EXPLANATORY NOTE – RESTATEMENT OF FINANCIAL INFORMATION
Sequential Brands Group, Inc. (“the Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amended Filing”) to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 15, 2021 (the “Original Filing”). In filing this amendment, the Company restates its previously issued audited consolidated financial statements and related disclosures for the year ended December 31, 2020 to reclassify its long-term debt, net of current portion, to current.
Background and Effects of the Restatement
As disclosed in the Current Report on Form 8-K filed on July 26, 2021, subsequent to the issuance of the Original Filing, the Company determined that its non-current debt should be reclassified to current debt (the “Reclassification of Indebtedness”). As previously disclosed in its Current Report on Form 8-K dated June 21, 2021, the Company entered into a waiver (the “Waiver”) under its Third Amended and Restated First Lien Credit Agreement, dated as of July 1, 2016 (as amended, restated or otherwise modified from time to time, the “Amended BoA Credit Agreement”), with Bank of America, N.A. (“BoA”), as administrative agent and collateral agent, and the lenders party thereto. Due to the Waiver, management reassessed its existing waivers with Wilmington Trust, National Association and the required lenders under its Third Amended and Restated Credit Agreement, dated as of July 1, 2016 along with its balance sheet classification of all debt for the year ended December 31, 2020. When reviewing and re-evaluating the Company’s situation of waivers and its multiple extensions, which also cover any cross-defaults between the Credit Agreements, management determined an adjustment for non-current debt is required in accordance with Accounting Standard Codification (“ASC”) 470, Debt. ASC 470 states that debt would qualify as noncurrent if the creditor eitherwaives its right to demand repayment under the specific covenant that was violatedor otherwise loses its right to demand repayment (e.g., because the debtor cures the violation) for a period of more than one year after the balance sheet date. While the Company’s existing waivers had multiple extensions, the waiver period was not over one year. As a result, in this Amended Filing, all non-current debt of $436.4 million, was reclassified to current debt at December 31, 2020.
Management evaluated the materiality of the error from a quantitative and qualitative perspective and concluded that this adjustment was material to the Company’s presentation and disclosures of current and non-current liabilities on its condensed consolidated balance sheet. There was no impact on the Company’s results of operations, changes in equity, and cash flows. The Company has effected the adjustment in this Amended Filing.
Refer to Note 18 of the Notes to Consolidated Financial Statements of this Amended Filing.
Internal Controls and Disclosure Controls and Procedures
Management has reassessed its evaluation of the effectiveness of its Disclosure Controls and Procedures as of December 31, 2020 based on the classification error described above, and has concluded that there was a material weakness in the Company’s internal controls over financial reporting for the classification of our debt and that disclosure controls and procedures were not effective. For a description of the material weakness in our internal control over financial reporting and our plan to remediate the material weakness, see Part II – Item 9A. Controls and Procedures of this Amended Filing.
Items Amended in This Filing
This Amended Filing amends and restates the following items of the Company’s Original Filing as of, and for the year ended December 31, 2020:
| ● | Part I – Item 1A. Risk Factors—Risks Related to Our Internal Controls |
| ● | Part I – Item 7. Management’s Discussion and Analysis—Liquidity and Capital Resources |
| ● | Part II – Item 9A. Controls and Procedures |
| ● | Part IV – Item 15. Exhibits, Financial Statement Schedules |
In accordance with applicable SEC rules, this Amended Filing includes certifications as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from the Company’s Principal Executive Officer and Principal Financial Officer dated as of the date of this Amended Filing.
Except for the items noted above, no other information included in the Original Filing is being amended by this Amended Filing. The Amended Filing speaks as of the date of the Original Filing and the Company has not updated the Original Filing to reflect events occurring subsequent to the date of the Original Filing. Accordingly, this Amended Filing should be read in conjunction with the Company’s filings made with the SEC subsequent to the date of the Original Filing.
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SEQUENTIAL BRANDS GROUP, INC.
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Unless otherwise noted, references in this Annual Report on Form 10‑K10-K to the “Sequential Brands Group,” “Company,” “our Company,” “we,” “us,” “our” or similar pronouns refer to Sequential Brands Group, Inc. and its subsidiaries. References to other companies may include their trademarks, which are the property of their respective owners.
This 20182020 Annual Report on Form 10‑K,10-K, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We use words such as “future,” “seek,” “could,” “can,” “predict,” “believe,” “intend,” “expect,” “anticipate,” “plan,” “may,” “will,” “should,” “estimate,” “potential,” “project” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements. Such risks and uncertainties include, but are not limited to the following: (i) risks and uncertainties discussed in the reports that the Company has filed with the Securities and Exchange Commission (the “SEC”); (ii) general economic, market or business conditions; (iii) the Company’s ability to identify suitable targets for acquisitionssubstantial level of indebtedness, including the possibility that such indebtedness and to obtain financing for such acquisitions on commercially reasonable terms;related restrictive covenants may adversely affect the Company’s future cash flows, results of operations and financial condition, and decrease its operating flexibility; (iv) the Company’s ability to timely achieveextend the anticipated resultsWaiver (as defined herein); (v) uncertainties around the effects of the COVID-19 pandemic, including adverse effects on the Company's business, financial position, cash flows, ability to comply with its acquisitionsdebt covenants and any potential future acquisitions; (v)related uncertainty around the Company's ability to continue as a going concern; (vi) uncertainties related to the timing, proposals or decisions arising from the Company’s ability to successfully integrate acquisitions into its ongoing business; (vi)strategic review, including the potential impactdivestiture of one or more existing brands or a sale of the consummation of its acquisitions or any potential future acquisitions on the Company’s relationships, including with employees, licensees, customers and competitors;Company; (vii) the Company’s ability to achieve and/or manage growth and to meet target metrics associated with such growth; (viii) the Company’s ability to successfully attract new brands and to identify suitable licensees for its existing and newly acquired brands; (ix) the Company’s substantial level of indebtedness, including the possibility that such indebtedness and related restrictive covenants may adversely affect the Company’s future cash flows, results of operations and financial condition and decrease its operating flexibility; (x) the Company’s ability to achieve its guidance; (xi)any guidance it provides; (x) continued market acceptance of the Company’s brands; (xii)(xi) changes in the Company’s competitive position or competitive actions by other companies; (xiii)(xii) licensees’ ability to fulfill their financial obligations to the Company; (xiv)(xiii) concentrations of the Company’s licensing revenues with a limited number of licensees and retail partners; (xiv) the Company’s ability to identify suitable targets for acquisitions and to obtain financing for such acquisitions on commercially reasonable terms; (xv) the Company’s ability to timely achieve the anticipated results of its acquisitions and any potential future acquisitions; (xvi) the Company’s ability to successfully integrate acquisitions into its ongoing business; (xvii) the potential impact of the consummation of its acquisitions or any potential future acquisitions on the Company’s relationships, including with employees, licensees, customers and competitors; (xviii) adverse effects on the Company and its licensees due to natural disasters, pandemic disease and other unexpected events; (xix) uncertainties surrounding the Company and its legal proceedings; and (xx) other circumstances beyond the Company’sCompany's control.
Forward-looking statements speak only as of the date they are made and are based on current expectations and assumptions. You should not put undue reliance on any forward-looking statement. We are not under any obligation, and we expressly disclaim any obligation, to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to such or other forward-looking statements.
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Corporate Overview
We own a portfolio of consumer brands in the home, active and fashionlifestyle categories, includingMartha Stewart,, Jessica Simpson, AND1, Avia, Joe’s and GAIAM. We aim to maximize the value of our brands by promoting, marketing and licensing the brands through various distribution channels, including to retailers, wholesalers and distributors in the United States and in certain international territories. Our core strategy is to enhance and monetize the global reach of our existing brands, and to pursue additional strategic acquisitions to grow the scope of and diversify our portfolio of brands.
Our business is designed to maximize the value of our brands through license agreements with partners that are responsible for manufacturing and distributing our licensed products and, with the exception of our Martha Stewart brand, primarily responsible for the design of such licensed products. Our brands are licensed for a broad range of product
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categories, including apparel, footwear, fashion accessories and home goods, as well as, with respect to our Martha Stewart brand, food, wine and a variety of media related assets, such as magazines, books and other print and digital content.goods. We seek to select licensees who have demonstrated the ability to produce and sell quality products in their respective licensed categories and have the capability to meet or exceed the minimum sales thresholds and guaranteed minimum royalty payments that we generally require.
We license our brands to both wholesale and direct-to-retail 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 a particular brand for sale to multiple accounts within an approved channel of distribution and territory. 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. As of December 31, 2018,2020, we had approximately one-hundred fiftyone hundred licensees, with wholesale licensees comprising a significant majority.
Strategy
We own, manage, and maximize the long-term value of a diversified portfolio of global consumer brands. We aim to acquire well-known consumer brands with high potential for growth and strong brand awareness. We additionally seek to diversify our portfolio by evaluating the strength of targeted brands and the expected viability and sustainability of future royalty streams. Upon the acquisition of a brand, we partner with leading wholesalers and retailers to drive incremental value and maximize brand equity. We focus on certain key initiatives in our licensing and brand management business. These initiatives include:
| Maximizing the value of our existing brands by creating efficiencies, adding additional product categories, expanding distribution and retail presence and optimizing sales through innovative marketing that increases consumer brand awareness and loyalty; |
| Expanding through e-commerce channels; |
| Developing international expansion through additional licenses, partnerships and other arrangements with leading retailers and wholesalers outside the United States; and |
| Acquiring consumer brands (or the rights to such brands) with high consumer awareness, broad appeal and applicability to a wide range of product categories. |
Licensing Relationships
Our license agreements typically require a licensee to pay us royalties based upon net sales and, in most cases, contain guaranteed minimum royalties. Our license agreements also require licensees to support the brands by either paying or spending contractually guaranteed minimum amounts for the marketing and advertising of the respective licensed brands. As of February 28, 2019,April 13, 2021, we had contractual rights to receive an aggregate of $317.9$194.8 million in minimum royalty and marketing and advertising revenue from our licensees through the balance of the current terms of such licenses, excluding any renewals.
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Our license agreements stipulate specific geographical territories and distribution channels in which the licensed products may be sold. Currently, the majority of our revenues are from license agreements with stipulated distribution territories in the United States. As we grow our existing brands and acquire new brands, we intend to increase the share of our international revenue, primarily through additional licenses, partnerships and other arrangements.
Our licensing revenues are concentrated with certain licensees and retail partners. During the year ended December 31, 2018, one licensee2020, three licensees represented at least 10% of net revenue, accounting for 13%19%, 18% and 15% of the Company’s net revenue.revenue from continuing operations. For additional information, see “Risk Factors Risks Related to our Business - A substantial portion of our licensing revenue is concentrated with a limited number of licensees and retail partners, such that the loss of a licensee or retail partner could materially decrease our revenue and cash flows” in Item 1A.
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Description of Our Brands
Martha Stewart
We own the Martha Stewart brand, which we acquired in 2015 through the acquisition of Martha Stewart Living Omnimedia (“MSLO”). MSLO was founded in 1997 by Martha Stewart, an Emmy Award-winning television show host, entrepreneur, bestselling author of over 90 books, and America’s most trusted lifestyle expert and teacher. Millions of people rely on Martha Stewart as a source of useful "how-to" information for all aspects of everyday living - cooking, entertaining, gardening, home renovating, collecting, organizing, crafting, holidays, healthy living and pets. The Martha Stewart brand reaches approximately 100 million consumers across all media and merchandising platforms each month. Her branded products are found in over 70 million households and have a growing retail presence in thousands of locations. We currently license the Martha Stewart brand to various licensees, including retailers such as Macy’s, Staples and Michaels. In 2018, the Martha Stewart brand launched the MarthaStewart.TV app available for Apple, Android, Amazon Fire+, Roku and Chromecast devices. Additionally, the Martha Stewart brand launched a new floral subscription line in the fourth quarter of 2018. The Martha Stewart brand continued its relationship with QVC in multiple categories including apparel, skin care, garden, and food.
Jessica Simpson
We acquired a majority ownership interest in the Jessica Simpson brand, including the Jessica Simpson Collection master license and other rights, in 2015. Founded in 2005, the Jessica Simpson Collection is a signature lifestyle concept inspired by and designed in collaboration with Jessica Simpson. The growing brand offers multiple product categories including footwear, apparel, fragrance, fashion accessories, maternity apparel, girls’ clothing and home products. The brand is supported by best-in-class licensees and has strong department store and online distribution through Dillard’s, Macy’s, Belk, Nordstrom, Zappos.com, and DSW, among other independent retailers. We have a license agreement with Camuto Group to manufacture and distribute footwear under the Jessica Simpson Collection. The Jessica Simpson Collection is distributed worldwide.
AND1
We acquired the AND1 brand in 2014, which was founded in 1993 and prides itself on being the original street basketball brand focusing on the everyday player. Key licensees for the AND1 brand include E.S. Originals, Inc. (“ESO”)Galaxy Active for footwear and High Life, LLC for apparel. In addition, the AND1 brand is licensed in product categories, such as hosiery, underwear, off-court/casual footwear and other accessories. The AND1 brand is offered through Wal-Mart stores, sporting goods retailers and related e-commerce sites in the United States and has a strong distribution network reaching over 20 countries.In 2018, AND1 announced a multi-year partnership with NBA legend Kevin Garnett as the creative director and global brand ambassador for AND1 as well as the development of a jointly created capsule collection.
Avia
We acquired the Avia brand in 2014, which was founded in 1979 and is best known for running and activewear products designed to unite performance and function for athletes of every level. Since we acquired Avia, we have expanded its licensed product categories to include wearable fitness accessories, hosiery, sports bags and various other accessory products. The Avia brand is primarily offered through Wal-Mart stores in the United States, with additional distribution through specialty retailers and related e-commerce sites such as Modell’s Sporting Goods, as well as globally in numerous countries. In 2018, Avia continued to expand globally and initiatedcountries including an international partnership in China. In 2018, we announced our collaboration with Vanessa Hudgens to serve as the brand ambassador for the Avia brand as well as the development of a jointly created capsule collection.
GAIAM
We acquired the GAIAM brand in 2016. Founded in 1996 as an eco-living catalog company, GAIAM evolved into a yoga brand by producing and distributing yoga videos and related products through multiple channels of distribution. GAIAM has since expanded to include a full line of apparel, yoga mats, yoga mat bags, yoga blocks and straps, yoga and
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fitness props, balance balls, bags, active sitting products, including our balance ball chair, fitness kits and various other accessories. GAIAM is dedicated to making yoga, fitness and wellness accessible to all through a wide distribution network that consists of approximately 38,000 retail doors, 19,000 store-within-a-stores, 5,000 category management locations and e-commerce. We currently license the GAIAM brand to various licensees, including Fit For Life, LLC for yoga sporting goods and High Life, LLC for apparel. In 2018, Jessica Biel, GAIAM’s brand ambassador, in collaboration with GAIAM launched their capsule collection.
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Joe’s
We acquired the Joe’s brand in 2015. Founded in 2001, Joe’s is a casual chic global lifestyle brand synonymous with classic, modernized wardrobe staples ranging from premium denim to handcrafted collection pieces, and from contemporary accessories to footwear. Joe’s has since expanded to include kid’s apparel and footwear, intimate apparel, hosiery,sleepwear, fragrance, men’s tailoring, tie, belts small leather goods and bags. hosiery. Concurrently with the acquisition, we entered into a long-term license agreement for the brand’s core categories with Centric Brands, Inc.Joe’s branded products are available at better department stores and specialty boutiques in the United States and internationally.Joe’s marketing campaigns featured top model Sara Sampaio for the women’s business and Julian Edelman for the men’s business.
Ellen Tracy
We acquired the Ellen Tracy brand in 2013, which was founded in 1949 and is a leading fashion lifestyle brand focusing on polished and sophisticated style for modern women. The Ellen Tracy brand is known for quality tailoring, timeless silhouettes and classic signature prints. Product offerings currently include apparel, outerwear, sleepwear, intimate apparel, hosiery, eyewear, fragrance, fashion accessories, swimwear, handbags and luggage. Licensees for the Ellen Tracy brand include GBG USA Inc. for sportswear and dresses, Weatherproof for outerwear, Amerex for swimwear, and Komar for sleepwear and intimate apparel. In addition, the Ellen Tracy brand has been licensed for jewelry, bath and body gifts, cosmetics and home. The Ellen Tracy brand is offered in premium and regional department and specialty stores throughout the United States as well as globally.In 2018, Ellen Tracy continued its collaboration with top model Irina Shayk, featuring her in marketing campaigns and releasing a jointly created limited edition apparel collection.
Emeril Lagasse
We acquired the Emeril Lagasse brand in 2015. Emeril Lagasse is the chef/proprietor of 12 restaurants throughout the United States, and the best-selling author of 19 cookbooks. As a national TV personality, he has hosted more than 2,000 shows on the Food Network, is the food correspondent for ABC’s “Good Morning America” and appeared as a guest judge on Bravo’s hit food series, “Top Chef”. Licensees for the Emeril Lagasse brand primarily include various food and kitchen preparation manufacturers for product categories such as cookware, cutlery and food and coffee products. Emeril Lagasse branded products are available in department stores, club stores, supermarkets and specialty stores within the United States, as well as through QVC.
William Rast
The William Rast brand is a lifestyle fashion brand rounded in the iconography of biker culture with designs that embody the “new America” sensibility and deliver an edgy yet tailored collection of premium denim, ready to wearfragrance and outerwearjewelry for both men and women. Product offerings include denim sportswear, outerwear and fragrance.jewelry. Licensees for the William Rast brand include One JeanswearOmega Apparel for men’s denim and Millennial Apparel Group for women’s apparel, Level 8 Apparel LLCdenim, Yoki Fashions Inc. for outerwearfootwear and Bellevue Brands Inc. for fragrance. Distribution includes several national retailers including Macy’s, Dillard’s, Belk, Lord & Taylor and Amazon. In August 2018, William Rast launched its Fall 2018 men’s and women’s collection with a campaign featuring multi-platinum selling country music star Brett Young alongside supermodel Stella Maxwell.
Heelys
We acquired the Heelys brand in 2013, which was founded in 1999 and has been a breakout success in the world of action sports among children and teens with its innovative, patented dual-purpose wheeled footwear, featuring a stealth removable wheel in the heel. Heelys continues to grow into the ultimate kids’ active lifestyle brand. The primary licensee
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for the Heelys brand is BBC International LLC for wheeled footwear and related accessories. The Heelys brand is offered through department stores, sporting goods retailers, related e-commerce sites, as well as Heelys’ own e-commerce site in the United States and over 70 additional countries.
Caribbean Joe
We acquired the Caribbean Joe brand in 2013, which was founded in 1999 and is a casual, island inspired, lifestyle brand. Originally rooted in apparel, Caribbean Joe’sJoe’s product offerings have expanded to include swimwear, fashion accessories and home textiles. The Licensees for the Caribbean Joe brand include Levy Group Inc. for all apparel and women’s swimwear and the Bentex Group for women’s sleepwear, loungewear as well as men’s and kid’s swimwear. The Caribbean Joe brand is distributed in the United States through mid-tier department stores, specialty stores, e-commerce sites and off-price retailers as well as internationally through specialty retailers and distributors.Club retailers.
DVS
We own a 65% interest in the DVS brand through a joint venture with Elan Polo International, Inc. (“Elan Polo”), a global organization which designs, sources and delivers men’s, women’s and children’s shoes to retailers around the world. The DVS brand is a footwear brand dedicated to inspiring youth to have fun and always push forward and is best known for its great style, technical features and input of some of the best action sports athletes in the world. Product offerings for the brand currently include footwear, backpacks and accessories. The primary licensee for the DVS brand is
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Elan Polo for footwear, with distribution through specialty street skating and other specialty stores in the United States and internationally.
The Franklin MintSPRI
We acquired The Franklin Mint brand in 2013, which was founded in 1964 and is a brand in the collectible and gift giving arena. The Franklin Mint brand has been licensed in multiple categories, including coins, models, jewelry, games, décor, giftables, seasonal, and co-branded products through license agreements. The Franklin Mint brand is currently offered via the franklinmint.com website.
Linens N Things
We acquired the Linens N Things brand in 2014, which was founded in 1975 and is a home textiles, housewares and decorative home accessories brand.
SPRI
We acquired the SPRI brand in July 2016 as part of the GAIAM transaction. Founded in 1983 as the Sports Performance Rehabilitative Institute, SPRI pioneered a line of rubber resistance products in the fitness & training category. Over the past 30 years, SPRI has grown to be a leading exercise brand, offering a full line of fitness accessories, training tools and educational materials. The SPRI brand today focuses on distribution in both the commercial fitness (gyms, fitness clubs and hotels) and retail fitness channels. The SPRI brand continues to show growth through expansion at TargetWalmart with the “Ignite” by SPRI collection.
Nevados
We acquired the Nevados brand in 2014, which was founded in 1990 and was inspired by the 17,000‑ foot Los Nevados National Natural Park in the Colombian Andes Mountains range. With a dedication to comfort and durability, Nevados offers hiking boots and outdoor shoes to make sure you see the great outdoors, and enjoy every step of the way. Today the brand is distributed through Amazon, as well as select specialty stores in the United States and internationally.
Business Segment
We have a single operating and reportable segment, as described more fully in “Management’s Discussion and AnalysisNote 2 of the Notes to Consolidated Financial Condition and Results of Operations—Reportable Segment” in Item 7. See Item 6 of this Annual
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Report on Form 10‑K for measures of our net revenues, consolidated net loss and total assets as of December 31, 2018 and 2017, and for the years ended December 31, 2018, 2017 and 2016.Statements.
Corporate Organization/Information
We were formed in June 2015 in connection with a strategic combination resulting in our predecessors, Sequential Brands Group, Inc. (“Old Sequential”) and MSLO, becoming our wholly-owned subsidiaries (the “Mergers”). Old Sequential was incorporated under the laws of the State of Delaware in 1982 as People’s Liberation, Inc. and changed its name to Sequential Brands Group, Inc. in 2012. Old Sequential's common stock began trading on the Nasdaq Capital Market (“Nasdaq”) under the ticker “SQBG” on September 24, 2013, and we succeeded to Old Sequential’s listing on December 7, 2015.
On June 10, 2019, we completed the sale of MSLO, a Delaware corporation and a wholly-owned subsidiary of the Company, for $166 million in cash consideration, plus additional amounts in respect of pre-closing accounts receivable that are received after the closing, subject to certain adjustments, pursuant to the Purchase Agreement with the Buyer entered into on April 16, 2019. In addition, the Purchase Agreement provides for an earnout of up to $40,000,000 payable to Sequential if certain performance targets are achieved during the three calendar years ending December 31, 2020, December 31, 2021 and December 31, 2022. The performance targets were not met for the year ended December 31, 2020. MSLO and its subsidiaries were engaged in the business of promoting, marketing and licensing the Martha Stewart and the Emeril Lagasse brands through various distribution channels.
Due to the sale of MSLO during the second quarter of 2019 (see Note 4 of Notes to Consolidated Financial Statements included in this Form 10-K), in accordance with ASC 205, Discontinued Operations, we have classified the results of MSLO as discontinued operations in our consolidated statements of operations and cash flows for all periods presented. Additionally, the related assets and liabilities directly associated with MSLO are classified as held for disposition from discontinued operations in our consolidated balance sheets for all periods presented. All amounts included in the Notes to Consolidated Financial Statements relate to continuing operations unless otherwise noted.
Competition
We operate in a highly competitive market, both for our individual brands and for the Company as a whole.
Our brands are subject to extensive competition from various domestic and foreign brands. Each of our brands has a number of competitors within its specific product categories and distribution channels that compete with the product categories and distribution channels in which our brands’ products are sold. Our brands also compete within the retail stores and other distribution channels that carry such brand’s product lines with other products offered by these retail stores and distribution channel in the respective product categories, including with products sold under our partners’ private labels. Due to various business factors as well as COVID-19, there has been a consequential effect of retailers going out of business and store closures which has led to increased competition within the retailers that are still open. Furthermore, products and brands that were previously selling in their own retail stores or department stores are now expanding to serve
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their business to a larger market, through discount stores and warehouses clubs. In this new environment, our brands have less shelf space to sell their goods and an ever-growing market of new brands hitting the market. We also compete with the e-commerce businesses of these stores and other websites that sell similar retail goods. As more customer demand shifts to digital commerce, our brands face more competition from new and up and coming brands whose launch and advertising strategies are through digital media platforms. Competitive factors include design, style, quality, price, name recognition, service and advertising.
In addition, we face competition in establishing and maintaining licensee relationships for our existing brands. Competitors may seek to enter into brand licensing arrangements with our current or potential licensees, which may inhibit our ability to enter into or maintain licensing arrangements. In addition, the retailers that currently sell our branded products may develop their own brands or acquire brands rather than purchase products from our licensees, which could make it more difficult for our licensees to achieve their sales targets.
We also compete with traditional apparel and consumer brand companies, as well as other brand management companies, for acquisitions of accretive brands, particularly brands with high consumer awareness, broad appeal and applicability to a wide range of product categories.
Trademarks
Our trademarks and associated marks are registered or pending registration with the U.S. Patent and Trademark Office in block letter and/or logo formats, as well as in combination with a variety of ancillary marks for use with respect to a broad range of product categories, including footwear, apparel, fragrance, handbags, backpacks, watches, home goods and various other goods and services. We intend to renew these registrations as appropriate prior to their expiration. In addition, we register our trademarks in other countries and regions around the world. We also have domestic, foreign and international intellectual property coverage for the technology and designs for several brands including for Heelys wheeled footwear and certain Gaiam yoga-related products and SPRI products. We own the rights to 4421 U.S. issued patents and 4922 foreign issued patents within 24 territories, along with several pending U.S. and foreign patent applications and industrial designs. Further, in connection with the acquisition of the Martha Stewart brand, we are also the owners of domestic and international design and utility patents covering certain Martha Stewart Crafts paper punches. 12 territories.
We monitor on an ongoing basis unauthorized use and filings of our trademarks and patents and rely primarily upon a combination of federal, state and local laws, as well as contractual restrictions, to protect our intellectual property rights, both domestically and internationally.
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Seasonality
Our business is affected by seasonality in the businesses of many of our licensees. Historically, this can result in higher revenues during our fourth quarter, which includes the holiday retail season in the United States. We recognized 29% and 28% of our annual net revenues during the fourth quarter of 2018 and 2017, respectively. Our seasonality may change as we continue to grow our business.
Employees
As of February 28, 2019,April 13, 2021, we had a total of 12919 employees and area-specific consultants working to support our operations. None of our employees are represented by a labor union. We consider our relationship with our employees to be satisfactory.
Available Information
Our corporate website address is www.sequentialbrandsgroup.com. The information contained on our website is not part of this report. We file our annual, quarterly and current reports and other information with the SEC. These reports, and any amendments to these reports, are made available on our website and can be viewed and downloaded free of charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC. In addition, the SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, which is available at www.sec.gov.
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows, prospects and/or the trading price of our common stock. Although the risks and uncertainties listed below are those that we consider significant, material risks and uncertainties that are not presently known to us may also adversely affect our business, financial condition or results of operations. In
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evaluating our business and an investment in our securities, you should consider the following risk factors, in addition to the other information presented in this report, as well as the other reports we file from time to with the SEC:
Risks Related to Our Internal Controls
We have identified a material weakness in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.
On July 21, 2021, our board of directors, following discussions with management, determined that its audited financial statements for the year ended December 31, 2020 as included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2021 and its unaudited condensed consolidated financial statements for the quarter ended September 30, 2020 filed with the SEC on November 16, 2020 required restatement to correct the classification of its outstanding debt as current. The board’s determination to restate such financial statements was based upon the requirement to reclassify all of its debt from non-current to current in its consolidated balance sheets that was identified by management during the course of preparing the Company’s financial statements for the quarter ended March 31, 2021.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation of those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As described elsewhere in this filing, we have identified a material weakness in our internal control over financial reporting related to debt classification accounting. As a result of this material weakness, our management has concluded that our internal control over financial reporting was not effective as of the end of the period covered by this report.
We are taking measures to remediate the material weaknesses described herein. However, if we are unable to remediate our material weaknesses in a timely manner or we identify additional material weaknesses or significant deficiencies in our internal controls or disclosure controls, we may be unable to provide required financial information in a timely and reliable manner and we may incorrectly report financial information. If our financial statements are not filed on a timely basis, we could be subject to adverse action by shareholders, Nasdaq, the SEC or other regulatory authorities. The existence of material weaknesses or significant deficiencies in internal control over financial reporting could adversely affect our reputation or investor perceptions of us, which could have a negative effect on the trading price of our stock. In addition, we may incur additional costs to remediate material weaknesses or significant deficiencies in our internal control over financial reporting.
We cannot assure you that the measures we are taking will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
Risks Related to Our Business
We have incurred a substantial amount of indebtedness in connection with our acquisitions, which could adversely affect our financial condition and results of operations and raises substantial doubt about our ability to continue as a going concern.
As of December 31, 2020, we had outstanding net indebtedness of $452.3 million, as described more fully in Note 8 of Notes to Consolidated Financial Statements. As more fully described below and in our other public filings, we
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obtained amendments and waivers of our indebtedness multiple times during 2020 and 2021 and expect to need one or more additional amendments or waivers in the future.
Our high level of indebtedness means we may be unable to generate cash sufficient to pay when due (whether at stated maturity or upon acceleration) the principal of, interest on or other amounts due in respect of such indebtedness. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents that govern our indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service debt, would increase.
Our substantial level of indebtedness and concerns around our ability to comply with the covenants in our indebtedness has important consequences, which include, but are not limited to, the following:
| ● | if we continue to be unable to comply with the financial and other restrictive covenants in the documents governing our indebtedness we may experience an event of default that, if not cured or waived, could result in the foreclosure on substantially all of our assets; |
| ● | a substantial portion of our cash flow from operations is required to pay principal and interest on our debt and costs incurred in obtaining amendments to and waivers under our debt; |
| ● | our interest expense could increase if interest rates increase because our borrowings generally bear interest at floating rates; |
| ● | our leverage increases our vulnerability to general economic downturns, including the effects of COVID-19, and adverse competitive and industry conditions, placing us at a disadvantage compared to those of our competitors that are less leveraged; |
| ● | our debt service obligations limit our flexibility in planning for, or reacting to, changes in our business and in the brand licensing industry and limit our ability to expand our business; and |
| ● | our level of debt limits our ability to raise additional financing on satisfactory terms or at all. |
We cannot be certain that we will be able to pay principal and interest on our debt and meet our other obligations or that we will be able to continue as a going concern. In particular, we do not know at this time what the effects will be of the coronavirus pandemic, including the effects of our licensees requesting delaying payments or failing to make payments to us. We expect that we will be required to sell assets, refinance all or part of our debt, make additional borrowings or sell more securities, none of which we can guarantee that we will be able to do and which, if accomplished, may adversely affect us.
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We are subject to a number of restrictive covenants under our debt arrangements, including operating restrictions and financial covenants, and our lenders have a right to appoint an independent majority of our board of directors. Our business, financial condition and results of operations will be adversely affected if we continue to be unable to maintain compliance with such covenants.
Our outstanding debt is generally guaranteed jointly and severally by each of our domestic subsidiaries. Our and our subsidiaries’ obligations under the Debt Facilities (as defined in Note 8 of Notes to Consolidated Financial Statements) and the associated guarantees are secured, in each case, by first priority liens (subject, in the case of the Amended Wilmington Credit Agreement, to the liens under the Amended BoA Credit Agreement on, and security interests in, substantially all of the present and after acquired assets of us and each of our subsidiaries, subject to certain customary exceptions). The Debt Facilities contain a number of restrictive covenants, representations and warranties, including representations relating to the intellectual property owned by us and our subsidiaries and the status of our material license agreements. In addition, the Debt Facilities include covenants and events of default, including, in the case of the Amended BoA Credit Agreement, requirements that we (i) maintain a positive net income (as defined), (ii) satisfy a maximum loan to value ratio (as calculated pursuant to the Amended BoA Credit Agreement) and (iii) satisfy a maximum consolidated first lien leverage ratio (as calculated pursuant to the Amended BoA Credit Amendment), and, in the case of the Amended Wilmginton Credit Agreement, to satisfy (i) a maximum consolidated total leverage ratio (as calculated pursuant to the Amended Wilmington Credit Agreement) and (ii) a maximum consolidated first lien leverage ratio (as calculated pursuant to the Amended Wilmington Credit Agreement). We have been unable to comply with such covenants in recent fiscal quarters and have needed to obtain amendments of and waivers under our Debt Facilities. If we continue to be unable to comply with such covenants, our lenders could demand immediate payment of amounts outstanding.
As described elsewhere in this filing, the COVID-19 pandemic has adversely affected our projected long-term revenues, earnings, liquidity and cash flows. We obtained multiple waivers of the covenants in the Amended Wilmington Credit Agreement during 2020, and our current waiver expires on April 19, 2021. We plan to work with our lenders under the Amended Wilmington Credit Agreement to address the financial covenants in the Loan Agreements in response to the current economic environment. However, there can be no assurance that we will be able to reach any agreement with such lenders. If we are unable to comply with our debt covenants as modified, a default under the Loan Agreements would be triggered and our obligations under the Loan Agreements may be accelerated. As a result, we would need to seek alternative financing sources to fund our ongoing operations and to repay amounts outstanding and satisfy our other obligations under our existing borrowing and financing arrangements. Such financing may not be available on favorable terms, or at all. Non-compliance with our debt covenants creates a material uncertainty that casts substantial doubt with respect to our ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities that would be necessary if we were unable to realize our assets and settle our liabilities as a going concern in the normal course of operations. In addition, as previously disclosed in our Form 10-Q for the quarter ended September 30, 2020, we have agreed with the lenders under the Amended Wilmington Credit Agreement (“the Wilmington Facility Loan Parties”) that, if the Wilmington Facility Loan Parties continue to be lenders as of April 1, 2021, they have the right to appoint an independent majority of our Board of Directors (inclusive of Ms. Mazzucchelli and Mr. Dionne, who currently serve as directors of the Company). As disclosed in our Form 8-K filed on March 31, 2021, the Wilmington Lenders continue to be our lenders as of April 1, 2021, and furthermore, we received resignations from four directors and the Board currently consists of Mr. William Sweedler, Mr. Aaron Hollander, Ms. Mazzucchelli and Mr. Dionne. The Company’s bylaws provide that, effective April 1, 2021, the Board may not increase the number of directors to more than five members.
We expect to incur significant costs in connection with our waivers related to our compliance under the Amended Wilmington agreement as well as costs related to any dispositions or divestitures of our brands.
We have incurred and expect to continue to incur significant costs and expenses in connection with past and future waivers related to our compliance with and amendments to our debt arrangements, including lender fees, third party advisory costs and legal costs. There are many factors beyond our control that could affect the total amount or timing of similar expenses in the future.
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We are engaged in a broad strategic review, which may substantially change our operations and may result in the divestiture of one or more existing brands or a sale of the Company.
We are engaged in a broad exploration of strategic alternatives available to the Company to best position, manage or repay its indebtedness. Such strategic alternatives may include the divestiture of one or more existing brands or a sale of the Company. Stifel is the exclusive financial advisor for the process. We cannot assure you that the review of strategic alternatives will result in any transaction, and the process of exploring strategic alternatives has involved, and will continue to involve, the dedication of significant resources and the incurrence of significant costs and expenses. In addition, speculation and uncertainty regarding the strategic review process may cause or result in disruption of our business; distraction of our employees; difficulty in recruiting, hiring, motivating, and retaining talented and skilled personnel; difficulty in maintaining or negotiating and consummating new business or strategic relationships or transactions; and increased stock price volatility. If we are unable to mitigate these or other potential risks related to the uncertainty caused by the strategic review process, it will adversely affect our business or adversely impact our net sales, operating results, and financial condition.
The recent coronavirus outbreak has had an adverse effect on our business, financial position, cash flows and on the value of our intangible assets.
COVID-19 has spread rapidly across the globe, including the U.S. The pandemic has had an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, our licensees, customer sentiment in general, and temporary closing of stores containing our brands. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine may continue to increase, which has already affected, and may continue to affect, retailers, as well as our licensees who sell to these retailers. We are unable to predict when retailers who have temporarily closed stores will reopen or if additional periods of store closures will be needed or mandated, including the spread of COVID-19. Continued impacts of the pandemic have and may continue to materially adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows as certain licensees have requested temporary relief, delayed or not made scheduled payments. COVID-19 is adversely impacting sales in the apparel and accessories industry. Diminished sales of products bearing our brands have had an adverse effect on the estimated fair value of our intangible assets, including our trademarks, which has resulted in material non-cash impairment charges for the year ended December 31, 2020. No triggering events were identified that would require additional reassessment of the Company’s intangible assets at December 31, 2020. As we disclosed previously, we are involved in a strategic review of our brands which includes evaluating potential divestitures of our brands. We may or may not execute a transaction; however, if we do we would re-examine our indefinite-lived intangible asset valuations at that time which may or may not result in a potential impairment. The extent of the future impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. There can be no guarantee that consumer demand will recover. This situation is changing rapidly, and additional adverse impacts may arise that we are not aware of currently. The potential impact of COVID-19 intensifies the business and operating risks that we face and should be considered when reading the additional risk factors below.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may damage the facilities of our licensees on which we depend and could impact consumer spending.
If any of our licensees facilities, including manufacturing, finishing or distribution facilities, or the facilities of our suppliers, third-party service providers, or customers, is affected by natural disasters, such as earthquakes, tsunamis, power shortages or outages, floods or monsoons, public health crises, such as pandemics and epidemics, political crises, such as terrorism, war, political instability or other conflict, or other events outside of our control, it could have an adverse effect on our business. Disasters occurring at our licensees’ facilities also could impact our reputation and our consumers’ perception of our brands. Moreover, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally, which could adversely impact our results of operations. In March 2020, the World Health Organization declared the coronavirus outbreak to be a global pandemic. Certain licensees have been
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and may continue to be adversely impacted by the coronavirus outbreak due to manufacturing facility closures, store closures and a decrease in consumer traffic. Although the coronavirus outbreak is an ongoing phenomenon with uncertain scale, to date the outbreak has had severe global macroeconomic and financial market impacts. The impact of the coronavirus on consumer demand and on our results of operations remain uncertain; however, such impacts may be significant.
The failure of our licensees to fulfill their financial obligations with respect to royalty payments under their license agreements or to otherwise adequately produce, market and sell products bearing our brand names in their license categories could have a material adverse effect on our business, financial condition and results of operations.
