UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to ______________________.
Commission File Number 001-37656
SEQUENTIAL BRANDS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 47-4452789 |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
organization) | |
1407 Broadway, 38th Floor
New York, New York 10018
(Address of principal executive offices) (Zip Code)
(646) 564-2577
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ | ||||
| | | | |
Non-accelerated filer ☒ | | Smaller reporting company ☐ | Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
Common stock, par value $0.01 per share | | SQBG | | NASDAQ Capital Market |
As of November 11, 2020, the registrant had 1,651,484 shares of common stock, par value $0.01 per share, outstanding.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
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5 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 40 | |
| | |
48 | ||
| | |
48 | ||
| | |
| | |
| | |
49 | ||
| | |
49 | ||
| | |
49 | ||
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51 |
2
Forward-Looking Statements
This quarterly report on Form 10-Q (this “Quarterly Report”), including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 acquisitions and to obtain financing for such acquisitions on commercially reasonable terms; (iv) the Company’s ability to timely achieve the anticipated results of any potential future acquisitions; (v) the Company’s ability to successfully integrate acquisitions into its ongoing business; (vi) the potential impact of the consummation of any potential future acquisitions on the Company’s relationships, including with employees, licensees, customers and competitors; (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) continued market acceptance of the Company’s brands; (xii) changes in the Company’s competitive position or competitive actions by other companies; (xiii) licensees’ ability to fulfill their financial obligations to the Company; (xiv) concentrations of the Company’s licensing revenues with a limited number of licensees and retail partners; (xv) uncertainties related to the timing, proposals or decisions arising from the Company’s strategic review, including the divestiture of one or more existing brands or a sale of the Company; (xvi) adverse effects on the Company and its licensees due to natural disasters, pandemic disease and other unexpected events; (xvii) 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 debt covenants and related uncertainty around the Company's ability to continue as a going concern; and (xviii) other circumstances beyond the Company's control.
Forward-looking statements speak only as of the date they are made and are based on current expectation 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.
Where You Can Find Other Information
Our corporate website address is www.sequentialbrandsgroup.com. The information contained on our website is not part of this Quarterly 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. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. 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.
3
Unless otherwise noted, references in this Quarterly Report 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.
4
PART I - FINANCIAL INFORMATION
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2020 |
| 2019 |
| ||
|
| | (Unaudited) |
| (Note 2) |
| |
Assets | | | | | | | |
Current Assets: |
| |
|
| |
|
|
Cash | | $ | 21,937 |
| $ | 6,264 | |
Restricted cash | |
| 294 |
|
| 2,043 | |
Accounts receivable, net | |
| 42,921 |
|
| 39,452 | |
Prepaid expenses and other current assets | |
| 12,373 |
|
| 4,228 | |
Current assets from discontinued operations | | | 152 | | | 6,839 | |
Total current assets | |
| 77,677 |
|
| 58,826 | |
| | | | | | | |
Property and equipment, net | |
| 1,534 |
|
| 5,349 | |
Intangible assets, net | |
| 489,938 |
|
| 599,967 | |
Right-of-use assets - operating leases | |
| 52,240 |
|
| 50,320 | |
Other assets | | | 9,900 |
| | 8,782 | |
Total assets | | $ | 631,289 |
| $ | 723,244 | |
| | | | | | | |
Liabilities and Equity | |
|
|
|
|
| |
Current Liabilities: | |
|
|
|
|
| |
Accounts payable and accrued expenses | | $ | 19,225 |
| $ | 15,721 | |
Current portion of long-term debt | |
