NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
|
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. The Company currently has more than fifty licensees, 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 the Company’s business strategy, the Company has previously entered into (and expects 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.
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the instructions
to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”).
Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been
condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not
include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations,
or cash flows. It is the Company’s opinion, however, that the accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial
position, operating results and cash flows for the periods presented.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on March 31, 2014, which contains the audited
financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results
of Operations, for the years ended December 31, 2013 and 2012. The financial information as of December 31, 2013 is derived from
the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The interim results for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for
the year ending December 31, 2014 or for any future interim periods.
Principles
of Consolidation
The
accompanying unaudited condensed 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 consolidation.
Use of
Estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period.
SEQUENTIAL
BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
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 unaudited interim condensed 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.
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.
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 consist of a single
revenue stream which is the licensing of our trademark portfolio.
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.
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 credit worthiness, 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 at both March 31, 2014 and December 31, 2013.
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
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2014
(UNAUDITED)
(dollars 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. At March 31, 2014 and December 31, 2013, the Company had $643 of certain unrecognized tax
benefits, included as a component of long-term liabilities held for disposition from discontinued operations of wholesale business, 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 net income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the period, 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 shares used to calculate basic and diluted earnings (loss) per common
share consists of the following:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
24,700,717
|
|
|
|
7,268,359
|
|
Warrants
|
|
|
742,899
|
|
|
|
0
|
|
Unvested restricted stock
|
|
|
620,819
|
|
|
|
0
|
|
Stock options
|
|
|
163,004
|
|
|
|
0
|
|
Diluted weighted average common shares outstanding
|
|
|
26,227,439
|
|
|
|
7,268,359
|
|
The
computation of basic and diluted EPS for the three months ended March 31, 2014 and 2013 excludes the common stock equivalents
of the following potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
125,000
|
|
|
|
2,686
|
|
Unvested restricted stock
|
|
|
0
|
|
|
|
357
|
|
Stock options
|
|
|
79,666
|
|
|
|
328
|
|
|
|
|
204,666
|
|
|
|
3,371
|
|
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. Substantially all of the Company’s cash is deposited with high quality financial institutions. At times,
however, such cash may be in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit. The Company
has not experienced any losses in such accounts as of March 31, 2014.
SEQUENTIAL
BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
Customer
Concentrations
The Company recorded
net revenues of $6,262 and $1,629 during the three months ended March 31, 2014 and 2013, respectively. During the three months
ended March 31, 2014, two licensees represented at least 10% of net revenue, accounting for 20% and 17% of the Company’s
net revenue. During the three months ended March 31, 2013 two licensees accounted for 55% and 14% of the Company’s net revenue.
Concentrations of
credit risk with respect to accounts receivable are minimal due to the limited amount of outstanding receivables and the
nature of the Company’s royalty revenues.
Accounts Receivable
The Company’s
accounts receivable amounted to approximately $5,204 and $5,286 as of March 31, 2014 and December 31, 2013, respectively. Three
licensees accounted for approximately 73% (31%, 26%, and 16%) of the Company’s total consolidated accounts receivable balance
as of March 31, 2014 and three licensees accounted for approximately 60% (35%, 14% and 11%) of the Company’s total consolidated
accounts receivable balance as of December 31, 2013. The Company does not believe the accounts receivable balance from these licensees
represents a significant collection risk based on past collection experience.
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. The Company records such legal costs as incurred.
Noncontrolling Interest
Noncontrolling
interest from continuing operations recorded for the three months ended March 31, 2014 and 2013 represents income allocations
to Elan Polo International, Inc., a member of DVS Footwear International, LLC (“DVS LLC”).
|
3.
|
Fair
Value Measurement 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 360-15,
Impairment or Disposal of Long-Lived Assets
.
|
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.