Our revenues are almost entirely dependent on royalty payments made to us pursuant to license agreements entered into with licensees of our brands. These license agreements often require that licensees advance payment to us of a portion of the sales royalty payments due thereunder and, in most cases, provide for guaranteed minimum royalty payments. The failure of our licensees to satisfy their financial obligations under these agreements, or their inability to operate successfully or at all, could result in a breach of an agreement, early termination of an agreement, non-renewal of an agreement or an amendment of an agreement to reduce the guaranteed minimum royalty payments or sales royalties due thereunder, each of which could eliminate some or all of that revenue stream. A decrease or elimination of revenue could have a material adverse effect on our financial condition, results of operations and cash flows.
During the term of a license agreement, our revenues and the value of our brands substantially depend upon our licensees’ ability to maintain the quality and marketability and market acceptance of the branded products licensed to such licensee and their failure to do so could negatively affect consumer perception of our brands and harm our future growth and prospects. Further, the failure of our licensees to meet their production, manufacturing and distribution requirements, or a weak economy or softness in the retail, apparel or home goods sectors, could cause our licensees to default on their obligations to make guaranteed minimum royalty payments to us or cause a decline in their sales and potentially decrease the amount of royalty payments in excess of guaranteed minimum royalty payments due to us. In addition, our licensees’ inability to maintain market acceptance of our brands or our failure to monitor our licensees’ compliance with their license
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agreements or take appropriate corrective action when necessary may subject our intellectual property assets to cancellation, loss of rights or devaluation and any devaluation of our trademarks or other intellectual property could cause a material impairment in the carrying value of such intellectual property, potentially resulting in a charge as an expense to our results of operations. If such developments occur or our licensees are otherwise not successful, the value and recognition of our brands, as well as our business, financial condition and results of operations, could be materially adversely affected.
Our business depends on continued market acceptance of our brands and the products bearing these brands.
The retail industry is highly susceptible to changes in consumer preferences and continued market acceptance of our brands and our licensees’ products, as well as market acceptance of any future products bearing our brands and is subject to a high degree of uncertainty. In order to generate revenues and profits, our licensees must develop product offerings that appeal to consumers. We retain rights to monitor the products our licensees’ design and produce and may retain the right to preview and approve such products, we cannot assure you that licensees will develop, market and sell products that appeal to consumers. Any significant changes in consumer preferences or any inability on our licensees’ part to anticipate or react to such changes could reduce demand for our branded products and erode the competitiveness of such products, which would negatively affect our financial condition, results of operations and cash flows.
The continued success of our brands and branded products and market acceptance of new products and product categories also depend on our ability to continually improve the effectiveness of our marketing efforts. We devote significant resources and expenditures to promoting our brands and new product launches, but there can be no assurance as to our continued ability to effectively execute our marketing programs. To the extent our licensees misjudge the market for our brands and branded products, or our marketing efforts are unsuccessful, our business, results of operations and prospects will be adversely affected.
We have incurred a substantial amount of indebtedness in connection with our acquisitions, which could adversely affect our financial condition and results of operations.
As of December 31, 2018, we had outstanding net indebtedness of $610.8 million, as described more fully in Note 10 to our consolidated financial statements.
Our high level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on or other amounts due in respect of such indebtedness. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents that govern our indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service debt, would increase.
Our increased level of indebtedness could have other important consequences, which include, but are not limited to, the following:
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We cannot be certain that our earnings will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If we do not have sufficient earnings, we may be required to seek to refinance all or part of our then existing debt, sell assets, make additional borrowings or sell more securities, none of which we can guarantee that we will be able to do and which, if accomplished, may adversely affect us.
We are subject to a number of restrictive covenants under our debt arrangements, including customary operating restrictions and customary financial covenants. Our business, financial condition and results of operations may be adversely affected if we are unable to maintain compliance with such covenants.
Our outstanding debt is generally guaranteed jointly and severally by each of our domestic subsidiaries. Our and our subsidiaries’ obligations under the August 2018 Debt Facilities (as defined in Note 10 to our consolidated financial statements) and the associated guarantees are secured, in each case, by first priority liens (subject, in the case of the New Amended KKR Credit Agreement, to the liens under the New Amended BoA Credit Agreement on, and security interests in, substantially all of the present and after acquired assets of us and each of our subsidiaries, subject to certain customary exceptions). The August 2018 Debt Facilities contain a number of restrictive covenants, representations and warranties, including representations relating to the intellectual property owned by us and our subsidiaries and the status of our material license agreements. In addition, the August 2018 Debt Facilities include covenants and events of default, including, in the case of the New Amended BoA Credit Agreement, requirements that we (i) maintain a positive net income (as defined), (ii) satisfy a maximum loan to value ratio (as calculated pursuant to the New Amended BoA Credit Agreement) and (iii) satisfy a maximum consolidated first lien leverage ratio (as calculated pursuant to the New Amended BoA Credit Amendment), and, in the case of the New Amended KKR Credit Agreement, to satisfy (i) a maximum consolidated total leverage ratio (as calculated pursuant to the New Amended KKR Credit Agreement) and (ii) a maximum consolidated first lien leverage ratio (as calculated pursuant to the New Amended KKR Credit Agreement).
If our business, financial condition or results of operations are adversely affected by one or more of the risk factors described in this Annual Report on Form 10‑K or elsewhere in our filings with the SEC, we may be unable to maintain compliance with these financial covenants. If we fail to comply with such covenants, our lenders could demand immediate payment of amounts outstanding. Under such circumstances, we would need to seek alternative financing sources to fund our ongoing operations and to repay amounts outstanding and satisfy our other obligations under our existing borrowing and financing arrangements. Such financing may not be available on favorable terms, or at all. Consequently, we may be restricted in how we fund ongoing operations and strategic initiatives and deploy capital and in our ability to make acquisitions. As a result, our business, financial condition and results of operations may be further adversely affected if we are unable to maintain compliance with our debt covenants.
We or our licensees may not be able to continue to compete successfully because of intense competition within our licensees’ markets, the strength of some of their competitors or other factors.
Our trademark licenses are for products primarily in the apparel, footwear, fashion and home accessories markets, in which our licensees face intense competition. Competitive factors in these markets include design, quality, price, style, name recognition, service and advertising. Changing customer preferences and the limited availability of shelf space can adversely affect the competitive position of our licensees’ products. Many of our licensees’ competitors have greater financial, distribution, marketing and other resources than our licensees and have achieved significant name recognition for their brands. Our licensees may be unable to successfully compete in the markets for their products, which would adversely affect our revenues and cash flows, and we may not be able to continue to compete successfully with respect to our licensing arrangements.
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We and our licensees are subject to risks and uncertainties relating to operating outside of the United States, foreign manufacturing and the price, availability and quality of raw materials, which could result in interruptions to their operations or increase their operating costs, thereby affecting their ability to deliver goods to the market, reducing or delaying their sales and decreasing our revenues.
We market and license our brands outside the United States, and many of our licensees operate outside the United States. We face numerous risks in doing business outside the United States, including: (i) unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements; (ii) tariffs, trade protection measures, import or export licensing requirements, trade embargoes, sanctions and other trade barriers; (iii) competition from foreign companies; (iv) less effective and less predictable protection and enforcement of our intellectual property; (v) changes in the political or economic condition of a specific country or region (including, without limitation, as a result of political unrest), particularly in emerging markets; (vi) fluctuations in the value of foreign currency versus the U.S. dollar and the cost of currency exchange; (vii) potentially adverse tax consequences; and (viii) cultural differences in the conduct of business. Any one or more of such factors could impact current or future international sales of our brands or inhibit our ability to expand internationally. In addition, our business practices in international markets are subject to the requirements of the U.S. Foreign Corrupt Practices Act and all other applicable anti-bribery laws, any violation of which could subject us to significant fines, criminal sanctions and other penalties.
Further, a significant portion of the products sold by our licensees are manufactured overseas. There are substantial risks associated with foreign manufacturing, including (i) changes in laws relating to quotas, and the payment of tariffs and duties, (ii) fluctuations in foreign currency exchange rates, (iii) shipping delays and (iv) international political, regulatory and economic developments. Further, our licensees may experience fluctuations in the price, availability and quality of fabrics and raw materials used by them in their manufactured apparel or purchased finished goods. Any of these risks could increase our licensees’ operating costs. Our licensees also import finished products and assume all risk of loss and damage with respect to these goods once they are shipped by their suppliers. If these goods are destroyed or damaged during shipment, the revenues of our licensees could be reduced as a result of our licensees’ inability to deliver or their delay in delivering their products. A reduction in the revenues generated by our licensees would reduce the amount of our royalty revenues in excess of guaranteed minimum royalty payments and, in extreme circumstances, result in failures to make guaranteed minimum royalty payments to us.
A substantial portion of our licensing revenue is concentrated with a limited number of licensees and retail partners, such that the loss of a licensee or retail partner could materially decrease our revenue and cash flows.
Our licensing revenues are concentrated with a limited number of licensees and retail partners. During the year ended December 31, 2018, one licensee2020, three licensees represented at least 10% of net revenue, accounting for 13%19%, 18% and 15% of the Company’s net revenue.revenue from continuing operations. During the year ended December 31, 2017,2019, three licensees represented at least 10% of net revenue, each accounting for 11%19%, 16% and 14% of the Company’s net revenue.revenue from continuing operations. Our revenue and cash flows would be materially and adversely affected if any of them were to have financial difficulties affecting their ability to make payments, elected not to renew or extend any existing license agreements or arrangements with us or significantly reduced their sales of these licensed products under any of these license agreements or arrangements, and we were not able to replace the revenue generated by such licensees.
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We may not be able to adequately protect our intellectual property rights, which could compromise our competitive position and decrease the value of our brands.
We own, through our subsidiaries, U.S. federal trademark registrations and foreign trademark registrations for our brands that are vital to the success and further growth of our business. In addition, we own domestic, foreign and international intellectual property registrations for the technology and designs incorporated into Martha Stewart Crafts paper punches, Heelys wheeled footwear and Gaiam yoga products. The loss of or inability to enforce our proprietary rights could materially and adversely affect our business and financial condition. For instance, if any third party independently develops similar products to those marketed and distributed by our licensees or manufactures knock-offs of such products, it may harm the reputation of our brands, decrease their value or cause a decline in our licensees’ sales and thus our revenues. Additionally, the laws of foreign countries may provide inadequate protection for intellectual property rights, making it difficult to enforce such rights in those countries.
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We may need to bring legal claims to enforce or protect our intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources and negatively impact our business operations. In addition, notwithstanding the rights we have secured in our intellectual property, third parties may bring claims against us or our licensees alleging that we or our licensees have infringed on their intellectual property rights or that our or our licensees’ intellectual property rights are not valid. Any claims against us or our licensees, with or without merit, could be time consuming and costly to defend or litigate and therefore could adversely affect our business. In addition, to the extent that any of our intellectual property assets is deemed to violate the proprietary rights of third parties in any litigation or proceeding or as a result of any claim, then we and our licensees may be prevented from using it, which could cause a breach or termination of license agreements. If our licensees are prevented from using the intellectual property we have licensed to them, the revenues of our licensees will be reduced with respect to those intellectual property assets, and the related royalty payments we receive could be reduced. Litigation with respect to our intellectual property or breaches of our license agreements could result in a judgment or monetary damages.
We depend upon the servicesThe effects of recent or prospective changes in our key executives,management, including changes in our Chief Executive Officer, Ms. Karen Murray. If we lose the services of Ms. Murray or other key executives, we may not be able to fully implement our business plan and future growth strategy, which would harmboard, create uncertainties around our business and prospects.
Four of our directors recently resigned from our board of directors, specifically Mr. Al Gossett, Mr. Gary Johnson, Mr. Stewart Leonard, Jr. and Ms. Martha Stewart. Our board now consists of Mr. William Sweedler, Mr. Aaron Hollander, Ms. Silvia Mazzucchelli and Mr. John Dionne. Ms. Mazzucchelli and Mr. Dionne are both relatively recent additions to our board, having joined on August 11, 2020 and November 13, 2020, respectively. As disclosed elsewhere, because the Wilmington Facility Loan Parties continue to be our lenders, they currently have the right under our debt documentation to appoint an independent majority of our board, inclusive of Ms. Mazzucchelli and Mr. Dionne. We do not know whether or when the Wilmington Facility Loan Parties may appoint an additional director to our board.
In addition, our success is largely dependent upon the expertise and knowledge of our Chief Executive Officer, Ms. Karen Murray,Chairman, Mr. William Sweedler, and other key members of the executive team, whom we rely upon to formulate our business strategies. Our key executives’ leadership and experience in the licensing industry is important to the successful implementation of our business and marketing strategy. We do not carry key person life insurance covering our key executives, with the exception of Ms. Martha Stewart. The loss of the services ofexecutives. Changes in management, including changes to our key executives could have a material adverse effect onboard, may create uncertainities around or adversely affect our business prospects, financial condition, resultsor prospects. We do not know, and cannot assure you as to, the effects of operations and cash flows.such changes.
Our results of operations may fluctuate significantly, which may make it difficult to predict our performance and result in volatility in our stock price.
We have in the past experienced substantial variations in our revenue and results of operations from quarter to quarter, and we expect to continue to experience such substantial variations. This variability is affected by numerous factors, including:
| the timing of the introduction of new licensed products by our licensees; |
| the level of consumer acceptance of our brands and licensed products; |
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| seasonality resulting in higher revenues in the second half of the year; |
| general economic and industry conditions that affect consumer spending and retailer purchasing; |
| the availability of viable licensees that meet our brand criteria; and |
| the timing of marketing expenditures. |
Because of these fluctuations in our revenues, operating expenses and cash flows it may be difficult to make period-to-period comparisons of our result of operations and liquidity and it may be difficult for securities analysts and investors to predict our performance. As a result, our results of operations in any particular quarter may be below the expectations of securities analysts or investors. Fluctuations in our performance and the failure to meet analyst expectations could cause declines or volatility in our stock price.
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Demand for our brands and branded products may be materially and adversely affected by reductions in disposable income, which in turn depends on general economic conditions and the global economy.
Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also retailers and distributors, who license our brands. Consumer spending has fluctuated significantly and may become depressed or be subject to deterioration in the near future. The worldwide apparel and consumer products industries are heavily influenced by general economic cycles. Purchases of apparel, footwear and accessories tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income declines. During periods of recession or economic uncertainty, our licensees may not be able to maintain or increase sales of our branded products to existing customers, make sales to new customers, open or operate new retail stores or maintain sales levels at existing stores as consumers may shift discretionary income spending to other areas other than our licensee’s products. As a result, our results of operations may be adversely and materially affected by downward trends in the United States or global economy.
The market price of our common stock has declined significantly and may be volatile, which could reduce the demand for our common stock.
The publicly traded shares of our common stock have experienced, and may continue to experience, significant price fluctuations, ranging between $5.20$4.47 and $0.69$80.40 during our last two fiscal years. Due to the continued, sustained decline in our stock price during 2017, we recorded a goodwill impairment charge of $304.1 million in the fourth quarter of 2017. See Note 9 to our consolidated financial statements for further information on our goodwill impairment. Future decreases or volatility in our stock price could reduce demand for our common stock, regardless of our operating performance. The trading price of our common stock could also change significantly over short periods of time in response to write-downs or actual or anticipated variations in our quarterly results of operations, announcements by us, our licensees or our respective competitors, factors affecting our licensees’ markets generally or changes in national or regional economic conditions.
Our largest stockholders control a significant percentage of our common stock and are represented on our board of directors, which may enable such stockholders, alone or together with our other significant stockholders, to exert influence over corporate transactions and other matters affecting the rights of our stockholders.
As of February 28, 2019,March 31, 2021, Tengram Capital Partners Gen2 Fund, L.P. (“Tengram”) beneficially owns approximately 11.8%, Carlyle Galaxy Holdings, L.P. (“Carlyle”) beneficially owns approximately 9.9%11.5% and Ms. Martha Stewart beneficially owns approximately 12.8%12.5% of our outstanding shares of common stock. Mr. William Sweedler, chairmanExecutive Chairman of our board of directors, is a principal of Tengram Mr. Rodney Cohen is a director and managing director of Carlyle, and Ms. Martha Stewart became a director in connection with the closing of the Mergers.Mergers and was a director post the sale of MSLO until her resignation, effective March 26, 2021. As a result, each of Tengram Carlyle and Ms. Martha Stewart, individually or collectively, areis able to exercise substantial influence over our board of directors and matters requiring stockholder approval, including the election of directors and approval of significant corporate actions, such as mergers and other business combination transactions.
Circumstances may occur in which the interests of these stockholders could conflict with the interests of our other stockholders. The voting power of these stockholders also could discourage others from seeking to acquire control of us, which may reduce the market price of our common stock. In addition, as previously disclosed in our Form 10-Q for the quarter ended September 30, 2020, we have agreed with the lenders that, if the Wilmington Facility Loan Parties continue
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to be lenders as of April 1, 2021, they have the right to appoint an independent majority of our Board of Directors (inclusive of Ms. Mazzucchelli and Mr. Dionne, who currently serve as directors of the Company). As of April 1, 2021, the Wilmington Facility Loan Parties continue to be our lenders and, therefore, they have the right to appoint an independent majority of our Board of Directors. The Company’s bylaws provide that, effective April 1, 2021, the Board may not increase the number of directors to more than five members.
We may be deemed a former shell company and therefore resales of shares of our restricted common stock in reliance on Rule 144 may be subject to additional requirements and Rule 144 may be unavailable at all if we fail to comply with our reporting obligations.
From time to time we have issued shares of our common stock in transactions exempt from registration requirements, and such shares are “restricted securities” within the meaning of Rule 144. Rule 144 generally permits the resale, subject to various terms and conditions, of restricted securities after they have been held for six months. However, one of our predecessors was a former shell company and, as a result, securities laws also might deem us to be a former shell company. If we are deemed a former shell company, Rule 144 may be unavailable for resales of our restricted common stock unless we have satisfied certain reporting requirements under the Securities Exchange Act of 1934, as
13
amended (the “Exchange Act”), for the twelve months preceding the time of sale. However, we cannot assure you that future reports or other materials will be filed as necessary to maintain the availability of the exemption under Rule 144. If we are deemed a former shell company and we fail to comply with our reporting obligations under the Exchange Act, Rule 144 will be unavailable to holders of our restricted common stock, which may limit the holders’ ability to sell such restricted shares. In addition, because of the on-going reporting requirements under Rule 144, restrictive legends on certificates for shares of our common stock cannot be removed except in connection with an actual sale that is subject to an effective registration statement under, or an applicable exemption from the registration requirements of, the Securities Act.
While we audit our licensees from time to time in the ordinary course, we otherwise rely on the accuracy of our licensees’ retail sales reports for reporting and collecting our revenues, and if these reports are untimely or incorrect, our revenue could be delayed or inaccurately reported.
Under our existing agreements, our licensees pay us licensing fees based in part on the retail value of products sold. We rely on our licensees to accurately report the retail sales in collecting our license fees, preparing our financial reports, projections, budgets, and directing our sales and marketing efforts. Our license agreements permit us to audit our licensees. If any of our licensee reports understate the retail sales of products they sell, we may not collect and recognize revenue to which we are entitled, or may endure significant expense to obtain compliance.
We do not foresee paying dividends in the foreseeable future.
We have not paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing licensing operations, further develop our brands and finance the acquisition of additional brands.
We have a significant amount of intangible assets, including our trademarks, recorded on our consolidated balance sheet. As a result of changes in market conditions and declines in the estimated fair value of these assets, we have been required to write-down all of our goodwill and a portion of our other intangible assets and may be required to record impairments of our intangible assets in the future which could adversely affect our results of operations.
As of December 31, 2018,2020, intangible assets represented $964.9$485 million, or 89.5%85.8% of our total consolidated assets. Under current accounting principles generally accepted in the United States (“GAAP”), indefinite-lived intangible assets are not amortized, but instead are subject to impairment evaluation based on related estimated fair values, with such testing to be done at least annually. Our trademarks are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any write-down of intangible assets resulting from future periodic evaluations would, as applicable, either decrease our net income or increase our net loss and those decreases or increases could be material. We recorded non-cash impairment charges of $17.9$85.6 million in the first quarter of 2020 and
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$33.1 million in the third quarter of 2019 for indefinite-lived intangible assets for certain brands in the third quarter of 2018;brands; the impairments arose due to reduced growth expectations and the impact of licensee transitions for these brands.Due to the continued, sustained decline in our stock price, we recorded a goodwill impairment charge of $304.1 million in the fourth quarter of 2017. See Note 8 and Note 9 to our consolidated financial statements for further information on these impairment charges.
Our use of certain tax attributes may be limited.
We have significant net operating losses (“NOLs”)., some of which do not expire. A valuation allowance has been provided as of December 31, 2018 which primarily relates to state2020 on all deferred tax assets that have a definite life. Indefinite-lived net operating losses and capital loss carryforwards.have been recognized to the extent we believe they can be utilized against indefinite-lived deferred tax liabilities. As of December 31, 2018,2020, we have federal NOLs available to carryforward to future periods of $188.9$181 million which begin expiring in 20242025 and we have state NOLs available to carryforward to future periods of $208.2$158.0 million which begin expiring in 2019. We have foreign tax credits available to carryforward to future periods of $0.6 million as of December 31, 2018 which begin expiring in 2019.2021. We have experienced several changes of ownership under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) which place various limitations on the use of NOLs. The limitation on NOLs is based uponcalculated using a formula provided under Section 382 of the Code that utilizesis based on the company’s fair market value of us and the prevailing interest rates at the time of the ownership change. An “ownership change” is generally a 50% increase in ownership over a three-year
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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 our ability to offset future taxable income.
We may be a party to litigation in the normal course of business, which could affect our financial position and liquidity.
From time to time, we may be made a party to litigation in the normal course of business. For example, as the owner of a trademark, we may be named as a defendant in a lawsuit relating to a product designed and manufactured by a licensee of that trademark. If we are alleged to have infringed the intellectual property rights of another party, any resulting litigation could be costly and could damage our reputation. Litigation also diverts the time and resources of management, regardless of the merits of the claim. In most cases, our licensees under the existing license agreements are obligated to defend and indemnify us, as licensor, and our affiliates with respect to such litigation. In the past year we have been subject to litigation from the Securities and Exchange Commission and a third party relating to accounting decisions in 2016 and 2017. There has been a demand regarding a derivative action related to the same facts as well. There could be other federal or state actions brought regarding the facts surrounding this matter or other accounting or disclosure decisions made by the Company subsequently, including a federal class action that has been filed. We also maintain insurance for certain risks, but it is not possible to obtain insurance to protect against all possible liabilities. Although historically the litigation involving us has not been material to our financial position or our liquidity, any litigation has an element of uncertainty and if any such litigation were to be adversely determined and/or a licensee were to fail to properly indemnify us and/or we did not have appropriate insurance coverage, such litigation could affect our financial position and liquidity.
Our common stock may be delisted from the NASDAQ
On January 16, 2019, we received a letter from the Nasdaq notifying us that we were not in compliance with Nasdaq’s requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2), because for a period of 30 consecutive business days the bid price of our common stock had not closed at or above the minimum of $1.00 per share. On February 14, 2019, we received a letter from Nasdaq indicating that we had regained compliance with the rule because the closing bid price of our common stock was at or above $1.00 per share for a minimum of 10 consecutive business days. However, we cannot assure you that the trading price of our common stock will exceed Nasdaq’s minimum bid price in the future. If our stock price again falls below $1.00 for 30 consecutive business days, we will receive a new notice from Nasdaq. If we fail to meet the minimum bid price and do not or cannot otherwise regain compliance, our common stock may be delisted from Nasdaq.
Our business, financial condition and results of operations could suffer in the event of security breaches, cyber-attacks or unauthorized disclosures of personal information.
In conducting their business, including their e-commerce business, our licensees and retail partners obtain and transmit confidential information about their customers, including credit card information, through their websites and their information technology systems. If our licensees or retail partners experience such a security breach or cyber-attack, it could adversely affect their business and operations, including damaging their reputation and their relationships with their customers, exposing them to risks of litigation and liability including under data privacy laws and regulations, all of which could have a material adverse effect on their ability to meet their minimum net sales requirements and to make guaranteed minimum royalty payments to us in accordance with the terms of their respective license agreements. We cannot assure you that our licensees and retail partners will not experience any future security breaches, cyber-attacks or unauthorized disclosures. In addition, as a result of recent security breaches at a number of prominent retailers, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become more uncertain. As a result, our licensees and retail partners may incur significant costs to comply with laws regarding the protection and unauthorized disclosure of personal information, which could also negatively affect their ability to generate sales and make royalty payments to us, resulting in a material adverse effect on our business, financial condition and results of operations.
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Changes in the U.S. trade environment, including the imposition of import tariffs, could adversely affect the amount or timing of our revenues, results of operations or cash flows.
The current political climate has introduced uncertainty with respect to trade policies, tariffs and government regulations impacting trade between the United States and other countries. It remains unclear what the new U.S. Administration or foreign governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or international trade agreements and policies. These tariffs, which do not apply directly to our branding business, may materially and adversely affect our licensees by imposing tariffs on goods they import. The imposition of tariffs may negatively affect key licensees or the suppliers, manufacturers and customers of goods produced under our trademarks. For example, tariffs may result in or have resulted in increasing our licensees’ costs to produce goods and decrease their sales and gross margins and demand for their products. Such outcomes could adversely affect the amount or timing of our revenues, results of operations or cash flows, and continuing uncertainty about changes in the U.S. trade environment could cause our licensees to experience sales volatility, price fluctuations or supply shortages or advances or delays in the manufacture and sale of products produced under our trademarks.
Changes in the method for determining LIBOR and the potential replacement of the LIBOR benchmark interest rate could increase our borrowing costs.
Some of our borrowings bear interest at a variable rate based on LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), a regulator of financial services firms and financial markets in the United Kingdom, stated that it will plan for a phase out of regulatory oversight of LIBOR interest rates indices. On March 5, 2021, ICE Benchmark Administration Limited, the authorized administrator of LIBOR, announced its intention to cease the publication of the one week and two month USD LIBOR after December 31, 2020 and the overnight and twelve month after June 30, 2023. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.
We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. Introduction of an alternative rate also may introduce additional basis risk for market participants as an alternative index is utilized along with LIBOR. There can be no guarantee that SOFR will become widely used and that alternatives may or may not be developed with additional complications. We are not able to predict whether LIBOR will cease to be available after 2021, whether SOFR will become a widely accepted benchmark in place of LIBOR, or what the impact of such a possible transition to SOFR may have on our results of operations. As of December 31, 2020, we have adopted Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”).
Risks Related to Our Acquisitions
If we are unable to identify and successfully acquire additional brands or to finance the acquisition of such brands, our rate of growth may be reduced and, even if additional trademarks are acquired, we may not realize anticipated benefits due to integration or licensing difficulties.
A key component of our growth strategy is the acquisition of additional brands. In 2016, we acquired GAIAM, and in 2015, we acquired Jessica Simpson, Joe’s, Martha Stewart and Emeril LagasseJoe’s and are continually exploring new acquisition opportunities. However, we face extensive competition for new brand acquisitions, both from other brand
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management companies as well as traditional consumer brand companies, retailers and private equity groups, which could increase the price of the acquisitions and make it more difficult for us to find suitable acquisition targets. In addition, even if we successfully acquire additional brands or the rights to use additional brands, we may not be able to achieve or maintain profitability levels that justify our investment in, or realize planned benefits with respect to, those additional brands.
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Although we seek to temper our acquisition risks, all acquisitions, whether they are of additional intellectual property assets or of the companies that own them, entail numerous risks, any of which could detrimentally affect our results of operations and/or the value of our equity. These risks include, among others:
| unanticipated costs associated with the target acquisition; |
| negative effects on reported results of operations from acquisition related charges and amortization of acquired intangibles; |
| diversion of management’s attention from other business concerns; |
| the challenges of maintaining focus on, and continuing to execute, core strategies and business plans as our brand and license portfolio grows and becomes more diversified; |
| inability to find suitable licensees for our newly acquired brands; |
| adverse effects on our existing licensing relationships, including our existing licensees terminating their license agreements with us; |
| potential difficulties associated with the retention of key employees and the assimilation of any other employees, who may be retained by us in connection with or as a result of our acquisitions; and |
| risks of entering new domestic and international markets (whether it be with respect to new licensed product categories or new licensed product distribution channels) or markets in which we have limited prior experience. |
In the event we acquire intellectual property assets or the companies that own them, our due diligence reviews are subject to inherent uncertainties and may not reveal all potential risks. We may therefore fail to discover or inaccurately assess undisclosed or contingent liabilities, including liabilities for which we may have responsibility as a successor to the seller or the target company. In addition, as a successor, we may be responsible for any past or continuing violations of law by the seller or the target company. Although we generally attempt to seek contractual protections through representations, warranties and indemnities, we cannot be sure that we will obtain such provisions in our acquisitions or that such provisions will fully protect us from all unknown, contingent or other liabilities or costs. Finally, claims against us relating to any acquisition may necessitate our seeking claims against the seller for which the seller may not, or may not be able to, indemnify us or that may exceed the scope, duration or amount of the seller’s indemnification obligations.
Acquiring additional brands could also have a significant effect on our financial condition and could cause substantial fluctuations in our liquidity, cash balances and quarterly and yearly results of operations. Acquisitions could result in the recording of significant goodwill and intangible assets on our financial statements, the amortization or impairment of which would reduce our reported earnings in subsequent years. We cannot make assurances with respect to the timing, likelihood or financial or business effect of any possible transaction. Moreover, our ability to grow through the acquisition of additional brands will also depend on the availability of capital to complete the necessary acquisition arrangements. We may elect to pursue acquisitions through debt financing or the issuance of shares of our common stock or convertible securities. The use of equity as transaction consideration could dilute our common stock, reduce our earnings per share or reduce the market price of our common stock. We cannot guarantee that our stockholders will achieve greater returns as a result of any future acquisitions we complete.
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We may not realize all of the anticipated benefits of our acquisitions or those benefits may take longer to realize than expected.
Our ability to realize the anticipated benefits of our acquisitions depends, to a large extent, on our ability to implement changes to acquired businesses in a manner that facilitates growth opportunities and realizes anticipated synergies. We will be required to devote significant management attention, resources and costs to realigning the business
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practices and operations of acquired businesses to our brand management model. We generally expect to benefit from operational synergies from our acquisitions resulting from the consolidation of capabilities and elimination of redundancies, as well as greater efficiencies from increased scale and market integration. However, this process may preclude or impede realization of the benefits expected from acquisitions and could adversely affect current revenues and investments in future growth, which could adversely affect our results of operations. We cannot be certain that we will not be required to implement further realignment activities, make additions or other changes to our workforce based on other cost reduction measures or changes in the markets and industry in which we compete. In addition, future business conditions and events may impact our ability to continue to realize any benefits of these initiatives. If we are not able to successfully achieve these objectives, the anticipated benefits of our acquisitions may not be realized fully or at all or may take longer to realize than expected.
The failure to successfully integrate new businesses and operations as a result of acquisitions may adversely affect our future results.
Businesses that we have acquired or may acquire in the future have operated historically as independent companies. We may face significant challenges in consolidating certain businesses and functions of these businesses, integrating their organizations, procedures, policies and operations, addressing differences in the business cultures and retaining key personnel. The integration process and other disruptions resulting from the business combinations mentioned above may also disrupt each company’s ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships with employees, business partners, customers and others with whom we have business or other dealings, or limit our ability to achieve the anticipated benefits of the acquisitions. In addition, difficulties in integrating the businesses mentioned above could harm our reputation.
If we are not able to successfully combine our businesses in an efficient, effective and timely manner, the anticipated benefits and cost savings of the acquisitions may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely.
Our success depends in part on the continued success of our celebrity based brandsbrand and the reputation and popularity of those celebrities.the celebrity. Any adverse reactions to publicity relating to those celebrities,the celebrity, or the loss of theirits services, could adversely affect our revenues and results of operations as well as our ability to maintain or generate a consumer base.
We believe that maintaining and enhancing our celebrity based brandsbrand is important to our business, financial condition and results of operations. Our celebrity based brandsbrand may be negatively impacted by a number of factors, including the reputation of its content and products, the uniqueness and relevance of celebrity branded content, and the reputation and popularity of those celebrities.the celebrity. If we fail to maintain and enhance these brands,this brand, or if excessive expenses are incurred in an effort to do so, our business, financial condition and results of operations could be materially and adversely affected.
Moreover, we believe our celebrities’celebrity’s image, reputation, popularity and talent are material to the success of their brand. Any repeated or sustained negative shifts in public or industry perceptions of such celebritiesthis celebrity could have a material adverse effect on these brands and, consequently, our business.
We may require additional capital to finance the acquisition of additional brands, and our inability to raise such capital on beneficial terms or at all could limit our growth.
We may, in the future, require additional capital to help fund all or part of potential acquisitions. If, at the time required, we do not have sufficient cash to finance those additional capital needs, we will need to raise additional funds through equity and/or debt financing. We cannot guarantee that, if and when needed, additional financing will be available
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to us on acceptable terms or at all. If additional capital is needed and is either unavailable or cost prohibitive, our growth may be limited as we may need to change our business strategy to slow the rate of, or eliminate, our expansion plans. In addition, any additional financing we undertake could impose additional covenants upon us that restrict our operating flexibility, and, if we issue equity securities to raise capital, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock.
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We expect to incur transaction costs in connection with our acquisitions.
We have incurred and expect to continue to incur significant costs and expenses in connection with past and future acquisitions, including financial advisory, legal, accounting, consulting and other advisory fees and expenses, reorganization and restructuring costs, litigation defense costs, severance/employee benefit-related expenses, filing fees, printing expenses and other related charges. There are also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with our acquisitions. There are many factors beyond our control that could affect the total amount or timing of the integration and implementation expenses. These costs and expenses could reduce the benefits and income we expect to achieve from our acquisitions.
Item 1B. Unresolved Staff Comments
None.
Our principal offices areoffice is located at 601 West 261407 Broadway, 38th Street, 9th Floor, - Suite 900, New York, New York 10001,10018, and our telephone number is (646) 564‑2577.564-2577.
We lease the following properties as of December 31, 2018:2020:
| | | | | | |
| | | | Square Footage | | |
Location |
| Type |
| (Approximate) |
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| Expiration Date | |||
New York, NY |
| Corporate Headquarters |
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| |
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| | September 12, 2024 | ||
Los Angeles, CA |
| Office |
| 4,724 | | July 31, |
On February 21, 2017,November 13, 2020, we amended theentered into a lease oftermination agreement for our former corporate headquarters which extendedin New York, NY and the lease through December 31, 2033 and effectiveexisting office in February 2018, lowered the rented square footage to approximately 63,000 square feet ofNew York, NY became our current corporate office space and 7,000 square feet of other rentable space. On January 12, 2018, we further amended the lease of our corporate headquarters, effective in February 2018, to increase the rented square footage by approximately 12,300 square feet.
headquarters. We believe that the facilities we utilize are well maintained, in good operating condition and adequate to meet our current and foreseeable needs.
General Legal Matters
On December 11, 2020, the SEC filed a lawsuit against the Company in the U.S. District Court for the Southern District of New York titled Securities and Exchange Commission v. Sequential Brands Group, Inc. The SEC alleges that the Company delayed a goodwill impairment in the fourth quarter of 2016 and first three quarters of 2017 at a time the SEC asserts there was evidence of likely impairment. In the fourth quarter of 2017, we impaired all of our goodwill, resulting in an impairment charge of $304.1 million. The SEC also alleges there were related deficiencies in internal accounting controls. The case seeks injunctive relief and civil monetary penalties. In February 2021, the Company filed its motion to dismiss the complaint, which is currently pending. The Company strongly disagrees with the SEC and believes it acted reasonably. It will be vigorously defending itself. The Company cannot predict the duration or outcome of this matter. Costs related to this matter may be significant.
On January 20, 2021, a shareholder derivative complaint, titled Delmonico v. Shmidman, et al., was filed in the U.S. District Court of Delaware. The case names the Company and certain of its current and former officers and directors as defendants. The complaint alleges breaches of fiduciary duties and violation of Section 14(a) of the Exchange Act. The allegations in the complaint are based principally on the allegations in the SEC’s complaint and the Company’s alleged failure to disclose such matters in its 2020 proxy statement. The plaintiff seeks, among other things, injunctive relief and damages. The Company intends to vigorously defend against these claims. Litigation costs in this matter may be significant.
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On March 16, 2021, a class action lawsuit, titled D’Arcy v. Sequential Brands Group Inc. et al., was filed by a purchaser of the Company’s securities, and prospectively on behalf of all other purchasers of the Company’s publicly traded securities between November 3, 2016 and December 11, 2020, in the U.S. District Court for the Central District of California. The complaint names the Company and certain of its current and former officers and directors as defendants. The complaint alleges violations of Section 10(b) and 20(a) of the Exchange Act. The allegations in the complaint are based principally on the allegations in the SEC’s complaint filed on December 11, 2020. The plaintiff seeks, among other things, class certification and damages. While it is not uncommon for a lawsuit to be filed promptly after an SEC complaint, it should be noted that even the SEC action did not allege fraud under Section 10(b), so this action seeks relief far beyond what the SEC had any basis to allege under the facts and the law. The Company plans to defend itself vigorously. Litigation costs in this matter may be significant.
On May 2, 2019, Plaintiff Delta Galil USA, Inc. (“Plaintiff”) commenced an action against Defendants Sequential Brands Group, Inc. (“SQBG”) and American Sporting Goods Corporation (“ASG”) in the Supreme Court of the State of New York, New York County (the “Action”). Plaintiff asserts claims for (1) breach of a license agreement against SQBG and ASG seeking monetary damages, and (2) breach of a guaranty against SQBG seeking monetary damages. On December 2, 2019, ASG filed counterclaims against Plaintiff in the Action for breach of the license agreement seeking monetary damages. The Company intends to vigorously defend against these claims and pursue it counterclaims. Litigation costs in this matter may be significant.
On February 7, 2020, Wenger S.A. (“Plaintiff”) sued Galaxy Brands LLC and Olivet International, Inc. in the United States District Court for the Southern District of New York asserting claims of trademark infringement, unfair competition and copyright infringement against the use of the Galaxy SWISSTECH and related cross design marks on backpacks and luggage. Plaintiff seeks an injunction preventing use of the SWISSTECH marks, cancellation of Galaxy’s federal registrations for the SWISSTECH marks, damages, and attorney fees. Galaxy and Olivet filed counterclaims for a declaration canceling the Plaintiff’s trademark registrations, and finding them invalid and unenforceable. We intend to vigorously defend against these claims and pursue our counterclaims. Litigation costs in this matter may be significant.
