NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
|
1.
|
Organization and Nature of Operations
|
Overview
Sequential Brands Group,
Inc. (the “Company”), through its wholly-owned and majority-owned subsidiaries, owns a portfolio of consumer brands,
including
William Rast
®,
People’s Liberation
®,
DVS
®,
Heelys
®,
Ellen Tracy
®
and
Caribbean Joe
®. The Company promotes, markets, and licenses these brands and intends to grow its portfolio 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 its licensing arrangements, the
Company’s licensing partners are responsible for designing, manufacturing and distributing the Company’s licensed products,
subject to the Company’s continued oversight and marketing support. In its direct-to-retail license, the Company grants
the retailer the exclusive right to distribute branded apparel in a broad range of product categories through its stores, consumer-direct
mail and consumer-direct ecommerce distribution channels. In its 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.
In the second half
of 2011, the Company changed its business model to focus on licensing and brand management. Prior to its change in business model
and since 2005, the Company designed, marketed and provided, on a wholesale basis, branded apparel and accessories. Commencing
in July 2008, the Company implemented a retail strategy and opened retail stores to sell its branded products. In connection with
the change in the Company’s business model, the Company discontinued its wholesale distribution of branded apparel and apparel
accessories, liquidated its existing inventory and closed its remaining retail stores. 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.
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article
8 of Regulation S-X of the United States Securities and Exchange Commission ( the “SEC”). Certain information or footnote
disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant
to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is the Company’s
opinion, however, that the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting
of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash
flows for the periods presented.
The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2012, as filed with the SEC on April 1, 2013, which contains the audited financial statements and notes
thereto, together with Management’s Discussion and Analysis, for the years ended December 31, 2012 and 2011. The financial
information as of December 31, 2012 is derived from the audited financial statements presented in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2012. The interim results for the three months ended March 31, 2013 are not necessarily
indicative of the results to be expected for the year ending December 31, 2013 or for any future interim periods.
Principles of Consolidation
The accompanying unaudited
condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of
unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
Making estimates requires
management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the unaudited interim condensed consolidated financial statements,
which management considered in formulating its estimate could change in the near term due to one or more future confirming events.
Accordingly, the actual results could differ significantly from estimates.
Discontinued Operations
The Company accounted
for the decisions to close down its wholesale and retail operations as discontinued operations in accordance with the guidance
provided in 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.
Reportable Segment
An operating segment,
in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated
only to a limited extent. Our chief operating decision maker, the Chief Executive Officer, reviews financial information presented
on a consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and
assessing financial performance. Accordingly, we only have a single operating and reportable segment. All of our operations consist
of a single revenue stream which is the licensing of our trademark portfolio.
Revenue Recognition
The Company has entered
into various trade name license agreements that provide revenues based on minimum royalties and 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 the term
of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as
income during the period corresponding to the licensee's sales. Payments received as consideration of the grant of a license or
advanced royalty payments are recorded as deferred revenue at the time payment is received and recognized ratably as revenue over
the term of the license agreement. Revenue is not recognized unless collectability is reasonably assured.
If licensing arrangements
are terminated prior to the original licensing period, the Company will recognize revenue for any contractual termination fees,
unless such amounts are deemed non-recoverable.
The timing of
the Company’s sales and revenue recognition are subject to seasonality and therefore the Company expects revenues
to be weighted to the fourth quarter of 2013 as a normal reflection of the timing of our licensees’ back to
school and holiday businesses.
Accounts Receivable
Accounts receivable are recorded net of
allowances for doubtful accounts, based on the Company’s ongoing discussions with its licensees, and its evaluation of each
licensee’s payment history and account aging. The Company did not deem it necessary to record an allowance for doubtful accounts
at December 31, 2012.
Income Taxes
Current income taxes
are based on the respective periods’ taxable income for federal and state income tax reporting purposes. Deferred tax liabilities
and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is required
if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will
not be realized.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
The Company has adopted the FASB guidance
on accounting for uncertainty in income taxes. The guidance clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with other authoritative U.S. GAAP, and prescribes a recognition threshold
and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. The guidance also addresses derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Because of the Company’s historical losses, adoption of the guidance did not have a significant
effect on its accounting and disclosures for income taxes. At March 31, 2013 and December 31, 2012, the Company has no unrecognized
tax benefits and does not expect a material change in the next 12 months. Interest and penalties related to uncertain tax positions,
if any, are recorded in income tax expense.
Loss Per Share
Basic loss per share
(“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common
shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to
all potentially dilutive common shares outstanding during the period, including stock options and warrants, using the treasury
stock method, and convertible debt, using the if-converted method. Diluted EPS excludes all potentially dilutive shares of common
stock if their effect is anti-dilutive.
The computation of
basic and diluted EPS for the three months ended March 31, 2013 and 2012 excludes the common stock equivalents of the following
potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
2013
|
|
|
2012
|
|
Senior secured convertible debentures
|
|
|
0
|
|
|
|
5,524
|
|
Warrants
|
|
|
2,686
|
|
|
|
2,217
|
|
Unvested restricted stock
|
|
|
357
|
|
|
|
0
|
|
Stock options
|
|
|
328
|
|
|
|
451
|
|
|
|
|
3,371
|
|
|
|
8,192
|
|
Customer Concentrations
During the three months
ended March 31, 2013, two customers comprised greater than 10% of the Company’s net revenue from continuing operations. Revenue
derived from these customers amounted to 55.3% and 13.9%, respectively, of net revenue from continuing operations for the three
months ended March 31, 2013. At March 31, 2013, there was approximately $687 due from one of these customers, pursuant to the terms
of the related license agreements. During the three months ended March 31, 2012, two customers comprised greater than 10% of the
Company’s net revenue from continuing operations. Revenue derived from these customers amounted to 78.8% and 14.2%, respectively,
of net revenue from continuing operations for the three months ended March 31, 2012. At March 31, 2012, no amounts were due from
these major customers.
