Consolidated Statements
of Cash Flows are continued on the following page.
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
NOTE 1 - 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 during the
second or third quarter of 2012. To reflect the Company’s business transition, in March 2012, the Company’s corporate
name was changed from People’s Liberation, Inc. to Sequential Brands Group, Inc. The Company’s wholesale and retail
operations are referred to as “Historical Operations” in these notes to the Company’s Consolidated Financial
Statements.
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
® and
People’s Liberation
® 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 three traditional 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 traditional 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, as the Company transitions its business model and liquidates its existing inventory, the Company will continue to sell
William Rast and People’s Liberation branded apparel on a limited basis through its domestic wholesale operations.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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. The Company’s two remaining William Rast retail stores are expected
to be closed in 2012. The Company expects to have limited sales from these locations in 2012.
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.
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. 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 consolidated financial statements.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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 consolidated financial statements.
Discontinued Operations
In 2012, the Company’s
Board of Directors decided to discontinue the Company’s wholesale operations and in 2012, the Company accounted for its wholesale
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.
In the Original Filing,
the Company’s financial statements for the fiscal years ended December 31, 2011 and 2010, did not reflect the discontinued
operations of the Company’s wholesale business since the decision to discontinue those operations was not made at the time
those financial statements were previously issued. In accordance with guidance provided in FASB ASC 360 and guidance provided by
the SEC, the previously filed consolidated financial statements as of and for the years ended December 31, 2011 and 2010 have been
retroactively amended to reflect the Company’s wholesale business as discontinued operations. The Company’s Continuing
Operations presented in this Form 10-K/A represent the Company’s licensing and brand management business.
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.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
The consolidated financial statements and the related notes to the consolidated financial statements included
in this Amended Annual report on Form 10-K/A to the Company’s Annual Report on Form 10-K for the year ended December 31,
2011 have been adjusted to reflect the retroactive effect of the reverse stock split.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accounts of Versatile,
Bella Rose, William Rast Sourcing, William Rast Licensing, William Rast Retail, William Rast Europe, and through April 26, 2011
J. Lindeberg USA and J. Lindeberg Retail have been consolidated for financial statement presentation. All significant inter-company
accounts and transactions have been eliminated in the consolidation.
Discontinued Operations
The Company accounted
for the sale of its 50% member interest in J. Lindeberg, USA and the decision 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
.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America, 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, goodwill, deferred taxes,
accrued expenses, income taxes, stock based compensation, deferred license revenue 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.
Revenue Recognition
License Revenue
- 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 revenue is recognized on a straight-line
basis over each period, 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.
Wholesale Revenue
–
The Company recognizes wholesale revenue 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.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Website Revenue
- The Company recognizes website revenue when merchandise is shipped to a customer and when collection is reasonably assured.
Retail Revenue
- The Company recognizes retail revenue on the date of purchase from the Company’s retail stores.
Advertising Revenue
- The Company records advertising revenue received under its sponsorship agreements in the period in which the event to which the
advertising rights were granted occurred.
Design Revenue
- The Company records design revenue received under its design and license agreements in the period in which the design services
are provided to the licensee.
Comprehensive Income
The Company discloses
comprehensive income in accordance with generally accepted principles which establish standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose financial statements. There were no material other comprehensive
income items for the years ended December 31, 2011 and 2010.
Advertising
Advertising costs are
charged to expense as of the first date the advertisements take place. Advertising expenses included in discontinued operations
of wholesale business approximated $942,000 and $797,000 for the years ended December 31, 2011 and 2010, respectively.
Inventories
Inventories, consisting
of piece goods and trim, work-in-process and finished goods, are stated at the lower of cost (first-in, first-out method) or market
value. Inventories are evaluated for obsolescence and slow-moving items based on management’s analysis of sales levels, sales
projections and inventory levels. The carrying value of inventories is included in current assets held for disposition of wholesale
business and retail subsidiary for the years ended December 31, 2011 and 2010.
Stock-Based Compensation
The Company recognizes
compensation costs relating to share-based payment transactions in accordance with generally accepted accounting principles. See
Note 15 for disclosures regarding stock-based compensation.
Property and Equipment
Property and equipment
are stated at cost. Maintenance and repairs are charged to expense as incurred. Upon retirement or other disposition of property
and equipment, applicable cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses
are included in results of operations.
Depreciation of property
and equipment is computed using the straight-line method based on estimated useful lives of the assets as follows:
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Furniture and fixtures
|
5 years
|
|
|
Office equipment
|
5 to 7 years
|
|
|
Machinery and equipment
|
5 to 7 years
|
|
|
Leasehold improvements
|
Term of the lease or the estimated life of the related improvements, whichever is shorter.
|
|
|
Computer Software
|
5 years
|
Included in long-term
assets held for disposition at December 31, 2011 and 2010 are furniture and fixtures, computer software and leasehold improvements
with an aggregate net book value of $259,725 and $934,510, respectively, related to the discontinued operations of the Company’s
retail subsidiary and wholesale business.
Impairment of Long-Lived Assets and
Goodwill
Long-lived assets, including trademarks, and operational control rights, representing goodwill, related
to William Rast Sourcing and William Rast Licensing, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. For the year ended December 31, 2011, the Company recorded an impairment loss of $207,581 related to trade names
the Company is no longer using. The impairment loss is included in loss from discontinued operations of wholesale business. There
was no impairment loss recorded for the year ended December 31, 2010.
Income Taxes
Bella Rose, William
Rast Sourcing, William Rast Licensing, William Rast Europe, William Rast Retail, J. Lindeberg USA and J. Lindeberg USA Retail are
limited liability companies and are subject to California minimum tax of $800 and a fee based on total annual revenue. The earnings
of a limited liability company are reported individually by its members.
On November 22, 2005,
People’s Liberation, Inc. (formerly Century Pacific Financial Corporation) acquired all of the outstanding voting securities
of Bella Rose and Versatile, each of which became a wholly-owned subsidiary of the Company. As a result, Versatile and Bella Rose
(including its subsidiaries, William Rast Sourcing, William Rast Licensing and J. Lindeberg USA through April 26, 2011) are consolidated
and income taxes are reported by the parent, Sequential Brands Group, Inc. (formerly People’s Liberation, Inc.). Taxes are
calculated on a consolidated basis at C-Corporation income tax rates.
Deferred income taxes
are recognized using the asset and liability method by applying income tax rates to cumulative temporary differences based on when
and how they are expected to affect the tax return. Deferred tax assets and liabilities, if any, are adjusted for income tax rate
changes.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
The Company’s
policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As
of December 31, 2011 and 2010, the Company did not have any accrued interest or penalties associated with any unrecognized tax
benefits.
Generally accepted
accounting principles require the Company to account for uncertainty in income taxes recognized in its financial statements, which
includes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Company uses a two-step approach to recognize and measure uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that
it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized
upon ultimate settlement.
The Company files U.S.
Federal tax returns, California, New York, Georgia, Florida, New Jersey and Texas franchise tax returns. For the U.S. Federal
return, all periods subsequent to December 31, 2007 are subject to tax examination by the U.S. Internal Revenue Service (“IRS”).
In February 2011, the Company was notified by the IRS that one of its subsidiaries, William Rast Sourcing, was selected for examination
for the 2008 tax year. On February 24, 2012, the Company received notice from the IRS stating that their audit was concluded
and there were no adjustments proposed. Therefore, no reserves for uncertain income tax positions have been recorded for the years
ended December 31, 2011 and 2010. In addition, the Company does not anticipate that the total amount of unrecognized tax benefit
related to any particular tax position will change significantly within the next 12 months.
Concentration of Credit Risk
Financial instruments,
which potentially expose the Company to concentration of credit risk, consist primarily of cash and cash equivalents, trade accounts
receivable, and amounts due to/from factors. Concentration of credit risk with respect to trade accounts receivable is significantly
mitigated by the use of factors, which effectively transfers a substantial amount of credit risk to the factors. The Company and
its factors perform on-going credit evaluations of its customers and the Company maintains an allowance for doubtful accounts and
chargebacks. The Company may extend unsecured credit to its customers in the normal course of business.
For the years ended
December 31, 2011 and 2010, the Company’s products were primarily sold to department stores, major and specialty retail stores
and international distributors. These customers can be significantly affected by changes in economic, competitive or other factors.
The Company, at times, made substantial sales to a relatively few, large customers. In order to minimize the risk of loss, the
Company assigned the majority of domestic accounts receivable to its factors without recourse. For non-factored and recourse receivables,
account-monitoring procedures are utilized to minimize the risk of loss. Collateral is generally not required.
Accounts Receivable - Allowance for
Returns, Discounts and Bad Debts
The
Company
evaluates the collectability of accounts receivable and charge backs (disputes from customers) based upon a combination of factors.
In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (such as
in the case of bankruptcy filings, litigation or substantial
downgrading by credit sources),
a specific allowance
for bad debts is taken against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected.
For all other customers, the Company recognizes an allowance for bad debts and uncollectible charge backs based on its historical
collection experience. If collection experience deteriorates (for example, due to an unexpected material adverse change in a major
customer’s ability to meet its financial obligations to the Company), the estimates of the recoverability of amounts due
could be reduced by a material amount.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Shipping and Handling Costs
The Company recorded
shipping and handling costs billed to wholesale customers as a component of revenue, and shipping and handling costs incurred by
the Company for inbound and outbound freight were recorded as a component of cost of sales. Total shipping and handling costs included
as a component of revenue for the years ended December 31, 2011 and 2010 amounted to approximately $53,000 and $120,000, respectively.