On June 19, 2020, Payless Holdings, LLC and its affiliates (“Plaintiff”), reorganized debtors under a bankruptcy plan, commenced an adversary proceeding in the United States Bankruptcy Court for the Eastern District of Missouri by the filing of a complaint against Martha Stewart Living Omnimedia, Inc. (n/k/a Martha Stewart Living Omnimedia, L.P.) (“Defendant”). The complaint seeks the return of a payment received in January 2019 as a preferential transfer. On February 17, 2021, Plaintiff filed an amended complaint that seeks the return of an additional payment received in August 2018 (together with the January 2019 payment), as either a preferential transfer or a fraudulent conveyance. On or about February 23, 2021, Defendant filed an application for an administrative claim, which, if allowed, may setoff amounts sought by Plaintiff in the adversary proceeding. Pursuant to a certain Equity Purchase Agreement, dated April 16, 2019, the Company is indemnifying Defendant for the claims in the adversary proceeding. The Company intends to vigorously defend against these claims and pursue it counterclaims. Litigation costs in this matter may be significant.
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 our lawyers and legal consultants.
With respect to our outstanding legal matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our
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business, financial condition or results of operations or cash flows. However, the outcome of such legal matters is
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inherently unpredictable and subject to significant uncertainties. Further, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. See
Note 13 of11 to the Consolidated Financial Statements in this Form 10-K for further information.is incorporated by reference into this Item 3.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Trading
Our common stock trades on the Nasdaq StockCapital Market under the symbol “SQBG”. As of February 28, 2019,April 13, 2021, there were approximately 1,223395 holders of record of our common stock.
Dividends
We have not paid or declared cash distributions or dividends on our common stock during the last two fiscal years or any subsequent interim period. We do not intend to pay cash dividends on our common stock in the near future. We currently intend to retain all earnings, if and when generated, to finance our operations. The declaration of cash dividends in the future will be determined by the Board based upon our earnings, financial condition, capital requirements, contractual obligations which may prohibit the payment of dividends, including our current or any future indebtedness, and other relevant factors. Our ability to pay dividends on our common stock and repurchase our common stock is restricted by certain of our current indebtedness and may be restricted or prohibited under future indebtedness.
Equity Compensation Plan
The table below sets forth the information regarding our equity compensation plans as of December 31, 2018:2020:
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| remaining available for | |||||||
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| Number of securities to |
| Weighted-average |
| future issuance under | ||||||||
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| be issued upon exercise of |
| exercise price of |
| equity compensation plans | ||||||||
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| outstanding options, |
| outstanding options, |
| (excluding securities | ||||||||
| | | | | | | | |||||||
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| |
| | |
| Number of securities | |||||||
| | | | | | | remaining available for | |||||||
| | Number of securities to | | Weighted-average | | future issuance under | ||||||||
| | be issued upon exercise of | | exercise price of | | equity compensation plans | ||||||||
| | outstanding options, | | outstanding options, | | (excluding securities | ||||||||
Plan category |
| warrants and rights |
| warrants and rights |
| reflected in column (a)) | | warrants and rights | | warrants and rights | | reflected in column (a)) | ||
|
| (a) |
| (b) |
| (c) | ||||||||
| | (a) | | (b) | | (c) | ||||||||
Equity compensation plans approved by security holders (1) |
| 249,501 |
| $ | 12.70 |
| — |
| 5,488 | | $ | 12.67 |
| — |
Equity compensation plans not approved by security holders |
| — |
|
| N/A |
| N/A |
| — | | | N/A |
| N/A |
Total |
| 249,501 |
|
|
|
| — |
| 5,488 | |
|
|
| — |
| (1) |
| Consists of options to purchase our common stock issued under our 2005 Stock Incentive Plan (the “2005 Stock Incentive Plan”) and the Sequential Brands Group, Inc. 2013 Stock Incentive Compensation Plan (the "2013 Stock Incentive Plan"). The 2005 Stock Incentive Plan was replaced by the 2013 Stock Incentive Plan. No new grants were granted under the 2005 Stock Incentive Plan since August 2013, when the 2013 Stock Incentive Plan came into effect. For a description of our 2013 Stock Incentive Plan, see Note |
25 |
|
|
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the period covered by this Annual Report on Form 10‑K10-K that were not previously disclosed in a Quarterly Report on Form 10‑Q10-Q or a Current Report on Form 8‑K.
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8-K.
Common Stock Repurchase Programs
During the quarter ended December 31, 2018,2020, we repurchased 5,3805,433 shares of our common stock from employees for income tax withholdings related to the vesting of restricted stock.stock units. We do not currently have in place a repurchase program with respect to our common stock.
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| Publicly Announced |
| Purchased Under the | ||||||||||
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| | | | | | | | | (d) Maximum Number | |||||||||
| | | | | | | (c) Total Number of | | (or Approximate Dollar | |||||||||
| | | | | | | Shares (or Units) | | Value) of Shares (or | |||||||||
| | (a) Total Number of | | | | | Purchased as Part of | | Units) that May Yet Be | |||||||||
| | Shares (or Units) | | (b) Average Price Paid | | Publicly Announced | | Purchased Under the | ||||||||||
Period |
| Purchased (1) |
| per Share (or Unit) |
| Plans or Programs |
| Plans or Programs |
| Purchased (1) |
| per Share (or Unit) |
| Plans or Programs |
| Plans or Programs | ||
October 1 - 31 |
| 5,380 |
| $ | 1.69 |
| N/A |
| N/A | | — | | $ | — | | N/A | | N/A |
November 1 - 30 |
| — |
| $ | — |
| N/A |
| N/A |
| 5,433 | | $ | 6.55 |
| N/A |
| N/A |
December 1 - 31 |
| — |
| $ | — |
| N/A |
| N/A |
| — | | $ | — |
| N/A |
| N/A |
Total |
| 5,380 |
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| — |
| — |
| 5,433 | |
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| — |
| — |
| (1) |
| During the fourth quarter of |
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock during the period beginning on December 31, 2013 and ending on December 31, 2018 with the cumulative total return on the Standard & Poor’s 500 Composite Index (“S&P 500”) and a Custom Peer Group, which includes Carter’s Inc., Cherokee, Inc., Columbia Sportswear Company, Guess ? Inc., Hanesbrands, Inc., Iconix Brand Group Inc., PVH Corp. and Xcel Brands Inc. The comparison assumes that $100 was invested on December 31, 2013 in our common stock, S&P 500 and Custom Peer Group. The stock performance shown on the graph should not be considered indicative of future performance.
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Item 6. Selected Financial Data
The following table presents our selected historical financial data forSmaller reporting companies are not required to provide the periods indicated. The selected historical financial data has been derived from our audited consolidated financial statements referred to underinformation required by this Item 8 of this Annual Report on Form 10‑K. The following selected historical financial data should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this Annual Report on Form 10‑K and in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" set forth in Item 7 of this Annual Report on Form 10‑K. The historical consolidated financial statements for Old Sequential for periods prior to the Mergers are considered to be the historical financial statements of Sequential Brands Group, Inc. and thus, our consolidated financial statements for fiscal 2015 reflect Old Sequential’s consolidated financial statements for the period from January 1, 2015 through December 4, 2015 and for the fiscal year 2014 and Sequential Brand Group Inc.’s thereafter. We have not declared dividends during the periods presented below.6.
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Consolidated Statements of Operations Data: |
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Net revenue |
| $ | 169,956 |
| $ | 167,464 |
| $ | 155,528 |
| $ | 88,262 |
| $ | 41,837 |
Operating expenses |
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| 87,767 |
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| 79,443 |
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| 85,392 |
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| 58,611 |
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| 29,806 |
Impairment charges |
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| 17,899 |
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| 340,628 |
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| - |
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| - |
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| - |
Loss on sale of assets |
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| 7,117 |
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| - |
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| - |
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| - |
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| - |
Income (loss) from operations |
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| 57,173 |
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| (252,607) |
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| 70,136 |
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| 29,651 |
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| 12,031 |
Net (loss) income |
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| (4,978) |
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| (181,546) |
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| 6,631 |
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| 2,416 |
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| (646) |
Net income attributable to noncontrolling interest |
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| (5,506) |
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| (4,172) |
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| (7,452) |
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| (5,287) |
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| (422) |
Net loss attributable to Sequential Brands Group, Inc. and Subsidiaries |
| $ | (10,484) |
| $ | (185,718) |
| $ | (821) |
| $ | (2,871) |
| $ | (1,068) |
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Basic and diluted loss per share: |
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Attributable to Sequential Brands Group, Inc. and Subsidiaries |
| $ | (0.16) |
| $ | (2.95) |
| $ | (0.01) |
| $ | (0.07) |
| $ | (0.04) |
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Basic and diluted weighted average common shares outstanding |
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| 63,700,081 |
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| 62,861,743 |
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| 61,912,410 |
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| 41,177,523 |
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| 29,964,604 |
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| 2018 |
| 2017 |
| 2016 |
| 2015 |
| 2014 | |||||
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Consolidated Balance Sheet Data: |
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Cash |
| $ | 14,106 |
| $ | 18,902 |
| $ | 19,133 |
| $ | 41,560 |
| $ | 22,521 |
Working capital (as defined) |
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| 28,010 |
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| 32,111 |
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| 26,778 |
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| 49,594 |
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| 23,584 |
Intangible assets, net |
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| 964,911 |
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| 995,170 |
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| 1,030,212 |
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| 872,277 |
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| 303,039 |
Total assets |
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| 1,078,668 |
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| 1,097,211 |
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| 1,434,863 |
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| 1,289,837 |
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| 526,363 |
Long-term debt, including current portion |
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| 610,787 |
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| 630,597 |
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| 645,035 |
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| 542,065 |
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| 175,500 |
Total equity |
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| 344,644 |
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| 353,538 |
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| 537,568 |
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| 525,649 |
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| 264,900 |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10‑K,10-K, as well as the disclosures about forward-looking statements in Item 1 and the section “Risk Factors” contained in Item 1A. This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity and cash flows for the fiscal year ended December 31, 2018.2020. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control.
Licensing and Brand Management Business
We own a portfolio of consumer brands in the home, active and fashionlifestyle categories, including Martha Stewart, Jessica Simpson, AND1, Avia, Joe’s and GAIAM. We aim to maximize the value of our brands by promoting, marketing and licensing the brands through various distribution channels, including to retailers, wholesalers and distributors in the United States and in certain international territories. Our core strategy is to enhance and monetize the global reach of our existing brands, and to pursue additional strategic acquisitions to grow the scope of and diversify our portfolio of brands.
We aim to acquire well-known consumer brands with high potential for growth and strong brand awareness. We additionally seek to diversify our portfolio by evaluating the strength of targeted brands and the expected viability and sustainability of future royalty streams. Upon the acquisition of a brand, we partner with leading wholesalers and retailers
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to drive incremental value and maximize brand equity. We focus on certain key initiatives in our licensing and brand management business. These initiatives include:
| Maximizing the value of our existing brands by creating efficiencies, adding additional product categories, expanding distribution and retail presence and optimizing sales through innovative marketing that increases consumer brand awareness and loyalty; |
| Expanding through e-commerce channels; |
| Developing international expansion through additional licenses, partnerships and other arrangements with leading retailers and wholesalers outside the United States; and |
| Acquiring consumer brands (or the rights to such brands) with high consumer awareness, broad appeal and applicability to a wide range of product categories. |
Our business is designed to maximize the value of our brands through license agreements with partners that are responsible for manufacturing and distributing our licensed products and, with the exception of our Martha Stewart brand, primarily responsible for the design of such licensed products. Our brands are licensed for a broad range of product categories, including apparel, footwear fashion accessories and home goods, as well as, with respect to our Martha Stewart brand, food, wine, and a variety of media related assets, such as magazines, books and other print and digital content.accessories. We seek to select licensees who have demonstrated the ability to produce and sell quality products in their respective licensed categories and have the capability to meet or exceed the minimum sales thresholds and guaranteed minimum royalty payments that we generally require.
We license our brands to both wholesale and direct-to-retail 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 a particular brand for sale to multiple accounts within an approved channel of distribution and territory. 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. As of December 31, 2018,2020, we had approximately one-hundred fiftyone hundred licensees, with wholesale licensees comprising a significant majority.
Our license agreements typically require a licensee to pay us royalties based upon net sales and, in most cases, contain guaranteed minimum royalties. Our license agreements alsooften require licensees to support the brands by either paying
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or spending contractually guaranteed minimum amounts for the marketing and advertising of the respective licensed brands. As of February 28, 2019,April 13, 2021, we had contractual rights to receive an aggregate of $317.9$194.8 million in minimum royalty and marketing and advertising revenue from our licensees through the balance of the current terms of such licenses, excluding any renewals.renewal option periods.
Items Affecting ComparabilityReverse Stock Split and Reclassification of Prior Periods Presented
On JanuaryJuly 27, 2020, the Company’s previously announced 1 2018,share-for-40 shares (1:40) reverse stock split (the “Reverse Stock Split”) of the Company’s outstanding common stock, par value $0.01 per share became effective. All share and per share amounts in this Form 10-K have been adjusted to reflect the Reverse Stock Split. The stated capital attributable to common stock on the Company’s consolidated balance sheet at December 31, 2019 was reduced proportionately to the Reverse Stock Split ratio, and the additional paid-in capital account was credited with the amount by which the stated capital is reduced. Prior periods in this Form 10-K have been reclassified to reflect this change.
On June 10, 2019, we completed the sale of MSLO, a Delaware corporation and a wholly-owned subsidiary of the Company, adopted ASC 606, Revenue from Contractsfor $166 million in cash consideration, plus additional amounts in respect of pre-closing accounts receivable that are received after the closing, subject to certain adjustments, pursuant to an equity purchase agreement (the “Purchase Agreement”) with Customers (“ASC 606”Marquee Brands LLC (the “Buyer”) entered into on a modified retrospective basisApril 16, 2019. In addition, the Purchase Agreement provides for all open contracts asan earnout of January 1, 2018. Underup to $40,000,000 payable to Sequential if certain performance targets are achieved during the modified retrospective basis, resultsthree calendar years ending December 31, 2020, December 31, 2021 and December 31, 2022. The performance targets were not met for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjustedyear ended December 31, 2020. MSLO and continueits subsidiaries were engaged in the business of promoting, marketing and licensing the Martha Stewart and the Emeril Lagasse brands through various distribution channels.
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Due to be reported in accordance with ASC 605, Revenue Recognition (“ASC 605”). For further discussion refer tothe sale of MSLO during the second quarter of 2019 (see Note 2 and 54 of Notes to Consolidated Financial Statements included in this Form 10-K.
10-K), in accordance with Accounting Standards Codification (“ASC”) 205, Discontinued Operations, we have classified the results of MSLO as discontinued operations in our consolidated statements of operations and cash flows for all periods presented. Additionally, the related assets and liabilities directly associated with MSLO are classified as discontinued operations in our consolidated balance sheets for all periods presented. All amounts included in the Notes to Consolidated Financial Statements relate to continuing operations unless otherwise noted.
Recently Issued Accounting Standards
Refer to “Recently Issued Accounting Standards” in Note 2 of Notes to Consolidated Financial Statements included in this Form 10‑K.10-K.
Critical Accounting Policies, Judgments and Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and our disclosure of commitments and contingencies at the date of the financial statements. On an on-going basis, we evaluate our estimates and judgments. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry and current and expected economic conditions, that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
A description of significant accounting policies that require us to make estimates and assumptions in the preparation of our consolidated financial statements is as follows:
Revenue Recognition. We recognize revenue in accordance with ASC 606, which became effective as of January 1, 2018 (See NoteNotes 2 and 5 in the Form 10-Kof Notes to Consolidated Financial Statements for impact of adoption and other related disclosures). ASC 606 requires a five-step approach to determine the appropriate method of revenue recognition for each contractual arrangement:
Step 1: Identify the Contract(s) with a Customer
Step 2: Identify the Performance Obligation(s) in the Contract
Step 3: Determine the Transaction Price
Step 4: Allocate the Transaction Price to the Performance Obligation(s) in the Contract
Step 5: Recognize Revenue when (or as) the Entity Satisfies a Performance Obligation
We have entered into various license agreements for our owned trademarks. Under ASC 606, our agreements are generally considered symbolic licenses, which contain the characteristics of a right-to-access license since the customer is simultaneously receiving the intellectual property (“IP”) and benefiting from it throughout the license period. We assess each license agreement at inception and determine the performance obligation(s) and appropriate revenue recognition method. As part of this process, we apply judgments based on historical trends when estimating future revenues and the period over which to recognize revenue.
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We generally recognize revenue for license agreements under the following methods:
1. | Licenses with guaranteed minimum royalties (“GMRs”): Generally, guaranteed minimum royalty payments (fixed revenue) are recognized on a straight-line basis over the term of the contract, as defined in each license agreement. |
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2. | Licenses with both GMRs (fixed revenue) and earned royalties (variable revenue): Earned royalties in excess of fixed revenue are only recognized when we are reasonably certain that the guaranteed minimum payments for the period, as defined in each license agreement, will be exceeded. Additionally, we have categorized certain contracts as variable when there is a history and future expectation of exceeding GMRs. We recognize income for these contracts during the period corresponding to the licensee’s sales. |
3. | Licenses that are sales-based only or earned royalties: Earned royalties (variable revenue) are recognized as income during the period corresponding to the licensee’s sales. |
Payments received as consideration for the grant of a license or advanced royalty payments are recorded as deferred revenue at the time payment is received and recognized into revenue under the methods described above.
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the current portion of deferred revenue on the consolidated balance sheets.
We disaggregate revenue into two categories: licensing agreements and other, which is comprised of revenue from sources such as editorial content for books, television, sales commissions and vendor placement commissions.
With respect to editorial content for books, we receive advance payments from our publishers and recognize revenue when manuscripts are delivered to and accepted by the publishers. Revenue is also earned from book publishing when sales on a unit basis exceed the advanced royalty.
Television sponsorship revenues are generally recorded ratably across the period when new episodes initially air. Revenue from media content is recognized at a point in time, when the content is delivered and accepted.
Commission revenues and vendor placement commission revenuesrevenue`s are recorded in the period the commission is earned.
We entered into a transaction with a media company for which we receive advertising credits as part of the consideration exchanged. These transactions are recorded at the estimated fair value of the advertising credits received, as their fair value is deemed more readily determinable than the fair value of the trademark licensing right provided by us, in accordance with ASC 845, Nonmonetary Transactions. The fair value of the advertising credits are recorded as revenue and in other assets when earned, and expensed when the advertising credits are utilized. We recorded revenue of $3.7 million for each year ended December 31, 2018 and 2017 related to the advertising credits. We recorded $1.3 million of expense related to the advertising credits utilized for the year ended December 31, 2018. We did not record any expense related to the advertising credits for the year ended December 31, 2017 as they had not yet been utilized.
Goodwill and Intangible Assets. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (on October 1st) 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 considered its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. In evaluating goodwill for impairment, we first assessed qualitative factors to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount. Qualitative factors considered included, for example, macroeconomic and industry conditions, overall financial performance, and other relevant entity-specific events. If we bypassed the qualitative assessment, or concluded that it was more likely than not that the fair value of a reporting unit was less than its carrying value, we then performed a quantitative goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any. If the carrying value of the reporting unit’s goodwill exceeded the implied fair value of the goodwill, an impairment loss was recognized in the amount of that excess, not to exceed the carrying amount of goodwill. See
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Note 2 – Summary of Significant Accounting Policies in Notes to our Consolidated Financial Statements for further information.
Intangible assets represent trademarks, customer agreements and patents related to our brands and a favorable lease.brands. Finite-lived intangible 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 finite-lived assets is 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 onOn an annual basis (on October(October 1st) and betweenas needed, we test indefinite lived trademarks for impairment through the use of discounted cash flow models. Assumptions used in our discounted cash flow models include: (i) discount rates; (ii) projected annual tests if an event occurs or circumstancesrevenue growth rates; and (iii) projected long-term growth rates. Our estimates also factor in economic conditions and expectations of management, which may change that indicate thatin the carrying amountfuture based on period-specific facts and circumstances. Other intangibles with determinable lives, including certain trademarks, customer agreements and patents, are evaluated for the possibility of impairment when certain indicators are present, and are otherwise amortized on a straight-line basis over the estimated useful lives of the indefinite-lived intangible asset may not be recoverable.assets (currently ranging from 2 to 15 years).
When conducting our impairment assessment of indefinite-lived intangible assets, we initially perform 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, we then test the asset for recoverability. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its future discounted net cash flows. If the carrying amount of 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.
AssumptionsThe Company performed its most recent test as October 1, 2020 and did not identify any impairments. Based upon the results of its annual impairment test performed as of October 1, 2020, Joe’s indefinite-lived intangible asset’s estimated fair value exceeded its carrying value by less than 2%. Management considers the assumptions used in our fair valueits analysis to be its best estimates are as follows: (i) discount rates; (ii) projectedacross a range of possible outcomes based on available evidence at the time of its annual revenue growth rates;impairment test. While the Company concluded no impairment triggers existed at December 31, 2020, the Joe’s indefinite-lived intangible asset is at risk of future impairment in the event of significant unexpected changes in the Company’s forecasted future results and (iii) projected long-term growth rates. Our estimates also factorcash flows for the Joe’s trademark. As the Company disclosed previously, it is involved in economic conditions and expectationsa strategic review of managementits brands which includes evaluating potential divestitures of its brands. The Company may or may not execute a transaction; however, if it does, the Company would re-examine its intangible asset valuations at that time which may changeor may not result in a potential impairment. During the future based on period-specific factsquarter ended March 31, 2020, the Company recorded non-cash impairment charges of $85.6 million consisting of $33.2 million related to the Jessica Simpson trademark, $29.8 million related to the Gaiam trademark, $12.0 million related to the Joe’s trademark and circumstances.$10.6 million related to the Ellen Tracy trademark. The impairments arose due to reduced sales forecasts and higher discount rates for these brands driven by the financial impacts of COVID-19 and the current economic environment.
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Due to the identification of impairment indicators during the quarter ended September 30, 2018,2019, specifically the impairment of certain tradenames due to reduced growth expectations and the impact of licensee transitions for these brands, we performed impairment testing of our indefinite-lived assets at September 30, 2018,2019, which replaced our October 1st annual test. As a result of our testing, we recorded a non-cash impairment charge of $17.9$33.1 million relating to our indefinite-lived intangible assets during the quarter ended September 30, 2018.
Dueconsisting of $28.5 million related to the identification of impairment indicators during the quarter ended September 30, 2017, specifically the impairment of certain tradenames due to reduced contractual minimums or reduced sales forecasts in key distribution channels, we performed impairment testing of our goodwillJessica Simpson trademark and indefinite-lived assets at September 30, 2017, which replaced our October 1st annual test. As a result of our testing, we recorded a non-cash impairment charge of $36.5$4.6 million relating to our indefinite-lived intangible assets during the quarter ended September 30, 2017.
Duerelated to the identification of impairment indicators during the year ended December 31, 2017, we performed impairment testing of our goodwill and indefinite-lived assets during the fourth quarter of 2017. As a result of our testing, we recorded a non-cash goodwill impairment charge of $304.1 million during the fourth quarter of 2017.Joe’s trademark.
Income Taxes. Current income taxes are based on the respective periods’ taxable income for federal, foreign 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 statutory tax rates in effect for the year in which the differences are expected to reverse. In accordance with ASU No. 2015‑17 “Balance2015-17, Balance Sheet Classification of Deferred Taxes”Taxes, all deferred income taxes are reported and classified as non-current. 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. 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 and tax provisions under the Tax Act, primarily the new limitation on interest expense deductions, management had determined that enough certainty existed to warrant the release of theThe Company increased its valuation allowance recorded against substantially all ofdue to the Company’s deferred tax assets as of December 31, 2017.expected full year net loss and the inability to rely on future forecasted operations due to the volatility in the economic environment caused by COVID-19. See Note 1614 of Notes to our consolidated financial statementsConsolidated Financial Statements for further information on the release ofincrease to our valuation allowance.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense for corporate taxpayers from 30% of adjustable taxable income to 50% of adjustable taxable income for tax years beginning in 2019 and 2020, class life changes to qualified improvement property (in general, from 39 years to 15 years), acceleration of the ability for corporate taxpayers to recover alternative minimum tax (“AMT”) credits, suspension of 80% of taxable income limitation on the use of NOLs for tax years beginning before January 1, 2021 and the ability to carry back NOLs incurred from tax years 2018 through 2020 up to the five preceding tax years. As a result of the CARES Act, it is anticipated that the Company will fully utilize all interest expense that was deferred beginning in 2018 with no additional disallowed interest expense in 2020. The Company had accrued for an AMT credit of less than $0.1 million which was recorded as a receivable as of December 31, 2019; payment of this AMT credit was received during the year ended December 31, 2020.
We apply 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
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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. During the years ended December 31, 20182020 and 2017,2019, the Company did not have any reserves or accrued interest and penalties recorded through current income tax expense in accordance with ASC 740, Income Taxes (“ASC 740”). 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, 20152017 through December 31, 2018.2020.
Stock-Based Compensation. We accountImpact of COVID-19
The COVID-19 pandemic has resulted in state-government mandated store closures and social distancing measures throughout most of the U.S. As states continue to relax and then tighten restrictions, we are unsure when retail stores will be ordered to close, at what capacity, or how long such periods of store closures will be needed or mandated. For the year ended December 31, 2020, COVID-19 caused a significant reduction in retail stores that remained open, as well as a change in consumer purchasing behavior for stock-based compensationspecific types of products. Both have led to a reduction in orders from retailers for certain types of products bearing some of our brands, as discussed in Item 1. Even as the vaccines are widely administered, we cannot predict when government restrictions and mandates will be imposed or lifted, or how quickly, if at all, retail stores and customers will return to their pre-COVID-19 purchasing behaviors, so we cannot predict how long our results of operations and financial performance will be impacted. Accordingly, the COVID-19 pandemic has adversely affected our fiscal year 2020 and our projected long-term revenues, earnings, liquidity and cash flows. However, the situation is dynamic, and we are not currently able to predict the full impact of COVID-19 on our results of operations and cash flows. In response to COVID-19, we have taken the following actions:
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| ● | Increasing available cash on hand including utilizing revolver borrowings under the Amended BoA Credit Agreement. We made net revolver borrowings of $14.1 million, excluding lender fees, under the Amended BoA Credit Agreement; |
| ● | Implementing temporary salary reductions across the Company; |
| ● | Obtained a Paycheck Protection Program (“PPP”) loan of $769,295 on May 18, 2020 under the CARES Act; |
| ● | Decreasing operating expenses through marketing spend reductions and deferral of non-essential spending; |
| ● | Continuing to evaluate strategic alternatives; and |
| ● | Proactively partnering with our lender base to provide more flexibility. |
On November 16, 2020, the Company modified the covenants in, and obtained a waiver through December 31, 2020 of defaults under ASC Topic 718, Compensation - Stock Compensationthe Amended Wilmington Credit Agreements. The amendments, among other matters, waive existing defaults under the Credit Agreement through December 31, 2020; limit the Company’s ability to conduct certain dispositions and make certain restricted payments and investments without the consent of the Wilmington Facility Loan Parties’; prohibit the repayment of existing indebtedness, the incurrence of new indebtedness of the creation of liens in each case without the consent of the Wilmington Facility Loan Parties; and provide certain information rights and other assurances to the Wilmington Facility Loan Parties, including with respect to the Company’s ongoing strategic review process. The amendments also provide that, if the Wilmington Facility Loan Parties under the Credit Agreement continue to be lenders as of April 1, 2021, the Wilmington Facility Loan Parties under the Credit Agreement shall have the right to appoint an independent majority of the Company’s Board of Directors (inclusive of Ms. Mazzucchelli and Mr. Dionne, who currently serve as directors of the Company). As of April 1, 2021, the Wilmington Facility Loan Parties continue to be our lenders and, therefore, they have the right to appoint an independent majority of our Board of Directors. The Company’s bylaws provide that, effective April 1, 2021, the Board may not increase the number of directors to more than five members. The Company extended its waiver through April 19, 2021. However, as a result of the impacts of the COVID-19 pandemic, the Company is not currently forecasted to be able to comply, in the next twelve months, with certain of the financial covenants under the Amended Wilmington Credit Agreement. If the Company fails to comply with its financial covenants, as modified, a default under the Loan Agreements would be triggered and the Company’s obligations under the Loan Agreements may be accelerated. The risk of non-compliance creates a material uncertainty that casts substantial doubt with respect to our ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities that would be necessary if we were unable to realize our assets and settle our liabilities as a going concern in the normal course of operations.
During the first quarter of 2020, we recorded non-cash impairment charges of $85.6 million consisting of $33.2 million related to the Jessica Simpson trademark, $29.8 million related to the Gaiam trademark, $12.0 million related to the Joe’s trademark and $10.6 million related to the Ellen Tracy trademark. The impairments arose due to reduced sales forecasts and higher discount rates for these brands driven by the financial impacts of COVID-19 and the current economic environment. Fair value for each trademark was determined based on the income approach using estimates of future discounted cash flows.
Discontinued Operations
Due to the sale of MSLO during the second quarter of 2019 (see Note 4 of Notes to Consolidated Financial Statements), which requires companies to measure and recognize compensation expensewe have classified the results of MSLO as discontinued operations in our a consolidated statements of operations for all stock-based payments atperiods presented. The related assets and liabilities directly associated with MSLO are classified as discontinued operations in our consolidated balance sheets for all periods presented.
On June 10, 2019, the Company completed the sale of MSLO. During the first quarter of 2019, the Company recorded non-cash impairment charges of $161.2 million for indefinite-lived intangible assets related to the Martha Stewart and Emeril Lagasse trademarks. The impairments arose during the sale process for the Martha Stewart and Emeril Lagasse brands due to the difference in the fair value. Compensation cost for restricted stock is measured usingvalue as indicated by the quoted marketsales price as compared to the carrying values of our common stock at the date the common stock is granted. For restricted stock and restricted stock units, for which restrictions lapse with the passage of time (“time-based restricted stock”), compensation cost is recognized on a straight-line basis over the period between the issue date and the date that restrictions lapse. Time-based restricted stock isintangible assets included in total shares of common stock outstanding upon the lapse of applicable restrictions. For restricted stock, for which restrictions are based on performance measures (“performance stock units” or “PSUs”), restrictions lapse when those performance measures have been deemed achieved. Compensation cost for PSUs is recognized on a straight-line basis during the period from the date on which the likelihoodtransaction. The sale of the PSUs being earned is deemed probableMartha Stewart and (x) the end of the fiscal year during which such PSUs are granted or (y) the date on which awards of such PSUs may beEmeril Lagasse brands was approved by the compensation committeeBoard of Directors on April 15, 2019, to allow the Company’s boardCompany to achieve one of directors (the “Compensation Committee”) on a discretionary basis, as applicable. PSUsits top priorities in significantly reducing
31
its debt. These charges are included in total common stock outstanding upon the lapseloss from discontinued operations in the consolidated statements of applicable restrictions. PSUs are included in total diluted common stock outstanding when the performance measures have been deemed achieved but the PSUs have not yet been issued.
At each subsequent reporting period prioroperations. See Note 3, Note 4 and Note 7 of Notes to the lapse of restrictions on warrants, time-based restricted stock and PSUs granted to non-employees, the Company remeasures the aggregate compensation cost of such grants using the Company’s fair value at the end of such reporting period and revises the straight-line recognition of compensation cost in line with such remeasured amount.
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 (the “CODM”) 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 CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenuesConsolidated Financial Statements for purposes of making operating decisions and assessing financial performance. Accordingly, we have determined that we have a single operating and reportable segment. In addition, we have no foreign operations or any assets in foreign locations. Nearly all of our operations consist of a single revenue stream, which is the licensing of our trademark portfolio, with additional revenues derived from television, book, café operations and certain commissions.
27
further information.
Results of Operations
Comparison of the Years Ended December 31, 20182020 and 20172019
The following table summarizes our results of operations for the years indicated and is derived from our consolidated financial statements:
| | | | | | | | | | ||||||||||||
| | Year Ended December 31, | | Better/(Worse) | |||||||||||||||||
|
| 2020 |
| 2019 |
| (Dollars) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Year Ended December 31, |
| Better/(Worse) |
| ||||||||||||||||
|
| 2018 |
| 2017 |
| (Dollars) |
| (Percentage) |
| ||||||||||||
|
| (in thousands, except percentages) |
| ||||||||||||||||||
| | (in thousands) | |||||||||||||||||||
Net revenue |
| $ | 169,956 |
| $ | 167,464 |
| $ | 2,492 |
| 1.5 | % | | $ | 89,811 | | $ | 101,576 | | $ | (11,765) |
Operating expenses |
|
| 87,767 |
|
| 79,443 |
|
| (8,324) |
| (10.5) | % | |
| 53,861 | |
| 61,671 | |
| 7,810 |
Impairment charges |
|
| 17,899 |
|
| 340,628 |
|
| 322,729 |
| 94.7 | % | | | 85,590 | | | 33,109 | | | (52,481) |
Loss on sale of assets |
|
| 7,117 |
|
| - |
|
| (7,117) |
| (100.0) | % | |||||||||
Income (loss) from operations |
|
| 57,173 |
|
| (252,607) |
|
| 309,780 |
| 122.6 | % | |||||||||
Gain on sale of assets | |
| (4,527) | |
| - | |
| 4,527 | ||||||||||||
(Loss) income from continuing operations | |
| (45,113) | |
| 6,796 | |
| (51,909) | ||||||||||||
Other expense |
|
| 693 |
|
| 1,583 |
|
| 890 |
| 56.2 | % | |
| 5,809 | |
| 2,107 | |
| (3,702) |
Interest expense, net |
|
| 62,152 |
|
| 59,891 |
|
| (2,261) |
| (3.8) | % | |
| 48,252 | |
| 53,760 | |
| 5,508 |
Loss before income taxes |
|
| (5,672) |
|
| (314,081) |
|
| 308,409 |
| 98.2 | % | |||||||||
Loss from continuing operations before income taxes | |
| (99,174) | |
| (49,071) | |
| (50,103) | ||||||||||||
Benefit from income taxes |
|
| (694) |
|
| (132,535) |
|
| 131,841 |
| 99.5 | % | |
| (3,067) | |
| (8,695) | |
| (5,628) |
Net loss |
|
| (4,978) |
|
| (181,546) |
|
| 176,568 |
| 97.3 | % | |||||||||
Net income attributable to noncontrolling interests |
|
| (5,506) |
|
| (4,172) |
|
| (1,334) |
| (32.0) | % | |||||||||
Loss from continuing operations | |
| (96,107) | |
| (40,376) | |
| (55,731) | ||||||||||||
Net loss attributable to noncontrolling interests from continuing operations | |
| 7,963 | |
| 6,036 | |
| 1,927 | ||||||||||||
Loss from continuing operations attributable to Sequential Brands Group, Inc. and Subsidiaries | | | (88,144) | | | (34,340) | | | (53,804) | ||||||||||||
Loss from discontinued operations, net of income taxes | | | (1,276) | | | (125,063) | | | 123,787 | ||||||||||||
Net loss attributable to Sequential Brands Group, Inc. and Subsidiaries |
| $ | (10,484) |
| $ | (185,718) |
| $ | 175,234 |
| 94.4 | % | | $ | (89,420) | | $ | (159,403) | | $ | 69,983 |
Net Revenue. The year-over-year changes in netNet revenue were primarily driven by revenue earned for facilitating certain distribution arrangements and rights transfer fees included in 2018, increased revenues for GAIAM, Ellen Tracy and AND1 offset by decreases in revenue for Avia, Nevados, William Rast, and Jessica Simpson, the expiration of legacy contracts for the Martha Stewart brandand the absence of FUL and Revo revenue duedecreased $11.8 million to the sale of the trademarks during the first half of 2018. The year-to-date impact of ASC 606 in 2018 resulted in lower revenue across all brands of $3.5 million.
Operating expenses. Operating expenses increased $8.3$89.8 million for the year ended December 31, 2018 to $87.7 million2020 compared to $79.4$101.6 million for the year ended December 31, 2017. 2019. The decrease in net revenue for the year ended December 31, 2020 compared to the year ended December 31, 2019 is primarily attributable to certain licensee transitions, lower contractual GMRs for Gaiam, licensee agreements that have expired, as well as the economic impact of COVID-19 which caused supply chain disruptions for our licensees and retail store closures.
Operating expenses. Operating expenses decreased $7.8 million for the year ended December 31, 2020 to $53.9 million compared to $61.7 million for the year ended December 31, 2019. This increasedecrease was primarily driven by increased advertising coststhe reversal of $7.0bad debt expense of $2.7 million; lower bad debt expense of $2.1 million increased settlement fees of $4.0 million related to a $4.2 million settlement with a licensee as part of a strategic shift to a direct-to-retail license in the third quarter of 2018, legal costs of $4.4 million related to a $3.2 million accrual for a legacy litigation settlement claim, third-party fees related to debt refinancing of $1.2 million expensed in accordance with ASC 470 – Debt, partially offsetdriven by the absence of $6.7a write-off of an outstanding receivable balance from Tommie Copper in 2019; as well as decreases in marketing costs of $10.0 million severancedue to the deferral of non-essential spending in response to COVID; compensation of $5.5 million due to lower headcount, the absence of CEO expense for the fourth quarter of 2020, and lower benefits related expenses; commissions of $1.4 million and business development costs in connection with the Company’s CEO transition, decreased productionof $0.1 million; legal costs and professional fees of $1.1$1.3 million; deal costs and management fees of $1.7 million drivenand contributions of $0.1 million. These decreases were offset by $1.0the increases in debt refinancing costs $1.6 million of expenses related to Martha & Snoop’s Potluck Dinner Party show and decreased rentamortization expense of $0.5 million.$15.5 million due to reclassification of the Avia and Ellen Tracy trademarks from indefinite-lived to finite-lived intangible assets.
Impairment charges. During the year ended December 31, 2018,2020, the Company recorded non-cash impairment charges of $17.9$85.6 million for indefinite-lived intangible assetsconsisting of $33.2 million related to the trademarksJessica Simpson trademark, $29.8 million related to the Gaiam trademark, $12.0 million related to the Joe’s trademark and $10.6 million related to the Ellen Tracy trademark. The impairments arose due to reduced sales forecasts and higher discount rates for these brands driven by the financial impacts of twoCOVID-19 and the current economic environment. During the year ended December 31, 2019, the Company recorded non-cash impairment charges of $33.1 million consisting of $28.5 million related to the Company’s brands: Ellen TracyJessica Simpson trademark andCaribbean Joe.
32
$4.6 million related to the Joe’s trademark. The impairments arose due to reduced growth expectations and the impact of licensee transitions for these brands. Fair value for each trademark was determined based on the income approach using estimates of future discounted cash flows. The impairments arose due to reduced growth expectations and the impact
Gain on sale of licensee transitions for these brands. assets. During the year ended December 31, 2017, we recorded non-cash impairment charges of $304.1 million related to our goodwill and $36.5 million for indefinite-lived intangible assets related to the trademarks of five of our non-core brands: Caribbean Joe, Revo, Franklin Mint, Nevados, and FUL. Fair value for each trademark was determined based on estimates of future discounted cash flows. The trademark impairments arose due to reduced contractual minimums or reduced sales forecasts in key distribution channels for these brands. The goodwill impairment was triggered in the fourth quarter of 2017 by the continued decline of our stock price and the related decline in our market capitalization. During the fourth quarter of 2017, our stock price and market capitalization declined approximately 41%, consistent with the decline in market capitalization of similar companies in our sector.
