|
Item 1.
|
Financial Statements
|
SEQUENTIAL
BRANDS GROUP, INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(see Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,581,695
|
|
|
$
|
242,791
|
|
Restricted cash
|
|
|
35,320
|
|
|
|
35,268
|
|
Accounts receivable, license agreements
|
|
|
45,000
|
|
|
|
-
|
|
Receivables arising from DVS transaction
|
|
|
1,080,000
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
15,116
|
|
|
|
50,000
|
|
Current assets held for disposition from discontinued operations of wholesale business subsidiary
|
|
|
344,974
|
|
|
|
339,184
|
|
Current assets held for disposition from discontinued operations of retail subsidiary
|
|
|
-
|
|
|
|
60,883
|
|
Total current assets
|
|
|
8,102,105
|
|
|
|
728,126
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation and amortization
|
|
|
237,273
|
|
|
|
300,049
|
|
Trademarks, net of accumulated amortization
|
|
|
4,254,943
|
|
|
|
391,575
|
|
Goodwill
|
|
|
428,572
|
|
|
|
428,572
|
|
Deferred financing costs, net and other assets
|
|
|
739,219
|
|
|
|
25,092
|
|
Long-term assets held for disposition from discontinued operations of wholesale business
|
|
|
21,092
|
|
|
|
54,160
|
|
Long-term assets held for disposition from discontinued operations of retail subsidiary
|
|
|
105,858
|
|
|
|
260,825
|
|
Total assets
|
|
$
|
13,889,062
|
|
|
$
|
2,188,399
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,650,584
|
|
|
$
|
1,618,374
|
|
Deferred license revenue, current portion
|
|
|
566,926
|
|
|
|
1,325,500
|
|
Note payable to related parties
|
|
|
-
|
|
|
|
750,000
|
|
Note payable
|
|
|
-
|
|
|
|
1,000,000
|
|
Current liabilities held for disposition from discontinued operations of wholesale business
|
|
|
673,764
|
|
|
|
1,762,552
|
|
Current liabilities held for disposition from discontinued operations of retail subsidiary
|
|
|
337,271
|
|
|
|
403,805
|
|
Total current liabilities
|
|
|
3,228,545
|
|
|
|
6,860,231
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
Deferred license revenue, long-term portion
|
|
|
446,800
|
|
|
|
455,200
|
|
Deferred lease obligations held for disposition from discontinued operations of retail subsidiary
|
|
|
103,305
|
|
|
|
288,765
|
|
Senior secured convertible debentures
|
|
|
3,146,020
|
|
|
|
-
|
|
Total long-term liabilities
|
|
|
3,696,125
|
|
|
|
743,965
|
|
Total liabilities
|
|
|
6,924,670
|
|
|
|
7,604,196
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock Series A, $0.001 par value, 19,400 shares authorized; 14,500 shares issued and outstanding at June 30, 2012; no preferred shares issued or outstanding as of December 31, 2011
|
|
|
15
|
|
|
|
-
|
|
Common stock, $0.001 par value, 150,000,000 shares authorized; 2,400,171 shares issued and outstanding at June 30, 2012 and December 31, 2011
|
|
|
2,400
|
|
|
|
2,400
|
|
Additional paid-in capital
|
|
|
13,935,940
|
|
|
|
2,372,367
|
|
Accumulated deficit
|
|
|
(9,097,963
|
)
|
|
|
(7,790,564
|
)
|
Total stockholders’ equity (deficit)
|
|
|
4,840,392
|
|
|
|
(5,415,797
|
)
|
Noncontrolling interest
|
|
|
2,124,000
|
|
|
|
-
|
|
Total
equity
(deficit)
|
|
|
6,964,392
|
|
|
|
(5,415,797
|
)
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
13,889,062
|
|
|
$
|
2,188,399
|
|
See Notes to Condensed Consolidated Financial
Statements.
SEQUENTIAL
BRANDS GROUP, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(see Note 16)
|
|
|
|
|
|
(see Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,045,085
|
|
|
$
|
84,922
|
|
|
$
|
2,099,599
|
|
|
$
|
84,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,650,771
|
|
|
|
70,126
|
|
|
|
2,609,490
|
|
|
|
78,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(605,686
|
)
|
|
|
14,796
|
|
|
|
(509,891
|
)
|
|
|
6,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
190,740
|
|
|
|
15,167
|
|
|
|
334,329
|
|
|
|
30,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(796,426
|
)
|
|
|
(371
|
)
|
|
|
(844,220
|
)
|
|
|
(23,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
900
|
|
|
|
-
|
|
|
|
10,900
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(797,326
|
)
|
|
|
(371
|
)
|
|
|
(855,120
|
)
|
|
|
(24,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations of wholesale business
|
|
|
210,319
|
|
|
|
(3,382,229
|
)
|
|
|
(5,639
|
)
|
|
|
(2,427,097
|
)
|
Loss from discontinued operations of retail subsidiary
|
|
|
(291,375
|
)
|
|
|
(244,814
|
)
|
|
|
(446,640
|
)
|
|
|
(575,220
|
)
|
Income (loss) from discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
136,792
|
|
|
|
-
|
|
|
|
(125,771
|
)
|
Gain on sale of member interest in subsidiary
|
|
|
-
|
|
|
|
2,012,323
|
|
|
|
-
|
|
|
|
2,012,323
|
|
Net loss from discontinued operations
|
|
|
(81,056
|
)
|
|
|
(1,477,928
|
)
|
|
|
(452,279
|
)
|
|
|
(1,115,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(878,382
|
)
|
|
|
(1,478,299
|
)
|
|
|
(1,307,399
|
)
|
|
|
(1,140,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in continued operations
|
|
|
-
|
|
|
|
(30,720
|
)
|
|
|
-
|
|
|
|
(18,719
|
)
|
Noncontrolling interest in discontinued operations of wholesale business
|
|
|
-
|
|
|
|
1,231,321
|
|
|
|
-
|
|
|
|
2,495,499
|
|
Noncontrolling interest in discontinued operations of retail subsidiary
|
|
|
-
|
|
|
|
122,407
|
|
|
|
-
|
|
|
|
287,610
|
|
Noncontrolling interest in discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
(68,396
|
)
|
|
|
-
|
|
|
|
62,885
|
|
|
|
|
-
|
|
|
|
1,254,612
|
|
|
|
-
|
|
|
|
2,827,275
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(878,382
|
)
|
|
$
|
(223,687
|
)
|
|
$
|
(1,307,399
|
)
|
|
$
|
1,687,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(0.33
|
)
|
|
|
(0.01
|
)
|
|
|
(0.35
|
)
|
|
|
(0.02
|
)
|
Discontinued operations
|
|
|
(0.04
|
)
|
|
|
(0.08
|
)
|
|
|
(0.19
|
)
|
|
|
0.72
|
|
Attributable to common stockholders
|
|
|
(0.37
|
)
|
|
|
(0.09
|
)
|
|
|
(0.54
|
)
|
|
|
0.70
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
2,400,171
|
|
|
|
2,400,171
|
|
|
|
2,400,171
|
|
|
|
2,400,171
|
|
See Notes to Condensed
Consolidated Financial Statements.
SEQUENTIAL
BRANDS GROUP, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(see Note 16)
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,307,399
|
)
|
|
$
|
(1,140,138
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss from discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
125,771
|
|
Gain on sale of discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
(2,012,323
|
)
|
Loss from discontinued operations of wholesale business
|
|
|
5,639
|
|
|
|
2,427,097
|
|
Loss from discontinued operations of retail subsidiary
|
|
|
446,640
|
|
|
|
575,220
|
|
Depreciation and amortization
|
|
|
85,035
|
|
|
|
78,328
|
|
Stock based compensation
|
|
|
1,874
|
|
|
|
75,560
|
|
Warrant issued for services
|
|
|
-
|
|
|
|
89,000
|
|
Amortization of valuation discount and deferred financing costs
|
|
|
311,252
|
|
|
|
-
|
|
Loss on disposal of fixed assets
|
|
|
6,448
|
|
|
|
-
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
295,874
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
34,884
|
|
|
|
-
|
|
Other assets
|
|
|
12,845
|
|
|
|
(8,500
|
)
|
Accounts payable and accrued expenses
|
|
|
55,499
|
|
|
|
47,655
|
|
Deferred license revenue
|
|
|
(1,107,848
|
)
|
|
|
-
|
|
Income taxes payable
|
|
|
(9,558
|
)
|
|
|
800
|
|
Net cash flows (used in) provided by operating activities from continuing operations
|
|
|
(1,168,815
|
)
|
|
|
258,470
|
|
Net cash flows used in operating activities from discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
(119,282
|
)
|
Net cash flows used in operating activities from discontinued operations of wholesale business
|
|
|
(1,067,149
|
)
|
|
|
(1,790,127
|
)
|
Net cash flows used in operating activities from discontinued operations of retail subsidiary
|
|
|
(482,784
|
)
|
|
|
(481,536
|
)
|
Net cash flows used in operating activities
|
|
|
(2,718,748
|
)
|
|
|
(2,132,475
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of DVS
|
|
|
(8,550,000
|
)
|
|
|
-
|
|
Proceeds from sale of non-core assets derived from DVS acquisition
|
|
|
3,590,000
|
|
|
|
-
|
|
Proceeds from sale of receivable
|
|
|
-
|
|
|
|
722,916
|
|
(Increase) decrease in restricted cash
|
|
|
(52
|
)
|
|
|
121,052
|
|
Acquisition of trademarks
|
|
|
-
|
|
|
|
(17,496
|
)
|
Acquisition of property and equipment
|
|
|
(12,074
|
)
|
|
|
(104,244
|
)
|
Net cash flows (used in) provided by investing activities from continuing operations
|
|
|
(4,972,126
|
)
|
|
|
722,228
|
|
Cash proceeds received in sale of discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
900,000
|
|
Net cash flows used in investing activities from discontinued operations of J. Lindeberg subsidiaries
|
|
|
-
|
|
|
|
(9,213
|
)
|
Net cash flows used in investing activities from discontinued operations of wholesale business
|
|
|
-
|
|
|
|
(2,518
|
)
|
Net cash flows used in investing activities from discontinued operations of retail subsidiary
|
|
|
-
|
|
|
|
(1,350
|
)
|
Net cash flows (used in) provided by investing activities
|
|
|
(4,972,126
|
)
|
|
|
1,609,147
|
|
Condensed Consolidated Statements of Cash
Flows are continued on the following page.
SEQUENTIAL BRANDS GROUP, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
|
|
Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(see Note 16)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of note payable
|
|
$
|
(1,000,000
|
)
|
|
$
|
-
|
|
Proceeds from senior secured convertible debentures
|
|
|
14,500,000
|
|
|
|
-
|
|
Deferred financing costs
|
|
|
(844,222
|
)
|
|
|
-
|
|
Investment by noncontrolling interest member
|
|
|
2,124,000
|
|
|
|
-
|
|
Repayment of note payable to related parties
|
|
|
(750,000
|
)
|
|
|
-
|
|
Net cash flows provided by financing activities from continuing operations
|
|
|
14,029,778
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,338,904
|
|
|
|
(523,328
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
242,791
|
|
|
|
1,184,743
|
|
Cash and cash equivalents, end of period
|
|
$
|
6,581,695
|
|
|
$
|
661,415
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
82,019
|
|
|
$
|
75,498
|
|
Income taxes paid
|
|
|
23,047
|
|
|
|
59,065
|
|
Noncash investing and financing transaction:
|
|
|
|
|
|
|
|
|
Fair value of warrants issued in financing transaction
|
|
|
4,214,857
|
|
|
|
-
|
|
Debt discount – beneficial conversion feature on senior secured convertible debentures
|
|
|
7,346,857
|
|
|
|
-
|
|
Accumulated noncontrolling interest upon sale of discontinued operations
|
|
|
-
|
|
|
|
(1,843,727
|
)
|
Receivable received in sale of member interest in subsidiary
|
|
|
-
|
|
|
|
750,000
|
|
See Notes to Condensed
Consolidated Financial Statements.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
1.
|
Presentation of Interim Information
|
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q
and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments that,
in the opinion of the management of Sequential Brands Group, Inc. (the “Company”) and subsidiaries are considered necessary
for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results
of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future
period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements
of the Company included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011.
The
preparation of consolidated financial statements in conformity with
U.S. GAAP
requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. The significant assets and liabilities
that require management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements
included inventories, accounts receivable and due to factor, intangible assets, deferred taxes, accrued expenses, income taxes,
stock based compensation and noncontrolling interest. Management is also required to make significant estimates and
assumptions related to its disclosure of litigation and the recording of related contingent assets or liabilities, if any.
Reverse Stock Split
On September 11, 2012,
the Company effected a 1-for-15 reverse stock split of its common stock. As a result of the reverse stock split, every fifteen
shares of common stock of the Company were combined into one share of common stock. Immediately after the September 11, 2012 effective
date, the Company had approximately 2.4 million shares of common stock issued and outstanding. All share and per share amounts
have been retroactively restated to reflect the reverse stock split.
|
2.
|
Organization and Nature of Operations
|
Overview
Since the Company’s
formation in 2005, the Company has been a designer, marketer and wholesale provider of branded apparel and apparel accessories.
Commencing in July 2008, the Company implemented a retail strategy and opened retail stores to sell its branded products. In the
second half of 2011, the Company decided to change its business model to focus on licensing and brand management. In connection
with the change in the Company’s business model, the Company is presently winding down the wholesale distribution of its
branded apparel and apparel accessories, liquidating its existing inventory and closing its remaining retail stores. The Company
expects to complete its transition from a wholesale and retail company to a licensing and brand management company by the end of
2012. To reflect the Company’s business transition, in March 2012 the Company’s corporate name was changed from People’s
Liberation, Inc. (“People’s Liberation”) to Sequential Brands Group, Inc. The Company’s wholesale and retail
operations are referred to as “Historical Operations” in these notes to the Company’s condensed consolidated
financial statements.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Licensing and Brand Management Business
As a licensing and
brand management company, the Company plans to promote, market, and license a portfolio of consumer brands. Presently, the Company’s
brands include
William Rast
®,
People’s Liberation
® and
DVS
® and the Company intends to grow
its portfolio of brands by acquiring rights to additional brands. The Company has licensed and intends to license its brands in
a variety of categories to retailers, wholesalers and distributors in the United States and in certain international territories.
In the Company’s licensing arrangements, the Company’s licensing partners will be responsible for designing, manufacturing
and distributing the Company’s licensed products, subject to the Company’s continued oversight and marketing support.
Currently, the Company has one direct-to-retail and five wholesale licenses. In its direct-to-retail license, the Company granted
JC Penney, a national retailer, the exclusive right to distribute William Rast branded apparel in a broad range of product categories
through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce distribution channels
which are targeted to consumers in the United States. In the Company’s wholesale licenses, the Company grants rights to a
single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to multiple
stores within an approved channel of distribution.
Historical Operations
Wholesale Operations
Since the Company’s
inception in 2005, in the United States, the Company has distributed its William Rast branded merchandise and, through April 26,
2011, its J. Lindeberg branded merchandise to better specialty stores, boutiques and department stores, such as Nordstrom, Saks
Fifth Avenue and Neiman Marcus, as well as online at various websites including williamrast.com, jlindebergusa.com and Zappos.com.
In 2012, the Company decided to discontinue its wholesale operations completely. For the remainder of 2012, the Company will continue
to sell William Rast and People’s Liberation branded apparel on a limited basis through its domestic wholesale operations
in order to liquidate its existing inventory.