Total shipping and handling costs included as a component of cost of sales amounted to approximately $635,000 and $1,387,000 for
the years ended December 31, 2011 and 2010, respectively. Shipping and handling costs are included in loss from discontinued operations
of wholesale business in the statement of operations for the years ended December 31, 2011 and 2010.
Classification of
Expenses
Licensing and Brand
Management Business
Operating Expenses
- Operating expenses primarily include compensation, royalties, professional fees, marketing and promotion, facility costs, travel
and entertainment, depreciation and amortization expense, and other general corporate expenses.
Historical Operations
Cost of Goods Sold
- Cost of goods sold includes expenses primarily related to inventory purchases and contract labor, freight, duty and overhead
expenses. Overhead expenses primarily consist of warehouse and shipping salaries and expenses.
Selling, Design
and Production Expense –
Selling, design and production expense primarily includes tradeshows, fashion shows, salaries,
commissions, royalties, advertising, marketing and promotion, design fees, samples, travel and showroom expenses.
General and Administrative
Expenses
- General and administrative expenses primarily include salaries, professional fees, facility costs, travel and entertainment,
depreciation and amortization expense, and other general corporate expenses.
Noncontrolling Interest
In accordance with
the provisions of Statement of Financial Accounting Standard No. 160,
Noncontrolling Interest in Consolidated Financial Statements
– an amendment of ARB No. 51,
superseded by ASC 810-10-65 adopted by the Company on January 1, 2009, the Company allocates
profits and losses to each of the members of William Rast Sourcing and William Rast Licensing in accordance with the amended and
restated limited liability company operating agreements for such entities, which became effective as of January 1, 2007 (the “Operating
Agreements”).
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
William Rast Sourcing,
and its wholly-owned subsidiaries William Rast Retail and William Rast Europe B.V., and William Rast Licensing have accumulated
losses totaling approximately $15.7 million from inception (October 1, 2006) through September 30, 2011. Beginning January 1, 2009
through September 30, 2011, approximately $6.0 million of these losses has been allocated to Tennman WR-T, Inc., the noncontrolling
interest member of William Rast Sourcing and William Rast Licensing.
Effective as of October
1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. As a result of the recapitalization,
both William Rast Sourcing and William Rast Licensing are owned 82% by Bella Rose and 18% by Tennman WR-T, Inc. Beginning October
1, 2011, all operating losses will be allocated to Bella Rose in accordance with the amended and restated operating agreements
of William Rast Sourcing and William Rast Licensing. See further discussion in Note 6 to the consolidated financial statements.
Beginning
July 1, 2008 through April 26, 2011, the operations of J. Lindeberg USA are included in the consolidated financial statements
of the Company. Profit and loss allocations to Lindeberg Sweden were recorded as increases and decreases in noncontrolling interest
in the consolidated financial statements of the Company. On April 26, 2011, the Company and its wholly owned subsidiary, Bella
Rose, LLC, completed the sale of Bella Rose’s 50% membership interest in J. Lindeberg USA, LLC to J. Lindeberg USA Corp.,
as further described in Note 14 to the consolidated financial statements.
Recently Issued Accounting Standards
In December 2011,
the Financial Accounting Standards Board (“FASB”) issued authoritative guidance in regards to the presentation of netting
assets and liabilities as a single amount in the statement of financial position to address the difference between GAAP and international
financial reporting standards (“IFRS”). This authoritative guidance is to be applied for annual reporting periods beginning
on or after January 1, 2013, and interim periods within those annual periods. The Company does not expect the adoption of this
guidance to have a material effect on its consolidated financial statements.
In June 2011,
the FASB issued ASU No. 2011-5, which amends the Comprehensive Income Topic of the ASC. 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 will adopt the ASU as required. It will have no affect on the Company’s results
of operations, financial condition or liquidity.
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. Early adoption is permitted. The Company is currently
evaluating the affects adoption of ASU 2011-08 may have on its goodwill impairment testing, if any.
Other recent accounting
pronouncements did not or are not believed to have a material impact on the Company's present or future consolidated financial
statements.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Fair Value of Financial Instruments
The following methods
and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate
that value.
Accounts receivable
and due from (to) factor
: Due to the short-term nature of the receivables, the fair value approximates the carrying value.
Accounts payable,
accrued expenses and deferred license revenue
: Due to the short-term nature of these liabilities, the fair value approximates
the carrying value.
Note Payable and
Note Payable to related parties:
Estimated to approximate fair value based upon current market borrowing rates for loans with
similar terms and maturities.
In accordance with
generally accepted accounting principles, the Company measures fair value of financial assets and liabilities by establishing a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
·
|
Level I - Quoted prices (unadjusted) in active markets for identical asset or liabilities
that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level I inputs
include active exchange-traded securities and exchange-based derivatives.
|
|
·
|
Level II - Inputs other than quoted prices included within Level I that are directly observable
for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities
utilizing Level II inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
|
|
·
|
Level III - Unobservable inputs for the asset or liability only used when there is little, if any,
market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level III inputs
include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value
pricing models.
|
The Company determined
that as of December 31, 2011 and 2010, there were no significant financial instruments that required fair value measurement.
NOTE 3 - EARNINGS
PER SHARE
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.
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. 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.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Warrants representing
1,112,666 shares of common stock at exercise prices ranging from $1.20 to $7.50 per share and stock options representing 451,467
shares of common stock at exercise prices ranging from $2.25 to $18.75 per share were outstanding as of December 31, 2011, but
were excluded from the average number of common shares outstanding in the calculation of diluted earnings per share for the year
ended December 31, 2011 because the effect of including these shares would have been antidilutive.
Warrants representing
29,333 shares of common stock at exercise prices ranging from $6.00 to $7.50 per share and stock options representing 172,333
shares of common stock at exercise prices ranging from $3.00 to $18.75 per share
were outstanding as of December 31, 2010, but were excluded from the average number of common shares outstanding in
the calculation of earnings per share for the year ended December 31, 2010 because the effect of including these shares would
be anti-dilutive.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment
from continuing operations is summarized as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
257,304
|
|
|
$
|
249,864
|
|
Office equipment
|
|
|
72,715
|
|
|
|
66,059
|
|
Machinery and equipment
|
|
|
13,901
|
|
|
|
13,901
|
|
Auto
|
|
|
86,518
|
|
|
|
-
|
|
Leasehold improvements
|
|
|
47,623
|
|
|
|
47,623
|
|
Computer software
|
|
|
225,348
|
|
|
|
221,718
|
|
|
|
|
703,409
|
|
|
|
599,165
|
|
Less accumulated depreciation and amortization
|
|
|
(403,360
|
)
|
|
|
(355,619
|
)
|
|
|
$
|
300,049
|
|
|
$
|
243,546
|
|
Depreciation and amortization
expense from continuing operations amounted to $118,329 and $115,794 for the years ended December 31, 2011 and 2010, respectively.
Included in long-term
assets held for disposition at December 31, 2011 are furniture and fixtures, computer software and leasehold improvements with
an aggregate net book value of $259,725 related to the discontinued operations of the Company’s wholesale and retail subsidiaries.
NOTE 5 – TRADEMARKS
Trademarks from continuing
operations are summarized as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Trademarks, at cost
|
|
$
|
499,298
|
|
|
$
|
481,802
|
|
Less accumulated amortization
|
|
|
(107,723
|
)
|
|
|
(74,573
|
)
|
|
|
$
|
391,575
|
|
|
$
|
407,229
|
|
Future annual estimated
amortization expense is summarized as follows:
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Years Ending December 31,
|
|
|
|
2012
|
|
$
|
26,105
|
|
2013
|
|
|
26,105
|
|
2014
|
|
|
26,105
|
|
2015
|
|
|
26,105
|
|
2016
|
|
|
26,105
|
|
Thereafter
|
|
|
261,050
|
|
|
|
$
|
391,575
|
|
Trademark amortization expense from continuing operations amounted to $50,657 and $29,910 for the years
ended December 31, 2011 and 2010, respectively. For the year ended December 31, 2011, the Company recorded an impairment loss of
$207,581 related to trade names the Company is no longer using. The impairment loss was charged to loss from discontinued operations
of wholesale business. There were no impairment losses recorded for the year ended December 31, 2010.