Recent
Accounting Pronouncements
In July 2012, the FASB
issued ASU No. 2012-02,
Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
(ASU 2012-02)
,
allowing entities the option to first assess qualitative factors to determine whether it is necessary to
perform the quantitative impairment test. If the qualitative assessment indicates it is more-likely-than-not that the fair value
of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise,
no testing is required. ASU 2012-02 was effective for the Company beginning January 1, 2013. The adoption of this update did not
have a material impact on the condensed consolidated financial statements.
|
3.
|
Fair Value Measurement of Financial Instruments
|
FASB ASC 820-10,
Fair
Value Measurements and Disclosures
(“ASC 820-10”), defines fair value, establishes a framework for measuring fair
value in U.S. GAAP and provides for expanded disclosure about fair value measurements. ASC 820-10 applies to all other accounting
pronouncements that require or permit fair value measurements.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
The Company determines
or calculates the fair value of financial instruments using quoted market prices in active markets when such information is available
or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available
market discount rate information for similar types of instruments while estimating for non-performance and liquidity risk. These
techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future
cash flow.
Assets and liabilities typically recorded
at fair value on a non-recurring basis to which ASC 820-10 applies include:
|
·
|
Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination, and
|
|
·
|
Long-lived assets measured at fair value due to an impairment assessment under ASC 360-15.
|
ASC 820-10 requires
that assets and liabilities recorded at fair value be classified and disclosed in one of the following three categories:
|
·
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
|
|
·
|
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
·
|
Level 3 inputs are unobservable and are typically based on the Company’s own assumptions, including situations where there is little, if any, market activity. Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 classification. As a result, the unrealized gains and losses for assets within the Level 3 classification may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
|
In certain cases, the
inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company classifies
such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or liability.
As of March 31, 2013
and December 31, 2012, there are no assets or liabilities that are required to be measured at fair value on a recurring basis.
The following table sets forth the carrying value and the fair value of the Company’s financial assets and liabilities required
to be disclosed at March 31, 2013 and December 31, 2012:
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial Instrument
|
|
Level
|
|
|
3/31/2013
|
|
|
12/31/2012
|
|
|
3/31/2013
|
|
|
12/31/2012
|
|
Cash
|
|
|
1
|
|
|
$
|
16,365
|
|
|
$
|
2,624
|
|
|
$
|
16,365
|
|
|
$
|
2,624
|
|
Restricted cash
|
|
|
1
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
35
|
|
Accounts receivable
|
|
|
2
|
|
|
$
|
1,060
|
|
|
$
|
476
|
|
|
$
|
1,060
|
|
|
$
|
476
|
|
Accounts payable
|
|
|
2
|
|
|
$
|
6,118
|
|
|
$
|
3,720
|
|
|
$
|
6,118
|
|
|
$
|
3,720
|
|
Term loans
|
|
|
3
|
|
|
$
|
63,731
|
|
|
$
|
-
|
|
|
$
|
54,977
|
|
|
$
|
-
|
|
Senior secured convertible debentures
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
3,502
|
|
|
$
|
-
|
|
|
$
|
12,594
|
|
The carrying amounts
of the Company’s cash, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term
maturities. The remaining financial assets and liabilities are comprised of term loans and convertible debentures. The Company
estimated the fair value of its convertible debentures by performing discounted cash flow analyses using an appropriate market
discount rate. The Company calculated the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or LIBOR
rates for variable-rate debt, for maturities that correspond to the maturities of its debt adding appropriate credit spreads derived
from information obtained from third-party financial institutions. These credit spreads take into account factors such as the Company’s
credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
For purposes of this
fair value disclosure, the Company based its fair value estimate for term loans on its internal valuation whereby the Company applied
the discounted cash flow method to its expected cash flow payments due under these debt agreements based on market interest rate
quotes as of March 31, 2013 and December 31, 2012 for debt with similar risk characteristics and maturities.
|
4.
|
Discontinued Operations of Wholesale Business
|
Discontinued operations
as of March 31, 2013 mainly represent the wind down costs related to the Heelys, Inc. (“Heelys”) legacy operating business,
as a result of the Company’s decision to discontinue its wholesale business related to the Heelys brand. As of March 31,
2013, costs attributable to the Heelys legacy operations mainly represent severance expense, lease termination costs and professional
and other fees. The Company expects to complete the wind down of Heelys legacy operations by the end of 2013. Discontinued operations
as of March 31, 2012 represent the Company’s decision to discontinue its wholesale business related to its People’s
Liberation and William Rast branded products.
A summary of the Company’s
results of discontinued operations of its wholesale business for the three months ended March 31, 2013 and 2012 and the Company’s
assets and liabilities from discontinued operations of its wholesale business as of March 31, 2013 and December 31, 2012 is as
follows:
Results of discontinued
operations:
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
0
|
|
|
$
|
445
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(3,864
|
)
|
|
$
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations, basic and diluted
|
|
$
|
(0.53
|
)
|
|
$
|
(0.09
|
)
|
Assets and liabilities
of discontinued operations:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Current assets
|
|
$
|
4,590
|
|
|
$
|
0
|
|
Long-term assets
|
|
$
|
14
|
|
|
$
|
4
|
|
Current liabilities
|
|
$
|
5,810
|
|
|
$
|
957
|
|
Long-term liabilities
|
|
$
|
1,225
|
|
|
$
|
0
|
|
|
5.
|
Discontinued Operations of Retail Subsidiary
|
Discontinued operations
as of March 31, 2012 represent the Company’s decision to discontinue its retail operations included in its subsidiary, William
Rast Retail, LLC (“Rast Retail”). The Company discontinued its retail operations included in its Rast Retail subsidiary
and closed the retail stores in 2012.
