NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Overview
Sequential Brands Group, Inc. (“the Company”), through its wholly-owned and majority-owned subsidiaries, owns a portfolio of consumer brands, including
Ellen Tracy
,
William Rast
,
Revo,
Caribbean Joe
,
Heelys
,
DVS
,
The Franklin Mint
and
People’s Liberation
. The Company promotes, markets, and licenses these brands and intends to pursue acquisitions of additional brands or rights to 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 its licensing arrangements, the Company’s licensing partners are responsible for designing, manufacturing and distributing the Company’s licensed products, subject to the Company’s continued oversight and marketing support. We currently have more than 50 licensees, up from eight at the end of 2012, almost all of which are wholesale licensees. In a wholesale license, a wholesale supplier is granted rights (typically on an exclusive basis) to a single or small group of related product categories for sale to multiple accounts within an approved channel of distribution and territory. Also, as part of our business strategy, we have previously entered into (and expect in the future to enter into) direct-to-retail licenses. In a direct-to-retail license, a single retailer is granted the right (typically on an exclusive basis) to sell branded products in a broad range of product categories through its brick and mortar stores and e-commerce sites.
In the second half of 2011, the Company changed its business model to focus on licensing and brand management. Prior to this, the Company designed, marketed and provided, on a wholesale basis, branded apparel and accessories, as well as operated retail stores to sell its branded products. In the second half of 2011, the Company discontinued its wholesale distribution of branded apparel and apparel accessories, liquidated its existing inventory and closed its remaining retail stores. 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidation.
Discontinued Operations
The Company accounted for the decisions to close down its wholesale and retail operations as discontinued operations in accordance with the guidance provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Subsequent Events
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are filed for potential recognition or disclosure. Any material events that occur between the balance sheet date and filing date are disclosed as subsequent events, while the consolidated financial statements are adjusted to reflect any conditions that exist at the balance sheet date.
Revenue Recognition
The Company has entered into various trade name license agreements that provide revenues based on minimum royalties and advertising/marketing fees and additional revenues based on a percentage of defined sales. Minimum royalty and advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, 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 recorded as deferred revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Revenue is not recognized unless collectability is reasonably assured.
If licensing arrangements are terminated prior to the original licensing period, the Company will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable.
Restricted Cash
The Company did not have any restricted cash as of December 31, 2013. As of December 31, 2012, the Company had approximately $
35
of restricted cash which was used to collateralize certain obligations.
Accounts Receivable
Accounts receivable are recorded net of allowances for doubtful accounts, based on the Company’s ongoing discussions with its licensees, and its evaluation of each licensee’s payment history and account aging. Account balances deemed to be uncollectible are charged to the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was $
135
and $
0
at December 31, 2013 and 2012, respectively.
Property and Equipment
Property and equipment are stated at cost,
less accumulated depreciation and amortization
. Maintenance and repairs are charged to expense as incurred. Upon retirement or other disposition of property and equipment, applicable cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are included in results of operations.
Depreciation and amortization of property and equipment is computed using the straight-line method based on estimated useful lives of the assets as follows:
Furniture and fixtures
|
|
5 years
|
|
Office equipment
|
|
5 to 7 years
|
|
Machinery and equipment
|
|
5 to 7 years
|
|
Leasehold improvements
|
|
Term of the lease or the estimated life of the related improvements, whichever is shorter.
|
|
Computer Software
|
|
5 years
|
|
Deferred Financing Costs
Direct costs incurred in connection with issuing debt securities or obtaining debt or other credit arrangements are recorded as deferred financing costs and are amortized as interest expense, using the effective interest method, over the term of the related debt.
Convertible Instruments
The Company reviews all of its convertible instruments for the existence of an embedded conversion feature which may require bifurcation if certain criteria are met. The criteria, if met, require companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments. These three criteria include circumstances in which:
|
(a)
|
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract,
|
|
(b)
|
the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and
|
|
(c)
|
a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to certain requirements (except for when the host instrument is deemed to be conventional).
|
S
EQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
The Company reviews all of its convertible instruments for the existence of a beneficial conversion feature. Upon the determination that a beneficial conversion feature exists, the beneficial conversion feature would be recorded as a discount from the face amount of the respective debt instrument based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized to interest expense over the term of the related debt. If the instrument is converted prior to the original maturity of the debt, the remaining unamortized discount is charged to expense at the conversion date.
Treasury Stock
Treasury stock is recorded at cost as a reduction of stockholders’ equity in the accompanying consolidated balance sheets.
Preferred Stock
Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies preferred stock in stockholders’ equity.
The Company’s preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not solely within its control as of December 31, 2013 and 2012. Accordingly, all issuances of preferred stock are presented as a component of stockholders’ equity.
Common Stock Purchase Warrants and Derivative Financial Instruments
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other freestanding derivatives, if any, at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company determined that its outstanding common stock purchase warrants satisfied the criteria for classification as equity instruments at December 31, 2013 and 2012.
Advertising
Advertising costs related to media ads are charged to expense as of the first date the advertisements take place. Advertising costs related to campaign ads, such as production and talent, are expensed over the term of the related advertising campaign. Advertising expenses included in operating expenses approximated $
1,583
and $
604
for the years ended December 31, 2013 and 2012, respectively.
Stock-Based Compensation
Compensation cost for restricted stock is measured using the quoted market price of the Company’s common stock at the date the common stock is granted. For restricted stock where restrictions lapse with the passage of time (“time-based restricted stock”), compensation cost is recognized over the period between the issue date and the date that restrictions lapse. Time-based restricted stock is included in total common shares outstanding upon the lapse of any restrictions. For restricted stock where restrictions are based on performance measures (“performance-based restricted stock”), restrictions lapse when those performance measures have been deemed earned. Performance-based restricted stock is included in total common shares outstanding upon the lapse of any restrictions. Performance-based restricted stock is included in total diluted shares outstanding when the performance measures have been deemed earned but not issued.
Compensation cost for stock options, in accordance with accounting for share-based payment under GAAP, is calculated using the Black-Scholes valuation model based on awards ultimately expected to vest, reduced for estimated forfeitures, and expensed on a straight-line basis over the requisite service period of the grant. Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture experience and will be revised in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes
Current income taxes are based on the respective periods’ taxable income for federal and state income tax reporting purposes. Deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(d
ollars are in thousands (unless otherwise noted), except share and per share data)
The Company applies the FASB guidance on accounting for uncertainty in income taxes. The guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with other authoritative GAAP, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also addresses derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of the guidance did not have a significant effect on its accounting and disclosures for income taxes. At December 31, 2013 and 2012, the Company has certain unrecognized tax benefits, included as a component of long-term liabilities held for disposition from discontinued operations of wholesale operations subsidiary, and does not expect a material change in the next twelve months. Interest and penalties related to uncertain tax positions, if any, are recorded in income tax expense. Tax years that remain open for assessment for federal and state tax purposes include the years ended December 31, 2010 through 2013.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the year, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period, including stock options and warrants, using the treasury stock method, and convertible debt, using the if-converted method. Diluted EPS excludes all potentially dilutive shares of common stock if their effect is anti-dilutive.
The computation of basic and diluted EPS for the years ended December 31, 2013 and 2012 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Senior secured convertible debentures
|
|
0
|
|
5,523,810
|
|
Warrants
|
|
1,744,922
|
|
2,250,762
|
|
Unvested restricted stock
|
|
464,847
|
|
357,147
|
|
Stock options
|
|
413,667
|
|
404,800
|
|
|
|
2,623,436
|
|
8,536,519
|
|
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk consist primarily of cash. Cash is held for use for working capital needs and/or future acquisitions. At times, our cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
Customer Concentrations
The following table shows significant concentrations in our revenues and accounts receivable for the periods indicated:
|
|
Percentage of Revenue
|
|
Percentage of Accounts
|
|
|
|
During the Years Ended
|
|
Receivable at
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Customer A
|
|
18
|
%
|
63
|
%
|
14
|
%
|
74
|
%
|
Customer B
|
|
11
|
%
|
0
|
%
|
11
|
%
|
0
|
%
|
Customer C
|
|
10
|
%
|
0
|
%
|
35
|
%
|
0
|
%
|
Customer D
|
|
7
|
%
|
0
|
%
|
11
|
%
|
0
|
%
|
Customer E
|
|
1
|
%
|
10
|
%
|
0
|
%
|
20
|
%
|
Customer F
|
|
0
|
%
|
14
|
%
|
0
|
%
|
0
|
%
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Noncontrolling Interest
Noncontrolling interest from continuing operations recorded for the years ended December 31, 2013 and 2012 represents income and loss allocations to Elan Polo International, Inc. (“Elan Polo”), a member of DVS Footwear International, LLC (“DVS LLC”), net of member distributions (see Note 6)
.
Reportable Segment
An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited extent. Our chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance. Accordingly, we only have a single operating and reportable segment. In addition, we have no foreign operations or any assets in foreign locations. All of our domestic operations are consisted of a single revenue stream which is the licensing of our trademark portfolio.
Loss Contingencies
We recognize contingent losses that are both probable and estimable. In this context, we define probability as circumstances under which events are likely to occur. In regards to legal costs, we record such costs as incurred.
Recently Issued Accounting Standards
In July 2012, the FASB issued ASU No. 2012-02,
Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
(
“
ASU 2012-02”)
,
allowing entities the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If the qualitative assessment indicates it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no testing is required. ASU 2012-02 is effective for reporting periods beginning January 1, 2013. The adoption of this update did not have a material impact on the consolidated financial statements but may have an impact in future periods.
In February 2013, the FASB issued ASU 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
(“ASU 2013-02”). ASU 2013-02 is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. Accordingly, an entity is required to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 effective January 1, 2013 and the adoption did not have a material impact on the Company’s consolidated financial statements but may have an impact in future periods.
NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820-10,
Fair Value Measurements and Disclosures
(“ASC 820-10”), defines fair value, establishes a framework for measuring fair value in GAAP and provides for expanded disclosure about fair value measurements. ASC 820-10 applies to all other accounting pronouncements that require or permit fair value measurements.
The Company determines or calculates the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments while estimating for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.
Assets and liabilities typically recorded at fair value on a non-recurring basis to which ASC 820-10 applies include:
|
•
|
Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination, and
|
|
•
|
Long-lived assets measured at fair value due to an impairment assessment under ASC 360-10-15,
Impairment or Disposal of Long-Lived Assets
.