28
Loss on sale of assets. During the year ended December 31, 2018,2020, the Company recorded a lossgain on sale of assetsasset of $7.1$0.9 million related to the sale of the RevoNevados trademark and a gain on April 19, 2018, recognized duringsale of assets of $3.7 million related to the first quartersale of 2018,the Franklin Mint and the FUL trademark on May 30, 2018, recognized during the second quarter of 2018.Linen ‘n Things trademarks.
Other expense. Other expense duringwas $5.8 million for the year ended December 31, 2018 consists2020 compared to other expense of immaterial items. Other expense during$2.1 million for the year ended December 31, 2017 consisted2019 primarily due to the loss on our interest rate swaps and loss on lease terminations of a $1.9 million loss recorded in connection with the sale of equity securities and other immaterial items partially offset by MSLO pre-acquisition sales tax refunds of $0.1 million and other immaterial items.$2.9 million.
Interest expense, net. The year-over-year increase in net interestInterest expense of $2.3decreased $5.5 million is primarily duecompared to an increase in interest incurred under our loan agreements. the prior year. Interest expense, net during the year ended December 31, 20182020 includes interest incurred under our loan agreements of $57.1$42.6 million, non-cash interest related to the amortization of deferred financing costs of $4.5$6.7 million, and non-cash interest income of $1.0 million related to the accretion of the present value of certain payment arrangements. Interest expense, net during the year ended December 31, 2019 includes interest incurred under our loan agreements of $48.2 million, non-cash interest related to the amortization of deferred financing costs of $5.6 million, the expensing of $0.1$0.8 million of deferred financing costs as a result of a partial extinguishment ofon the Amended BoA Credit AgreementRevolving and Term loans in accordance with ASC 470 – Debt in connection with the Company’s entry into the New Amended BoA Credit Agreement and non-cash interest income of $0.5$0.8 million related to the accretion of the present value of guaranteed contractual payments assumed through certain of the Company’s acquisitions and certain other payment arrangements.Interest expense, net during the year ended December 31, 2017 includes interest incurred under our loan agreements of $55.1 million, non-cash interest related to the amortization of deferred financing costs of $3.9 million and non-cash interest of $0.9 million related to the accretion of the present value of guaranteed contractual payments assumed through certain of the Company’s acquisitions.
Income taxes.The benefit forfrom income taxes in continuing operations for the year ended December 31, 20182020 differs from the statutory rate primarily for state, local and foreign jurisdiction taxes offset by taxes attributable to noncontrolling interests and an increase to the valuation allowance. We increased our valuation allowance due to the expected full year net loss and the inability to rely on future forecasted operations due to the volatility caused by COVID-19. The benefit for income taxes in continuing operations for the year ended December 31, 2019 differs from the statutory rate primarily for additional tax benefit attributable to noncontrolling interest offset by non-deductible compensation and an increase in the valuation allowance on state tax attributes.The benefit from income taxes for the year ended December 31, 2017 primarily represents a tax benefit recognized due to the decrease in deferred tax liabilities as a result of the reduction in the future corporate tax rate from 35% to 21% and the release of the valuation allowance recorded against substantially all of the Company’s deferred tax assets prior to December 31, 2017, offset by the non-tax deductible goodwill impairment.
Noncontrolling interest. Noncontrolling interest for the year ended December 31, 20182020 represents net incomeloss allocations of $5.6$8.8 million to With You, Inc., a member of With You LLC (the partnership between us and Jessica Simpson), $0.6 million to Elan Polo International, Inc., a member of DVS LLC, and a noncontrolling interest lossnet income allocation of $0.7$0.2 million to JALP, LLC, a member of FUL IP Holdings, LLC (“JALP, LLC”) and $0.6 million to Elan Polo International, Inc., a member of DVS LLC (“DVS LLC”). Noncontrolling interest for the year ended December 31, 20172019 represents net incomeloss allocations of $5.8$6.2 million to With You, Inc., a member of With You LLC (the partnership between us and Jessica Simpson), $0.6 and $0.5 million to JALP, LLC, and a net income allocation of $0.7 million to Elan Polo International, Inc., a member of DVS LLC, and a noncontrolling interest loss allocationLLC.
Discontinued Operations. The Company completed the sale of $2.2 million to JALP, LLC.
29
Comparison of the Years Ended December 31, 2017 and 2016
The following table summarizes our results of operations for the periods indicated and is derived from our consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
| Better/(Worse) |
| Change |
| |||||
|
| 2017 |
| 2016 |
| (Dollars) |
| (Percentage) |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Net revenue |
| $ | 167,464 |
| $ | 155,528 |
| $ | 11,936 |
| 7.7 | % |
Operating expenses |
|
| 79,443 |
|
| 85,392 |
|
| 5,949 |
| 7.0 | % |
Impairment charges |
|
| 340,628 |
|
| - |
|
| (340,628) |
| (100.0) | % |
(Loss) income from operations |
|
| (252,607) |
|
| 70,136 |
|
| (322,743) |
| (460.2) | % |
Other expense |
|
| 1,583 |
|
| 3,810 |
|
| 2,227 |
| 58.5 | % |
Interest expense, net |
|
| 59,891 |
|
| 50,538 |
|
| (9,353) |
| (18.5) | % |
(Loss) income before income taxes |
|
| (314,081) |
|
| 15,788 |
|
| (329,869) |
| (2,089.4) | % |
(Benefit from) provision for income taxes |
|
| (132,535) |
|
| 9,157 |
|
| (141,692) |
| (1,547.4) | % |
Net (loss) income |
|
| (181,546) |
|
| 6,631 |
|
| (188,177) |
| (2,837.8) | % |
Net income attributable to noncontrolling interests |
|
| (4,172) |
|
| (7,452) |
|
| 3,280 |
| 44.0 | % |
Net loss attributable to Sequential Brands Group, Inc. and Subsidiaries |
| $ | (185,718) |
| $ | (821) |
| $ | (184,897) |
| (22,521.0) | % |
Net Revenue. The increase in net revenue for the year ended December 31, 2017 as compared to the year ended December 31, 2016 is primarily attributable to the acquisition of GAIAM, Inc. during the third quarter of 2016 and increased revenues in the Avia, Joe’s, and Ellen Tracy brands offset by decreased revenues in the Martha Stewart brand. Net revenue for the year ended December 31, 2017 consists primarily of licensing revenue earned from our license agreements relating to the Martha Stewart, Jessica Simpson, GAIAM, Avia, AND1, Joe’s and Ellen Tracy brands. Net revenue for the year ended December 31, 2016 consists primarily of licensing revenue earned from our license agreements relating to the Martha Stewart, Jessica Simpson, Avia, AND1, GAIAM, Ellen Tracy and Joe’s brands.
Operating expenses. Operating expenses decreased $5.9 million for the year ended December 31, 2017 to $79.4 million compared to $85.4 million for the year ended December 31, 2016. This decrease was primarily driven by a decrease in restructuring costs of $3.2 million, stock-based compensation costs of $1.8 million, professional fees of $3.2 million, deal advisory costs of $3.0 million, advertising costs of $2.8 million, and rent costs of $1.7 million, partially offset by increased stock-based compensation and severance of $6.7 million in connection with the Company’s CEO transition, increased compensation costs of $1.2 million, $1.0 million of higher expenses related to the Martha & Snoop’s Potluck Dinner Party show, and increased contributions of $0.9 million.
Impairment charges. During the year ended December 31, 2017 we recorded non-cash impairment charges of $304.1 million related to our goodwill and $36.5 million for indefinite-lived intangible assets related to the trademarks of five of our non-core brands: Caribbean Joe, Revo, Franklin Mint, Nevados, and FUL. Fair value for each trademark was determined based on estimates of future discounted cash flows. The trademark impairments arose due to reduced contractual minimums or reduced sales forecasts in key distribution channels for these brands. The goodwill impairment was triggered in the fourth quarter of 2017 by the continued decline of our stock price and the related decline in our market capitalization. During the fourth quarter of 2017, our stock price and market capitalization declined approximately 41%, consistent with the decline in market capitalization of similar companies in our sector.
Other expense. Other expenseMSLO during the year ended December 31, 2017 consists of a $1.9 million loss recorded in connection with the sale of equity securities and other immaterial items partially offset by MSLO pre-acquisition sales tax refunds of $0.1 million and other immaterial items. Other expense during the year ended December 31, 2016 consists of the impairment of our equity securities of $4.4 million partially offset by other immaterial items.
Interest expense, net. The year-over-year increase in net interest expense of $9.4 million is primarily due to an increase in interest incurred under our loan agreements. Interest expense, net during the year ended December 31, 2017 includes interest incurred under our loan agreements of $55.1 million, non-cash interest related to the amortization of
30
deferred financing costs of $3.9 million and non-cash interest of $0.9 million related to the accretion of the present value of guaranteed contractual payments assumed through certain of the Company’s acquisitions. Interest expense during the year ended December 31, 2016 includes interest incurred under our loan agreements and interest rate caps of $46.2 million, non-cash interest related to the amortization of deferred financing costs of $2.8 million and the write-off of $0.3 million of deferred financing costs as2019. As a result, we have classified the results of an extinguishment a portionMSLO as discontinued operations in our consolidated statements of the BoA Credit Agreementoperations for all periods presented. The related assets and liabilities directly associated with MSLO are classified as discontinued operations in accordance with ASC 470 – Debtour consolidated balance sheets for all periods presented. See Note 4 of Notes to Consolidated Financial Statements in connection with the Company’s entry into the Amended BoA Credit Agreement. Additionally, we expensed non-cash interest of $1.2 million related to the accretion of the present value of guaranteed contractual payments assumed through certain of the Company’s acquisitions in 2015.
Income taxes. The benefit from income taxesthis Form 10-K for the year ended December 31, 2017 primarily represents a tax benefit recognized due to the decrease in deferred tax liabilities as a result of the reduction in the future corporate tax rate from 35% to 21% and the release of the valuation allowance recorded against substantially all of the Company’s deferred tax assets prior to December 31, 2017, offset by the non-tax deductible goodwill impairment. The provision for income taxes for the year ended December 31, 2016 represents the non-cash deferred tax expense created by the amortization of certain acquired trademarks for tax but not book purposes and taxes for state, local and foreign jurisdictions. The 2016 effective tax rate differed from the statutory tax rate primarily due to benefits from taxes attributable to noncontrolling interest, changes in valuation allowance, change in state tax rates and a reversal of unrecognized tax benefits.
Noncontrolling interest. Noncontrolling interest for the year ended December 31, 2017 represents net income allocations of $5.8 million to With You, Inc., a member of With You LLC (the partnership between us and Jessica Simpson), $0.6 million to Elan Polo International, Inc., a member of DVS LLC, and a noncontrolling interest loss allocation of $2.2 million to JALP, LLC, a member of FUL IP Holdings, LLC. Noncontrolling interest for the year ended December 31, 2016 represents net income allocations of $6.5 million to With You, Inc., a member of With You LLC (the partnership between us and Jessica Simpson), $0.6 million to Elan Polo International, Inc., a member of DVS LLC, and $0.4 million to JALP, LLC, a member of FUL IP Holdings, LLC.
further discussion.
Liquidity and Capital Resources
Liquidity
Refer to Note 8 of Notes to Consolidated Financial Statements for a discussion of our borrowings under the Third Amended and Restated First Lien Credit Agreement with Bank of America, N.A., as administrative agent and collateral agent and the lenders party thereto and the Third Amended and Restated Credit Agreement with Wilmington Trust, National Association, as administrative agent and collateral agent and the lenders party thereto.
As of December 31, 2018,2020, we had cash on hand, including restricted cash, of $16.1$15.5 million and a negative net working capital balance (defined below) of $409.6 million. Additionally, we had outstanding debt obligations under our
33
loan agreements of $470.8 million excluding $18.6 million of deferred financing fees. As previously disclosed, the total debt is classified as current as of December 31, 2020 and that drives the change from period to period. As of December 31, 2019, we had cash on hand, including restricted cash, of $8.3 million and a net working capital balance (defined below) of $28.0$11.5 million. Additionally, we had outstanding debt obligations under our loan agreements of $634.9$468.2 million excluding $24.1 million of deferred financing fees. As of December 31, 2017, we had cash on hand, including restricted cash, of $20.4 million and a net working capital balance (defined below) of $32.1 million. Additionally, we had outstanding debt obligations under our loan agreements of $644.7 million excluding $14.1$22.2 million of deferred financing fees. Net working capital is defined as current assets minus current liabilities, excluding restricted cash and discontinued operations. As of December 31, 2020, we were fully drawn down under the current revolving credit facility (the “Revolving Credit Facility”). See Note 8 of Notes to Consolidated Financial Statements for a description of certain financing transactions consummated by us. See Note 17 of Notes to Consolidated Financial Statements regarding certain subsequent events related to our indebtedness. See Item 1a. Risk Factors for further information.
At December 31, 2020, the Company was in compliance with the covenants included in the Amended BoA Credit Agreement. On November 16, 2020, due to the occurrence of certain events, the Company entered into the Fifth Amendment to Third Amended and Restated Credit Agreement and Limited Waiver (the “Fifth Amendment”) with the Wilmington Facility Loan Parties. The Fifth Amendment modified certain of the covenants in, and provided a waiver through December 31, 2020 of defaults under, the Amended Wilmington Credit Agreement (the “Waiver”). The Company received several extensions of the Waiver in the first quarter of 2021. The current extension of the Waiver expires on April 19, 2021 and the Company is negotiating to further extend the Waiver. The Company is also not currently forecasted to be able to comply, in the next twelve months from the date of filing this Form 10-K, with certain of the financial covenants under the Amended Wilmington Credit Agreement. If the Company fails to comply with such financial covenants, or further extend the Waiver, an event of default under the Loan Agreements would be triggered and its obligations under the Loan Agreements may be accelerated. The Company continues to evaluate strategic alternatives, including the divestiture of one or more existing brands or a sale of the Company. The risk of non-compliance creates a material uncertainty that casts substantial doubt with respect to the ability of the Company to continue as a going concern. Further, the Company is negotiating with its lenders to obtain a new waiver for the going concern disclosure included in the unqualified audit opinion for the year ended December 31, 2020 delivered by our independent registered public accounting firm for our annual audited financial statements. There are no material capital expenditure commitments as of December 31, 2020. Furthermore, due to the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on our results of operations and cash flows. We are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses, obtaining a PPP loan and utilizing funds available under our Revolving Credit Facility. The COVID-19 pandemic has resulted in state-government mandated store closures and social distancing measures throughout most of the U.S. These actions have caused many retailers carrying our branded products to close in the first and second quarter of 2020, which has affected retailers, as well as our licensees who sell to these retailers. As states continue to relax and then tighten restrictions, we are unsure when retail stores will be ordered to close, at what capacity, or how long such periods of store closures will be needed or mandated. The impacts of COVID-19 have adversely affected our near-term and long-term revenues, earnings, liquidity and cash flows as certain licensees have requested temporary relief or deferred making their scheduled payments. Although there is significant uncertainty in the current economic environment, we currently believe that cash from operations and our currently available cash (including available(as a result of borrowings under our existing financing arrangements)arrangements, including under the PPP) will be sufficient to satisfy our anticipated working capital requirements for the foreseeable future and at least twelve months from the date of filing this Form 10-K. Overall, we do
The CARES Act contains several new or changed income tax provisions, including but not expect any negative effectslimited to our funding sources that would have a material effectthe following: increased limitation threshold for determining deductible interest expense for corporate taxpayers from 30% of adjustable taxable income to 50% of adjustable taxable income for tax years beginning in 2019 and 2020, class life changes to qualified improvement property (in general, from 39 years to 15 years), acceleration of the ability for corporate taxpayers to recover alternative minimum tax (“AMT”) credits, suspension of 80% of taxable income limitation on our liquidity. We intend to continue financing future brand acquisitions through a combinationthe use of cash from operations, bank financingNOLs for tax years beginning before January 1, 2021 and the issuanceability to carry back NOLs incurred from tax years 2018 through 2020 up to the five preceding tax years. As a result of the CARES Act, it is anticipated that the Company will fully utilize all interest expense that was deferred beginning in 2018 with no additional equity and/or debt securities. See Note 10disallowed interest expense in 2020. The Company had accrued for an AMT credit of Notes to Consolidated Financial Statements included in this Form 10-K forapproximately $0.1 million which was recorded as a description of certain financing transactions consummated by us. There are no material capital expenditure commitmentsreceivable as of December 31, 2018.
2019; payment of this AMT credit was accelerated under the CARES Act. The Company received the AMT refund as of September 30, 2020. On May 18, 2020, the Company received loan proceeds of $769,295 from a promissory note issued by Bank of America, N.A., under the PPP loan which was established under the CARES Act and is administered by the U.S. Small Business Administration. The term on the loan is two years and the annual interest rate is
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Table1.00%. Payments of Contentsprincipal and interest are deferred for the first six months of the loan. The Company received consent from its lenders under the Amended Wilmington Credit Agreement to apply for the PPP loan. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under PPP. The Company filed for forgiveness on this loan on November 20, 2020 and believes that the loan will be forgiven. Such forgiveness will be determined based on the use of the loan proceeds for payroll costs, rent and utility expenses and the maintenance of workforce and compensation levels with certain limitations. There is uncertainty around the standards and operation of the PPP, and no assurance is provided that the Company will obtain forgiveness in whole or in part.
Cash Flows from Continuing Operations
Cash flows from continuing operations for operating, financing and investing activities for the years ended December 31, 2018, 20172020 and 20162019 are summarized in the following table:
| | | | | | | |||||||||
| | Year Ended December 31, | |||||||||||||
|
| 2020 |
| 2019 | |||||||||||
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|
|
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|
|
|
| ||||||
|
| Year Ended December 31, | |||||||||||||
|
| 2018 |
| 2017 |
| 2016 | |||||||||
|
| (in thousands) | |||||||||||||
| | (in thousands) | |||||||||||||
Operating activities |
| $ | 32,900 |
| $ | 28,210 |
| $ | 43,038 | | $ | (49) | | $ | (36,914) |
Investing activities |
|
| (172) |
|
| 2,863 |
|
| (151,367) | |
| 7,870 | |
| 166,186 |
Financing activities |
|
| (37,023) |
|
| (31,294) |
|
| 87,423 | |
| (4,961) | |
| (176,806) |
Net decrease in cash and restricted cash |
| $ | (4,295) |
| $ | (221) |
| $ | (20,906) | ||||||
Net increase (decrease) in cash and restricted cash | | $ | 2,860 | | $ | (47,534) | |||||||||
Operating Activities
Net cash provided byused in operating activities from continuing operations increased $4.7 million to $32.9was less than $0.1 million for the year ended December 31, 2018 as2020, compared to net cash provided byused in operating activities from continuing operations of $28.2$36.9 million for the year ended December 31, 2017.2019. The $4.7$36.8 million increase was primarily attributable to a decrease in net loss of $176.6 million, increases in accounts receivable of $6.2 million, other liabilities of $6.7 million and accounts payable and accrued expenses of $5.7 million, offset by decreasesan increase in non-cash items of $187.8$110.6 million driven by deferred income taxes and impairment charges and an increase in prepaid expenses and other assets of $1.6$0.7 million and other liabilities of $0.5 million, offset by an increase in net loss of $55.7 million, decrease in accounts receivable of $9.2 million, accounts payable and accrued expenses of $9.7 million, and deferred revenue of $1.1$0.4 million on a year-over-year basis.
Investing Activities
Net cash used inprovided by investing activities decreased $3.1 million to $0.2was $7.9 million for the year ended December 31, 20182020, compared to net cash provided by investing activities of $2.9$166.2 million for the year ended December 31, 2017. This2019. The $158.3 million decrease iswas driven primarily by $4.2 millionthe absence of cash used for purchasesproceeds from the sale of propertyMSLO of $165.9 million in 2019, offset by proceeds from sale of Nevados, Franklin Mint and equipment during the year ended December 31, 2018 compared to $3.1Linen ‘n Things trademarks of $8.1 million during the year ended December 31, 2017. The increase in cash used for purchases of property and equipment was primarily related to leasehold improvements as we reconfigured and reduced our office space at the Company’s headquarters. During the year ended December 31, 2018, we sold the FUL and Revo trademarks and received cash proceeds of $4.4 million. During the year ended December 31, 2017, we sold equity securities for $5.8 million.2020.
Financing Activities
Net cash used in financing activities for the year ended December 31, 20182020 amounted to $37.0$5.0 million, compared to $31.3$176.8 million for the year ended December 31, 2017.2019. During the year ended December 31, 2018,2020, we made principal repayments of $12.7 million for principal payments and $11.5 million for revolver under our loan agreements in accordance with contractual terms, additions of $28.9deferred financing costs of $1.5 million, received proceeds of $0.8 million from Paycheck Protection Program, repurchased of common stock of $0.2 million and made $0.1 million of distributions to certain noncontrolling interest partners. During the year ended December 31, 2019, we made principal repayments of $21.7 million under our loan agreements in accordance with contractual terms as well as repaid $154 million of principal in connection with the sale of MSLO, paid lender fees of $4.6 million related to loan amendments and $6.7made $5.4 million of distributions to certain noncontrolling interest partners. In addition, we received loan proceeds as part of our debt refinancing of $107.6 million, made prepayments of $88.6 million under the Amended FS/KKR Credit Agreement, and paid $14.6 million of related lender and third-party fees during the year ended December 31, 2018. During the year ended December 31, 2017, we made principal payments of $28.3 million under our loan agreements in accordance with contractual terms and $7.4 million of distributions to certain noncontrolling interest partners. During the year ended December 31, 2018, we repurchased common stock from employees for tax withholding purposes related to the vesting of restricted stock of $2.4 million as compared to $1.2 million during the year ended September 30, 2017.
Debt
As of December 31, 2018,2020, we were party to the First Amendment to the Third Amended and Restated First Lien Credit Agreement with Bank of America, N.A. as administrative and collateral agent (the “New Amended BoA Credit Agreement”)Agreement and the First Amendment to the Third Amended and RestatedWilmington Credit Agreement, with Wilmington Trust, National Association as administrative agent and collateral agent (the “New Amended FS/KKR Credit Agreement”), referred to as our loan agreements.Loan Agreements. Refer to Note 108 of Notes to Consolidated Financial Statements in this Form 10-K
35
for a discussion of our borrowings and the terms of these debt facilities. As of December 31, 20182020 and 2017,2019, respectively, our long-term
32
debt, including current portion, was $634.9$470.8 million and $644.7$468.2 million, excluding $24.1respectively, which is presented net of $18.6 million and $14.1$22.2 million of deferred financing fees, respectively.respectively, in the consolidated balance sheets. As of December 31, 2018,2020, we had no availabilitywere fully drawn down under the current revolving credit facility (the “Revolving Credit Facility”).facility. We may request an increase in (i) the Revolving Credit Facility and Tranche A Loans as would not cause the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect to any such increase, to exceed 2.80:1.00 and (ii) the Tranche A‑1A-1 Loans, as would not cause the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect to any such increase, to exceed (a) with respect to any increase, the proceeds of which will be used solely to finance an acquisition, 3.00:1.00 and (b) with respect to any other increase, 2.90:1.00, subject to the satisfaction of certain conditions in the New Amended BoA Credit Agreement. We may request one or more additional term loan facilities or the increase of term loan commitments under the New Amended FS/KKRWilmington Credit Agreement as would not cause the consolidated total leverage ratio, determined on a pro forma basis after giving effect to any such addition and increase, to exceed 6.00:1.00, subject to the satisfaction of certain conditions in the New Amended FS/KKRWilmington Credit Agreement. We made $28.9$24.2 million of principal repayments under our loan agreementsLoan Agreements during the year ended December 31, 2018.2020.
Contractual Obligations
Our material contractual obligations as of December 31, 2018 are summarized as follows:
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|
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|
| Payments Due by Period | |||||||||||||
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|
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|
| Less than 1 |
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|
|
| After 5 | ||
Contractual Obligations |
| Total |
| Year |
| 1-3 Years |
| 4-5 Years |
| Years | |||||
|
| (in thousands) | |||||||||||||
Operating leases |
| $ | 89,292 |
| $ | 6,481 |
| $ | 12,647 |
| $ | 12,539 |
| $ | 57,626 |
Guaranteed payments in connection with acquisitions |
|
| 4,202 |
|
| 3,000 |
|
| 1,202 |
|
| - |
|
| - |
Long-term debt obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans |
|
| 519,850 |
|
| 28,300 |
|
| 56,600 |
|
| 166,600 |
|
| 268,350 |
Revolving Loan |
|
| 115,000 |
|
| - |
|
| - |
|
| 115,000 |
|
| - |
Total |
| $ | 728,344 |
| $ | 37,781 |
| $ | 70,449 |
| $ | 294,139 |
| $ | 325,976 |
Going Concern and Future Capital Requirements
We believe cash on hand and cash from operations will be sufficientThe Company is not currently forecasted to meet our capital requirements for the twelve months following the filing of this Form 10-K. We intend to continue financing future brand acquisitions through a combination of cash from operations, bank financing and the issuance of additional equity or debt securities. The extent of our future capital requirements will depend on many factors, including our results of operations and growth through the acquisition of additional brands, and we cannot be certain that we will be able to obtain additional financing in sufficient amounts or on acceptable termscomply, in the near future, if at all.next twelve months, with certain of the financial covenants under the Amended Wilmington Credit Agreement. The Company has been unable to comply with such covenants in recent fiscal quarters and has needed to obtain amendments of and waivers under its Debt Facilities. The Company extended its waiver through April 19, 2021. The risk of non-compliance creates a material uncertainty that casts substantial doubt with respect to the ability of the Company to continue as going concern.
We cannot assure you that our lenders would be willing to negotiate further changes to our financial covenants when necessary. In those circumstances, our lenders could declare the outstanding principal of all of our debt to be due and payable. In that circumstance, we may be required to seek protection under applicable bankruptcy laws. Further, the Company is negotiating with its lenders to obtain a new waiver for the going concern disclosure included in the unqualified audit opinion for the year ended December 31, 2020 delivered by our independent registered public accounting firm for our annual audited financial statements.
Off-Balance Sheet Arrangements
At December 31, 20182020 and 2017,2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
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Recent Accounting Pronouncements
See Note 2 of Notes to our consolidated financial statementsConsolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on financial conditions and results of operations.
Item 7A. Quantitative and Qualitative Disclosures aboutAbout Market Risk
We limit exposureSmaller reporting companies are not required to foreign currency fluctuationsprovide the information required by requiring payment under the majority of our licenses to be denominated in U.S. dollars. One of our licenses is denominated in Canadian dollars. If there were an adverse change in the exchange rate from Canadian to U.S. dollars of 10%, the expected effect on net income would be immaterial.this Item 7A.
Our earnings may also be affected by changes in LIBOR interest rates as a result of our loan agreements. As further discussed in Note 10 to our consolidated financial statements, we have entered into interest rate swaps and interest rate caps to mitigate the effects of a change in LIBOR interest rates. An increase in LIBOR interest rates of one percent affecting the loan agreements would not have had a material effect on our results of operations during the years ended December 31, 2018, 2017 and 2016.36
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required to be submitted in response to this Item 8 are set forth after Part IV, Item 15 of this Annual Report on Form 10‑K10-K and are incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive OfficerChairman (who acts as our principal executive officer) and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a‑15(e)13a-15(e) and 15d‑15(e)15d-15(e) of the Exchange Act) as of December 31, 2018,2020, the end of the period covered by this report. Based on, and as of the date of such evaluation, the Chief Executive Officer andre-evaluation, the Chief Financial Officer havehas concluded that our disclosure controls and procedures were not effective as of December 31, 20182020 such that the information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and co-principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on the reasons for restatement as described in the explanatory note, Management has re-evaluated its disclosure and has concluded that its internal controls within the financial reporting process were not effective as a result of misapplication of generally accepted accounting principles (GAAP) related to debt classification. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a‑15(f)13a-15(f) and 15d‑15(f)15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our Chief Executive OfficerChairman (who acts as our principal executive officer) and our Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
34
Our management, under the supervision and with the participation of our Chief Executive OfficerChairman (who acts as our principal executive officer) and our Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, as issued in 2013. Based on this assessment,our re-assessment, our management concluded that our internal control over financial reporting was not effective as of December 31, 2018,2020, based on those criteria.the material weakness disclosed above.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures
37
may deteriorate. The effectiveness of our internal control over financial reporting as of December 31, 20182020 has been audited by CohnReznick LLP, an independent registered public accounting firm, as stated in their report provided below.
Changes in Internal Control Over Financial Reporting
ThereIn connection with our continued monitoring and maintenance of our controls procedures, we continue to review, test, and improve the effectiveness of our internal controls. Management plans to evaluate and strengthen controls as noted to address the above material weakness. Other than the material weakness as a result of the reclassification of indebtedness which in turn led to the amended filing mentioned above, there have not been any changes in our internal control over financial reporting during the quarter ended December 31, 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sequential Brands Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Sequential Brands Group, Inc. and Subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of operations, comprehensive (loss) income, changes in equity and cash flows and the financial statement schedule listed in the index appearing under Item 15(a) of the Company and our report dated March 14, 2019, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ CohnReznick LLP
New York, New York
March 14, 2019
36
None.Waivers
On April 9, 2021, the Company and certain of its subsidiaries obtained waivers to extend the deadline for providing the Company’s annual audited financial statements, the audit report of our independent registered public accounting firm, and certain compliance certificates to Wilmington Trust, National Association, as administrative agent and collateral agent and the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent and the lenders party thereto. Further, the Company is negotiating with its lenders to obtain a new waiver for the going concern language disclosure included in the unqualified audit opinion for the year ended December 31, 2020, delivered by our independent registered public accounting firm for our annual audited financial statements, as the Company’s existing waiver that includes this specific covenant, expires on April 20, 2021.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sequential Brands Group, Inc.
Adverse Opinion on Internal Control Over Financial Reporting
We have audited Sequential Brands Group, Inc. and subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Sequential Brands Group, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2020, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our report dated April 15, 2021, we expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. Management has subsequently identified a deficiency in controls for the accounting for the classification of debt and has further concluded that such deficiency represented a material weakness as of December 31, 2020. As a result, management has revised its assessment, as presented in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, to conclude that the Company’s internal control over financial reporting was not effective as of December 31, 2020. Accordingly, our present opinion on the effectiveness of internal control over financial reporting as of December 31, 2020, as expressed herein, is different from that expressed in our previous report.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
The Company did not have adequate controls over the accounting for the classification of debt. This control deficiency resulted in a material error and the restatement of previously issued consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows of the Company as of December 31, 2020 and 2019 and for each of the years in the two-year period December 31, 2020 and our report, which includes an explanatory paragraph relating to the Company’s ability to continue as a going concern, dated April 15, 2021, except for the effect of the restatement disclosed in Note 18, as to which the date is August 10, 2021, expressed an unqualified opinion.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report dated April 15, 2021, except for the effect of the restatement disclosed in Note 18, as to which the date is August 10, 2021, on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the entity’s
39
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ CohnReznick LLP
New York, New York
April 15, 2021, except for the effect of the material weakness described in the fourth paragraph above, as to which the date is August 10, 2021.
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Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be contained under the captions “Directors and Executive Officers” and “Corporate Governance” in the definitive proxy statement for the annual meeting of stockholders to be held on June 7, 20194, 2021 (the “Proxy Statement”) to be filed with the SEC within 120 days after December 31, 2018,2020, which information is incorporated herein by reference in response to this item.
Code of Ethics
We have adopted a Code of Ethics applicable to all members of our Board and to all of our employees and executive officers, including our Chief Executive OfficerChairman and Chief Financial Officer. The Code of Ethics constitutes a “code of ethics” as defined by applicable SEC rules and a “code of conduct” as defined by applicable Nasdaq rules. Our code of ethics is posted on our website located at www.sequentialbrandsgroup.com in the section titled “Investor Relations—Corporate Governance.” You may also request a copy of the Code of Ethics by writing or calling us at:
SEQUENTIAL BRANDS GROUP, INC.
Attn: Investor Relations
601 West 261407 Broadway, 38thStreet, Suite 900 Floor
New York, New York 1000110018
Tel.: (646) 564‑2577564-2577
Any amendment or waiver of the Code of Ethics pertaining to a member of our Board or one of our executive officers will be disclosed on our website within four business days.
Item 11. Executive Compensation
The information required by this item will be contained under the caption “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be contained under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement, which information is incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained under the captions “Certain Relationships and Related Transactions” and “Corporate Governance” in the Proxy Statement, which information is incorporated herein by reference in response to this item.
Item 14. Principal Accounting Fees and Services
The information required by this item will be contained under the caption “Principal Accounting Fees and Services” in the Proxy Statement, which information is incorporated herein by reference in response to this item.
3741
Item 15. Exhibits, Financial Statement Schedules
| (a) |
| Documents filed as part of this report |
1. | Financial Statements. |
See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.
2. | Financial Statement Schedules. |
Schedule II – Valuation and Qualifying Accounts is required to be filed by Item 8 of the Annual Report on Form 10-K.
All other schedulesSchedules are omitted because the information is inapplicable or presented in the Notes to the Consolidated Financial Statements.
3. | Exhibits. See Item 15(b) below. |
| (b) |
| Exhibits. See Exhibit Index, which is incorporated herein by reference. |
| (c) |
| Financial Statement Schedule. See Item 15(a) above. |
3842
EXHIBIT INDEX
Exhibit |
| |
| Description | |
| |
|
| ||
| ||
|
| |
3.1 | | |
| | |
3.2 | | |
| | |
4.1 | | |
| |
|
10.1 | ||
| | |
| |
|
| | |
| | |
| | |
| |
|
| | |
| |
|
| ||
| | |
| |
|
| ||
| ||
39
| ||
| ||
| | |
| |
|
| | |
| |
|
| | |
| |
|
| ||
| | |
| | |
43
| | |
| |
|
| | |
| | |
| | |
| | |
| | |
| | |
40
| | |
| | |
10.15 | | |
| | |
10.16 | | |
| | |
10.17 | | |
| | |
10.18 | | |
| | |
10.19 | |
44
| | |
10.20 | | |
| | |
10.21 | | |
| | |
10.22 | | |
| | |
| | |
10.24 | | |
| | |
10.25 | | |
| | |
10.26 | | |
| | |
10.27 | | |
| | |
| | |
| | |
10.29 | | |
| | |
10.30 | | |
| | |
10.31 | |
45
| | |
10.32 | | |
10.33 | | |
| | |
10.34 | | |
| | |
10.35 | | |
| | |
21.1 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
101.INS + | | XBRL Instance Document |
| | |
101.SCH + | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL + | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF + | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB + | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE + | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this agreement have been omitted. The Registrant undertakes to supplementally furnish a copy of the omitted schedules to the Securities and Exchange Commission upon request.
† Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.
+ Filed herewith.
46
4147
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SEQUENTIAL BRANDS GROUP, INC. |
|
|
Date: | /s/ |
| By: |
| Title: Chief |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name |
| Title |
| Date |
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/s/ | |
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/s/ Aaron Hollander |
| Director |
|
|
Aaron Hollander |
|
|
| |
|
|
|
|
|
/s/ |
| Director |
|
|
|
|
|
|
|
/s/ Sherman Edmiston III | Director | |||
Sherman Edmiston III | August 10, 2021 | |||
| | | | |
|
|
|
|
|
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| |||
|
| |||
|
| |||
|
| |||
|
|
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |||
| |
| |
Audited Financial Statements: | | | |
| |||
| |||
| F-2 | ||
| |||
Consolidated Balance Sheets at December 31, | |
| |
| |||
Consolidated Statements of Operations for the Years Ended December 31, | |
| |
| |||
|
| ||
| |||
|
| ||
| |||
Consolidated Statements of Cash Flows for the Years Ended December 31, | |
| |
| |||
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sequential Brands Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sequential Brands Group, Inc. and Subsidiariessubsidiaries (the “Company”) as of December 31, 20182020 and 2017,2019, and the related consolidated statements of operations, comprehensive (loss) income,loss, changes in equity and cash flows for each of the years in the three-yeartwo-year period ended December 31, 2018,2020, and the related notes and the financial statement schedule listed in the index appearing under Item 15(a) (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018,2020 and 2017,2019, and the results of its operations and its cash flows for each of the years in the three-yeartwo-year period ended December 31, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2019,April 15, 2021, except for the material weakness described in the fourth paragraph, as to which the date is August 10, 2021, expressed an unqualified opinion.adverse opinion on the effectiveness of the Company's internal control over financial reporting.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has received a waiver for non-compliance with certain of its covenants under one of its debt agreements; however, there can be no assurance that future waivers for non-compliance would be agreed upon or approved by its lenders. As such, the risk of non-compliance creates a material uncertainty that raises substantial doubt about its ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-2
Restatement of the 2020 Consolidated Financial Statements
As discussed in Note 18 to the consolidated financial statements, the accompanying 2020 consolidated financial statements have been restated to correct for a misstatement.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Trademarks Impairment Testing
As disclosed in Note 2 to the consolidated financial statements, indefinite-lived trademarks are tested for impairment annually in the fourth quarter of each year unless an interim test is required due to the presence of indictors that the trademarks may not be fully recoverable. In the first quarter of 2020, the Company performed an interim impairment test which resulted in an impairment charge of $85,590,000 relating to indefinite-lived trademarks. The Company uses an income approach using a discounted cash flow model to value the indefinite-lived trademark(s), comparing its fair value to its carrying value to determine impairment. If the carrying value of such assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds fair value.
Finite-lived trademarks are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company uses the income approach using an undiscounted cash flow model to estimate the fair value of the finite-lived tradename, comparing its estimated fair value to its carrying value. If the carrying value exceeds fair value, the Company will use a discounted cash flow model to determine the fair value, and an impairment loss is recognized if the carrying amount of finite-lived intangible asset exceeds fair value.
As of December 31, 2020, the Company had indefinite-lived trademarks with an aggregate carrying value of $376,446,000 and finite-lived trademarks with an aggregate carrying value of $108,991,000.
We identified the Company’s trademarks impairment testing as a critical audit matter. Auditing the Company’s trademark impairment testing was complex and subjective due to the significant estimation required to determine the forecasted cash flows used in the Company’s testing. Specifically, the forecasted cash flows are sensitive to significant assumptions such as discount rates, projected annual revenue growth rates, projected long-term growth rates and residual or terminal values, all of which are affected by expected future market or economic conditions, including the effects of the global pandemic. In addition, our audit effort involved the use of a professional within our firm with specialized skill and knowledge in valuation methods and models.