|
SEQUENTIAL
BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
|
•
|
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 March 31, 2014
and December 31, 2013, there are no assets or liabilities that are required to be measured at fair value on a recurring basis,
except for the Company’s interest rate swap (See Note 7). 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 March 31, 2014 and December 31, 2013:
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial Instrument
|
|
Level
|
|
|
3/31/2014
|
|
|
12/31/2013
|
|
|
3/31/2014
|
|
|
12/31/2013
|
|
Cash
|
|
|
1
|
|
|
$
|
22,906
|
|
|
$
|
25,125
|
|
|
$
|
22,906
|
|
|
$
|
25,125
|
|
Accounts receivable
|
|
|
2
|
|
|
$
|
5,204
|
|
|
$
|
5,286
|
|
|
$
|
5,204
|
|
|
$
|
5,286
|
|
Accounts payable
|
|
|
2
|
|
|
$
|
1,182
|
|
|
$
|
1,597
|
|
|
$
|
1,182
|
|
|
$
|
1,597
|
|
Interest rate swap
|
|
|
2
|
|
|
$
|
69
|
|
|
$
|
0
|
|
|
$
|
69
|
|
|
$
|
0
|
|
Term loans
|
|
|
3
|
|
|
$
|
55,998
|
|
|
$
|
57,931
|
|
|
$
|
52,066
|
|
|
$
|
53,640
|
|
The
carrying amounts of the Company’s cash, accounts receivable and accounts payable approximate fair value due to their short-term
maturities. The remaining financial assets and liabilities are comprised of Term Loans (as defined below).
The
Company records its interest rate swap on the condensed consolidated balance sheet at fair value (Level 2). As of March 31, 2014,
the fair value of the Company’s interest rate swap is immaterial. The valuation technique used to determine the fair value
of the interest rate swap approximates the net present value of future cash flows which is the estimated amount that a bank would
receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates.
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 (as defined
below) based on market interest rate quotes as of March 31, 2014 and December 31, 2013 for debt with similar risk characteristics
and maturities.
|
4.
|
Discontinued
Operations of Wholesale Business
|
Discontinued operations
as of March 31, 2014 and 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 March 31, 2013, costs attributable to the Heelys legacy operations mainly represent severance expense, lease termination
costs and professional and other fees. The Company did not record any costs during the three months ended March 31, 2014.
A
summary of the Company’s results of discontinued operations of its wholesale business for the three months ended March 31,
2014 and 2013 and the Company’s assets and liabilities from discontinued operations of its wholesale business as of March
31, 2014 and December 31, 2013 is as follows:
SEQUENTIAL
BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
Results
of discontinued operations:
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
0
|
|
|
$
|
(3,864
|
)
|
Noncontrolling interest
|
|
|
0
|
|
|
|
0
|
|
Loss from discontinued operations of wholesale business, net of tax
|
|
$
|
0
|
|
|
$
|
(3,864
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations, basic
|
|
$
|
-
|
|
|
$
|
(0.53
|
)
|
Loss per share from discontinued operations, diluted
|
|
$
|
-
|
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
24,700,717
|
|
|
|
7,268,359
|
|
Weighted average shares outstanding, diluted
|
|
|
26,227,439
|
|
|
|
7,268,359
|
|
Assets
and liabilities of discontinued operations:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Prepaid expenses and other current assets
|
|
$
|
190
|
|
|
$
|
213
|
|
Accounts payable and accrued expenses
|
|
$
|
629
|
|
|
$
|
1,105
|
|
Long-term liabilities
|
|
$
|
814
|
|
|
$
|
884
|
|
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. No events or circumstances indicate an impairment has been identified subsequent to the Company’s December
31, 2013 impairment testing.
SEQUENTIAL
BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
Intangible
assets are summarized as follows:
March 31, 2014
|
|
Useful
Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Finite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
15
|
|
|
$
|
4,729
|
|
|
$
|
(663
|
)
|
|
$
|
4,066
|
|
Customer agreements
|
|
|
4
|
|
|
|
1,120
|
|
|
|
(263
|
)
|
|
|
857
|
|
Patents
|
|
|
10
|
|
|
|
665
|
|
|
|
(48
|
)
|
|
|
617
|
|
|
|
|
|
|
|
$
|
6,514
|
|
|
$
|
(974
|
)
|
|
|
5,540
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,754
|
|
Future
annual estimated amortization expense is summarized as follows:
Years ending December 31,
|
|
|
|
2014 (nine months)
|
|
$
|
496
|
|
2015
|
|
|
662
|
|
2016
|
|
|
662
|
|
2017
|
|
|
469
|
|
2018
|
|
|
382
|
|
Thereafter
|
|
|
2,869
|
|
|
|
$
|
5,540
|
|
Amortization
expense amounted to $165 and $75 for the three months ended March 31, 2014 and 2013, 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. No events or circumstances indicate an impairment has been identified
subsequent to the Company’s December 31, 2013 impairment testing.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
The components of long-term
debt are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Term Loans
|
|
$
|
57,000
|
|
|
$
|
59,000
|
|
Unamortized discounts
|
|
|
(1,002
|
)
|
|
|
(1,069
|
)
|
Total long-term debt, net of unamortized discounts
|
|
|
55,998
|
|
|
|
57,931
|
|
Less: current portion of long-term debt
|
|
|
8,000
|
|
|
|
8,000
|
|
Long-term debt
|
|
$
|
47,998
|
|
|
$
|
49,931
|
|
Term Loans
In connection with
the Company’s acquisition from ETPH Acquisition, LLC (“ETPH”) of all of the outstanding equity interest of B®and
Matter, LLC (“Brand Matter”) (the “Ellen Tracy and Caribbean Joe Acquisition”), on March 28, 2013, the
Company entered into a (i) first lien loan agreement (the “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 (the “Second Lien Loan Agreement”
and, together with the First Lien Loan Agreement, the “Loan Agreements”), which provide for term loans of up to $20,000
(the “Second Lien Term Loan” and, together with the First Lien Term Loan, 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 the adjusted London Interbank Offered Rate (“LIBOR”) or (b) 3.00% per annum plus the Base
Rate, as defined in the applicable Loan Agreement (4.25% at March 31, 2014). The Second Lien Term Loan bears interest at 12.75%
per annum plus adjusted LIBOR (12.99% at March 31, 2014).