| 17,000 |
|
| 12,750 | |
Current portion of deferred revenue | |
| 5,428 |
|
| 6,977 | |
Current portion of lease liabilities - operating leases | | | 3,267 | | | 3,035 | |
Current liabilities from discontinued operations | | | 382 | | | 1,959 | |
Total current liabilities | |
| 45,302 |
|
| 40,442 | |
| | | | | | | |
Long-term debt, net of current portion | |
| 436,388 |
|
| 433,250 | |
Long-term deferred revenue, net of current portion | |
| 2,638 |
|
| 4,604 | |
Deferred income taxes | |
| 15,728 |
|
| 14,351 | |
Lease liabilities - operating leases, net of current portion | | | 52,222 | | | 54,168 | |
Other long-term liabilities | | | 1,828 |
| | 3,389 | |
Total liabilities | |
| 554,106 |
|
| 550,204 | |
| | | | | | | |
Commitments and contingencies | |
|
|
|
|
| |
| | | | | | | |
Equity: | |
|
|
|
|
| |
Preferred stock Series A, $0.01 par value; 10,000,000 shares authorized; none issued and outstanding at September 30, 2020 and December 31, 2019 | |
| - |
|
| - | |
Common stock, $0.01 par value; 150,000,000 shares authorized; 1,676,489 and 1,671,937 shares issued at September 30, 2020 and December 31, 2019, respectively, and 1,650,571 and 1,644,518 shares outstanding at September 30, 2020 and December 31, 2019, respectively | |
| 17 |
|
| 17 | |
Additional paid-in capital | |
| 515,470 |
|
| 515,151 | |
Accumulated other comprehensive loss | |
| (3,227) |
|
| (4,096) | |
Accumulated deficit | |
| (479,086) |
|
| (394,126) | |
Treasury stock, at cost; 25,918 and 27,419 shares at September 30, 2020 and December 31, 2019, respectively | |
| (3,234) |
|
| (3,230) | |
Total Sequential Brands Group, Inc. and Subsidiaries stockholders’ equity | |
| 29,940 |
|
| 113,716 | |
Noncontrolling interests | |
| 47,243 |
|
| 59,324 | |
Total equity | |
| 77,183 |
|
| 173,040 | |
Total liabilities and equity | | $ | 631,289 |
| $ | 723,244 | |
See Notes to Condensed Consolidated Financial Statements.
5
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | | | | | | | | | | | | |
Net revenue | | $ | 24,024 | | $ | 25,392 | | $ | 66,849 | | $ | 77,331 | |
Operating expenses | |
| 8,726 | |
| 12,247 | |
| 37,576 | |
| 41,700 | |
Impairment charges | | | - | | | 33,109 | | | 85,590 | | | 33,109 | |
Gain on sale of assets | |
| (3,723) | |
| - | |
| (4,624) | |
| - | |
Income (loss) from operations | |
| 19,021 | |
| (19,964) | |
| (51,693) | |
| 2,522 | |
Other (income) expense | |
| (72) | |
| 843 | |
| 3,467 | |
| 1,270 | |
Interest expense, net | |
| 11,925 | |
| 13,048 | |
| 36,362 | |
| 40,794 | |
Income (loss) from continuing operations before income taxes | |
| 7,168 | |
| (33,855) | |
| (91,522) | |
| (39,542) | |
Provision for (benefit from) income taxes | |
| 1,290 | |
| (6,035) | |
| 1,770 | |
| (6,655) | |
Income (loss) from continuing operations | |
| 5,878 | |
| (27,820) | |
| (93,292) | |
| (32,887) | |
Net (income) loss attributable to noncontrolling interests from continuing operations | |
| (1,409) | |
| 9,449 | |
| 9,535 | |
| 6,455 | |
Income (loss) from continuing operations attributable to Sequential Brands Group, Inc. and Subsidiaries | | | 4,469 | | | (18,371) | | | (83,757) | | | (26,432) | |
Loss from discontinued operations, net of income taxes | | | (32) | | | (309) | | | (1,203) | | | (122,192) | |
Net income (loss) attributable to Sequential Brands Group, Inc. and Subsidiaries | | $ | 4,437 | | $ | (18,680) | | $ | (84,960) | | $ | (148,624) | |
| | | | | | | | | | | | | |
Earnings (loss) per share from continuing operations: | |
|
| |
|
| |
|
| |
|
| |
Basic and diluted | | $ | 2.71 | | $ | (11.31) | | $ | (50.96) | | $ | (16.36) | |
| | | | | | | | | | | | | |
Loss per share from discontinued operations: | |
|
| |
|
| |
|
| |
|
| |
Basic and diluted | | $ | (0.02) | | $ | (0.19) | | $ | (0.73) | | $ | (75.63) | |
| | | | | | | | | | | | | |
Earnings (loss) per share attributable to Sequential Brands Group, Inc. and Subsidiaries: | |
|
| |
|
| |
|
| |
|
| |
Basic and diluted | | $ | 2.69 | | $ | (11.50) | | $ | (51.69) | | $ | (92.00) | |
| | | | | | | | | | | | | |
Weighted-average common shares outstanding: | |
|
| |
| | |
|
| |
| | |
Basic and diluted | |
| 1,650,420 | |
| 1,623,802 | |
| 1,643,517 | |
| 1,615,558 | |
See Notes to Condensed Consolidated Financial Statements.