A summary of the Company’s
results of discontinued operations of its retail subsidiary for the three months ended March 31, 2013 and 2012 and the Company’s
liabilities from discontinued operations of its retail subsidiary as of March 31, 2013 and December 31, 2012 is as follows:
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
Results of discontinued
operations:
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
0
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
0
|
|
|
$
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.06
|
)
|
Liabilities of discontinued
operations:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Current liabilities
|
|
$
|
13
|
|
|
$
|
394
|
|
Acquisition of Heelys,
Inc.
On January 24, 2013,
the Company completed its acquisition of Heelys pursuant to the agreement and plan of merger (the “Heelys Merger Agreement”),
dated as of December 7, 2012, by and among Heelys, the Company and Wheels Merger Sub, Inc., a Delaware corporation and wholly-owned
subsidiary of the Company. In accordance with the Heelys Merger Agreement, the Company acquired all of the outstanding shares of
common stock of Heelys at a purchase price of $2.25 per share in cash, for an aggregate consideration of approximately $62,974.
The purchase was funded with cash and investments from Heelys of approximately $55,451 and with cash from the Company of approximately
$7,523. Cash and investments provided by Heelys for the acquisition was not acquired by the Company upon acquisition, but instead
was distributed directly to the Heelys’ shareholders at the closing. The acquisition of Heelys was effected in order to develop
and build the Company’s diversified portfolio of consumer brands.
In connection with
the acquisition of Heelys, the Company entered into a multi-country exclusive license agreement (the “Heelys License Agreement”)
with BBC International LLC (“BBC”) to license the trademark “Heelys” and all existing derivative brands,
including (i) Heelys, (ii) Sidewalk Sports, (iii) Nano, and (iv) Soap (collectively, the “Marks”). The Heelys License
Agreement grants an exclusive, nontransferable, non-assignable license, without the right to sub-license, to use the Marks and
certain proprietary rights, including patents, in connection with the manufacturing, distribution, advertising and sale of wheeled
footwear and footwear without wheels (the “Licensed Products”), subject to the terms and conditions stated in the Heelys
License Agreement. The term of the Heelys License Agreement expires on June 30, 2019.
The acquisition of
Heelys was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were
recorded at their estimated fair values, and operating results for Heelys are included in the condensed consolidated financial
statements from the effective date of acquisition of January 24, 2013. Accounting standards require that when the fair value of
the net assets acquired exceeds the purchase price, resulting in a bargain purchase of a business, the acquirer must reassess the
reasonableness of the values assigned to all of the net assets acquired, liabilities assumed and consideration transferred. The
Company performed such a reassessment and concluded that the preliminary values assigned for the Heelys acquisition are reasonable.
Consequently, the Company recognized a gain on bargain purchase in the amount of $227 arising from the acquisition of Heelys. The
gain was recorded in operating expenses in the accompanying condensed consolidated statement of operations as of March 31, 2013.
There was no goodwill as a result of the acquisition.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
The allocation of the
purchase price is based upon certain preliminary valuations and other analyses that have not been completed as of the date of this
filing. Any changes in the estimated fair values of the net assets recorded for this acquisition prior to the finalization of more
detailed analyses will change the allocation of the purchase price. As such, the purchase price allocations for this transaction
are preliminary estimates, which are subject to change within the measurement period. Any subsequent changes to the purchase price
allocations that are material will be adjusted retroactively. The preliminary allocation of the purchase price is summarized as
follows:
Cash consideration paid by the Company
|
|
$
|
7,523
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Cash
|
|
$
|
2,447
|
|
Accounts receivable
|
|
|
4,733
|
|
Prepaid expenses and other current assets
|
|
|
1,610
|
|
Property and equipment
|
|
|
311
|
|
Other assets
|
|
|
10
|
|
Current liabilities
|
|
|
(4,528
|
)
|
Deferred tax liability
|
|
|
(2,553
|
)
|
Other long term liabilities
|
|
|
(760
|
)
|
Net assets acquired
|
|
|
1,272
|
|
Trademarks
|
|
|
6,383
|
|
Patents
|
|
|
95
|
|
Gain on bargain purchase of business
|
|
|
(227
|
)
|
|
|
$
|
7,523
|
|
Trademarks
have been preliminarily determined by management to have an indefinite useful life and accordingly, no amortization is
recorded in the Company’s statement of operations. Trademarks are subject to a test for impairment on an annual basis.
Patents will be amortized on a straight-line basis over their expected useful lives of 10 years. The Company incurred legal
and other costs related to the transaction of approximately $1,576, of which approximately $673 was recognized during the
year ended December 31, 2012 and approximately $903 was recognized in operating expenses in the accompanying condensed
consolidated statement of operations as of March 31, 2013.
Upon acquisition, the
Company discontinued Heelys wholesale legacy operations as it transitioned the business to a licensing and brand management model.
Accordingly, Heelys assets and liabilities at March 31, 2013, as well as its results of operations from the date of acquisition
through March 31, 2013, related to the wholesale business have been reclassified to discontinued operations (see Note 4).
Total revenues and
income from continuing operations since the date of acquisition, included in the condensed consolidated statements of operations
for the three months ended March 31, 2013, are $153 and $201, respectively.