The primary procedures we performed to address this critical audit matter included the following:
| ● | Obtaining an understanding of and evaluating the Company’s process to estimate future cashflows, including the methods, data, and significant assumptions used in developing the discounted cashflow model as well as the completeness and accuracy of the underlying data used by the Company in its analyses. |
| ● | Evaluating the reasonableness of the Company’s forecasted revenues, operating results, and cash flows by comparing those forecasts to the underlying business strategies and growth plans, including existing license arrangements. In addition, we performed sensitivity analyses related to the key inputs to forecasted cash flows, including revenue growth rates and discount rates, to evaluate whether the changes in the assumptions would result in a material change to forecasted cash flows. |
| ● | Assessing management’s ability to estimate future cash flows by comparing the Company’s historical forecasted sales, operating results, and cash flow forecasts to actual results for the same period. |
F-3
| ● | With the assistance of the firm’s valuation professionals, evaluating the reasonableness of the Company’s discounted cash flow model(s), including the terminal value and discount rates assumptions. |
Going Concern
As disclosed in Notes 2 and 8 to the consolidated financial statements, the Company is party to the Fifth Amendment to the Third Amended and Restated Credit Agreement with Wilmington Trust, National Association as administrative agent and collateral agent (the “Amended Wilmington Credit Agreement”). The Company has obtained multiple waivers of the covenants in the Amended Wilmington Credit Agreement during 2020 and 2021, and the current waiver expires on April 19, 2021. However, the Company is not currently forecasted to be able to comply, in the next twelve months, with certain of the covenants under the Amended Wilmington Credit Agreement. If the Company continues to be unable to comply with such covenants, its lenders could demand immediate payment of amounts outstanding. This creates a material uncertainty on the Company’s ability to continue as a going concern.
We identified the evaluation of whether the Company has the ability to continue as a going concern due to its forecasted inability to maintain compliance with its debt covenants under the Amended Wilmington Credit Agreement and its inability to meet its debt obligations in the event of non-compliance and acceleration of the amounts due under the Amended Wilmington Credit Agreement. Auditing management’s going concern analysis was complex and highly subjective due to the significant estimation required to forecast future operations and cash flows utilized in the Company’s covenant calculations that are affected by expected future market or economic conditions, including the effects of the global pandemic.
The primary procedures we performed to address this critical audit matter included the following:
| ● | Obtaining an understanding of and testing the Company’s process to identify events and circumstances that would raise substantial doubt about the Company’s ability to continue as a going concern, which included the forecasted compliance with covenants under the Amended Wilmington Credit Agreement. |
| ● | Obtaining an understanding of and testing the Company’s process to estimate future cashflows, including methods, data, and significant assumptions used in developing the future cashflows, as well as the completeness and accuracy of the underlying data used by the Company in its analyses. |
| ● | Evaluating the reasonableness of the following significant assumptions made by management, including: |
| o | The Company’s forecasted revenues and cash flows by comparing those forecasts to the underlying business strategies and growth plans, including existing license arrangements. |
| o | Management’s ability to estimate future cash flows, including forecasted revenues, by comparing the Company’s historical cash flow forecasts to actual results. |
| o | We performed a sensitivity analysis related to the key inputs to forecasted cash flows, including revenue growth rates, as well as on the specific inputs in the calculation of the Company’s forecasted covenant compliance. |
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2013.
New York, New York
March 14, 2019
April 15, 2021, except for the effect of the restatement disclosed in Note 18, as to which the date is August 10, 2021.
F-2F-4
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
(in thousands, except share and per share amounts)
|
|
|
|
|
| ||||||
| December 31, | ||||||||||
| 2018 |
| 2017 | ||||||||
|
|
|
|
|
| ||||||
| | | | | | | |||||
| | December 31, | |||||||||
|
| 2020 (restated) |
| 2019 | |||||||
Assets |
|
|
|
|
| | | | | | |
Current Assets: |
|
|
|
|
|
| |
|
| |
|
Cash | $ | 14,106 |
| $ | 18,902 | | $ | 15,501 |
| $ | 6,264 |
Restricted cash |
| 2,032 |
|
| 1,531 | |
| - |
|
| 2,043 |
Accounts receivable, net |
| 66,202 |
|
| 60,102 | |
| 43,039 |
|
| 39,452 |
Prepaid expenses and other current assets |
| 11,224 |
|
| 8,635 | |
| 7,791 |
|
| 4,228 |
Current assets from discontinued operations | | | - | | | 6,839 | |||||
Total current assets |
| 93,564 |
|
| 89,170 | |
| 66,331 |
|
| 58,826 |
|
|
|
|
|
| ||||||
|
|
|
|
|
| ||||||
| | | | | | | |||||
Property and equipment, net |
| 8,971 |
|
| 7,035 | |
| 1,280 |
|
| 5,349 |
Intangible assets, net |
| 964,911 |
|
| 995,170 | |
| 485,458 |
|
| 599,967 |
Right-of-use assets - operating leases | |
| 3,257 |
|
| 50,320 | |||||
Other assets |
| 11,222 |
|
| 5,836 | | | 9,583 |
| | 8,782 |
Total assets | $ | 1,078,668 |
| $ | 1,097,211 | | $ | 565,909 |
| $ | 723,244 |
|
|
|
|
|
| ||||||
| | | | | | | |||||
Liabilities and Equity |
|
|
|
|
| |
|
|
|
|
|
Current Liabilities: |
|
|
|
|
| |
|
|
|
|
|
Accounts payable and accrued expenses | $ | 23,527 |
| $ | 19,126 | | $ | 18,826 |
| $ | 15,721 |
Current portion of long-term debt |
| 28,300 |
|
| 28,300 | |
| 452,250 |
|
| 12,750 |
Current portion of deferred revenue |
| 11,695 |
|
| 8,102 | |
| 3,924 |
|
| 6,977 |
Current portion of lease liabilities - operating leases | | | 936 | | | 3,035 | |||||
Current liabilities from discontinued operations | | | 730 | | | 1,959 | |||||
Total current liabilities |
| 63,522 |
|
| 55,528 | |
| 476,666 |
|
| 40,442 |
|
|
|
|
|
| ||||||
| | | | | | | |||||
Long-term debt, net of current portion |
| 582,487 |
|
| 602,297 | |
| - |
|
| 433,250 |
Long-term deferred revenue, net of current portion |
| 8,224 |
|
| 11,845 | |
| 2,483 |
|
| 4,604 |
Deferred income taxes |
| 67,002 |
|
| 67,799 | |
| 11,108 |
|
| 14,351 |
Lease liabilities - operating leases, net of current portion | | | 2,776 | | | 54,168 | |||||
Other long-term liabilities |
| 12,789 |
|
| 6,204 | | | 297 |
| | 3,389 |
Total liabilities |
| 734,024 |
|
| 743,673 | |
| 493,330 |
|
| 550,204 |
|
|
|
|
|
| ||||||
Commitments and Contingencies |
|
|
|
|
| ||||||
|
|
|
|
|
| ||||||
| | | | | | | |||||
Commitments and contingencies | |
|
|
|
|
| |||||
| | | | | | | |||||
Equity: |
|
|
|
|
| |
|
|
|
|
|
Preferred stock Series A, $0.01 par value; 10,000,000 shares authorized; none issued and outstanding at December 31, 2018 and 2017 |
| - |
|
| - | ||||||
Common stock, $0.01 par value; 150,000,000 shares authorized; 65,990,179 and 63,652,721 shares issued at December 31, 2018 and 2017, respectively, and 64,327,582 and 63,227,727 shares outstanding at December 31, 2018 and 2017, respectively |
| 657 |
|
| 635 | ||||||
Preferred stock Series A, $0.01 par value; 10,000,000 shares authorized; none issued and outstanding at December 31, 2020 and December 31, 2019 | |
| - |
|
| - | |||||
Common stock, $0.01 par value; 150,000,000 shares authorized; 1,688,156 and 1,671,937 shares issued at December 31, 2020 and December 31, 2019, respectively, and 1,656,805 and 1,644,518 shares outstanding at December 31, 2020 and December 31, 2019, respectively | |
| 17 |
|
| 17 | |||||
Additional paid-in capital |
| 513,764 |
|
| 508,444 | |
| 515,584 |
|
| 515,151 |
Accumulated other comprehensive (loss) income |
| (1,554) |
|
| 80 | ||||||
Accumulated other comprehensive loss | |
| (2,340) |
|
| (4,096) | |||||
Accumulated deficit |
| (234,723) |
|
| (225,369) | |
| (483,546) |
|
| (394,126) |
Treasury stock, at cost; 1,662,597 and 424,994 shares at December 31, 2018 and 2017, respectively |
| (4,226) |
|
| (1,799) | ||||||
Treasury stock, at cost; 31,351 and 27,419 shares at December 31, 2020 and December 31, 2019, respectively | |
| (3,269) |
|
| (3,230) | |||||
Total Sequential Brands Group, Inc. and Subsidiaries stockholders’ equity |
| 273,918 |
|
| 281,991 | |
| 26,446 |
|
| 113,716 |
Noncontrolling interests |
| 70,726 |
|
| 71,547 | |
| 46,133 |
|
| 59,324 |
Total equity |
| 344,644 |
|
| 353,538 | |
| 72,579 |
|
| 173,040 |
Total liabilities and equity | $ | 1,078,668 |
| $ | 1,097,211 | | $ | 565,909 |
| $ | 723,244 |
See Notes to Consolidated Financial Statements.
F-3F-5
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
| |||||||
|
| Year Ended December 31, | ||||||||||||||
|
| 2018 |
| 2017 |
| 2016 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||||
| | Year Ended December 31, | ||||||||||||||
|
| 2020 |
| 2019 |
| |||||||||||
Net revenue |
| $ | 169,956 |
| $ | 167,464 |
| $ | 155,528 | | $ | 89,811 | | $ | 101,576 | |
Operating expenses |
|
| 87,767 |
|
| 79,443 |
|
| 85,392 | |
| 53,861 | |
| 61,671 | |
Impairment charges |
|
| 17,899 |
|
| 340,628 |
|
| - | | | 85,590 | | | 33,109 | |
Loss on sale of assets |
|
| 7,117 |
|
| - |
|
| - | |||||||
Income (loss) from operations |
|
| 57,173 |
|
| (252,607) |
|
| 70,136 | |||||||
Gain on sale of assets | |
| (4,527) | |
| - | | |||||||||
(Loss) income from operations | |
| (45,113) | |
| 6,796 | | |||||||||
Other expense |
|
| 693 |
|
| 1,583 |
|
| 3,810 | |
| 5,809 | |
| 2,107 | |
Interest expense, net |
|
| 62,152 |
|
| 59,891 |
|
| 50,538 | |
| 48,252 | |
| 53,760 | |
(Loss) income before income taxes |
|
| (5,672) |
|
| (314,081) |
|
| 15,788 | |||||||
(Benefit from) provision for income taxes |
|
| (694) |
|
| (132,535) |
|
| 9,157 | |||||||
Net (loss) income |
|
| (4,978) |
|
| (181,546) |
|
| 6,631 | |||||||
Net income attributable to noncontrolling interests |
|
| (5,506) |
|
| (4,172) |
|
| (7,452) | |||||||
Loss from continuing operations before income taxes | |
| (99,174) | |
| (49,071) | | |||||||||
Benefit from income taxes | |
| (3,067) | |
| (8,695) | | |||||||||
Loss from continuing operations | |
| (96,107) | |
| (40,376) | | |||||||||
Net loss attributable to noncontrolling interests from continuing operations | |
| 7,963 | |
| 6,036 | | |||||||||
Loss from continuing operations attributable to Sequential Brands Group, Inc. and Subsidiaries | | | (88,144) | | | (34,340) | | |||||||||
Loss from discontinued operations, net of income taxes | | | (1,276) | | | (125,063) | | |||||||||
Net loss attributable to Sequential Brands Group, Inc. and Subsidiaries |
| $ | (10,484) |
| $ | (185,718) |
| $ | (821) | | $ | (89,420) | | $ | (159,403) | |
|
|
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||||
Loss per share from continuing operations: | |
|
| |
|
|
| |||||||||
Basic and diluted | | $ | (53.54) | | $ | (21.21) |
| |||||||||
| | | | | | | | |||||||||
Loss per share from discontinued operations: | |
|
| |
|
|
| |||||||||
Basic and diluted | | $ | (0.78) | | $ | (77.25) |
| |||||||||
| | | | | | | | |||||||||
Loss per share attributable to Sequential Brands Group, Inc. and Subsidiaries: |
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Basic and diluted |
| $ | (0.16) |
| $ | (2.95) |
| $ | (0.01) | | $ | (54.32) | | $ | (98.46) |
|
|
|
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||||
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Basic and diluted |
|
| 63,700,081 |
|
| 62,861,743 |
|
| 61,912,410 | |
| 1,646,194 | |
| 1,619,021 | |
See Notes to Consolidated Financial Statements.
F-6
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| | | | | | | |
| | Year Ended December 31, | | ||||
|
| 2020 |
| 2019 |
| ||
Net loss from continuing operations | | $ | (96,107) | | $ | (40,376) | |
Other comprehensive (loss) income: | |
|
| |
|
| |
Unrealized gain (loss) on interest rate swaps | |
| 1,756 | |
| (2,542) | |
Other comprehensive income (loss) | |
| 1,756 | |
| (2,542) | |
Comprehensive loss | |
| (94,351) | |
| (42,918) | |
| | | | | | | |
Comprehensive loss from continuing operations attributable to noncontrolling interests | |
| 7,963 | |
| 6,036 | |
Comprehensive loss from continuing operations attributable to Sequential Brands Group, Inc. and Subsidiaries | | | (86,388) | | | (36,882) | |
Loss from discontinued operations, net of income taxes | | | (1,276) | | | (125,063) | |
Comprehensive loss attributable to Sequential Brands Group, Inc. and Subsidiaries | | $ | (87,664) | | $ | (161,945) | |
See Notes to Consolidated Financial Statements.
F-4F-7
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Sequential | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Brands | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Group, Inc. | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | and | | | | | | | ||
| | | | | | | | | | | | | Additional | | Other | | | | | | | | | | | Subsidiaries | | | | | | | |||
| | Preferred Stock | | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total | |||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Shares |
| Amount |
| Equity |
| Interests |
| Equity | |||||||||||
Balance at January 1, 2019 | | — | | $ | — | | | 1,649,754 | | $ | 16 | | $ | 514,405 | | $ | (1,554) | | $ | (234,723) | | | (41,565) | | $ | (4,226) | | $ | 273,918 | | $ | 70,726 | | $ | 344,644 |
Stock-based compensation | | — | | | — | | | 22,183 | |
| 1 | |
| 468 | |
| — | |
| — | |
| — | |
| — | |
| 469 | |
| — | |
| 469 |
Shares issued from treasury stock | | — | | | — | | | — | |
| — | |
| — | |
| — | |
| — | |
| 21,614 | |
| 1,268 | |
| 1,268 | |
| — | |
| 1,268 |
Shares issued under stock incentive plan | | — | | | — | | | — | | | — | | | 278 | | | — | | | — | | | — | | | — | | | 278 | | | — | | | 278 |
Unrealized loss on interest rate swaps, net of tax | | — | | | — | | | — | | | — | | | — | | | (2,542) | | | — | | | — | | | — | | | (2,542) | | | — | | | (2,542) |
Repurchase of common stock | | — | | | — | | | — | |
| — | |
| — | |
| — | |
| — | |
| (7,468) | |
| (272) | |
| (272) | |
| — | |
| (272) |
Noncontrolling interest distributions | | — | | | — | | | — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (5,366) | |
| (5,366) |
Net loss attributable to noncontrolling interests | | — | | | — | | | — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (6,036) | |
| (6,036) |
Net loss attributable to common stockholders | | — | | | — | | | — | |
| — | |
| — | |
| — | |
| (159,403) | | | — | |
| — | |
| (159,403) | |
| — | |
| (159,403) |
Balance at December 31, 2019 | | — | | $ | — | | | 1,671,937 | | $ | 17 | | $ | 515,151 | | $ | (4,096) | | $ | (394,126) | | | (27,419) | | $ | (3,230) | | $ | 113,716 | | $ | 59,324 | | $ | 173,040 |
Stock-based compensation | | — | | | — | | | 16,667 | | | — | | | 471 | | | — | | | — | | | — | | | — | | | 471 | | | — | | | 471 |
Unrealized gain on interest rate swaps | | — | | | — | | | — | | | — | | | — | | | 1,756 | | | — | | | — | | | — | | | 1,756 | | | — | | | 1,756 |
Reverse Stock Split | | — | | | — | | | (448) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Repurchase of common stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8,485) | | | (77) | | | (77) | | | — | | | (77) |
Shares issued from treasury stock | | — | | | — | | | — | | | — | | | (38) | | | — | | | — | | | 4,553 | | | 38 | | | — | | | — | | | — |
Noncontrolling interest distributions | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,228) | | | (5,228) |
Net loss attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,963) | | | (7,963) |
Net loss attributable to common stockholders | | — | | | — | | | — | | | — | | | — | | | — | | | (89,420) | | | — | | | — | | | (89,420) | | | — | | | (89,420) |
Balance at December 31, 2020 | | — | | $ | — | | | 1,688,156 | | $ | 17 | | $ | 515,584 | | $ | (2,340) | | $ | (483,546) | | | (31,351) | | $ | (3,269) | | $ | 26,446 | | $ | 46,133 | | $ | 72,579 |
See Notes to Consolidated Financial Statements.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMECASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
|
| 2018 |
| 2017 |
| 2016 | |||
Net (loss) income |
| $ | (4,978) |
| $ | (181,546) |
| $ | 6,631 |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
Unrealized gain on equity securities |
|
| - |
|
| - |
|
| 2,062 |
Reclassification adjustment related to impairment of equity securities |
|
| - |
|
| - |
|
| 4,375 |
Unrealized (loss) gain on interest rate caps |
|
| (80) |
|
| 224 |
|
| (144) |
Unrealized (loss) gain on interest rate swaps |
|
| (1,554) |
|
| - |
|
| 29 |
Other comprehensive (loss) income |
|
| (1,634) |
|
| 224 |
|
| 6,322 |
Comprehensive (loss) income |
|
| (6,612) |
|
| (181,322) |
|
| 12,953 |
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
| (5,506) |
|
| (4,172) |
|
| (7,452) |
Comprehensive (loss) income attributable to Sequential Brands Group, Inc. and Subsidiaries |
| $ | (12,118) |
| $ | (185,494) |
| $ | 5,501 |
See Notes to Consolidated Financial Statements.
F-5
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sequential |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brands |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Group, Inc. |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| and |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
| Other |
|
|
|
|
|
|
|
|
|
| Subsidiaries |
|
|
|
|
|
| |||
|
| Preferred Stock |
| Common Stock |
| Paid-in |
| Comprehensive |
| Accumulated |
| Treasury Stock |
| Stockholders' |
| Noncontrolling |
| Total | |||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Shares |
| Amount |
| Equity |
| Interests |
| Equity | |||||||||||
Balance at January 1, 2016 |
| — |
| $ | — |
|
| 60,480,474 |
| $ | 605 |
| $ | 496,179 |
| $ | (6,466) |
| $ | (38,830) |
|
| — |
| $ | — |
| $ | 451,488 |
| $ | 74,161 |
| $ | 525,649 |
Stock-based compensation |
| — |
|
| — |
|
| 746,567 |
|
| 5 |
|
| 6,399 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,404 |
|
| — |
|
| 6,404 |
Issuance of Galaxy Brand Holdings, Inc. holdback shares |
| — |
|
| — |
|
| 1,375,000 |
|
| 14 |
|
| (14) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Unrealized gain on interest rate hedging transactions |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 29 |
|
| — |
|
| — |
|
| — |
|
| 29 |
|
| — |
|
| 29 |
Unrealized gain and reclassification adjustment on equity securities |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,437 |
|
| — |
|
| — |
|
| — |
|
| 6,437 |
|
| — |
|
| 6,437 |
Unrealized loss on interest rate caps |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (144) |
|
| — |
|
| — |
|
| — |
|
| (144) |
|
| — |
|
| (144) |
Repurchase of common stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (97,686) |
|
| (638) |
|
| (638) |
|
| — |
|
| (638) |
Noncontrolling interest distribution |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (6,800) |
|
| (6,800) |
Net income attributable to noncontrolling interest |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7,452 |
|
| 7,452 |
Net loss attributable to common stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (821) |
|
| — |
|
| — |
|
| (821) |
|
| — |
|
| (821) |
Balance at December 31, 2016 |
| — |
|
| — |
|
| 62,602,041 |
|
| 624 |
|
| 502,564 |
|
| (144) |
|
| (39,651) |
|
| (97,686) |
|
| (638) |
|
| 462,755 |
|
| 74,813 |
|
| 537,568 |
Stock-based compensation |
| — |
|
| — |
|
| 1,050,680 |
|
| 11 |
|
| 5,900 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5,911 |
|
| — |
|
| 5,911 |
Shares issued under stock incentive plan |
| — |
|
| — |
|
| — |
|
| — |
|
| - |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| - |
Stock registration costs |
| — |
|
| — |
|
| — |
|
| — |
|
| (20) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (20) |
|
| — |
|
| (20) |
Unrealized gain on interest rate caps |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 224 |
|
| — |
|
| — |
|
| — |
|
| 224 |
|
| — |
|
| 224 |
Repurchase of common stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (327,308) |
|
| (1,161) |
|
| (1,161) |
|
| — |
|
| (1,161) |
Noncontrolling interest distributions |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7,438) |
|
| (7,438) |
Net income attributable to noncontrolling interests |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,172 |
|
| 4,172 |
Net loss attributable to common stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (185,718) |
|
| — |
|
| — |
|
| (185,718) |
|
| — |
|
| (185,718) |
Balance at December 31, 2017 |
| — |
|
| — |
|
| 63,652,721 |
|
| 635 |
|
| 508,444 |
|
| 80 |
|
| (225,369) |
|
| (424,994) |
|
| (1,799) |
|
| 281,991 |
|
| 71,547 |
|
| 353,538 |
Cumulative effect of revenue recognition accounting change |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,130 |
|
| — |
|
| — |
|
| 1,130 |
|
| 355 |
|
| 1,485 |
Stock-based compensation |
| — |
|
| — |
|
| 1,493,972 |
|
| 14 |
|
| 3,828 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,842 |
|
| — |
|
| 3,842 |
Shares issued under stock incentive plan |
| — |
|
| — |
|
| 843,486 |
|
| 8 |
|
| 1,492 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,500 |
|
| — |
|
| 1,500 |
Unrealized loss on interest rate caps |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (80) |
|
| — |
|
| — |
|
| — |
|
| (80) |
|
| — |
|
| (80) |
Unrealized loss on interest rate swaps |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,554) |
|
| — |
|
| — |
|
| — |
|
| (1,554) |
|
| — |
|
| (1,554) |
Repurchase of common stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,237,603) |
|
| (2,427) |
|
| (2,427) |
|
| — |
|
| (2,427) |
Noncontrolling interest distributions |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (6,682) |
|
| (6,682) |
Net income attributable to noncontrolling interests |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5,506 |
|
| 5,506 |
Net loss attributable to common stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,484) |
|
| — |
|
| — |
|
| (10,484) |
|
| — |
|
| (10,484) |
Balance at December 31, 2018 |
| — |
| $ | — |
|
| 65,990,179 |
| $ | 657 |
| $ | 513,764 |
| $ | (1,554) |
| $ | (234,723) |
|
| (1,662,597) |
| $ | (4,226) |
| $ | 273,918 |
| $ | 70,726 |
| $ | 344,644 |
| | | | | | |
| | Year Ended December 31, | ||||
| | 2020 | | 2019 | ||
Cash flows from operating activities | | | ||||
Loss from continuing operations | | $ | (96,107) | | $ | (40,376) |
Loss from discontinued operations, net of tax | | | (1,276) | | | (125,063) |
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | |
|
| |
|
|
(Benefit from) provision for bad debts | |
| (393) | |
| 4,123 |
Depreciation and amortization | |
| 21,565 | |
| 4,923 |
Stock-based compensation | |
| 471 | |
| 1,871 |
Amortization of deferred financing costs | |
| 6,675 | |
| 6,381 |
Impairment charges | |
| 85,590 | |
| 33,109 |
(Gain) loss on equity securities | |
| (459) | |
| 123 |
(Income) loss from equity method investment | | | (295) | | | 78 |
Loss on interest rate swaps | | | 3,789 | | | 1,029 |
Loss on disposal of property and equipment | | | - | | | 70 |
Loss on lease termination | | | 2,915 | | | 0 |
Amortization of operating leases | | | 3,864 | | | 6,261 |
Gain on sale of assets | | | (4,527) | | | - |
Deferred income taxes | |
| (3,243) | |
| (52,651) |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| (3,194) | |
| 6,025 |
Prepaid expenses and other assets | |
| 2,234 | |
| 1,534 |
Accounts payable and accrued expenses | |
| (6,609) | |
| 3,092 |
Deferred revenue | |
| (5,174) | |
| (4,815) |
Other liabilities | |
| (7,151) | |
| (7,691) |
Cash used in operating activities from continuing operations | |
| (49) | |
| (36,914) |
Cash provided by operating activities from discontinued operations | |
| 4,334 | |
| 40,321 |
Cash provided by operating activities | |
| 4,285 | |
| 3,407 |
| | | | | | |
Cash flows from investing activities | |
|
| |
|
|
Investments in intangible assets, including registration and renewal costs | |
| (107) | |
| (136) |
Purchases of property and equipment | |
| (73) | |
| (64) |
Proceeds from sale of trademarks | |
| 8,050 | |
| - |
Proceeds from sale of equity securities | | | - | | | 458 |
Proceeds from sale of discontinued operations | |
| - | |
| 165,928 |
Cash provided by investing activities from continuing operations | |
| 7,870 | |
| 166,186 |
Cash used in investing activities from discontinued operations | |
| - | |
| (44) |
Cash provided by investing activities | |
| 7,870 | |
| 166,142 |
| | | | | | |
Cash flows from financing activities | |
|
| |
|
|
Proceeds from long-term debt | |
| 26,782 | |
| 9,000 |
Payments of long-term debt | |
| (24,150) | |
| (175,661) |
Proceeds from Paycheck Protection Program | |
| 769 | |
| - |
Deferred financing costs | |
| (3,057) | |
| (4,507) |
Repurchases of common stock | |
| (77) | |
| (272) |
Noncontrolling interest distributions | |
| (5,228) | |
| (5,366) |
Cash used in financing activities from continuing operations | |
| (4,961) | |
| (176,806) |
Cash used in financing activities from discontinued operations | |
| - | |
| (574) |
Cash used in financing activities | |
| (4,961) | |
| (177,380) |
| | | | | | |
Cash and restricted cash: | | | | | | |
Net increase (decrease) in cash and restricted cash | |
| 7,194 | |
| (7,831) |
Balance — Beginning of year | |
| 8,307 | |
| 16,138 |
Balance — End of year | | $ | 15,501 | | $ | 8,307 |
| | | | | | |
Reconciliation to amounts on consolidated balance sheets | |
|
| |
|
|
Cash | | $ | 15,501 | | $ | 6,264 |
Restricted cash | |
| - | |
| 2,043 |
Total cash and restricted cash | | $ | 15,501 | | $ | 8,307 |
| | | | | | |
Supplemental disclosures of cash flow information | |
|
| |
|
|
Cash paid for: | |
|
| |
|
|
Interest | | $ | 44,809 | | $ | 52,747 |
Taxes | | $ | 154 | | $ | 1,102 |
| | | | | | |
Non-cash investing and financing activities | |
| | |
|
|
Unrealized gain (loss) on interest rate swaps, net during the year | | $ | 1,756 | | $ | (2,542) |
Receivable for sale of trademark rights | | $ | 8,015 | | $ | - |
See Notes to Consolidated Financial Statements.
F-6F-9
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
|
| 2018 |
| 2017 |
| 2016 | |||
|
|
|
|
|
|
|
| (Note 2) | |
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (4,978) |
| $ | (181,546) |
| $ | 6,631 |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Provision for bad debts |
|
| 1,618 |
|
| 689 |
|
| 295 |
Depreciation and amortization |
|
| 3,366 |
|
| 4,788 |
|
| 4,765 |
Stock-based compensation |
|
| 3,842 |
|
| 5,911 |
|
| 6,404 |
Impairment of equity securities |
|
| - |
|
| - |
|
| 4,375 |
Amortization of deferred financing costs |
|
| 4,481 |
|
| 3,862 |
|
| 3,111 |
Loss on debt extinguishment |
|
| 148 |
|
| - |
|
| - |
Impairment charges |
|
| 17,899 |
|
| 340,628 |
|
| - |
Income from equity method investment |
|
| (61) |
|
| (22) |
|
| (9) |
Loss on disposal of property and equipment |
|
| 131 |
|
| 2 |
|
| 447 |
Realized loss on sale of equity securities |
|
| - |
|
| 1,916 |
|
| - |
Loss on sale of assets |
|
| 7,117 |
|
| - |
|
| - |
Deferred income taxes |
|
| (1,260) |
|
| (132,669) |
|
| 9,581 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (1,383) |
|
| (7,596) |
|
| (11,464) |
Prepaid expenses and other assets |
|
| (7,994) |
|
| (6,350) |
|
| 2,347 |
Accounts payable and accrued expenses |
|
| 5,808 |
|
| 59 |
|
| (5,132) |
Deferred revenue |
|
| (4,415) |
|
| (3,336) |
|
| 22,126 |
Other liabilities |
|
| 8,581 |
|
| 1,874 |
|
| 125 |
Cash Provided By Operating Activities From Continuing Operations |
|
| 32,900 |
|
| 28,210 |
|
| 43,602 |
Cash Used In Operating Activities From Discontinued Operations |
|
| - |
|
| - |
|
| (564) |
Cash Provided By Operating Activities |
|
| 32,900 |
|
| 28,210 |
|
| 43,038 |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
| - |
|
| - |
|
| (146,883) |
Cash paid for equity method investment |
|
| - |
|
| - |
|
| (704) |
Investments in intangible assets, including registration and renewal costs |
|
| (295) |
|
| (335) |
|
| (500) |
Proceeds from sale of equity securities |
|
| - |
|
| 5,757 |
|
| - |
Purchases of property and equipment |
|
| (4,233) |
|
| (3,061) |
|
| (3,325) |
Proceeds from sale of property and equipment |
|
| - |
|
| 2 |
|
| 45 |
Proceeds from sale of trademarks |
|
| 4,356 |
|
| 500 |
|
| - |
Cash (Used In) Provided By Investing Activities |
|
| (172) |
|
| 2,863 |
|
| (151,367) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
| 107,607 |
|
| 10,000 |
|
| 132,000 |
Stock registration costs |
|
| - |
|
| (20) |
|
| - |
Payment of long-term debt |
|
| (117,456) |
|
| (28,300) |
|
| (19,000) |
Purchase of interest rate caps |
|
| - |
|
| - |
|
| (1,248) |
Guaranteed payments in connection with acquisitions |
|
| (3,475) |
|
| (4,375) |
|
| (3,750) |
Deferred financing costs |
|
| (14,590) |
|
| - |
|
| (13,141) |
Repurchases of common stock |
|
| (2,427) |
|
| (1,161) |
|
| (638) |
Noncontrolling interest distributions |
|
| (6,682) |
|
| (7,438) |
|
| (6,800) |
Cash (Used In) Provided By Financing Activities |
|
| (37,023) |
|
| (31,294) |
|
| 87,423 |
|
|
|
|
|
|
|
|
|
|
Cash and Restricted Cash: |
|
|
|
|
|
|
|
|
|
Net Decrease In Cash and Restricted Cash |
|
| (4,295) |
|
| (221) |
|
| (20,906) |
Balance — Beginning of year |
|
| 20,433 |
|
| 20,654 |
|
| 41,560 |
Balance — End of year |
| $ | 16,138 |
| $ | 20,433 |
| $ | 20,654 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures Of Cash Flow Information |
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
Interest |
| $ | 58,681 |
| $ | 55,755 |
| $ | 45,308 |
Taxes |
| $ | 90 |
| $ | 163 |
| $ | 178 |
|
|
|
|
|
|
|
|
|
|
Non-cash Investing And Financing Activities |
|
|
|
|
|
|
|
|
|
Accrued purchases of property and equipment at year end |
| $ | 18 |
| $ | 152 |
| $ | 10 |
Unrealized gain on equity securities during the year |
| $ | - |
| $ | - |
| $ | 2,062 |
Unrealized (loss) gain on interest rate cap, net during the year |
| $ | (80) |
| $ | 224 |
| $ | (144) |
Unrealized loss on interest rate swaps, net during the year |
| $ | (1,554) |
| $ | - |
| $ | - |
See Notes to Consolidated Financial Statements.
F-7
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 20172020 AND 20162019
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Overview
Sequential Brands Group, Inc. (the “Company”) owns a portfolio of consumer brands in the fashion, active and homelifestyle categories. The Company aims to maximize the strategic value of its brands by promoting, marketing and licensing its global brands through various distribution channels, including to retailers, wholesalers and distributors in the United States and in certain international territories. The Company’s core strategy is to enhance and monetize the global reach of its existing brands, and to pursue additional strategic acquisitions to grow the scope of and diversify its portfolio of brands. The Company licenses brands to both wholesale and direct-to-retail 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 a particular brand for sale to multiple accounts within an approved channel of distribution and territory. 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. As of December 31, 2018,2020, the Company had approximately one-hundred fiftyone hundred licensees, with wholesale licensees comprising a significant majority.
We were formed in June 2015 in connection with a strategic combination resulting in our predecessors, Sequential Brands Group, Inc. (“Old Sequential”) and Martha Stewart Living Omnimedia, Inc. (“MSLO”), becoming our wholly-owned subsidiaries (the “Mergers”). Old Sequential was incorporated under the laws of the State of Delaware in 1982 as People’s Liberation, Inc. and changed its name to Sequential Brands Group, Inc. in 2012. Old Sequential's common stock began trading on the Nasdaq Capital Market (“Nasdaq”) under the ticker “SQBG” on September 24, 2013, and we succeeded to Old Sequential’s listing on December 7, 2015.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reverse Stock Split and Reclassification of Prior Year Presentation
On JanuaryJuly 27, 2020, the Company’s announced 1 2018,share-for-40 shares (1:40) reverse stock split (the “Reverse Stock Split”) of the Company’s outstanding common stock, par value $0.01 per share became effective. All share and per share amounts in this Form 10-K have been adjusted to reflect the Reverse Stock Split. The stated capital attributable to common stock on the Company’s consolidated balance sheet at December 31, 2019 was reduced proportionately to the Reverse Stock Split ratio, and the additional paid-in capital account was credited with the amount by which the stated capital is reduced. Prior periods in this Form 10-K have been reclassified to reflect this change.
On June 10, 2019, the Company adopted Accounting Standards Updatecompleted the sale of Martha Stewart Living Omnimedia, Inc. (“ASU”) No. 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”MSLO”), which changesa Delaware corporation and a wholly-owned subsidiary of the presentationCompany, for $166 million in cash consideration, plus additional amounts in respect of restricted cashpre-closing accounts receivable that are received after the closing, subject to certain adjustments, pursuant to an equity purchase agreement (the “Purchase Agreement”) with Marquee Brands LLC (the “Buyer”) entered into on April 16, 2019. In addition, the Purchase Agreement provides for an earnout of up to $40,000,000 payable to the Company if certain performance targets are achieved during the three calendar years ending December 31, 2020, December 31, 2021 and December 31, 2022. The performance targets were not met for the year ended December 31, 2020. MSLO and its subsidiaries were engaged in the business of promoting, marketing and licensing the Martha Stewart and the Emeril Lagasse brands through various distribution channels.
Correction of Prior Period Error
During the preparation of its annual financial statements, the Company discovered an error on the Company’s consolidated statement of comprehensive loss for the year ended December 31, 2019. The Company had previously disclosed an unrealized loss of $5.6 million for interest rate swaps. The Company has corrected the error on the Company’s consolidated statements of comprehensive loss in this current Form 10-K to reflect an unrealized loss of $2.5 million for the year ended December 31, 2019. The unrealized loss on interest rate swaps was correctly disclosed in the 2019 Form 10-K on both the statement of cash flows. ASU 2016-18 requires an entity to show the changes in total cash, cash equivalents, restricted cash,equity and restricted cash equivalents in the statement of cash flows.
As a result of the adoption of ASU 2016-18, the Company no longer shows the changes in restricted cash as investing activities on the statement of cash flows for the year ended December 31, 2019. This error had no impact on its consolidated balance sheets, statements of operations, statements of changes in equity, statement of cash flows and reconcilesthe Notes to Consolidated Financial Statements for the years ended December 31, 2019, 2018 and 2017.
F-10
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, which continues to spread throughout the U.S. COVID-19 is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis. As COVID-19 spread, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine continued to increase, which has affected retailers, as well as our licensees who sell to these retailers. These actions caused many retailers carrying the Company’s branded products to close in the first and second quarter of 2020, which has affected retailers, as well as our licensees who sell to these retailers. As states continue to relax and then tighten restrictions, the Company is unsure when retail stores will be ordered to close, at what capacity, or how long such periods of store closures will be needed or mandated. For the year ended December 31, 2020, COVID-19 caused a significant reduction in retail stores that remained open, as well as a change in consumer purchasing behavior for specific types of products. Both have led to a reduction in orders from retailers for certain types of products bearing some of our brands. Even as the vaccines are widely administered, we cannot predict when government restrictions and mandates will be imposed or lifted, or how quickly, if at all, retail stores and customers will return to their pre-COVID-19 purchasing behaviors, so we cannot predict how long our results of operations and financial performance will be impacted. The impacts of COVID-19 have adversely affected the Company’s near-term and long-term revenues, earnings, liquidity and cash flows as certain licensees have requested temporary relief or deferred making their scheduled payments. However, the Company is not currently able to predict the full impact of COVID-19 on its results of operations and cash flows. The Company has proactively taken steps to increase available cash on hand including utilizing revolver borrowings under the Third Amendment to the total cashThird Amended and restricted cash balance,Restated First Lien Credit Agreement with Bank of America, N.A. as administrative and collateral agent (the “Amended BoA Credit Agreement”). During the year ended December 31, 2020, the Company made net revolver borrowings of $14.1 million, excluding lender fees, under the Amended BoA Credit Agreement.