6
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(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 |
| - | |
| - | |
| 11,443 | |
| - | |
| 726 | |
| - | |
| - | |
| - | |
| - | |
| 726 | |
| - | |
| 726 |
Unrealized loss on interest rate swaps, net of tax | | - | | | - | | | - | | | - | | | - | | | (1,480) | | | - | | | - | | | - | | | (1,480) | | | - | | | (1,480) |
Repurchase of common stock |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (3,371) | |
| (170) | |
| (170) | |
| - | |
| (170) |
Noncontrolling interest distributions |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (1,093) | |
| (1,093) |
Net income attributable to noncontrolling interests |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 1,539 | |
| 1,539 |
Net loss attributable to common stockholders |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (125,345) | |
| - | |
| - | |
| (125,345) | |
| - | |
| (125,345) |
Balance at March 31, 2019 |
| - | | $ | - | |
| 1,661,197 | | $ | 16 | | $ | 515,131 | | $ | (3,034) | | $ | (360,068) | |
| (44,936) | | $ | (4,396) | | $ | 147,649 | | $ | 71,172 | | $ | 218,821 |
Stock-based compensation |
| - | |
| - | |
| 9,586 | |
| - | |
| 567 | |
| - | |
| - | |
| - | |
| - | |
| 567 | |
| - | |
| 567 |
Shares issued from treasury stock |
| - | |
| - | |
| - | |
| - | |
| (1,124) | |
| - | |
| - | |
| 11,614 | |
| 1,124 | |
| - | |
| - | |
| - |
Unrealized loss on interest rate swaps, net of tax | | - | | | - | | | - | | | - | | | - | | | (1,684) | | | - | | | - | | | - | | | (1,684) | | | - | | | (1,684) |
Repurchase of common stock |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (2,341) | |
| (78) | |
| (78) | |
| - | |
| (78) |
Noncontrolling interest distributions |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (2,046) | |
| (2,046) |
Net income attributable to noncontrolling interests |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 1,455 | |
| 1,455 |
Net loss attributable to common stockholders |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (4,599) | |
| - | |
| - | |
| (4,599) | |
| - | |
| (4,599) |
Balance at June 30, 2019 |
| - | | $ | - | |
| 1,670,783 | | $ | 16 | | $ | 514,574 | | $ | (4,718) | | $ | (364,667) | |
| (35,663) | | $ | (3,350) | | $ | 141,855 | | $ | 70,581 | | $ | 212,436 |
Stock-based compensation |
| - | |
| - | |
| 577 | |
| - | |
| 150 | |
| - | |
| - | |
| - | |
| - | |
| 150 | |
| - | |
| 150 |
Unrealized gain on interest rate swaps, net of tax | | - | | | - | | | - | | | - | | | - | | | 78 | | | - | | | - | | | - | | | 78 | | | - | | | 78 |
Noncontrolling interest distributions |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (1,064) | |
| (1,064) |
Net loss attributable to noncontrolling interests |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (9,449) | |
| (9,449) |
Net loss attributable to common stockholders |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (18,680) | |
| - | |
| - | |
| (18,680) | |
| - | |
| (18,680) |
Balance at September 30, 2019 |
| - | | $ | - | |
| 1,671,360 | | $ | 16 | | $ | 514,724 | | $ | (4,640) | | $ | (383,347) | |
| (35,663) | | $ | (3,350) | | $ | 123,403 | | $ | 60,068 | | $ | 183,471 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2020 |
| - | | $ | - | |
| 1,671,937 | | $ | 17 | | $ | 515,151 | | $ | (4,096) | | $ | (394,126) | |