Acquisition of Ellen
Tracy® and Caribbean Joe® Brands
On March 28, 2013,
the Company entered into a purchase agreement (the “BM Purchase Agreement”), by and among the Company, ETPH Acquisition,
LLC, (“ETPH”) and B®and Matter, LLC (“Brand Matter”), pursuant to which the Company acquired from ETPH
all of the outstanding equity interests of Brand Matter (the “Ellen Tracy and Caribbean Joe Acquisition”) for an aggregate
purchase price consisting of (i) approximately $62,285 of cash, subject to adjustment as set forth in the BM Purchase Agreement,
(ii) 2,833,590 shares of the Company’s common stock, and (iii) 5-year warrants to purchase up to an aggregate of 125,000
shares of the Company’s common stock at an exercise price equal to $10.00 per share (the “Purchase Price”).
In connection with
the Ellen Tracy and Caribbean Joe Acquisition, the Company entered into a (i) first lien term loan agreement, dated as of March
28, 2013 (“First Lien Loan Agreement”), which provides for term loans of up to $45,000 and (ii) a second lien term
loan, dated as of March 28, 2013 (“Second Lien Loan Agreement”), which provides for term loans of up to $20,000 (see
Note 9). The proceeds from the term loans were used to fund the Ellen Tracy and Caribbean Joe Acquisition, repay existing debt,
pay fees and expenses in connection with the foregoing, finance capital expenditures and for general corporate purposes. The Ellen
Tracy and Caribbean Joe Acquisition was effected to complete the Company’s base platform through acquiring two strong brands,
Ellen Tracy
® and
Caribbean Joe
®, with a proven team.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
The Ellen Tracy and
Caribbean Joe Acquisition was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed
liabilities were recorded at their estimated fair values, and operating results for Brand Matter are included in the condensed
consolidated financial statements from the effective date of acquisition of March 28, 2013.
The allocation of the
purchase price is based upon certain preliminary valuations and other analyses that have not been completed as of the date of this
filing. Any changes in the estimated fair values of the net assets recorded for this acquisition prior to the finalization of more
detailed analyses will change the allocation of the purchase price. As such, the purchase price allocations for this transaction
are preliminary estimates, which are subject to change within the measurement period. Any subsequent changes to the purchase price
allocations that are material will be adjusted retroactively. The preliminary allocation of the purchase price is summarized as
follows:
Cash paid
|
|
$
|
62,285
|
|
Fair value of common stock issued (2,833,590 shares)
|
|
|
19,835
|
|
Fair value of warrants issued (125,000 warrants)
|
|
|
393
|
|
Total consideration paid
|
|
$
|
82,513
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Cash
|
|
$
|
140
|
|
Current assets
|
|
|
316
|
|
Property and equipment
|
|
|
101
|
|
Other assets
|
|
|
146
|
|
Current liabilities
|
|
|
(1,172
|
)
|
Net liabilities assumed
|
|
|
(469
|
)
|
Trademarks
|
|
|
79,716
|
|
Customer agreements
|
|
|
1,000
|
|
Goodwill
|
|
|
2,266
|
|
|
|
$
|
82,513
|
|
The fair value of the
common stock issued was determined using the closing market price of the Company’s common stock on March 28, 2013. The fair
value of the warrants issued was determined using the Black-Scholes option-pricing model utilizing the following assumptions: dividend
yield of zero, a risk-free interest rate of 0.77%, expected term of five years and an expected volatility of 64%.
Goodwill arising
from the Ellen Tracy and Caribbean Joe Acquisition mainly consists of the synergies of an ongoing licensing and brand
management business and an experienced, assembled workforce. The Company’s goodwill is not deductible for tax purposes.
Trademarks have been determined by management to have an indefinite useful life and accordingly, no amortization is recorded
in the Company’s statement of operations. Goodwill and trademarks are subject to a test for impairment on an annual
basis. Customer agreements will be amortized on a straight-line basis over their expected useful lives of 4 years. The
Company incurred legal and other costs related to the transaction of approximately $2,559, of which approximately $879 was
recognized during the year ended December 31, 2012 and approximately $1,680 was recognized in operating expenses in the
accompanying condensed consolidated statement of operations as of March 31, 2013.
Total
revenues and loss from continuing operations since the date of the Ellen Tracy and Caribbean Joe Acquisition, included in
the condensed consolidated statements of operations for the three months ended March 31, 2013, are $0 and $2,712,
respectively. The loss from continuing operations is mainly attributable to the non-cash deferred tax expense related to the
acquired trademarks.
The following unaudited
consolidated pro forma information gives effect to the acquisitions of Heelys and Brand Matter as if these transactions had occurred
on January 1, 2012. The following pro forma information is presented for illustration purposes only and is not necessarily indicative
of the results that would have been attained had the acquisition of these businesses been completed on January 1, 2012, nor are
they indicative of results that may occur in any future periods.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
The Company’s
pro forma revenue (unaudited) would have been $3,958 and $3,802 for the three months ended March 31, 2013 and 2012, respectively,
if the transactions had occurred on January 1, 2012. The Company’s pro forma net loss attributable to common stockholders
(unaudited), including the loss from discontinued operations, would have been $9,013 and $22,876 for the three months ended March
31, 2013 and 2012, respectively. The supplemental pro forma information for the three months ended March 31, 2013 has been adjusted
to:
|
I.
|
exclude certain non-recurring
expenses of:
|
|
a)
|
$2,583 relating to acquisition-related costs; and
|
|
b)
|
$11,614 relating to the non-cash interest expense recognized on the remaining unamortized discount
of the beneficial conversion feature, Warrants and deferred financing costs of the Debentures (see Note 9); and
|
|
II.
|
include certain expenses of:
|
|
a)
|
$65 relating to the amortization of acquired customer agreements and patents; and
|
|
b)
|
$1,154 of interest expense relating to the Term Loans; amortization of deferred financing costs
and amortization of debt discount (see Note 9).