NOTE 6 – WILLIAM RAST OWNERSHIP
RECAPITALIZATION AND GOODWILL
William Rast Ownership Recapitalization
Effective as of October
1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. As further described below, the
recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing, LLC (“WRS”) and William Rast
Licensing, LLC (“WRL”) in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as
other consideration. The recapitalization was implemented through the entry into the following agreements on October 3, 2011:
|
·
|
Second Amended and Restated Limited Liability
Company Operating Agreement of William Rast Sourcing, LLC by and among Bella Rose and TWR (the “Sourcing Operating Agreement”);
|
|
·
|
Second Amended and Restated Limited Liability
Company Operating Agreement of William Rast Licensing, LLC by and among Bella Rose and TWR (the “Licensing Operating Agreement”
and together with the Sourcing Operating Agreement, the “New Operating Agreements”);
|
|
·
|
Royalty Agreement by and among WRS, WRL
and TWR (the “Royalty Agreement”);
|
|
·
|
Preemptive Rights and Board Nominee Agreement
by and between the Company and TWR (the “Rights Agreement”);
|
|
·
|
Services Agreement by and between WRL
and Tennman Brands, LLC f/s/o Justin Timberlake (“TBL”)(the “Services Agreement”); and
|
|
·
|
Voting Agreement by and among Colin Dyne,
Justin Timberlake and Al Gossett (the “Voting Agreement”).
|
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
The New Operating Agreements
amend and restate that certain Amended and Restated Operating Agreement of William Rast Sourcing, LLC effective January 1, 2007,
as amended October 2, 2007, and that certain Amended and Restated Operating Agreement of William Rast Licensing, LLC effective
January 1, 2007, as amended October 2, 2007. The New Operating Agreements reclassify the membership interests previously issued
to the members of each of WRS and WRL, such that Bella Rose now holds 82% of the membership interests of each of WRS and WRL (in
the form of Class A membership interests), with the remaining 18% of the membership interests of each of WRS and WRL held by TWR
(in the form of Class B membership interests).
The New Operating Agreements
provide that the holders of the Class A membership interests of each of WRS and WRL shall be entitled to all of the distributable
cash from operations and all of the distributable cash from a Sale Transaction (as defined in the New Operating Agreements) that
is not paid to the holders of the Class B membership interests of each of WRS and WRL. In connection with a Sale Transaction of
WRS or WRL, in exchange for the repurchase by WRS or WRL, as applicable, of all of its Class B membership interests, WRS or WRL,
as applicable, shall pay to the holders of such Class B membership interests a liquidating payment equal to 18% of the aggregate
sale proceeds for such Sale Transaction (the “Liquidating Payment”).
In connection with
the ownership recapitalization, TWR, WRS and WRL entered into the Royalty Agreement. Pursuant to the Royalty Agreement, WRS is
obligated to pay TWR 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 WRS pays the Liquidating Payment or (ii) the date that TWR or any of its affiliates no longer owns Class B membership interests
in WRS. During each year of the agreement, WRS is obligated to pay TWR 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 WRL shall
pay to TWR an amount equal to 50.0% of all gross receipts of WRL in respect of royalties or other compensation earned with respect
to the license by WRL 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 WRL pays the Liquidating Payment or (ii) the date that TWR or any of its
affiliates no longer owns Class B membership interests in WRL.
Also in connection
with the above-described ownership recapitalization, TWR and the Company entered into the Rights Agreement. Pursuant to the Rights
Agreement, the Company granted to TWR, for a period of up to five years, the right to purchase up to 25% of new securities that
the Company may sell from time to time on the same terms offered to other investors and the right to designate Al Gossett as a
nominee for election to the Board of Directors of the Company.
As part of the above-described
transaction, Colin Dyne, Justin Timberlake and Al Gossett entered into the Voting Agreement. Pursuant to the Voting Agreement,
such stockholders agree to vote their shares of People’s Liberation’s common stock at any meeting of the Company’s
stockholders at which a vote could be taken with respect to the election of Mr. Gosset and Mr. Dyne to People’s Liberation’s
Board of Directors or in connection with any written consent of the Company’s stockholders with respect to the election of
Mr. Gossett and Mr. Dyne to the Company’s Board of Directors.
The ownership recapitalization
also included the entry into the Services Agreement by WRL and TBL. Pursuant to the Services Agreement, TBL agrees to provide certain
non-exclusive promotional services of Justin Timberlake to WRL and its licensees in connection with the commercial exploitation
of William Rast branded apparel and other consumer products.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
During the year ended
December 31, 2011, the Company recorded $200,000 in royalty expense related to minimum royalties due under the Royalty Agreement
related to the accounting period July 1, 2011 through December 31, 2011.
The Company has accounted
for this transaction in accordance with the provisions of ASC 810 which states that a change in a parent’s ownership interest
in a subsidiary while the parent retains its controlling financial interest is to be accounted for as an equity transaction. Therefore,
no gain or loss will be recognized in the Company’s consolidated statement of operations as a result of this transaction.
On the effective date of this transaction, the Company’s books and records reflected a debit balance in noncontrolling interest
related to its William Rast subsidiaries of approximately $6 million, representing the 50% interest owned by TWR. On the effective
date of this transaction, the Company adjusted the $6 million debit balance in noncontrolling interest with a corresponding reduction
to additional paid-in capital, as the noncontrolling interest related to its William Rast subsidiaries has been eliminated for
financial statement purposes as a result of this transaction. TRW will retain an 18% equity interest in the William Rast subsidiaries
as a result of this transaction, will not participate in the management of the operations of these entities, and will not participate
in the allocation of profits and losses or rights to any future income or losses, with the exception of the Liquidating Payment
discussed above.
Goodwill
Goodwill consists of
operational control rights related to the William Rast Sourcing and William Rast Licensing entities.
In consideration for Tennman entering into certain Operating Agreements on October 1, 2006 with terms
which gave Bella Rose operational control over the WRS and WRS, the Company issued to Tennman 38,095 shares of its common stock,
par value $0.001 per share. The common stock issued contains restrictions related to the sale or transfer of the shares, including
right of first refusal and annual volume limitations. The market price of the Company’s common stock on the date of issuance
of the shares was $11.25. The $428,572 value of the common stock issued to Tennman has been recorded as goodwill on Bella Rose’s
financial statements and is is reviewed for impairment on a quarterly basis.
NOTE 7 – CHARLOTTE RUSSE DISTRIBUTION
AGREEMENT AND LITIGATION
Distribution Agreement
On December 16, 2008,
the Company entered into an agreement (the “
Agreement
”) with Charlotte Russe, pursuant to which the Company’s
wholly-owned subsidiary, Versatile, agreed to exclusively sell to Charlotte Russe, in North America and Central America, People’s
Liberation branded apparel, apparel accessories, eyewear, jewelry, watches, cosmetics and fragrances, and to provide Charlotte
Russe with marketing and branding support for People’s Liberation branded apparel and apparel accessories.
Litigation
Beginning October of
2009, the Company had been in litigation with Charlotte Russe and its affiliates in relation to the exclusive distribution agreement
between the parties. On February 3, 2011, People's Liberation, Versatile Entertainment, Colin Dyne, ECA Holdings II, LLC and New
Media Retail Concepts entered into a Settlement Agreement and Mutual Release with Charlotte Russe Holding, Inc. and Charlotte Russe
Merchandising, Inc., Advent International Corporation, Advent CR Holdings, Inc., David Mussafer, and Jenny Ming. The agreement
was entered into to settle all disputes among the parties relating to:
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
|
·
|
that
certain action in the Los Angeles County Superior Court entitled Charlotte Russe Holding, Inc. et al. v. Versatile Entertainment,
Inc. et al., Case No. BC 424734; and
|
|
·
|
that
certain action entitled Versatile Entertainment, Inc. et al. v. David Mussafer, et al., originally brought in the Los Angeles
County Superior Court, Case No. BC 424675.
|
Pursuant
to the settlement agreement, on February 3, 2011 the Company received approximately $3.5 million, after the distribution of amounts
owed under the terms of an asset purchase agreement (described below), and the payment of legal fees and expenses. 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
Company also received proceeds of $750,000 in the third quarter of 2010 relating to the Charlotte Russe litigation, for total proceeds
relating to the litigation of $4.3 million. As further described in Note 13, the $750,000 was received in connection with 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.
During
the year ended December 31, 2010, the Company wrote off approximately $588,000 of accounts receivable due from Charlotte Russe
and recorded an inventory reserve of approximately $76,000 for inventory on hand related to purchase orders received from Charlotte
Russe.
The
Company has included the effects of the Charlotte Russe litigation in discontinued operations of its wholesale business for the
years ended December 31, 2011 and 2010.
NOTE
8 –LICENSE AGREEMENTS
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 each
period, 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 year ended December 31, 2011, the Company recorded total license revenue related to its license agreements of
approximately $548,000. For the year ended December 31, 2010, the Company recorded total license revenue related to its license
agreements of approximately $5.0 million, the majority of which related to its nonrecurring license agreement with the Target Corporation
described below. Deferred revenue as of December 31, 2011 amounted to $1.8 million, the majority of which related to an advanced
payment received by the Company under the terms of its license agreement with JC Penney as described below.
Future annual minimum
royalty and design fee revenue is summarized as follows:
Years Ending December 31,
|
|
|
|
2012
|
|
$
|
2,606,875
|
|
2013
|
|
|
5,115,625
|
|
2014
|
|
|
5,515,000
|
|
2015
|
|
|
5,042,914
|
|
2016
|
|
|
1,600,418
|
|
Thereafter
|
|
|
1,731,668
|
|
|
|
$
|
21,612,500
|
|
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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.
The license granted
to JC Penney is exclusive (subject to certain exceptions) 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 agrees to refrain
from selling or authorizing any other party to sell, with certain exception as outlined in the agreement, any line of William Rast
branded apparel products in the United States through any distribution channel; provided, however, that the Company continues to
have the right to sell William Rast branded products without restriction until May 15, 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
The Company has entered
into four agreements for the license of its William Rast products as follows:
VIVA Optique:
Effective December 3, 2009, the Company entered into a license agreement with Viva Optique, Inc. for the worldwide license of William
Rast branded eyewear for men and women. The initial term of the license agreement ends on December 31, 2013 and includes an option
to renew for an additional three-year term through December 2016. The license agreement provides for the payment of royalties based
on net sales at a negotiated rate and minimum royalty amounts for each contract year.