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
This topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 requires that assets and liabilities recorded at fair value be classified and disclosed in one of the following three categories:
|
•
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
|
|
•
|
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
•
|
Level 3 inputs are unobservable and are typically based on the Company’s own assumptions, including situations where there is little, if any, market activity. Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 classification. As a result, the unrealized gains and losses for assets within the Level 3 classification may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company classifies such financial assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
As of December 31, 2013 and 2012, there are no assets or liabilities that are required to be measured at fair value on a recurring basis. The following table sets forth the carrying value and the fair value of the Company’s financial assets and liabilities required to be disclosed at December 31, 2013 and 2012:
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instrument
|
|
Level
|
|
|
12/31/13
|
|
|
12/31/12
|
|
|
12/31/13
|
|
|
12/31/12
|
|
Cash
|
|
1
|
|
$
|
25,125
|
|
$
|
2,624
|
|
$
|
25,125
|
|
$
|
2,624
|
|
Restricted cash
|
|
1
|
|
$
|
-
|
|
$
|
35
|
|
$
|
-
|
|
$
|
35
|
|
Accounts receivable
|
|
2
|
|
$
|
5,286
|
|
$
|
476
|
|
$
|
5,286
|
|
$
|
476
|
|
Accounts payable
|
|
2
|
|
$
|
1,597
|
|
$
|
3,720
|
|
$
|
1,597
|
|
$
|
3,720
|
|
Term loans
|
|
3
|
|
$
|
57,931
|
|
$
|
-
|
|
$
|
53,640
|
|
$
|
-
|
|
Senior secured convertible debentures
|
|
3
|
|
$
|
-
|
|
$
|
3,502
|
|
$
|
-
|
|
$
|
12,594
|
|
The carrying amounts of the Company’s cash, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities. The remaining financial assets and liabilities are comprised of the Term Loans and the Debentures. The Company estimated the fair value of the Debentures at December 31, 2012 by performing discounted cash flow analyses using an appropriate market discount rate. The Company calculated the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or LIBOR rates for variable-rate debt, for maturities that correspond to the maturities of its debt adding appropriate credit spreads derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as the Company’s credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.
For purposes of this fair value disclosure, the Company based its fair value estimate for the Term Loans on its internal valuation whereby the Company applied the discounted cash flow method to its expected cash flow payments due under the Loan Agreements based on market interest rate quotes as of December 31, 2013 and 2012 for debt with similar risk characteristics and maturities.
NOTE 4 DISCONTINUED OPERATIONS OF WHOLESALE BUSINESS
Discontinued operations as of December 31, 2013 mainly represent the wind down costs related to the Heelys, Inc. (“Heelys”) legacy operating business, as a result of the Company’s decision to discontinue its wholesale business related to the
Heelys
brand. As of December 31, 2013, costs attributable to the Heelys legacy operations mainly represent severance expense, lease termination costs and professional and other fees. Discontinued operations as of December 31, 2012 represent the Company’s decision to discontinue its wholesale business related to its
People’s Liberation
and
William Rast
branded products.
A summary of the Company’s results of discontinued operations of its wholesale business for the years ended December 31, 2013 and 2012 and the Company’s assets and liabilities from discontinued operations of its wholesale business as of December 31, 2013 and 2012 are as follows:
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Results of discontinued wholesale operations:
|
|
Years Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
0
|
|
$
|
943
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations of wholesale business, net of tax
|
|
$
|
(6,244)
|
|
$
|
(985)
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations, basic and diluted
|
|
$
|
(0.35)
|
|
$
|
(0.41)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
17,713,140
|
|
|
2,413,199
|
|
Assets and liabilities of discontinued wholesale operations:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Accounts receivable
|
|
$
|
0
|
|
$
|
0
|
|
Prepaid expenses and other current assets
|
|
$
|
213
|
|
$
|
0
|
|
Long-term assets
|
|
$
|
0
|
|
$
|
4
|
|
Accounts payable and accrued expenses
|
|
$
|
1,105
|
|
$
|
957
|
|
Long-term liabilities
|
|
$
|
884
|
|
$
|
0
|
|
NOTE 5 DISCONTINUED OPERATIONS OF RETAIL SUBSIDIARY
Discontinued operations as of December 31, 2012 represent the Company’s decision to discontinue its retail operations included in its subsidiary, William Rast Retail, LLC (“Rast Retail”). The Company discontinued its retail operations included in Rast Retail and closed the retail stores in 2012.
A summary of the Company’s results of discontinued operations of Rast Retail for the years ended December 31, 2013 and 2012 and the Company’s liabilities from discontinued operations of Rast Retail as of December 31, 2013 and 2012 is as follows:
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Results of discontinued retail operations:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
0
|
|
$
|
707
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations of retail subsidiary, net of tax
|
|
$
|
0
|
|
$
|
(795)
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations, basic and diluted
|
|
$
|
(0.00)
|
|
$
|
(0.33)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
17,713,140
|
|
|
2,413,199
|
|
Liabilities of discontinued retail operations:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Accounts payable and accrued expenses
|
|
$
|
0
|
|
$
|
394
|
|
NOTE 6 - ACQUISITIONS
Acquisition of the DVS Brand
In June 2012, the Company completed a series of transactions which included (i) its acquisition of assets relating to the consumer product brands
DVS
and
Matix
, (ii) its sale of all of its acquired assets relating to the
Matix
brand and certain tangible assets related to the
DVS
brand, but excluding its intellectual property rights in the
DVS
brand, (iii) the contribution of the trademarks relating to the
DVS
brand into DVS LLC, and (iv) the entry into a license agreement in relation to the
DVS
brand, all as further described below. This acquisition was effected in order to develop and build the Company’s diversified portfolio of consumer brands.
|
(i)
|
Completion of DVS Acquisition
|
On June 26, 2012, the Company acquired from DVS Shoe Co., Inc. (“DVS Shoe Co
.
”) substantially all of DVS Shoe Co.’s assets relating to its consumer product brands
DVS
and
Matix
pursuant to the terms of a purchase and sale agreement entered into on June 20, 2012. In consideration for the assets, which primarily consisted of inventory, accounts receivable, trademarks and other intellectual property rights, the Company paid $
8,550
in cash to DVS Shoe Co. The acquisition of assets was treated as the acquisition of a business for accounting purposes.
|
(ii)
|
Entry into Purchase and Sale Agreement with Westlife Distribution USA, LLC.
|
Following the acquisition, on June 28, 2012, the Company entered into a purchase and sale agreement with Westlife Distribution USA, LLC (“Westlife”). Pursuant to the agreement, the Company sold the assets relating to its acquired
Matix
brand, including all trademarks and other intellectual property relating to the
Matix
brand, other intangibles, inventory of
Matix
branded products, prepaids and accounts receivable. On June 29, 2012, upon the closing of the transactions contemplated by the purchase and
s
ale agreement, the Company received $
2,950
million in cash from Westlife.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
|
(iii)
|
Entry into Collaboration with Elan Polo International, Inc.
|
In connection with the acquisition, the Company received a 65% economic interest in DVS LLC. DVS LLC is a collaboration between the Company and Elan Polo. DVS LLC was formed for the purpose of licensing the
DVS
trademark to third parties primarily in connection with the manufacturing, distribution, marketing and sale of
DVS
branded footwear, apparel and apparel accessories. In exchange for its 65% economic interest in DVS LLC, the Company contributed trademarks and other intellectual property rights relating to the
DVS
brand to DVS LLC.
In exchange for its 35% economic interest in DVS LLC, Elan Polo contributed $
2,124
in cash to the newly formed entity. Elan Polo’s minority member interest in DVS LLC has been reflected as noncontrolling interest on the Company’s consolidated balance sheet.
In connection with the formation of DVS LLC, the Company and Elan Polo entered into a limited liability company operating agreement of DVS LLC on June 29, 2012 (the “Operating Agreement”). Subject to certain exceptions, the Operating Agreement provides that the Company has the right to manage, control and conduct the business affairs of DVS LLC. The Operating Agreement provides that the Company will receive
65
% of the distributions and allocation of net profits and losses of DVS LLC and
60
% of the distributable assets upon dissolution of DVS LLC.
|
(iv)
|
Entry into License Agreement with Elan Polo International, Inc.
|
On June 29, 2012, DVS LLC entered into a license agreement with Elan Polo. Pursuant to the agreement, DVS LLC granted to Elan Polo an exclusive license (subject to certain exceptions) to use the
DVS
trademark in connection with the worldwide manufacture, distribution, marketing and sale to approved customers of men’s, women’s and children’s footwear. Unless otherwise terminated earlier pursuant to its terms, the agreement will continue through December 31, 2019. Subject to the satisfaction of certain conditions, Elan Polo may elect to extend the term of the agreement for two additional renewal terms of five years each.
During the term of the agreement, Elan Polo has agreed to pay DVS LLC royalties that are based on a percentage of net sales of DVS licensed products. Royalties are payable on a quarterly basis, and Elan Polo has guaranteed the payment to DVS LLC of certain minimum royalties during each contract year of the agreement.
In connection with the entry into the license agreement with Elan Polo, the Company also sold its DVS branded inventory, purchase orders, customer lists and other intangible assets acquired from DVS Shoe Co. to Elan Polo for $
640
, its estimated fair market value.
Accounting for the DVS Transactions
The aggregate purchase price of the acquisition amounted to $
8,550
million. The allocation of the purchase price is summarized as follows:
Matix and DVS non-core assets
|
|
$
|
3,590
|
|
Accounts and other receivables
|
|
|
891
|
|
Trademarks
|
|
|
4,069
|
|
Total acquisition price
|
|
$
|
8,550
|
|
The acquisition of the DVS brand was accounted for under the acquisition method of accounting. Accordingly, the net assets acquired were recorded at their estimated fair values, and operating results for
DVS
are included in the consolidated financial statements from the effective date of acquisition of June 26, 2012. There was no excess of purchase price over the fair value of the assets acquired and therefore no resulting goodwill upon the acquisition.
The DVS trademarks will be amortized over their expected useful lives of
fifteen
years. Legal and other fees related to the transaction of $
1,145
were included in operating expenses in the accompanying consolidated statement of operations for the year ended December 31, 2012.
The Company immediately sold the assets of the
Matix
brand to an unaffiliated company and its acquired DVS branded inventory to Elan Polo for an aggregate amount of $
3,590
. The Company did not recognize a gain or loss on these transactions as it considered the purchase price of the
Matix
assets and the DVS branded inventory to be equivalent to the fair value of the assets on the date of the transactions.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Acquisition of Heelys, Inc.
On January 24, 2013, the Company completed its acquisition of Heelys pursuant to the agreement and plan of merger (the “Heelys Merger Agreement”), dated as of December 7, 2012, by and among Heelys, the Company and Wheels Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company. In accordance with the Heelys Merger Agreement, the Company acquired all of the outstanding shares of common stock of Heelys at a purchase price of $
2.25
per share in cash, for an aggregate consideration of approximately $
62,974
. The purchase was funded with cash and investments from Heelys of approximately $
55,451
and with cash from the Company of approximately $
7,523
. Cash and investments provided by Heelys for the acquisition were not acquired by the Company upon acquisition, but instead were distributed directly to the Heelys’ stockholders at the closing. The acquisition of Heelys was effected in order to develop and build the Company’s diversified portfolio of consumer brands.