Going Concern
As of December 31, 2020, the Company was party to the Amended BoA Credit Agreement and the Fifth Amendment to the Third Amended and Restated Credit Agreement with Wilmington Trust, National Association as administrative agent and collateral agent (as amended from time to time, the “Amended Wilmington Credit Agreement”), collectively referred to as its loan agreements (“Loan Agreements”). The Company has obtained multiple waivers of the covenants in the Amended Wilmington Credit Agreement during 2020, and the current waiver expires on April 19, 2021. However, there can be no assurance that such amendments would be agreed upon or approved by such lenders. If the Company fails to comply with its financial covenants, as modified, a default under the Loan Agreements would be triggered and the Company’s obligations under the Loan Agreements may be accelerated. The Company’s management is continuing to conduct a broad review of strategic alternatives, including in respect to the fact that the Company is currently in default of its financial covenants under its Amended Wilmington Credit Agreement with Wilmington Trust, National Association as administrative agent, and the lenders party thereto, and is operating under a waiver from the lenders under that agreement; however, there can be no assurance that such efforts will be successful. The risk of non-compliance creates a material uncertainty that casts substantial doubt with respect to the ability of the Company to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities that would be necessary if the Company was unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. See “Note 8 – Long Term Debt” with respect to compliance under the Loan Agreements and effects of COVID-19.
Paycheck Protection Program
On May 18, 2020, the Company received loan proceeds of $769,295 from a promissory note issued by Bank of America, N.A., under the PPP loan which was established under the CARES Act and is administered by the U.S. Small Business Administration. The term on the loan is two years and the annual interest rate is 1.00%. Payments of principal and interest are presented separatelydeferred for the first six months of the loan. The Company received consent from its lenders under the
F-11
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Amended Wilmington Credit Agreement to apply for the PPP loan which is recorded in accrued expenses on the consolidated balance sheets.sheet. The Company filed for forgiveness on this loan on November 20, 2020 and believes that the loan will be forgiven. Such forgiveness will be determined based on the use of the loan proceeds for payroll costs, rent and utility expenses and the maintenance of workforce and compensation levels with certain limitations. There is uncertainty around the standards and operation of the PPP, and no assurance is provided that the Company will obtain forgiveness in whole or in part.
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.
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 periods.
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
F-8
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, actual results could differ significantly from estimates.
Discontinued Operations
The Company accounted for the closuresale of its wholesale operations during 2013 as discontinued operationsMSLO in accordance with the guidance provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC 360, Accounting for Impairment or Disposal of Long-Lived Assets, (“ASC 360”) and Accounting Standard Update (“ASU”) No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The Company followed the held-for-sale criteria as defined in ASC 205, Presentation of Financial Statements, which360. ASC 360 requires that only a component of an entity or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations 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 discontinued operations and assets held for sale.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. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), which became effective for the Company as of January 1, 2018 (See(see Note 5 for impact of adoption and other related disclosures). ASC 606 requires a five-step approach to determine the appropriate method of revenue recognition for each contractual arrangement:
Step 1: Identify the Contract(s) with a Customer
Step 2: Identify the Performance Obligation(s) in the Contract
Step 3: Determine the Transaction Price
F-12
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Step 4: Allocate the Transaction Price to the Performance Obligation(s) in the Contract
Step 5: Recognize Revenue when (or as) the Entity Satisfies a Performance Obligation
The Company has entered into various license agreements for its owned trademarks. Under ASC 606, the Company’s agreements are generally considered symbolic licenses, which contain the characteristics of a right-to-access license since the customer is simultaneously receiving the intellectual property (“IP”) and benefiting from it throughout the license period. The Company assesses each license agreement at inception and determines the performance obligation(s) and appropriate revenue recognition method. As part of this process, the Company applies judgments based on historical trends when estimating future revenues and the period over which to recognize revenue.
The Company generally recognizes revenue for license agreements under the following methods:
1. | Licenses with guaranteed minimum royalties (“GMRs”): Generally, guaranteed minimum royalty payments (fixed revenue) comprising the transaction price are recognized on a straight-line basis over the term of the contract, as defined in each license agreement. |
2. | Licenses with both GMRs (fixed revenue) and earned royalties (variable revenue): Earned royalties in excess of fixed revenue are only recognized when the Company is reasonably certain that the guaranteed minimum payments for the period, as defined in each license agreement, will be exceeded. Additionally, the Company has categorized certain contracts as variable when there is a history and future expectation of exceeding GMRs. The Company recognizes income for these contracts during the period corresponding to the licensee’s sales. |
3. | Licenses that are sales-based only or earned royalties: Earned royalties (variable revenue) are recognized as income during the period corresponding to the licensee’s sales. |
Payments received as consideration for the grant of a license or advanced royalty payments are recorded as deferred revenue at the time payment is received and recognized into revenue under the methods described above.
F-9
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the current portion of deferred revenue on the consolidated balance sheets.
The Company disaggregates its revenue into two categories: licensing agreements and other, which is comprised of revenue from sources such as editorial content for books, television, sales commissions and vendor placement commissions.
With respect to editorial content for books, the Company receives advance payments from the Company’s publishers and recognizes revenue when manuscripts are delivered to and accepted by the publishers. Revenue is also earned from book publishing when sales on a unit basis exceed the advanced royalty.
Television sponsorship revenues are generally recorded ratably across the period when new episodes initially air. Revenue from media content is recognized at a point in time, when the content is delivered and accepted.
Commission revenues and vendor placement commission revenues are recorded in the period the commission is earned.
The Company entered into a transaction with a media company in 2017 for which it receives advertising credits as part of the consideration exchanged. These transactions are recorded at the estimated fair value of the advertising credits received, as their fair value is deemed more readily determinable than the fair value of the trademark licensing right and other services provided by the Company, in accordance with ASC 845, Nonmonetary Transactions. The fair value of the advertising credits are recorded as revenue and in other assets when earned, and expensed when the advertising credits are utilized. The Company recorded revenue of $3.7 million for each year ended December 31, 2018 and 2017 related to the advertising credits. The Company recorded $1.3 million of expense related to the advertising credits utilized for the year ended December 31, 2018. The Company did not record any expense related to the advertising credits for the year ended December 31, 2017 as they had not yet been utilized.
Restricted Cash
Restricted cash at December 31, 2018 consistsconsisted of cash deposited with a financial institution required as collateral for the Company’s cash-collateralized letter of credit facilities.facilities at December 31, 2019. The Company does not have any restricted cash reported on its consolidated balance sheet at December 31, 2020.
Accounts Receivable
Accounts receivable are recorded net of allowances for doubtful accounts, based on the Company’s ongoing discussions with its licensees and other customers and its evaluation of their creditworthiness, payment history and account aging. The Company adopted ASU 2016-13, Financial Statements – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) effective January 1, 2020. ASU 2016-13 requires companies to adopt a methodology that measures expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption did not have a material impact on the Company’s consolidated financial statements. The primary impact to the Company is the timing of recording expected credit losses
F-13
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
on its trade receivables. Accounts receivable balances deemed to be uncollectible are charged to the allowance for doubtful accountswritten off after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was $2.1$0.4 million and $0.6$5.8 million at December 31, 20182020 and 2017,2019, respectively.
The Company’s accounts receivable, net amounted to $66.2$43.0 million and $60.1$39.5 million as of December 31, 20182020 and 2017,2019, respectively. ThreeTwo licensees accounted for approximately 44% (19%, 13%,57% (36% and 12%21%) of the Company’s total consolidated accounts receivable, net balance as of December 31, 20182020 and threetwo licensees accounted for approximately 53% (25%, 15%51% (33% and 13% 18%) of the Company’s total consolidated accounts receivable, net balance as of December 31, 2017.2019. The Company does not believe the accounts receivable balances from these licensees represents a significant collection risk based on past collection experience.experience, however, the current environment as discussed previously may have a material impact on future collections.
Investments
The Company accounts for equity securities under ASC 321, Investments – Equity Securities (“ASC 321”). Such securities are reported at fair value in the consolidated balance sheets and, at the time of purchase, are reported in the
F-10
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
consolidated statements of cash flows as an investing activity. Gains and losses on equity securities are recognized through net loss. The Company recognized a gain on its equity securities for $0.5 million and a loss on its equity securities for $0.9$0.1 million recorded in other expense on the consolidated statementstatements of operations for the yearyears ended December 31, 2018.
Prior to adoption of ASC 321 in 2018, the Company accounted for its equity securities under ASC 320, Investments – Debt2020 and Equity Securities. During the second quarter of 2017, the Company sold equity securities for $5.8 million. The book cost basis of the equity securities was approximately $7.7 million, which was determined using the specific identification method. The sale resulted in a net realized loss of $1.9 million, which is recorded in other expense (income) in the consolidated statement of operations for the year ended December 31, 2017. The Company did not hold any equity securities as of December 31, 2017.2019, respectively.
Equity Method Investment
For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation, the Company uses the equity method of accounting. On July 1, 2016, the Company acquired a 49.9% noncontrolling interest in Gaiam Pty. Ltd. in connection with its acquisition of Gaiam Brand Holdco, LLC (see Note 6).LLC. The value of the Company’s equity method investment was $0.7$0.9 million and $0.8$0.6 million as of December 31, 20182020 and 2017,2019, respectively, and is included in other assets in the consolidated balance sheets. The Company’s share of earnings from its equity method investee, which was not material for the years ended December 31, 2018, 20172020 and 2016,2019, is included in other (income) expense in the consolidated statements of operations.
On July 2, 2020, the Company entered into an asset purchase agreement to sell its Franklin Mint trademark for $3.5 million and retained a 5% equity interest in the Franklin Mint purchaser’s entity. The remaining investment will be accounted for under the equity method since a 3-5% equity interest is considered to be "more than minor” in a limited partnership investment such as this. The Company recorded an initial investment of $0.2 million in other assets in the consolidated balance sheet.
The Company evaluates its equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investment may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other-than-temporary.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method of accounting. The Company does not have any goodwill reported on its consolidated balance sheetsheets at December 31, 2018.2020 or 2019.
On an annual basis (October 1st) and as needed, the Company tests goodwill and indefinite lived trademarks for impairment through the use of discounted cash flow models. Assumptions used in our discounted cash flow models are as follows: (i) discount rates; (ii) projected averageannual revenue growth rates; and (iii) projected long-term growth rates. Our estimates also
F-14
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
factor in economic conditions and expectations of management, which may change in the future based on period-specific facts and circumstances. Other intangibles with determinable lives, including certain trademarks, customer agreements, patents and a favorable lease, are evaluated for the possibility of impairment when certain indicators are present, and are otherwise amortized on a straight-line basis over the estimated useful lives of the assets (currently ranging from 2 to 15 years). The Company performed its most recent test as October 1, 2020 and did not identify any impairments.
DueThe Company determined that the Ellen Tracy trademark should no longer be classified as an indefinite-lived intangible asset and was reclassified in the second quarter of 2020 as a finite-lived intangible asset and is now amortized on a straight-line basis over the remaining estimated useful life of the trademark of fifteen years. The Company recorded amortization expense of $1.8 million related to this trademark during the year ended December 31, 2020.
During the first quarter of 2020, the Company recorded non-cash impairment charges of $85.6 million consisting of $33.2 million related to the identificationJessica Simpson trademark, $29.8 million related to the Gaiam trademark, $12.0 million related to the Joe’s trademark and $10.6 million related to the Ellen Tracy trademark. The impairments arose due to reduced sales forecasts and higher discount rates for these brands driven by the financial impacts of impairment indicatorsCOVID-19 and the current economic environment. Fair value for each trademark was determined based on the income approach using estimates of future discounted cash flows. Additionally, the Company determined that the Avia trademark should no longer be classified as an indefinite-lived intangible asset and was reclassified in the first quarter of 2020 as a finite-lived intangible asset and amortized on a straight-line basis over the remaining estimated useful life of the trademark of six years. The estimated useful life was determined based on a license agreement for its Avia trademark which included a clause that if the licensee pays to the Company cumulative total royalties of $100.0 million, the licensee has the right to require the Company to assign full title and ownership of the trademark to the licensee (See Note 11). The Company amortized $13.9 million related to this trademark during the year ended December 31, 2020.
On June 10, 2019, the Company completed the sale of MSLO. During the first quarter of 2019, the Company recorded non-cash impairment charges of $161.2 million for indefinite-lived intangible assets related to the Martha Stewart and Emeril Lagasse trademarks. The impairments arose as a result of the sale process for the Martha Stewart and Emeril Lagasse brands (as discussed in Note 4) due to the difference in the fair value as indicated by the sales price as compared to the carrying values of the intangible assets included in the transaction. The sale of the Martha Stewart and Emeril Lagasse brands was approved by the Board of Directors on April 15, 2019, to allow the Company to achieve one of its top priorities in significantly reducing its debt. Going forward the Company’s strategy is to focus on higher margin brands that are well suited for growing health, wellness and beauty categories. These charges are included in discontinued operations in the consolidated statements of operations.
During the year ended September 30, 2018, specificallyDecember 31, 2019, the Company recorded non-cash impairment charges of certain tradenames$33.1 million consisting of $28.5 million related to the Jessica Simpson trademark and $4.6 million related to the Joe’s trademark. The impairments arose due to reduced growth expectations and the impact of licensee transitions for these brands,brands. Fair value for each trademark was determined based on the Company performed impairment testingincome approach using estimates of its indefinite-lived assets at September 30, 2018, which replaced its October 1st annual test. As a result of its testing, the Company recorded a non-cash impairment charge of $17.9 million relating to its indefinite-lived intangible assets during the quarter ended September 30, 2018.
Due to the identification of impairment indicators during the quarter ended September 30, 2017, the Company performed impairment testing of its goodwill and indefinite-lived assets at September 30, 2017, which replaced its October 1st annual test. As a result of its testing, the Company recorded a non-cash impairment charge of $36.5 million relating to its indefinite-lived intangible assets during the quarter ended September 30, 2017.
F-11
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
Due to the identification of impairment indicators during the quarter ended December 31, 2017, the Company performed impairment testing of its goodwill and indefinite-lived assets at December 31, 2017. As a result of its testing, the Company recorded a non-cash goodwill impairment charge of $304.1million during the quarter ended December 31, 2017.future discounted cash flows. See Notes 3 8 and 97 for further details.
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.
F-15
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
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 |
Computer hardware/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 |
|
| |
Websites |
| 3 years |
Deferred Financing Costs
Deferred financing costs represent lender fees, legal and other third-party costs incurred in connection with issuing debt securities or obtaining debt or other credit arrangements. Deferred financing costs are recorded as a deduction of the carrying value of debt and are amortized as interest expense, using the effective interest method, over the term of the related debt. Debt discounts are amortized to interest expense over the term of the related debt.
Treasury Stock
Treasury stock is recorded at cost as a reduction of equity in the consolidated balance sheets.
Preferred Stock
Preferred stock subject to mandatory redemption (if any) is classified as a liability instrument and is measured at fair value. The Company classifies conditionally redeemable preferred stock (if any), which includes preferred stock that features 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 as a component of equity.
The Company’s preferred stock does not feature any redemption rights within the holders’ control or conditional redemption features not solely within its control as of December 31, 20182020 and 2017.2019. Accordingly, all issuances of preferred stock are presented as a component of equity. The Company did not have any preferred stock outstanding as of December 31, 20182020 and 2017.2019.
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) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share
F-12
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
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, 20182020 and 2017.2019.
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 from continuing operations approximated $13.9 million, $6.9 $2.0
F-16
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
million and $9.6$12.0 million for the years ended December 31, 2018, 20172020 and 2016,2019, respectively. As of December 31, 2018,2020 and 2019, the Company had no capitalized advertising costs recorded on the consolidated balance sheet. As of December 31, 2017, the Company had $0.4 million of capitalized advertising costs recorded on the consolidated balance sheet.sheets.
Stock-Based Compensation
Compensation cost for restricted stock is measured at fair value using the quoted market price of the Company’s common stock at the date the common stock is granted. For restricted stock and restricted stock units, for which restrictions lapse with the passage of time (“time-based restricted stock”), compensation cost is recognized on a straight-line basis over the period between the issue date and the date that restrictions lapse. Time-based restricted stock is included in total shares of common stock outstanding upon the lapse of applicable restrictions. For restricted stock, for which restrictions are based on performance measures (“performance stock units” or “PSUs”), restrictions lapse when those performance measures have been deemed achieved. Compensation cost for PSUs is recognized on a straight-line basis during the period from the date on which the likelihood of the PSUs being earned is deemed probable and (x) the end of the fiscal year during which such PSUs are grantedexpected to vest or (y) the date on which awards of such PSUs may be approved by the compensation committee of the Company’s board of directors (the “Compensation Committee”) on a discretionary basis, as applicable. PSUs are included in total shares of common stock outstanding upon the lapse of applicable restrictions. PSUs are included in total diluted shares of common stock outstanding when the performance measures have been deemed achieved but the PSUs have not yet been issued.
Fair value for stock options and warrants is calculated using the Black-Scholes valuation model and is expensed on a straight-line basis over the requisite service period of the grant. InCompensation cost is reduced for forfeitures as they occur in accordance with the provisions of ASU 2016‑09 “2016-09, Simplifying the Accounting for Share-Based Payments”Payments (“ASU 2016‑09”2016-09”).
The Company adopted ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) as of January 1, 2019 on a modified retrospective basis. In accordance with ASU 2018-07, the Company recognizes compensation cost is reduced for actual forfeitures as they occur.grants to non-employees on a straight-line basis over the period of the grant. Prior toperiods have not been restated and were accounted for under the adoption to ASU 2016‑09, the Company’s estimated forfeiture rate utilized in calculating compensation cost was zero percent based on the Company’s limited historical forfeiture experience.
Atprevious method where at each subsequent reporting period prior to the lapse of restrictions on warrants, time-based restricted stock and PSUs granted to non-employees, the Company remeasuresremeasured the aggregate compensation cost of such grants using the Company’s stock pricefair value at the end of such reporting period and revisesrevised the straight-line recognition of compensation cost in line with such remeasured amount.
Leases
The Company has operating leases for its offices and showrooms and for copiers. The Company adopted ASU No. 2016-02, Leases (“ASU 2016-02” or “ASC 842”) as of January 1, 2019 using the modified retrospective method as of the period of adoption. The Company elected the package of practical expedients upon transition where the Company did not reassess the lease classification and initial direct costs for leases that existed prior to adoption. Additionally, the Company did not reassess contracts entered into prior to adoption to determine whether the arrangement was or contained a lease. In accordance with ASU 2016-02, for leases over twelve months the Company records a right-of-use asset and a lease liability representing the present value of future lease payments. Rent expense is recognized on a straight-line basis over the term of the lease. Sublease income (in which we are the sublessor) is recognized on a straight-line basis over the term of the sublease, as a reduction to lease expense. The Company evaluates its right-of-use (“ROU”) assets for impairment in accordance with ASC 360. See Note 10 for further information.
Income Taxes
Current income taxes are based on the respective periods’ taxable income for federal, foreign 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 statutory tax rates in effect for the year in which the differences are expected to reverse. In accordance with ASU No. 2015‑17 “Balance2015-17, Balance Sheet Classification of Deferred Taxes”Taxes,
F-17
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
all deferred income taxes are reported and classified as non-current. A valuation allowance is required if, based
F-13
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
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.
On March 27, 2020, the CARES Act was signed into law. The CARES Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense for corporate taxpayers from 30% of adjustable taxable income to 50% of adjustable taxable income for tax years beginning in 2019 and 2020, class life changes to qualified improvement property (in general, from 39 years to 15 years), acceleration of the ability for corporate taxpayers to recover AMT credits, suspension of 80% of taxable income limitation on the use of NOLs for tax years beginning before January 1, 2021 and the ability to carry back NOLs incurred from tax years 2018 through 2020 up to the five preceding tax years. As a result of the CARES Act, it is anticipated that the Company will fully utilize all interest expense that was deferred beginning in 2018 with no additional disallowed interest expense in 2020. The Company had accrued for an AMT credit of less than $0.1 million which was recorded as a receivable as of December 31, 2019; payment of this AMT credit was received during the year ended December 31, 2020.
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. During the yearsyear ended December 31, 2018 and 2017,2020, the Company did not have any reserves or interest and penalties to record through current income tax expense in accordance with ASC 740, Income Taxes (“ASC 740”). 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, 20152017 through December 31, 2018.2020.
Earnings Per Share
Basic earningsloss per share (“EPS”) attributable to Sequential Brands Group, Inc. and Subsidiaries is computed by dividing net loss attributable to Sequential Brands Group, Inc. and Subsidiaries by the weighted-average number of common shares outstanding during the reporting period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the reporting period, including stock options, PSUs 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. In periods when there is a net loss, diluted loss per share is equal to basic loss per share, since the effect of including any common stock equivalents would be anti-dilutive. Basic weighted-average common shares outstanding is equivalent to diluted weighted-average common shares outstanding for the years ended December 31, 2018, 20172020 and 2016.2019 for the calculation of basic loss per share attributable to Sequential Brands Group, Inc. and Subsidiaries.
The computation of diluted EPS attributable to Sequential Brands Group, Inc. and Subsidiaries for the years ended December 31, 2018, 20172020 and 20162019 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
|
|
|
|
|
|
| Year Ended December 31, | ||||
|
| 2018 |
| 2017 |
| 2016 |
Warrants |
| — |
| — |
| 125,535 |
Acquisition hold back shares |
| — |
| — |
| 172,814 |
Unvested restricted stock |
| 1,233,703 |
| 166,607 |
| 122,167 |
Performance based restricted stock |
| 58,275 |
| 65,087 |
| 407,303 |
Stock options |
| — |
| — |
| 7,977 |
Total |
| 1,291,978 |
| 231,694 |
| 835,796 |
| | | | | |
|
| Year Ended December 31, | |||
|
| 2020 |
| 2019 |
|
Unvested restricted stock |
| 8,648 |
| 11,885 |
|
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk consist primarily of cash, restricted cash and accounts receivable and equity securities.receivable. Cash is held to meet working capital needs and future acquisitions. Restricted cash is pledged as collateral for a comparable amount of irrevocable standby letters of credit for certain of the Company’s leased properties. Substantially all of the Company’s cash and restricted cash and equity securities are deposited with high quality financial institutions. At times,
F-18
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
however, such cash and restricted cash and equity securities 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 December 31, 2018.2020.
Concentration of credit risk with respect to accounts receivable historically has been minimal, however, the current environment as discussed previously may have a material impact on future collections. The Company performs periodic credit evaluations of its customers’ financial condition. The allowance for doubtful accounts is minimal due tobased upon the collection history and the natureexpected collectability of the Company’s revenue arrangements.
F-14
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
all accounts receivable.
Customer Concentrations
The Company recorded net revenues from continuing operations of $170.0 million, $167.5$89.8 million and $155.5$101.6 million during the years ended December 31, 2018, 20172020 and 2016,2019, respectively. During the year ended December 31, 2018, one licensee2020, three licensees represented at least 10% of net revenue, accounting for 13%19%, 18% and 15% of the Company’s net revenue.revenue from continuing operations. During the year ended December 31, 2017,2019, three licensees represented at least 10% of net revenue, each accounting for 11%19%, 16% and 14% of the Company’s net revenue. During the year ended December 31, 2016, one licensee represented at least 10% of net revenue accounting for 11% of the Company’s net revenue.from continuing operations.
Loss Contingencies
The Company recognizes contingent losses that are both probable and estimable. In this context, probable means circumstances under which events are likely to occur. The Company records legal costs pertaining to contingencies as incurred.
Noncontrolling InterestInterests
Noncontrolling interest recorded for the yearyears ended December 31, 20182020 and 2019 represents an income allocationsallocation to Elan Polo International, Inc., a member of DVS Footwear International, LLC (“DVS LLC”) and JALP, LLC, a member of FUL IP Holdings, LLC, and a loss allocation to With You, Inc., a member of With You LLC (the partnership between the Company and Jessica Simpson) and a loss allocation to JALP, LLC (“JALP”), a member of FUL IP Holdings, LLC (“FUL IP”). Noncontrolling interest recorded for the year ended December 31, 2017 represents income allocations to DVS LLC, With You, Inc. and a loss allocation to JALP. Noncontrolling interest recorded for the year ended December 31, 2016 represents income allocations to DVS LLC, With You, Inc. and JALP.LLC. The following table sets forth the noncontrolling interest for the years ended December 31, 2018, 20172020 and 2016:2019:
| | | | | | |||||||||||
| | Year Ended December 31, | ||||||||||||||
|
| 2020 |
| 2019 |
| |||||||||||
|
|
|
|
|
|
|
| |||||||||
|
| Year Ended December 31, | ||||||||||||||
|
| 2018 |
| 2017 |
| 2016 | ||||||||||
|
| (in thousands) | ||||||||||||||
| | (in thousands) | ||||||||||||||
With You LLC |
| $ | 5,607 |
| $ | 5,816 |
| $ | 6,525 | | $ | (8,797) | | $ | (6,230) | |
DVS LLC |
| 614 |
| 581 |
|
| 564 | |
| 594 | |
| 659 | | ||
FUL IP |
|
| (715) |
|
| (2,225) |
|
| 363 | |
| 240 | |
| (465) | |
Net income attributable to noncontrolling interests |
| $ | 5,506 |
| $ | 4,172 |
| $ | 7,452 | |||||||
Net loss attributable to noncontrolling interests | | $ | (7,963) | | $ | (6,036) | | |||||||||
The following table sets forth the noncontrolling interest as of December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | ||||||||||||
|
| DVS LLC |
| FUL IP |
| With You LLC |
| Total | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| DVS LLC |
| FUL IP |
| With You LLC |
| Total | ||||||||||||||||
|
| (in thousands) | ||||||||||||||||||||||
Balance at January 1, 2017 |
| $ | 2,651 |
| $ | 4,774 |
| $ | 67,388 |
| $ | 74,813 | ||||||||||||
| | (in thousands) | ||||||||||||||||||||||
Balance at January 1, 2019 | | $ | 2,701 |
| $ | 496 |
| $ | 67,529 | | $ | 70,726 | ||||||||||||
Net income (loss) attributable to noncontrolling interests |
|
| 581 |
|
| (2,225) |
|
| 5,816 |
|
| 4,172 | |
| 659 |
| | (465) |
| | (6,230) | |
| (6,036) |
Distributions |
|
| (564) |
|
| (363) |
|
| (6,511) |
|
| (7,438) | |
| (614) |
| | - |
| | (4,752) | |
| (5,366) |
Balance at December 31, 2017 |
|
| 2,668 |
|
| 2,186 |
|
| 66,693 |
|
| 71,547 | ||||||||||||
Balance at December 31, 2019 | |
| 2,746 |
| | 31 |
| | 56,547 | |
| 59,324 | ||||||||||||
Net income (loss) attributable to noncontrolling interests |
|
| 614 |
|
| (715) |
|
| 5,607 |
|
| 5,506 | |
| 594 |
| | 240 |
| | (8,797) | |
| (7,963) |
Impact of adoption of ASC 606 |
|
| - |
|
| - |
|
| 355 |
|
| 355 | ||||||||||||
Distributions |
|
| (581) |
|
| (975) |
|
| (5,126) |
|
| (6,682) | |
| (1,060) |
| | (240) |
| | (3,928) | |
| (5,228) |
Balance at December 31, 2018 |
| $ | 2,701 |
| $ | 496 |
| $ | 67,529 |
| $ | 70,726 | ||||||||||||
Balance at December 31, 2020 | | $ | 2,280 | | $ | 31 | | $ | 43,822 | | $ | 46,133 | ||||||||||||
During the year ended December 31, 2018,2020, the Company recorded a loss on salegain of assets of $2.0$0.5 million related to the FUL trademark settlement. During the year ended December 31, 2019, the Company wrote-off a receivable related to the previous sale of the FUL trademark.
F-15F-19
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 20172020 AND 20162019
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 (the “CODM”) 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. The Company’s CODM, the Chief Executive Officer,Chairman, 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, the Company has determined that it has a single operating and reportable segment. In addition, the Company has no foreign operations or any assets in foreign locations. The majority of the Company’s operations consist of a single revenue stream, which is the licensing of its trademark portfolio, with additional revenues derived from television, book, café operations and certain commissions.
Recently Issued Accounting Standards
ASU No. 2018-18, “Collaborative Arrangements2019-12, “Simplifying the Accounting for Income Taxes (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606”740)”
In November 2018,December 2019, the FASB issued ASU No. 2018-18 “Collaborative Arrangements2019-12, Simplifying the Accounting for Income Taxes (Topic 808): Clarifying740) (“ASU 2019-12”), which simplifies the Interaction between Topic 808accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to intraperiod tax allocations, the methodology for calculating income taxes in an interim period and Topic 606” (“ASU 2018-18”). ASU 2018-18 amendsthe recognition of deferred tax liabilities related to outside basis differences. The standard also simplifies GAAP for other areas of ASC 808, Collaborative Arrangements (“ASC 808”)740 by clarifying and ASC 606, Revenue from Contracts with Customers (“ASC 606”)amending existing guidance related to clarifyaccounting for franchise taxes and accounting for transactions that certain transactions between participantsresult in a collaborative arrangement should be accounted for under ASC 606 whenstep-up in the counterparty is a customer.tax basis of goodwill.
ASU 2018-182019-12 is effective for annual and interim periods beginning after December 15, 2019,2020, and early adoption is permitted. The Company does not expect the adoption of ASU 2018-182019-12 to have a material impact on the Company’s consolidated financial statements.
ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”
In October 2018, the FASB issued ASU No. 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”). ASU 2018-16 adds the overnight index swap rate based on the Secured Overnight Financing Rate to the list of US benchmark interest rates in ASC 815 that are eligible to be hedged. Entities may now designate changes in this rate as the hedged risk in hedges of interest rate risk for fixed-rate financial instruments.
ASU 2018-16 is effective when an entity adopts the new hedging guidance in ASU No. 2017‑12, “Targeted Improvements to Accounting for Hedging Activities”(“ASU 2017‑12”). The Company early adopted the provisions of ASU 2017‑12 in December 2018. The adoption of ASU 2017-12 and ASU 2018-16 did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2018-13, “Fair Value Measurement (Topic 820):Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”
In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 eliminates, amends, and adds certain disclosure requirements for fair value measurements.
ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for the entire standard or for the provisions that eliminate or amend disclosure requirements. The Company
F-16
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
does not expect the adoption of ASU 2018-13 to have a material impact on the Company’s consolidated financial statements.
ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”
In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 aligns the accounting for share-based payment awards to employees and non-employees. Under ASU 2018-07 the existing employee guidance will apply to nonemployee share-based transactions, except for specific guidance related to the attribution of compensation cost. ASU 2018-07 should be applied to all new awards granted after the date of adoption.
ASU 2018-07 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company does not expect the adoption of ASU 2018-02 to have a material impact on the Company’s consolidated financial statements.
ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 permits a company to reclassify the disproportionate income tax effects (“stranded tax effects”) of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income to retained earnings.
ASU 2018-02 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company does not expect the adoption of ASU 2018-02 to have a material impact on the Company’s consolidated financial statements.
ASU No. 2017‑12, “Targeted Improvements to Accounting for Hedging Activities”
In August 2017, the FASB issued ASU No. 2017‑12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017‑12 amends the hedge accounting recognition and presentation requirements in ASC 815, Derivatives and Hedging. The amendments in ASU 2017‑12 are intended to improve the transparency and understandability of information about an entity’s risk management activities and simplify the application of hedge accounting.
ASU 2017‑12 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company early adopted the provisions of ASU 2017‑12 in December 2018. The adoption of ASU 2017-12 did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2017‑04, “Simplifying the Test for Goodwill Impairment”
In January 2017, the FASB issued ASU No. 2017‑04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017‑04”). ASU 2017‑04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step 2 of the goodwill impairment test. As a result, under ASU 2017‑04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
ASU 2017‑04 is effective prospectively for annual and interim periods beginning on or after December 15, 2019, and early adoption is permitted on testing dates after January 1, 2017. The Company adopted the provisions of ASU 2017‑04 during the first quarter of 2017. The adoption of ASU 2017‑04 did not have a material impact on the Company’s consolidated financial statements.
F-17
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
ASU No. 2016‑02, “Leases”
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 is that an entity should recognize on its balance sheet, assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”) and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”) to improve certain aspects of ASU 2016-02.
ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company adopted the new standard as of January 1, 2019 using the modified retrospective method as of the period of adoption. The Company elected the package of practical expedients upon transition where the Company did not reassess the lease classification and initial direct costs for leases that existed prior to adoption. Additionally, the Company did not reassess contracts entered into prior to adoption to determine whether the arrangement was or contained a lease. The Company elected to keep leases with an initial term of twelve months or less off the balance sheet. The Company estimates the adoption of the standard will increase assets and lease liabilities on its consolidated balance sheet by approximately $57 million primarily related to its corporate headquarters lease and will not have a material impact on the Company’s statements of operations and cash flows.
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820‑10, 820-10, Fair Value Measurements and Disclosures (“ASC 820‑10”820-10”), defines fair value, establishes a framework for measuring fair value in GAAP and provides for expanded disclosure about fair value measurements. ASC 820‑10820-10 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 flows.
Assets and liabilities typically recorded at fair value on a non-recurring basis to which ASC 820‑10820-10 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 |
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
F-20
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
measuring fair value. ASC 820‑10820-10 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. |
F-18
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
| 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. |
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.
During the year ended December 31, 2018,2020, the Company recorded non-cash impairment charges of $17.9$85.6 million for indefinite-lived intangible assetsconsisting of $33.2 million related to the trademarksJessica Simpson trademark, $29.8 million related to the Gaiam trademark, $12.0 million related to the Joe’s trademark and $10.6 million related to the Ellen Tracy trademark. The impairments arose due to reduced sales forecasts and higher discount rates for these brands driven by the financial impacts of twoCOVID-19 and the current economic environment. Fair value for each trademark was determined based on the income approach using estimates of future discounted cash flows, a Level 3 measurement within the Company’s brands: Ellen Tracyfair value hierarchy.
During the year ended December 31, 2019, the Company recorded non-cash impairment charges of $33.1 million consisting of $28.5 million related to the Jessica Simpson trademark and Caribbean Joe.$4.6 million related to the Joe’s trademark. The impairments arose due to reduced growth expectations and the impact of licensee transitions for these brands. Fair value for each trademark was determined based on the income approach using estimates of future discounted cash flows, a Level 3 measurement within the fair value hierarchy. The Company determined that certain trademarks which had been impaired during the year ended December 31, 2018 should no longer be classified as indefinite-lived intangible assets. The Company recorded $0.3 million in amortization during the year ended December 31, 2018 related to these trademarks. The following table shows the change in indefinite-lived intangible assets for the yearyears ended December 31, 20182020 and 2019 (in thousands):
| | | | | | |
| | Year Ended December 31, | ||||
| | 2020 |
| 2019 | ||
| | (in thousands) | ||||
Beginning Balance at |
| $ | 591,958 | | $ | 624,985 |
Additions and reclassification from indefinite to definite-lived | | | (129,922) | | | 82 |
Impairment charges | |
| (85,590) | |
| (33,109) |
Ending Balance at | | $ | 376,446 | | $ | 591,958 |
|
|
|
|
Balance at January 1, 2018 |
| $ | 990,677 |
Additions |
|
| 272 |
Impairment charges |
|
| (17,899) |
Reclassified to finite-lived intangible assets |
|
| (6,951) |
Sale of trademarks |
|
| (11,170) |
Ending balance at December 31, 2018 |
| $ | 954,929 |
On June 10, 2019, the Company completed the sale of MSLO. During the year ended December 31, 2017,first quarter of 2019, the Company had recorded non-cash impairment charges of $36.5$161.2 million for these indefinite-lived intangible assets related to the trademarks of five ofMartha Stewart and Emeril Lagasse trademarks. The impairments arose during the Company’s brands: Caribbean Joe, Revo, Franklin Mint, Nevados,sale process for the Martha Stewart and FUL. Fair value for each trademark was determined based onEmeril Lagasse brands (as discussed in Notes 4 and 7) due to the income approach using estimates of future discounted cash flows, a Level 3 measure withindifference in the fair value hierarchy.as indicated by the sales price as compared to the carrying values of the intangible assets included in the transaction. The impairments arose due to reduced contractual minimums or reduced sales forecasts in key distribution channels for these brands. When an intangible asset’s useful life is no longer considered to be indefinite, it must be amortized oversale of the remaining period that it is expected to contribute to cash flows. The Company determined that certain trademarks which had been impairedMartha Stewart and Emeril Lagasse brands was approved by the Board of Directors during the year ended December 31, 2017 should no longer be classified as indefinite-lived intangible assets. The Company recorded less than $0.1 million in amortization during the year ended December 31, 2017 relatedsecond quarter of 2019, to these trademarks. The following table shows the change in indefinite-lived assets for the year ended December 31, 2017:
|
|
|
|
Balance at January 1, 2017 |
| $ | 1,025,260 |
Additions |
|
| 2,383 |
Impairment charges |
|
| (36,505) |
Reclassified to finite-lived intangible assets |
|
| (461) |
Ending balance at December 31, 2017 |
| $ | 990,677 |
During the year ended December 31, 2017,allow the Company recorded a non-cash goodwill impairment chargeto achieve one of $304.1 million. The quantitative evaluation of goodwill impairment included an assessment of fair value under the income
F-19
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
approach using estimates of future discounted cash flows, a Level 3 measure within the fair value hierarchy. See Note 9 for further details.its top priorities in significantly reducing its debt.
As of December 31, 20182020 and 2017,2019, there were no assets or liabilities that are required to be measured at fair value on a recurring basis, except for the Company’s equity securities (see Note 2), interest rate cap (see Note 10), and interest rate swaps (see Note 10) and Legacy Payments (as defined below) for Ms. Martha Stewart. 8).
F-21
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
There was no change to the fair value level hierarchy classification for the years ended December 31, 20182020 and 2017.2019. 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, 20182020 and 2017:2019:
|
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|
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|
|
|
|
|
|
|
|
|
| Carrying Value |
| Fair Value | ||||||||
Financial Instrument |
| Level |
| 12/31/2018 |
| 12/31/2017 |
| 12/31/2018 |
| 12/31/2017 | ||||
|
| (in thousands) | ||||||||||||
Equity securities |
| 1 |
| $ | 627 |
| $ | - |
| $ | 627 |
| $ | - |
Interest rate caps |
| 2 |
| $ | - |
| $ | 1,239 |
| $ | - |
| $ | 1,239 |
Interest rate swaps - liability |
| 2 |
| $ | 2,019 |
| $ | - |
| $ | 2,019 |
| $ | - |
Term Loans |
| 2 |
| $ | 519,850 |
| $ | 551,913 |
| $ | 515,742 |
| $ | 542,655 |
Revolving Loan |
| 2 |
| $ | 115,000 |
| $ | 92,787 |
| $ | 114,827 |
| $ | 92,389 |
Legacy Payments |
| 3 |
| $ | 2,553 |
| $ | 2,256 |
| $ | 2,553 |
| $ | 2,256 |
| | | | | | | | | | | | | | |
| | | | Carrying Value | | Fair Value | ||||||||
Financial Instrument |
| Level |
| 12/31/2020 |
| 12/31/2019 |
| 12/31/2020 |
| 12/31/2019 | ||||
| | (in thousands) | ||||||||||||
Equity securities | | 1 | | $ | 506 | | $ | 47 | | $ | 506 | | $ | 47 |
Interest rate swaps - liability | | 2 | | $ | 6,477 | | $ | 6,514 | | $ | 6,477 | | $ | 6,514 |
Term loans |
| 2 | | $ | 441,081 | | $ | 453,831 | | $ | 440,325 | | $ | 451,483 |
Revolving loan |
| 2 | | $ | 29,740 | | $ | 14,358 | | $ | 29,787 | | $ | 14,323 |
The carrying amounts of the Company’s cash, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.
