg business to our joint venture partner in April 2011, including our three retail stores.
Corporate Structure
Sequential Brands Group,
Inc., formerly People’s Liberation Inc., is the parent holding company of Versatile Entertainment, Inc. (“Versatile”)
and Bella Rose, LLC (“Bella Rose”), both of which were consolidated under and became wholly-owned subsidiaries of People’s
Liberation on November 22, 2005.
Versatile conducts our People’s Liberation
brand business and our William Rast brand business is conducted through Bella Rose, LLC.
Structure of William
Rast Business
William Rast Sourcing,
LLC and William Rast Licensing, LLC are consolidated under Bella Rose, and through September 30, 2011 were each owned 50% by Bella
Rose and 50% by Tennman WR-T, Inc., an entity owned in part by Justin Timberlake.
Effective as of October
1, 2011, we recapitalized the ownership of our William Rast branded apparel business. As further described under Note 4 to our
consolidated financial statements, the recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing
and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as other consideration.
Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by TWR, and Bella Rose is entitled
to all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing or William
Rast Licensing that is not paid to TWR.
William Rast Retail,
LLC, a California limited liability company, was formed on August 26, 2009 and is a wholly-owned subsidiary of William Rast Sourcing.
William Rast Retail was formed to operate our William Rast retail stores. The operations of William Rast Retail are shown as discontinued
operations in the accompanying consolidated financial statements.
Structure of J.
Lindeberg Business
Prior to its sale on
April 26, 2011, our J. Lindeberg brand business was conducted through Bella Rose. From July 1, 2008 through April 26, 2011, J.
Lindeberg USA, LLC was consolidated under Bella Rose and was owned 50% by Bella Rose and 50% by J. Lindeberg USA Corp. an entity
owned by J. Lindeberg AB, a Swedish corporation. J. Lindeberg USA Retail, LLC, a California limited liability company, was formed
on August 21, 2009 and is a wholly-owned subsidiary of J. Lindeberg USA. J. Lindeberg Retail was formed to operate our J. Lindeberg
retail stores. The operations of J. Lindeberg are shown as discontinued operations in the accompanying consolidated financial statements.
Cash Received from
Securities Purchase Agreement
On February 2, 2012,
we entered into a Securities Purchase Agreement with TCP WR Acquisition, LLC. Pursuant to the Securities Purchase Agreement, we
sold Debentures, Warrants and Series A Preferred Stock to TCP WR Acquisition, LLC, as further described elsewhere in this report.
A portion of the proceeds received from this transaction was used to pay amounts due to our factor, Rosenthal & Rosenthal,
and terminate our factoring facility, payoff our notes payable to Monto Holdings (pty) Ltd. and Mobility Special Situations I,
LLC and pay certain past due payables. Net proceeds from this transaction after the payment of closing, legal and other costs and
the repayment of the aforementioned debt amounted to approximately $11.7 million.
Critical Accounting Policies, Judgments
and Estimates
Our discussion and
analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related
to our valuation of inventories and our allowance for uncollectible house accounts receivable, recourse factored accounts receivable
and chargebacks, and 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. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements:
Inventories
.
Inventories are evaluated on a continual basis and reserve adjustments, if any, are made based on management’s estimate of
future sales value of specific inventory items. Reserve adjustments are made for the difference between the cost of the inventory
and the estimated market value, if lower, and charged to operations in the period in which the facts that give rise to the adjustments
become known. Inventories, consisting of piece goods and trim, work-in-process and finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
Accounts Receivable.
Factored accounts receivable balances with recourse, chargeback and other receivables are evaluated
on a continual basis and allowances are provided for potentially uncollectible accounts based on management’s estimate of
the collectability of customer accounts. Factored accounts receivable without recourse are also evaluated on a continual basis
and allowances are provided for anticipated returns, discounts and chargebacks based on management’s estimate of the collectability
of customer accounts and historical return, discount and other chargeback rates. If the financial condition of a customer were
to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance may be required. Allowance
adjustments are charged to operations in the period in which the facts that give rise to the adjustments become known.
Intangible Assets.
Intangible assets are evaluated on a continual basis and impairment adjustments are made based
on management’s reassessment of the useful lives related to intangible assets with definite useful lives. Intangible assets
with indefinite lives are evaluated on a continual basis and impairment adjustments are made based on management’s comparison
of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Impairment adjustments
are made for the difference between the carrying value of the intangible asset and the estimated valuation and charged to operations
in the period in which the facts that give rise to the adjustments become known.