In connection with the acquisition of Heelys, the Company entered into a multi-country exclusive license agreement (the “Heelys License Agreement”) with BBC International LLC (“BBC”) to license the trademark “
Heelys
” and all existing derivative brands, including (i) Heelys, (ii) Sidewalk Sports, (iii) Nano, and (iv) Soap (collectively, the “Marks”). The Heelys License Agreement grants an exclusive, nontransferable, non-assignable license, without the right to sub-license, to use the Marks and certain proprietary rights, including patents, in connection with the manufacturing, distribution, advertising and sale of wheeled footwear and footwear without wheels (the “Licensed Products”), subject to the terms and conditions stated in the Heelys License Agreement. The initial term of the Heelys License Agreement expires on June 30, 2019, subject to BBC’s right to renew the Heelys License Agreement for two additional five year periods based on its achievement of certain royalty thresholds.
The acquisition of Heelys was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values, and operating results for Heelys are included in the consolidated financial statements from the effective date of acquisition of January 24, 2013. Accounting standards require that when the fair value of the net assets acquired exceeds the purchase price, resulting in a bargain purchase of a business, the acquirer must reassess the reasonableness of the values assigned to all of the net assets acquired, liabilities assumed and consideration transferred. The Company performed such a reassessment and concluded that the values assigned for the Heelys acquisition are reasonable. Consequently, the Company recognized a gain on bargain purchase in the amount of $
227
arising from the acquisition of Heelys
, which has been recorded as a component of operating expenses in the accompanying consolidated statement of operations during the year ended December 31, 2013
. There was no goodwill as a result of the acquisition.
The allocation of the purchase price is summarized as follows:
Cash consideration paid by the Company
|
|
$
|
7,523
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Cash
|
|
$
|
2,447
|
|
Accounts receivable
|
|
|
4,733
|
|
Prepaid expenses and other current assets
|
|
|
1,610
|
|
Property and equipment
|
|
|
311
|
|
Other assets
|
|
|
12
|
|
Current liabilities
|
|
|
(4,528)
|
|
Deferred tax liability
|
|
|
(2,553)
|
|
Other long term liabilities
|
|
|
(760)
|
|
Net assets acquired
|
|
|
1,272
|
|
Trademarks
|
|
|
6,383
|
|
Patents
|
|
|
95
|
|
Gain on bargain purchase of business
|
|
|
(227)
|
|
|
|
$
|
7,523
|
|
Trademarks have been determined by management to have an indefinite useful life and accordingly, no amortization is recorded in the Company’s consolidated statement of operations. Trademarks are subject to a test for impairment on an annual basis, or sooner if an event occurs or circumstances change that indicate that the carrying amount of the trademarks may not be recoverable. Patents are amortized on a straight-line basis over their expected useful lives of ten years.
In connection with the acquisition, the Company granted a consultant
5
-year warrants to purchase up to an aggregate of
28,000
shares of the Company’s common stock at an exercise price of $
6.01
per share. The warrants had a fair value of $
90
using the Black-Scholes option-pricing model utilizing the following assumptions: dividend yield of zero, a risk-free interest rate of
0.87
%, expected term of
five
years and an expected volatility of
64
%. The Company incurred legal and other costs related to the transaction of approximately $
1,621
, of which approximately $
673
was recognized during the year ended December 31, 2012 and approximately $
948
was recognized in operating expenses in the accompanying consolidated statement of operations during the year ended December 31, 2013.
Because this acquisition was a stock purchase for tax purposes, the Company did not obtain a stepped-up tax basis in Heelys’ assets. A deferred tax liability of $
2,553
was established as part of the acquisition accounting to reflect the difference between the fair value of the acquired intangibles on the date of acquisition and the carryover tax basis of the intangibles.
Upon acquisition, the Company discontinued Heelys wholesale legacy operations as it transitioned the business to a licensing and brand management model. Accordingly, Heelys assets and liabilities at December 31, 2013, as well as its results of operations from the date of acquisition through December 31, 2013, related to the wholesale business have been reclassified to discontinued operations (see Note 4).
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Total revenues and income from continuing operations since the date of acquisition, included in the consolidated statement of operations for the year ended December 31, 2013, are $
1,683
and $
1,557
, respectively.
Acquisition of Ellen Tracy and Caribbean Joe Brands
On March 28, 2013, the Company entered into a purchase agreement (the “BM Purchase Agreement”), by and among the Company, ETPH Acquisition, LLC, (“ETPH”) and B®and Matter, LLC (“Brand Matter”), pursuant to which the Company acquired from ETPH all of the outstanding equity interests of Brand Matter (the “Ellen Tracy and Caribbean Joe Acquisition”) for an aggregate purchase price consisting of (i) approximately $62,285 of cash, subject to adjustment as set forth in the BM Purchase Agreement, (ii) 2,833,590 shares of the Company’s common stock, and (iii) 5-year warrants to purchase up to an aggregate of 125,000 shares of the Company’s common stock at an exercise price equal to $10.00 per share.
In connection with the Ellen Tracy and Caribbean Joe Acquisition, the Company entered into a (i) first lien term loan agreement, dated as of March 28, 2013 (“First Lien Loan Agreement”), which provides for term loans of up to $
45,000
and (ii) a second lien term loan, dated as of March 28, 2013 (“Second Lien Loan Agreement” and, together with the First Lien Loan Agreement, the “Loan Agreements”), which provides for term loans of up to $
20,000
(see Note 12). The proceeds from these term loans were used to fund the Ellen Tracy and Caribbean Joe Acquisition, repay existing debt, pay fees and expenses in connection with the foregoing, finance capital expenditures and for general corporate purposes. The Ellen Tracy and Caribbean Joe Acquisition was effected to complete the Company’s base platform through acquiring two strong brands,
Ellen Tracy
and
Caribbean Joe
, with a proven team.
The Ellen Tracy and Caribbean Joe Acquisition was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values, and operating results for Brand Matter are included in the consolidated financial statements from the effective date of acquisition of March 28, 2013.
The allocation of the purchase price is summarized as follows:
Cash paid
|
|
$
|
62,285
|
|
Fair value of common stock issued (2,833,590 shares)
|
|
|
19,835
|
|
Fair value of warrants issued (125,000 warrants)
|
|
|
393
|
|
Total consideration paid
|
|
$
|
82,513
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Cash
|
|
$
|
140
|
|
Current assets
|
|
|
316
|
|
Property and equipment
|
|
|
101
|
|
Other assets
|
|
|
146
|
|
Current liabilities
|
|
|
(1,172)
|
|
Net liabilities assumed
|
|
|
(469)
|
|
Trademarks
|
|
|
81,349
|
|
Customer agreements
|
|
|
1,000
|
|
Goodwill
|
|
|
633
|
|
|
|
$
|
82,513
|
|
The fair value of the common stock issued was determined using the closing market price of the Company’s common stock on March 28, 2013. The fair value of the warrants issued was determined using the Black-Scholes option-pricing model utilizing the following assumptions: dividend yield of zero, a risk-free interest rate of
0.77
%, expected term of
five
years and an expected volatility of
64
%.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Goodwill arising from the Ellen Tracy and Caribbean Joe Acquisition mainly consists of the synergies of an ongoing licensing and brand management business and an experienced, assembled workforce. The Company’s goodwill is deductible for tax purposes and will be amortized for tax purposes over a period of fifteen years. Trademarks have been determined by management to have an indefinite useful life and accordingly, no amortization is recorded in the Company’s consolidated statement of operations. Goodwill and trademarks are subject to a test for impairment on an annual basis, or sooner if an event occurs or circumstances change that indicate that the carrying amount of the goodwill and/or trademarks may not be recoverable. Customer agreements are amortized on a straight-line basis over their expected useful lives of four years. The Company incurred legal and other costs related to the transaction of approximately $2,610, of which approximately $879 was recognized during the year ended December 31, 2012 and approximately $1,731 was recognized in operating expenses in the accompanying consolidated statement of operations during the year ended December 31, 2013.
Total revenues and income from continuing operations since the date of the Ellen Tracy and Caribbean Joe Acquisition, included in the consolidated statements of operations for the year ended December 31, 2013, are $
11,807
and $
7,637
, respectively. Loss from continuing operations for the year ended December 31, 2013 includes the non-cash deferred tax expense related to the acquired trademarks of $
1,786
.
Acquisition of the Revo Brand
On August 2, 2013, the Company entered into an asset purchase agreement (the “Revo Purchase Agreement”), by and among the Company, SBG Revo Holdings, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (“SBG Revo”), and Oakley, Inc., a Washington corporation (“Oakley”), pursuant to which SBG Revo acquired certain assets (other than certain specified excluded assets) of Oakley and certain of its affiliates (the “Purchased Assets”). Under the terms of the Revo Purchase Agreement, SBG Revo paid Oakley and certain of its affiliates an aggregate purchase price of $
20,125
in cash and acquired the Purchased Assets. The Purchased Assets consisted of the
Revo
brand, including related intellectual property and certain other assets, including certain inventory, which was simultaneously sold to the Company’s licensee. The purchase was partially funded with proceeds from the 2013 PIPE Transaction (see Note 22). The Company acquired the
Revo
brand in order to build and strengthen its brand portfolio.
The acquisition was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values, and operating results for the
Revo
brand are included in the consolidated financial statements from the effective date of acquisition of August 2, 2013.
The allocation of the purchase price is summarized as follows:
Cash consideration paid by the Company
|
|
$
|
20,125
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Accounts receivable
|
|
$
|
2,099
|
|
Trademarks
|
|
|
17,293
|
|
Patents
|
|
|
570
|
|
Goodwill
|
|
|
163
|
|
|
|
$
|
20,125
|
|
Goodwill arising from the acquisition of the
Revo
brand mainly consists of the synergies of an ongoing licensing and brand management business. The Company’s goodwill is deductible for tax purposes and will be amortized for tax purposes over a period of fifteen years. Trademarks have been determined by management to have an indefinite useful life and accordingly, no amortization is recorded in the Company’s consolidated statement of operations. Goodwill and trademarks are subject to a test for impairment on an annual basis
, or sooner if an event occurs or circumstances change that indicate that the carrying amount of the goodwill and/or trademarks may not be recoverable
. Patents are amortized on a straight-line basis over their expected useful lives of ten years. In connection with the acquisition, the Company granted a consultant
5
-year warrants to purchase up to an aggregate of
122,000
shares of the Company’s common stock at an exercise price of $
5.80
per share. The warrants had a fair value of $
346
using the Black-Scholes option-pricing model utilizing the following assumptions: dividend yield of zero, a risk-free interest rate of
1.72
%, expected term of
five
years and an expected volatility of
55.67
%. The Company incurred legal and other costs related to the transaction of approximately $
1,496
, which has been recognized in operating expenses in the accompanying consolidated statement of operations during the year ended December 31, 2013.
Total revenues and income from continuing operations since the date of the acquisition of the
Revo
brand, included in the consolidated statements of operations for the year ended December 31, 2013, are $
2,183
and $
668
, respectively.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Acquisition of The Franklin Mint Brand
On November 1, 2013, SBG FM, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company, entered into an asset purchase agreement with The Franklin Mint, LLC, pursuant to which the Company acquired
The Franklin Mint
brand, including all of the related intellectual property and certain other assets.