RGA Leatherworks:
Effective April 14, 2011, the Company entered into a multi-year licensing agreement with RGA Leatherworks to design, produce and
distribute in the United States and Canada William Rast branded leather goods. Product categories include men’s wallets,
small leather goods, messenger bags, totes, belts, travel kits and electronic cases. The license agreement expires on December
31, 2016. The license agreement provides 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.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
How Fashions International:
Effective September 9, 2011, the Company entered into a multi-year licensing agreement with How Fashions International Inc.
to design, produce and distribute in Canada William Rast branded apparel. Product categories include men’s and women’s
denim, knit tops, woven shirts and outerwear. The William Rast branded apparel collection is available in upscale department stores
and specialty retailers in Canada. The initial term of the license agreement ends on September 30, 2026 and includes an option
to renew for an additional five-year term through September 2031. The license agreement provides for the payment of royalties based
on net sales at a negotiated rate and minimum royalty amounts for each contract year.
Target Corporation:
In May 2010, the Company entered into a design and licensing agreement with Target Corporation and in December 2010, the Company
launched an exclusive collection of William Rast products for a limited time in Target stores throughout the United States. The
exclusive collection included William Rast branded men’s and women’s denim and knits designed specifically for Target.
During the year ended December 31, 2010, the Company received design and product revenues over the term of the agreement. In addition
to product revenue, Target released commercials and other advertising media during the launch of the exclusive collection.
NOTE 9 – ENDORSEMENT AGREEMENT
In March 2011, the
Company entered into an exclusive endorsement agreement with Danica Patrick. The endorsement agreement provides that Danica Patrick
will endorse the Company’s William Rast branded eyewear and William Rast Racing branded eyewear over a term expiring on May
1, 2014.
Future annual endorsement
payments under the Danica Patrick agreement are summarized as follows:
Years Ending December 31,
|
|
|
|
2012
|
|
$
|
250,000
|
|
2013
|
|
|
300,000
|
|
2014
|
|
|
350,000
|
|
|
|
$
|
900,000
|
|
NOTE
10 - NOTE PAYABLE TO RELATED PARTIES AND ASSET PURCHASE AGREEMENT
On August 13, 2010,
the Company’s subsidiary, William Rast Licensing, entered into a promissory note in the amount of $750,000 with Mobility
Special Situations I, LLC (“Mobility”), 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. The promissory note had an interest rate of 8%, payable monthly in arrears, and was due February
13, 2012. The promissory note was secured by the assets of William Rast Licensing and was guaranteed by the Company’s other
entities under common control, including People’s Liberation, Inc., William Rast Sourcing, LLC, William Rast Retail, LLC,
Bella Rose, LLC and Versatile Entertainment, Inc. The outstanding principal and interest balances of this promissory note were
paid in full in February 2012 with the proceeds received from the securities purchase agreement as further described in Note 24.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
In connection with
the promissory note discussed above, the Company also entered into an asset purchase agreement with New Media Retail Concepts,
LLC and ECA Holdings II, LLC on August 13, 2010. In exchange for $750,000 cash, the Company sold 50% of the net proceeds, after
legal fees and expenses, that may be received by the Company as a result of its on-going litigation with Charlotte Russe, as further
described in Note 7. The Company was not required to repay the $750,000 cash proceeds received from the asset purchase agreement
regardless of a favorable or unfavorable outcome of the Charlotte Russe litigation. The $750,000 cash proceeds received from the
asset purchase agreement were recorded as other income in the Company’s consolidated statement of operations for the year
ended December 31, 2010. New Media Retail Concepts, LLC and ECA Holdings II, LLC received from Charlotte Russe, in respect to the
interest they acquired in the litigation, a combined amount of $2.9 million of the settlement amount paid by Charlotte Russe pursuant
to the settlement agreement entered into by all parties to the litigation on February 3, 2011.
The Company entered
into the above mentioned promissory note and asset purchase agreement in order to fund a shortfall in cash flow from operations
resulting from its litigation with Charlotte Russe. The Company experienced a significant decrease in net sales and cash flows
from operations of its People’s Liberation business, and also incurred significant legal and other expenses related to the
litigation. The $750,000 purchase price of the asset purchase agreement was determined to be the fair value of the transactions,
which included the $750,000 promissory note, based on management’s evaluation of alternative financing arrangements and current
market conditions. At the time the Company entered into these transactions, management in consultation with legal counsel, was
unable to determine if the Company would prevail or, if in the event the Company did prevail, what the range of potential settlement
could be.
NOTE 11 - NOTE PAYABLE
On August 18, 2011,
the Company, through its subsidiary, William Rast Licensing, LLC, entered into a promissory note with Monto Holdings (Pty) Ltd.
(“Monto”). The promissory note in the amount of $1,000,000 was to be repaid as follows: (i) 40.0% of the
then outstanding principal amount on December 31, 2011, (ii) 20% of the then outstanding principal amount on February 29, 2012
and (iii) all of the remaining principal amount then outstanding on the maturity date, May 12, 2012. The promissory
note had an interest rate of 7% per annum, which was payable on the maturity date of the note unless the note is earlier repaid. The
promissory note was secured by the assets of William Rast Licensing and was guaranteed by the Company’s other entities under
common control, including People’s Liberation, Inc., William Rast Sourcing, LLC, William Rast Retail, LLC, Bella Rose, LLC
and Versatile Entertainment, Inc. The outstanding principal and interest balances of this promissory note were paid in full in
February 2012 with the proceeds received from the securities purchase agreement as further described in Note 24.
In connection with
the promissory note, People’s Liberation issued a fully-vested, five-year warrant to Monto to purchase 833,333 shares of
the Company’s common stock at an exercise price of $1.20 per share. The Warrant was valued at $50,000 using the
Black-Scholes option pricing model and was recorded as interest expense in the third quarter of 2011.
NOTE 12 – 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, the Company no longer
sells its People’s Liberation and William Rast branded products to wholesale and retail customers through its historical
distribution channels.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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 years ended
December 31, 2011 and 2010:
|
|
Year Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
6,330,129
|
|
|
$
|
19,873,109
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,550,550
|
)
|
|
$
|
(1,181,342
|
)
|
Noncontrolling interest
|
|
$
|
3,117,623
|
|
|
$
|
1,026,534
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to discontinued operations
|
|
$
|
(3,432,927
|
)
|
|
$
|
(154,808
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from discontinued operations
|
|
$
|
(1.43
|
)
|
|
$
|
(0.06
|
)
|
The following table
summarizes certain selected components of the discontinued operations of the Company’s wholesale business as of December
31, 2011 and 2010, the periods covered by this report:
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
Current assets
|
|
$
|
339,184
|
|
|
$
|
1,773,379
|
|
Long-term assets
|
|
$
|
54,160
|
|
|
$
|
1,085,357
|
|
Current liabilities
|
|
$
|
1,762,552
|
|
|
$
|
4,222,463
|
|
NOTE 13 – 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, LLC, which consisted of four retail stores were
discontinued. As of December 31, 2011, the Company had closed two of its retail stores and the remaining two stores are expected
to be closed in the second and third quarters 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.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
The following table
summarizes certain selected components of the discontinued operations of William Rast Retail for the years ended December 31, 2011
and 2010:
|
|
Year Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
1,850,723
|
|
|
$
|
2,044,324
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,554,672
|
)
|
|
$
|
(791,222
|
)
|
Noncontrolling interest
|
|
$
|
439,883
|
|
|
$
|
395,612
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to discontinued operations
|
|
$
|
(1,114,789
|
)
|
|
$
|
(395,610
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from discontinued operations
|
|
$
|
(0.46
|
)
|
|
$
|
(0.16
|
)
|
The following table
summarizes certain selected components of the discontinued operations of William Rast Retail as of December 31, 2011 and 2010,
the periods covered by this report:
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
Current assets
|
|
$
|
60,883
|
|
|
$
|
594,786
|
|
Long-term assets
|
|
$
|
260,825
|
|
|
$
|
665,689
|
|
Current liabilities
|
|
$
|
403,805
|
|
|
$
|
200,041
|
|
Long-term liabilities
|
|
$
|
288,765
|
|
|
$
|
382,814
|
|
As a result of the
expected closure of the Company’s two remaining retail stores 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 ranging from $500,000
to $600,000 in 2012. The expected losses include costs to close the Company’s stores, 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 in the period in which each retail store is closed.
NOTE 14 – DISCONTINUED OPERATIONS
OF J. LINDEBERG USA, LLC SUBSIDIARIES
On April 26, 2011,
the Company and its wholly owned subsidiary, Bella Rose, LLC, completed the sale of Bella Rose’s 50% membership interest
in J. Lindeberg USA, LLC (“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 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.
As of the closing,
Bella Rose’s interest in that certain factoring agreement, dated August 6, 2008, by and between Lindeberg USA and FTC Commercial
Corp., as amended from time to time, and related agreements (collectively, the “Factoring Agreement”) pursuant to which
FTC provided certain factoring services to Lindeberg USA, was assigned to Buyer. Also as of the closing, the guarantees of the
Company, Bella Rose, and Versatile Entertainment, Inc. (a wholly-owned subsidiary of the Company) in favor of FTC which guaranteed
the obligations of Lindeberg USA to FTC under the Factoring Agreement were terminated, along with the termination of a personal
validity guarantee of Colin Dyne, the Company’s Chief Executive Officer and the manager of J. Lindeberg USA, in favor of
FTC.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
In connection with
the sale of Bella Rose’s membership interest in Lindeberg USA to Buyer, certain customer lists, other intangibles, and lease
agreements and lease deposits of J. Lindeberg USA were transferred to J. Lindeberg USA Corp. on the closing date.