As part of the Company’s
Historical Operations, the Company also sold its William Rast branded apparel products internationally in select countries directly
and through agents and distributors to better department stores and boutiques. The Company’s distributors purchased products
at wholesale prices for resale in their respective territories and marketed, sold, warehoused and shipped William Rast branded
apparel products at their expense. The Company’s agents were paid a commission on net sales of the Company’s William
Rast products. In 2012, the Company expects to have an immaterial amount of sales of its William Rast and People’s Liberation
branded apparel from its international wholesale operations.
Retail Operations
The Company’s
Historical Operations also include the sale of William Rast branded apparel and accessories through its William Rast branded retail
stores and also through its William Rast branded outlet store. As part of the Company’s transition from a wholesale and retail
provider of apparel and apparel accessories to a brand management and licensing business, the Company closed its William Rast retail
stores located in Miami and San Jose in November 2011, and its Century City store in June 2012. The Company’s remaining William
Rast retail store is expected to be closed by the end of 2012. The Company has had limited sales from these locations in 2012.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
Through April 26, 2011,
the Company’s J. Lindeberg branded apparel and accessories were sold through its three full-price J. Lindeberg branded retail
stores. The Company sold its interest in its J. Lindeberg business to the Company’s joint venture partner in April 2011,
including its three retail stores.
Corporate Structure
Sequential Brands Group,
Inc., formerly People’s Liberation Inc., is the parent holding company of Versatile Entertainment, Inc. (“Versatile”)
and Bella Rose, LLC (“Bella Rose”), both of which were consolidated under and became wholly-owned subsidiaries of People’s
Liberation on November 22, 2005.
Versatile conducts the Company’s
People’s Liberation brand business and the Company’s William Rast brand business is conducted through Bella Rose, LLC.
In June 2012, the Company
formed DVS Footwear International, LLC (“DVS LLC”). DVS LLC is a collaboration between the Company and Elan Polo International,
Inc. (“Elan Polo”) in which the Company has a 65% economic interest and Elan Polo has a 35% economic interest. DVS
LLC was formed for the purpose of licensing the
DVS
® trademark to third parties primarily in connection with the manufacturing,
distribution, marketing and sale of DVS branded footwear, apparel and apparel accessories (see Note 12).
Structure of William
Rast Business
William Rast Sourcing,
LLC (“William Rast Sourcing”) and William Rast Licensing, LLC (“William Rast Licensing”) are consolidated
under Bella Rose, and through September 30, 2011 were each owned 50% by Bella Rose and 50% by Tennman WR-T, Inc. (“Tennman
WR-T”), an entity owned in part by Justin Timberlake.
Effective as of October
1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. As further described under Note
4 to the Company’s Consolidated Financial Statements, the recapitalization increased the ownership of Bella Rose in each
of William Rast Sourcing and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T as well as other
consideration. Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by Tennman WR-T, and
Bella Rose is entitled to all of the distributable cash from operations and all of the distributable cash from a sale of William
Rast Sourcing or William Rast Licensing that is not paid to Tennman WR-T.
William Rast Retail,
LLC (“William Rast Retail”), a California limited liability company, was formed on August 26, 2009 and is a wholly-owned
subsidiary of William Rast Sourcing. William Rast Retail was formed to operate the Company’s William Rast retail stores.
The operations of William Rast Retail are shown as discontinued operations in the accompanying unaudited condensed consolidated
financial statements.
Structure of J.
Lindeberg Business
Prior to its sale on
April 26, 2011, the Company’s J. Lindeberg brand business was conducted through Bella Rose. From July 1, 2008 through April
26, 2011, J. Lindeberg USA, LLC (“J. Lindeberg USA”) was consolidated under Bella Rose and was owned 50% by Bella Rose
and 50% by J. Lindeberg USA Corp. an entity owned by J. Lindeberg AB, a Swedish corporation. J. Lindeberg USA Retail, LLC, a California
limited liability company, was formed on August 21, 2009 and is a wholly-owned subsidiary of J. Lindeberg USA. J. Lindeberg Retail
was formed to operate the Company’s J. Lindeberg retail stores. The operations of J. Lindeberg are shown as discontinued
operations in the accompanying unaudited condensed consolidated financial statements.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
3.
|
Summary of Significant Accounting Policies
|
Discontinued Operations
The Company accounted
for the sale of its 50% member interest in J. Lindeberg USA and the decisions to close down its wholesale and retail operations
as discontinued operations in accordance with the guidance provided in FASB ASC 360,
Accounting for Impairment or Disposal of
Long-Lived Assets
, which requires that a component of an entity that has been disposed of or is classified as held for sale
and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for
sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, the
results of operations for the periods presented are reclassified into separate line items in the statements of operations. Assets
and liabilities are also reclassified into separate line items on the related balance sheets for the periods presented. The statements
of cash flows for the periods presented are also reclassified to reflect the results of discontinued operations as separate line
items.
Fair Value Measurement
FASB ASC 820-10 –
Fair Value Measurements and Disclosures
(“ASC 820-10”) defines fair value, establishes a framework for measuring
fair value in GAAP and provides for expanded disclosure about fair value measurements. ASC 820-10 applies to all other accounting
pronouncements that require or permit fair value measurements.
The Company
generally determines or calculates the fair value of financial instruments using quoted market prices in active markets when
such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow
analyses, incorporating available market discount rate information for similar types of instruments while estimating for
non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the
discount rate, credit spreads, and estimates of future cash flow.
Assets and liabilities typically recorded
at fair value on a non-recurring basis to which ASC 820-10 applies include:
|
·
|
Non-financial assets and liabilities initially
measured at fair value in an acquisition or business combination, and
|
|
·
|
Long-lived assets measured at fair value
due to an impairment assessment under ASC 360-15.
|
ASC820-10
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.
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
·
|
Level 2 inputs utilize other-than-quoted
prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities
in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
·
|
Level 3 inputs are unobservable and
are typically based on the Company’s own assumptions, including situations where there is little, if any, market
activity. Both observable and unobservable inputs may be used to determine the fair value of positions that are classified
within the Level 3 classification. As a result, the unrealized gains and losses for assets within the Level 3
classification may include changes in fair value that were attributable to both observable (e.g., changes in market interest
rates) and unobservable (e.g., changes in historical company data) inputs.
|
In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company classifies
such financial asset or liability based on the lowest level input that is significant to the fair value measurement in
its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or liability.
As of June 30, 2012
and December 31, 2011, there are no assets or liabilities that are required to be measured at fair value on a recurring basis.
At June 30,
2012 and December 31, 2011, the Company determined that the carrying value of its Level 1 assets, consisting of cash and
cash equivalents and restricted cash, approximated fair value. At June 30, 2012 and December 31, 2011, the Company determined
that the carrying value of its Level 2 assets, consisting of accounts receivable and accounts payable, approximated fair
value. At June 30, 2012 and December 31, 2011, the Company determined that the carrying value of its Level 3 assets,
consisting of notes payable and notes payable to related party, approximated fair value. The fair value of the senior secured
subordinated debentures was approximately $12,328,000 at June 30,2012.
The carrying amounts
of the Company’s cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value
due to their short-term maturities. The remaining financial assets and liabilities that are only disclosed at fair value are comprised
of convertible debentures, notes payable and notes payable to related parties. The Company estimated the fair value of its convertible
debentures by performing discounted cash flow analyses using an appropriate market discount rate. The Company calculated the market
discount rate by obtaining period-end treasury rates for fixed-rate debt, or LIBOR rates for variable-rate debt, for maturities
that correspond to the maturities of our debt adding an appropriate credit spreads derived from information obtained from third-party
financial institutions. These credit spreads take into account factors such as the Company’s credit standing, the maturity
of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.
For purposes of this
fair value disclosure, the Company based its fair value estimate for notes payable and notes payable to related party on an internal
valuation whereby the Company applies the discounted cash flow method to its expected cash flow payments due under these debt agreements
based on market interest rate quotes as of June 30, 2012 and December 31, 2011 for debt with similar risk characteristics and maturities.
Earnings Per Share (Restated)
Basic income (loss)
per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares
outstanding during the year. The diluted income (loss) per share calculation gives effect to all potentially dilutive common shares
outstanding during the year using the treasury stock method for warrants and options.
Warrants representing
2,217,428 shares of common stock at exercise prices ranging from $1.20 to $7.50 per share, stock options representing 451,467 shares
of common stock at exercise prices ranging from $2.25 to $18.75 per share and convertible debentures representing 5,523,809 shares
at an exercise price of $2.63 per share were outstanding as of June 30, 2012, but were excluded from the average number of common
shares outstanding in the calculation of diluted earnings per share for the three and six months ended June 30, 2012 because the
effect of including these shares would have been antidilutive.
Warrants representing
279,333 shares of common stock at exercise prices ranging from $3.00 to $7.50 per share and stock options representing 525,333
shares of common stock at exercise prices ranging from $2.25 to $18.75 per share were outstanding as of June 30, 2011, but were
excluded from the average number of common shares outstanding in the calculation of diluted earnings per share for the six months
ended June 30, 2011 because the average trading price of the Company’s common shares during the period was lower than the
exercise price of any of outstanding equity instruments, and therefore were antidilutive.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Customer and Supplier
Concentrations (Restated)
During the three months
ended June 30, 2012, two customers comprised greater than 10% of the Company’s net revenue from continuing operations. Revenue
derived from these customers amounted to 79.5% and 11.5%, respectively, of net revenue from continuing operations for the three
months ended June 30, 2012. During the six months ended June 30, 2012, these same two customers comprised greater than 10% of the
Company’s net revenue from continuing operations. Revenue derived from these customers amounted to 79.2% and 12.9%, respectively,
of net revenue from continuing operations for the six months ended June 30, 2012. During the three and six months ended June 30,
2011, one customer comprised greater than 10% of the Company’s net revenue. Revenue derived from this customer amounted to
100.0% of net revenue from continuing operations for the three and six months ended June 30, 2011. At June 30, 2012 and 2011, there
were no amounts due from these major customers pursuant to the terms of the related license agreements.
Off Balance Sheet
Risk and Contingencies
The Company is subject
to certain legal proceedings and claims arising in connection with its business (see Note 15).
In accordance with
the bylaws of the Company, officers and directors are indemnified for certain events or occurrences arising as a result of the
officer or director serving in such capacity. The term of the indemnification period is for the lifetime of the officer or director.
The maximum potential amount of future payments the Company could be required to make under the indemnification provisions of its
bylaws is unlimited. At this time, the Company believes the estimated fair value of the indemnification provisions of its bylaws
is minimal and therefore, the Company has not recorded any related liabilities.
In addition to the
indemnification required by the Company’s Amended and Restated Certificate of Incorporation and bylaws, the Company has entered
into indemnity agreements with each of its current officers, former officers Darryn Barber and Thomas Nields, directors and key
employees. These agreements provide for the indemnification of the Company’s directors, officers, former officers and key
employees for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them
by reason of the fact that they are or were the Company’s agents. The Company believes these indemnification provisions and
agreements are necessary to attract and retain qualified directors, officers and employees.
The Company enters
into indemnification provisions under its agreements in the normal course of business, typically with suppliers, customers, distributors
and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered
or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified
party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations
made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination
of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these
indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related
to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has not recorded any related liabilities.
Recently
Issued Accounting Standards
In May 2011, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04,
“Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU No. 2011-4
does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices
outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The
Company adopted ASU No. 2011-04 effective January 1, 2012 and it did not affect the Company’s results of operations, financial
condition or liquidity.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
In June 2011,
the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present
the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires
consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive
income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning
after December 15, 2011. The Company adopted ASU 2011-05 effective January 1, 2012 and it had no affect on the Company’s
disclosures in its financial statements.
In September 2011,
the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of
goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative
factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount
before performing the two step impairment review process. It also amends the examples of events or circumstances that would be
considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed
for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. The Company does
not believe that the adoption of this new accounting guidance will have a significant effect on its goodwill impairment assessments
in the future.
In December 2011, the
FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This
ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements
to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is
effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption
of this standard to have a material impact on its consolidated financial statement disclosures.
Trademarks are summarized as follows:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
Trademarks, at cost
|
|
$
|
4,379,298
|
|
|
$
|
499,298
|
|
Less: accumulated amortization
|
|
|
(124,355
|
)
|
|
|
(107,723
|
)
|
|
|
$
|
4,254,943
|
|
|
$
|
391,575
|
|
Future annual estimated
amortization expense is summarized as follows:
Years Ending December 31:
|
|
|
|
2012 (six months)
|
|
$
|
145,965
|
|
2013
|
|
|
291,931
|
|
2014
|
|
|
291,931
|
|
2015
|
|
|
291,931
|
|
2016
|
|
|
291,931
|
|
2017
|
|
|
291,931
|
|
Thereafter
|
|
|
2,649,323
|
|
|
|
$
|
4,254,943
|
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company’s
trademarks have a definite life and are amortized on a straight-line basis over their estimated useful lives of 15 years. Amortization
expense amounted to $8,316 and $8,316 for the three months ended June 30, 2012 and 2011, respectively. Amortization expense amounted
to $16,632 and $16,488 for the six months ended June 30, 2012 and 2011, respectively.
|
5.
|
William Rast Ownership Recapitalization (Restated)
|
Effective as of October
1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. The recapitalization increased the
ownership of Bella Rose in each of William Rast Sourcing and William Rast Licensing in exchange for certain royalties to be paid
to Tennman WR-T as well as other consideration.
As a result of the
recapitalization, both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by Tennman WR-T,
and Bella Rose is entitled to all of the distributable cash from operations and all of the distributable cash from a sale of William
Rast Sourcing or William Rast Licensing that is not paid to Tennman WR-T. In connection with the ownership recapitalization, Tennman
WR-T, William Rast Sourcing and William Rast Licensing entered into a Royalty Agreement. Pursuant to the Royalty Agreement, William
Rast Sourcing is obligated to pay Tennman WR-T a royalty in the amount of 5.0% of its wholesale net sales, plus 2.5% of its retail
net sales and 25.0% of its sublicensee gross consideration during the period commencing July 1, 2011 and continuing until the earlier
of (i) the date that William Rast Sourcing pays a liquidating payment to Tennman WR-T or (ii) the date that Tennman WR-T or any
of its affiliates no longer owns Class B membership interests in William Rast Sourcing. During the term of the agreement, William
Rast Sourcing is obligated to pay Tennman WR-T a guaranteed minimum royalty of $200,000 for the calendar year ended December 31,
2011 and $400,000 for each calendar year thereafter. The Royalty Agreement also provides that William Rast Licensing shall pay
to Tennman WR-T an amount equal to 50.0% of all gross receipts of William Rast Licensing in respect of royalties or other compensation
earned with respect to the license by William Rast Licensing of rights to the William Rast mark, subject to certain offsets, during
the period commencing July 1, 2011 and continuing until the earlier of (i) the date that William Rast Licensing pays a liquidating
payment to Tennman WR-T or (ii) the date that Tennman WR-T or any of its affiliates no longer owns Class B membership interests
in William Rast Licensing. During the three and six months ended June 30, 2012, the Company recorded approximately $180,000 and
$428,000, respectively, in royalty expense related to royalties due under the Royalty Agreement.
|
6.
|
Charlotte Russe Litigation
|
Beginning October of
2009, the Company had been in litigation with Charlotte Russe and its affiliates in relation to an exclusive distribution agreement
between the parties. On February 3, 2011, the Company (along with the other parties to the litigation) settled its litigation with
Charlotte Russe. Pursuant to the settlement agreement, the Company received $3.5 million, after the distribution of amounts owed
under the terms of an asset purchase agreement entered into by the Company with two related parties pursuant to which the Company
sold 50% of the net proceeds, after contingent legal fees and expenses, that may be received by the Company as a result of the
litigation. The settlement included the dismissal with prejudice of all claims pending between the parties as well as mutual releases,
without any admission of liability or wrongdoing by any of the parties to the actions. The settlement amount of $3.5 million is
included in loss from operations of wholesales business included in the Company’s statement of operations for the six months
ended June 30, 2011.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
7.
|
License Agreements (Restated)
|
The Company has entered
into various trade name license agreements that provide revenues based on minimum royalties and design fees and additional revenues
based on a percentage of defined sales. Minimum royalty and design fee revenue is recognized on a straight-line basis over the
term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized
as income during the period corresponding to the licensee's sales. Payments received as consideration of the grant of a license
or advanced royalty payments are recognized ratably as revenue over the term of the license agreement and are reflected on the
Company’s consolidated balance sheet under the caption of “Deferred License Revenue.” Revenue is not recognized
unless collectability is reasonably assured. For the three and six months ended June 30, 2012, the Company recorded total license
revenue related to its license agreements of approximately $1.0 million and $2.1 million, respectively. License revenue earned
during the three months and six months ended June 30, 2011 amounted to approximately $85,000.