|
The supplemental pro
forma information for the three months ended March 31, 2012 has been adjusted to include certain non-recurring expenses of:
|
a)
|
$5,530 relating to acquisition-related costs;
|
|
b)
|
$11,480 relating to the non-cash interest expense recognized on the remaining unamortized discount
of the beneficial conversion feature, Warrants and deferred financing costs of the Debentures;
|
|
c)
|
$1,282 of interest expense relating to the Term Loans; amortization of deferred financing costs
and amortization of debt discount;
|
|
d)
|
$65 relating to the amortization of acquired customer agreements and patents; and
|
|
e)
|
$2,213 relating to non-cash deferred tax expense on acquired trademarks.
|
Additionally, the supplemental
pro forma information has been adjusted to reflect the elimination of Heelys historical operations that are not related to the
licensing business, as this portion of their business has been discontinued by the Company (see Note 4).
Goodwill is summarized
as follows:
Balance at January 1, 2013
|
|
$
|
429
|
|
Acquisitions in 2013
|
|
|
2,266
|
|
Balance at March 31, 2013
|
|
$
|
2,695
|
|
Goodwill is tested
for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December
31 for the Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. The Company considers its market capitalization and the carrying value
of its assets and liabilities, including goodwill, when performing its goodwill impairment test. When conducting its annual goodwill
impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill
is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company
then applies a two-step impairment test. The two-step impairment test first compares the fair value of the Company's reporting
unit to its carrying or book value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired
and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds its fair value,
the Company determines the implied fair value of the reporting unit's goodwill and if the carrying value of the reporting unit's
goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded in the consolidated statement
s of operations.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
Intangible assets are
summarized as follows:
March 31, 2013
|
|
Useful
Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
15
|
|
|
$
|
4,569
|
|
|
$
|
(351
|
)
|
|
$
|
4,218
|
|
Customer agreements
|
|
|
4
|
|
|
|
1,000
|
|
|
|
0
|
|
|
|
1,000
|
|
Patents
|
|
|
10
|
|
|
|
95
|
|
|
|
0
|
|
|
|
95
|
|
|
|
|
|
|
|
$
|
5,664
|
|
|
$
|
(351
|
)
|
|
|
5,313
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,412
|
|
December 31, 2012
|
|
Useful
Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
15
|
|
|
$
|
4,569
|
|
|
$
|
(276
|
)
|
|
$
|
4,293
|
|
Intangible assets, net
|
|
|
|
|
|
$
|
4,569
|
|
|
$
|
(276
|
)
|
|
$
|
4,293
|
|
Future annual estimated
amortization expense is summarized as follows:
Years Ending December 31:
|
|
|
|
2013 (nine months)
|
|
$
|
423
|
|
2014
|
|
|
564
|
|
2015
|
|
|
564
|
|
2016
|
|
|
564
|
|
2017
|
|
|
377
|
|
2018
|
|
|
314
|
|
Thereafter
|
|
|
2,507
|
|
|
|
$
|
5,313
|
|
Amortization expense
amounted to $75 and $8 for the three months ended March 31, 2013 and 2012, respectively.
Intangible assets represent
trademarks, customer agreements and patents related to the Company’s brands. Definite lived assets are amortized on a straight-line
basis over the estimated useful lives of the assets. Indefinite lived intangible assets are not amortized, but instead are subject
to impairment evaluation. The carrying value of intangible assets and other long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
The components of long-term
debt is as follows:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Term Loans
|
|
$
|
65,000
|
|
|
$
|
0
|
|
Debentures
|
|
|
0
|
|
|
|
14,500
|
|
Accrued interest
|
|
|
0
|
|
|
|
30
|
|
Subtotal
|
|
|
65,000
|
|
|
|
14,530
|
|
Unamortized discounts
|
|
|
(1,269
|
)
|
|
|
(11,028
|
)
|
Total long-term debt, net of unamortized discounts
|
|
|
63,731
|
|
|
|
3,502
|
|
Less: current portion of long-term debt
|
|
|
8,000
|
|
|
|
0
|
|
Long-term debt
|
|
$
|
55,731
|
|
|
$
|
3,502
|
|
Term Loans
In connection with
the Ellen Tracy and Caribbean Joe Acquisition discussed in Note 6, on March 28, 2013, the Company entered into a (i) First Lien
Loan Agreement, which provides for term loans of up to $45,000 (the “First Lien Term Loan”) and (ii) a Second Lien
Loan Agreement (together with the First Lien Loan Agreement, the “Loan Agreements”), which provides for term loans
of up to $20,000 (the “Second Lien Term Loan” and, together with the First Lien Loan Agreement, the “Term Loans”).
The proceeds from the Term Loans were used to fund the Ellen Tracy and Caribbean Joe Acquisition, repay existing debt, pay fees
and expenses in connection with the foregoing, finance capital expenditures and for general corporate purposes. In connection with
the Second Lien Loan Agreement, the Company issued 5-year warrants to purchase up to an aggregate of 285,160 shares of the Company’s
common stock at an exercise price of $4.50 per share.
The Term Loans were
drawn in full on March 28, 2013. The Loan Agreements terminate, and all loans then outstanding under each Loan Agreement, must
be repaid on March 28, 2018. The Company is required to make quarterly scheduled amortization payments of the Term Loans prior
to the maturity of the Loan Agreements in an amount equal to (x) in the case of the First Lien Loan Agreement, $1,500 and (y) in
the case of the Second Lien Loan Agreement, $500. The First Lien Term Loan bears interest, at the Company’s option, at either
(a) 4.00% per annum plus adjusted LIBOR or (b) 3.00% per annum plus the Base Rate, as defined in the applicable Loan Agreement
(4.28% at March 31, 2013). The Second Lien Term Loan bears interest at 12.75% per annum plus adjusted LIBOR (13.03% at March 31,
2013).