Revenue Recognition.
We have entered into various trade name license agreements that provide revenues based on minimum royalties and additional revenues
based on a percentage of defined sales. Minimum royalty revenue is recognized on a straight-line basis over each period, as defined,
in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding
to the licensee's sales. Payments received as consideration of the grant of a license or advanced royalty payments are recognized
ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheet as
deferred license revenue. License revenue is not recognized unless collectability is reasonably assured. Wholesale revenue is recognized
when merchandise is shipped to a customer, at which point title transfers to the customer, and when collection is reasonably assured.
Customers are not given extended terms or dating or return rights without proper prior authorization. Revenue is recorded net of
estimated returns, charge backs and markdowns based upon management’s estimates and historical experience. Website revenue
is recognized when merchandise is shipped to a customer and when collection is reasonably assured. Retail revenue is recognized
on the date of purchase from our retail stores. Advertising revenue received under sponsorship agreements is recorded in the period
in which the event to which the advertising rights were granted occurred. Design revenue received under design and license agreements
is recorded in the period in which the design services are provided to the licensee.
Deferred Tax
Assets
. We may record a valuation allowance to reduce our deferred tax assets to an amount that
we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for a valuation allowance. If we determine that we may not realize all or part of
our deferred tax assets in the future, we will make an adjustment to the carrying value of the deferred tax asset, which would
be reflected as an income tax expense. Conversely, if we determine that we will realize a deferred tax asset, which currently has
a valuation allowance, we would be required to reverse the valuation allowance, which would be reflected as an income tax benefit.
Valuation allowance adjustments are made in the period in which the facts that give rise to the adjustments become known.
Stock Based Compensation.
Stock-based compensation expense is recognized based on awards ultimately expected to vest on a straight-line prorated basis. The
fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined
by the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors. Stock price volatility was estimated based on a peer
group of public companies and the expected term was estimated using the “safe harbor” provisions provided by generally
accepted accounting principles.
Noncontrolling Interest.
Profit and loss allocations to noncontrolling interest members of our subsidiaries were recorded as increases and decreases in
noncontrolling interest in our consolidated financial statements. Cash distributions, if any, made to a noncontrolling interest
member of any of our subsidiaries are accounted for as decreases in noncontrolling interest in the consolidated balance sheet of
the Company. To the extent the priority distributions are made, it would reduce the income allocable to the controlling interest.
Litigation Contingencies.
We are subject to on-going litigation which requires management to make certain assumptions and estimates regarding gain or loss
contingencies, if any, related to the outcome of pending litigation. In consultation with legal counsel, we consider the facts
and circumstances surrounding the pending litigation and the probability of the outcome of pending litigation, whether favorable
or unfavorable, in our estimates of gain or loss contingencies.
Results of Operations
The following table
presents consolidated statement of operations data from continuing operations for each of the periods indicated as a percentage
of net revenue.
|
|
Three Months Ended
March 31, 2012
|
|
|
Three Months Ended
March 31, 2011
|
|
Net revenue
|
|
|
100.0
|
%
|
|
|
- %
|
|
Operating expenses
|
|
|
75.6
|
|
|
|
-
|
|
Operating loss
|
|
|
24.4
|
%
|
|
|
- %
|
|
Comparison
of the three months ended March 31, 2012 and the three months ended March 31, 2011 from continuing operations
Net Revenue
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
1,372,533
|
|
|
$
|
-
|
|
|
|
100.0
|
%
|
Net revenue from continuing
operations for the three months ended March 31, 2012 consists of license revenue earned under our various license agreements related
to our William Rast brand. During the three months ended March 31, 2012, we had one direct-to-retail and three product license
agreements. During the three months ended March 31, 2011, we had one product license agreement which did not generate any revenue.
In the second half of 2011, we began to transition our business model from a wholesale and retail apparel company to a brand management
and licensing business. We expect to derive the majority of our 2012 revenue from our William Rast brand license agreements and
anticipate entering into additional license agreements for our brands in the future.
Operating Expenses
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
1,038,224
|
|
|
$
|
8,202
|
|
|
|
12558.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses from continuing operations for the three months ended March 31, 2012 and 2011 primarily related to
salaries, royalties,
professional fees, facility costs,
marketing expenses and
depreciation and amortization. The increase in operating expenses from continuing operations for the three months ended March
31, 2012 compared to the three months ended March 31, 2011 was due to our increase in license agreements and related revenue
during the three months ended March 31, 2012. We had one direct-to-retail and three traditional wholesale license agreements
during the first quarter of 2012, compared to one traditional wholesale license agreement during the first quarter of 2011.