| (27,419) | | $ | (3,230) | | $ | 113,716 | | $ | 59,324 | | $ | 173,040 |
Stock-based compensation |
| - | |
| - | |
| 5,000 | |
| - | |
| 231 | |
| - | |
| - | |
| - | |
| - | |
| 231 | |
| - | |
| 231 |
Unrealized loss on interest rate swaps | | - | | | - | | | - | | | - | | | - | | | (721) | | | - | | | - | | | - | | | (721) | | | - | | | (721) |
Repurchase of common stock |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (2,448) | |
| (36) | |
| (36) | |
| - | |
| (36) |
Shares issued from treasury stock |
| - | |
| - | |
| - | |
| - | |
| (6) | |
| - | |
| - | |
| 577 | |
| 6 | |
| - | |
| - | |
| - |
Noncontrolling interest distributions |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (2,016) | |
| (2,016) |
Net loss attributable to noncontrolling interests |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (12,006) | |
| (12,006) |
Net loss attributable to common stockholders |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (86,613) | |
| - | |
| - | |
| (86,613) | |
| - | |
| (86,613) |
Balance at March 31, 2020 |
| - | | $ | - | |
| 1,676,937 | | $ | 17 | | $ | 515,376 | | $ | (4,817) | | $ | (480,739) | |
| (29,290) | | $ | (3,260) | | $ | 26,577 | | $ | 45,302 | | $ | 71,879 |
Stock-based compensation |
| - | |
| - | |
| - | |
| - | |
| 94 | |
| - | |
| - | |
| - | |
| - | |
| 94 | |
| - | |
| 94 |
Unrealized gain on interest rate swaps | | - | | | - | | | - | | | - | | | - | | | 813 | | | - | | | - | | | - | | | 813 | | | - | | | 813 |
Repurchase of common stock |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (604) | |
| (5) | |
| (5) | |
| - | |
| (5) |
Shares issued from treasury stock |
| - | |
| - | |
| - | |
| - | |
| (28) | |
| - | |
| - | |
| 3,399 | |
| 28 | |
| - | |
| - | |
| - |
Net income attributable to noncontrolling interests |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| 1,062 | |
| 1,062 |
Net loss attributable to common stockholders |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| (2,784) | |
| - | |
| - | |
| (2,784) | |
| - | |
| (2,784) |
Balance at June 30, 2020 |
| - | | $ | - | |
| 1,676,937 | | $ | 17 | | $ | 515,442 | | $ | (4,004) | | $ | (483,523) | |
| (26,495) | | $ | (3,237) | | $ | 24,695 | | $ | 46,364 | | $ | 71,059 |
Stock-based compensation | | - | |
| - | | | - | | | - | | | 31 | | | - | | | - | | | - | | | - | | | 31 | | | - | | | 31 |
Unrealized gain on interest rate swaps | | - | | | - | | | - | | | - | | | - | | | 777 | | | - | | | - | | | - | | | 777 | | | - | | | 777 |
Reverse Stock Split | | - | | | - | | | (448) | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Shares issued from treasury stock | | - | |
| - | | | - | | | - | | | (3) | | | - | | | - | | | 577 | | | 3 | | | - | | | - | | | - |
Noncontrolling interest distributions | | - | |
| - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (530) | | | (530) |
Net income attributable to noncontrolling interests | | - | |
| - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,409 | | | 1,409 |
Net income attributable to common stockholders | | - | |
| - | | | - | | | - | | | - | | | - | | | 4,437 | | | - | | | - | | | 4,437 | | | - | | | 4,437 |
Balance at September 30, 2020 | | - | | $ | - | | | 1,676,489 | | $ | 17 | | $ | 515,470 | | $ | (3,227) | | $ | (479,086) | | | (25,918) | | $ | (3,234) | | $ | 29,940 | | $ | 47,243 | | $ | 77,183 |
See Notes to Condensed Consolidated Financial Statements.