The divestiture of
the Company’s membership interest in 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.
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 year ended December 31, 2011
through the effective date of the divestiture on April 26, 2011, and the year ended December 31, 2010:
|
|
Year Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
3,374,624
|
|
|
$
|
9,035,075
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(125,771
|
)
|
|
$
|
(377,955
|
)
|
Noncontrolling interest
|
|
$
|
62,885
|
|
|
$
|
188,979
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to discontinued operations
|
|
$
|
(62,886
|
)
|
|
$
|
(188,976
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from discontinued operations
|
|
$
|
(0.81
|
)
|
|
$
|
(0.08
|
)
|
The following table
summarizes certain selected components of the discontinued operations of J. Lindeberg USA as of December 31, 2011 and December
31, 2010, the periods covered by this report:
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
Current assets
|
|
$
|
-
|
|
|
$
|
1,824,959
|
|
Long-term assets
|
|
$
|
-
|
|
|
$
|
1,075,128
|
|
Current liabilities
|
|
$
|
-
|
|
|
$
|
895,732
|
|
Long-term liabilities
|
|
$
|
-
|
|
|
$
|
525,673
|
|
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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.
On June 24, 2011, the
Company also issued a fully vested, five year warrant to Monto to purchase 250,000 shares of its Common Stock at an exercise price
of $3.00 per share. In exchange for the rights to the receivable and the warrant, Monto paid to the Company a purchase price of
$722,916. The Warrant was valued at $89,000 using the Black-Scholes option pricing model and was recorded in general and administrative
expenses in the second quarter of 2011.
NOTE 15 - STOCK INCENTIVE PLAN, OPTIONS
AND WARRANTS
On January 5, 2006,
the Company adopted its 2005 Stock Incentive Plan (the “Plan”), which authorized the granting of stock-based incentive
awards. The Plan is administered by the Board of Directors, or a committee appointed by the Board of Directors, which determines
the recipients and terms of the awards granted. The Plan reserves a total of 366,667 shares of common stock for issuance.
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. 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.
During the year ended
December 31, 2011, the Company granted 152,000 options to employees and officers within the Plan at exercise prices of $2.25 and
$3.00, and 333,333 options to two employees and an officer outside the Plan, at an exercise price of $2.25. During the year ended
December 31, 2010, the Company did not issue options to its employees, officers or directors. Plan options to purchase 166,328
and 163,339 shares were exercisable as of December 31, 2011 and 2010, respectively. Options granted outside the Plan to purchase
200,000 shares were exercisable as of December 31, 2011. Total stock based compensation expense for options vesting during the
years ended December 31, 2011 and December 31, 2010 were approximately $76,000 and $67,000, respectively. There were no stock options
or warrants exercised during the years ended December 31, 2011 and 2010.
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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 generally accepted accounting
principles. 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 in the Plan during the year ended
December 31, 2011 included a dividend yield of zero, a risk-free interest rate of 1.8%, expected term of 6.25 years and an expected
volatility of 64%. The weighted-average assumptions the Company used as inputs to the Black-Scholes pricing model for options granted
outside of the Plan during the year ended December 31, 2011 included a dividend yield of zero, a risk-free interest rate of 2.2%,
expected term of 5.7 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 statements of operations for the years ended December 31, 2011 and 2010
is included in selling, design and production expense and general and administrative expense, and is based on awards ultimately
expected to vest. 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 year ended December 31, 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.
For the year ended
December 31, 2011 and 2010, total stock-based compensation expense included in the consolidated statements of operations was charged
to the following discontinued operating expense categories:
|
|
Year ended
December 31,
2011
|
|
|
Year ended
December 31,
2010
|
|
Selling, design and production expense
|
|
$
|
1,743
|
|
|
$
|
10,445
|
|
General and administrative
|
|
|
74,639
|
|
|
|
56,850
|
|
Total stock-based compensation
|
|
$
|
76,382
|
|
|
$
|
67,295
|
|
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
The following table
summarizes the activity in the Plan:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Options outstanding – January 1, 2010
|
|
|
193,000
|
|
|
$
|
8.40
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(20,667
|
)
|
|
|
7.35
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – December 31, 2010
|
|
|
172,333
|
|
|
|
8.55
|
|
Granted
|
|
|
152,000
|
|
|
|
2.55
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(72,866
|
)
|
|
|
3.60
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – December 31, 2011
|
|
|
251,467
|
|
|
$
|
6.30
|
|
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, 2010
|
|
|
44,524
|
|
|
$
|
2.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(14,862
|
)
|
|
|
(1.95
|
)
|
Forfeited
|
|
|
(20,667
|
)
|
|
|
(2.70
|
)
|
|
|
|
|
|
|
|
|
|
Unvested stock options – December 31, 2010
|
|
|
8,995
|
|
|
|
0.90
|
|
Granted
|
|
|
152,000
|
|
|
|
0.15
|
|
Vested
|
|
|
(2,989
|
)
|
|
|
(13.80
|
)
|
Forfeited
|
|
|
(72,867
|
)
|
|
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
Unvested stock options – December 31, 2011
|
|
|
85,139
|
|
|
$
|
0.15
|
|
The following table summarizes the activity
outside of the Plan:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Options outstanding – January 1, 2011
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
333,333
|
|
|
$
|
2.25
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(133,333
|
)
|
|
|
(2.25
|
)
|
|
|
|
|
|
|
|
|
|
Options outstanding – December 31, 2011
|
|
|
200,000
|
|
|
$
|
2.25
|
|
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
A summary of the changes in the Company’s
unvested stock options outside of the Plan is as follows:
|
|
Number of Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested stock options – January 1, 2011
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
333,333
|
|
|
|
0.30
|
|
Vested
|
|
|
(200,000
|
)
|
|
|
(0.30
|
)
|
Forfeited
|
|
|
(133,333
|
)
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
Unvested stock options – December 31, 2011
|
|
|
-
|
|
|
$
|
-
|
|
Additional information
relating to all stock options and warrants outstanding and exercisable at December 31, 2011, 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
|
|
|
|
4.6
|
|
|
$
|
1.20
|
|
|
|
833,333
|
|
|
$
|
1.20
|
|
$
|
2.25
|
|
|
(options)
|
|
|
252,000
|
|
|
|
9.1
|
|
|
$
|
2.25
|
|
|
|
218,333
|
|
|
$
|
2.25
|
|
$
|
3.00
|
|
|
(options)
|
|
|
56,867
|
|
|
|
9.7
|
|
|
$
|
3.00
|
|
|
|
5,492
|
|
|
$
|
3.00
|
|
$
|
3.00
|
|
|
(warrants)
|
|
|
250,000
|
|
|
|
4.5
|
|
|
$
|
3.00
|
|
|
|
250,000
|
|
|
$
|
3.00
|
|
$
|
4.50
|
|
|
(options)
|
|
|
2,000
|
|
|
|
6.5
|
|
|
$
|
4.50
|
|
|
|
2,000
|
|
|
$
|
4.50
|
|
$
|
4.65
|
|
|
(options)
|
|
|
1,600
|
|
|
|
5.5
|
|
|
$
|
4.65
|
|
|
|
1,600
|
|
|
$
|
4.65
|
|
$
|
5.70
|
|
|
(options)
|
|
|
16,000
|
|
|
|
5.6
|
|
|
$
|
5.70
|
|
|
|
16,000
|
|
|
$
|
5.70
|
|
$
|
6.00
|
|
|
(options)
|
|
|
30,000
|
|
|
|
6.5
|
|
|
$
|
6.00
|
|
|
|
30,000
|
|
|
$
|
6.00
|
|
$
|
6.00
|
|
|
(warrants)
|
|
|
10,000
|
|
|
|
.9
|
|
|
$
|
6.00
|
|
|
|
10,000
|
|
|
$
|
6.00
|
|
$
|
6.90
|
|
|
(options)
|
|
|
25,667
|
|
|
|
5.5
|
|
|
$
|
6.90
|
|
|
|
25,667
|
|
|
$
|
6.90
|
|
$
|
7.50
|
|
|
(options)
|
|
|
38,000
|
|
|
|
5.9
|
|
|
$
|
7.50
|
|
|
|
37,903
|
|
|
$
|
7.50
|
|
$
|
7.50
|
|
|
(warrants)
|
|
|
19,333
|
|
|
|
.9
|
|
|
$
|
7.50
|
|
|
|
19,333
|
|
|
$
|
7.50
|
|
$
|
18.75
|
|
|
(options)
|
|
|
29,333
|
|
|
|
4.5
|
|
|
$
|
18.75
|
|
|
|
29,333
|
|
|
$
|
18.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,564,133
|
|
|
|
5.5
|
|
|
$
|
2.55
|
|
|
|
1,478,944
|
|
|
$
|
2.54
|
|
As of December 31,
2011, there were 166,328 vested stock options within the Plan and 200,000 vested options outside the Plan. As of December 31, 2011,
there was approximately $7,000 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 three years. There was no unrecognized
related to share-based compensation arrangements granted outside the Plan as of December 31, 2011. The aggregate intrinsic value
of stock options outstanding was zero at December 31, 2011 and 2010 as the market value of the options was lower than the exercise
value.