Included in operating expenses from continuing operations for the three months ended March 31, 2012 is approximately $300,000
in royalties due to the minority interest member of our William Rast subsidiaries, Tennman WR-T, under the terms of our
royalty agreement related to license revenue earned from license agreements of our William Rast brand.
Also included
in operating expenses from continuing operations for the three months ended March 31, 2012, is approximately $65,000 of
nonrecurring expenses and approximately $172,000 of professional fees related to our year-end audit.
Interest Expense, net
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
$
|
78,162
|
|
|
$
|
15,000
|
|
|
|
421.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense from
continuing operations during the three months ended March 31, 2012 resulted primarily from interest due at rates of 7% and 8% on
our promissory notes payable in the aggregate principal amount of $1.75 million through the date of their repayment on February
3, 2012, interest at a rate of Libor on our $14.5 million Senior Secured Convertible Debentures and interest related to the accretion
of valuation discount allocated to our Senior Secured Convertible Debentures amounting to approximately $63,000 during the three
months ended March 31, 2012. Interest expense from continuing operations during the three months ended March 31, 2011 resulted
primarily from interest due at a rate of 8% on our promissory note payable to related parties amounting to $750,000. The increase
in interest expense from the first quarter of 2012 compared to the first quarter of 2011 is due primarily to the accretion of valuation
discount and an increase in borrowings during the period.
Provision for Income Taxes
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
$
|
10,000
|
|
|
$
|
800
|
|
|
|
1150.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income
taxes from continuing operations for the three months ended March 31, 2012 and 2011 represents the minimum tax payments due for
state and local purposes, including gross receipts tax on sales generated by our limited liability companies, and estimated Federal
and state taxes due at statutory effected tax rates, if any. As of December 31, 2011, a valuation allowance has been provided for
the entire amount of our deferred income tax asset related to net operating loss carryforwards, factored accounts receivable and
bad debt reserves and other reserves. At this time, we cannot determine that it is more likely than not that we will realize the
future income tax benefits related to our net operating losses. As of December 31, 2011, total net operating losses available to
carry forward to future periods amounted to approximately $11.5 million. The increase in the provision for income taxes from continuing
operations recorded for the three months ended March 31, 2012, compared to the three months ended March 31, 2011 resulted from
an increase in gross receipts tax related to an increase in revenue during the period.
Net Income (Loss) from Continuing
Operations
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
246,147
|
|
|
$
|
(24,002
|
)
|
|
|
1125.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net
income earned for the three months ended March 31, 2012 compared to the net loss incurred during the three months ended March 31,
2011 is due primarily to increased license revenue during the first quarter of 2012, offset by increased operating and interest
expenses during the quarter, as discussed above.
Noncontrolling Interest from Continuing
Operations
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest from continuing operations
|
|
$
|
-
|
|
|
$
|
12,001
|
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
from continuing operations recorded for the three months ended March 31, 2011 represents net loss allocations to Tennman WR-T,
Inc., a member of William Rast Sourcing and William Rast Licensing. Beginning January 1, 2009 through September 30, 2011, losses
were allocated to the members of William Rast Sourcing and William Rast Licensing based on their respective percentage interests
in such entities and profits were allocated to the members based on their percentage interest to the extent that the member was
previously allocated losses.
Effective as of October
1, 2011, we recapitalized the ownership of our William Rast branded apparel business. As further described under Note 7 to our
consolidated financial statements, the recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing
and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as other consideration.
Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by TWR and Bella Rose is entitled
to all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing or William
Rast Licensing that is not paid to TWR.
Discontinued Operations of Wholesale
Business
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
(215,958
|
)
|
|
$
|
955,132
|
|
|
|
(122.6
|
)%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
1,264,178
|
|
|
|
(100.0
|
)%
|
|
|
$
|
(215,958
|
)
|
|
$
|
2,219,310
|
|
|
|
(109.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations of our wholesale business for the three months ended March 31, 2012 and 2011 represents the results
of operations of our People’s Liberation and William Rast wholesale business. In November 2011, we began to transition from
a wholesale and retail focused business to a brand management and licensing business. As a result, our retail operations included
in our William Rast Retail subsidiary were discontinued. In 2012, we also decided to discontinue our wholesale operations completely.