7
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Nine Months Ended September 30, | ||||
| | 2020 | | 2019 | ||
Cash flows from operating activities | | | | | | |
Loss from continuing operations | | $ | (93,292) | | $ | (32,887) |
Loss from discontinued operations, net of tax | | | (1,203) | | | (122,192) |
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | |
|
| |
|
|
Provision for bad debts | |
| 132 | |
| 2,812 |
Depreciation and amortization | |
| 16,820 | |
| 2,586 |
Stock-based compensation | |
| 356 | |
| 1,299 |
Amortization of deferred financing costs | |
| 4,963 | |
| 4,705 |
Impairment charges | |
| 85,590 | |
| 33,109 |
(Gain) loss on equity securities | |
| (485) | |
| 85 |
Loss from equity method investment | | | 227 | | | 25 |
Loss on interest rate swaps | | | 3,673 | | | 1,276 |
Amortization of operating leases | | | 5,065 | | | 4,648 |
Gain on sale of assets | | | (4,624) | | | - |
Deferred income taxes | |
| 1,377 | |
| (51,564) |
Changes in operating assets and liabilities: | |
| | |
|
|
Accounts receivable | |
| (3,601) | |
| 5,379 |
Prepaid expenses and other assets | |
| (1,659) | |
| (76) |
Accounts payable and accrued expenses | |
| (1,023) | |
| (1,616) |
Deferred revenue | |
| (3,515) | |
| (3,258) |
Other liabilities | |
| (5,275) | |
| (4,410) |
Cash provided by (used in) operating activities from continuing operations | |
| 4,729 | |
| (37,887) |
Cash provided by operating activities from discontinued operations | |
| 3,907 | |
| 42,585 |
Cash provided by operating activities | |
| 8,636 | |
| 4,698 |
| | | | | | |
Cash flows from investing activities | |
|
| |
|
|
Investments in intangible assets, including registration and renewal costs | |
| (96) | |
| (100) |
Purchases of property and equipment | |
| (73) | |
| (48) |
Proceeds from sale of trademarks | |
| 4,850 | |
| - |
Proceeds from sale of discontinued operations | |
| - | |
| 165,928 |
Cash provided by investing activities from continuing operations | |
| 4,681 | |
| 165,780 |
Cash used in investing activities from discontinued operations | |
| - | |
| (44) |
Cash provided by investing activities | |
| 4,681 | |
| 165,736 |
| | | | | | |
Cash flows from financing activities | |
|
| |
|
|
Proceeds from long-term debt | |
| 25,382 | |
| - |
Payments of long-term debt | |
| (19,900) | |
| (173,161) |
Proceeds from Paycheck Protection Program | |
| 769 | |
| |
Deferred financing costs | |
| (3,057) | |
| (3,250) |
Repurchases of common stock | |
| (41) | |
| (248) |
Noncontrolling interest distributions | |
| (2,546) | |
| (4,203) |
Cash provided by (used in) financing activities from continuing operations | |
| 607 | |
| (180,862) |
Cash used in financing activities from discontinued operations | |
| - | |
| (574) |
Cash provided by (used in) financing activities | |
| 607 | |
| (181,436) |
| | | | | | |
Cash and restricted cash: | | | | | | |
Net increase (decrease) in cash and restricted cash | |
| 13,924 | |
| (11,002) |
Balance — Beginning of period | |
| 8,307 | |
| 16,138 |
Balance — End of period | | $ | 22,231 | | $ | 5,136 |
| | | | | | |
Reconciliation to amounts on condensed consolidated balance sheets | |
|
| |
|
|
Cash | | $ | 21,937 | | $ | 3,097 |
Restricted cash | |
| 294 | |
| 2,039 |
Total cash and restricted cash | | $ | 22,231 | | $ | 5,136 |
| | | | | | |
Supplemental disclosures of cash flow information | |
|
| |
|
|
Cash paid for: | |
|
| |
|
|
Interest | | $ | 33,745 | | $ | 41,331 |
Taxes | | $ | 135 | | $ | 89 |
| | | | | | |
Non-cash investing and financing activities | |
| | |
|
|
Accrued purchases of property and equipment at period end | | $ | - | | $ | 17 |
Unrealized gain (loss) on interest rate swaps, net during the period | | $ | 869 | | $ | (3,086) |
Receivable for sale of trademark rights | | $ | 11,315 | | $ | - |
See Notes to Condensed Consolidated Financial Statements.