Exclusive License Agreement –
JC Penney
In November 2011, the
Company entered into an exclusive license agreement with JC Penney pursuant to which the Company granted JC Penney a license to
use its William Rast trademark in connection with the manufacture, sale and marketing of men’s apparel and accessories, women’s
apparel, handbags, footwear, sunglasses, watches and luggage. The product categories are subject to certain exceptions as outlined
in the license agreement. The Company will provide design, marketing and branding support for William Rast branded apparel and
apparel accessories to JC Penney under the terms of the contract.
Subject to certain
exceptions, the license granted to JC Penney is exclusive with respect to JC Penney’s right to sell and market William Rast
branded products through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce distribution
channels which are targeted to consumers in the United States. During the term of the agreement, the Company has agreed to refrain
from selling or authorizing any other party to sell, with certain exceptions described in the agreement, any line of William Rast
branded apparel products in the United States through any distribution channel; provided, however, that the Company continued to
have the right to sell William Rast branded products without restriction through June 30, 2012.
The agreement with
JC Penney will continue through January 30, 2016 and JC Penney may elect to extend the term of the agreement for one additional
renewal term of five years.
During each royalty
period during the term, JC Penney has agreed to pay the Company royalties based upon a percentage of JC Penney’s net sales
of William Rast branded products and has also agreed to pay the Company minimum annual royalties and design fees.
Product License Agreements
In addition to its
direct-to-retail license agreement with JC Penney, the Company has three other agreements for the license of its William Rast branded
products and two license agreements for its DVS branded products. The license agreements provide for the payment of royalties based
on net sales at a negotiated rate and minimum royalty amounts for each contract year.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Future annual minimum royalty and design
fee revenue is summarized as follows:
Years Ending December 31,
|
|
|
|
2012 (six months)
|
|
$
|
2,999,346
|
|
2013
|
|
|
6,341,548
|
|
2014
|
|
|
6,944,667
|
|
2015
|
|
|
6,762,417
|
|
2016
|
|
|
2,792,917
|
|
2017
|
|
|
2,748,000
|
|
Thereafter
|
|
|
5,400,000
|
|
|
|
$
|
33,988,895
|
|
|
8.
|
Discontinued Operations of Wholesale Business
|
In 2012, the Company’s
Board of Directors decided to discontinue the Company’s wholesale business completely and as a result, will no longer sell
its People’s Liberation and William Rast branded products to wholesale and retail customers. For the remainder of 2012, the
Company will continue to sell William Rast and People’s Liberation branded apparel on a limited basis through its domestic
wholesale operations in order to liquidate its existing inventory.
The discontinuation
of the Company’s wholesale business has been accounted for as a discontinued operation and, accordingly, all prior periods
presented in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted to conform
to this presentation.
The following table
summarizes certain selected components of the discontinued operations of the Company’s wholesale business for the three and
six months ended June 30, 2012 and 2011:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
825,474
|
|
|
$
|
1,429,695
|
|
|
$
|
1,270,200
|
|
|
$
|
3,266,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
210,319
|
|
|
$
|
(3,382,229
|
)
|
|
$
|
(5,639
|
)
|
|
$
|
(2,427,097
|
)
|
Noncontrolling interest
|
|
$
|
-
|
|
|
$
|
1,231,321
|
|
|
$
|
-
|
|
|
$
|
2,495,499
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
210,319
|
|
|
$
|
(2,150,908
|
)
|
|
$
|
(5,639
|
)
|
|
$
|
68,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share from discontinued operations
|
|
$
|
0.09
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.03
|
|
The following table
summarizes certain selected components of the discontinued operations of the Company’s wholesale business as of June 30,
2012 and December 31, 2011, the periods covered by this report:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
Current assets
|
|
$
|
344,974
|
|
|
$
|
339,184
|
|
Long-term assets
|
|
$
|
21,092
|
|
|
$
|
54,160
|
|
Current liabilities
|
|
$
|
673,764
|
|
|
$
|
1,762,552
|
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
During the three months
ended June 30, 2012, three customers comprised greater than 10% of the Company’s net revenue from discontinued operations
of the Company’s wholesale business. Revenue derived from these customers amounted to 48.5%, 28.8% and 12.9% of net revenue
from discontinued operations of the Company’s wholesale business for the three months ended June 30, 2012. During the three
months ended June 30, 2011, three customers comprised greater than 10% of the Company’s net revenue from discontinued operations
of its wholesale business. Revenue derived from these customers amounted to 27.1%, 24.9% and 14.1% of net revenue from discontinued
operations of the Company’s wholesale business for the three months ended June 30, 2011. During the six months ended June
30, 2012, three customers comprised greater than 10% of the Company’s net revenue from discontinued operations of its wholesale
business. Revenue derived from these customers amounted to 31.5%, 30.9 and 12.9% of net revenue from discontinued operations of
its wholesale business for the six months ended June 30, 2012. During the six months ended June 30, 2011, three customers comprised
greater than 10% of the Company’s net revenue from the discontinuation of its wholesale business. Revenue derived from these
customers amounted to 34.2%, 22.7% and 13.67% of net revenue from the discontinuation of the Company’s wholesale business
for the six months ended June 30, 2011. At June 30, 2012, the total amount due from these major customers amounted to approximately
$475,000 and is included in current assets held for disposition from discontinued operations of wholesale business.
During the three and
six months ended June 30, 2012, there were no suppliers that comprised greater than 10% of our purchases from discontinued operations.
During the six months ended June 30, 2011, three suppliers comprised greater than 10% of the Company’s purchases from discontinued
operations. Purchases from these suppliers amounted to 31.3%, 13.6% and 10.9% for the six months ended June 30, 2011.
|
9.
|
Discontinued Operations of Retail Subsidiary
|
In the second half
of 2011, the Company’s Board of Directors decided to transition the Company’s business from a wholesale and retail
provider of branded apparel and apparel accessories to a brand management and licensing business. As a result, the Company’s
retail operations included in the Company’s subsidiary, William Rast Retail, which consisted of four retail stores were discontinued.
As of June 30, 2012, the Company has closed three of its retail stores and the remaining store is expected to be closed by the
end of 2012.
The closing of the
Company’s retail stores has been accounted for as a discontinued operation and, accordingly, all prior periods presented
in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted to conform to this
presentation.
The following table
summarizes certain selected components of the discontinued operations of William Rast Retail for the three and six months ended
June 30, 2012 and 2011:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
245,339
|
|
|
$
|
477,364
|
|
|
$
|
510,523
|
|
|
$
|
1,039,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(291,375
|
)
|
|
$
|
(244,814
|
)
|
|
$
|
(446,640
|
)
|
|
$
|
(575,220
|
)
|
Noncontrolling interest
|
|
$
|
-
|
|
|
$
|
122,407
|
|
|
$
|
-
|
|
|
$
|
287,610
|
|
Net loss attributable to common stockholders
|
|
$
|
(291,375
|
)
|
|
$
|
(122,407
|
)
|
|
$
|
(446,640
|
)
|
|
$
|
(287,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from discontinued operations
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.12
|
)
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The following table
summarizes certain selected components of the discontinued operations of William Rast Retail as of June 30, 2012 and December 31,
2011, the periods covered by this report:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
Current assets
|
|
$
|
-
|
|
|
$
|
60,883
|
|
Long-term assets
|
|
$
|
105,858
|
|
|
$
|
260,825
|
|
Current liabilities
|
|
$
|
337,271
|
|
|
$
|
403,805
|
|
Long-term liabilities
|
|
$
|
103,305
|
|
|
$
|
288,765
|
|
As a result of the
expected closure of the Company’s remaining retail store and other costs to be incurred in future periods related to the
winding down of William Rast Retail’s operations, the Company expects to incur additional expenses for the remainder of 2012
ranging from $300,000 to $400,000. The expected losses include costs to close the Company’s remaining store, store rent,
lease termination settlements and fees, fixed asset write-offs, employee severance costs, litigation costs, if any, and related
professional fees. The Company recognizes costs incurred to close its retail stores upon the “cease use date” of the
retail store.
|
10.
|
Discontinued Operations of J. Lindberg USA Subsidiaries
|
On April 26, 2011,
the Company and its wholly owned subsidiary, Bella Rose, completed the sale of Bella Rose’s 50% membership interest in J.
Lindeberg USA to J. Lindeberg USA Corp. (“Buyer”) pursuant to the terms of a Unit Purchase Agreement entered into by
the parties on April 7, 2011. Prior to the closing of the transaction and since July 1, 2008, Lindeberg USA was owned
50% by Bella Rose and 50% by Buyer.
In consideration for
Bella Rose’s 50% membership interest in J. Lindeberg USA, Buyer agreed to pay to the Company an aggregate of $1,650,000,
of which $900,000 was paid upon the closing of the transaction and $750,000 was received in the form of a receivable that was non-interest
bearing and to be paid on the six month anniversary of the closing of the transaction. On June 24, 2011, the Company and its wholly-owned
subsidiary, Bella Rose, LLC, entered into an asset purchase agreement with Monto Holding (Pty) Limited (“Monto”). Pursuant
to the agreement, the Company sold to Monto without recourse the $750,000 receivable owed to the Company under the terms of the
Unit Purchase Agreement discussed above. The receivable balance was paid by the buyer to Monto in October 2011.
The divestiture of
the Company’s membership interest in J. Lindeberg USA has been accounted for as a discontinued operation and, accordingly,
all prior periods presented in the accompanying consolidated balance sheets, statements of operations and cash flows have been
adjusted to conform to this presentation.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company recorded
a gain in the second quarter of 2011 related to this divestiture as follows:
Carrying value of net assets of J. Lindeberg USA
|
|
$
|
(1,501,404
|
)
|
Noncontrolling interest on date of divestiture
|
|
|
1,863,727
|
|
Carrying value of net assets attributable to J. Lindeberg USA
|
|
|
362,323
|
|
Cash proceeds received at closing
|
|
|
900,000
|
|
Receivable from Buyer
|
|
|
750,000
|
|
Gain on sale of member interest in subsidiary
|
|
$
|
2,012,323
|
|
The following table
summarizes certain selected components of the discontinued operations of J. Lindeberg USA for the three and six months ended June
30, 2011:
|
|
Three Months
Ended
June 30, 2011
|
|
|
Six Months
Ended
June 30, 2011
|
|
Net Revenue
|
|
$
|
733,150
|
|
|
$
|
3,374,624
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
136,792
|
|
|
$
|
(125,771
|
)
|
Noncontrolling interest
|
|
$
|
(68,396
|
)
|
|
$
|
62,885
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to discontinued operations
|
|
$
|
68,396
|
|
|
$
|
(62,886
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share from discontinued operations
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
During the three and
six months ended June 30, 2011, the Company purchased all of its J. Lindeberg brand products from J. Lindeberg AB in Sweden, the
beneficial owner of 50% of the Company’s former subsidiary, J. Lindeberg USA. Total purchases from J. Lindeberg AB for the
six months ended June 30, 2011 amounted to approximately $1.8 million.
|
11.
|
Stock Based Compensation
|
Stock Options
On January 5, 2006,
the Company adopted its 2005 Stock Incentive Plan (the “Plan”), which authorized the granting of a variety of stock-based
incentive awards. The Plan is administered by the Company’s Board of Directors, or a committee appointed by the Board of
Directors, which determines the recipients and terms of the awards granted. The Plan provides for a total of 366,667 shares of
common stock to be reserved for issuance under the Plan.
On September 11, 2012,
the Company effected a 1-for-15 reverse stock split of its common stock as further described in Note 1. As a result of the reverse
stock split, every fifteen shares of common stock of the Company were combined into one share of common stock. The number of shares
and exercise price of outstanding stock options and warrants are presented below after giving retroactive effect to the reverse
stock split that occurred on September 11, 2012.
The Company recognizes
stock-based compensation costs on a straight-line basis over the vesting period of each award, which is generally between one to
four years.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
During the three months
and six months ended June 30, 2012, the Company did not grant any options. During the three and six months ended June 30, 2011,
the Company granted 33,333 and 102,000 options to employees and officers within the Plan at an exercise price of $2.25 and 333,333
options to two employees and an officer outside the Plan, also at an exercise price of $2.25. Plan options to purchase 186,086
and 165,847 shares were exercisable as of June 30, 2012 and 2011, respectively. Options granted outside the Plan to purchase 200,000
shares were exercisable as of June 30, 2012 and 2011. Total stock based compensation expense for the three and six months ended
June 30, 2012 was approximately $1,000 and $2,000, respectively. Total stock based compensation expense for the three and six months
ended June 30, 2011 was approximately $19,000 and $76,000, respectively. There were no stock options or warrants exercised during
the three and six months ended June 30, 2012 and 2011.
The fair value of options
is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes pricing
model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors. Stock price volatility is estimated based on a peer group of public companies
and expected term is estimated using the “safe harbor” provisions provided in accordance with U.S. GAAP. The safe harbor
provisions were extended beyond December 31, 2007 for companies that did not have sufficient historical data to calculate the expected
term of their related options. The Company does not have sufficient historical data to calculate expected term and the safe harbor
provisions were used to calculate expected term for options granted during the periods. The weighted-average assumptions the Company
used as inputs to the Black-Scholes pricing model for options granted during the six months ended June 30, 2011 included a dividend
yield of zero, a risk-free interest rate of 2.2%, expected term of 6.1 years and an expected volatility of 64%.
For stock-based awards
issued to employees, directors and officers, stock-based compensation is attributed to expense using the straight-line single option
method. Stock-based compensation expense recognized in the Statement of Operations for the three months ended June 30, 2012 and
2011 is included in operating expenses and is based on awards ultimately expected to vest. FASB ASC Topic 718 requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
For the six months ended June 30, 2011, the Company used historical data to calculate the expected forfeiture rate.
Options awarded to
non-employees are charged to expense when the services are performed and benefit is received as provided by FASB ASC Topic 505-50.