For the remainder of 2012, we will continue to sell William Rast and People’s Liberation branded apparel on a limited basis
through our domestic wholesale operations in order to liquidate our existing inventory. The decrease in income from discontinued
operations of our wholesale business in the first quarter of 2012 from the first quarter of 2011 was due primarily to non-recurring
income received in the
settlement of our litigation with Charlotte
Russe during the first quarter of 2011 and decreased revenue
received in the first quarter of 2012
,
offset by decreased operating expenses during the first quarter of 2012.
Discontinued Operations of Retail
Subsidiary
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(155,265
|
)
|
|
$
|
(330,406
|
)
|
|
|
(53.0
|
)%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
165,203
|
|
|
|
(100.0
|
)%
|
|
|
$
|
(155,265
|
)
|
|
$
|
(165,203
|
)
|
|
|
(6.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations of retail subsidiary for the three months ended March 31, 2012 and 2011 represents the results of operations of our
William Rast Retail subsidiary. In November 2011, we began to transition from a wholesale and retail focused business to a brand
management and licensing business. As a result, our retail operations included in our William Rast Retail subsidiary, which consisted
of four retail stores, were discontinued. We closed two of our retail stores in 2011 and the remaining two stores are expected
to be closed in the second and third quarters of 2012. The decrease in net loss from discontinued operations of our retail subsidiary
during the three months ended March 31, 2012 compared to the three months ended March 31, 2011 is due primarily to decreased operating
expenses, offset by decreased net revenue during the three months ended March 31, 2012.
Discontinued Operations of J. Lindeberg
Subsidiaries
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
(262,563
|
)
|
|
|
100.0
|
%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
131,281
|
|
|
|
(100.0
|
)%
|
|
|
$
|
-
|
|
|
$
|
(131,282
|
)
|
|
|
100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations of J. Lindeberg Subsidiaries for the three months ended March 31, 2011 represents the results of operations of our J.
Lindeberg subsidiaries during the period. We sold our 50% member interest in J. Lindeberg, USA on April 26, 2011. The gain on the
sale of member interest in subsidiary was recorded in the second quarter of 2011 and is further described in Note 9 to the consolidated
financial statements included elsewhere in this report.
Net (Loss) Income Attributable to
Common Stockholders
|
|
Three Months
Ended
March 31, 2012
|
|
|
Three Months
Ended
March 31, 2011
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(125,076
|
)
|
|
$
|
1,910,824
|
|
|
|
(106.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in net loss attributable to common stockholders for the three months ended March 31, 2012 compared to net income attributable
to common stockholders for the three months ended March 31, 2011 is due primarily to income received in the
settlement
of our litigation with Charlotte Russe and noncontrolling interest recorded during the first quarter of 2011, and a decrease in
income from discontinued operations in the first quarter of 2012, offset by an increased in income from continuing operations during
the first quarter of 2012, as discussed above.
Liquidity and Capital
Resources
As of March 31, 2012,
our continuing operations had cash and cash equivalents of approximately $9.8 million and a working capital balance of approximately
$8.3 million. As of March 31, 2011, our continuing operations had cash and cash equivalents of approximately $0.9 million, and
a working capital balance of approximately $682,000, and approximately $1.0 million of availability from our factors. As of March
31, 2011, net advances from our factors totaled approximately $1.9 million.
Cash
Flows from Continuing Operations
Cash flows from continuing
operations for operating, financing and investing activities for the three months ended March 31, 2012 and 2011 are summarized
in the following table:
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(1,354,035
|
)
|
|
$
|
63,777
|
|
Investing activities
|
|
|
(21
|
)
|
|
|
9,132
|
|
Financing activities
|
|
|
11,905,778
|
|
|
|
-
|
|
Net increase in cash
|
|
$
|
10,551,722
|
|
|
$
|
72,909
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash used in operating
activities from continuing operations was approximately $1.4 million for the three months ended March 31, 2012 and net cash provided
by operating activities from continuing operations was approximately $64,000 for the three months ended March 31, 2011. Net cash
used in operating activities from continuing operations for the three months ended March 31, 2012 was primarily a result of a decrease
in deferred license revenue and decreased accounts payable and accrued expenses. Net cash provided by operating activities from
continuing operations for the three months ended March 31, 2011 was primarily a result of net income earned during the period.
Investing Activities
Net cash used in investing
activities from continuing operations was approximately zero for the three months ended March 31, 2012 and net cash provided by
investing activities from continuing operations was approximately $9,000 for the three months ended March 31, 2011. Net cash provided
by investing activities from continuing operations for the three months ended March 31, 2011 consisted primarily of a decrease
in restricted cash, offset capital expenditures related to property and equipment, and trademarks.