8
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)
1. Organization and Nature of Operations
Overview
Sequential Brands Group, Inc. (the “Company”) owns a portfolio of consumer brands in the active and lifestyle 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 September 30, 2020, the Company had over ninety licensees, with wholesale licensees comprising a significant majority.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations or cash flows. It is the Company’s opinion, however, that the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 31, 2020, which contains the audited consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2019, 2018 and 2017. The financial information as of December 31, 2019 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The interim results for September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.
Reverse Stock Split and Reclassification of Prior Periods
On July 27, 2020, the Company’s previously announced 1 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-Q have been adjusted to reflect the Reverse Stock Split. The stated capital attributable to common stock on the Company’s condensed 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-Q have been reclassified to reflect this change.
9
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
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. 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 Third Amended and Restated First Lien Credit Agreement with Bank of America, N.A. as administrative and collateral agent (the “Amended BoA Credit Agreement”). During the nine months ended September 30, 2020, the Company made net revolver borrowings of $12.7 million, excluding lender fees, under the Amended BoA Credit Agreement.
As of September 30, 2020, the Company was party to the Amended BoA Credit Agreement and the Fourth 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”). 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 Paycheck Protection Program (“PPP”) which was established under the Coronavirus Aid, Relief, and Economic Security Act (“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 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. 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 unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
10
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting 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 unaudited condensed consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Discontinued Operations
The Company accounted for the sale of Martha Stewart Living Omnimedia, Inc. (“MSLO”) in accordance with Accounting Standards Codification (“ASC”) 360, Accounting for Impairment or Disposal of Long-Lived Assets (“ASC 360”) and Accounting Standards 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 360. ASC 360 requires that a component of an entity that has been disposed of or is classified as held for sale and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, the results of operations for the periods presented are reclassified into separate line items in the unaudited condensed consolidated statements of operations. Assets and liabilities are also reclassified into separate line items on the related condensed consolidated 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.
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 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 if certain performance targets are achieved during the three calendar years ending December 31, 2020, December 31, 2021 and December 31, 2022. 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 3), in accordance with ASC 205, Discontinued Operations, we have classified the results of MSLO as discontinued operations in our unaudited condensed 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 condensed consolidated balance sheets for all periods presented. All amounts included in the notes to the unaudited condensed consolidated financial statements relate to continuing operations unless otherwise noted.
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. 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
11
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
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
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.
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the current portion of deferred revenue on the condensed consolidated balance sheets.
The Company disaggregates its revenue from continuing operations into two categories: licensing agreements and other, which is comprised of revenue from sources such as sales commissions and vendor placement commissions.
Commission revenues and vendor placement commission revenues are recorded in the period the commission is earned.
Restricted Cash
Restricted cash consists of cash deposited with a financial institution required as collateral for the Company’s cash-collateralized letter of credit facilities.