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 three months
ended March 31, 2014 and 2013, accretion of the discount amounted to $66 which was recorded as a component of interest expense
in the accompanying unaudited condensed consolidated statements of operations. Contractual interest expense on the Term Loans amounted
to $1,270 for the three months ended March 31, 2014 which was recorded as a component of interest expense in the accompanying unaudited
condensed consolidated statements of operations. There was no contractual interest expense or accretion of the discount recorded
for the three months ended March 31, 2013.
During 2013, 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 costs and included in other assets in the accompanying condensed consolidated balance sheets, and are being
amortized as non-cash interest expense over the contractual term of the Term Loans. During the three months ended March 31, 2014,
amortization of these fees amounted to $101 which was recorded as a component of interest expense in the accompanying unaudited
condensed consolidated statements of operations. There was no amortization of deferred financing costs recorded for the three months
ended March 31, 2013.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
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 as of March
31, 2014.
Interest Rate Swap
The Company currently
has exposure to variability in cash flows due to the impact of changes in interest rates for the Company’s Term Loans. During
2014, the Company entered into an interest rate swap agreement related to $57,000 notional value of the Term Loans (the “Swap
Agreement”).
The objective of the
interest rate swap agreement is to eliminate the variability in cash flows for the interest payments associated with the Term Loans,
which vary by a variable-rate: 1-month LIBOR. The Company has formally documented the Swap Agreement as a cash flow hedge of the
Company’s exposure to 1-month LIBOR. Because the critical terms of the Swap Agreement and the hedged item coincide (notional
amount, interest rate reset dates, interest rate payment dates, maturity/expiration date, and underlying index), the hedge is expected
to completely offset changes in expected cash flows due to fluctuations in the 1-month LIBOR rate over the term of the hedge. The
effectiveness of the hedge relationship will be periodically assessed during the life of the hedge by comparing the current terms
of the Swap Agreement and the debt to assure they continue to coincide and through an evaluation of the continued ability of the
counterparty to the Swap Agreement to honor its obligations under the Swap Agreement. Should the critical terms no longer match
exactly, hedge effectiveness (both prospective and retrospective) will be assessed by evaluating the cumulative dollar offset for
the actual hedging instrument relative to a hypothetical derivative whose terms exactly match the terms of the hedged item.
The components of the
Company’s Swap Agreement as of March 31, 2014, are as follows:
|
|
Notional
Value
|
|
|
Derivative Asset
|
|
|
Derivative Liability
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$
|
57,000
|
|
|
$
|
0
|
|
|
$
|
(69
|
)
|
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 “TCP 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.
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 (“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 TCP 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.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
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 TCP 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.
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 William Rast Sourcing, LLC (“Rast Sourcing”) under its factoring facility with Rosenthal & Rosenthal; (b)
all indebtedness owed by William Rast Licensing, LLC (“Rast Licensing”) to Mobility Specialty Situations I, LLC pursuant
to a promissory note in the aggregate principal amount of $750; and (c) all indebtedness owed by Rast Licensing to Monto Holdings
(Pty) Ltd. 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.
|
8.
|
Commitments and Contingencies
|
General Legal Matters
From time to time,
the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that such matters
are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company
is, or could be, involved in litigation, will not have a material adverse effect on its 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.
|
9.