The Company has recorded
a valuation allowance for all of its deferred tax asset related to net operating loss carryforwards as of December 31, 2011. As
a result, the stock-based compensation has not been tax effected on the consolidated statement of operations. For the years ended
December 31, 2011 and 2010, the deferred tax effect related to nonqualified stock options was not material.
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
On August 18, 2011,
the Company issued a warrant to purchase 833,333 shares of its common stock to Monto Holdings (Pty) Limited in conjunction with
a note payable as further described in Note 14 to the consolidated financial statements. The warrant has an exercise price of $1.20,
a term of five years and is exercisable immediately. The warrant was valued at approximately $50,000 using the Black-Scholes pricing
model and the weighted-average assumptions discussed above.
On June 24, 2011, the
Company issued a warrant to purchase 250,000 shares of its common stock to Monto Holdings (Pty) Limited in accordance with an asset
purchase agreement as further described in Note 16 to the consolidated financial statements. The warrant has an exercise price
of $3.00, a term of five years and is exercisable immediately. The warrant was valued at approximately $89,000 using the Black-Scholes
pricing model and the weighted-average assumptions discussed above.
NOTE 16 - INCOME TAXES
On November 22, 2005,
the Company acquired all of the outstanding voting securities of Bella Rose and Versatile, each of which became a wholly-owned
subsidiary of the Company. As a result, Versatile and Bella Rose, including its 50% owned subsidiaries, William Rast Sourcing,
William Rast Licensing and J. Lindeberg USA (through April 26, 2011) are consolidated and taxes are reported by the parent, Sequential
Brands Group, Inc. Taxes are calculated on a consolidated basis at C-Corporation tax rates.
Deferred income taxes
arise principally from temporary differences in the method of depreciating property and equipment for income tax reporting purposes
and the recognition of expense related to the allowance for doubtful accounts, factor open credits and inventory reserves for income
tax reporting purposes, and net operating loss carryforwards. The Company has Federal net operating losses available to carryforward
to future periods of approximately $11.5 million as of December 31, 2011 which expire beginning 2027. As of December 31, 2010,
the Company provided a valuation allowance for a portion of the deferred income tax asset related to its Federal net operating
loss carryforwards. As of December 31, 2010, the Company determined that it was more likely than not that it would realize the
future income tax benefits related to a portion of its Federal net operating losses. During the year ended December 31, 2011, the
Company increased the valuation allowance related to its net operating loss carryforwards to reserve the entire asset balance,
as the Company was unable to determine if it was more likely than not that it would realize the future income tax benefits related
to its net operating losses. This resulted in a deferred provision for income taxes from discontinued operations of $908,000 recorded
during the year ended December 31, 2011.
The Company has net
operating losses available to carryforward to future periods from California of approximately $11.7 million as of December 31,
2011 which expire beginning 2017. For the years ending December 31, 2011 and 2010, the use of California state operating losses
has been suspended for companies with taxable annual income greater than $300,000. As the Company is unable to determine whether
it will be able to utilize its California net operating losses against future income, the Company has provided a valuation allowance
for all of its deferred income tax asset related to its California net operating loss carryforwards as of December 31, 2011 and
2010.
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
The (benefit) provision
for income taxes from continuing operations for the years ended December 31, 2011 and 2010 consists of the following:
|
|
2011
|
|
|
2010
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
State:
|
|
|
|
|
|
|
|
|
Current (benefit) provision
|
|
|
(800
|
)
|
|
|
800
|
|
Deferred benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(800
|
)
|
|
|
800
|
|
|
|
$
|
(800
|
)
|
|
$
|
800
|
|
The difference between
the (benefit) provision for income taxes and the expected income tax (benefit) provision determined by applying the statutory Federal
and state income tax rates to pre-tax accounting loss from continuing operations for the years ended December 31, 2011 and 2010
are as follows:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
State taxes net of Federal benefit
|
|
|
6.0
|
|
|
|
(6.0
|
)
|
Net operating loss valuation allowance
|
|
|
(40.0
|
)
|
|
|
40.0
|
|
LLC gross receipts tax and minimum statutory state income taxes
|
|
|
(0.3
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)%
|
|
|
0.7
|
%
|
The components of the
Company’s consolidated deferred income tax balances from continuing operations as of December 31, 2011 and 2010 are as follows:
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
Deferred income tax asset – long-term:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,888,000
|
|
|
|
2,395,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability – long-term:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(195,000
|
)
|
|
|
(125,000
|
)
|
|
|
|
3,693,000
|
|
|
|
2,270,000
|
|
Less: Valuation allowance
|
|
|
(3,693,000
|
)
|
|
|
(2,270,000
|
)
|
Net deferred income tax asset – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
NOTE 17 - RELATED PARTY TRANSACTIONS
Colin Dyne became Chief
Executive Officer and a director of the Company on May 21, 2007 and the Company’s Chief Financial Officer effective December
30, 2010. Mr. Dyne is a significant stockholder of the Company. Mr. Dyne also served as Vice Chairman of the Board of Directors
of Talon International, Inc. (OTCBB: TALN), owner of Talon zippers, until July 2010. Mr. Dyne founded Tag-It, Inc., a subsidiary
of Talon, in 1991. Mr. Dyne served as Talon’s President from inception and as its Chief Executive Officer from 1997 to 2005.
During the years ended December 31, 2011 and 2010, the Company purchased trim products from Talon amounting to approximately $226,000
and $123,000, respectively. During the year ended December 31, 2011, Mr. Dyne loaned the Company $230,000 in the form of unsecured,
non-interest bearing advances. There were no formal terms of repayment, however, the entire balance was repaid to Mr. Dyne in 2011.
On August 13, 2010,
the Company’s subsidiary, William Rast Licensing, entered into a promissory note in the amount of $750,000 with Mobility
Special Situations I, LLC (“Mobility”), 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. The promissory note had an interest rate of 8%, payable monthly in arrears, and was due February
13, 2012. The promissory note was secured by the assets of William Rast Licensing and was guaranteed by the Company’s other
entities under common control, including People’s Liberation, Inc., William Rast Sourcing, LLC, William Rast Retail, LLC,
Bella Rose, LLC and Versatile Entertainment, Inc. The outstanding principal and interest balances of this promissory note were
paid in full in February 2012 with the proceeds received from the securities purchase agreement as further described in Note 24.
In connection with
the promissory note discussed above, the Company also entered into an asset purchase agreement with New Media Retail Concepts,
LLC and ECA Holdings II, LLC on August 13, 2010. In exchange for $750,000 cash, the Company sold 50% of the net proceeds, after
legal fees and expenses, that may be received by the Company as a result of its on-going litigation with Charlotte Russe, as further
described in Note 7. The Company was not required to repay the $750,000 cash proceeds received from the asset purchase agreement
regardless of a favorable or unfavorable outcome of the Charlotte Russe litigation. The $750,000 cash proceeds received from the
asset purchase agreement were recorded in loss from discontinued operations of wholesale business in the Company’s consolidated
statement of operations for the year ended December 31, 2010. New Media Retail Concepts, LLC and ECA Holdings II, LLC received
from Charlotte Russe, in respect to the interest they acquired in the litigation, a combined amount of $2.9 million of the settlement
amount paid by Charlotte Russe pursuant to the settlement agreement entered into by all parties to the litigation on February 3,
2011.
The Company entered
into the above mentioned promissory note and asset purchase agreement in order to fund a shortfall in cash flow from operations
resulting from its litigation with Charlotte Russe. The Company experienced a significant decrease in net sales and cash flows
from operations of its People’s Liberation business, and also incurred significant legal and other expenses related to the
litigation. The $750,000 purchase price of the asset purchase agreement was determined to be the fair value of the transactions,
which included the $750,000 promissory note, based on management’s evaluation of alternative financing arrangements and current
market conditions. At the time the Company entered into these transactions, management in consultation with legal counsel, was
unable to determine if the Company would prevail or, if in the event the Company did prevail, what the range of potential settlement
could be.
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
In May 2010, the Company’s
subsidiary, William Rast Sourcing, LLC, entered into a design and licensing agreement with the Target Corporation, as further described
in Note 8. During the year ended December 31, 2010, Target made a direct payment of $250,000 to Justin Timberlake, a minority
interest holder of William Rast Sourcing, on behalf of the Company for his services related to the Target agreement.
Kenneth Wengrod, a
former member of the Company’s Board of Directors, currently serves as President of FTC Commercial Corp. (“FTC”),
a company which he founded in 2002 and in which he holds a minority equity position. FTC is a global finance commercial service
company primarily focused in the apparel industry. The Company was party to various factoring agreements with FTC. In connection
with Mr. Wengrod’s appointment as a director, on September 21, 2007, the Company granted to Mr. Wengrod a ten-year option
to purchase 1,600 shares of the Company’s common stock at an exercise price of $7.50 per share pursuant to the Company’s
2005 Stock Incentive Plan. On June 26, 2008 and June 12, 2009, Mr. Wengrod received an additional 2,000 options at an exercise
price of $4.50 per share and 3,200 options at an exercise price of $3.00 per share, respectively, to purchase shares of the Company’s
common stock as compensation for director services provided to the Company. Mr. Wengrod resigned from our Board of Directors on
July 12, 2010 and his stock options were forfeited. The Company terminated its factoring agreements with FTC on various dates ending
in April 2011.