The Franklin Mint
brand is well-known in the collectible and gift giving arena with its mission of delivering quality, integrity and creativity. The Company acquired
The Franklin Mint
brand in order to build and strengthen its brand portfolio.
Pro Forma Information (Unaudited)
The following unaudited consolidated pro forma information gives effect to the acquisition of
DVS
,
Heelys
and
The Franklin Mint
brands and the Ellen Tracy and Caribbean Joe Acquisition as if these transactions had occurred on January 1, 2012. Supplemental pro forma information has not been provided for the
Revo
brand as the acquired operations were a component of a larger legal entity and separate historical financial statements were not prepared. Since stand-alone financial information of the
Revo
brand prior to the acquisition was not readily available, compilation of such data was impracticable. The following pro forma information is presented for illustration purposes only and is not necessarily indicative of the results that would have been attained had the acquisition of these businesses been completed on January 1, 2012, nor are they indicative of results that may occur in any future periods.
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
Revenues
|
|
$
|
25,363
|
|
$
|
19,390
|
|
Income (loss) from continuing operations
|
|
$
|
4,173
|
|
$
|
(39,161)
|
|
Net loss attributable to Sequential Brands Group, Inc. and Subsidiaries
|
|
$
|
(2,660)
|
|
$
|
(41,136)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14)
|
|
$
|
(2.61)
|
|
Diluted
|
|
$
|
(0.13)
|
|
$
|
(2.61)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
19,645,652
|
|
|
15,737,272
|
|
Diluted
|
|
|
20,750,591
|
|
|
15,737,272
|
|
The supplemental pro forma information for the years ended December 31, 2013 and 2012 has been adjusted for the following certain non-recurring expenses:
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Acquisition-related costs
|
|
$
|
5,083
|
|
$
|
(8,029)
|
|
Non-cash interest expense recognized on the remaining unamortized discount of the beneficial conversion feature, Warrants and deferred financing costs of the Debentures (see Note 12)
|
|
|
11,614
|
|
|
(11,480)
|
|
Amortization of acquired customer agreements and patents
|
|
|
(98)
|
|
|
(317)
|
|
Interest expense on Term Loans and amortization of deferred financing costs and debt discount (see Note 12)
|
|
|
(1,154)
|
|
|
(5,172)
|
|
Non-cash deferred tax expense on acquired trademarks
|
|
|
0
|
|
|
(2,213)
|
|
Net (increase) decrease to pro forma net loss
|
|
$
|
15,445
|
|
$
|
(27,211)
|
|
Additionally, the supplemental pro forma information has been adjusted to reflect the elimination of Heelys historical operations that are not related to the licensing business, as this portion of their business has been discontinued by the Company (see Note 4).
NOTE 7 PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
288
|
|
$
|
0
|
|
Office equipment
|
|
|
38
|
|
|
0
|
|
Machinery and equipment
|
|
|
10
|
|
|
0
|
|
Leasehold improvements
|
|
|
138
|
|
|
0
|
|
Computer software
|
|
|
178
|
|
|
0
|
|
Property and equipment
|
|
|
652
|
|
|
0
|
|
Less accumulated depreciation and amortization
|
|
|
(66)
|
|
|
0
|
|
Net property and equipment, net
|
|
|
586
|
|
|
0
|
|
Prepaid fixtures
|
|
|
400
|
|
|
0
|
|
Property and equipment, net
|
|
$
|
986
|
|
$
|
0
|
|
In December 2012, in connection with the relocation the Company’s corporate headquarters, the Company wrote off approximately $
184
of fixed assets. This impairment of property and equipment is included in operating expenses on the accompanying consolidated statement of operations for the year ended December 31, 2012. Depreciation and amortization expense amounted to $
66
and $
128
for the years ended December 31, 2013 and 2012, respectively.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
NOTE 8 INTANGIBLE ASSETS
Intangible assets are summarized as follows:
|
|
Useful
|
|
Gross
|
|
|
|
Net
|
|
|
|
Lives
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
December 31, 2013
|
|
(Years)
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
15
|
|
$
|
4,699
|
|
$
|
(585)
|
|
$
|
4,114
|
|
Customer agreements
|
|
4
|
|
|
1,120
|
|
|
(192)
|
|
|
928
|
|
Patents
|
|
10
|
|
|
665
|
|
|
(31)
|
|
|
634
|
|
|
|
|
|
$
|
6,484
|
|
$
|
(808)
|
|
|
5,676
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
110,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
$
|
115,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Useful
Lives
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
15
|
|
$
|
4,569
|
|
$
|
(276)
|
|
$
|
4,293
|
|
Intangible assets, net
|
|
|
|
$
|
4,569
|
|
$
|
(276)
|
|
$
|
4,293
|
|
Future annual estimated amortization expense is summarized as follows:
Years ending December 31,
|
|
|
|
|
2014
|
|
$
|
660
|
|
2015
|
|
|
660
|
|
2016
|
|
|
660
|
|
2017
|
|
|
467
|
|
2018
|
|
|
380
|
|
Thereafter
|
|
|
2,849
|
|
|
|
$
|
5,676
|
|
Amortization expense amounted to $
532
and $
168
for the years ended December 31, 2013 and 2012, respectively.
Intangible assets represent trademarks, customer agreements and patents related to the Company’s brands. Finite lived assets are amortized on a straight-line basis over the estimated useful lives of the assets. Indefinite lived intangible assets are not amortized, but instead are subject to impairment evaluation. The carrying value of intangible assets and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite lived intangible assets are tested for impairment on an annual basis (December 31 for the Company) and between annual tests if an event occurs or circumstances change that indicate that the carrying amount of the indefinite lived intangible asset may not be recoverable. When conducting its annual indefinite lived intangible asset impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that the asset is impaired. If it is determined by a qualitative evaluation that it is more likely than not that the asset is impaired, the Company then tests the asset for recoverability. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There was no impairment of definite lived intangibles during the years ended December 31, 2013 and 2012. The Company performed its annual impairment evaluation of its indefinite lived intangible assets as of December 31, 2013. There was no impairment of indefinite lived intangibles during the years ended December 31, 2013 and 2012.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
NOTE 9 GOODWILL
Goodwill is summarized as follows:
Balance at January 1, 2013
|
|
$
|
429
|
|
Acquisitions in 2013
|
|
|
796
|
|
Balance at December 31, 2013
|
|
$
|
1,225
|
|
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December 31 for the Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then applies a two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit's goodwill and if the carrying value of the reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded in the consolidated statements of operations. Through December 31, 2013, no impairment of goodwill has been identified.
NOTE 10 - NOTE PAYABLE TO RELATED PARTIES AND ASSET PURCHASE AGREEMENT
On August 13, 2010, the Company’s subsidiary, William Rast Licensing, LLC (“Rast Licensing”) entered into a promissory note in the amount of $
750
with Mobility Special Situations I, LLC (“Mobility”), an entity owned in part by Mark Dyne, the brother of the Company’s then Chief Executive Officer, Colin Dyne, and New Media Retail Concepts, LLC. The promissory note had an interest rate of
8
%, payable
monthly
in arrears, and was due
February 13, 2012
. The promissory note was secured by the assets of Rast Licensing and was guaranteed by the Company’s other entities under common control, including Sequential Brands Group, Inc., William Rast Sourcing, LLC (“Rast Sourcing”), Rast Retail, Bella Rose, LLC and Versatile Entertainment, Inc. The outstanding principal and interest balances of this promissory note were paid in full in February 2012 with the proceeds received from the Tengram Securities Purchase Agreement as further described in Note 12.
NOTE 11 - NOTE PAYABLE
On August 18, 2011, the Company, through its subsidiary, Rast Licensing, entered into a promissory note with Monto Holdings (Pty) Ltd. (“Monto”) in the amount of $
1,000
. The promissory note had an interest rate of
7
% per annum, which was payable on the maturity date of the note unless the note was repaid earlier. The promissory note was secured by the assets of Rast Licensing and was guaranteed by the Company’s other entities under common control. The outstanding principal and interest balances of this promissory note were paid in full in February 2012 with the proceeds received from the
Tengram Securities Purchase Agreement
as further described in Note 12.
NOTE 12 LONG-TERM DEBT
The components of long-term debt are as follows:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Term Loans
|
|
$
|
59,000
|
|
$
|
0
|
|
Debentures
|
|
|
0
|
|
|
14,500
|
|
Accrued interest
|
|
|
0
|
|
|
30
|
|
Subtotal
|
|
|
59,000
|
|
|
14,530
|
|
Unamortized discounts
|
|
|
(1,069)
|
|
|
(11,028)
|
|
Total long-term debt, net of unamortized discounts
|
|
|
57,931
|
|
|
3,502
|
|
Less: current portion of long-term debt
|
|
|
8,000
|
|
|
0
|
|
Long-term debt
|
|
$
|
49,931
|
|
$
|
3,502
|
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Term Loans
In connection with the Ellen Tracy and Caribbean Joe Acquisition further discussed in Note 6, on March 28, 2013, the Company entered into (i) a first lien loan agreement, which provides for term loans of up to $
45,000
(the “First Lien Term Loan”) and (ii) a second lien loan agreement, which provides for term loans of up to $
20,000
(the “Second Lien Term Loan” and, together with the First Lien Loan Agreement, the “Term Loans”). The proceeds from the Term Loans were used to fund the Ellen Tracy and Caribbean Joe Acquisition, repay existing debt, pay fees and expenses in connection with the foregoing, finance capital expenditures and for general corporate purposes. The Term Loans are secured by substantially all of the assets of the Company and are further guaranteed and secured by each of the domestic subsidiaries of the Company, other than DVS LLC, SBG Revo Holdings, LLC and SBG FM, LLC, subject to certain exceptions set forth in the Loan Agreements. In connection with the Second Lien Loan Agreement, the Company issued
5
-year warrants to purchase up to an aggregate of
285,160
shares of the Company’s common stock at an exercise price of $
4.50
per share.
In December 2013, the Company obtained the written consent of each of the lenders to the Loan Agreements and in connection therewith, SBG Revo Holdings, LLC agreed to become a Loan Party (as defined in the Loan Agreements) under each of the Loan Agreements, which transaction became effective February 2014.
The Term Loans were drawn in full on March 28, 2013. The Loan Agreements terminate, and all loans then outstanding under each Loan Agreement, must be repaid on March 28, 2018. The Company is required to make quarterly scheduled amortization payments of the Term Loans prior to the maturity of the Loan Agreements in an amount equal to (x) in the case of the First Lien Loan Agreement, $
1,500
and (y) in the case of the Second Lien Loan Agreement, $
500
. The First Lien Term Loan bears interest, at the Company’s option, at either (a) 4.00% per annum plus adjusted LIBOR or (b) 3.00% per annum plus the Base Rate, as defined in the applicable Loan Agreement (4.25% at December 31, 2013). The Second Lien Term Loan bears interest at 12.75% per annum plus adjusted LIBOR (12.99% at December 31, 2013).