Financing Activities
Net cash provided by
financing activities from continuing operations for the three months ended March 31, 2012 amounted to approximately $11.9 million
.
In February 2012, we received $14,500,000 in gross proceeds from the sale of senior secured convertible debentures. Net proceeds
from this transaction after the payment of closing, legal and other costs and the repayment of outstanding obligations related
to notes payable and our factoring agreement amounted to approximately $11.7 million.
There
were no financing activities from continuing operations for the three months ended March 31, 2011.
Cash Received from the Sale of Senior
Secured Convertible Debentures
In February 2012, we
raised $14,500,000 in gross proceeds from TCP WR Acquisition, LLC. Net proceeds from this transaction after the payment of closing,
legal and other costs and the repayment of outstanding obligations related to notes payable and our factoring agreement amounted
to approximately $11.7 million.
Cash Received from the Sale of our 50%
Membership Interest in J. Lindeberg USA
On April 26, 2011,
we completed the sale of Bella Rose’s 50% membership interest in J. Lindeberg USA to J. Lindeberg USA Corp. pursuant to the
terms of a Unit Purchase Agreement entered into by the parties on April 7, 2011. In consideration for Bella Rose’s 50% member
interest in Lindeberg USA, J. Lindeberg USA Corp. agreed to pay us an aggregate of $1,650,000, of which $900,000 was paid upon
the closing of the transaction and $750,000 was paid on the six month anniversary of the closing of the transaction.
Cash Received from
our Settlement with Charlotte Russe
On February 3, 2011,
we (along with the other parties to the litigation) settled our litigation with Charlotte Russe Holding, Inc. Pursuant to the settlement,
we received $3.5 million, after the distribution of amounts owed under the terms of an asset purchase agreement entered into by
us with two related parties pursuant to which we sold 50% of the net proceeds, after contingent legal fees and expenses, that may
be received by us as a result of the litigation, and the payment of legal fees and expenses. We also received proceeds of $750,000
in the third quarter of 2010 relating to the litigation in connection with the asset purchase agreement, for total proceeds related
to the litigation of $4.3 million. The settlement included the dismissal with prejudice of all claims pending between the parties
as well as mutual releases, without any admission of liability or wrongdoing by any of the parties to the actions.
Cash Provided from Factoring Agreements
On October 7, 2010,
William Rast Sourcing entered into a factoring agreement with Rosenthal & Rosenthal, Inc and beginning July 28, 2008 through
April 26, 2011, our subsidiary, J. Lindeberg USA, entered into various factoring arrangements with FTC Commercial Corp ("FTC").
As a result of the sale of our 50% member interest in J. Lindeberg USA on April 26, 2011, our interest in the factoring facility
with FTC was terminated. In February 2012, we also terminated all of our factoring and related agreements with Rosenthal &
Rosenthal and all obligations owed to Rosenthal & Rosenthal were paid in full from proceeds received from our transaction with
TWR.
While our factoring
arrangements were in place, our factors purchased our eligible accounts receivable and assumed the credit risk with respect to
those accounts for which the factors had given their prior approval. If the factor did not assume the credit risk for a receivable,
the collection risk associated with the receivables remained with us.
As of March 31, 2011,
total factored accounts receivable included in due to factor amounted to approximately $2.3 million. Outstanding advances, net
of matured funds, amounted to approximately $1.9 million as of March 31, 2011, and are included in the due from factor balance.
Future Capital Requirements
We believe the cash
received from our senior secured convertible debentures will be sufficient enough to meet our capital requirements for the next
twelve months, as they relate to our current operations and our growth strategies in the near term. The extent of our future capital
requirements will depend on many factors, including our results of operations and growth through the acquisition of additional
brands.
Contractual Obligations and Off-Balance
Sheet Arrangements
The following summarizes our contractual
obligations at March 31, 2012 and the effects such obligations are expected to have on liquidity and cash flows in future periods:
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
1-3
|
|
|
|
4-5
|
|
|
|
After
|
|
Contractual Obligations
|
|
|
Total
|
|
|
|
1 Year
|
|
|
|
Years
|
|
|
|
Years
|
|
|
|
5 Years
|
|
Operating leases
|
|
$
|
5,986,648
|
|
|
$
|
780,071
|
|
|
$
|
2,399,566
|
|
|
$
|
1,479,087
|
|
|
$
|
1,327,924
|
|
Senior secured convertible debentures
|
|
|
14,500,000
|
|
|
|
-
|
|
|
|
14,500,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
20,486,648
|
|
|
$
|
780,071
|
|
|
$
|
16,899,566
|
|
|
$
|
1,479,087
|
|
|
$
|
1,327,924
|
|
At March 31, 2012,
approximately $35,000 of the Company’s cash is held under lease lines as collateral to secure the Company’s lease agreements.