We were party to a
consulting arrangement with Susan White, a member of the Company’s Board of Directors, pursuant to which Ms. White provided
image and marketing consulting services to the Company. During the year ended December 31, 2010, the Company paid Ms. White approximately
$20,000 for such consulting services. There were no amounts paid to Ms. White during the year ended December 31, 2011.
NOTE 18 – OFFICER
COMPENSATION
Colin Dyne
On May 21, 2007, the
Company’s Board of Directors appointed Colin Dyne as its Chief Executive Officer and Co-Chairman of the Board of Directors,
and Mr. Dyne became our Chief Financial Officer effective December 30, 2010. During 2010 and 2011, Mr. Dyne received an annual
salary of $395,000. Mr. Dyne also received medical insurance reimbursements and an auto allowance of $2,000 per month. During 2010
and 2011, annual bonuses were determined at the discretion of the Board of Directors. Mr. Dyne did not receive annual bonuses for
the years ended December 31, 2011 and 2010. However, on February 3, 2011, a cash bonus of $275,000 was paid to Colin Dyne in connection
with the successful resolution of the Company’s litigation with Charlotte Russe, as discussed in Note 7. On February 3, 2011,
Mr. Dyne was also awarded an option to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.25
per share. The option has a term of ten years, vested immediately, and was granted outside the Company’s 2005 Stock Incentive
Plan. The option was granted to Mr. Dyne as compensation for personal guaranties Mr. Dyne provided in connection with the Company’s
factoring arrangements. The option was valued at $71,000 based on a Black Scholes valuation model and is included in operating
expenses on the accompanying statement of operations for the year ended December 31, 2011.
On December 14, 2011,
the Company entered into an employment agreement with Colin Dyne pursuant to which Mr. Dyne will continue to serve as our Chief
Executive Officer for a term of five years, which term will automatically renew for successive one year periods unless the Company
or Mr. Dyne elects not to extend the term of the agreement. During the term of the Agreement, Mr. Dyne will receive
a base salary of $650,000 per annum which is subject to increase and will be eligible to receive an annual cash performance bonus.
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
In the event Mr. Dyne’s
employment is terminated without cause or by Mr. Dyne for good reason, Mr. Dyne will receive all earned but unpaid base salary
and accrued but unpaid vacation through the date of termination as well as earned bonuses that have not been paid for prior fiscal
years (collectively, the “accrued obligations”). Mr. Dyne will also receive a severance amount equal to
the greater of (i) 1.5 times his base salary then in effect and (ii) an amount equal to the base salary that Mr. Dyne would have
received for the remainder of the term of the agreement had Mr. Dyne’s employment continued until the end of the employment
period. In addition, Mr. Dyne will receive a pro-rated annual bonus for the year in which he was terminated (the “pro-rated
bonus”) and all outstanding equity awards previously granted to Mr. Dyne will accelerate and become fully vested on the date
of his termination.
If Mr. Dyne’s
employment is terminated as a result of his death or disability, the Company will pay to Mr. Dyne or his estate all accrued obligations,
a lump sum equal to 100% of his then effective base salary and the pro-rated bonus. In addition, all outstanding equity
awards previously granted to Mr. Dyne will accelerate and become fully vested on the date of his termination. In the
event Mr. Dyne is terminated for cause or Mr. Dyne terminates his employment without good reason, the Company will have no further
obligations to Mr. Dyne except to pay Mr. Dyne all accrued obligations.
Andrea Sobel
On May 22, 2008, Andrea
Sobel was appointed our Executive Vice President of Branding and Licensing. On January 31, 2012, Ms. Sobel was appointed the Company’s
President of Licensing. Ms. Sobel entered into an employment agreement with the Company on May 16, 2008. Pursuant to the agreement,
Ms. Sobel is employed on an "at-will" basis, and received an initial base salary of $200,000 per annum. Ms. Sobel also
received medical insurance reimbursements and an auto allowance of $500 per month. Ms. Sobel did not receive annual bonuses for
the years ended December 31, 2011 and 2010. However, on February 3, 2011, a cash bonus of $25,000 was paid to Ms. Sobel in connection
with the successful resolution of the Company’s litigation with Charlotte Russe. On February 3, 2011, the Company’s
Board of Directors approved an award to Ms. Sobel of options to purchase 33,333 shares of common stock at an exercise price of
$2.25 per share. The options have a term of ten years and vest in thirty equal monthly installments beginning February 1, 2011
through August 1, 2013.
On December 14, 2011,
the Company entered into an employment agreement with Andrea Sobel pursuant to which Ms. Sobel will serve as our President of Licensing
for a term of three years, which term will automatically renew for successive one year periods unless the Company or Ms. Sobel
elects not to extend the term of the agreement. During the term of the agreement, Ms. Sobel will receive a base salary
of $250,000 per year, which is subject to increase and will be eligible to receive an annual cash performance bonus. Pursuant
to the agreement, Ms. Sobel was also granted a ten year option to purchase 50,000 shares of common stock at an exercise price of
$3.00 per share. The options vest in equal quarterly installments over a period of three years beginning on March 14,
2012.
In the event Ms. Sobel’s
employment is terminated without cause, Ms. Sobel will receive all earned but unpaid base salary and accrued but unpaid vacation
through the date of termination as well as earned bonuses that have not been paid for prior fiscal years. Ms. Sobel
will also receive a severance amount equal to 2.0 times her base salary then in effect if she is terminated without cause in the
first year of her agreement and if she is terminated without cause after the first year of her agreement, Ms. Sobel will receive
a severance amount equal to the base salary that Ms. Sobel would have received for the remainder of the term of the agreement had
Ms. Sobel’s employment continued until the end of the employment period. In addition, if Ms. Sobel is terminated
without cause, all outstanding equity awards previously granted to Ms. Sobel will accelerate and become fully vested on the date
of her termination.
SEQUENTIAL BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Darryn Barber
Mr. Barber became the
Company’s Chief Financial Officer on November 22, 2005 and our President on May 8, 2008. On December 30, 2010, Mr. Barber
resigned from his positions with the Company. Prior to his resignation, in 2010 Mr. Barber received a base salary of $275,000,
medical insurance reimbursements and an auto allowance of $1,500 per month. Mr. Barber did not receive a bonus for the year ended
December 31, 2010. In connection with Mr. Barber’s resignation, the Company entered into a Separation Agreement and a Consulting
Agreement with Mr. Barber. The Consulting Agreement provides that Mr. Barber will provide finance and other services to the Company
through December 30, 2011 and receive a payment of $15,000 per month. Subsequent to December 30, 2011, the Consulting Agreement
provides that Mr. Barber will be paid for his services at a rate of $150 per hour. During the term of the Consulting Agreement,
the Company continued to pay Mr. Barber’s medical insurance premiums and provided coverage to Mr. Barber under the Company’s
director and officer insurance policy. The terms of Mr. Barber’s Settlement Agreement provides for the continued right to
exercise outstanding stock options for a period of twelve months following the termination of Mr. Barber’s Consulting Agreement.
Thomas Nields
On November 8, 2006,
Mr. Nields was appointed as the Company’s Chief Operating Officer. On February 3, 2011, Mr. Nields resigned from his position
with the Company. Prior to his resignation as the Company’s Chief Operating Officer, Mr. Nields received a base salary of
$235,000 during 2010 and also received medical insurance reimbursements and an auto allowance of $1,200 per month. Mr. Nields did
not receive a bonus for the years ended December 31, 2011 and 2010. In connection with Mr. Nields’ resignation, the Company
entered into a Separation Agreement and a Consulting Agreement with Mr. Nields. The Consulting Agreement provided that Mr. Nields
provide supply chain development and other management services to the Company through December 31, 2011 and receive a payment of
$15,000 per month as compensation for such services. The Company also continued to pay Mr. Nields’ medical insurance premiums
through February 3, 2012 and continued coverage under its director and officer insurance policy during the term of the Consulting
Agreement. The terms of Mr. Nields’ Settlement Agreement provides for the continued right to exercise outstanding stock options
for a period of twelve months following the termination of Mr. Nield’s Consulting Agreement.
NOTE 19 – LEASES
The Company leases
its principal executive office space under a temporary lease agreement that expires in May 2012. The Company has signed a letter
of intent to lease new office space in the same building beginning June 2012 through August 2015. The new office space will have
approximately 3,000 square feet, and is located in Pacific Palisades, California. It is from this facility that the Company will
conduct all of its design, executive and administrative functions. Finished goods are shipped from a third-party warehouse in Los
Angeles, California. Internet products are shipped from a third-party warehouse in Long Beach, California. The Company has a showroom
located in New York City under a lease that expires in January 2013. The Company also has two William Rast retail stores located
in Los Angeles and Cabazon, California. The Company plans to close these stores in the second and third quarters of 2012. The lease
agreements related to the Cabazon and Los Angeles stores expire in July 2019 and January 2020.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
The Company accounts
for its leases in accordance generally accepted accounting principles, whereby step provisions, escalation clauses, tenant improvement
allowances, increases based on an existing index or rate, and other lease concessions are accounted for in the minimum lease payments
and are charged to operations on a straight line basis over the related lease term. Total rent expense for the years ended December
31, 2011 and 2010 amounted to approximately $1.7 million and $2.3 million, respectively, the majority of which is included in discontinued
operations of the Company’s wholesale business and retail subsidiary.