The fair value of the warrants was determined to be approximately $
1,269
using the Black-Scholes option-pricing model. The fair value of the warrants was recorded as a discount to the Term Loans and a corresponding increase to additional paid in capital. This amount is being accreted to non-cash interest expense over the contractual term of the Term Loans, which is five years. The assumptions utilized to value the warrants under the Black-Scholes option-pricing model included a dividend yield of zero, a risk-free interest rate of
0.77
%, expected term of five years and an expected volatility of
64
%.
During the year ended December 31, 2013, accretion of the discount amounted to $
201
, which was recorded as a component of interest expense in the accompanying consolidated statement of operations. Contractual interest expense on the Term Loans amounted to $
3,395
for the year ended December 31, 2013, which was recorded as a component of interest expense in the accompanying consolidated statement of operations.
The Company incurred legal and other fees associated with the closing of the Term Loans of approximately $
1,929
. These amounts have been recorded as deferred financing costsand included in other assets in the accompanying consolidated balance sheet, and are being amortized as non-cash interest expense over the contractual term of the Term Loans. During the year ended December 31, 2013, amortization of these fees amounted to $
289
, which was recorded as a component of interest expense in the accompanying consolidated statement of operations.
The Loan Agreements include customary representations and warranties and include representations relating to the intellectual property owned by the Company and its subsidiaries and the status of the Company’s material license agreements. In addition, the Loan Agreements include covenants and events of default including requirements that the Company satisfy a minimum positive net income test, maintain a minimum loan to value ratio (as calculated pursuant to the First Lien Loan Agreement or the Second Lien Loan Agreement, as applicable) and, in the case of the Second Lien Loan Agreement, maintain a minimum cash balance of $
3,525
through December 31, 2013 and $
3,000
after January 1, 2014 in accounts subject to control agreements, as well as limitations on liens on the assets of the Company and its subsidiaries, indebtedness, consummation of acquisitions (subject to certain exceptions and consent rights as set forth in the Loan Agreements) and fundamental changes (including mergers and consolidations of the Company and its subsidiaries), dispositions of assets of the Company and its subsidiaries, investments, loans, advances and guarantees by the Company and its subsidiaries, and restrictions on issuing dividends and other restricted payments, prepayments and amendments of certain indebtedness and material licenses, affiliate transactions and issuance of equity interests. The Company is in compliance with its covenants under the Loan Agreements as of December 31, 2013.
Variable Rate Senior Secured Convertible Debentures
On February 2, 2012, the Company entered into a securities purchase agreement (the “Tengram Securities Purchase Agreement”) with TCP WR Acquisition, LLC (“TCP WR”), pursuant to which the Company issued variable rate senior secured convertible debentures
due January 31, 2015
(the “Debentures”) in the amount of $
14,500
, warrants to purchase up to
1,104,762
shares of common stock (the “Warrants”) and
14,500
shares of Series A Preferred Stock, par value $
0.001
per share (“Series A Preferred Stock”). The Debentures had a three year term, with all principal and interest being due and payable at the maturity date of January 31, 2015, and had an interest rate of LIBOR.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
The Debentures were convertible at the option of TCP WR into
5,523,810
shares of the Company’s common stock at an initial conversion price of $
2.625
per share
, as adjusted for the reverse stock split (the
“Conversion Price”). The Warrants, which had a fair value of $
4,215
, are exercisable for
five
years at an exercise price of $2.625 per share
, as adjusted for the reverse stock split
. The fair value of the Warrants was recorded as a discount to the Debentures and was being accreted to interest expense over the contractual term of the Debentures. Additionally, the Debentures were deemed to have a beneficial conversion feature at the time of issuance. Accordingly, the beneficial conversion feature, which had a value of $
7,347
, was recorded as a discount to the Debentures and was being accreted to interest expense over the contractual term of the Debentures.
Legal and other fees associated with the transaction of $
844
were recorded as deferred financing costs and were being amortized to interest expense over the contractual term of the Debentures.
On March 28, 2013, in connection with the Ellen Tracy and Caribbean Joe Acquisition, TCP WR elected to convert the aggregate principal amount outstanding under the Debentures into shares of the Company’s common stock at the Conversion Price (the “TCP Conversion”). At the time of the TCP Conversion, the aggregate principal amount outstanding under the Debentures was $
14,500
, plus accrued and unpaid interest. The Company issued
5,523,810
shares of its common stock in the TCP Conversion. In connection with the TCP Conversion, the Company also redeemed all of the
14,500
issued and outstanding shares of Series A Preferred Stock held by TCP WR for a nominal fee of $
14.50
(unrounded) pursuant to the Designation of Rights, Preferences and Limitations for the Series A Preferred Stock. As a result of the TCP Conversion, the remaining unamortized discount of $
11,028
recorded in connection with the beneficial conversion feature and the Warrants issued with the Debentures to TCP WR, as well as the remaining unamortized balance of deferred financing costs of $
586
, were recognized as non-cash interest expense in the accompanying consolidated statement of operations as of December 31, 2013.
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: (a) all indebtedness owed by Rast Sourcing under its factoring facility with Rosenthal & Rosenthal; (b) all indebtedness owed by Rast Licensing to Mobility pursuant to a promissory note in the aggregate principal amount of $
750
; and (c) all indebtedness owed by Rast Licensing to Monto pursuant to a promissory note in the aggregate principal amount of $
1,000
. In connection with the repayments, all security agreements, assignment agreements, and guarantee agreements were terminated.
NOTE 13 LEASES
We lease office space, as well as office equipment, in New York for our corporate headquarters under a lease agreement which provides for approximately $
43
in monthly rent, expiring on
December 31, 2016
.
Total rent expense for the years ended December 31, 2013 and 2012 amounted to approximately $
217
and $
855
, respectively.
Future annual minimum payments due under the leases are summarized as follows:
Years Ending December 31,
|
|
|
|
|
2014
|
|
$
|
966
|
|
2015
|
|
|
934
|
|
2016
|
|
|
797
|
|
|
|
$
|
2,697
|
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
NOTE 14 COMMITMENTS AND CONTINGENCIES
Stockholder Derivative Complaint Settled
On January 17, 2012, RP Capital, LLC (“plaintiff”) filed a stockholders derivative complaint in the Superior Court of the State of California, County of Los Angeles, against the Company and former directors Colin Dyne, Kenneth Wengrod, Susan White and Dean Oakey. The case alleged that the defendants (i) breached their fiduciary duties to the Company for failing to properly oversee and manage the Company, (ii) certain defendants 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 sought (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 professional services. The parties agreed upon a settlement in the action. The court granted final approval of the settlement on March 12, 2013 and dismissed the case on the same day. Pursuant to the settlement, the Company was required, subject to certain exceptions, to implement and maintain in effect for a period of three years certain corporate governance initiatives. The Company is in compliance with all of its obligations pursuant to the settlement agreement. The settlement did not include any cash payment for damages.
General Legal Matters
From time to time, we are involved in legal matters arising in the ordinary course of business. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are, or could be, involved in litigation, will not have a material adverse effect on our business, financial condition or results of operations. Contingent liabilities arising from potential litigation are assessed by management based on the individual analysis of these proceedings and on the opinion of the Company’s lawyers and legal consultants.
NOTE 15 OFFICER COMPENSATION
Yehuda Shmidman Employment Agreement
On November 19, 2012, the Board appointed Yehuda Shmidman as the Company’s Chief Executive Officer and a Class I Director of the Board. Mr. Shmidman will serve on the Board for a term expiring at the 2015 annual meeting of stockholders, or until his successor has been elected and qualified. In connection with his appointment as the Company’s Chief Executive Officer, the Company entered into an employment agreement with Mr. Shmidman. Pursuant to the agreement, Mr. Shmidman will serve as the Company’s Chief Executive Officer for a term of three years. During the term of the agreement, Mr. Shmidman will receive a base salary of $
600
per annum, which is subject to increase, and he will be eligible to receive an annual cash performance bonus of up to
100
% of his base salary based on the attainment of the EBITDA target to be agreed upon by the Compensation Committee and Mr. Shmidman. On November 19, 2012, the Company issued
396,196
shares of restricted stock to Mr. Shmidman, in accordance with the terms of his employment agreement, of which
99,049
shares, or
25
%, vested on the date of grant, with the remaining shares vesting in equal installments on each of the first, second and third anniversaries of the grant date. On November 1, 2013, the Compensation Committee resolved to cancel the shares of restricted stock issued to Mr. Shmidman on November 19, 2012 and to issue replacement shares of restricted stock under
the Sequential Brands Group, Inc. 2013 Stock Incentive Compensation Plan (the “2013 Stock Incentive Plan”) on the same terms and subject to the same vesting schedule as the cancelled shares. In the event of a change of control of the Company, all unvested shares of restricted stock will immediately vest.
In the event Mr. Shmidman’s employment is terminated by the Company without cause or by Mr. Shmidman for good reason, Mr. Shmidman will receive all earned but unpaid base salary and payment for all accrued but unused vacation time through the date of termination, as well as any benefits to which Mr. Shmidman may be entitled under employee benefit plans (collectively, the “accrued obligations”). Mr. Shmidman will also receive a severance amount equal to the greater of (i) 1.5 times his base salary then in effect and (ii) an amount equal to the base salary that Mr. Shmidman would have received for the remainder of the term of the agreement had Mr. Shmidman’s employment continued until the end of the employment period. In addition, Mr. Shmidman will receive earned bonuses that have not been paid for prior fiscal years and, in the event such resignation or termination occurs following the Company’s first fiscal quarter of any year, a pro-rated annual bonus for the year in which his employment was terminated (the “pro-rated bonus”). In the event Mr. Shmidman’s employment is terminated by the Company without cause or by Mr. Shmidman for good reason, all unvested restricted stock will accelerate and become fully vested on the date of his termination.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Gary Klein Employment Agreement
On November 29, 2012, the Board appointed Gary Klein as the Company’s Chief Financial Officer for a term of three years. During the term of his employment, Mr. Klein will receive a base salary of $
250
per annum, which is subject to increase, and he will be eligible to receive an annual cash performance bonus of up to
50
% of his base salary based on the attainment of the EBITDA target to be agreed upon by the Company and Mr. Klein. Mr. Klein received a signing bonus of $
20
and on November 29, 2012, the Company issued
80,000
shares of restricted stock to Mr. Klein, in accordance with the terms of his employment agreement, of which
20,000
shares, or
25
%, vested upon Mr. Klein’s employment commencement date, with the remaining shares vesting in equal installments on each of the first, second and third anniversaries of Mr. Klein’s start date. On November 1, 2013, the Compensation Committeeresolved to cancel the shares of restricted stock issued to Mr. Klein on November 29, 2012 and to issue replacement shares of restricted stock under the Company’s 2013 Stock Incentive Plan on the same terms and subject to the same vesting schedule as the cancelled shares.
In the event of a change of control of the Company, all unvested shares of restricted stock will immediately vest.