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
12
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
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 unaudited condensed consolidated financial statements. The primary impact to the Company is the timing of recording expected credit losses on its trade receivables. Accounts receivable balances deemed to be uncollectible are written off after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was $2.4 million and $5.8 million as of September 30, 2020 and December 31, 2019, respectively.
The Company’s accounts receivable, net amounted to $42.9 million and $39.5 million as of September 30, 2020 and December 31, 2019, respectively. Two licensees accounted for approximately 50% (30% and 20%) of the Company’s total consolidated accounts receivable balance as of September 30, 2020 and two licensees accounted for approximately 51% (33%, and 18%) of the Company’s total consolidated accounts receivable balance as of December 31, 2019. The Company does not believe the accounts receivable balance from these licensees represents a significant collection risk based on past collection 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 condensed consolidated balance sheets and, at the time of purchase, are reported in the condensed consolidated statements of cash flows as an investing activity. Gains and losses on equity securities are recognized through continuing operations. The Company recognized a gain on its equity securities of $0.2 million and loss on its equity securities of $0.4 million recorded in other (income) expense from continuing operations in the unaudited condensed consolidated statements of operations for the three months ended September 30, 2020 and 2019, respectively. The Company recognized a gain on its equity securities of $0.5 million and loss on its equity securities of $0.1 million recorded in other (income) expense from continuing operations on the unaudited condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019.
Equity Method Investments
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, which is included in other assets in the condensed consolidated balance sheets. The Company’s share of earnings from its equity method investee, which was not material for the three and nine months ended September 30, 2020 and 2019, is included in other expense (income) from continuing operations in the unaudited condensed 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 transaction 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 included in the condensed consolidated balance sheet at September 30, 2020.
The Company evaluates its equity method investments 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 investments and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other-than-temporary.
13
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
Intangible Assets
On an annual basis (October 1st) and as needed, the Company tests indefinite-lived trademarks for impairment through the use of discounted cash flow models. Assumptions used in the Company’s discounted cash flow models include: (i) discount rates; (ii) projected average 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. 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 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.
The 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 amortized on a straight-line basis over the remaining estimated useful life of the trademark of fifteen years. The Company recorded amortization expense of $0.6 million and $1.2 million related to this trademark during the three and nine months ended September 30, 2020, respectively.
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 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. 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 Company amortized $3.4 million and $10.4 million related to this trademark during the three and nine months ended September 30, 2020, respectively.
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 3) 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 unaudited condensed consolidated statements of operations. See Note 3 and Note 7.
During the three months ended September 30, 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. 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 unaudited condensed consolidated statements of operations. See Note 4 and Note 7.
Treasury Stock
Treasury stock is recorded at cost as a reduction of equity in the condensed consolidated balance sheets.
14
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
Stock-Based Compensation
Compensation cost for restricted stock is measured using the quoted market price of the Company’s common stock at the date the common stock is granted. For restricted stock 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 expected 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. Compensation cost is reduced for forfeitures as they occur in accordance with ASU 2016-09, Simplifying the Accounting for Share-Based Payments (“ASU 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 for grants to non-employees on a straight-line basis over the period of the grant.
Leases
The Company has operating leases for certain properties 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. 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 6 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, Balance Sheet Classification of Deferred 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. The Company increased its valuation allowance due to the 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.
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
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
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 net operating losses (“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 approximately $0.1 million which was recorded as a receivable as of December 31, 2019; payment of this AMT credit was accelerated under the CARES Act. The Company received the AMT refund as of September 30, 2020.
The Company applies the Financial Accounting Standards Board (“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 nine months ended September 30, 2020 and year ended December 31, 2019, 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, 2016 through December 31, 2019.
Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) attributable to Sequential Brands Group, Inc. and Subsidiaries is computed by dividing net income (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. Basic weighted-average common shares outstanding is equivalent to diluted weighted-average common shares outstanding for the three and nine months ended September 30, 2020.