On December 10, 2018, the Company entered into interest rate swap agreements related to its term loans (the “2018 Swap Agreements”) with certain financial institutions. The Company recorded its interest rates swaps in accrued expense and other long-term liabilities on the consolidated balance sheets at fair value using Level 2 inputs. The 2018 Swap Agreements have a $300 million notional value and $150 million matures on December 31, 2021 and $150 million matures on January 4, 2022.
The Company’s risk management objective and strategy with respect to the 2018 Swap Agreements is to reduce its exposure to variability in cash flows on a portion of the Company’s floating-rate debt. The 2018 Swap Agreements protect the Company from increases in changes in its cash flows attributable to changes in a contractually specified interest rate on an amount of borrowing equal to the then outstanding swap notional. The Company will periodically assess the effectiveness of the hedge (both prospective and retrospective) by performing a single regression analysis that was prepared at the inception of the hedging relationship. To the extent the hedging relationship is highly effective, the gain or loss on the swap will be recorded in accumulated other comprehensive loss and reclassified into interest expense in the same period during which the hedged transactions affect earnings.
During the year ended December 31, 2019, the Company determined that a portion of one of the hedges was no longer effective due to the repayment of certain debt with the proceeds from the sale of MSLO (see Note 8). As a result, in accordance with ASC 815-30-40-6A, the Company de-designated it as a cash flow hedge and reclassified a loss of $0.4 million from other comprehensive loss to other expense in the consolidated statement of operations. Changes in the fair value of the de-designated interest rate swap after the de-designation date are being recognized through continuing operations. The Company recorded a loss of $3.8 million and $0.6 million in other expense from continuing operations in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively.
The components of the 2018 Swap Agreements as of December 31, 20182020 are as follows:
|
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|
|
|
|
| Notional Value |
| Derivative Asset |
| Derivative Liability | |||
|
| (in thousands) | |||||||
LIBOR based loans |
| $ | 300,000 |
| $ | — |
| $ | 2,019 |
| | | | | | | | | |
|
| Notional Value |
| Derivative Asset |
| Derivative Liability | |||
| | (in thousands) | |||||||
LIBOR based loans | | $ | 300,000 | | $ | — | | $ | 6,477 |
On November 30, 2016, the Company entered into interest rate cap agreements related to its 1‑month London Interbank Offered Rate (“LIBOR”) rates related to the Company’s loan agreements (the “2016 Cap Agreements”) with certain financial institutions. The 2016 Cap Agreements had a $500 million notional value, strike rate of 1.50% and matured on November 23, 2018. The Company recorded its interest rate caps on the consolidated balance sheets at fair value using Level 2 inputs. The valuation technique used to determine the fair value of the 2016 Cap Agreements approximated the net present value of future cash flows, taking into account current interest rates.
F-20F-22
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 20172020 AND 20162019
The Company’s risk management objective and strategy with respect to the 2016 Cap Agreements was to reduce its exposure to variability in expected future cash outflows (forecasted interest payments) attributable to change in 1‑month LIBOR rates, the designated benchmark interest rate being hedged, relating to a portion of its outstanding floating-rate debt. The 2016 Cap Agreements protect the Company from increases in hedged cash flows on its floating-rate debt attributable to changes in 1‑month LIBOR rates above the strike rate. Should 1‑month LIBOR rates exceed 1.50% on a rate reset date during the terms of the 2016 Cap Agreements, the financial institutions would pay the Company for an amount equivalent to the excess interest over the strike rate. To the extent the hedging relationship was perfectly effective, changes in the fair value of the hedging instrument each period would be deferred in accumulated other comprehensive loss in the statement of changes in equity, and the upfront hedging instrument purchase price will be reclassified to Interest expense, net in the consolidated statements of operations according to its caplet values. If hedge ineffectiveness existed, accumulated other comprehensive loss would be adjusted to a balance that reflected the lesser of either the cumulative change in the fair value of the hedging or the cumulative change in the fair value of the hypothetically “perfect” derivative. The amount of ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in the fair value of the hedging instrument over the cumulative change in the fair value of the hypothetical derivative.
For purposes of this fair value disclosure, the Company based its fair value estimate for the Term Loans and Revolving Loan (each, as defined in Note 10)8) 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 interest rates as of December 31, 20182020 and 20172019 for debt with similar risk characteristics and maturities.
In connectionNOTE 4 – DISCONTINUED OPERATIONS
On June 10, 2019, the Company completed the sale of MSLO, a Delaware corporation and a wholly-owned subsidiary of the Company, for $166 million in cash consideration, plus additional amounts in respect of pre-closing accounts receivable that are received after the closing, subject to certain adjustments, pursuant to the Purchase Agreement with the acquisitionBuyer entered into on April 16, 2019. In addition, the Purchase Agreement provides for an earnout of Martha Stewart Living Omnimedia (“MSLO”), beginning withup to $40,000,000 payable to the Company if certain performance targets are achieved during the three calendar years commencing on or after January 1, 2026, the Company will pay Ms. Stewart threeending December 31, 2020, December 31, 2021 and one-half percent (3.5%) of Gross Licensing Revenues (as defined in Ms. Stewart’s employment agreement) for each such calendar yearDecember 31, 2022. The performance targets were not met for the remainder of Ms. Stewart’s life (with a minimum of five (5) years of payments, to be made to Ms. Stewart’s estate if Ms. Stewart dies beforeyear ended December 31, 2030) (the “Legacy Payments”). The Company determined2020. MSLO and its subsidiaries were engaged in the acquisition date fair valuebusiness of Legacy Payments due to Ms. promoting, marketing and licensing the Martha Stewart was $1.7 million. The fair value of and the Legacy Payments due to Ms. Martha Stewart was $2.6 million and $2.3 million at December 31, 2018 and 2017, respectively.Emeril Lagasse brands through various distribution channels. The Company recorded $0.3a pre-tax loss of $1.6 million and $4.3 million on the sale of accretionMSLO during the each of the years ended December 31, 2018, 20172020 and 20162019, respectively which is recorded in discontinued operations in the consolidated statements of operations.
During the year ended December 31, 2019, the Company recorded non-cash impairment charges of $161.2 million for indefinite-lived intangible assets related to the Legacy PaymentsMartha Stewart and Emeril Lagasse trademarks. The impairments arose during the sale process for the Martha Stewart and Emeril Lagasse brands due to the difference in the fair value as indicated by the sales price as compared to the carrying values of the intangible assets included in the transaction. The sale of the Martha Stewart and Emeril Lagasse brands was approved by the Board of Directors on April 15, 2019, to allow the Company to achieve one of its top priorities in significantly reducing its debt. These charges are included in discontinued operations in the consolidated statements of operations. The Company recorded a net loss from discontinued operations of $1.3 million and $125.1 million for the expense withinyears ended December 31, 2020 and 2019, respectively.
The financial results of MSLO through December 31, 2020 are presented as loss from discontinued operations, net of income taxes in the consolidated statements of operations. The following table presents the discontinued operations in the consolidated statements of operations:
| | | | | | | |
| | Year Ended December 31, | |||||
|
| 2020 |
| 2019 |
| ||
| | | | | | | |
Net revenue | | $ | - | | $ | 18,771 | |
Operating expenses | |
| - | |
| 16,481 | |
Impairment charges | | | - | | | 161,224 | |
Loss on sale of MSLO | |
| 1,592 | |
| 4,273 | |
Loss from discontinued operations | |
| (1,592) | |
| (163,207) | |
Other expense | |
| 25 | |
| 485 | |
Interest expense | |
| - | |
| 3,570 | |
Loss from discontinued operations before income taxes | |
| (1,617) | |
| (167,262) | |
Benefit from income taxes | |
| (341) | |
| (42,199) | |
Loss from discontinued operations, net of income taxes | | $ | (1,276) | | $ | (125,063) | |
For the year ended December 31, 2019, the Company used cash proceeds from the MSLO sale to make mandatory prepayments of $109.6 million on the Revolving Credit Facility and voluntary prepayments of $44.4 million on its Tranche A-1 Term Loans (see Note 8). In accordance with ASC 205-20-45-6, Presentation of Financial Statements – Discontinued Operations, the Company has allocated interest expense netof $3.6 million for the year ended December 31, 2019, related to the portion of debt that was required to be paid as part of the transaction and accretion on certain MSLO legacy and guaranteed payments.
F-23
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
During the year ended December 31, 2019, the Company recorded $6.0 million in transaction costs directly related to the sale of MSLO which are recorded in discontinued operations in the consolidated statements of operations.
NOTE 4 – DISCONTINUED OPERATIONS OF WHOLESALE BUSINESSThe following table presents the assets and liabilities from discontinued operations as of December 31, 2020 and December 31, 2019:
| | | | | | |
| | December 31, | ||||
|
| 2020 |
| 2019 | ||
|
| |
|
| |
|
Carrying amount of assets included as part of discontinued operations: | | | | | | |
Current Assets: |
| |
|
| |
|
Prepaid expenses and other current assets | | $ | - |
| $ | 6,839 |
Total current assets from discontinued operations | | $ | - |
| $ | 6,839 |
| | | | | | |
| | | | | | |
Carrying amount of liabilities included as part of discontinued operations: | |
|
|
|
|
|
Current Liabilities: | |
|
|
|
|
|
Accounts payable and accrued expenses | | $ | 730 |
| $ | 1,959 |
Total current liabilities from discontinued operations | | $ | 730 |
| $ | 1,959 |
| | | | | | |
DuringThe prepaid expenses and other current assets at December 31, 2019 consisted of a $6.8 million receivable due to the yearCompany from the Buyer in accordance with the terms of the Purchase Agreement. There are no prepaid expenses and other current assets at December 31, 2020.
The following table presents the cash flow from discontinued operations for the years ended December 31, 2016, the Company released its $0.62020 and 2019:
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Cash provided by discontinued operating activities | | $ | 4,334 | | $ | 40,321 |
Cash used in discontinued investing activities | | $ | - | | $ | (44) |
Cash used in discontinued financing activities | | $ | - | | $ | (574) |
Cash provided by discontinued operating activities was approximately $4.3 million reserve of certain unrecognized tax benefits through current income tax expense in accordance with ASC 740. In addition, the Company wrote off the remaining assets and liabilities, a net de minimis amount, within other expense (income) in the consolidated statements of operations. There are no further transactions involving discontinued operations.
NOTE 5 – REVENUE
Adoption
On January 1, 2018, the Company adopted ASC 606 on a modified retrospective basis for all open contracts as of January 1, 2018. The core principle of the new guidance is the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. The new guidance defines a five-step approach to achieve this core principle and, in doing so, requires greater use of judgment and estimates and requires expanded disclosures related to the amounts of revenue recognized and judgements made. Under the modified retrospective basis, results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition (“ASC 605”).
In connection with the adoption of the new guidance, the Company recorded a net increase of $1.1 million to the opening balance of retained earnings (a reduction of the accumulated deficit). The adjustments consisted of increases of
F-21
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
$6.3 million to accounts receivable (resulting in unbilled receivables) and $4.4 million to deferred revenue (contract liability) offset by a noncontrolling interests opening balance adjustment of $0.4 million and an income tax impact of $0.5 million. The adjustments are recorded in the consolidated financial statements as the cumulative effect of revenue recognition accounting change.
Changes to the balances at January 1, 2018 resulting from the adoption of ASC 606 are as follows:
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| December 31, |
| Impact of |
|
|
| ||
|
| 2017 |
| Adoption of |
| January 1, | |||
|
| (As Reported) |
| ASC 606 |
| 2018 | |||
|
| (in thousands) | |||||||
Assets |
|
|
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|
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|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
| $ | 60,102 |
| $ | 6,335 |
| $ | 66,437 |
|
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Liabilities |
|
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|
Current Liabilities: |
|
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|
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|
|
|
Current portion of deferred revenue |
| $ | 8,102 |
| $ | 4,387 |
| $ | 12,489 |
Deferred income taxes |
|
| 67,799 |
|
| 463 |
|
| 68,262 |
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Equity |
|
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|
|
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|
Accumulated deficit |
| $ | (225,369) |
| $ | 1,130 |
| $ | (224,239) |
Noncontrolling interests |
|
| 71,547 |
|
| 355 |
|
| 71,902 |
Deferred revenue will be recognized as the Company fulfills its performance obligations over periods of approximately one to five years.
The impact to revenue for the year ended December 31, 2018 was a decrease of $3.52020 compared to $40.3 million due to the adoption of ASC 606. The impact to the provision for income taxes for the year ended December 31, 2018 was a reduction of income tax expense of $0.9 million due to the adoption of ASC 606.2019. The tables below summarize the impact of the adoption on the consolidated statement of operationscash provided by discontinued operating activities for the year ended December 31, 2018:
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|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
|
| 2018 | |||||||
|
| (in thousands, except share and per share data) | |||||||
|
|
|
| Adjustments |
| Under previous | |||
|
| As |
| due to |
| guidance | |||
|
| Reported |
| ASC 606 |
| (ASC 605) | |||
Net revenue |
| $ | 169,956 |
| $ | (3,553) |
| $ | 173,509 |
Operating expenses |
|
| 87,767 |
|
| 226 |
|
| 87,541 |
Impairment charges |
|
| 17,899 |
|
| - |
|
| 17,899 |
Loss on sale of assets |
|
| 7,117 |
|
| - |
|
| 7,117 |
Income from operations |
|
| 57,173 |
|
| (3,779) |
|
| 60,952 |
Other expense |
|
| 693 |
|
| - |
|
| 693 |
Interest expense, net |
|
| 62,152 |
|
| - |
|
| 62,152 |
Loss before income taxes |
|
| (5,672) |
|
| (3,779) |
|
| (1,893) |
(Benefit from) provision for income taxes |
|
| (694) |
|
| (869) |
|
| 175 |
Net loss |
|
| (4,978) |
|
| (2,910) |
|
| (2,068) |
Net income attributable to noncontrolling interests |
|
| (5,506) |
|
| 177 |
|
| (5,683) |
Net loss attributable to Sequential Brands Group, Inc. and Subsidiaries |
| $ | (10,484) |
| $ | (2,733) |
| $ | (7,751) |
F-22
Table2020 is primarily due to receipt of Contents
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
Loss per share attributable to Sequential Brands Group, Inc. and Subsidiaries: |
|
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | (0.16) |
| $ | (0.04) |
| $ | (0.12) |
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 63,700,081 |
|
| 63,700,081 |
|
| 63,700,081 |
Disaggregated Revenue
a portion of the receivable due the Company from the Buyer in accordance with the terms of the Purchase Agreement. The following table presents revenue disaggregatedcash provided by sourcediscontinued operating activities for the yearsyear ended December 31, 2018, 20172019 is primarily driven by the benefit from income taxes. The cash used in discontinued investing activities for the year ended December 31, 2019 is related to purchases of property and 2016:equipment and investments in intangible assets. The cash used in discontinued financing activities for the year ended December 31, 2019 is related to MSLO guaranteed payments.
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
|
| 2018 |
| 2017 |
| 2016 | |||
|
| (in thousands) | |||||||
Licensing Agreements |
| $ | 160,500 |
| $ | 161,703 |
| $ | 149,026 |
Other |
|
| 9,456 |
|
| 5,761 |
|
| 6,502 |
Total |
| $ | 169,956 |
| $ | 167,464 |
| $ | 155,528 |
NOTE 5 – REVENUE
The Company has entered into various license agreements that provide revenues in exchange for use of the Company’s IP. Licensing agreements are the Company’s primary source of revenue. The Company also derives revenue from other sources such as editorial content for books, television, commissions and vendor placement commissions.
F-24
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Disaggregated Revenue
The following table presents revenue disaggregated by source for the years ended December 31, 2020 and 2019:
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Licensing agreements | | $ | 89,635 | | $ | 101,161 |
Other | |
| 176 | |
| 415 |
Total | | $ | 89,811 | | $ | 101,576 |
Contract Balances
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the current portion of deferred revenue on the consolidated balance sheets.
The below table summarizes the net change inCompany’s contract assets and contract liabilities from the date of adoption to December 31, 2018:liabilities:
| | | | | | | |||||||||
| | December 31, | | December 31, | |||||||||||
|
| 2020 |
| 2019 | |||||||||||
|
|
|
|
|
|
|
|
|
| ||||||
|
| January 1, |
|
|
|
| December 31, | ||||||||
|
| 2018 |
| Changes |
| 2018 | |||||||||
|
| (in thousands) | |||||||||||||
| | (in thousands) | |||||||||||||
Contract assets |
| $ | 6,335 |
| $ | (3,168) |
| $ | 3,167 | | $ | 2,269 | | $ | 1,803 |
Contract liabilities |
|
| 4,387 |
|
| 612 |
|
| 4,999 | |
| 1,017 | |
| 3,040 |
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company has reviewed its various revenue streams for its existing contracts under the five-step approach. The Company has entered into various license agreements that provide revenues based on guaranteed minimum royalty payments with additional royalty revenues based on a percentage of defined sales. Guaranteed minimum royalty payments (“fixed revenue”)(fixed revenue) are recognized on a straight-line basis over the term of the contract, as defined in each license agreement. Earned royalties and earned royalties in excess of the fixed revenue (“variable revenue”)(variable revenue) are recognized as income during the period corresponding to the licensee’s sales. Earned royalties in excess of fixed revenue are only recognized when the Company is reasonably certain that the guaranteed minimums payments for the period, as defined in each license agreement, will be exceeded.
Licensing for trademarks is the Company’s largest revenue source. Under ASC 606, the Company’s agreements are generally considered symbolic licenses which contain the characteristics of a right-to-access license since the customer is simultaneously receiving the IP and benefiting from it throughout the license period. As such, the Company primarily records revenue from licenses with fixed revenue on a straight-line basis over the license period as the performance
F-23
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
obligation is satisfied over time. The Company applies its judgment based on historical trends when estimating future revenues and the period over which to recognize revenue when evaluating its licensing contracts.
Deferred revenue will be recognized as the Company fulfills its performance obligations over periods of approximately one to five years.
F-25
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The below table summarizes amounts related to future performance obligations from continuing operations under fixed contractual arrangements as of December 31, 20182020 and the periods in which they are expected to be earned and recognized as revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter | ||||||
Future Performance Obligations |
| $ | 73,561 |
| $ | 58,011 |
| $ | 42,300 |
| $ | 22,705 |
| $ | 18,148 |
| $ | 19,524 |
| | | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| | |
| | ||
| | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | ||||||
| | (in thousands) | ||||||||||||||||
Future Performance Obligations | | $ | 36,779 | | $ | 15,164 | | $ | 12,525 | | $ | 2,551 | | $ | 359 | | $ | 241 |
The Company does not disclose the amount attributable to unsatisfied or partially satisfied performance obligations for variable revenue contracts in accordance with the optional exemption allowed for under ASC 606. The Company has categorized certain contracts as variable when there is a history and future expectation of exceeding guaranteed minimum royalties.
H
NOTE 6 – ACQUISITIONS
Acquisition of Gaiam Brand Holdco, LLC
On July 1, 2016, the Company, together with its wholly-owned subsidiary, SBG-Gaiam Holdings LLC (formerly known as Stretch & Bend Holdings LLC), a Delaware limited liability company (“SBG-Gaiam” or the “Purchaser”) completed the acquisition pursuant to the terms of the Membership Interest Purchase Agreement (the “MIPA”) with GAIAM, Inc., a Colorado corporation (“Seller”) pursuant to which Purchaser agreed to acquire the branded consumer business of Seller for a total purchase price of $145.7 million in cash. As part of the transaction, SBG-Gaiam acquired Seller’s yoga, fitness and wellness product business, which include the GAIAM and SPRI brands. In tandem with the transaction, the Company signed long-term licensing agreements for the brands’ core categories, which became effective upon closing.
As part of the MIPA, the Company paid $1.9 million to Seller for severance related charges to employees of GAIAM, Inc. Also as part of the MIPA, the Company acquired a 49.9% noncontrolling interest in Gaiam Pty. Ltd, which is recorded under the equity method of accounting. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the acquired assets were recorded at their estimated fair values, and operating results for the GAIAM and SPRI brands are included in the Company’s consolidated financial statements from the effective date of the acquisition, July 1, 2016.
The Company made the following updates to the purchase price during the year ended December 31, 2017 in connection with finalizing the valuation of the Gaiam Brand Holdco, LLC acquisition (in thousands):
| |||
|
|
| |
|
| ||
|
| ||
|
|
F-24
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
The final allocation of the purchase price is summarized as follows (in thousands):
|
|
|
|
Total consideration paid |
| $ | 147,587 |
|
|
|
|
Allocated to: |
|
|
|
Trademarks |
| $ | 145,923 |
Goodwill |
|
| 1,084 |
Equity method investment |
|
| 757 |
Customer agreements |
|
| 23 |
Accrued expenses |
|
| (200) |
|
| $ | 147,587 |
The Company and Gaiam Brand Holdco, LLC elected to treat the acquisition as an asset acquisition under section 338(h)(10) of the United States Internal Revenue Service tax code. As such, the Company did not record a deferred tax liability in connection with the acquisition.
Goodwill arising from the acquisition mainly consists of the synergies of an ongoing licensing and brand management business. 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 tested for impairment on an annual basis or sooner, if an event occurs or circumstances change that indicate that the carrying amount of the goodwill or trademarks may not be recoverable. The Company incurred legal and other costs related to the transaction of $3.8 million, which have been recognized in operating expenses in the consolidated statement of operations during the year ended December 31, 2016.
Total revenues and income from continuing operations since the date of the acquisition of the GAIAM and SPRI brands, included in the consolidated statement of operations for the year ended December 31, 2016, are $12.0 million and $11.1 million, respectively.
NOTE 76 – PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
| | | | | | | ||||||
| | December 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
|
|
|
|
|
|
| ||||||
|
| December 31, | ||||||||||
|
| 2018 |
| 2017 | ||||||||
|
| (in thousands) | ||||||||||
| | (in thousands) | ||||||||||
Furniture and fixtures |
| $ | 6,094 |
| $ | 6,164 | | $ | 5,114 | | $ | 5,114 |
Computer hardware/equipment |
|
| 1,400 |
|
| 1,198 | |
| 289 | |
| 277 |
Leasehold improvements |
|
| 9,860 |
|
| 5,937 | |
| 945 | |
| 6,162 |
Computer software |
|
| 973 |
|
| 974 | |
| 570 | |
| 570 |
Websites |
|
| 304 |
|
| 400 | |
| 169 | |
| 169 |
Automobiles and trucks |
|
| 140 |
|
| 140 | ||||||
Property and equipment |
|
| 18,771 |
|
| 14,813 | |
| 7,087 | |
| 12,292 |
Less accumulated depreciation and amortization |
|
| (9,800) |
|
| (7,778) | |
| (5,807) | |
| (6,943) |
Property and equipment, net |
| $ | 8,971 |
| $ | 7,035 | | $ | 1,280 | | $ | 5,349 |
As discussed in Note 19, in February 2016, the Company wrote-off $0.4 million of leasehold improvements due to moving its corporate headquarters. There were no impairments of property and equipment recorded in the consolidated statements of operations for the years ended December 31, 2018, 20172020 and 2016.2019. The Company reviews the estimated lives of its fixed assets on an ongoing basis. During the year ended December 31, 2019, the review indicated that the lives of certain leasehold improvements were shorter than the estimated useful lives used for depreciation purposes due to the Company’s sublease of its former corporate headquarters. As a result, effective December 1, 2019, the Company changed its estimates of the useful lives of the leasehold improvements to better reflect the estimated periods during which the assets will remain in service. The remaining useful life was four months for these assets. The effect of the change was an increase of $1.5 million to depreciation and amortization expense from continuing operations for the year ended December 31, 2019. Depreciation and amortization expense from continuing operations amounted to $2.2 million, $3.8$4.1 million and $3.5$3.0 million for the years ended December 31, 2018, 20172020 and 2016,2019, respectively.
F-25F-26
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 20172020 AND 20162019
NOTE 87 – INTANGIBLE ASSETS
Intangible assets are summarized as follows:
| | | | | | | | | | | | |||||||||||
| | | | Gross | | | | | | | ||||||||||||
|
| Useful Lives |
| Carrying |
| Accumulated |
| Net Carrying | ||||||||||||||
December 31, 2020 | | (Years) | | Amount | | Amortization | | Amount | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
| Gross |
|
|
|
|
|
| ||||||||||||
|
| Useful Lives |
| Carrying |
| Accumulated |
| Net Carrying | ||||||||||||||
December 31, 2018 |
| (Years) |
| Amount |
| Amortization |
| Amount | ||||||||||||||
|
|
|
| (in thousands) | ||||||||||||||||||
| | | | (in thousands) | ||||||||||||||||||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
Trademarks |
| 5 - 15 |
| $ | 12,438 |
| $ | (2,689) |
| $ | 9,749 |
| 5 - 15 | | $ | 130,630 | | $ | (21,639) | | $ | 108,991 |
Customer agreements |
| 4 |
|
| 2,832 |
|
| (2,639) |
|
| 193 |
| 4 | |
| 2,080 | |
| (2,080) | |
| - |
Patents |
| 10 |
|
| 361 |
|
| (321) |
|
| 40 |
| 10 | |
| 95 | |
| (74) | |
| 21 |
|
|
|
| $ | 15,631 |
| $ | (5,649) |
|
| 9,982 | |||||||||||
|
|
| | $ | 132,805 | | $ | (23,793) | |
| 109,012 | |||||||||||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
Trademarks |
|
|
|
|
|
|
|
|
|
| 954,929 |
|
| |
|
| |
|
| |
| 376,446 |
Intangible assets, net |
|
|
|
|
|
|
|
|
| $ | 964,911 |
|
| |
|
| |
|
| | $ | 485,458 |
| | | | | | | | | | | | |||||||||||
| | | | Gross | | | | | | | ||||||||||||
|
| Useful Lives |
| Carrying |
| Accumulated |
| Net Carrying | ||||||||||||||
December 31, 2019 | | (Years) | | Amount | | Amortization | | Amount | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
| Gross |
|
|
|
|
|
| ||||||||||||
|
| Useful Lives |
| Carrying |
| Accumulated |
| Net Carrying | ||||||||||||||
December 31, 2017 |
| (Years) |
| Amount |
| Amortization |
| Amount | ||||||||||||||
|
|
|
| (in thousands) | ||||||||||||||||||
| | | | (in thousands) | ||||||||||||||||||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
Trademarks |
| 5 - 15 |
| $ | 5,462 |
| $ | (1,913) |
| $ | 3,549 |
| 5 - 15 | | $ | 12,491 | | $ | (4,515) | | $ | 7,976 |
Customer agreements |
| 4 |
|
| 2,832 |
|
| (2,257) |
|
| 575 |
| 4 | |
| 2,200 | |
| (2,198) | |
| 2 |
Patents |
| 10 |
|
| 665 |
|
| (296) |
|
| 369 |
| 10 | |
| 95 | |
| (64) | |
| 31 |
|
|
|
| $ | 8,959 |
| $ | (4,466) |
|
| 4,493 | |||||||||||
|
|
| | $ | 14,786 | | $ | (6,777) | |
| 8,009 | |||||||||||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Trademarks |
|
|
|
|
|
|
|
|
|
| 990,677 |
|
| |
|
| |
|
| |
| 591,958 |
Intangible assets, net |
|
|
|
|
|
|
|
|
| $ | 995,170 |
|
| |
|
| |
|
| | $ | 599,967 |
Future annual estimated amortization expense is summarized as follows:
|
|
|
| |||
| | | | |||
Years Ended December 31, |
| (in thousands) |
| (in thousands) | ||
2019 |
| $ | 2,018 | |||
2020 |
|
| 1,831 | |||
2021 |
|
| 1,828 | | $ | 17,964 |
2022 |
|
| 1,806 | |
| 17,964 |
2023 |
|
| 1,381 | |
| 17,611 |
2024 | |
| 16,546 | |||
2025 | |
| 16,513 | |||
Thereafter |
|
| 1,118 | |
| 22,414 |
|
| $ | 9,982 | |||
| | $ | 109,012 | |||
Amortization expense from continuing operations amounted to $1.2 million, $0.9$17.4 million and $1.3$1.9 million for the years ended December 31, 2018, 20172020 and 2016,2019, respectively.
Finite-lived intangible assets represent certain trademarks, customer agreements and patents related to the Company’s brands. Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The carrying value of finite-lived intangible assets and other long-lived assets is 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 not amortized, but instead are subject to impairment evaluation. As of December 31, 2018,2020, the trademarks of Martha Stewart, Jessica Simpson, AviaAND1, AND1Joe’s, Joe’s, GAIAM, Emeril, Caribbean Joe, and Ellen TracyCaribbean Joe have been determined to have an indefinite useful life, and accordingly, consistent with ASC Topic
F-26
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
350, no amortization has been recorded in
F-27
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
the Company’s consolidated statements of operations. Instead, each of these intangible assets are tested for impairment annually and as needed on an individual basis as separate single units of accounting, with any related impairment charge recorded to the statement of operations at the time of determining such impairment. The annual evaluation of the Company’s indefinite-lived trademarks is performed as of October 1, the beginning of the Company’s fourth fiscal quarter. Based onNo triggering events were identified that would require additional reassessment of the Company’s indefinite-lived intangible assets at December 31, 2020. Based upon the results of its annual evaluation,impairment test performed as of October 1, 2020, Joe’s indefinite-lived intangible asset’s estimated fair value exceeded its carrying value by less than 2%. Management considers the assumptions used in its analysis to be its best estimates across a range of possible outcomes based on available evidence at the time of its annual impairment test. While the Company concluded no impairment triggers existed at December 31, 2020, the Joe’s indefinite-lived intangible asset is at risk of future impairment in the event of significant unexpected changes in the Company’s forecasted future results and cash flows for the Joe’s trademark. As the Company disclosed previously, it is involved in a strategic review of its brands which includes evaluating potential divestitures of its brands. The Company may or may not execute a transaction; however, if it does, the Company would re-examine its intangible asset valuations at that time which may or may not result in a potential impairment.
During the third quarter of 2020, the Company entered into an asset purchase agreement to sell its Franklin Mint and Linen ‘n Things trademarks for $3.9 million. The Company retained a 5% equity interest in the Franklin Mint purchaser’s entity. The Company recorded a gain on sale of assets of $3.7 million related to the sale of the Franklin Mint and Linen ‘n Things trademarks. During the year ended December 31, 2020, the Company recorded an additional gain on sale of assets of $0.9 million related to the sale of the Nevados trademark.
During the second quarter of 2020, the Company determined that a certain the Ellen Tracy trademark should no longer be classified as an indefinite-lived intangible asset and was reclassified in the fourthsecond quarter of 20182020 as a finite-lived intangible asset and amortized on a straight-line basis over the remaining estimated useful life of the trademark.trademark of fifteen years. The Company amortized $1.2 million related to this trademark during the year ended December 31, 2020.
During the first quarter of 2020, the Company determined that the Avia trademark should no longer be classified as an indefinite-lived intangible asset and was reclassified in the first quarter of 2020 as a finite-lived intangible asset and amortized on a straight-line basis over the remaining estimated useful life of the trademark of six years. The estimated useful life was determined based on a license agreement for its Avia trademark which included a clause that if the licensee pays to the Company cumulative total royalties of $100.0 million, the licensee has the right to require the Company to assign full title and ownership of the trademark to the licensee (See Note 11). The Company amortized $13.9 million related to this trademark during the year ended December 31, 2020.
On October 24, 2019, a licensee for Avia exercised a purchase option in their existing license agreement to acquire ownership of the Avia trademark registered in China for $12.3 million, effective as of January 15, 2020. The $12.3 million was originally payable in installments over a period of three years as follows: $3.3 million on June 30, 2020, $5.0 million on June 30, 2021 and $4.0 million on June 30, 2022. The present value of the proceeds from the sale of $11.3 million are applied against the cost basis of the intangible asset on the Company’s consolidated balance sheet as of December 31, 2020. On July 22, 2020, the Company amended the agreement giving the licensee an option to modify the total purchase price to $8.8 million if payment was made in full by August 15, 2020, or to continue with the $12.3 million purchase price under a modified payment plan. The licensee did not pay the $8.8 million settlement amount by August 15, 2020 and now the $12.3 million is payable in installments over a period of three years as follows: $1.65 million on September 30, 2020, $1.65 million on December 30, 2020, $5.0 million on June 30, 2021 and $4.0 million on June 30, 2022. In the event the licensee fails to pay the purchase price as per the amended schedule, the Company has the right to take back the trademark. The Company has received payments of $3.3 million during the year ended December 31, 2020. On February 9, 2021, the Company amended the license agreement and modified the existing payment plan (see Note 17). The remaining amount due of $9.0 million is payable in equal installments of approximately $2.3 million on April 30, 2021, June 30, 2021, September 30, 2021 and December 31, 2021.
When conducting its impairment assessment of indefinite-lived intangible assets, 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
F-28
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
evaluation that it is more likely than not that the asset is impaired, the Company then tests the asset for recoverability. The Company tests its indefinite-lived intangible assets for recovery in accordance with ASC‑820‑10‑55‑3D.ASC-820-10-55-3D. When the income approach is used, fair value measurement reflects current market expectations about those future amounts. The income approach is based on the present value of future earnings expected to be generated by a business or asset. Income projections for a future period are discounted at a rate commensurate with the degree of risk associated with future proceeds. A residual or terminal value is also added to the present value of the income to quantify the value of the business beyond the projection period. As such, recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its expected future discounted net cash flows. If the carrying amount of 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 recoverability of the assets. Assumptions used in our estimates are as follows: (i) discount rates; (ii) projected annual revenue growth rates; and (iii) projected long-term growth rates. Our estimates also factor in economic conditions and expectations of management which may change in the future based on period-specific facts and circumstances. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
In June 2019, the Company completed the sale of MSLO. During the year ended December 31, 2018,first quarter of 2019, the Company recorded non-cash impairment charges of $17.9$161.2 million for indefinite-lived intangible assets related to the Martha Stewart and Emeril Lagasse trademarks reflected in discontinued operations on the consolidated statements of twooperations. The impairments arose during the sale process for the Martha Stewart and Emeril Lagasse brands (as discussed in Note 4) due to the difference in the fair value as indicated by the sales price as compared to the carrying values of the Company’s brands: Caribbean Joeintangible assets included in the transaction. The sale of the Martha Stewart and Emeril Lagasse brands was approved by the Board of Directors during the second quarter of 2019, to allow the Company to achieve one of its top priorities in significantly reducing its debt.
During the year ended Deccember 31, 2020, the Company recorded non-cash impairment charges of $85.6 million consisting of $33.2 million related to the Jessica Simpson trademark, $29.8 million related to the Gaiam trademark, $12.0 million related to the Joe’s trademark and $10.6 million related to the Ellen Tracy. trademark. The impairments arose due to reduced sales forecasts and higher discount rates for these brands driven by the financial impacts of COVID-19 and the current economic environment. During the year ended December 31, 2019, the Company recorded non-cash impairment charges of $33.1 million consisting of $28.5 million related to the Jessica Simpson trademark and $4.6 million related to the Joe’s trademark. The impairments arose due to reduced growth expectations and the impact of licensee transitions for these brands identified during the annual budget process which began at the end of the third quarter 2018.brands. Fair value for each trademark was determined based on the income approach using estimates of future discounted cash flows. These charges are included in impairment charges in the consolidated statements of operations.
Due to the identification of impairment indicators during the quarter ended September 30, 2017, the Company performed impairment testing of its goodwill and indefinite-lived assets at September 30, 2017, which replaced its October 1st annual test. As a result of its testing, during the quarter ended September 30, 2017, the Company recorded a non-cash impairment charge of $36.5 million relating to its indefinite-lived intangible assets related to the trademarks of Caribbean Joe, Revo, Franklin Mint, Nevados, and FUL. The impairments arose due to reduced contractual minimums or reduced sales forecasts in key distribution channels for these brands. In addition, in connection with its goodwill impairment testing performed at December 31, 2017, the Company performed impairment testing of its indefinite-lived assets at December 31, 2017, noting no additional impairment of its indefinite-lived intangible assets. See Note 9 – Goodwill for further details. When an intangible asset’s useful life is no longer considered to be indefinite, it must be amortized over the remaining period that it is expected to contribute to cash flows. The Company determined that certain trademarks which had been impaired during the year ended December 31, 2017 should no longer be classified as indefinite-lived intangible assets. The Company recorded less than $0.1 million in amortization during the year ended December 31, 2017 related to these trademarks. There was no impairment of intangible assets or other long-lived assets recognized during the year ended December 31, 2016.
F-27
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
During the year ended December 31, 2018, the Company sold both the Revo and FUL trademarks and incurred a loss on the sale of the assets of $7.1 million. The following table shows the change in indefinite-lived intangible assets for the year ended December 31, 2018 (in thousands):
|
|
|
|
Balance at January 1, 2018 |
| $ | 995,170 |
Impairment of trademarks |
|
| (17,899) |
Sale of trademarks |
|
| (11,473) |
Amortization |
|
| (1,182) |
Additions |
|
| 295 |
Balance at December 31, 2018 |
| $ | 964,911 |
NOTE 9 – GOODWILL
Previous changes in goodwill are summarized as follows (in thousands):
|
|
|
|
Balance at January 1, 2017 |
| $ | 307,744 |
Adjustment for acquisition of Gaiam Brand Holdco, LLC (a) |
|
| (3,621) |
Impairment charges |
|
| (304,123) |
Ending balance at December 31, 2017 |
| $ | - |
|
|
Goodwill is tested for impairment at the reporting unit level (the Company has determined that it has a single reporting unit) on an annual basis (October 1st) 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. As discussed below, during 2017, due to impairment indicators noted in between annual tests, the Company performed impairment testing at September 30, 2017, which replaced its October 1st annual test. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount. Qualitative factors considered include, for example, macroeconomic and industry conditions, overall financial performance and other relevant entity-specific events. If the Company bypasses the qualitative assessment, or concludes that it is more likely than not that the fair value of its reporting unit is less than its carrying value, it then performs a quantitative impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in the amount of that excess, not to exceed the carrying amount of goodwill.