Colin Dyne
On November 15, 2012, Colin Dyne resigned from his positions as the Company’s Chief Executive Officer, Chief Financial Officer and Director of the Board. In connection with Mr. Dyne’s resignation, the Company and Mr. Dyne entered into a separation and release agreement which provides for an aggregate payment to Mr. Dyne of $
2,350
, which has been included in operating expenses in the consolidated statement of operations for the year ended December 31, 2012. The agreement also provides that, subject to certain exceptions, other than the payment of accrued wages and unpaid vacation time, Mr. Dyne will not be entitled to any other payments or benefits in connection with the termination of his employment, including those provided for in Mr. Dyne’s employment agreement with the Company. Subject to certain exceptions, the agreement also provides a release of all claims that each party may have against the other and for the continued right for Mr. Dyne to exercise his outstanding stock options for a period of three years.
NOTE 16 - PREFERRED STOCK
On February 3, 2012, the Company amended and restated 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
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
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
381
votes per share (which is the number of shares of common stock a Debenture holder would receive if it converted $
1,000
in principal amount of Debentures into common stock at the Conversion Price
)
, 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.
|
|
⋅
|
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.
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
As more fully discussed in Note 12, in connection with the TCP Conversion on March 28, 2013, the Company redeemed all of the
14,500
issued and outstanding shares of Series A Preferred Stock held by TCP WR for a nominal redemption price of $
14.50
(unrounded).
NOTE 17 - STOCK INCENTIVE PLAN, OPTIONS AND WARRANTS
Stock Options
On January 5, 2006, the Company adopted the 2005 Stock Incentive Plan (
the “2005 Stock Incentive Plan”
),
which authorized the granting of a variety of stock-based incentive awards. The 2005 Stock Incentive Plan was administered by the Company’s Board, or a committee appointed by the Board, which determined the recipients and terms of the awards granted. The 2005 Stock Incentive Plan provided for the issuance of both incentive stock options (ISOs) and non-qualified stock options (NQOs). ISOs could only be granted to employees and NQOs could be granted to directors, officers, employees, consultants, independent contractors and advisors. The 2005 Stock Incentive Plan
provided for a total of
366,667
shares of common stock to be reserved for issuance under the 2005 Stock Incentive Plan.
On July 24, 2013, the Board approved and adopted the 2013 Stock Incentive Plan. The 2013 Stock Incentive Plan replaced the 2005 Stock Incentive Plan. No new grants will be granted under the 2005 Stock Incentive Plan as of July 24, 2013. Grants that were made under the 2005 Stock Incentive Plan prior to the Board’s approval and adoption of the 2013 Stock Incentive Plan will continue to be administered in effect in accordance with their terms. The 2013 Stock Incentive Plan became effective on July 24, 2013 and, subject to the right of the Board to amend or terminate the 2013 Stock Incentive Plan in accordance with terms and conditions thereof, will remain in effect until all shares of the Company’s common stock reserved for issuance thereunder have been delivered and any restrictions on such shares have lapsed. Notwithstanding the foregoing, no shares of the Company’s common stock may be granted under the 2013 Stock Incentive Plan on or after July 24, 2023.
The 2013 Stock Incentive Plan is administered by the Compensation Committee of the Board. Under the 2013 Stock Incentive Plan, the Compensation Committee is authorized to grant awards to employees, consultants and any other persons to whom the 2013 Stock Incentive Plan is applicable and to determine the number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. The Compensation Committee has the power to interpret the 2013 Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the 2013 Stock Incentive Plan.
The following types of awards or any combination of awards may be granted under the 2013 Stock Incentive Plan: (i) non-qualified stock options, (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units, (v) other stock-based awards, (vi) dividend equivalents and (vii) cash-based awards. The aggregate number of shares of the Company’s common stock that are reserved for awards to be granted under the 2013 Stock Incentive Plan is
2,500,000
shares, subject to adjustments for stock splits, recapitalizations and other specified events.
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. The risk free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, the expected life is based on the estimated average of the life of options using the simplified method, and forfeitures are estimated on the date of grant based on certain historical data. We utilize the simplified method to determine the expected life of our options due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on our history and expectation of dividend payouts.
Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
The following table summarizes our stock option activity for the year ended December 31, 2013:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
Average Exercise
|
|
Contractual Life
|
|
Aggregate
|
|
|
|
Options
|
|
Price
|
|
(in Years)
|
|
Intrinsic Value
|
|
Outstanding - December 31, 2012
|
|
404,800
|
|
$
|
4.09
|
|
7.3
|
|
$
|
808
|
|
Granted
|
|
67,000
|
|
|
3.18
|
|
|
|
|
|
|
Exercised
|
|
(41,473)
|
|
|
(2.52)
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
(16,660)
|
|
|
(7.64)
|
|
|
|
|
|
|
Outstanding - December 31, 2013
|
|
413,667
|
|
$
|
4.39
|
|
2.7
|
|
$
|
812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - December 31, 2013
|
|
351,667
|
|
$
|
4.13
|
|
1.6
|
|
$
|
812
|
|
A summary of the changes in the Company’s unvested stock options is as follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average Grant
|
|
|
|
Options
|
|
Date Fair Value
|
|
Unvested - December 31, 2012
|
|
46,240
|
|
$
|
0.01
|
|
Granted
|
|
67,000
|
|
|
3.18
|
|
Vested
|
|
(50,573)
|
|
|
(0.40)
|
|
Forfeited or Canceled
|
|
(667)
|
|
|
(0.10)
|
|
Unvested - December 31, 2013
|
|
62,000
|
|
$
|
3.21
|
|
During the year ended December 31, 2013, the Company granted
20,000
stock options to a consultant for future services. The options are exercisable at an exercise price of $
6.00
per share over a
ten
-year term and vest over
one
year. These options had a fair value of $
80
using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
2.02
|
%
|
Expected dividend yield
|
|
0.00
|
%
|
Expected volatility
|
|
56.72
|
%
|
Expected term
|
|
5.5 years
|
|
The Company recorded $
47
during the year ended December 31, 2013 as compensation expense pertaining to this grant.
During the year ended December 31, 2013, the Company granted
47,000
stock options to employees for future services. The options are exercisable at an exercise price of $
5.80
per share over a five-year term and vest over one to three years. These options had a fair value of $
133
using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
1.72
|
%
|
Expected dividend yield
|
|
0.00
|
%
|
Expected volatility
|
|
55.67
|
%
|
Expected term
|
|
3.0 to 3.5 years
|
|
The Company recorded $
57
during the year ended December 31, 2013 as compensation expense pertaining to this grant.
The Company did not grant any stock options during the year ended December 31, 2012.
Total compensation expense related to stock options for years ended December 31, 2013 and 2012 was approximately $
107
and $
4
, respectively. Total unrecognized compensation expense related to unvested stock awards at December 31, 2013 amounts to $
110
and is expected to be recognized over a weighted average period of approximately six months.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Warrants
The following table summarizes the Company’s outstanding warrants:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
Average Exercise
|
|
Contractual Life
|
|
Aggregate
|
|
|
|
Warrants
|
|
Price
|
|
(in Years)
|
|
Intrinsic Value
|
|
Outstanding - December 31, 2012
|
|
2,250,762
|
|
$
|
2.23
|
|
4.0
|
|
$
|
6,290
|
|
Granted
|
|
580,160
|
|
|
6.07
|
|
|
|
|
|
|
Exercised
|
|
(1,083,333)
|
|
|
(1.62)
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
(2,667)
|
|
|
(7.50)
|
|
|
|
|
|
|
Outstanding - December 31, 2013
|
|
1,744,922
|
|
$
|
3.88
|
|
3.5
|
|
$
|
3,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - December 31, 2013
|
|
1,704,922
|
|
$
|
3.83
|
|
3.5
|
|
$
|
3,323
|
|
A summary of the changes in the Company’s unvested warrants is as follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average Grant
|
|
|
|
Warrants
|
|
Date Fair Value
|
|
Unvested - December 31, 2012
|
|
45,000
|
|
$
|
3.05
|
|
Granted
|
|
580,160
|
|
|
3.71
|
|
Vested
|
|
(585,160)
|
|
|
(3.71)
|
|
Forfeited or Canceled
|
|
-
|
|
|
-
|
|
Unvested - December 31, 2013
|
|
40,000
|
|
$
|
3.00
|
|
As more fully described in Note 12, during the year ended December 31, 2012, in connection with the Tengram Securities Purchase Agreement, the Company issued
five
-year warrants to purchase up to an aggregate of
1,104,762
shares of the Company’s common stock at an exercise price of $
2.625
per share
, as adjusted for the reverse stock split.
During the year ended December 31, 2012, in connection with the acquisition of the
DVS
brand, the Company issued
five
-year warrants to purchase up to an aggregate of
60,000
shares of the Company’s common stock at an exercise price of $
5.75
per share.
As more fully described in Note 6, during the year ended December 31, 2013, in connection with the acquisition of the
Heelys
brand,
the Company issued
five
-year warrants to purchase up to an aggregate of
28,000
shares of the Company’s common stock at an exercise price of $
6.01
per share.
As more fully described in Note 6, during the year ended December 31, 2013, in connection with the Ellen Tracy and Caribbean Joe Acquisition, the Company issued
five
-year warrants to purchase up to an aggregate of
125,000
shares of the Company’s common stock at an exercise price of $
10.00
per share.
As more fully described in Note 6, during the year ended December 31, 2013, in connection with the acquisition of the
Revo
brand, the Company issued
five
-year warrants to purchase up to an aggregate of
122,000
shares of the Company’s common stock at an exercise price of $
5.80
per share.
During the year ended December 31, 2013, in connection with the acquisition of
The Franklin Mint
brand, the Company issued
five
-year warrants to purchase up to an aggregate of
10,000
shares of the Company’s common stock at an exercise price of $
5.35
per share. These warrants had a fair value of $
26
using the Black-Scholes option-pricing model with the following assumptions: dividend yield of zero, a risk-free interest rate of
1.37
%, expected term of five years and an expected volatility of
55.27
%.
As more fully described in Note 12, during the year ended December 31, 2013, in connection with the Second Lien Loan Agreement, the Company issued
five
-year warrants to purchase up to an aggregate of
285,160
shares of the Company’s common stock at an exercise price of $
4.50
per share.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
During the year ended December 31, 2013, the Company granted
10,000
warrants to a consultant for future services. The warrants are exercisable at an exercise price of $
5.80
per share over a five-year term and vest over one year. These warrants had a fair value of $
28
using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
1.72
|
%
|
Expected dividend yield
|
|
0.00
|
%
|
Expected volatility
|
|
55.67
|
%
|
Expected term
|
|
5 years
|
|
The Company recorded $
9
during the year ended December 31, 2013 as compensation expense pertaining to this grant.
Total compensation expense related to warrants for the year ended December 31, 2013 and 2012 was approximately $
9
and $
0
, respectively.
