NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(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
Ellen Tracy
,
William Rast
,
Revo,
Caribbean Joe
,
Heelys
,
DVS
,
The
Franklin Mint
and
People’s Liberation
. The Company promotes, markets, and licenses these brands and intends to
pursue acquisitions of additional brands or rights to 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. The Company currently has more than fifty licensees, almost all of which are wholesale
licensees. In a wholesale license, a wholesale supplier is granted rights (typically on an exclusive basis) to a single or small
group of related product categories for sale to multiple accounts within an approved channel of distribution and territory. Also,
as part of the Company’s business strategy, the Company has previously entered into (and expects in the future to enter
into) direct-to-retail licenses. In a direct-to-retail license, a single retailer is granted the right (typically on an exclusive
basis) to sell branded products in a broad range of product categories through its brick and mortar stores and e-commerce sites.
|
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 (“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 GAAP have been condensed or omitted, pursuant
to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all of the information
and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is the
Company’s opinion, however, that the accompanying unaudited condensed consolidated financial statements include all adjustments,
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, 2013, as filed with the SEC on March 31, 2014, which contains the audited financial statements
and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations,
for the years ended December 31, 2013 and 2012. The financial information as of December 31, 2013 is derived from the audited
financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The interim
results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the
year ending December 31, 2014 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 inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of
unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period.
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.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
Discontinued Operations
The Company accounted
for the decisions to close down its wholesale operations as discontinued operations in accordance with the guidance provided in
the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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. In addition, we have no
foreign operations or any assets in foreign locations. All of our domestic 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 advertising/marketing fees and
additional revenues based on a percentage of defined sales. Minimum royalty and advertising/marketing 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.
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 credit worthiness, payment history and account aging. Account balances deemed to be uncollectible
are charged to the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery
is considered remote. The allowance for doubtful accounts was $106 at June 30, 2014 and $135 at December 31, 2013.
The Company’s
accounts receivable amounted to approximately $7,450 and $5,286 as of June 30, 2014 and December 31, 2013, respectively. Three
licensees accounted for approximately 74% (28%, 26%, and 20%) of the Company’s total consolidated accounts receivable balance
as of June 30, 2014 and three licensees accounted for approximately 60% (35%, 14% and 11%) of the Company’s total consolidated
accounts receivable balance as of December 31, 2013. The Company does not believe the accounts receivable balance from these licensees
represents a significant collection risk based on past collection experience.
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. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in
thousands unless otherwise noted, except share and per share data)
The Company applies
the FASB guidance on accounting for uncertainty in income taxes. The guidance clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with other authoritative GAAP, and prescribes a recognition
threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The guidance also addresses derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. At June 30, 2014 and December 31, 2013, the Company had $643 of certain unrecognized tax
benefits, included as a component of long-term liabilities held for disposition from discontinued operations of wholesale business
and does not expect a material change in the next twelve months. Interest and penalties related to uncertain tax positions, if
any, are recorded in income tax expense. Tax years that remain open for assessment for federal and state tax purposes include
the years ended December 31, 2010 through 2013.