At March 31, 2012 and
2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
Factored accounts receivable
may subject us to off-balance sheet risk. We sold the majority of our trade accounts receivable to our factor and were contingently
liable to the factor for merchandise disputes, other customer claims and invoices that were not credit approved by the factors.
From time to time, our factor also issued letters of credit and vendor guarantees on our behalf. There were no outstanding letters
of credit or vendor guarantees as of March 31, 2012 and 2011. Ledger debt (payables to suppliers that use the same factor as the
Company) amounted to approximately $26,000 at March 31, 2011. There was no ledger debt as of March 31, 2012.
Recent Accounting Pronouncements
See Note 3 to Notes
to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected
dates of adoption and effects on results of operations and financial condition.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation
of Controls and Procedures
Members of our
management, including our Chief Executive Officer and Chief Financial Officer, Colin Dyne, have evaluated the effectiveness of
our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of March 31, 2012,
the end of the period covered by this report. Based upon that evaluation, Mr. Dyne concluded that our disclosure controls and procedures
were effective as of March 31, 2012.
Changes
in Internal Control Over Financial Reporting
There were no changes
in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph
(d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the first quarter ended March 31, 2012 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to
certain legal proceedings and claims arising in connection with the normal course of our business. In the opinion of
management, other than as described in Note 13 of the accompanying consolidated financial statements, which description is
incorporated herein by reference, there are currently no claims that could have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
Item 1A. Risk Factors
Cautionary Statements and Risk Factors
This Quarterly Report
on Form 10-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties. Our actual results
could differ materially from those anticipated in those forward-looking statements as a result of various factors, including those
set forth in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to such risk
factors during the three months ended March 31, 2012.
Item 6. Exhibits
The following exhibits
are filed as part of this report:
Exhibit Number
|
Exhibit Title
|
3.1
|
Amended and Restated Certificate of Incorporation of Sequential Brands Group, Inc. Incorporated by referenced to Exhibit 3.1 to our Current Report on Form 8-K (dated July 14, 2008), filed on July 18, 2008.
|
3.2
|
Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock. Incorporated by referenced to Exhibit 3.1 to our Current Report on Form 8-K (dated February 2, 2012), filed on February 8, 2012.
|
3.3
|
Certificate of Ownership and Merger merging Sequential Brands Group, Inc. with and into People’s Liberation, Inc. Incorporated by referenced to Exhibit 3.3 to our Annual Report on Form 10-K, filed on February 8, 2012.
|
10.1
|
Securities Purchase Agreement, dated February 2, 2012, between the Company and each purchaser identified on the signature page thereto. Incorporated by referenced to Exhibit 10.1 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
|
10.2
|
Form of Debenture. Incorporated by referenced to Exhibit 10.2 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
|
10.3
|
Form of Warrant. Incorporated by referenced to Exhibit 10.3 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
|
10.4
|
Stockholders Agreement dated February 22, 2012, by and among the Company, Colin Dyne, TCP WR Acquisition, LLC, and the other stockholders party thereto. Incorporated by referenced to Exhibit 10.4 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
|
10.5
|
Security Agreement, dated February 3, 2012, by and among the Company, certain subsidiaries of the Company and the holders of the Company’s Variable Rate Senior Secured Convertible Debentures signatory thereto. Incorporated by referenced to Exhibit 10.5 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
|
10.6
|
Subsidiary Guarantee, dated February 3, 2012, by and among certain subsidiaries of the Company in favor of the purchasers signatory to that certain Securities Purchase Agreement, dated February 2, 2012, between the Company and such purchasers. Incorporated by referenced to Exhibit 10.6 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
|
31.1*
|
Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
|
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 Act of 2002.
|
101.INS***
|
XBRL Instance Document
|
101.SCH***
|
XBRL Taxonomy Extension Schema Document
|
101.CAL***
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF***
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB***
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE***
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
***
|
XBRL information is furnished and not filed or a part
of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed
not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability
under these sections.
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
SEQUENTIAL BRANDS GROUP, INC.
|
|
|
Date: May 15, 2012
|
/s/
Colin Dyne
By: Colin Dyne
Its: Chief Executive Officer and Chief
Financial
Officer (Principal Executive, Financial and Accounting Officer)
|
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