Restricted Stock
As more fully described in Note 15, on November 19, 2012, the Company issued
396,196
shares of restricted stock to the Company’s Chief Executive Officer, Mr. Shmidman, in accordance with the terms of his employment agreement. Total compensation related to the restricted stock grant amounted to approximately $
2,278
, of which $
617
and $
570
was recorded in operating expenses in the Company’s consolidated statement of operations for the years ended December 31, 2013 and 2012, respectively.
Additionally, as more fully described in Note 15, on November 29, 2012, the Company issued
80,000
shares of restricted stock to the Company’s Chief Financial Officer, Mr. Klein, in accordance with the terms of his employment offer letter. Total compensation related to the restricted stock grant amounted to approximately $
400
, of which $
108
and $
100
was recorded in operating expenses in the Company’s consolidated statement of operations for the years ended December 31, 2013 and 2012, respectively.
During the year ended December 31, 2013, the Company issued 25,000 shares of restricted stock to its Chief Financial Officer, Mr. Klein, for future services. These shares vest over a period of three years, with the first vesting date being October 31, 2014. Total compensation related to the restricted stock grant amounted to approximately $132, of which $7 was recorded in operating expenses in the Company’s consolidated statement of operations for the year ended December 31, 2013.
During the year ended December 31, 2013, the Company issued
31,999
shares of restricted stock to members of its Board. Of the total shares issued,
23,378
shares vest on May 1, 2014 and
8,621
shares vest on September 11, 2014. Total compensation related to the restricted stock grants amounted to approximately $
200
, of which $
112
was recorded in operating expenses in the Company’s consolidated statement of operations for the year ended December 31, 2013.
During the year ended December 31, 2013, the Company issued
178,000
shares of restricted stock to a consultant and employees for future services. Of the total shares issued,
175,000
shares vest over four years and
3,000
shares vest over three years. Total compensation related to the restricted stock grants amounted to approximately $
1,032
, of which $
158
was recorded in operating expenses in the Company’s consolidated statement of operations for the year ended December 31, 2013.
A summary of the restricted stock activity for the year ended December 31, 2013 is as follows:
|
|
Number of
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
|
Weighted
Average
Remaining
Contractual Life
(in Years)
|
|
Aggregate
Intrinsic Value
|
|
Unvested - December 31, 2012
|
|
357,147
|
|
$
|
5.62
|
|
3.9
|
|
$
|
0
|
|
Granted
|
|
234,999
|
|
|
5.80
|
|
|
|
|
|
|
Vested
|
|
(127,299)
|
|
|
(5.64)
|
|
|
|
|
|
|
Unvested - December 31, 2013
|
|
464,847
|
|
$
|
5.71
|
|
2.9
|
|
$
|
20
|
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Total compensation expense related to restricted stock grants for the year ended December 31, 2013 and 2012 was approximately $
1,002
and $
670
, respectively.
NOTE 18 - INCOME TAXES
The Company and its subsidiaries are consolidated and taxes are reported by the parent, Sequential Brands Group, Inc. Taxes are calculated on a consolidated basis at C-Corporation tax rates.
Deferred income taxes arise principally from net operating loss (“NOL”) carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2013.
The Company has federal and state NOLs available to carryforward to future periods of approximately $
37.1
million as of December 31, 2013 which expire beginning in 2017 for state purposes and
2027
for federal purposes. As a result of TCP WR’s investment in February 2012, we experienced an “ownership change” under Section 382 of the Internal Revenue Code
(the “Code”)
, limiting our utilization of any NOLs generated through February 2012. In addition, $
13.1
million of these federal NOLs were acquired through the Heelys stock acquisition and are also subject to a separate limitation under Section 382 of the code. The limitation on NOLs is based upon a formula provided under Section 382 of the Code that is based on the fair market value of the Company and prevailing interest rates at the time of the ownership change. An “ownership change” is generally a
50
% increase in ownership over a three-year period by stockholders who directly or indirectly own at least five percent of a company’s stock. The limitations on the use of the NOLs under Section 382 could affect the Company’s ability to offset future taxable income.
The Company currently files U.S. federal tax returns and California and New York state tax returns. It is subject to examination by federal and state taxing authorities for the 2010 and subsequent tax years. The Company is not currently under examination in any jurisdiction.
The provision (benefit) for income taxes from continuing operations for the years ended December 31, 2013 and 2012 consists of the following:
|
|
2013
|
|
2012
|
|
Federal:
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
0
|
|
$
|
0
|
|
Deferred provision
|
|
|
1,451
|
|
|
0
|
|
|
|
|
1,451
|
|
|
-
|
|
State:
|
|
|
|
|
|
|
|
Current provision
|
|
|
63
|
|
|
27
|
|
Deferred provision
|
|
|
335
|
|
|
0
|
|
|
|
|
398
|
|
|
27
|
|
|
|
$
|
1,849
|
|
$
|
27
|
|
The difference between the provision for income taxes and the expected income tax provision determined by applying the statutory federal and state income tax rates to pre-tax accounting loss from continuing operations for the years ended December 31, 2013 and 2012 are as follows:
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
|
|
2013
|
|
2012
|
|
Federal statutory rate
|
|
35.0
|
%
|
34.0
|
%
|
State taxes net of Federal benefit
|
|
(1.9)
|
%
|
6.0
|
%
|
Non-deductible transaction costs
|
|
(3.6)
|
%
|
(11.0)
|
%
|
Noncontrolling Interest
|
|
2.2
|
%
|
0.0
|
%
|
Valuation allowance
|
|
(53.3)
|
%
|
(29.0)
|
%
|
Gross receipts tax and minimum statutory state income taxes
|
|
(0.4)
|
%
|
(0.3)
|
%
|
Other
|
|
2.1
|
%
|
(0.1)
|
%
|
|
|
(19.9)
|
%
|
(0.4)
|
%
|
The components of the Company’s consolidated deferred income tax balances as of December 31, 2013 and 2012 are as follows:
|
|
2013
|
|
2012
|
|
Deferred income tax assets - current
|
|
|
|
|
|
|
|
Bad debt reserve
|
|
$
|
54
|
|
$
|
0
|
|
Accruals and other reserves
|
|
|
0
|
|
|
386
|
|
|
|
|
54
|
|
|
386
|
|
Deferred income tax assets - long-term
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
12,918
|
|
|
6,854
|
|
Intangible assets - finite life
|
|
|
1,464
|
|
|
0
|
|
Stock options
|
|
|
418
|
|
|
0
|
|
Property, plant & equipment
|
|
|
295
|
|
|
0
|
|
Deferred rent
|
|
|
100
|
|
|
0
|
|
Other
|
|
|
739
|
|
|
0
|
|
|
|
|
15,934
|
|
|
6,854
|
|
Deferred income tax liability - long-term
|
|
|
|
|
|
|
|
Intangible assets - Indefinite life
|
|
|
(4,339)
|
|
|
0
|
|
|
|
|
11,649
|
|
|
7,240
|
|
|
|
|
|
|
|
|
|
Less: Valuation Allowance
|
|
|
(15,988)
|
|
|
(7,240)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability - long-term
|
|
$
|
(4,339)
|
|
$
|
0
|
|
Realization of the deferred tax assets is dependent on the existence of sufficient taxable income within the carryforward period, including future reversals of taxable temporary differences. The taxable temporary difference related to indefinite-lived trademarks, which are currently amortized for tax purposes, will reverse when such assets are disposed of or impaired. Because the period for their reversal is not determinable, the net deferred tax liability of $
4.3
million attributable to indefinite-lived trademarks could not be used to offset the deferred tax assets. As of December 31, 2013, a valuation allowance of approximately $
16.0
million had been recognized for deferred income taxes that may not be realized by the Company in future periods.
A reconciliation of the consolidated liability for gross unrecognized income tax benefits (excluding penalties and interest) for the year ended December 31, 2013 is as follows:
|
|
2013
|
|
2012
|
|
Balance at beginning of year
|
|
$
|
454
|
|
$
|
454
|
|
Decreases in prior year tax positions
|
|
|
0
|
|
|
0
|
|
Increases in prior year tax positions
|
|
|
0
|
|
|
0
|
|
Increases in current year tax positions
|
|
|
0
|
|
|
0
|
|
Settlements with taxing authorities
|
|
|
0
|
|
|
0
|
|
Lapse of statute of limitations
|
|
|
(74)
|
|
|
0
|
|
Balance at end of year
|
|
$
|
380
|
|
$
|
454
|
|
If the Company were to prevail on all unrecognized tax benefits recorded, approximately $
247
of the unrecognized tax benefits (excluding accrued interest and penalties) at December 31, 2013 would benefit at the effective tax rate. Liabilities for unrecognized tax benefits are included in long-term liabilities from discontinued operations in the consolidated balance sheet.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties related to tax liabilities in the tax provision. During the years ended December 31, 2013 and 2012, the Company recognized approximately $
23
and $
34
in interest and penalties, respectively. The Company has accrued $
263
and $
240
for interest and penalties at December 31, 2013 and 2012, respectively. Accrued interest and penalties are included in long-term liabilities from discontinued operations in the consolidated balance sheet.
NOTE 19 RELATED PARTY TRANSACTIONS
Entry into 2013 PIPE Purchase Agreements and Registration Rights Agreements
On July 25, 2013, the Company entered into securities purchase agreements (the “2013 PIPE Purchase Agreements”) with certain accredited investors (the “2013 PIPE Investors”), pursuant to which the Company agreed to sell to the 2013 PIPE Investors an aggregate of
8,000,000
shares of the Company’s common stock at a purchase price of $
5.50
per share, for a total offering amount of $
44,000
. The 2013 PIPE Investors included TCP SQBG II LLC (“TCP II”), an investment vehicle of Tengram Capital Partners Gen2 Fund, L.P. (“Tengram”), the Company’s largest stockholder, which agreed to purchase
257,273
shares, and Mr. Al Gossett, a member of the Board, who agreed to purchase
109,091
shares. The Company’s directors, Mr. Sweedler and Mr. Eby, are controlling partners of Tengram
Capital Associates, LLC (“TCA”) (the general partner of Tengram)
, which is the managing member of TCP WR, TCP SQBG Acquisition, LLC (“TCP Acquisition”) and TCP II. The closing date of the 2013 PIPE Transaction was July 26, 2013.
Relationship with Brand Matter
On March 28, 2013, the Company entered into the BM Purchase Agreement, by and among the Company, ETPH and Brand Matter, pursuant to which the Company acquired from ETPH all of the issued and outstanding equity interests of Brand Matter. Prior to the consummation of the Ellen Tracy and Caribbean Joe Acquisition, two of the Company’s directors, Mr. Sweedler and Mr. Eby (i) were members of Brand Matter and (ii) served on the board of directors of ETPH, the direct parent of Brand Matter. Mr. Sweedler also (i) served as co-chairman of the board of directors of Brand Matter, (ii) served as an executive officer of Brand Matter and (iii) beneficially owned certain membership interests of ETPH. As a consequence of Mr. Sweedler’s indirect beneficial ownership in Brand Matter and the Company and his and Mr. Eby’s positions with ETPH, the Company and Brand Matter as well as the Company and ETPH each appointed special independent committees (on which neither Mr. Sweedler nor Mr. Eby served) to review and negotiate the terms of the Ellen Tracy and Caribbean Joe Acquisition. In connection with the Ellen Tracy and Caribbean Joe Acquisition, Mr. Sweedler received shares of the Company’s common stock for all his equity interests in Brand Matter. Mr. Sweedler and Mr. Eby are also controlling partners in Tengram, which indirectly beneficially owns approximately
28.6
% of the Company’s outstanding common stock as of the date hereof.