Earnings Per Share
Basic earnings per
share (“EPS”) is computed by dividing net income (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 shares used to calculate basic and diluted earnings (loss) per common share
consists of the following:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
25,119,788
|
|
|
|
16,317,171
|
|
|
|
24,911,564
|
|
|
|
11,817,828
|
|
Warrants
|
|
|
0
|
|
|
|
749,782
|
|
|
|
1,379,387
|
|
|
|
0
|
|
Unvested restricted stock
|
|
|
0
|
|
|
|
367,579
|
|
|
|
184,451
|
|
|
|
0
|
|
Stock options
|
|
|
0
|
|
|
|
190,225
|
|
|
|
154,430
|
|
|
|
0
|
|
Diluted weighted average common shares outstanding
|
|
|
25,119,788
|
|
|
|
17,624,757
|
|
|
|
26,629,832
|
|
|
|
11,817,828
|
|
The computation of
basic and diluted EPS for the three and six months ended June 30, 2014 and 2013 excludes the common stock equivalents of the following
potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Warrants
|
|
|
1,744,921
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
1,602,922
|
|
Unvested restricted stock
|
|
|
626,089
|
|
|
|
0
|
|
|
|
0
|
|
|
|
380,525
|
|
Stock options
|
|
|
385,499
|
|
|
|
8,333
|
|
|
|
46,333
|
|
|
|
342,000
|
|
|
|
|
2,756,509
|
|
|
|
133,333
|
|
|
|
171,333
|
|
|
|
2,325,447
|
|
Concentration of Credit Risk
Financial instruments
which potentially expose the Company to credit risk consist primarily of cash and accounts receivable. Cash is held for use for
working capital needs and/or future acquisitions. Substantially all of the Company’s cash is deposited with high quality
financial institutions. At times, however, such cash may be in deposit accounts that exceed the Federal Deposit Insurance Corporation
insurance limit. The Company has not experienced any losses in such accounts as of June 30, 2014.
Concentration of credit
risk with respect to accounts receivable is minimal due to the limited amount of outstanding receivables and the nature of the
Company’s royalty revenues.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
Customer Concentrations
The Company recorded
net revenues of $7,003 and $4,347 during the three months ended June 30, 2014 and 2013, respectively. During the three months
ended June 30, 2014, two licensees represented at least 10% of net revenue, accounting for 18% and 16% of the Company’s
net revenue. During the three months ended June 30, 2013, two licensees accounted for 24% and 12% of the Company’s net revenue.
The Company recorded
net revenues of $13,265 and $5,976 during the six months ended June 30, 2014 and 2013, respectively. During the six months ended
June 30, 2014, two licensees represented at least 10% of net revenue, accounting for 19% and 16% of the Company’s net revenue.
During the six months ended June 30, 2013, one licensee accounted for 32% of the Company’s net revenue.
Loss Contingencies
We recognize contingent
losses that are both probable and estimable. In this context, we define probability as circumstances under which events are likely
to occur. The Company records such legal costs as incurred.
Noncontrolling Interest
Noncontrolling interest
from continuing operations recorded for the three and six months ended June 30, 2014 and 2013 represents income allocations to
Elan Polo International, Inc., a member of DVS Footwear International, LLC (“DVS LLC”).
|
3.
|
Fair
Value Measurement of Financial Instruments
|
ASC 820-10,
Fair
Value Measurements and Disclosures
(“ASC 820-10”), defines fair value, establishes a framework for measuring fair
value in GAAP and provides for expanded disclosure about fair value measurements. ASC 820-10 applies to all other accounting pronouncements
that require or permit fair value measurements.
The Company 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,
Impairment or Disposal of Long-Lived Assets
.
|
This topic defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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.
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
In certain cases,
the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company classifies
such financial assets or liabilities based on the lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or liability.
As of June 30, 2014
and December 31, 2013, there are no assets or liabilities that are required to be measured at fair value on a recurring basis,
except for the Company’s interest rate swap (see Note 8). 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 June 30, 2014 and December 31, 2013:
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial Instrument
|
|
Level
|
|
|
6/30/2014
|
|
|
12/31/2013
|
|
|
6/30/2014
|
|
|
12/31/2013
|
|
Cash
|
|
|
1
|
|
|
$
|
15,775
|
|
|
$
|
25,125
|
|
|
$
|
15,775
|
|
|
$
|
25,125
|
|
Accounts receivable
|
|
|
2
|
|
|
$
|
7,450
|
|
|
$
|
5,286
|
|
|
$
|
7,450
|
|
|
$
|
5,286
|
|
Accounts payable
|
|
|
2
|
|
|
$
|
1,586
|
|
|
$
|
1,597
|
|
|
$
|
1,586
|
|
|
$
|
1,597
|
|
Term loans
|
|
|
3
|
|
|
$
|
54,064
|
|
|
$
|
57,931
|
|
|
$
|
50,479
|
|
|
$
|
53,640
|
|
Interest rate swap
|
|
|
2
|
|
|
$
|
89
|
|
|
$
|
0
|
|
|
$
|
89
|
|
|
$
|
0
|
|
The carrying amounts
of the Company’s cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.