The following table
summarizes the activity within the Plan:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Options outstanding – January 1, 2012
|
|
|
251,467
|
|
|
|
6.30
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – June 30, 2012
|
|
|
251,467
|
|
|
$
|
6.30
|
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
A summary of the changes
in the Company’s unvested stock options within the Plan is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested stock options – January 1, 2012
|
|
|
85,139
|
|
|
|
0.15
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(19,758
|
)
|
|
|
(0.15
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unvested stock options – June 30, 2012
|
|
|
65,381
|
|
|
$
|
0.15
|
|
The following table summarizes the activity
outside of the Plan:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Options outstanding – January 1, 2012
|
|
|
200,000
|
|
|
|
2.25
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – June 30, 2012 (fully vested)
|
|
|
200,000
|
|
|
$
|
2.25
|
|
Additional information
relating to stock options outstanding and exercisable at June 30, 2012, summarized by exercise price, is as follows:
|
|
|
Outstanding Weighted Average
|
|
|
Exercisable
Weighted Average
|
|
|
|
|
|
|
|
Life
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Exercise Price Per Share
|
|
|
Shares
|
|
|
(years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$
|
2.25
|
(options)
|
|
|
|
252,000
|
|
|
|
8.6
|
|
|
$
|
2.25
|
|
|
|
229,217
|
|
|
$
|
2.25
|
|
$
|
3.00
|
(options)
|
|
|
|
56,867
|
|
|
|
9.2
|
|
|
$
|
3.00
|
|
|
|
14,283
|
|
|
$
|
3.00
|
|
$
|
4.50
|
(options)
|
|
|
|
2,000
|
|
|
|
6.0
|
|
|
$
|
4.50
|
|
|
|
2,000
|
|
|
$
|
4.50
|
|
$
|
4.65
|
(options)
|
|
|
|
1,600
|
|
|
|
5.0
|
|
|
$
|
4.65
|
|
|
|
1,600
|
|
|
$
|
4.65
|
|
$
|
5.70
|
(options)
|
|
|
|
16,000
|
|
|
|
5.2
|
|
|
$
|
5.70
|
|
|
|
16,000
|
|
|
$
|
5.70
|
|
$
|
6.00
|
(options)
|
|
|
|
30,000
|
|
|
|
6.0
|
|
|
$
|
6.00
|
|
|
|
30,000
|
|
|
$
|
6.00
|
|
$
|
6.90
|
(options)
|
|
|
|
25,667
|
|
|
|
5.0
|
|
|
$
|
6.90
|
|
|
|
25,667
|
|
|
$
|
6.90
|
|
$
|
7.50
|
(options)
|
|
|
|
38,000
|
|
|
|
5.4
|
|
|
$
|
7.50
|
|
|
|
37,986
|
|
|
$
|
7.50
|
|
$
|
18.75
|
(options)
|
|
|
|
29,333
|
|
|
|
4.0
|
|
|
$
|
18.75
|
|
|
|
29,333
|
|
|
$
|
18.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451,467
|
|
|
|
7.6
|
|
|
$
|
4.50
|
|
|
|
386,086
|
|
|
$
|
4.80
|
|
As of June 30, 2012,
there were 186,086 of vested stock options within the Plan and 200,000 of vested options outside the Plan. As of June 30, 2012,
there was approximately $5,000 of total unrecognized compensation expense related to share-based compensation arrangements granted
within the Plan. The cost is expected to be recognized on a weighted-average basis over the next two and a half years. There was
no unrecognized compensation expense related to share-based compensation arrangements granted outside the Plan as of June 30, 2012.
The aggregate intrinsic value of stock options outstanding was approximately $793,000 at June 30, 2012. The aggregate intrinsic
value of stock options outstanding was zero at June 30, 2011 as the market value of the options was lower than the exercise value.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Warrants
The following table
summarizes the Company’s outstanding warrants:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Warrants outstanding – January 1, 2012
|
|
|
1,112,666
|
|
|
|
1.80
|
|
Granted
|
|
|
1,104,762
|
|
|
|
2.63
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding – June 30, 2012 (fully vested)
|
|
|
2,217,428
|
|
|
$
|
2.25
|
|
Additional information
relating to warrants outstanding and exercisable at June 30, 2012, summarized by exercise price, is as follows:
|
|
|
Outstanding Weighted Average
|
|
|
Exercisable
Weighted Average
|
|
|
|
|
|
|
|
Life
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Exercise Price Per Share
|
|
|
Shares
|
|
|
(years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$
|
1.20
|
(warrants)
|
|
|
|
833,333
|
|
|
|
4.1
|
|
|
$
|
1.20
|
|
|
|
833,333
|
|
|
$
|
1.20
|
|
$
|
2.63
|
(warrants)
|
|
|
|
1,104,762
|
|
|
|
4.6
|
|
|
$
|
2.63
|
|
|
|
1,104,762
|
|
|
$
|
2.63
|
|
$
|
3.00
|
(warrants)
|
|
|
|
250,000
|
|
|
|
4.0
|
|
|
$
|
3.00
|
|
|
|
250,000
|
|
|
$
|
3.00
|
|
$
|
6.00
|
(warrants)
|
|
|
|
10,000
|
|
|
|
0.4
|
|
|
$
|
6.00
|
|
|
|
10,000
|
|
|
$
|
6.00
|
|
$
|
7.50
|
(warrants)
|
|
|
|
19,333
|
|
|
|
0.4
|
|
|
$
|
7.50
|
|
|
|
19,333
|
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,217,428
|
|
|
|
4.3
|
|
|
$
|
2.25
|
|
|
|
2,217,428
|
|
|
$
|
2.25
|
|
The aggregate intrinsic
value of warrants outstanding was approximately $6.2 million at June 30, 2012. The aggregate intrinsic value of warrants outstanding
was zero at June 30, 2011 as the market value of the warrants was lower than the exercise value.
|
12.
|
Acquisition of DVS Shoe Co. (Restated)
|
In June 2012, the
Company completed a series of transactions which included (i) its acquisition of assets relating to the
consumer
product brands “
DVS
®” and “
Matix
®”, (ii) its sale of all of its acquired assets
relating to the
Matix
® brand and certain tangible assets related to the
DVS
® brand, but excluding its intellectual
property rights in the
DVS
® brand, (iii)
the contribution of the trademarks relating to the
DVS
®
brand into DVS LLC
, and (iv) the entry into two license agreements in relation to the
DVS
®
brand, all as further described below.
Completion of Acquisition of DVS Shoe Co., Inc.
On June 26, 2012,
the Company acquired from DVS Shoe Co., Inc. (‘‘DVS Shoe Co.’') substantially all of DVS Shoe Co.’s assets
related to its consumer product brands
DVS
® and
Matix
® pursuant to the terms of a Purchase and Sale Agreement
entered into on June 20, 2012. In consideration for the assets, which primarily consisted of inventory, accounts receivable,
trademarks and other intellectual property rights, the Company paid $8.55 million in cash to DVS Shoe Co. The acquisition of the
assets was treated as the acquisition of a business for accounting purposes.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Entry into Purchase and Sale Agreement
with Westlife Distribution USA, LLC.
On June 28, 2012, following
the acquisition, the Company entered into a Purchase and Sale Agreement with Westlife Distribution USA, LLC (“Westlife”).
Pursuant to the agreement, the Company sold the assets relating to its acquired
Matix®
brand, including all trademarks
and other intellectual property relating to the
Matix®
brand, other intangibles, inventory of
Matix®
branded
products, prepaids and accounts receivable. On June 29, 2012, upon the closing of the transactions contemplated by the Purchase
and Sale Agreement, the Company received $2.95 million in cash from Westlife.
Entry into Collaboration with Elan
Polo International, Inc.
In connection with
the acquisition, the Company received a 65% economic interest in DVS LLC. DVS LLC is a collaboration between the
Company and Elan Polo. The new company was formed for the purpose of licensing the
DVS®
trademark to third parties primarily
in connection with the manufacturing, distribution, marketing and sale of
DVS®
branded footwear, apparel and apparel
accessories. In exchange for its 65% economic interest in DVS LLC, the Company contributed trademarks and other intellectual property
rights relating to the
DVS®
brand to DVS LLC. In exchange for its 35% economic interest in DVS LLC, Elan Polo contributed
$2,124,000 in cash to the newly formed entity.
In connection with
the formation of DVS LLC, the Company and Elan Polo entered into a Limited Liability Company Operating Agreement of DVS Footwear
International LLC on June 29, 2012 (the “Operating Agreement”). Subject to certain exceptions, the Operating Agreement
provides that the Company has the right to manage, control and conduct the business affairs of DVS LLC. The Operating Agreement
provides that the Company will receive 65% of the distributions and allocation of net profits and losses of DVS LLC and 60% of
the distributable assets upon dissolution of DVS LLC.
Entry into License Agreement with Elan Polo International,
Inc.
On June 29, 2012, DVS
LLC entered into a license agreement with Elan Polo. Pursuant to the agreement, DVS LLC granted to Elan Polo an exclusive license
(subject to certain exceptions) to use the
DVS®
trademark in connection with the worldwide manufacture, distribution,
marketing and sale to approved customers of men’s, women’s and children’s footwear. Unless otherwise terminated
earlier pursuant to its terms, the agreement will continue through December 31, 2019. Subject to the satisfaction of certain conditions,
Elan Polo may elect to extend the term of the agreement for two additional renewal terms of five years each.
During the term of
the agreement, Elan Polo has agreed to pay DVS LLC royalties that are based on a percentage of net sales of DVS licensed products.
Royalties are payable on a quarterly basis, and Elan Polo has guaranteed the payment to DVS LLC of certain minimum royalties during
each contract year of the agreement. On June 29, 2012, DVS LLC received an advanced royalty payment of $340,000 from Elan Polo
pursuant to the terms of the agreement.
In connection with
entering into the license agreement with Elan Polo, the Company also sold its DVS branded inventory, purchase orders, customer
lists and other intangible assets acquired from DVS Shoe Co. to Elan Polo for $640,000, its estimated fair market value.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Entry into License Agreement with RSA & Associates,
Inc.
On June 27, 2012, DVS
LLC entered into a license agreement with RSA & Associates, Inc. (“RSA”). Pursuant to the agreement, DVS LLC granted
to RSA an exclusive license (subject to certain exceptions) to use the
DVS®
trademark in connection with the manufacture,
distribution, marketing and sale to approved customers of men’s t-shirts, sport shirts, knit shirts, pants, shorts and hoodies.
Unless otherwise terminated earlier pursuant to its terms, the license agreement will continue through December 31, 2017. Subject
to the satisfaction of certain conditions, RSA may elect to extend the term of the agreement for one additional renewal term of
five years.
During the term of
the agreement, RSA has agreed to pay DVS LLC royalties that are based on a percentage of net sales of DVS licensed products. Except
during the first year of the agreement, royalties are payable on a quarterly basis, and RSA has guaranteed the payment to DVS LLC
of certain minimum royalties during each contract year of the agreement. The performance obligations of RSA under the license agreement
are guaranteed by Robert Allen Associates Inc., an affiliate of RSA.
Accounting for the DVS Transactions
The aggregate purchase
price of the acquisition was $8.55 million. The purchase price was allocated to the following assets based on the
fair market value of the assets on the date the transaction took place:
Matix and DVS non-core assets
|
|
$
|
3,590,000
|
|
Accounts and other receivables
|
|
|
891,000
|
|
Trademarks
|
|
|
4,069,000
|
|
Total acquisition price of DVS Shoe Co.
|
|
$
|
8,550,000
|
|
Upon the acquisition,
the Company immediately sold the assets of the Matix brand to an unaffiliated company and its acquired DVS branded
inventory to Elan Polo for an aggregate amount of $3,590,000. The Company did not recognize a gain or loss on these transactions
as it considered the purchase price of the Matix assets and the DVS branded inventory to be equivalent to the fair value of the
assets on the date of the transactions.
As part of the transaction,
the Company acquired accounts and notes receivables with an aggregate estimated fair market value on the date of the transaction
of $891,000, which has been reflected on the Company’s consolidated balance sheet as of June 30, 2012.
The DVS
trademarks will be amortized over their expected useful lives of 15 years. Legal and other fees related to the transaction of
$710,417 were included in the statement of operations in the quarter ended June 30, 2012. There was no excess of purchase
price over the fair value of the assets acquired and, therefore, no resulting goodwill upon the acquisition of DVS Shoe Co.
DVS Shoe Co. had no
license revenues, therefore pro forma revenue would equal actual revenue from continuing operations for the three and
six
month periods ended
June 30
, 2011 and 2012 if the transaction had occurred on January 1, 2011.
The Company’s pro forma net loss (unaudited), including the loss from discontinuing operations, would have been $
368,
000
and $
2,953,000
for the
six
months ended
June
30
,
2011 and 2012, respectively. The pro forma loss from discontinued operations
(unaudited) would have been $
2,251,
000
and $2,039,000
for the
three months ended
June 30,
2011
and 2012, respectively
.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
In conjunction with
the acquisition, the Company entered into a collaboration with Elan Polo pursuant to which Elan Polo paid the Company
$2,124,000 for a 35% economic member interest in DVS LLC, the entity that holds the DVS trademarks. The Company has included
the accounts of DVS LLC in its unaudited condensed consolidated financial statements for the period ended June 30, 2012. Elan Polo’s
minority member interest in DVS LLC has been reflected as noncontrolling interest on the Company’s unaudited condensed consolidated
balance sheet as of June 30, 2012.
|
13.
|
Securities Purchase Agreement and Repayment of Indebtedness (Restated)
|
Entry into Securities Purchase Agreement
On February 2, 2012,
the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with TCP WR Acquisition, LLC (“TCP”).
Pursuant to the Purchase Agreement, the Company sold to TCP a total of $14,500,000 in principal amount of Debentures, issued to
TCP Warrants to purchase 1,104,762 shares of common stock and issued to TCP 14,500 shares of Series A Preferred Stock. The Debentures
are convertible into 5,523,809 shares of common stock. Aggregate net proceeds from this transaction amounted to approximately $13.7
million after the payment of legal and other fees.
Pursuant to the
terms of the Purchase Agreement, the Company sold $14,500,000 in principal amount of Variable Rate Senior Secured Convertible
Debentures (the “Debentures”), convertible into shares of the Company’s common stock, $0.001 par value per
share (“Common Stock”), at an initial conversion price of $2.63 per share (the “Conversion Price”).
The Debentures have an interest rate of the one month LIBOR rate, and in the event payment on the Debentures is accelerated
as a result of an event of default, the rate of interest will increase to the lesser of 18% per annum or the maximum amount
permitted under applicable law. Interest on the Debentures is payable, at the Company’s option, in cash or in Common
Stock upon conversion of a Debenture (with respect to the principal amount then being converted) and on their maturity date.
The Debentures are payable on or before January 31, 2015 and a Debenture may not be prepaid without the consent of the holder
of the Debenture.
At any time after their
issuance, the Debentures are convertible at the Conversion Price into shares of Common Stock at the option of a Debenture holder.
On the maturity date, the Company may, in whole or in part, convert the then outstanding principal amount of each Debenture into
shares of Common Stock at the Conversion Price. The Conversion Price is subject to adjustment in the case of stock splits, stock
dividends, combinations of shares and similar recapitalization transactions. The Conversion Price is also subject to adjustment
based on the occurrence of certain events as further described in the Purchase Agreement.