The computation of diluted EPS for the three and nine months ended September 30, 2020 and 2019 excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:
| | | | | | | | | |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
Unvested restricted stock |
| — |
| 965 |
| 3,564 |
| 12,651 |
|
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk consist primarily of cash, restricted cash and accounts 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 are deposited with high quality financial institutions. At times, however, such cash and restricted cash may be in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit. The Company has not experienced any losses in such accounts as of September 30, 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 Company adopted ASU 2016-13, Financial
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
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 allowance for doubtful accounts is based upon the expected collectability of all accounts receivable.
Customer Concentrations
The Company recorded net revenues from continuing operations of $24.0 million and $25.4 million during the three months ended September 30, 2020 and 2019, respectively. During the three months ended September 30, 2020, three licensees represented at least 10% of net revenue from continuing operations, accounting for 17%, 17% and 17% of the Company’s net revenue from continuing operations. During the three months ended September 30, 2019, three licensees represented at least 10% of net revenue from continuing operations, accounting for 17%, 17% and 16% of the Company’s net revenue from continuing operations.
The Company recorded net revenues from continuing operations of $66.8 million and $77.3 million during the nine months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020, three licensees represented at least 10% of net revenue from continuing operations, accounting for 18%, 18% and 17% of the Company’s net revenue from continuing operations. During the nine months ended September 30, 2019, three licensees represented at least 10% of net revenue from continuing operations, accounting for 19%, 16% and 14% 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 Interest
Noncontrolling interest recorded for the three months ended September 30, 2020 in continuing operations represents income allocations to Elan Polo International, Inc., a member of DVS Footwear International, LLC and With You, Inc., a member of With You LLC (the partnership between the Company and Jessica Simpson). Noncontrolling interest recorded for the nine months ended September 30, 2020 in continuing operations represents an income allocation to Elan Polo International, Inc. and a loss allocation to With You, Inc.
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 Executive 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
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
offices 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 certain commissions.
New Accounting Pronouncements
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates.
ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022. The Company is currently evaluating its contracts and hedging relationships that reference LIBOR and the potential impact of adopting the new guidance.
ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“ASU 2019-12”), which simplifies the accounting 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 the recognition of deferred tax liabilities related to outside basis differences. The standard also simplifies GAAP for other areas of ASC 740 by clarifying and amending existing guidance related to accounting for franchise taxes and accounting for transactions that result in a step-up in the tax basis of goodwill.
ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020, and early adoption is permitted. The Company does not expect the adoption of ASU 2019-12 to have a material impact on the Company’s unaudited condensed consolidated financial statements.
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 Buyer entered into on April 16, 2019. In addition, the Purchase Agreement provides for an earnout of up to $40,000,000 if certain performance targets are achieved during the three calendar years ending December 31, 2020, December 31, 2021 and December 31, 2022. 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. The Company recorded a pre-tax loss of $1.6 million and $2.0 million on the sale of MSLO during the nine months ended September 30, 2020 and 2019, respectively which is recorded in discontinued operations in the unaudited condensed consolidated statements of operations.
During the nine months ended September 30, 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 as indicated by the sales price as compared to the carrying values of the intangible assets included in the
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2020
(UNAUDITED)
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 unaudited condensed consolidated statements of operations. The Company recorded a net loss from discontinued operations of less than $0.1 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively. The Company recorded a net loss from discontinued operations of $1.2 million and $122.2 million for the nine months ended September 30, 2020 and 2019, respectively.
The financial results of MSLO for the three and nine months ended September 30, 2020 and 2019 are presented as income (loss) from discontinued operations, net of taxes in the unaudited condensed consolidated statements of operations. The following table presents the discontinued operations in the unaudited condensed consolidated statements of operations:
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Net revenue | | $ | - | | $ | - | | $ | - | | $ | 18,771 |
Operating expenses | |
| - | |
| 114 | |
| - | |
| 16,503 |
Impairment charges | | | - | | | - | | | - | | ||