Due to impairment indicators noted during the third quarter of 2017, specifically the impairment of certain tradenames due to reduced contractual minimums or reduced sales forecasts in key distribution channels, the Company, with the assistance of a third party valuation specialist, performed a quantitative assessment at September 30, 2017, which replaced its October 1st annual test. Fair value for the quantitative assessment was determined under an income approach using estimates of discounted future cash flows. The income approach relies on assumptions such as the Company’s projected future earnings and appropriate discount rates.
Significant assumptions used in the income approach were as follows: (i) discount rates; (ii) projected annual revenue growth rates; and (iii) projected long-term growth rates. The Company’s estimates also factor in economic conditions and expectations of management which may change in the future based on period-specific facts and circumstances. The Company corroborated the results of the income approach by reconciling to within a reasonable range of the Company’s market capitalization, (calculated as total common shares outstanding multiplied by the common equity price per share, as adjusted for a control premium factor). The control premium was estimated based upon control
F-28
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
premiums observed in comparable market transactions. Reconciling items identified included the benefit of the Company’s fully reserved tax assets for which the market may not have been giving full value and depressed market multiples experienced by the entities within our brand licensing peer group. Based on the results of the quantitative assessment, the Company determined that goodwill was not impaired as of September 30, 2017.
Due to additional impairment indicators noted during the fourth quarter of 2017, specifically a sharp and continued decline in its stock price and the related decline in its market capitalization, the Company determined that there was a fourth quarter impairment indicator and a quantitative impairment test was required to be performed at December 31, 2017. During the fourth quarter of 2017, the Company’s stock price and market capitalization declined approximately 41%, consistent with the decline in market capitalization of similar companies in the Company’s sector. The Company evaluated the fair value of its reporting unit under the income approach (in the same manner as noted above in its assessment at September 30, 2017), adjusting its assumptions to reflect additional market risk in the discount rate (from 10.25% to 11.25%), as well as adjusted future effective tax rates, noting that the fair value of its reporting unit indicated by the income approach at December 31, 2017 was no longer in excess of its carrying value.
At December 31, 2017, after comparing the results of the income approach to the market capitalization approach, the Company noted it could no longer corroborate the results of the income approach by reconciling to within a reasonable range of the Company’s market capitalization, including an assumed control premium. As discussed above, the two primary differences between the market approach and income approach were determined to be the Company’s fully reserved tax assets, for which the market may not have been giving full value and depressed market multiples experienced by all entities within the brand licensing peer group. The reconciliation was significantly impacted by the decreased market capitalization, as well as the enactment in December 2017 of the Tax Cuts and Jobs Act, which reduced the aforementioned reconciling item for fully reserved tax assets. As such, the Company determined that the value indicated by the market capitalization approach, calculated using the December 31, 2017 closing stock price of $1.78 and an estimated control premium factor of 20%, was the most appropriate measure of the fair value of the Company as of December 31, 2017. Based on this analysis, the fair value of the Company’s single reporting unit was below its carrying value by an amount greater than the carrying value of goodwill, and the Company recorded an impairment charge of $304.1 million in the fourth quarter of 2017 to fully write off its goodwill.
NOTE 108 – LONG-TERM DEBT
The components of long-term debt are as follows:
| | | | | | | ||||||
| | December 31, | ||||||||||
|
| 2020 (restated) |
| 2019 | ||||||||
|
|
|
|
|
|
| ||||||
|
| December 31, | ||||||||||
|
| 2018 |
| 2017 | ||||||||
|
| (in thousands) | ||||||||||
| | (in thousands) | ||||||||||
Secured Term Loans |
| $ | 519,850 |
| $ | 551,913 | | $ | 441,081 | | $ | 453,831 |
Revolving Credit Facility |
|
| 115,000 |
|
| 92,787 | |
| 29,740 | |
| 14,358 |
Unamortized deferred financing costs |
|
| (24,063) |
|
| (14,103) | |
| (18,571) | |
| (22,189) |
Total long-term debt, net of unamortized deferred financing costs |
|
| 610,787 |
|
| 630,597 | |
| 452,250 | |
| 446,000 |
Less: current portion of long-term debt |
|
| 28,300 |
|
| 28,300 | |
| 452,250 | |
| 12,750 |
Long-term debt |
| $ | 582,487 |
| $ | 602,297 | | $ | 0 | | $ | 433,250 |
August 2018 Debt Facilities
On August 7, 2018,November 16, 2020, due to the occurrence of certain events, the Company and certain ofentered into the Fifth Amendment to its subsidiaries amended its (i) Third Amended and Restated First LienCredit Agreement and Limited Waiver (as amended, the “the “Fifth Amendment”) with Wilmington Trust, National Association, as administrative agent and collateral agent (the “Wilmington Agent”) and
F-29
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
the lenders party thereto (the “Wilmington Facility Loan Parties”). The Fifth Amendment modified certain of the covenants in, and provided a waiver through December 31, 2020 of defaults under, the Amended Wilmington Credit Agreement (the “New“Waiver”). The Company received several extensions of the Waiver in the first quarter of 2021. The current extension of the Waiver expires on April 19, 2021 and the Company is negotiating to further extend the Waiver. The Company is also not currently forecasted to be able to comply, in the next twelve months, with certain of the financial covenants under the Amended Wilmington Credit Agreement. If the Company fails to comply with such financial covenants, or further extend the Waiver, an event of default under the Loan Agreements would be triggered and its obligations under the Loan Agreements may be accelerated. The Company continues to evaluate strategic alternatives, including the divestiture of one or more existing brands or a sale of the Company. The risk of non-compliance creates a material uncertainty that casts substantial doubt with respect to the ability of the Company to continue as a going concern. As disclosed in the Company’s Form 8-K filed on March 31, 2021, the Wilmington Facility Loan Parties under the Credit Agreement continued to be lenders as of April 1, 2021 and, therefore have the right to appoint an independent majority of the Company’s Board of Directors (inclusive of Ms. Mazzucchelli and Mr. Dionne, who currently serve as directors of the Company).
Management continues to conduct a broad review of strategic alternatives, including the divestiture of one or more existing brands or a sale of the Company, including in respect to the fact that the Company is currently in default of its financial covenants under its Third Amended and Restated Credit Agreement with Wilmington Trust, National Association as administrative agent, and the lenders party thereto, and is operating under a waiver from the lenders under that agreement. The risk of non-compliance creates a material uncertainty that casts substantial doubt with respect to the ability of the Company to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities that would be necessary if the Company was unable to realize its assets and settle its liabilities as a going concern in the normal course of operations.
On March 30, 2020, the Company entered into the Fourth Amendment (“Fourth Amendment”) to the Third Amended and Restated Credit Agreement. Pursuant to the Fourth Amendment, no mandatory amortization payments were required until September 30, 2020. The Fourth Amendment allows for the netting of up to $5 million in cash of the Company and its subsidiaries for purposes of calculating the leverage ratio covenants, except for the quarter ended March 31, 2020 which allowed for netting of up to $10 million in cash. On August 11, 2020, pursuant to the terms of the Fourth Amendment, the Company added a new director to sit on its Board of Directors. The Company incurred $3.1 million in lender fees associated with the amendment which was recorded in deferred financing costs in accordance with ASC 470, Debt, and included in debt in the consolidated balance sheet. These fees are being amortized using the effective interest rate method over the remainder of the term of the Fourth Amendment.
On December 30, 2019, the Company entered into the Third Amendment to the Third Amended and Restated Credit Agreement (the “Amended BoA Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral agent and the lenders party thereto (the “BoA Facility Loan Parties”). The loans under the Amended BoA Credit Agreement will be subject to quarterly amortization payments of $2.5 million through September 30, 2020, $3.25 million through September 30, 2021 and (ii)$4 million for each fiscal quarter thereafter. The Amended BoA Credit Agreement modifies the calculation of Consolidated EBITDA (as defined in the agreement) by permitting additional addbacks and specifying the EBITDA amounts for the quarters ended September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019. The Amended BoA Credit Agreement allows for the netting of up to $5 million in cash of the Company and its subsidiaries for purposes of calculating the leverage ratio covenant. The Company reduced the available commitments under the revolving facility to $80 million. During the year ended December 31, 2019, the Company incurred $1.3 million in lender fees associated with the amendment which was recorded in deferred financing costs in accordance with ASC 470, Debt and included in long-term debt, net of current portion in the consolidated balance sheet. These fees are being amortized using the effective interest rate method over the remainder of the term of the Amended BoA Credit Agreement.
On August 12, 2019, the Company entered into the Third Amendment to the Third Amended and Restated First Lien Credit Agreement (the “New Amended FS/KKR“Wilmington Credit Agreement”) with the Wilmington Trust, National Association, as administrative agent and collateral agent (the “FS/KKR Agent”)Agent and the lenders party theretoWilmington Facility
F-30
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Loan Parties. Pursuant to the Wilmington Credit Agreement, no mandatory amortization payments are required until September 30, 2020. Thereafter, the loans under the Wilmington Credit Agreement will be subject to quarterly amortization payments of $1.0 million. Pursuant to the Wilmington Credit Agreement, no payment with proceeds of any consolidated excess cash flow was required to be made prior to the fiscal year ended December 31, 2020. The Wilmington Credit Agreement modified the calculation of Consolidated EBITDA (as defined in the agreement) by permitting additional addbacks and specifying the EBITDA amounts for the quarters ended March 31, 2019 and June 30, 2019. The Wilmington Credit Agreement allows for the netting of up to $5 million in cash of the Company and its subsidiaries for purposes of calculating the leverage ratio covenant. The Company also agreed under the Wilmington Credit Agreement not to borrow more than $30 million under the Bank of America Revolving Credit Facility. During the third quarter of 2019, the Company incurred $3.3 million in lender fees associated with the amendment which was recorded in deferred financing costs in accordance with ASC 470, Debt, and included in long-term debt, net of current portion in the consolidated balance sheet. These fees are being amortized using the effective interest rate method over the remainder of the term of the Wilmington Credit Agreement.
On June 10, 2019, the Company completed the sale of MSLO. The Company used cash proceeds from the MSLO sale to make mandatory prepayments of $109.6 million of the Revolving Credit Facility and voluntary prepayments of $44.4 million on its Tranche A-1 Term Loans.
On August 7, 2018 (the “FS/KKR“Closing Date”), the Company and certain of its subsidiaries amended its (i) Third Amended and Restated First Lien Credit Agreement (the “BoA Credit Agreement”) with the BoA Facility Loan Parties”).Parties and (ii) Wilmington Credit Agreement with the Wilmington Agent and the Wilmington Facility Loan Parties. The Company used a portion of the proceeds of the $335.0 million loans made to the
F-29
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
Company under the New Amended BoA Credit Agreement to prepay loans under the Amended FS/KKRWilmington Credit Agreement.
During 2018, the Company incurred $14.6 million in lender and certain third-party fees associated with debt refinancing, which was recorded as deferred financing costs in accordance with ASC 470 – Debt and included in Long-term debt, net of current portion in the consolidated balance sheet at December 31, 2018. These fees are being amortized using the effective interest rate method over the terms of the New Amended BoA Credit Agreement and New Amended FS/KKR Credit Agreement. The Company expensed $0.1 million of deferred financing costs, included in Interest Expense, net in the consolidated statement of operations, as a result of a partial extinguishment of the Amended BoA Credit Agreement in accordance with ASC 470 – Debt in connection with the Company’s entry into the New Amended BoA Credit Agreement.
The New Amended BoA Credit Agreement provides for several five-year senior secured credit facilities, consisting of (i) Tranche A Term Loans in an aggregate principal amount of $150.0 million (the “Amended Tranche A Loans”), (ii) Tranche A-1 Term Loans in an aggregate principal amount of $70.0 million (the “Amended Tranche A-1 Loans” and, together with the Tranche A Loans, the “Amended BoA“BoA Term Loans”) and (iii) revolving credit commitments in the aggregate principal amount of $130.0 million (the “Amended Revolving“Revolving Credit Commitments” and, the loans under the Revolving Credit Commitments, the “Amended Revolving“Revolving Loans”). On the Closing Date, the total amount outstanding under the New Amended BoA Credit Agreement was $335.0 million, including (i) $150.0 million of Amended Tranche A Loans, (ii) $70.0 million of Amended Tranche A-1 Loans and (iii) $115.0 million of Amended Revolving Loans.
The loans under the New Amended BoA Credit Agreement bear interest, at the Company’s option, at a rate equal to (i) with respect to the Amended Revolving Loans and the Amended Tranche A Loans (a) the LIBOR rate plus 3.50% per annum or (b) the base rate plus 2.50% per annum and (ii) with respect to the Amended Tranche A-1 Loans (a) the LIBOR rate plus 7.00% per annum or (b) the base rate plus 6.00% per annum. The loans under the New Amended BoA Credit Agreement provide for interest rate reductions if certain leverage ratios are achieved, with minimum interest rates equal to (i) with respect to the Amended Revolving Loans and the Amended Tranche A Loans (a) the LIBOR rate plus 3.00% per annum or (b) the base rate plus 2.00% per annum and (ii) with respect to the Amended Tranche A-1 Loans (a) the LIBOR rate plus 6.00% per annum or (b) the base rate plus 5.00% per annum. The undrawn portions of the Revolving Credit Commitments are subject to a commitment fee of 0.375% per annum. As of December 31, 2020, the Company had no availability under the current revolving credit facility (the “Revolving Credit Facility”).
The Company may make voluntary prepayments of the loans outstanding under the New Amended BoA Credit Agreement, subject to the payment of customary “breakage” costs with respect to LIBOR-based borrowings and, in certain cases, to the prepayment premium set forth in the New Amended BoA Credit Agreement. Additionally, the Company is mandated to make prepayments (without payment of a premium or penalty) under the New Amended BoA Credit Agreement amounting to: (i) the loans outstanding under the New Amended BoA Credit Agreement plus, (a) where intellectual property is disposed, 50.0% of the disposed intellectual property’s orderly liquidation value, and (b) where any other assets constituting collateral are disposed or upon the receipt of certain insurance proceeds, 100% of the net proceeds thereof, subject to certain reinvestment rights; and (ii) the Amended Tranche A-1 Loans to the extent that the outstanding principal amount thereof exceeds 15.0% of the orderly liquidation value of the registered trademarks owned by the BoA Facility Loan Parties.The Per the Amended BoA Term Loans
F-31
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Credit Agreement, the loans will continuebe subject to amortize in quarterly installmentsamortization payments of $5.0 million.
$2.5 million through September 30, 2020, $3.25 million through September 30, 2021 and $4.0 million for each fiscal quarter thereafter.
The New Amended BoA Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the BoA Facility Loan Parties and their subsidiaries. Moreover, the New Amended BoA Credit Agreement contains financial covenants that require the BoA Facility Loan Parties and their subsidiaries to (i) maintain a positive net income, (as definedwhich is calculated on a a quarterly basis to be equal or less than zero; consolidated positive net income should be calculated as an amount equal to consolidated net income for the applicable measurement period deducted by depreciation and amortization expense, one-time non-cash charges, non-cash compensation, non-cash Federal, state, local and foreign income taxes relating to amortization of intangibles for tax purposes and non-cash interest, one-time costs relating to any permitted acquisition, if any, or fees in the New Amended BoA Credit Agreement)connection with any permitted indebtedness in an amount not to exceed $5.0 million in any Fiscal Year (ii) satisfy a maximum loan to value ratio initially set at 50.0% (applicable to the Amended Revolving Loans and Amended Tranche A Loans) decreasing over the term of the New Amended BoA Credit Agreement until reaching a final maximum loan to value ratio of 42.5% and (iii) satisfy a maximum consolidated first lien leverage ratio, initially set at 3.875:1.00,1:00, decreasing over the term of the New Amended BoA Credit Agreement until reaching a final maximum ratio of 2.875:1.00 for the fiscal quarter ending September 30, 2022 and thereafter.
F-30
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES At December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER2018, 2017 AND 2016
2020, the Company is in compliance with the covenants included in the Amended BoA Credit Agreement.
The New Amended BoA Credit Agreement contains certain customary events of default, including a change of control. If an event of default occurs and is not cured within any applicable grace period or not waived, the Bank of America Agent, at the request of the lenders under the New Amended BoA Credit Agreement, must take various actions, including, without limitation, the acceleration of all amounts due under the New Amended BoA Credit Agreement.
The Company may request an increase in (i) the Revolving Credit Facility and Tranche A Loans as would not cause the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect to any such increase, to exceed 2.80:1.00 and (ii) the Tranche A-1 Loans, as would not cause the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect to any such increase, to exceed (a) with respect to any increase, the proceeds of which will be used solely to finance an acquisition, 3.00:1.00 and (b) with respect to any other increase, 2.90:1.00, subject to the satisfaction of certain conditions in the New Amended BoA Credit Agreement. At December 31, 2018, the Company is in compliance with the covenants included in the New Amended BoA Credit Agreement.
The New Amended FS/KKRWilmington Credit Agreement provides for a five and a half-year $314.0 million senior secured term loan facility. The Company may request one or more additional term loan facilities or the increase of term loan commitments under the New Amended FS/KKRWilmington Credit Agreement as would not have caused the consolidated total leverage ratio, determined on a pro forma basis after giving effect to any such addition and increase, to exceed 6.00:1.00, subject to the satisfaction of certain conditions in the New Amended FS/KKRWilmington Credit Agreement.
The loans under the New Amended FS/KKRWilmington Credit Agreement bear interest, at the Company’s option, at a rate equal to either (i) the LIBOR rate plus 8.75% per annum or (ii) the base rate plus 7.75% per annum.
The Company may make voluntary prepayments of the loans outstanding under the New Amended FS/KKRWilmington Credit Agreement, subject to the payment of customary “breakage” costs with respect to LIBOR-based borrowings and, in certain cases, to the prepayment premium set forth in the New Amended FS/KKRWilmington Credit Agreement. The Company is mandated to make prepayments (without payment of a premium or penalty) of loans outstanding under the New Amended FS/KKRWilmington Credit Agreement amounting to: (i) where intellectual property was disposed, 50.0% of the disposed intellectual property’s orderly liquidation value, (ii) where any other asset constituting collateral is disposed or upon the receipt of certain insurance proceeds, 100% of the net proceeds thereof, subject to certain reinvestment rights, and (iii) any consolidated excess cash flow, in an amount equal to (a) in the event the consolidated total leverage ratio was at least 4.00:1.00, 75% thereof, (b) in the event the consolidated total leverage ratio was less than 4.00:1.00 but at least 3.00:1.00, 50% thereof and (c) in the event the consolidated total leverage ratio was less than 3.00:1.00, 0% thereof. TheNo mandatory amortization payments were required until September 30, 2020. Thereafter, the loans under the New Amended FS/KKRWilmington Credit Agreement will continueare subject to amortize in quarterly installmentsamortization payments of approximately $2.1$1.0 million. Under the Amended Wilmington Credit Agreement, as described above, the quarterly amortization payments of $1.0 million remain unchanged.
F-32
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The New Amended FS/KKRWilmington Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the FS/KKRWilmington Facility Loan Parties and their subsidiaries. Moreover, the New Amended FS/KKRWilmington Credit Agreement contains financial covenants that require the FS/KKRWilmington Facility Loan Parties and their subsidiaries to satisfy (i) a maximum consolidated total leverage ratio, initially set at 7.25:1.00, decreasing over the term of the New Amended FS/KKRWilmington Credit Agreement until reaching a final maximum ratio of 6.25:1.00 for the fiscal quarter ending September 30, 2022 and thereafter and (ii) a maximum consolidated first lien leverage ratio, initially set at 3.875:1.00, decreasing over the term of the New Amended FS/KKRWilmington Credit Agreement until reaching a final maximum ratio of 2.875:1.00 for the fiscal quarter ending September 30, 2022 and thereafter.At December 31, 2018, the Company is in compliance with the covenants included in the New Amended FS/KKR Credit Agreement.
The New Amended FS/KKRWilmington Credit Agreement contains certain customary events of default, including a change of control. If an event of default occurs and is not cured within any applicable grace period or is not waived, the FS/KKRWilmington Agent, at the request of the lenders under the New Amended FS/KKRWilmington Credit Agreement, is required to take various actions, including, without limitation, the acceleration of amounts due thereunder.
The Company may request one or more additional term loan facilities or the increase of term loan commitments under the New Amended FS/KKR Credit Agreement as would not have caused the consolidated total leverage ratio,
F-31
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
determined on a pro forma basis after giving effect to any such addition and increase, to exceed 6.00:1.00, subject to the satisfaction of certain conditions in the New Amended FS/KKR Credit Agreement.
July 2016 Debt Facilities
On July 1, 2016 (the “Closing Date”), the Company and certain of its subsidiaries entered into (i) the Third Amended and Restated First Lien Credit Agreement (the “Amended BoA Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral agent and the lenders party thereto (the “BoA Facility Loan Parties”) and (ii) the Third Amended and Restated Credit Agreement (the “Amended FS/KKR Credit Agreement”) with Wilmington Trust, National Association, as administrative agent and collateral agent (the “FS/KKR Agent”) and the lenders party thereto. Such agreements amended, restated and replaced the December 2015 debt facilities. The Company used a portion of the proceeds of the $287.5 million loans made to the Company under the Amended BoA Credit Agreement and the $415.0 million loans made to the Company under the Amended GSO Credit Agreement to fund the payment of the purchase price with respect to the acquisition of the Gaiam Brand Holdco, LLC and costs and expenses incurred in connection with such acquisition and related transactions.
The Amended BoA Credit Agreement provided for several five-year credit facilities, consisting of (i) Tranche A Term Loans in an aggregate principal amount of $133.0 million (the “Tranche A Loans”), (ii) Tranche A‑1 Term Loans in an aggregate principal amount of $44.5 million (the “Tranche A‑1 Loans” and, together with the Tranche A Loans, the “BoA Term Loans”) and (iii) revolving credit commitments in the aggregate principal amount of $110.0 million (the “Revolving Credit Facility” and, the loans under the Revolving Credit Facility, the “Revolving Loans”). On the Closing Date, the total amount outstanding under the Amended BoA Credit Agreement was $258.0 million, including (i) $133.0 million of Tranche A Loans, (ii) $44.5 million of Tranche A‑1 Loans and (iii) $80.5 million of borrowing under the Revolving Loans.
The loans under the Amended BoA Credit Agreement bore interest, at the Company’s option, at a rate equal to (i) with respect to the Revolving Loans and the Tranche A Loans (a) the LIBOR rate plus 3.50% per annum or (b) the base rate plus 2.50% per annum and (ii) with respect to the Tranche A‑1 Loans (a) the LIBOR rate plus 7.00% per annum or (b) the base rate plus 6.00% per annum. The undrawn portions of the commitments under the Revolving Credit Facility were subject to a commitment fee of 0.375% per annum.
The Company could have made voluntary prepayments of the loans outstanding under the Amended BoA Credit Agreement, subject to the payment of customary “breakage” costs with respect to LIBOR-based borrowings and, in certain cases, to the prepayment premium set forth in the Amended BoA Credit Agreement. Additionally, the Company was mandated to make prepayments (without payment of a premium or penalty) under the Amended BoA Credit Agreement amounting to: (i) the loans outstanding under the Amended BoA Credit Agreement plus, (a) where intellectual property was disposed, 50.0% of the disposed intellectual property’s orderly liquidation value, and (b) where any other assets constituting collateral are disposed or upon the receipt of certain insurance proceeds, 100% of the net proceeds thereof, subject to certain reinvestment rights; and (ii) the Tranche A‑1 Loans to the extent that the outstanding principal amount thereof exceeds 10.0% of the orderly liquidation value of the registered trademarks owned by the BoA Facility Loan Parties. On September 30, 2016, the BoA Term Loans commenced amortization in quarterly installments of $5.0 million.
The Amended BoA Credit Agreement contained customary representations and warranties and customary affirmative and negative covenants applicable to the BoA Facility Loan Parties and their subsidiaries. Moreover, the Amended BoA Credit Agreement contained financial covenants that required the BoA Facility Loan Parties and their subsidiaries to (i) maintain a positive net income (as defined), (ii) satisfy a maximum loan to value ratio set at 50.0% (applicable to the Revolving Loans and Tranche A Loans) and (iii) satisfy a maximum consolidated first lien leverage ratio, initially set at 2.80:1.00, decreasing over the term of the Amended BoA Credit Agreement until reaching the final maximum ratio of 2.50:1.00 for the fiscal quarter ending September 30, 2018 and thereafter
The Amended BoA Credit Agreement contained certain customary events of default, including a change of control. If an event of default occurred and was not cured within any applicable grace period or not waived, the Bank of
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
America Agent, at the request of the lenders under the Amended BoA Credit Agreement, must take various actions, including, without limitation, the acceleration of amounts due under the Amended BoA Credit Agreement.
The Company could have requested an increase in (i) the Revolving Credit Facility and Tranche A Loans as would not have caused the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect to any such increase, to exceed 2.33:1.00 and (ii) the Tranche A-1 Loans, as would not have caused the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect to any such increase, to exceed (a) with respect to any increase, the proceeds of which will be used solely to finance an acquisition, 2.50:100 and (b) with respect to any other increase, 2.40:1.00, subject to the satisfaction of certain conditions in the Amended BoA Credit Agreement.
The Amended FS/KKR Credit Agreement provided for a six-year $415.0 million senior secured term loan facility. The Company could have requested one or more additional term loan facilities or the increase of term loan commitments under the Amended FS/KKR Credit Agreement as would not have caused the consolidated total leverage ratio, determined on a pro forma basis after giving effect to any such addition and increase, to exceed 6.00:1.00, subject to the satisfaction of certain conditions in the Amended FS/KKRWilmington Credit Agreement.
The loansReclassification of Indebtedness as of December 31, 2020
As a result of the foregoing events and circumstances, the Company reclassified all of its indebtedness under the Amended FS/KKRBoA Credit Agreement bore interest, at the Company’s option, at a rate equal to either (i) the LIBOR rate plus an applicable margin of 8.25% or 9.00% per annum or (ii) the base rate plus an applicable margin of 7.25% or 8.00% per annum, in each case based upon the consolidated total leverage ratio.
The Company could have made voluntary prepayments of the loans outstanding underand the Amended FS/KKR Credit Agreement, subject to the payment of customary “breakage” costs with respect to LIBOR-based borrowings and, in certain cases, to the prepayment premium set forth in the Amended FS/KKR Credit Agreement. The Company was mandated to make prepayments (without payment of a premium or penalty) of loans outstanding under the Amended FS/KKR Credit Agreement amounting to: (i) where intellectual property was disposed, 50.0% of the disposed intellectual property’s orderly liquidation value, (ii) where any other asset constituting collateral was disposed or upon the receipt of certain insurance proceeds, 100% of the net proceeds thereof, subject to certain reinvestment rights, and (iii) any consolidated excess cash flow, in an amount equal to (a) in the event the consolidated total leverage ratio was at least 4.00:1.00, 75% thereof, (b) in the event the consolidated total leverage ratio was less than 4.00:1.00 but at least 3.00:1.00, 50% thereof and (c) in the event the consolidated total leverage ratio was less than 3.00:1.00, 0% thereof. On March 31, 2018, the Loans under the Amended FS/KKR Credit Agreement commenced amortization in quarterly installments, equal to 2.00% per annum of the original aggregate principal amount thereof.
The Amended FS/KKR Credit Agreement contained customary representations and warranties and customary affirmative and negative covenants applicable to the FS/KKR Facility Loan Parties and their subsidiaries. Moreover, the Amended FS/KKR Credit Agreement contained financial covenants that require the GSO Facility Loan Parties and their subsidiaries to satisfy (i) a maximum consolidated total leverage ratio, initially set at 7.25:1.00, decreasing over the term of the Amended FS/KKR Credit Agreement until reaching the final maximum ratio of 6.50:1.00 for the fiscal quarter ending September 30, 2018 and thereafter and (ii) a maximum consolidated first lien leverage ratio, initially set at 2.80:1.00, decreasing over the term of the Amended FS/KKR Credit Agreement until reaching the final maximum ratio of 2.50:1.00 for the fiscal quarter ending September 30, 2018 and thereafter.
The Amended FS/KKR Credit Agreement contained certain customary events of default, including a change of control. If an event of default occurred and was not cured within any applicable grace period or was not waived, the FS/KKR Agent, at the request of the lenders under the Amended FS/KKR Credit Agreement, was required to take various actions, including, without limitation, the acceleration of amounts due thereunder.
The Company could have requested one or more additional term loan facilities or the increase of term loan commitments under the FS/KKRWilmington Credit Agreement as would not have caused the consolidated total leverage ratio, determined on a pro forma basis after giving effect to any such addition and increase, to exceed 6.00:1.00, subject to the satisfactioncurrent indebtedness as of certain conditions in the FS/KKR Credit Agreement.December 31, 2020. See “Note 18 – Restatement of Previously Issued Consolidated Financial Statements” for additional information.
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
Interest Expense from Continuing Operations
Interest expense, net during the year ended December 31, 20182020 includes interest incurred under our loan agreements interest rate caps and interest rate swaps of $57.1$42.6 million, non-cash interest related to the amortization of deferred financing costs of $4.5$6.7 million and $0.1 million of deferred financing costs as a result of a partial extinguishment of the Amended BoA Credit Agreement in accordance with ASC 470 – Debt in connection with the Company’s entry into the New Amended BoA Credit Agreement. Additionally, we expensed non-cash interest income of $0.5$1.0 million related to the accretion of the present value of guaranteed contractual payments and Legacy Payments assumed through certain of the Company’s acquisitions in 2015 and certain other payment arrangements.
Interest expense, net during the year ended December 31, 20172019 includes interest incurred under our loan agreements and interest rate caps of $55.1 million and non-cash interest related to the amortization of deferred financing costs of $3.9 million. Additionally, we expensed non-cash interest of $0.9 million related to the accretion of the present value of guaranteed contractual payments and Legacy Payments assumed through certain of the Company’s acquisitions in 2015.
Interest expense during the year ended December 31, 2016 includes interest incurred under our loan agreements and interest rate caps of $46.2$48.2 million, non-cash interest related to the amortization of deferred financing costs of $2.8$5.6 million, and the write-offthe expensing of $0.3$0.8 million of deferred financing costs as a result of ana partial extinguishment a portion ofon the BoA Credit AgreementRevolving and Term loans in accordance with ASC 470 – Debt in connection with the Company’s entry into the Amended BoA Credit Agreement. Additionally, we expensed and non-cash interest income of $1.2$0.8 million related to the accretion of the present value of guaranteed contractual payments and Legacy Payments assumed through certain of the Company’s acquisitions in 2015.payment arrangements.
Interest Rate Swaps
On December 10, 2018, the Company entered into interest rate swap agreements related to its term loans (the “2018the 2018 Swap Agreements”)Agreements with certain financial institutions. The Company recorded its interest rate swaps in accrued expenseexpenses and other long-term liabilities on the consolidated balance sheets at fair value using Level 2 inputs. The 2018 Swap Agreements have a $300 million notional value, and $150 million matures on December 31, 2021 and $150 million matures on January 4, 2022.
The Company’s risk management objective and strategy with respect to the 2018 Swap Agreements is to reduce its exposure to variability in cash flows on a portion of the Company’s floating-rate debt. The 2018 Swap Agreements protect the Company from changes in its cash flows attributable to changes in a contractually specified interest rate on an amount of borrowing equal to the then outstanding swap notional. The Company will periodically assess the effectiveness of the hedge (both prospective and retrospective) by performing a single regression analysis that was prepared at the inception of the hedging relationship. To the extent the hedging relationship is highly effective, the gain or loss on the
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
swap will be recorded in accumulated other comprehensive loss and reclassified into interest expense in the same period during which the hedged transactions affect earnings.
During 2015,the year ended December 31, 2019, the Company entered into an interest rate swap agreement related to term loans (the “2015 Swap Agreement”). The Company recorded its interest rate swap on the consolidated balance sheets at fair value using Level 2 inputs. The 2015 Swap Agreement ended on December 30, 2016.
The objectivedetermined that a portion of one of the swap agreementhedges was no longer effective due to reduce the variability in cash flows for interest payments associatedrepayment of certain debt with the loan agreements, which are based onproceeds from the 1‑month LIBOR rates. Thesale of MSLO (see Note 4). As a result, in accordance with ASC 815-30-40-6A, the Company formally documented the swap agreementde-designated it as a cash flow hedge and reclassified a loss of the Company’s exposure$0.4 million from other comprehensive loss to 1‑month LIBOR. Because the critical terms of the swap agreement and the hedged items coincided at inception (e.g., notional amount, interest rate reset dates, interest rate payment dates, maturity/expiration date and underlying index), the hedge was expected to completely offset changes in expected cash flows due to fluctuationsother expense in the 1‑month LIBOR rate over the termconsolidated statement of the hedge. The effectiveness of the hedge relationship was periodically assessed during the life of the hedge by comparing the current terms of the swap agreement and the loan agreements to assure they continue to coincide and through an evaluation of the continued ability of the
F-34
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
respective counterparties to honor their obligations under the 2015 Swap Agreement. When the key terms no longer match exactly, hedge effectiveness (both prospective and retrospective) is 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. Because the notional amounts of the Company’s swap agreement no longer matched the notional amounts of the loan agreements exactly, the Company assessed the ineffectiveness of the swap agreement and determined that differences were immaterial during the year ended December 31, 2016.
Interest Rate Caps
On November 30, 2016, the Company entered into interest rate cap agreements related to its 1‑month LIBOR rates related to the 2016 Cap Agreements with certain financial institutions. The 2016 Cap Agreements had a $500 million notional value, strike rate of 1.5% and matured on November 23, 2018. The Company recorded its interest rate caps on the consolidated balance sheets at fair value using Level 2 inputs. The valuation technique used to determine the fair value of the 2016 Cap Agreements approximated the net present value of future cash flows, taking into account current interest rates.
The Company’s risk management objective and strategy with respect to the 2016 Cap Agreements was to reduce its exposure to variability in expected future cash outflows (forecasted interest payments) attributable to change in 1‑month LIBOR rates, the designated benchmark interest rate being hedged, relating to a portion of its outstanding floating-rate debt. The 2016 Cap Agreements protected the Company from increases in hedged cash flows on its floating-rate debt attributable to changes in 1‑month LIBOR rates above the strike rate. Should 1‑month LIBOR rates exceed 1.50% on a rate reset date during the terms of the 2016 Cap Agreements, the financial institutions would have paid the Company for an amount equivalent to the excess interest over the strike rate. To the extent the hedging relationship is perfectly effective, changesoperations. Changes in the fair value of the hedging instrument each period would be deferredde-designated interest rate swap after the de-designation date are being recognized through continuing operations. The Company recorded a loss of $3.8 million and $0.6 million in accumulated other comprehensive loss in the statement of changes in equity, and the upfront hedging instrument purchase price would be reclassified to interest expense netfrom continuing operations in the consolidated statements of operations according to its caplet values. If hedge ineffectiveness exists, accumulated other comprehensive loss would be adjusted to a balance that reflectsoperation for the lesser of either the cumulative change in the fair value of the hedging or the cumulative change in the fair value of the hypothetically “perfect” derivative. The amount of ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in the fair value of the hedging instrument over the cumulative change in the fair value of the hypothetical derivative.years ended December 31, 2020 and 2019, respectively.
Debt Maturities
As of December 31, 2018,2020, the Company’s debt maturities for the next five years and thereafter on a calendar year basis are as follows:
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
|
| Total |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
| Total |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter | ||||||||||||||||||||||||||||
|
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||
| | (in thousands) | ||||||||||||||||||||||||||||||||||||||||
Term Loans |
| $ | 519,850 |
| $ | 28,300 |
| $ | 28,300 |
| $ | 28,300 |
| $ | 28,300 |
| $ | 138,300 |
| $ | 268,350 | | $ | 441,081 | | $ | 17,750 | | $ | 20,000 | | $ | 111,631 | | $ | 291,700 | | $ | - | | $ | - |
Revolving Loan |
|
| 115,000 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 115,000 |
|
| - | |
| 29,740 | |
| - | |
| - | |
| 29,740 | |
| - | |
| - | |
| - |
Total |
| $ | 634,850 |
| $ | 28,300 |
| $ | 28,300 |
| $ | 28,300 |
| $ | 28,300 |
| $ | 253,300 |
| $ | 268,350 | | $ | 470,821 | | $ | 17,750 | | $ | 20,000 | | $ | 141,371 | | $ | 291,700 | | $ | - | | $ | - |
F-35
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
NOTE 119 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses from continuing operations consist of the following:
| | | | | | | ||||||
| | December 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
|
|
|
|
|
|
| ||||||
|
| December 31, | ||||||||||
|
| 2018 |
| 2017 | ||||||||
|
| (in thousands) | ||||||||||
| | (in thousands) | ||||||||||
Accounts payable |
| $ | 4,207 |
| $ | 1,627 | | $ | 2,330 | | $ | 2,942 |
Accrued expenses |
|
|
|
|
|
| |
|
| |
|
|
Guaranteed payments in connection with acquisitions - current |
|
| 2,828 |
|
| 3,295 | ||||||
Interest |
|
| 2,401 |
|
| 3,215 | |
| 927 | |
| 1,025 |
Compensation |
|
| 3,365 |
|
| 4,928 | |
| 1,509 | |
| 2,395 |
Marketing and commissions |
|
| 1,330 |
|
| 2,804 | |
| 1,269 | |
| 1,402 |
Interest rate swap liability - current | | | 6,180 | | | 3,124 | ||||||
Litigation contingencies and claims | | | 4,338 | | | 1,954 | ||||||
Licensee settlement payable - current | | | 1,000 | | | 940 | ||||||
PPP loan | | | 774 | | | - | ||||||
Professional services fees |
|
| 1,986 |
|
| 424 | | | 317 | | | 227 |
Legal settlement payable - current |
|
| 3,200 |
|
| - | ||||||
Licensee settlement payable - current |
|
| 1,883 |
|
| - | ||||||
Other accrued expenses |
|
| 2,327 |
|
| 2,833 | |
| 182 | |
| 1,712 |
Total accounts payable and accrued expenses |
| $ | 23,527 |
| $ | 19,126 | | $ | 18,826 | | $ | 15,721 |
NOTE 1210 – LEASES
Operating LeasesThe Company has operating leases for its offices and showrooms. The Company adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective method as of the period of adoption. The Company elected the package of practical expedients upon transition where the Company did not reassess the lease classification and initial direct costs for leases that existed prior to adoption. Additionally, the Company did not reassess contracts entered into prior to adoption to determine whether the arrangement was or contained a lease. At January 1, 2019, the Company did not have any leases that had not yet commenced. The Company also elected the practical expedient to not recognize ROU assets or lease liabilities for leases with a term of twelve months or less.
F-34