In connection with
the sale of the Debentures, the Company issued to TCP warrants (the “Warrants”) to purchase 1,104,762 shares of the
Company’s Common Stock. The Warrants are exercisable immediately after issuance and have a term of five years. The Warrants
may be exercised at an initial exercise price per share of $2.63, which is subject to adjustment in the case of stock splits, stock
dividends, combinations of shares and similar recapitalization transactions. The warrants were valued at approximately $4.2 million
using the Black-Scholes pricing model and recorded as a valuation discount to the Debentures. The assumptions the Company used
as inputs to the Black-Scholes pricing model for the valuation of the warrants included a dividend yield of zero, a risk-free interest
rate of 1.4%, expected term of five years and an expected volatility of 64%.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Also in
connection with the sale of the Debentures, the Company agreed to issue one share of Series A Preferred Stock, par value
$0.001 per share (“Series A Preferred Stock”), for every $1,000 of principal amount of Debentures purchased by
TCP. The Series A Preferred Stock is designed to give holders of the Debentures certain voting rights while the Debentures
remain outstanding and each share of Series A Preferred Stock is entitled to vote 381 votes. The Series A Preferred Stock
will be redeemed on the conversion or repayment of the Debenturer for a nominal amount.
The Company has recorded
a valuation discount of approximately $7.3 million related to the beneficial conversion feature of the Debentures. The Company
also recorded deferred financing costs of approximately $844,000, included in other assets, related to legal and other fees associated
with the financing. The valuation discount and deferred financing costs are being amortized to interest expense over the term of
the Debentures based upon the effective interest method. The unamortized amount of the valuation discount has been presented as
an offset to the face amount of the Debentures in the Company’s consolidated balance sheet. Included in interest expense
for the three and six months ended June 30, 2012 is approximately $183,000 and $311,000, respectively, of amortization related
to the valuation discount and deferred financing costs.
The components of the
Debentures as of June 30, 2012 are as follows:
Face value of the debentures
|
|
$
|
14,500,000
|
|
Valuation discount
|
|
|
(11,367,712
|
)
|
Accrued interest
|
|
|
13,732
|
|
|
|
$
|
3,146,020
|
|
Description of Subsidiary Guarantee
and Security Agreement
In connection with
the financing, the Company’s subsidiaries, Versatile Entertainment, Bella Rose, William Rast Sourcing, William Rast Licensing
and William Rast Retail executed a Subsidiary Guarantee in favor of TCP pursuant to which such subsidiaries guarantee the Company’s
obligations under the Debentures (the “Subsidiary Guarantee”). In addition, the Company and the above mentioned subsidiaries
entered into a security agreement (the “Security Agreement”) with TCP pursuant to which such parties granted to TCP
a first priority security interest in all of their assets to secure the Company’s obligations under the Debentures and such
subsidiaries’ obligations under the Subsidiary Guarantee.
Termination of Material Agreements
The proceeds received
from the financing were used in part to repay the following indebtedness of the Company and its subsidiaries:
Rosenthal Indebtedness
All indebtedness owed
by William Rast Sourcing under its factoring facility with Rosenthal & Rosenthal. In connection with the repayment, the following
agreements were terminated: (i) Factoring Agreement effective as of October 7, 2010 by and between Rosenthal & Rosenthal, Inc.
and William Rast Sourcing; (ii) Inventory Security Agreement effective as of October 7, 2010 by William Rast Sourcing in favor
of Rosenthal & Rosenthal, Inc.; (iii) Assignment Agreement effective as of October 7, 2010 by and between William Rast Licensing
and Rosenthal & Rosenthal, Inc.; and (iv) guarantees of the Company, Bella Rose, Versatile and Colin Dyne in favor of Rosenthal.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Mobility Indebtedness
All indebtedness owed
by William Rast Licensing to Mobility Special Situations I, LLC (“Mobility”), pursuant to that certain promissory note
in the original aggregate principal amount of $750,000 issued to Mobility. Prior to its repayment, the promissory note was secured
by the assets of William Rast Licensing and was guaranteed by the Company, William Rast Sourcing, William Rast Retail, Bella Rose
and Versatile. In connection with the repayment, the following agreements were terminated (other than with respect to obligations
that survive the termination of such agreements): (i) the Promissory Note entered into on August 13, 2010 by William Rast Licensing
in favor of Mobility; (ii) Borrower Security Agreement entered into on August 13, 2010 by William Rast Licensing in favor of Mobility;
(iii) Guarantor Security Agreement entered into on August 13, 2010 by People’s Liberation, Versatile, Bella Rose, William
Rast Sourcing and William Rast Retail in favor of Mobility; (iv) Guaranty dated August 13, 2010 granted in favor of Mobility by
People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William Rast Retail. Mobility is an entity owned in
part by Mark Dyne, the brother of the Company’s Chief Executive Officer, Colin Dyne, and New Media Retail Concepts, LLC,
an entity owned by Gerard Guez, a significant beneficial owner of the Company’s Common Stock.
Monto Indebtedness
All indebtedness owed
by William Rast Licensing to Monto Holdings (Pty) Ltd. (“Monto”), pursuant to that certain promissory note in the original
aggregate principal amount of $1,000,000. Prior to its repayment, the promissory note was secured by the assets of William Rast
Licensing and was guaranteed by the Company, William Rast Sourcing, William Rast Retail, Bella Rose, and Versatile. In connection
with the repayment, the following agreements were terminated (other than with respect to obligations that survive the termination
of such agreements): (i) the Promissory Note entered into on August 18, 2011 by William Rast Licensing in favor of Monto; (ii)
Borrower Security Agreement entered into on August 18, 2011 by William Rast Licensing in favor of Monto; (iii) Guarantor Security
Agreement entered into on August 18, 2011 by People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William
Rast Retail in favor of Monto; (iv) Guaranty dated August 18, 2011 granted in favor of Monto by People’s Liberation, Versatile,
Bella Rose, William Rast Sourcing and William Rast Retail.
Other terms
The Purchase
Agreement provides TCP with piggyback registration rights with respect to TCP’s shares of Common Stock, requires the
Company to seek approval from its stockholders to amend the Company’s certificate of incorporation to increase its
common stock available for issuance, requires the Company to pay TCP a fee of $362,500 plus all legal and other fees and expenses
incurred by TCP in connection with the Purchase Agreement, and requires the Company to pay TCP an annual monitoring fee of
$250,000 so long as certain conditions are satisfied.
In addition, the Purchase
Agreement contains negative covenants that prohibit the Company and its subsidiaries from taking certain actions without TCP’s
prior consent until the later of February 3, 2014 and the date that TCP’s beneficial ownership of Common Stock is less than
40% of the Company’s fully diluted Common Stock. The negative covenants apply to, with certain exceptions, issuing debt or
equity securities; acquiring assets or equity interests of third parties, disposing of assets or equity interests of subsidiaries,
entering into joint ventures, or engaging in other types of mergers and acquisitions transactions; paying or declaring dividends;
settling litigation; entering into transactions with affiliates; dissolving or commencing bankruptcy proceedings; or changing the
Company’s principal lines of business.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
On February 3, 2012,
the Company amended its certificate of incorporation by creating a new series of preferred stock designated Series A Preferred
Stock, by filing with the Delaware Secretary of State a Certificate of Designation of Preferences, Rights and Limitations of Series
A Preferred Stock. The Certificate of Designation sets forth the rights, preferences, privileges and restrictions of the Series
A Preferred Stock, which include the following:
|
·
|
The authorized number of shares of Series
A Preferred Stock is 19,400, having a par value $0.001 per share and a stated value of $1,000 per share (“Stated Value”).
|
|
·
|
Holders of Series A Preferred Stock are
not entitled to dividends or any liquidation preference.
|
|
·
|
Series A Preferred Stock may only be transferred
by a holder of such stock to a transferee if such transfer also includes a transfer to the transferee of $1,000 in principal amount
of Debentures for each one share of transferred Series A Preferred Stock.
|
|
·
|
The holders of Series A Preferred Stock
vote together as a single class with the holders of Common Stock on all matters requiring approval of the holders of Common Stock,
except that each share of Preferred Stock is entitled to 381 votes per share (which is the number of shares of Common Stock a Debenture
holder would receive if it converted $1,000 in principal amount of Debentures into Common Stock at a conversion price of $2.63),
which number of votes per share is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and
similar recapitalization transactions relating to the Company’s Common Stock.
|
|
·
|
As long as any shares of Series A Preferred
Stock are outstanding, the Company will not, without the affirmative vote of the holders of a majority of the then outstanding
shares of the Series A Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series A Preferred
Stock or alter or amend the Certificate of Designation, (b) amend the Company’s certificate of incorporation or other charter
documents in any manner that adversely affects any rights of such holders, (c) increase the number of authorized shares of Series
A Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
|
|
·
|
Upon conversion of the principal amount
of a Debenture, in whole or in part, into shares of Common Stock or upon the repayment of the principal amount of a Debenture,
in whole or in part, by the Company, the Company has the right to and will redeem from the Debenture holder at a price of $0.001
per share, a number of shares of Series A Preferred Stock determined by dividing (i) the outstanding principal amount of the Debenture
that has been repaid or converted into Common Stock, as applicable by (ii) the Stated Value.
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
15.
|
Shareholder Derivative Complaint
|
On January 17, 2012,
plaintiff RP Capital, LLC filed a shareholders’ derivative complaint in the Superior Court of the State of California, County
of Los Angeles, Case Number BC477118 against Colin Dyne, Kenneth Wengrod, Susan White, Dean Oakey and the Company. The case alleges
that the defendants (i) breached their fiduciary duties to the Company for failing to properly oversee and manage the Company,
(ii) were unjustly enriched, (iii) abused their control, (iv) grossly mismanaged the Company, (v) wasted corporate assets, (vi)
engaged in self-dealing, and (vii) breached their fiduciary duties by disseminating false and misleading information. The plaintiffs
seek (i) judgment against the defendants in favor of the Company for the amount of damages sustained by the Company as a result
of the defendants’ alleged breaches of their fiduciary duties; (ii) judgment directing the Company to take all necessary
actions to reform and improve its corporate governance and internal procedures to comply with applicable laws; (iii) an award to
the Company of restitution from the defendants and an order from the court to disgorge all profits, benefits and other compensation
obtained by the defendants from their alleged wrongful conduct and alleged fiduciary breaches and (iv) an award of costs and disbursements
of the action, including reasonable fees for profession services. The Company is in the process of negotiating a settlement with
regards to this complaint. Management believes that the settlement will not result in a cash settlement for damages by the Company
and that the Company’s out-of-pocket expenses will include only a nominal amount related to its insurance deductible.
|
16.
|
Restatement of Financial Statements
|
Recognition of License
Revenue
In the
first quarter of 2013, management and the Audit Committee of the Company’s Board of Directors (the “Audit
Committee”) determined that the Company’s accounting treatment pertaining to revenue recognition on certain of
its license agreements should be modified. This change in accounting treatment resulted in a restatement of revenue,
operating expenses, loss from continuing operations and loss attributable to common stockholders on the
Company’s statement of operations and accounts receivable, deferred license revenue, accounts payable and accrued
expenses, and accumulated deficit on its balance sheet, as of and for the three and six months ended June 30, 2012.
Valuation of Senior
Secured Convertible Debentures
In the first
quarter of 2013, an accounting review by management and the Audit Committee revealed that the Company’s
accounting treatment relating to the valuation of its variable rate senior secured convertible debentures (the
“Debentures”) should be modified. Management initially concluded that the valuation date of the two closings of
the transaction was on the same date, February 3, 2012. After further review, management determined that there should be two
separate valuation dates, one for each of the closings, on February 3, 2012 and February 22, 2012, respectively. The change
in the valuation date of the second closing created a beneficial conversion feature to the holders of the Debentures. This
change in accounting treatment resulted in a restatement of non-cash interest expense, loss from continuing operations and
loss attributable to common stockholders and basic and diluted loss per common share on the Company’s
statements of operations and other assets, the Debentures, additional paid-in capital and accumulated deficit on its balance
sheet, as of and for the three and six months ended June 30, 2012. The Company also changed the classification of the
Debentures from the mezzanine section of the balance sheet to long-term debt.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Accounting for DVS
Transaction
In the first
quarter of 2013, an accounting review by management and the Audit Committee revealed that the Company’s accounting for the
acquisition of its DVS brand should be modified. Management initially concluded in June 2012 that the acquisition of its DVS
brand should be treated as an asset acquisition for accounting purposes. After further review, management determined that the
DVS acquisition should be treated as an acquisition of a business for accounting purposes. This change in accounting
treatment resulted in a restatement of operating expenses, loss from continuing operations and loss attributable
to common stockholders on the Company’s statement of operations and trademarks and accumulated deficit on its balance
sheet, as of and for the three and six months ended June 30, 2012.
Revision to Notes to Condensed Consolidated
Financial Statements (unaudited)
In the first
quarter of 2013, as
a result of a review by management and the Audit Committee, the Company concluded that the notes to the
financial statements omitted certain required interim disclosures. As a result, the Company has amended the notes to its financial
statements to include additional disclosures for intangible assets and fair value of financial instruments.
The cumulative effect
of restating the June 30, 2012 balance sheet presented in this Form 10-Q/A was a decrease in accounts receivable of approximately
$296,000, an increase in other assets of approximately $727,000, a decrease in trademarks of approximately $710,000, a decrease
in accounts payable and accrued expenses of approximately of $125,000, an increase in deferred license revenue of approximately
$205,000, a decrease in senior secured convertible debentures of approximately $10.4 million, an increase in additional paid-in
capital of $11.3 million and an increase in the accumulated deficit of approximately $1.2 million.
The cumulative effect
of restating the June 30, 2012 statement of cash flows for the six month period presented in this Form 10-Q/A was an increase in
net loss of approximately $1.2 million, an increase in amortization of valuation discount and deferred financing costs of approximately
$154,000, a decrease in cash flows from receivables of $296,000, an decrease in cash flows from accounts payable and accrued expenses
of $125,000, and an increase in cash flows from deferred license revenues of $205,000, and a decrease in investing activities related
to the expensing of legal and other fees incurred in connection with the DVS acquisition of $710,000. The
restatement has no impact on cash flows from financing activities.