The fair value of the
warrants was determined to be approximately $1,269 using the Black-Scholes option-pricing model. The fair value of the warrants
was recorded as a discount to the Term Loans and a corresponding increase to additional paid in capital. This amount is being accreted
to non-cash interest expense over the contractual term of the Term Loans, which is five years. The assumptions utilized to value
the warrants under the Black-Scholes option-pricing model included a dividend yield of zero, a risk-free interest rate of 0.77%,
expected term of five years and an expected volatility of 64%.
There was no contractual
interest expense or accretion of the discount recorded for the three months ended March 31, 2013.
The Company incurred
legal and other fees associated with this transaction of approximately $1,973. These amounts have been recorded as deferred financing
costs in the accompanying condensed consolidated balance sheet, and are being amortized as non-cash interest expense over the contractual
term of the Term Loans. There was no amortization of deferred financing costs recorded for the three months ended March 31, 2013.
The Loan Agreements
include customary representations and warranties and include representations relating to the intellectual property owned by the
Company and its subsidiaries and the status of the Company’s material license agreements. In addition, the Loan Agreements
include covenants and events of default including requirements that the Company satisfy a minimum positive net income test, maintain
a minimum loan to value ratio (as calculated pursuant to the First Lien Loan Agreement or the Second Lien Loan Agreement, as applicable)
and, in the case of the Second Lien Loan Agreement, maintain a minimum cash balance of $3,525 through December 31, 2013 and $3,000
after January 1, 2014 in accounts subject to control agreements, as well as limitations on liens on the assets of the Company and
its subsidiaries, indebtedness, consummation of acquisitions (subject to certain exceptions and consent rights as set forth in
the Loan Agreements) and fundamental changes (including mergers and consolidations of the Company and its subsidiaries), dispositions
of assets of the Company and its subsidiaries, investments, loans, advances and guarantees by the Company and its subsidiaries,
and restrictions on issuing dividends and other restricted payments, prepayments and amendments of certain indebtedness and material
licenses, affiliate transactions and issuance of equity interests.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
Variable Rate Senior
Secured Convertible Debentures
On February 2, 2012,
the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with TCP WR Acquisition,
LLC (“TCP WR”), pursuant to which the Company issued variable rate senior secured convertible debentures (the “Debentures”)
in the amount of $14,500, warrants to purchase up to 1,104,762 shares of common stock (the “Warrants”) and 14,500 shares
of Series A Preferred Stock, par value $0.001 per share (“Series A Preferred Stock”). The Debentures had a three year
term, with all principal and interest being due and payable at the maturity date of January 31, 2015, and had an interest rate
of LIBOR.
The Debentures were
convertible at the option of TCP WR into 5,523,810 shares of the Company’s common stock at an initial conversion price of
$2.625 per share (“Conversion Price”). The Warrants, which had a fair value of $4,215, are exercisable for five years
at an exercise price of $2.625 per share. The fair value of the Warrants was recorded as a discount to the Debentures and was being
accreted to interest expense over the contractual term of the Debentures. Additionally, the Debentures were deemed to have a beneficial
conversion feature at the time of issuance. Accordingly, the beneficial conversion feature, which had a value of $7,347, was recorded
as a discount to the Debentures and was being accreted to interest expense over the contractual term of the Debentures.
Legal and other fees
associated with the transaction of $844 were recorded as deferred financing costs and were being amortized to interest expense
over the contractual term of the Debentures.
On
March 28, 2013, in connection with the
Ellen Tracy and Caribbean Joe
Acquisition, TCP WR elected
to convert the aggregate principal amount outstanding under the Debentures into shares of the Company’s common stock at a
conversion rate of $2.625 per share (the “TCP Conversion”). At the time of the TCP Conversion, the aggregate principal
amount outstanding under the Debentures was $14,500, plus accrued and unpaid interest. The Company issued 5,523,810 shares of its
common stock in the TCP Conversion. In connection with the TCP Conversion, the Company also redeemed all of the 14,500 issued and
outstanding shares of Series A Preferred Stock held by TCP WR for an aggregate redemption price (unrounded) of $14.50 pursuant
to the Designation of Rights, Preferences and Limitations for the Series A Preferred Stock. As a result of the TCP Conversion,
the remaining unamortized discount of $11,028 recorded in connection with the beneficial conversion feature and the Warrants issued
with the Debentures to TCP WR, as well as the remaining unamortized balance of deferred financing costs of $586, were recognized
as non-cash interest expense in the accompanying statement of operations as of March 31, 2013.
|
10.
|
Commitments and Contingencies
|
Shareholder Derivative
Complaint – Settled
On January 17, 2012,
RP Capital, LLC (“plaintiff”) filed a shareholders’ derivative complaint in the Superior Court of the State of
California, County of Los Angeles, against the Company and former directors Colin Dyne, Kenneth Wengrod, Susan White and Dean Oakey.