|
Stock-based Compensation
|
Stock
Options
The following table
summarizes the Company’s stock option activity for the three months ended March 31, 2014:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Average Exercise
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Price
|
|
|
(in Years)
|
|
|
Intrinsic Value
|
|
Outstanding - December 31, 2013
|
|
|
423,667
|
|
|
$
|
4.45
|
|
|
|
2.7
|
|
|
$
|
812
|
|
Granted
|
|
|
17,500
|
|
|
|
6.61
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(21,667
|
)
|
|
|
(3.31
|
)
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding - March 31, 2014
|
|
|
419,500
|
|
|
$
|
4.60
|
|
|
|
2.3
|
|
|
$
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - March 31, 2014
|
|
|
342,500
|
|
|
$
|
4.28
|
|
|
|
1.6
|
|
|
$
|
765
|
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
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, 2013
|
|
|
62,000
|
|
|
$
|
3.21
|
|
Granted
|
|
|
17,500
|
|
|
|
6.61
|
|
Vested
|
|
|
(2,500
|
)
|
|
|
(2.84
|
)
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
Unvested - March 31, 2014
|
|
|
77,000
|
|
|
$
|
2.93
|
|
During the three months
ended March 31, 2014, the Company granted 17,500 stock options to employees for future services. The options are exercisable at
an exercise price of $5.75 (2,500 options) and $6.75 (15,000 options) per share over a five-year term and vest over one to three
years. These options had a fair value of $33 using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
1.15
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
37.67
|
%
|
Expected life
|
|
|
3.5 years
|
|
The Company recorded
$1 during the three months ended March 31, 2014 as compensation expense pertaining to these grants.
The Company did not
grant any stock options during the three months ended March 31, 2013.
Total compensation
expense related to stock options for the three months ended March 31, 2014 and 2013 was approximately $20 and $4, respectively.
Total unrecognized compensation expense related to unvested stock option awards at March 31, 2014 amounted to $45 and is expected
to be recognized over a weighted average period of approximately one year.
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, 2013
|
|
|
1,744,922
|
|
|
$
|
3.88
|
|
|
|
3.5
|
|
|
$
|
3,323
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding - March 31, 2014
|
|
|
1,744,922
|
|
|
$
|
3.88
|
|
|
|
3.3
|
|
|
$
|
3,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - March 31, 2014
|
|
|
1,704,922
|
|
|
$
|
3.83
|
|
|
|
3.5
|
|
|
$
|
3,323
|
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
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, 2013
|
|
|
40,000
|
|
|
$
|
3.00
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
Unvested - March 31, 2014
|
|
|
40,000
|
|
|
$
|
3.00
|
|
During the three months
ended March 31, 2013, in connection with the Heelys acquisition, 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.
During the three months
ended March 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.
During the three months
ended March 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.
Total compensation
expense related to warrants for the three months ended March 31, 2014 was approximately $8. The Company did not record any compensation
expense related to warrants for the three months ended March 31, 2013.
Restricted Stock
During the three months
ended March 31, 2014, the Company issued 200,000 shares of restricted stock to a consultant and employee for future services.
Total compensation related to the restricted stock grants amounted to approximately $1,120, of which $88 was recorded in operating
expenses in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2014.
A summary of the restricted
stock activity for the three months ended March 31, 2014 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
(in Years)
|
|
|
Intrinsic Value
|
|
Unvested - December 31, 2013
|
|
|
464,847
|
|
|
$
|
5.71
|
|
|
|
2.9
|
|
|
$
|
20
|
|
Granted
|
|
|
200,000
|
|
|
|
5.60
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Unvested - March 31, 2014
|
|
|
664,847
|
|
|
$
|
5.68
|
|
|
|
2.4
|
|
|
$
|
25
|
|
Total compensation
expense related to the restricted stock grants for the three months ended March 31, 2014 and 2013 was approximately $436 and $167,
respectively.
|
10.
|
Related Party Transactions
|
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 $0 and $250 for services
under this agreement for the three months ended March 31, 2014 and 2013, respectively. At March 31, 2014 and 2013, there were no
amounts owed to TCM.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise noted, except share and per share data)
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 $257 and $628 for the three months ended
March 31, 2014 and 2013, respectively. At March 31, 2014 and December 31, 2013, amounts owed to Tennman WR-T of $427 and $388,
respectively, are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
During the three months ended March 31, 2014 and 2013, the Company recorded approximately $296 and $123, respectively, in royalty
expense, of which approximately $296 and $123, respectively, are included in operating expenses from continuing operations.