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
A summary of the effects
of the restatement as of and for the three and six month periods ended June 30, 2012 are as follows:
Consolidated Balance Sheet
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Notes
|
|
Accounts receivable, license agreements
|
|
$
|
340,874
|
|
|
$
|
(295,874
|
)
|
|
$
|
45,000
|
|
1
|
|
Total current assets
|
|
|
8,397,979
|
|
|
|
(295,874
|
)
|
|
|
8,102,105
|
|
|
|
Trademarks, net of accumulated amortization
|
|
|
4,965,360
|
|
|
|
(710,417
|
)
|
|
|
4,254,943
|
|
3
|
|
Other assets
|
|
|
12,247
|
|
|
|
726,972
|
|
|
|
739,219
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,168,381
|
|
|
$
|
(279,319
|
)
|
|
$
|
13,889,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,775,927
|
|
|
$
|
(125,343
|
)
|
|
$
|
1,650,584
|
|
1
|
|
Deferred license revenue, current portion
|
|
|
361,428
|
|
|
|
205,498
|
|
|
|
566,926
|
|
1
|
|
Total current liabilities
|
|
|
3,148,390
|
|
|
|
80,155
|
|
|
|
3,228,545
|
|
|
|
Senior secured convertible debentures
|
|
|
-
|
|
|
|
3,146,020
|
|
|
|
3,146,020
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,698,495
|
|
|
|
3,226,175
|
|
|
|
6,924,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured convertible debentures
|
|
|
13,540,998
|
|
|
|
(13,540,998
|
)
|
|
|
-
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
36,002
|
|
|
|
(33,602
|
)
|
|
|
2,400
|
|
4
|
|
Additional paid-in capital
|
|
|
2,626,027
|
|
|
|
11,309,913
|
|
|
|
13,935,940
|
|
2,4
|
|
Accumulated deficit
|
|
|
(7,857,156
|
)
|
|
|
(1,240,807
|
)
|
|
|
(9,097,963
|
)
|
1,2,3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (deficiency)
|
|
|
(5,195,112
|
)
|
|
|
10,035,504
|
|
|
|
4,840,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficiency)
|
|
$
|
14,168,381
|
|
|
$
|
(279,319
|
)
|
|
$
|
13,889,062
|
|
|
|
|
|
Three Months Ended June 30, 2012
|
|
|
|
Consolidated Statement of Operations
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Notes
|
|
Net revenue
|
|
$
|
1,228,438
|
|
|
$
|
(183,353
|
)
|
|
$
|
1,045,085
|
|
1
|
|
Operating expenses
|
|
|
986,192
|
|
|
|
664,579
|
|
|
|
1,650,771
|
|
5
|
|
Income (loss) from operations
|
|
|
242,246
|
|
|
|
(847,932
|
)
|
|
|
(605,686
|
)
|
|
|
Interest expense, net
|
|
|
101,806
|
|
|
|
88,934
|
|
|
|
190,740
|
|
2
|
|
Income (loss) before income taxes
|
|
|
140,440
|
|
|
|
(936,866
|
)
|
|
|
(796,426
|
)
|
|
|
Provision for income taxes
|
|
|
900
|
|
|
|
-
|
|
|
|
900
|
|
|
|
Income (loss) from continuing operations
|
|
|
139,540
|
|
|
|
(936,866
|
)
|
|
|
(797,326
|
)
|
|
|
Net loss from discontinued operations
|
|
|
(81,056
|
)
|
|
|
-
|
|
|
|
(81,056
|
)
|
|
|
Net income (loss)
|
|
$
|
58,484
|
|
|
$
|
(936,866
|
)
|
|
$
|
(878,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.06
|
|
|
|
|
|
|
$
|
(0.33
|
)
|
|
|
Discontinued operations
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
$
|
(0.04
|
)
|
|
|
Attributable to common stockholders
|
|
$
|
0.02
|
|
|
|
|
|
|
$
|
(0.37
|
)
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
2,400,171
|
|
|
|
|
|
|
|
2,400,171
|
|
4
|
|
SEQUENTIAL BRANDS GROUP, INC.
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
|
Six Months Ended June 30, 2012
|
|
|
|
Consolidated Statement of Operations
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Notes
|
|
Net revenue
|
|
$
|
2,600,971
|
|
|
$
|
(501,372
|
)
|
|
$
|
2,099,599
|
|
1
|
|
Operating expenses
|
|
|
2,024,416
|
|
|
|
585,074
|
|
|
|
2,609,490
|
|
5
|
|
Income (loss) from operations
|
|
|
576,555
|
|
|
|
(1,086,446
|
)
|
|
|
(509,891
|
)
|
|
|
Interest expense, net
|
|
|
179,968
|
|
|
|
154,361
|
|
|
|
334,329
|
|
2
|
|
Income (loss) before income taxes
|
|
|
396,587
|
|
|
|
(1,240,807
|
)
|
|
|
(844,220
|
)
|
|
|
Provision for income taxes
|
|
|
10,900
|
|
|
|
-
|
|
|
|
10,900
|
|
|
|
Income (loss) from continuing operations
|
|
|
385,687
|
|
|
|
(1,240,807
|
)
|
|
|
(855,120
|
)
|
|
|
Net loss from discontinued operations
|
|
|
(452,279
|
)
|
|
|
-
|
|
|
|
(452,279
|
)
|
|
|
Net income (loss)
|
|
$
|
(66,592
|
)
|
|
$
|
(1,240,807
|
)
|
|
$
|
(1,307,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.16
|
|
|
|
|
|
|
$
|
(0.36
|
)
|
|
|
Discontinued operations
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
$
|
(0.19
|
)
|
|
|
Attributable to common stockholders
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
2,400,171
|
|
|
|
|
|
|
|
2,400,171
|
|
4
|
|
|
|
Six Months Ended June 30, 2012
|
|
|
|
Consolidated Statement of Cash Flows
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Notes
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(66,592
|
)
|
|
$
|
(1,240,807
|
)
|
|
$
|
(1,307,399
|
)
|
1,2,3
|
|
Amortization of valuation discount and deferred financing costs
|
|
|
156,891
|
|
|
|
154,361
|
|
|
|
311,252
|
|
2
|
|
Receivables
|
|
|
-
|
|
|
|
295,874
|
|
|
|
295,874
|
|
1
|
|
Accounts payable and accrued expenses
|
|
|
180,842
|
|
|
|
(125,343
|
)
|
|
|
55,499
|
|
1
|
|
Deferred license revenue
|
|
|
(1,313,346
|
)
|
|
|
205,498
|
|
|
|
(1,107,848
|
)
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of DVS assets
|
|
|
(9,260,417
|
)
|
|
|
710,417
|
|
|
|
(8,550,000
|
)
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
(5,682,543
|
)
|
|
|
710,417
|
|
|
|
(4,972,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued in financing transaction
|
|
$
|
285,388
|
|
|
$
|
3,929,469
|
|
|
$
|
4,214,857
|
|
2
|
|
Debt discount – beneficial conversion feature on senior secured convertible debentures
|
|
$
|
-
|
|
|
$
|
7,346,857
|
|
|
$
|
7,346,857
|
|
2
|
|
Notes:
1 - Adjustment to recognize license revenue
on a straight-line basis over the term of each contract year.
2 - Adjustment to recognize valuation discount,
deferred financing costs and related interest expense on Debentures.
3 - Adjustment to account for the business
acquisition of DVS Shoe Co.
4 - Adjustment to reflect 1-for-15 reverse
stock split effective September 11, 2012.
5 - Adjustment to recognize expenses corresponding
to license revenue of ($45,848) and ($125,343) for the three and six months ended June 30, 2012, respectively, and acquisition
costs related to the business acquisition of DVS Shoe Co. of $710,417 for the three and six months ended June 30, 2012.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The information contained
in this Quarterly Report on Form 10-Q/A (this “Quarterly Report”) is intended to update the information contained in
our Annual Report on Form 10-K/A for the year ended December 31, 2011 (our “2011 Annual Report”) and presumes that
readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and other information contained in our 2011 Annual Report. The following discussion and analysis also should
be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere
in this Quarterly Report.
This
discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and
cash flows of Sequential Brands Group, Inc. for the three and six months ended June 30, 2012 and the three and six months ended
June 30, 2011. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements
within
the meaning of the
Private Securities Litigation Reform Act of 1995.
These
forward-looking statements generally are identified by the words “believe,” “project,” “expect,”
“anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,”
“plan,” “may,” “should,” “will,” “would,” “will be,” “will
continue,” “will likely result” and similar expressions. Forward-looking statements involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our control. Forward-looking statements are based on current
expectations and assumptions and actual results could differ materially from those projected in the forward-looking statements
as a result of, among other things, those factors set forth in “Risk Factors” contained in Item 1A of our 2011 Annual
Report and
Part
II, Item 1A of
this Quarterly Report.
Restatement of Financial Statements
The
unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2012 have been restated
as a result of adjustments related to the recognition of license revenue, valuation and recording of our senior secured convertible
debentures and accounting for the acquisition of DVS Shoe Co., as further described in Note 16 to our condensed consolidated financial
statements. The following information presented below has been revised accordingly to reflect the restatement adjustments.
Overview
Since our formation
in 2005, we have been a designer, marketer and wholesale provider of branded apparel and apparel accessories. Commencing in July
2008, we implemented a retail strategy and opened retail stores to sell our branded products. In the second half of 2011, we decided
to change our business model to focus on licensing and brand management. In connection with the change in our business model, we
are presently winding down the wholesale distribution of our branded apparel and apparel accessories, liquidating our existing
inventory and closing our remaining retail stores. We expect to complete our transition from a wholesale and retail company to
a licensing and brand management company during the second or third quarter of 2012. To reflect our business transition, in March
2012, we changed our corporate name from People’s Liberation, Inc. to Sequential Brands Group, Inc. In this report, we refer
to our wholesale and retail operations as our Historical Operations.
Licensing and Brand Management Business
As a licensing and
brand management company, we plan to promote, market, and license a portfolio of consumer brands. Presently, our brands include
William Rast
®,
People’s Liberation
® and
DVS®
and we intend to grow our portfolio of brands
by acquiring rights to additional brands. We have licensed and intend to license our brands in a variety of categories to retailers,
wholesalers and distributors in the United States and in certain international territories. In our licensing arrangements, our
licensing partners will be responsible for designing, manufacturing and distributing our licensed products, subject to our continued
oversight and marketing support. Currently, we have one direct-to-retail and five wholesale licenses. In our direct-to-retail
license, we granted JC Penney, a national retailer, the exclusive right to distribute William Rast branded apparel in a broad range
of product categories through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce
distribution channels which are targeted to consumers in the United States. In our wholesale licenses, we grant rights to a single
or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to multiple stores
within an approved channel of distribution.
Historical Operations
Wholesale Operations
Since our inception
in 2005, in the United States, we have distributed our William Rast branded merchandise and, through April 26, 2011, our J. Lindeberg
branded merchandise to better specialty stores, boutiques and department stores, such as Nordstrom, Saks Fifth Avenue and Neiman
Marcus, as well as online at various websites including williamrast.com, jlindebergusa.com and zappos.com. In 2012, we decided
to discontinue our wholesale operations completely. For the remainder of 2012, we will continue to sell William Rast and People’s
Liberation branded apparel on a limited basis through our domestic wholesale operations in order to liquidate our existing inventory.
As part of our Historical
Operations, we also sold our William Rast branded apparel products internationally in select countries directly and through agents
and distributors to better department stores and boutiques. Our distributors purchased products at wholesale prices for resale
in their respective territories and marketed, sold, warehoused and shipped William Rast branded apparel products at their expense.
Our agents were paid a commission on net sales of our William Rast products. In 2012, we expect to have an immaterial amount of
sales of our William Rast and People’s Liberation branded apparel from our international wholesale operations.
Retail Operations
Our Historical Operations
also include the sale of William Rast branded apparel and accessories through our William Rast branded retail stores and also through
our William Rast branded outlet store. As part of our transition from a wholesale and retail provider of apparel and apparel accessories
to a brand management and licensing business, we closed our William Rast retail stores located in Miami and San Jose in November
2011, and our Century City store in June 2012. Our remaining William Rast retail store is expected to be closed by the end of 2012.
We expect to have limited sales from these locations in 2012.
Through April 26, 2011,
our J. Lindeberg branded apparel and accessories were sold through our three full-price J. Lindeberg branded retail stores. We
sold our interest in our J. Lindeberg business to our joint venture partner in April 2011, including our three retail stores.
Corporate Structure
Sequential
Brands Group, Inc., formerly People’s Liberation Inc., is the parent holding company of Versatile Entertainment, Inc.
(“Versatile”) and Bella Rose, LLC (“Bella Rose”), both of which were consolidated under and became
wholly-owned subsidiaries of People’s Liberation on November 22, 2005. Versatile conducts our People’s Liberation
brand business and our William Rast brand business is conducted through Bella Rose.
In June 2012, we formed
DVS Footwear International, LLC (“DVS LLC”). DVS LLC is a collaboration with Elan Polo International, Inc. (“Elan
Polo”) in which we have a 65% economic interest and Elan Polo has a 35% economic interest. DVS LLC was formed for the purpose
of licensing the DVS® trademark to third parties primarily in connection with the manufacturing, distribution, marketing and
sale of DVS branded footwear, apparel and apparel accessories.
Structure of William
Rast Business
William Rast Sourcing,
LLC and William Rast Licensing, LLC are consolidated under Bella Rose, and through September 30, 2011 were each owned 50% by Bella
Rose and 50% by Tennman WR-T, Inc. (“Tennman WR-T”), an entity owned in part by Justin Timberlake.
Effective as of October
1, 2011, we recapitalized the ownership of our William Rast branded apparel business. As further described under Note 5 to our
consolidated financial statements, the recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing
and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T as well as other consideration. Both William
Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by Tennman WR-T, and Bella Rose is entitled to
all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing or William
Rast Licensing that is not paid to Tennman WR-T.
William Rast Retail,
LLC, a California limited liability company, was formed on August 26, 2009 and is a wholly-owned subsidiary of William Rast Sourcing.
William Rast Retail was formed to operate our William Rast retail stores. The operations of William Rast Retail are shown as discontinued
operations in the accompanying consolidated financial statements.
Structure of J.
Lindeberg Business
Prior to its sale on
April 26, 2011, our J. Lindeberg brand business was conducted through Bella Rose. From July 1, 2008 through April 26, 2011, J.
Lindeberg USA, LLC was consolidated under Bella Rose and was owned 50% by Bella Rose and 50% by J. Lindeberg USA Corp. an entity
owned by J. Lindeberg AB, a Swedish corporation. J. Lindeberg USA Retail, LLC, a California limited liability company, was formed
on August 21, 2009 and is a wholly-owned subsidiary of J. Lindeberg USA. J. Lindeberg Retail was formed to operate our J. Lindeberg
retail stores. The operations of J. Lindeberg are shown as discontinued operations in the accompanying consolidated financial statements.
Acquisition of Assets
from DVS Shoe Co.
In June 2012, we completed
a series of transactions which included (i) the acquisition of assets relating to the
consumer product
brands “
DVS
®” and “
Matix
®”, (ii) the sale of all of the acquired assets relating
to the
Matix
® brand and certain assets related to the
DVS
® brand, (iii)
the contribution of the trademarks
related to the DVS® brand into DVS LLC
, and (iv) the entry into two license agreements in relation
to the
DVS
® brand, all as further described below.
Completion of Acquisition of Assets
from DVS Shoe Co., Inc.
On June 26, 2012,
we acquired from DVS Shoe Co. substantially all of DVS Shoe Co.’s assets relating to its consumer product brands
DVS
®
and
Matix
® pursuant to the terms of a Purchase and Sale Agreement entered into on June 20, 2012. In consideration
for the assets, which primarily consisted of inventory, accounts receivable, trademarks and other intellectual property rights,
we paid $8.55 million in cash to DVS Shoe Co. The acquisition of the assets was treated as the acquisition of a business for accounting
purposes.
Entry into Purchase and Sale Agreement
with Westlife Distribution USA, LLC.
On June 28, 2012, following
the acquisition, we entered into a Purchase and Sale Agreement with Westlife Distribution USA, LLC (“Westlife”).
Pursuant to the agreement, we sold the assets relating to the acquired
Matix®
brand, including all trademarks and other
intellectual property relating to the
Matix®
brand, other intangibles, inventory of
Matix®
branded products,
prepaids and accounts receivable. On June 29, 2012, upon the closing of the transactions contemplated by the Purchase and Sale
Agreement, we received $2.95 million in cash from Westlife.
Entry into Collaboration with Elan
Polo International, Inc.
In connection with
the acquisition, we received a 65% economic interest in DVS Footwear International LLC, a newly formed Delaware
limited liability company (“DVS LLC”). DVS LLC is a collaboration with Elan Polo International, Inc., a global organization
which designs, sources and delivers men's, women's, and children's shoes to retailers around the world (“Elan Polo”).
The new company was formed for the purpose of licensing the
DVS®
trademark to third parties primarily in connection
with the manufacturing, distribution, marketing and sale of
DVS®
branded footwear, apparel and apparel accessories.