The case alleges that the defendants (i) breached their fiduciary duties to the Company for failing to properly oversee and manage
the Company, (ii) certain defendants 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 professional services. The parties agreed upon a
settlement in the action. The court granted final approval of the settlement on March 12, 2013 and dismissed the case on the same
day. Pursuant to the settlement, the Company is required, subject to certain exceptions, to implement and maintain in effect for
a period of three years certain corporate governance initiatives, many of which the Company implemented in early 2012. The settlement
did not include any cash payment for damages.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
General Legal Matters
From time to time,
the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that such matters
are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company
is, or could be, involved in litigation, will not have a material adverse effect on its business, financial condition or results
of operations. Contingent liabilities arising from potential litigation are assessed by management based on the individual analysis
of these proceedings and on the opinion of the Company’s lawyers and legal consultants. At March 31, 2013, the Company is
a defendant in litigation involving former vendors of the Company’s discontinued wholesale operations. These vendors’
claims relate primarily to amounts owed for goods sold and delivered to the Company. Based on the information received from the
Company’s legal consultants and on the analysis of potential demands, the Company has recorded an estimated liability for
the probable loss as a component of liabilities of discontinued operations in the accompanying condensed consolidated balance sheet
at December 31, 2012.
|
11.
|
Stock Based Compensation
|
Stock Options
The following table
summarizes the Company’s stock option activity for the three months ended March 31, 2013:
|
|
Number of
Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding - December 31, 2012
|
|
|
404,800
|
|
|
$
|
4.09
|
|
|
|
7.3
|
|
|
$
|
808
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,800
|
)
|
|
|
(3.63
|
)
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
(68,726
|
)
|
|
|
(10.44
|
)
|
|
|
|
|
|
|
|
|
Outstanding - March 31, 2013
|
|
|
328,275
|
|
|
$
|
2.77
|
|
|
|
2.5
|
|
|
$
|
1,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - March 31, 2013
|
|
|
326,011
|
|
|
$
|
2.77
|
|
|
|
2.6
|
|
|
$
|
1,410
|
|
A summary of the changes
in the Company’s unvested stock options is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested - December 31, 2012
|
|
|
46,240
|
|
|
$
|
0.01
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(43,250
|
)
|
|
|
0.01
|
|
Forfeited or Canceled
|
|
|
(726
|
)
|
|
|
0.01
|
|
Unvested - March 31, 2013
|
|
|
2,264
|
|
|
$
|
0.01
|
|
The Company did not
grant any options during the three months ended March 31, 2013 and 2012. Total compensation expense related to stock options for
the three months ended March 31, 2013 and 2012 was approximately $4 and $1, respectively. As of March 31, 2013, there was no unrecognized
compensation expense related to stock options.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
Warrants
The following table
summarizes the Company’s outstanding warrants:
|
|
Number of
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding - December 31, 2012
|
|
|
2,250,762
|
|
|
$
|
2.23
|
|
|
|
4.0
|
|
|
$
|
6,290
|
|
Granted
|
|
|
438,160
|
|
|
|
6.17
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
(2,667
|
)
|
|
|
(7.50
|
)
|
|
|
|
|
|
|
|
|
Outstanding - March 31, 2013
|
|
|
2,686,255
|
|
|
$
|
2.87
|
|
|
|
3.8
|
|
|
$
|
11,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - March 31, 2013
|
|
|
2,647,505
|
|
|
$
|
2.82
|
|
|
|
3.8
|
|
|
$
|
11,434
|
|
A summary of the changes
in the Company’s unvested warrants is as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested - December 31, 2012
|
|
|
45,000
|
|
|
$
|
3.05
|
|
Granted
|
|
|
438,160
|
|
|
|
4.00
|
|
Vested
|
|
|
(444,410
|
)
|
|
|
(3.99
|
)
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
Unvested - March 31, 2013
|
|
|
38,750
|
|
|
$
|
3.05
|
|
Restricted Stock
On November 19, 2012,
the Company issued 396,196 shares of restricted stock to the Company’s Chief Executive Officer, in accordance with the terms
of his employment agreement. Total compensation related to the restricted stock grant amounted to approximately $2,278, of which
$142 was recorded in operating expenses in the Company’s condensed consolidated statement of operations for the three months
ended March 31, 2013.
On November 29, 2012,
the Company issued 80,000 shares of restricted stock to the Company’s Chief Financial Officer, in accordance with the terms
of his employment offer letter. Total compensation related to the restricted stock grant amounted to approximately $400, of which
$25 was recorded in operating expenses in the Company’s consolidated statement of operations for the three months ended March
31, 2013.
A summary of the restricted
stock activity for the three months ended March 31, 2013 is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Weighted Average
Remaining
Contractual Life
(in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Unvested - December 31, 2012
|
|
|
357,147
|
|
|
$
|
5.62
|
|
|
|
3.9
|
|
|
$
|
0
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
5.62
|
|
|
|
|
|
|
|
|
|
Unvested - March 31, 2013
|
|
|
357,147
|
|
|
$
|
5.62
|
|
|
|
3.6
|
|
|
$
|
491
|
|
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
|
12.
|
Related Party Transactions
|
Relationship
with Brand Matter
On
March 28, 2013, the Company entered into the BM Purchase Agreement, by and among the Company, ETPH and Brand Matter, pursuant to
which the Company acquired from ETPH all of the issued and outstanding equity interests of Brand Matter. Three of the Company’s
directors, William Sweedler, Matthew Eby and Richard Gersten, are members of Tengram Capital Associates, LLC (“Tengram”),
which indirectly beneficially owns approximately 43% of the Company’s outstanding common stock as of the date hereof. Two
of the Company’s directors, Mr. Sweedler and Mr. Eby, are members of Brand Matter. Prior to the consummation of the Ellen
Tracy and Caribbean Joe Acquisition, (i) Messrs. Sweedler and Eby also served on the board of directors of ETPH, the direct parent
of Brand Matter, (ii) Mr. Sweedler served as co-chairman of the board of directors of Brand Matter, (iii) Mr. Sweedler served as
an executive officer of Brand Matter, and (iv) Mr. Sweedler beneficially owned certain membership interests of ETPH. As a consequence
of Mr. Sweedler’s indirect beneficial ownership in Brand Matter and the Company and his and Mr. Eby’s positions with
ETPH, the Company and Brand Matter as well as the Company and ETPH each appointed special independent committees (on which neither
Mr. Sweedler nor Mr. Eby served) to review and negotiate the terms of the Ellen Tracy and Caribbean Joe Acquisition. In connection
with the Ellen Tracy and Caribbean Joe Acquisition, Mr. Sweedler received shares of the Company’s common stock for all his
equity interests in Brand Matter.