The Company records
its interest rate swap on the condensed consolidated balance sheet at fair value (Level 2). As of June 30, 2014, the fair value
of the Company’s interest rate swap is immaterial. The valuation technique used to determine the fair value of the interest
rate swap approximates the net present value of future cash flows which is the estimated amount that a bank would receive or pay
to terminate the swap agreement at the reporting date, taking into account current interest rates.
For purposes of this
fair value disclosure, the Company based its fair value estimate for the Term Loans (as defined below) on its internal valuation
whereby the Company applied the discounted cash flow method to its expected cash flow payments due under the Loan Agreements (as
defined below) based on market interest rate quotes as of June 30, 2014 and December 31, 2013 for debt with similar risk characteristics
and maturities.
|
4.
|
Discontinued
Operations of Wholesale Business
|
Discontinued operations
as of the three and six months ended June 30, 2014 and 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. For the three and six months ended June 30, 2013, costs attributable to the Heelys legacy operations mainly represent
severance expense, lease termination costs and professional and other fees. The Company did not record any costs during the three
and six months ended June 30, 2014.
A summary of the Company’s
results of discontinued operations of its wholesale business for the three and six months ended June 30, 2014 and 2013 and the
Company’s assets and liabilities from discontinued operations of its wholesale business as of June 30, 2014 and December
31, 2013 is as follows:
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
Results of discontinued
operations:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
0
|
|
|
$
|
(102
|
)
|
|
$
|
0
|
|
|
$
|
(3,966
|
)
|
Noncontrolling interest
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Loss from discontinued operations of wholesale business, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of tax
|
|
$
|
0
|
|
|
$
|
(102
|
)
|
|
$
|
0
|
|
|
$
|
(3,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations, basic
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
(0.33
|
)
|
Loss per share from discontinued operations, diluted
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
25,119,788
|
|
|
|
16,317,171
|
|
|
|
24,911,564
|
|
|
|
11,817,828
|
|
Weighted average shares outstanding, diluted
|
|
|
25,119,788
|
|
|
|
17,624,757
|
|
|
|
26,629,832
|
|
|
|
11,817,828
|
|
Assets and liabilities
of discontinued operations:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Prepaid expenses and other current assets
|
|
$
|
194
|
|
|
$
|
213
|
|
Accounts payable and accrued expenses
|
|
$
|
404
|
|
|
$
|
1,105
|
|
Long-term liabilities
|
|
$
|
745
|
|
|
$
|
884
|
|
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
statements of operations. No events or circumstances indicate an impairment has been identified subsequent to the Company’s
December 31, 2013 impairment testing.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
Intangible assets
are summarized as follows:
|
|
Useful
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
June 30, 2014
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Finite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
15
|
|
|
$
|
4,762
|
|
|
$
|
(743
|
)
|
|
$
|
4,019
|
|
Customer agreements
|
|
|
4
|
|
|
|
1,120
|
|
|
|
(332
|
)
|
|
|
788
|
|
Patents
|
|
|
10
|
|
|
|
665
|
|
|
|
(64
|
)
|
|
|
601
|
|
|
|
|
|
|
|
$
|
6,547
|
|
|
$
|
(1,139
|
)
|
|
|
5,408
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,693
|
|
Future annual estimated
amortization expense is summarized as follows:
Years ending December 31,
|
|
|
|
2014 (six months)
|
|
$
|
334
|
|
2015
|
|
|
664
|
|
2016
|
|
|
664
|
|
2017
|
|
|
472
|
|
2018
|
|
|
384
|
|
Thereafter
|
|
|
2,890
|
|
|
|
$
|
5,408
|
|
Amortization expense
amounted to $166 and $142 for the three months ended June 30, 2014 and 2013, respectively. Amortization expense amounted to $331
and $217 for the six months ended June 30, 2014 and 2013, respectively.