Amended and Restated Stockholders Agreement
On February 22, 2012, the Company, TCP WR and Mr. Dyne, the Company’s former chief executive officer, chief financial officer and director entered into a stockholders agreement (the “Stockholders Agreement”). In connection with the Ellen Tracy and Caribbean Joe Acquisition, the Company entered into the amended and restated stockholders agreement, dated as of March 27, 2013 (the “Amended Stockholders Agreement”), pursuant to which Mr. Dyne was removed as a party. The terms of the Amended Stockholders Agreement are otherwise substantially similar to those in the Stockholders Agreement.
Entry into 2012 PIPE Purchase Agreement and Registration Rights Agreement
On December 21, 2012, the Company entered into a securities purchase agreement (the “2012 PIPE Purchase Agreement”), by and among the Company and the investors signatory thereto (the “2012 PIPE Investors”), pursuant to which the Company agreed to sell to the 2012 PIPE Investors an aggregate of
4,966,667
shares of the Company’s common stock at a purchase price of $
4.50
per share, for a total offering amount of approximately $
22,350
million. The 2012 PIPE Investors included the Company’s chief executive officer, Mr. Yehuda Shmidman, who agreed to purchase
11,111
shares and TCP Acquisition, a fund managed by Tengram, which agreed to purchase
733,333
shares. The closing date of the 2012 PIPE Transaction was January 9, 2013.
Heelys Merger Agreement
On December 7, 2012, in connection with the Company’s entry into the Heelys Merger Agreement, the Company entered into an equity commitment letter with Tengram, pursuant to which such entity agreed to provide the Company with up to $
8,100
of equity financing, subject to the terms and conditions set forth in the commitment letter, if needed, to enable the Company to satisfy its obligations under the Heelys Merger Agreement. The commitment letter automatically terminated upon the consummation of the transactions contemplated by the Heelys Merger Agreement on January 24, 2013 without an equity financing by Tengram.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
Change of Control Transaction with TCP WR Acquisition, LLC
Mr. Sweedler and Mr. Eby are each directors of the Company, and are controlling partners of TCA, which has the sole voting control over TCP WR. On February 2, 2012, the Company entered into the Tengram Securities Purchase Agreement, pursuant to which the Company sold the Debentures, warrants and Series A Preferred Stock to TCP WR.
The Tengram Securities Purchase Agreement provided certain piggyback rights to TCP WR for its shares of the Company’s common stock issued upon conversion of the Debentures or shares of the Company’s common stock issuable upon conversion of the warrants held by TCP WR to be included in a registration statement, subject to customary underwriter cutbacks.
In connection with the Ellen Tracy and Caribbean Joe Acquisition in March 2013, the Debentures were converted into
5,523,810
shares of the Company’s common stock at the Conversion Price and all of the issued and outstanding shares of Series A Preferred Stock were redeemed for a nominal fee of $
14.50
(unrounded).
Pursuant to the terms of the piggyback rights granted to TCP WR under the Securities Purchase Agreement, TCP WR requested that the 5,523,810 shares of the Company’s common stock issued upon conversion of the Debentures be registered.
Consulting Services Agreement with Tengram Capital Management, L.P.
Pursuant to an agreement with Tengram Capital Management, L.P. (“TCM”), an affiliate of Tengram, the Company, effective as of January 1, 2013, has engaged TCM to provide services to the Company pertaining to (i) mergers and acquisitions, (ii) debt and equity financing, and (iii) such other related areas as the Company may reasonably request from time to time. TCM is entitled to receive compensation, including fees and reimbursement of out-of-pocket expenses in connection with performing its services under such agreement. The agreement remains in effect for a period continuing through the earlier of five years or the date on which TCM and its affiliates cease to own in excess of
5
% of the outstanding shares of common stock in the Company. The Company paid TCM $
1,000
and $
689
for services under this agreement in 2013 and 2012, respectively. At December 31, 2013 and 2012, there were no amounts owed to TCM.
Additionally, in July 2013, the Company entered into a consulting arrangement with an employee of TCM, pursuant to which such employee provides legal and other consulting services at the request of the Company from time to time. The employee was also issued
125,000
shares of restricted stock, vesting over a
four
year period. The Company paid such employee $
125
for services under this agreement in 2013. At December 31, 2013, there were no amounts owed to such employee.
Transactions with Tennman WR-T, Inc.
In connection with the royalty agreement between Tennman WR-T, Inc. (“Tennman WR-T”), Rast Sourcing and Rast Licensing, royalties paid by Rast Sourcing to Tennman WR-T, a minority interest holder of Rast Sourcing, amounted to $
1,090
and $
400
for the years ended December 31, 2013 and 2012, respectively.
At December 31, 2013 and 2012, amounts owed to Tennman WR-T of $
388
and $
572
, respectively, are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. During the years ended December 31, 2013 and 2012, the Company recorded approximately $
855
and $
930
, respectively, in royalty expense, of which approximately $
855
and $
872
, respectively, are included in operating expenses from continuing operations and $
0
and $
58
, respectively, are included in discontinued operations.
NOTE 20 PROFIT SHARING PLAN
The Company has established a 401(k) profit-sharing plan for the benefit of eligible employees. The Company may make contributions to the plan as determined by the Board. There were no contributions made during the years ended December 31, 2013 and 2012.
NOTE 21 2012 PRIVATE PLACEMENT TRANSACTION
On December 21, 2012, the Company entered into the 2012 PIPE Purchase Agreement with the 2012 PIPE Investors, pursuant to which the Company agreed to sell to the 2012 PIPE Investors an aggregate of
4,966,667
shares of the Company’s common stock at a purchase price of $
4.50
per share, for a total offering amount of approximately $
22,350
. Net proceeds, after the payment of legal and other expenses of $
1,138
, amounted to approximately $
21,212
.
The
2012 PIPE Transaction
was consummated on January 9, 2013 and a portion of the proceeds was used to fund the acquisition of Heelys. Affiliates of the Company purchased
744,444
shares, with the Company’s
Chief Executive Officer, Mr. Shmidman,
purchasing
11,111
shares and TCP Acquisition purchasing
733,333
shares. The Company’s directors, Mr. Sweedler and Mr. Eby, are controlling partners of Tengram, which is the managing member of TCP WR and TCP Acquisition. As contemplated by the 2012 PIPE Purchase Agreement, the Company also entered into a registration rights agreement with the 2012 PIPE Investors on January 9, 2013, as amended on May 14, 2013 (the “Amended Registration Rights Agreement”).
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
(dollars are in thousands (unless otherwise noted), except share and per share data)
The Amended Registration Rights Agreement requires the Company to file a resale shelf registration statement for the shares of common stock purchased by the 2012 PIPE Investors in the 2012 PIPE Transaction in the event any such shares of common stock constitute “Registrable Securities” (as defined in the Amended Registration Rights Agreement) as of July 15, 2013 (the “Filing Deadline”) and requires the Company to use its commercially reasonable efforts to cause the resale shelf registration statement to become effective as promptly thereafter as practicable but in any event not later than 90 days after the Filing Deadline if the Company receives comments from the SEC, or 30 days after the Filing Deadline, if the Company does not receive comments from the SEC. Prior to the Filing Deadline, each of the 2012 PIPE Investors who held Registrable Securities as of such time waived its respective rights under the Amended Registration Rights Agreement to cause the Company to file and cause to become effective a resale shelf registration statement (such Investors, the “2012 PIPE Affiliates”). The Amended Registration Rights Agreement provides for customary indemnification and contribution provisions, as well as customary restrictions such as blackout periods, and gives the holders of a majority of the shares sold in the 2012 PIPE Transaction that constitute “Registrable Securities” the right to terminate the Amended Registration Agreement. In connection with the 2013 PIPE Transaction, each of the 2012 PIPE Affiliates received piggyback rights for its shares under the 2013 Registration Rights Agreements.
NOTE 22 2013 PRIVATE PLACEMENT TRANSACTION
On July 25, 2013, the Company entered into the 2013 PIPE Purchase Agreements with the 2013 PIPE Investors, pursuant to which the Company agreed to sell to the 2013 PIPE Investors an aggregate of
8,000,000
shares of the Company’s common stock, par value $
0.001
, at a purchase price of $
5.50
per share, for a total offering amount of $
44,000
. Certain affiliates of the Company, including Mr. Al Gossett, a member of the Company’s Board, and TCP II, an entity affiliated with Tengram, agreed to purchase
109,091
shares and
257,273
shares, respectively, in the 2013 PIPE Transaction. Net proceeds, after the payment of legal and other expenses of $
3,250
, amounted to approximately $
40,750
.
As contemplated by the 2013 PIPE Purchase Agreements, on July 26, 2013 (the “Closing Date”), the Company entered into registration rights agreements with the 2013 PIPE Investors (the “2013 Registration Rights Agreements”). The 2013 Registration Rights Agreements required the Company to file a resale shelf registration statement for the shares of common stock purchased by each 2013 PIPE Investor in the 2013 PIPE Transaction, and certain other investors granted piggyback rights thereunder, including the 2012 PIPE Affiliates, within 75 days of the Closing Date (the “2013 Filing Deadline”) and to use its commercially reasonable efforts to cause a resale shelf registration statement to become effective as promptly thereafter as practicable but in any event not later than 90 days after the 2013 Filing Deadline if the Company receives comments from the SEC, or 30 days after the 2013 Filing Deadline, if the Company does not receive comments from the SEC (such applicable date, the “2013 Effectiveness Deadline”), subject to certain permitted extensions upon the occurrence of certain events. Subject to certain restrictions, the Company’s obligations to file and to cause the resale shelf registration statement to become effective may be suspended for a period of time, upon written notice to the 2013 PIPE Investors, if the Company determines in its reasonable good faith judgment that it is in an Acquisition Event Period, as defined in the 2013 Registration Rights Agreements.
On September 27, 2013, in accordance with the terms of the 2013 Registration Rights Agreements, the Company filed the resale shelf registration statement with the SEC, which was declared effective on December 3, 2013. The 2013 Registration Rights Agreements provide for restrictions such as suspension and blackout periods. The 2013 Registration Rights Agreements also provide for customary indemnification and contribution provisions, subject to certain exceptions for a specific investor.
The Company used a portion of the proceeds to fund the acquisition of the
Revo
brand (see Note 6) and intends to use the remaining net proceeds for general corporate purposes, including other potential business acquisitions, and to pay the fees and expenses associated therewith.