Amended and Restated
Stockholders Agreement
On
February 22, 2012, the Company, TCP WR and Colin Dyne, the Company’s former chief executive officer, chief financial officer
and director entered into a stockholders agreement (the “Stockholders Agreement”). In connection with the Ellen Tracy
and Caribbean Joe Acquisition, the Company entered into the amended and restated stockholders agreement, dated as of March 27,
2013 (the “A&R Stockholders Agreement”), pursuant to which Mr. Dyne was removed as a party to such agreement. The
terms of the A&R Stockholders Agreement are otherwise substantially similar to those in the Stockholders Agreement.
Heelys
Merger Agreement
On
December 7, 2012, in connection with the Company’s entry into the Heelys Merger Agreement, as discussed in Note 6 the Company
entered into an equity commitment letter with Tengram Capital Partners Gen2 Fund, L.P., pursuant to which such entity agreed to
provide up to $8,100 of equity financing to the Company, subject to the terms and conditions set forth in the commitment letter,
if needed, for the Company to satisfy its obligations under the Heelys Merger Agreement. The commitment letter automatically terminated
upon the consummation of the transactions contemplated by the merger agreement on January 24, 2013 without an equity financing
by Tengram Capital Partners Gen2 Fund, L.P.
Change of Control
Transaction with TCP WR
William Sweedler, Matthew
Eby and Richard Gersten are each directors of the Company, and are the controlling members of Tengram, which has the sole voting
control over TCP WR. On February 2, 2012, the Company entered into the Securities Purchase Agreement with TCP WR pursuant to which
the Company sold the Debentures, the Warrants and Series A Preferred Stock to TCP WR.
Fees paid to TCP WR,
including the annual monitoring fees, and legal and other fees, amounted to approximately $250 and $689 for the three months ended
March 31, 2013 and 2012, respectively. At March 31, 2012 and December 31, 2012, amounts owed to TCP WR of $438 and $0, respectively,
are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
Transactions with
Tennman WR-T, Inc.
In May 2010, the Company’s
subsidiary, William Rast Sourcing, LLC (“Rast Sourcing”), entered into a design and licensing agreement with the Target
Corporation. During the three months ended March 31, 2013 and 2012, the Company paid $628 and $100, respectively, in royalties
to Tennman WR-T, Inc. (“Tennman WR-T”), a minority interest holder of Rast Sourcing. At March 31, 2012 and December
31, 2012, amounts owed to Tennman WR-T of $123 and $378, respectively, are included in accounts payable and accrued expenses in
the accompanying condensed consolidated balance sheets.
SEQUENTIAL BRANDS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2013
(UNAUDITED)
(dollars are in thousands (unless otherwise
noted), except share and per share data)
|
13.
|
Private Placement Transaction
|
On
December 21, 2012, the Company entered into a securities purchase agreement (the “PIPE Purchase Agreement”) with a
select group of accredited investors (the “PIPE Investors”), pursuant to which the Company agreed to sell to the PIPE
Investors an aggregate of 4,966,667 shares of the Company’s common stock, par value $0.001 (the “Securities”),
at a purchase price of $4.50 per share, for a total offering amount of approximately $22,350 (the “Offering”). Net
proceeds, after the payment of legal and other expenses, amounted to approximately $21,212.
The Offering was consummated
on January 9, 2013 and a portion of the proceeds were used to fund the acquisition of Heelys. Affiliates of the Company purchased
744,444 shares, with the Company’s Chief Executive Officer purchasing 11,111 shares and TCP SQBG Acquisition, LLC (“TCP
SQBG”), a fund affiliated with TCP WR, purchasing 733,333 shares. The Company’s directors, William Sweedler, Matthew
Eby and Richard Gersten, are co-managing members of Tengram, which is the managing member of TCP WR and TCP SQBG. As contemplated
by the PIPE Purchase Agreement, the Company also entered into a registration rights agreement with the PIPE Investors on January
9, 2013 (the “Registration Rights Agreement”).
The Registration Rights
Agreement requires the Company to file a resale shelf registration statement (the “Resale Shelf”) for the Securities
purchased by each PIPE Investor in the Offering within 120 days of the Closing Date (the “Filing Deadline”) and requires
the Company to use its commercially reasonable efforts to cause the Resale Shelf to become effective as promptly thereafter as
practicable but in any event not later than 90 days after the Filing Deadline if the Company receives comments from the SEC, or
30 days after the Filing Deadline, if the Company does not receive comments from the SEC (such applicable date, the “Effectiveness
Deadline”). If the Company fails to meet the Filing Deadline or the Effectiveness Deadline, subject to certain grace periods
provided for in the Registration Rights Agreement, the Company will be required to pay certain liquidated damages to the Investors.
The maximum aggregate liquidated damages payable to a PIPE Investor, including any interest, shall be 10% of the aggregate amount
paid by such PIPE Investor. The Registration Rights Agreement also provides for customary indemnification and contribution provisions,
as well as customary restrictions such as blackout periods. In the event the PIPE Investors no longer hold “Registrable Securities,”
as defined in the Registration Rights Agreement, notwithstanding the foregoing, the Company may no longer be obligated to register
the Securities with the SEC.