Future annual minimum
payments due under the leases are summarized as follows:
Years Ending December 31,
|
|
|
|
|
2012
|
|
$
|
866,478
|
|
2013
|
|
|
665,392
|
|
2014
|
|
|
681,045
|
|
2015
|
|
|
701,609
|
|
2016
|
|
|
722,910
|
|
Thereafter
|
|
|
2,264,208
|
|
|
|
$
|
5,901,642
|
|
NOTE 20 - CUSTOMER CONCENTRATION
During the year ended
December 31, 2011, two customers comprised greater than 10% of the Company’s net revenue from continuing operations. Revenue
derived from these customers amounted to 52.2% and 40.7% of net revenue from continuing operations for the year ended December
31, 2011. At December 31, 2011, there was approximately $1.8 million due from these major customers pursuant to the terms of the
related license agreements. The Company did not have any revenue from continuing operations during the year ended December 31,
2010.
NOTE 21 - OFF-BALANCE
SHEET RISK AND CONTINGENCIES
Financial instruments
that potentially subject the Company to off-balance sheet risk consist of factored accounts receivable. The Company sells the majority
of its trade accounts receivable to its factor and is contingently liable to the factor for merchandise disputes and other customer
claims. At December 31, 2011, total factor receivables approximated $404,000, $352,000 of which are without recourse and $52,000
are with recourse and both are included in current assets held for disposition from discontinued operations of wholesale business.
From time to time, the Company’s factor also issued letters of credit and vendor guarantees on the Company’s behalf.
There were no outstanding letters of credit or vendor guarantees as of December 31, 2011. There was no outstanding ledger debt
(payables to suppliers that use the same factor as the Company) as of December 31, 2011.
The Company is subject
to certain legal proceedings and claims arising in connection with its business. In the opinion of management, except as described
in Note 23 to the consolidated financial statements and as provided for in the consolidated financial statements, there are currently
no additional claims that could have a material adverse effect on the Company’s consolidated financial position, results
of operations or cash flows.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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.
NOTE 22 – PROFIT
SHARING PLAN
The Company has established
a 401(k) profit-sharing plan for the benefit of eligible employees. The Company may make contributions to the plan as determined
by the Board of Directors. There were no contributions made during the years ended December 31, 2011 and 2010.
NOTE 23 – SHAREHOLDER
DERRIVATIVE COMPLAINT (SUBSEQUENT EVENT)
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 believes, in consultation with legal counsel, that
these claims are without merit or substance, and intends to vigorously defend against these claims. The derivative complaint is
in the early stages of discovery and the Company, in consultation with legal counsel, is unable to determine the outcome, whether
favorable or unfavorable, or a range of possible loss, if any, to Company.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
NOTE 24 – SECURITIES
PURCHASE AGREEMENT AND REPAYMENT OF INDEBTEDNESS (SUBSEQUENT EVENTS)
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 agreed to sell Debentures, Warrants and Series A Preferred Stock to TCP, as further
described below.
The first of two closings
of the financing occurred on February 3, 2012. At the first closing, the Company sold to TCP $3,000,000 in principal amount of
Debentures, issued to TCP a Warrant to purchase 228,571 shares of common stock and issued to TCP 3,000 shares of Series A Preferred
Stock. The Debentures issued in the first closing are convertible into 1,142,857 shares of common stock.
The second and final
closing of the financing occurred on February 22, 2012. At the second closing, the Company sold to TCP $11,500,000 in principal
amount of Debentures, issued to TCP a Warrant to purchase 876,191 shares of common stock and issued to TCP 11,500 shares of Series
A Preferred Stock. The Debentures issued in the second closing are convertible into 4,380,952 shares of common stock.
At the first and second
closings combined, 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. Total Debentures issued
in the first and second closings 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.
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 the authorized number of shares
of the Company’s Common Stock to at least 300 million, requires the Company to pay TCP at the second closing 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 at the second closing and on each one year anniversary of such date so long as
TCP has the right under the Stockholders Agreement to nominate one or more directors to the Company’s Board.
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.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
As a condition to TCP’s
obligations under the Purchase Agreement, Colin Dyne, the Company’s chief Executive Officer and Chief Financial Officer,
entered into a lock-up agreement precluding Mr. Dyne from disposing of any of his shares of Common Stock or other equity securities
of the Company until July 31, 2012.
Description of Debentures
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 common stock of the Company, $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 LIBOR, 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.
Description of Subsidiary Guarantee
and Security Agreement
At the first closing
of 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.
Description of Warrants
In connection with
the sale of the Debentures, the Company agreed to issue to TCP warrants to purchase 1,104,762 shares of the Company’s Common
Stock (the “Warrants”). 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.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
Description of Series A Preferred
Stock
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 entitle to vote 381 votes, as further described below.
Description of Stockholders Agreement
In connection with
the Purchase Agreement, the Company, TCP and Colin Dyne, the Company’s Chief Executive Officer and a director, entered into
a Stockholders Agreement (the “
Stockholders Agreement
”). As contemplated by the Stockholders Agreement, at the
second closing the Company increased the size of its Board of Directors (the “
Board
”) from three members to
six members and appointed William Sweedler, Matthew D. Eby and Richard Gersten, each a Partner at Tengram Capital Partners, an
affiliate of TCP, to serve as directors. Mr. Sweedler, Mr. Eby and Mr. Gersten will serve as Class I, Class II and Class III directors,
respectively, for terms expiring at the 2012, 2013 and 2014 annual meeting of stockholders, respectively, and/or until their respective
successors have been elected and qualified. At the second closing, William Sweedler was also appointed to serve as Chairman of
the Board. Also pursuant to the Stockholders Agreement:
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The maximum size of the Board shall not be increased to greater than seven (7) directors except
with the consent of Mr. Dyne and TCP.
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In connection with any director nominees to be submitted to holders of Common Stock for election
at a stockholders’ meeting, TCP shall have the right to nominate a number of nominees for director such that the number of
directors that will be serving on the Board (determined immediately following the election of directors and assuming that the director
nominees designated by TCP are elected to the Board) that have been appointed or nominated by TCP equals three.
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In connection with any director nominees to be submitted to holders of Common stock for election
at a stockholders’ meeting, a committee of the Company’s Board comprised solely of directors then serving on the Board
who were not nominated or appointed by TCP (the “Special Committee”), acting by majority vote, shall have the right
to nominate a number of nominees for director such that the number of directors that will be serving on the Board (determined immediately
following the election of directors and assuming that the director nominees designated by the Special Committee are elected to
the Board) that have been nominated by the Special Committee or who were serving on the Board prior to the closing of the financing
equals three.
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All board nominees other than those described above, if any, to be presented to the Company’s
stockholders for election will be designated by the full Board, acting by majority vote.
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TCP and Dyne agree to vote all of their Common Stock and voting Preferred Stock, and to take all
other necessary or desirable actions within such stockholder’s control, and the Company agrees to take all necessary and
desirable actions within its control, to cause the election, removal and replacement of directors and members of committees as
described in the Stockholders Agreement, including by voting all of such stockholder’s shares of Common Stock and voting
Preferred Stock for the election of the Board’s nominees for director.
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SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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Mr. Dyne will provide TCP with a right of first refusal with respect to any shares of the Company’s
voting securities that Mr. Dyne proposes to sell in a negotiated transaction.
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TCP will provide Mr. Dyne with a tag-along right, providing Mr. Dyne with the right to sell his
shares of the Company’s voting securities in a transaction where TCP is selling its shares of the Company’s voting
securities.
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The Company agrees to provide TCP with a preemptive right, pursuant to which TCP will have the
right, subject to certain exceptions set forth in the Stockholders Agreement, to acquire in a subsequent issuance of securities
by the Company a number of offered securities that will allow TCP to maintain its percentage ownership of the Company’s voting
securities.
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Termination of a Material Definitive
Agreements
The proceeds received
from the first closing of 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.
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.
SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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 as further described in Note 11. 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.
Changes in Control
Pursuant to the Purchase
Agreement, at the first closing the Company issued to TCP a Warrant to purchase 228,571 shares of Common Stock and 3,000 shares
of Series A Preferred Stock. At the second closing, the Company issued an additional 11,500 shares of Series A Preferred
Stock to TCP and Warrants to purchase up to 876,191 shares of Common Stock.
As further described
below, 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. Therefore,
TCP has the right to vote 5,523,809 shares of the Company’s Common Stock (which excludes any shares obtained upon exercise
of the warrants). This represents 69.7% of the Company’s outstanding voting securities. The issuance of the securities to
TCP in the financing allows TCP to control all matters submitted for approval to the holders of Common Stock. However, pursuant
to the Stockholders Agreement and notwithstanding TCP’s ownership of a majority of the Company’s voting securities,
TCP does not have the right to elect a majority of the directors serving on the Company’s Board.
Amendment to Certificate of Incorporation
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:
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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
”).
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Holders of Series A Preferred Stock are
not entitled to dividends or any liquidation preference.
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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.
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SEQUENTIAL
BRANDS GROUP, INC.
(FORMERLY PEOPLE’S LIBERATION,
INC.)
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(As Amended)
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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.
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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.
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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.
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