In exchange for our 65% economic interest in DVS LLC, we contributed trademarks and other intellectual property rights relating
to the
DVS®
brand to DVS LLC. In exchange for its 35% economic interest in DVS LLC, Elan Polo contributed $2,124,000
in cash to the newly formed entity.
In connection with
the formation of DVS LLC, we and Elan Polo entered into a Limited Liability Company Operating Agreement of DVS Footwear International
LLC on June 29, 2012 (the “Operating Agreement”). Subject to certain exceptions, the Operating Agreement provides that
we have the right to manage, control and conduct the business affairs of DVS LLC. The Operating Agreement provides that we will
receive 65% of the distributions and allocation of net profits and losses of DVS LLC and 60% of the distributable assets upon dissolution
of DVS LLC.
Entry into License Agreement with Elan Polo International,
Inc.
On June 29, 2012, DVS
LLC entered into a license agreement with Elan Polo. Pursuant to the agreement, DVS LLC granted to Elan Polo an exclusive license
(subject to certain exceptions) to use the
DVS®
trademark in connection with the worldwide manufacture, distribution,
marketing and sale to approved customers of men’s, women’s and children’s footwear. Unless otherwise terminated
earlier pursuant to its terms, the agreement will continue through December 31, 2019. Subject to the satisfaction of certain conditions,
Elan Polo may elect to extend the term of the agreement for two additional renewal terms of five years each.
During the term of
the agreement, Elan Polo has agreed to pay DVS LLC royalties that are based on a percentage of net sales of DVS licensed products.
Royalties are payable on a quarterly basis, and Elan Polo has guaranteed the payment to DVS LLC of certain minimum royalties during
each contract year of the agreement. On June 29, 2012, DVS LLC received an advanced royalty payment of $340,000 from Elan Polo
pursuant to the terms of the agreement.
In connection with
entering into the license agreement with Elan Polo, we also sold the DVS branded inventory, purchase orders, customer lists and
other intangible assets acquired from DVS Shoe Co. to Elan Polo for $640,000, its estimated fair value.
Entry into License Agreement with RSA & Associates,
Inc.
On June 27, 2012, DVS
LLC entered into a license agreement with RSA & Associates, Inc. (“RSA”). Pursuant to the agreement, DVS LLC granted
to RSA an exclusive license (subject to certain exceptions) to use the
DVS®
trademark in connection with the manufacture,
distribution, marketing and sale to approved customers of men’s t-shirts, sport shirts, knit shirts, pants, shorts and hoodies.
Unless otherwise terminated earlier pursuant to its terms, the license agreement will continue through December 31, 2017. Subject
to the satisfaction of certain conditions, RSA may elect to extend the term of the agreement for one additional renewal term of
five years.
During the term of
the agreement, RSA has agreed to pay DVS LLC royalties that are based on a percentage of net sales of DVS licensed products. Except
during the first year of the agreement, royalties are payable on a quarterly basis, and RSA has guaranteed the payment to DVS LLC
of certain minimum royalties during each contract year of the agreement. The performance obligations of RSA under the license agreement
are guaranteed by Robert Allen Associates Inc., an affiliate of RSA.
Cash Received from
Securities Purchase Agreement
On February 2, 2012,
we entered into a Securities Purchase Agreement with TCP WR Acquisition, LLC. Pursuant to the Securities Purchase Agreement, we
sold Debentures, Warrants and Series A Preferred Stock to TCP WR Acquisition, LLC, as further described elsewhere in this report.
A portion of the proceeds received from this transaction was used to pay amounts due to our factor, Rosenthal & Rosenthal,
and terminate our factoring facility, payoff our notes payable to Monto Holdings (pty) Ltd. and Mobility Special Situations I,
LLC and pay certain past due payables. Net proceeds from this transaction after the payment of closing, legal and other costs and
the repayment of the aforementioned debt amounted to approximately $11.7 million.
Critical Accounting Policies, Judgments
and Estimates
Our discussion and
analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related
to our valuation of our allowance for uncollectible accounts receivable, and contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated
financial statements:
Accounts Receivable.
Accounts receivable are evaluated on a continual basis and allowances are provided for potentially
uncollectible accounts based on management’s estimate of the collectability of customer accounts. Accounts receivable are
also evaluated on a continual basis and allowances are provided for anticipated returns, discounts and chargebacks based on management’s
estimate of the collectability of customer accounts and historical return, discount and other chargeback rates. If the financial
condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance
may be required. Allowance adjustments are charged to operations in the period in which the facts that give rise to the adjustments
become known.
Goodwill and
Intangible Assets.
Goodwill is the excess of cost of an acquired entity over the amounts assigned
to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment
on an annual basis as of December 31, and between annual tests if indicators of potential impairment exist, using a fair-value-based
approach. No impairment of goodwill has been identified during any of the periods presented. Intangible assets are amortized using
the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically
and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of
the periods presented.
Revenue Recognition.
We have entered into various trade name license agreements that provide revenues based on minimum royalties and additional revenues
based on a percentage of defined sales. Minimum royalty revenue is recognized on a straight-line basis over the term of each contract
year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the
period corresponding to the licensee's sales. Payments received as consideration of the grant of a license or advanced royalty
payments are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated
balance sheet as deferred license revenue. License revenue is not recognized unless collectability is reasonably assured. Wholesale
revenue is recognized when merchandise is shipped to a customer, at which point title transfers to the customer, and when collection
is reasonably assured. Customers are not given extended terms or dating or return rights without proper prior authorization. Revenue
is recorded net of estimated returns, charge backs and markdowns based upon management’s estimates and historical experience.
Website revenue is recognized when merchandise is shipped to a customer and when collection is reasonably assured. Retail revenue
is recognized on the date of purchase from our retail stores. Advertising revenue received under sponsorship agreements is recorded
in the period in which the event to which the advertising rights were granted occurred. Design revenue received under design and
license agreements is recorded in the period in which the design services are provided to the licensee.
Deferred Tax Assets
and Valuation Allownace.
Deferred taxes are recorded for the difference between the financial statement and tax basis of the
Company’s assets and liabilities and net operating loss carryforwards. A valuation allowance is recorded to reduce deferred
tax assets to an amount whose realization is more likely than not. U.S. income taxes are not provided on the undistributed earnings
of foreign subsidiaries as they are considered to be permanently reinvested.
The Company’s
ability to utilize net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership.
In addition, the ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving
taxable income. There is no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Accordingly,
a valuation allowance has been recorded to offset deferred tax assets. Should we determine that we would be able to realize the
deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made.
Reserve for Closed
Facilities.
We maintain a reserve for future rental obligations, carrying costs, and other closing costs related to closed
facilities. In accordance with ASC 420, Exit or Disposal Cost Obligations, we recognize exit costs for any store closures at the
time the store is closed. Such costs are recorded within the discontinued operations line item on our condensed consolidated statements
of operations.
Stock Based Compensation.
Stock-based compensation expense is recognized based on awards ultimately expected to vest on a straight-line prorated basis. The
fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined
by the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors. Stock price volatility was estimated based on a peer
group of public companies and the expected term was estimated using the “safe harbor” provisions provided by generally
accepted accounting principles.
Noncontrolling Interest.
Profit and loss allocations to noncontrolling interest members of our subsidiaries are recorded as increases and decreases in noncontrolling
interest in our consolidated financial statements. Cash distributions, if any, made to a noncontrolling interest member of any
of our subsidiaries are accounted for as decreases in noncontrolling interest in the consolidated balance sheet of the Company.
To the extent the priority distributions are made, it would reduce the income allocable to the controlling interest.
Litigation Contingencies.
We are subject to on-going litigation which requires management to make certain assumptions and estimates regarding gain or loss
contingencies, if any, related to the outcome of pending litigation. In consultation with legal counsel, we consider the facts
and circumstances surrounding the pending litigation and the probability of the outcome of pending litigation, whether favorable
or unfavorable, in our estimates of gain or loss contingencies.
Results of Operations
The following table
presents consolidated statement of operations data from continuing operations for each of the periods indicated as a percentage
of net revenue.
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
Net revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating Expenses
|
|
|
158.0
|
%
|
|
|
82.6
|
%
|
|
|
124.3
|
%
|
|
|
92.2
|
%
|
Operating income from continuing operations
|
|
|
(58.0
|
)%
|
|
|
17.4
|
%
|
|
|
(24.3
|
)%
|
|
|
7.8
|
%
|
Comparison
of the three months ended June 30, 2012 and the three months ended June 30, 2011 from continuing operations
Net Revenue
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
1,045,085
|
|
|
$
|
84,922
|
|
|
|
1130.6
|
%
|
Net revenue from continuing
operations for the three months ended June 30, 2012 consists of license revenue earned under our various license agreements related
to our William Rast brand. During the three months ended June 30, 2012, we had one direct-to-retail and three product license agreements
for our William Rast brand. During the three months ended June 30, 2011, we earned revenue from one product license agreement.
In the second half of 2011, we began to transition our business model from a wholesale and retail apparel company to a brand management
and licensing business. In June 2012, we entered into two new license agreements for our newly acquired DVS brand. We expect to
derive the majority of our 2012 revenue from our license agreements and anticipate entering into additional license agreements
for our brands in the future.
Operating Expenses
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
1,650,771
|
|
|
$
|
70,126
|
|
|
|
2254.0
|
%
|
Operating
expenses from continuing operations for the three months ended June 30, 2012 and 2011 primarily related to salaries, royalties,
professional fees, facility costs,
marketing expenses and depreciation and amortization. The
increase in operating expenses from continuing operations for the three months ended June 30, 2012 compared to the three months
ended June 30, 2011 was due primarily to an increase in operating expense incurred to support our increase in license agreements
and related revenue during the three months ended June 30, 2012. We had one direct-to-retail and three wholesale license agreements
for our William Rast brand during the second quarter of 2012, compared to one wholesale license agreement during the second quarter
of 2011. Included in operating expenses from continuing operations for the three months ended June 30, 2012 is approximately $133,000
in royalty expense due to the minority interest member of our William Rast subsidiaries, Tennman WR-T, under the terms of our royalty
agreement related to license revenue earned from license agreements of our William Rast brand. In June 2012, we entered into two
new license agreements for our newly acquired DVS brand. Included in operating expenses for the second quarter of 2012 is approximately
$710,000 in legal and other fees incurred related to our DVS acquisition.
Interest Expense, net
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
$
|
190,740
|
|
|
$
|
15,167
|
|
|
|
1157.6
|
%
|
Interest expense from
continuing operations during the three months ended June 30, 2012 resulted primarily from interest at a rate of Libor on our $14.5
million Senior Secured Convertible Debentures (“Debentures”) and interest related to the accretion of the valuation
discount and amortization of deferred financing costs associated with our Debentures amounting to approximately $191,000 during
the three months ended June 30, 2012. Interest expense from continuing operations during the three months ended June 30, 2011 resulted
primarily from interest due at a rate of 8% on our promissory note payable to related parties amounting to $750,000. The increase
in interest expense from the second quarter of 2012 compared to the second quarter of 2011 is due primarily to the accretion of
valuation discount, amortization of deferred financing costs and an increase in borrowings during the period.
Provision for Income Taxes
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
$
|
900
|
|
|
$
|
-
|
|
|
|
N/A
|
|
The provision for income
taxes from continuing operations for the three months ended June 30, 2012 and 2011 represents the minimum tax payments due for
state and local purposes, including gross receipts tax on sales generated by our limited liability companies, and estimated Federal
and state taxes due at statutory effected tax rates, if any. As of June 30, 2012, a valuation allowance has been provided for the
entire amount of our deferred income tax asset related to net operating loss carryforwards, factored accounts receivable and bad
debt reserves and other reserves. At this time, we cannot determine that it is more likely than not that we will realize the future
income tax benefits related to our net operating losses. As of December 31, 2011, total net operating losses available to carry
forward to future periods amounted to approximately $11.5 million. The increase in the provision for income taxes from continuing
operations recorded for the three months ended June 30, 2012, compared to the three months ended June 30, 2011 resulted from an
increase in gross receipts tax related to an increase in revenue during the period.
Net Loss from Continuing Operations
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(797,326
|
)
|
|
$
|
(371
|
)
|
|
|
*
|
|
*Not meaningful
The increase in net
loss from continuing operations for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 is due
primarily to increased operating and interest expenses, offset by increased license revenue during the second quarter of 2012,
as discussed above.
Noncontrolling Interest from Continuing
Operations
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Noncontrolling interest from continuing operations
|
|
$
|
-
|
|
|
$
|
(30,720
|
)
|
|
|
100.0
|
%
|
Noncontrolling interest
from continuing operations recorded for the three months ended June 30, 2011 represents net loss allocations to Tennman WR-T, a
member of William Rast Sourcing and William Rast Licensing. Beginning January 1, 2009 through September 30, 2011, losses were allocated
to the members of William Rast Sourcing and William Rast Licensing based on their respective percentage interests in such entities
and profits were allocated to the members based on their percentage interest to the extent that the member was previously allocated
losses.
Effective as of October
1, 2011, we recapitalized the ownership of our William Rast branded apparel business. As further described under Note 5 to our
condensed consolidated financial statements, the recapitalization increased the ownership of Bella Rose in each of William Rast
Sourcing and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T as well as other consideration.
Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by Tennman WR-T and Bella Rose is
entitled to all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing
or William Rast Licensing that is not paid to Tennman WR-T.
Discontinued Operations of Wholesale
Business
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
210,319
|
|
|
$
|
(3,382,229
|
)
|
|
|
(106.2
|
)%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
1,231,321
|
|
|
|
(100.0
|
)%
|
|
|
$
|
210,319
|
|
|
$
|
(2,150,908
|
)
|
|
|
(109.8
|
)%
|
Net income and loss
from discontinued operations of our wholesale business for the three months ended June 30, 2012 and 2011 represents the results
of operations of our People’s Liberation and William Rast wholesale business. In November 2011, we began to transition from
a wholesale and retail focused business to a brand management and licensing business. As a result, our retail operations included
in our William Rast Retail subsidiary were discontinued. In 2012, we also decided to discontinue our wholesale operations completely.
For the remainder of 2012, we will continue to sell William Rast and People’s Liberation branded apparel on a limited basis
through our domestic wholesale operations in order to liquidate our existing inventory. The increase in income from discontinued
operations of our wholesale business in the second quarter of 2012 compared to the net loss incurred in the second quarter of 2011
was due primarily to decreased operating and income tax related expenses incurred during the second quarter of 2012, offset by
decreased revenue
earned in the second quarter of 2012
.
Discontinued Operations of Retail
Subsidiary
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(291,375
|
)
|
|
$
|
(244,814
|
)
|
|
|
19.0
|
%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
122,407
|
|
|
|
(100.0
|
)%
|
|
|
$
|
(291,375
|
)
|
|
$
|
(122,407
|
)
|
|
|
138.0
|
%
|
Net loss from discontinued
operations of retail subsidiary for the three months ended June 30, 2012 and 2011 represents the results of operations of our William
Rast Retail subsidiary. In November 2011, we began to transition from a wholesale and retail focused business to a brand management
and licensing business. As a result, our retail operations included in our William Rast Retail subsidiary, which consisted of four
retail stores, were discontinued. We closed two of our retail stores in 2011, one store in the second quarter of 2012, and the
remaining store is expected to be closed in the second half of 2012. The increase in net loss from discontinued operations of our
retail subsidiary during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 is due primarily
to increased operating expenses related to the closure of one of our stores in the second quarter of 2012, decreased net revenue
and decreased noncontrolling interest during the three months ended June 30, 2012.
Discontinued Operations of J. Lindeberg
Subsidiaries
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
$
|
-
|
|
|
$
|
136,792
|
|
|
|
(100.0
|
)%
|
Gain on sale of member interest in subsidiary
|
|
|
-
|
|
|
|
2,012,323
|
|
|
|
(100.0
|
)%
|
|
|
|
-
|
|
|
|
2,149,115
|
|
|
|
(100.0
|
)%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
(68,396
|
)
|
|
|
100.0
|
%
|
|
|
$
|
-
|
|
|
$
|
2,080,719
|
|
|
|
(100.0
|
)%
|
Net income from discontinued
operations of our J. Lindeberg subsidiaries for the period ended June 30, 2011 represents the results of operations of our J. Lindeberg
subsidiary from the beginning of the quarter through the date of the sale of our 50% member interest in J. Lindeberg, USA on April
26, 2011. The gain on the sale of member interest in subsidiary is further described in Note 10 to this report.
Net Loss Attributable to Common Stockholders
|
|
Three Months
Ended
June 30, 2012
|
|
|
Three Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(878,382
|
)
|
|
$
|
(223,687
|
)
|
|
|
292.7
|
%
|
The increase in net
loss attributable to common stockholders for the three months ended June 30, 2012 compared to the three months ended June 30, 2011
is due primarily to increased operating and interest expenses incurred from continuing operations and decreased noncontrolling
interest from discontinued operations, offset by increased revenue from continuing operations and decreased loss from discontinued
operations of our wholesale and retail businesses for the three months ended June 30, 2012.
Comparison
of the six months ended June 30, 2012 and the six months ended June 30, 2011 from continuing operations
Net Revenue
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
2,099,599
|
|
|
$
|
84,922
|
|
|
|
2372.4
|
%
|
Net revenue from continuing
operations for the six months ended June 30, 2012 consists of license revenue earned under our various license agreements related
to our William Rast brand. During the six months ended June 30, 2012, we had one direct-to-retail and three product license agreements.
During the six months ended June 30, 2011, we earned revenue from one product license agreement. In the second half of 2011, we
began to transition our business model from a wholesale and retail apparel company to a brand management and licensing business.
In June 2012, we entered into two new license agreements for our newly acquired DVS brand. We expect to derive the majority of
our 2012 revenue from our license agreements and anticipate entering into additional license agreements for our brands in the future.
Operating Expenses
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
2,609,490
|
|
|
$
|
78,328
|
|
|
|
3231.5
|
%
|
The increase in operating
expenses from continuing operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was due
to an increase in operating expense incurred to support our increase in license agreements and related revenue during the six months
ended June 30, 2012. We had one direct-to-retail and three wholesale license agreements of our William Rast brand during the first
half of 2012, compared to one wholesale license agreement during the first half of 2011. Included in operating expenses from continuing
operations for the six months ended June 30, 2012 is approximately $359,000 in royalty expense due to the minority interest member
of our William Rast subsidiaries, Tennman WR-T, under the terms of our royalty agreement with Tennman WR-T. In June 2012, we entered
into two new license agreements for our newly acquired DVS brand. Included in operating expenses for the second quarter of 2012
is approximately $710,000 in legal and other fees incurred related to our DVS acquisition. Also included in operating expenses
from continuing operations for the six months ended June 30, 2012, is approximately $65,000 of nonrecurring expenses and approximately
$172,000 of professional fees related to our 2011 year-end audit.
Interest Expense, net
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
$
|
334,329
|
|
|
$
|
30,167
|
|
|
|
1008.3
|
%
|
Interest expense from
continuing operations during the six months ended June 30, 2012 resulted primarily from interest due at rates of 7% and 8% on our
promissory notes payable in the aggregate principal amount of $1.75 million through the date of their repayment on February 3,
2012, interest at a rate of London Interbank Offered Rate (“LIBOR”) on our $14.5 million Debentures and interest related
to the accretion of the valuation discount and amortization of deferred financing costs associated with our Debentures amounting
to approximately $334,000 during the six months ended June 30, 2012. Interest expense from continuing operations during the six
months ended June 30, 2011 resulted primarily from interest due at a rate of 8% on our promissory note payable to related parties
amounting to $750,000. The increase in interest expense from the first half of 2012 compared to the first half of 2011 is due primarily
to the accretion of valuation discount, amortization of deferred financing costs and an increase in borrowings during the period.
Provision for Income Taxes
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
$
|
10,900
|
|
|
$
|
800
|
|
|
|
1262.5
|
%
|
The provision for income
taxes from continuing operations for the six months ended June 30, 2012 and 2011 represents the minimum tax payments due for state
and local purposes, including gross receipts tax on sales generated by our limited liability companies, and estimated Federal and
state taxes due at statutory effected tax rates, if any. As of June 30, 2012, a valuation allowance has been provided for the entire
amount of our deferred income tax asset related to net operating loss carryforwards, factored accounts receivable and bad debt
reserves and other reserves. At this time, we cannot determine that it is more likely than not that we will realize the future
income tax benefits related to our net operating losses. As of December 31, 2011, total net operating losses available to carry
forward to future periods amounted to approximately $11.5 million. The increase in the provision for income taxes from continuing
operations recorded for the six months ended June 30, 2012, compared to the six months ended June 30, 2011 resulted from an increase
in gross receipts tax related to an increase in revenue during the period.
Net Loss from Continuing Operations
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(855,120
|
)
|
|
$
|
(24,373
|
)
|
|
|
3408.5
|
%
|
The increase in net
loss from continuing operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 is due primarily
to increased operating and interest expenses, offset by increased license revenue earned during the six months ended June 30, 2012,
as discussed above.
Noncontrolling Interest from Continuing
Operations
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Noncontrolling interest from continuing operations
|
|
$
|
-
|
|
|
$
|
(18,719
|
)
|
|
|
100.0
|
%
|
Noncontrolling interest
from continuing operations recorded for the six months ended June 30, 2011 represents net loss allocations to Tennman WR-T, a member
of William Rast Sourcing and William Rast Licensing. Beginning January 1, 2009 through September 30, 2011, losses were allocated
to the members of William Rast Sourcing and William Rast Licensing based on their respective percentage interests in such entities
and profits were allocated to the members based on their percentage interest to the extent that the member was previously allocated
losses.
Effective as of October
1, 2011, we recapitalized the ownership of our William Rast branded apparel business. As further described under Note 5 to our
condensed consolidated financial statements, the recapitalization increased the ownership of Bella Rose in each of William Rast
Sourcing and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T as well as other consideration.
Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by Tennman WR-T and Bella Rose is
entitled to all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing
or William Rast Licensing that is not paid to Tennman WR-T.
Discontinued Operations of Wholesale
Business
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(5,639
|
)
|
|
$
|
(2,427,097
|
)
|
|
|
(99.8
|
)%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
2,495,499
|
|
|
|
(100.0
|
)%
|
|
|
$
|
(5,639
|
)
|
|
$
|
68,402
|
|
|
|
(108.2
|
)%
|
Net
loss from discontinued operations of our wholesale business for the six ended June 30, 2012 and 2011 represents the results of
operations of our People’s Liberation and William Rast wholesale business. In November 2011, we began to transition from
a wholesale and retail focused business to a brand management and licensing business. As a result, our retail operations included
in our William Rast Retail subsidiary were discontinued. In 2012, we also decided to discontinue our wholesale operations completely.
For the remainder of 2012, we will continue to sell William Rast and People’s Liberation branded apparel on a limited basis
through our domestic wholesale operations in order to liquidate our existing inventory. The decrease in loss from discontinued
operations of our wholesale business in the first half of 2012 compared to the first half of 2011 was due primarily to decreased
operating expenses incurred during the first half of 2012, offset by non-recurring income received in the
settlement
of our litigation with Charlotte Russe during the first quarter of 2011 and decreased revenue
earned
in the first half of 2012
.
Discontinued Operations of Retail
Subsidiary
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(446,640
|
)
|
|
$
|
(575,220
|
)
|
|
|
(22.4
|
)%
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
287,610
|
|
|
|
(100.0
|
)%
|
|
|
$
|
(446,640
|
)
|
|
$
|
(287,610
|
)
|
|
|
55.3
|
%
|
Net loss from discontinued
operations of retail subsidiary for the six months ended June 30, 2012 and 2011 represents the results of operations of our William
Rast Retail subsidiary. In November 2011, we began to transition from a wholesale and retail focused business to a brand management
and licensing business. As a result, our retail operations included in our William Rast Retail subsidiary, which consisted of four
retail stores, were discontinued. We closed two of our retail stores in 2011, one store in the second quarter of 2012, and the
remaining store is expected to be closed in the second half of 2012. The increase in net loss from discontinued operations of our
retail subsidiary during the six months ended June 30, 2012 compared to the six months ended June 30, 2011 is due primarily to
decreased noncontrolling interest and decreased net revenue, offset by decreased operating expenses during the six months ended
June 30, 2012.
Discontinued Operations of J. Lindeberg
Subsidiaries
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
(125,771
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of member interest in subsidiary
|
|
|
-
|
|
|
|
2,012,323
|
|
|
|
(100.0
|
)%
|
|
|
|
-
|
|
|
|
1,886,552
|
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in discontinued operations
|
|
|
-
|
|
|
|
62,885
|
|
|
|
(100.0
|
)%
|
|
|
$
|
-
|
|
|
$
|
1,949,437
|
|
|
|
(100.0
|
)%
|
Net income from discontinued
operations of our J. Lindeberg subsidiaries for the period ended June 30, 2011 represents the results of operations of our J. Lindeberg
subsidiary from the beginning of the year through the date of the sale of our 50% member interest in J. Lindeberg, USA on April
26, 2011. The gain on the sale of member interest in subsidiary is further described in Note 10 to this report.
Net (Loss) Income Attributable to
Common Stockholders
|
|
Six Months
Ended
June 30, 2012
|
|
|
Six Months
Ended
June 30, 2011
|
|
|
Percent
Change
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(1,307,399
|
)
|
|
$
|
1,687,137
|
|
|
|
(177.5
|
)%
|
The net loss attributable
to common stockholders for the six months ended June 30, 2012 compared to net income for the six months ended June 30, 2011 is
due primarily to increased operating and interest expenses incurred from continuing operations and decreased noncontrolling interest
from discontinued operations recorded for the six months ended June 30, 2012, offset by increased revenue from continuing operations
and decreased losses from discontinued operations of our wholesale and retail businesses.
Liquidity and Capital
Resources
As of June 30, 2012,
our continuing operations had cash and cash equivalents of approximately $6.6 million and a working capital balance of approximately
$5.5 million. As of June 30, 2011, our continuing operations had cash and cash equivalents of approximately $661,000, a working
capital balance of approximately $404,000, and approximately $214,000 of availability from our factors. As of June 30, 2011, advances
from our factors, net of matured funds, totaled approximately $481,000.
Cash
Flows from Continuing Operations
Cash flows from continuing
operations for operating, financing and investing activities for the six months ended June 30, 2012 and 2011 are summarized in
the following table:
|
|
Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
Operating activities
|
|
$
|
(1,168,815
|
)
|
|
$
|
258,470
|
|
Investing activities
|
|
|
(4,972,126
|
)
|
|
|
722,228
|
|
Financing activities
|
|
|
14,029,778
|
|
|
|
-
|
|
Net increase in cash
|
|
$
|
7,888,837
|
|
|
$
|
980,698
|
|
Operating Activities
Net cash used in operating
activities from continuing operations was approximately $1.2 million for the six months ended June 30, 2012 and net cash provided
by operating activities from continuing operations was approximately $258,000 for the six months ended June 30, 2011. Net cash
used in operating activities from continuing operations for the six months ended June 30, 2012 was primarily a result of a decrease
in deferred license revenue. Net cash provided by operating activities from continuing operations for the six months ended June
30, 2011 was primarily a result of increased accounts payable and accrued expenses during the period.
Investing Activities
Net cash used in
investing activities from continuing operations was approximately $5.0 million for the six months ended June 30, 2012 and net
cash provided by investing activities from continuing operations was approximately $722,000 for the six months ended June 30,
2011. Net cash used in investing activities from continued operations for the six months ended June 30, 2012 consisted
primarily of $5.0 million of net cash paid in the DVS acquisition in June 2012 and related sale of DVS
non-core assets, as further discussed in Note 12 to the consolidated financial statements. Net cash provided by investing
activities from continued operations for the six months ended June 30, 2011 consisted primarily of proceeds received from the
sale of a receivable resulting from the sale of our member interest in J. Lindeberg USA and a decrease in restricted cash,
offset by capital expenditures.
Financing Activities
Net
cash provided by financing activities from continuing operations for the six months ended June 30, 2012 amounted to
approximately $14.0 million. In February 2012, we received $14,500,000 in gross proceeds from the sale of Debentures. Net
proceeds from this transaction after the payment of closing, legal and other costs and the repayment of outstanding
obligations related to notes payable and our factoring agreement amounted to approximately $11.7 million.
We also
received $2.1 million of cash from our noncontrolling interest member of DVS LLC related to our DVS acquisition in June 2012, as further discussed in Note 12 to the consolidated financial statements.
There
were no financing activities from continuing operations for the six months ended June 30, 2011.
Future Capital Requirements
We believe the cash
received from our sale of Debentures will be sufficient to meet our capital requirements for the next twelve months, as they relate
to our current operations and our growth strategies in the near term. The extent of our future capital requirements will depend
on many factors, including our results of operations and growth through the acquisition of additional brands.
Contractual Obligations and Off-Balance
Sheet Arrangements
The following summarizes our contractual
obligations at June 30, 2012 and the effects such obligations are expected to have on liquidity and cash flows in future periods:
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
Operating leases
|
|
$
|
3,336,792
|
|
|
$
|
577,530
|
|
|
$
|
1,411,093
|
|
|
$
|
793,446
|
|
|
$
|
554,723
|
|
Minimum royalties due
|
|
|
2,400,000
|
|
|
|
400,000
|
|
|
|
1,200,000
|
|
|
|
800,000
|
|
|
|
*
|
|
Senior secured convertible debentures
|
|
|
14,500,000
|
|
|
|
-
|
|
|
|
14,500,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
20,236,792
|
|
|
$
|
977,530
|
|
|
$
|
17,111,093
|
|
|
$
|
1,593,446
|
|
|
$
|
554,723
|
|
|
*
|
Pursuant to the royalty agreement between WRS, WRL and TWR, as discussed in Note 5 to the condensed
consolidated financial statements, WRS is obligated to pay TWR a guaranteed minimum royalty of $400,000 per calendar year, with
such payments continuing until the earlier of (i) the date that WRL pays a liquidating payment to TWR or (ii) the date that TWR
or any affiliates no longer owns Class B membership interests in WRL.
|
At June 30, 2012, approximately
$35,000 of the Company’s cash is held under lease lines as collateral to secure the Company’s lease agreements.
At June 30, 2012 and
2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
Factored accounts receivable
may subject us to off-balance sheet risk. We sold the majority of our trade accounts receivable to our factor and were contingently
liable to the factor for merchandise disputes, other customer claims and invoices that were not credit approved by the factors.
From time to time, our factor also issued letters of credit and vendor guarantees on our behalf. There were no outstanding letters
of credit or vendor guarantees as of June 30, 2012 and December 31, 2011. There was no ledger debt (payables to suppliers that
use the same factor as the Company) as of June 30, 2012 and December 31, 2011.
Recent Accounting Pronouncements
See Note 3 to the accompanying
consolidated financial statements for a full description of recent accounting pronouncements including the respective expected
dates of adoption and effects on results of operations and financial condition.