Intangible assets
represent trademarks, customer agreements and patents related to the Company’s brands. Finite 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.
Indefinite lived intangible assets are tested for impairment on an annual basis (December 31 for the Company) and between annual
tests if an event occurs or circumstances change that indicate that the carrying amount of the indefinite lived intangible asset
may not be recoverable. When conducting its annual indefinite lived intangible asset impairment assessment, the Company initially
performs a qualitative evaluation of whether it is more likely than not that the asset is impaired. If it is determined by a qualitative
evaluation that it is more likely than not that the asset is impaired, the Company then tests the asset for recoverability. 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. No events or circumstances indicate an impairment has been
identified subsequent to the Company’s December 31, 2013 impairment testing.
|
7.
|
Acquisition
of Remaining Ownership Interest in William Rast Sourcing, LLC and William Rast Licensing,
LLC
|
On May 5, 2014, the
Company entered into a merger agreement (the “Tennman Merger Agreement), by and among the Company and Tennman WR-T, Inc.
(“Tennman WR-T”), a Delaware corporation, pursuant to which the Company acquired the remaining 18% interest in William
Rast Sourcing, LLC (“Rast Sourcing”) and William Rast Licensing, LLC (“Rast Licensing”) for an aggregate
purchase price consisting of (i) $3,050 of cash and (ii) 581,341 shares of the Company’s common stock, valued at $4,950
based on the weighted average closing stock price for the ten days prior to closing. Shares of the Company’s common stock
issued as part of the consideration pursuant to the Tennman Merger Agreement were issued in a private placement transaction conducted
pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
The Company
accounted for the acquisition under ASC 810-10-45-23,
Consolidation,
which states that changes in a
parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be
accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners).
Therefore, no gain has been recognized in the unaudited condensed consolidated statements of operations or unaudited
condensed consolidated statements of comprehensive (loss) income.
As part of the Tennman
Merger Agreement, the Company will pay royalties to Tennman Brands, LLC based on certain performance thresholds.
The Company incurred
legal costs related to the transaction of approximately $60. The aggregate purchase price, inclusive of the legal costs, was recognized
in common stock and additional paid-in capital in the accompanying condensed consolidated balance sheet as of June 30, 2014.
The components of
long-term debt are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Term Loans
|
|
$
|
55,000
|
|
|
$
|
59,000
|
|
Unamortized discounts
|
|
|
(936
|
)
|
|
|
(1,069
|
)
|
Total long-term debt, net of unamortized discounts
|
|
|
54,064
|
|
|
|
57,931
|
|
Less: current portion of long-term debt
|
|
|
8,000
|
|
|
|
8,000
|
|
Long-term debt
|
|
$
|
46,064
|
|
|
$
|
49,931
|
|
Term Loans
In connection with
the Company’s acquisition from ETPH Acquisition, LLC (“ETPH”) of all of the outstanding equity interest of B®and
Matter, LLC (“Brand Matter”) (the “Ellen Tracy and Caribbean Joe Acquisition”), on March 28, 2013, the
Company entered into a (i) first lien loan agreement (the “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 (the “Second Lien Loan Agreement”
and, together with the First Lien Loan Agreement, the “Loan Agreements”), which provide for term loans of up to $20,000
(the “Second Lien Term Loan” and, together with the First Lien Term Loan, 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. The Term Loans are secured
by substantially all of the assets of the Company and are further guaranteed and secured by each of the domestic subsidiaries
of the Company, other than DVS LLC, SBG Revo Holdings, LLC and SBG FM, LLC, subject to certain exceptions set forth in the Loan
Agreements. 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. In December 2013, the Company obtained
the written consent of each of the lenders to the Loan Agreements and in connection therewith, SBG Revo Holdings, LLC agreed to
become a Loan Party (as defined in the Loan Agreements) under each of the Loan Agreements, which transaction became effective
February 2014.
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 the adjusted London Interbank Offered Rate (“LIBOR”) or (b) 3.00% per annum plus the
Base Rate, as defined in the applicable Loan Agreement (4.25% at June 30, 2014). The Second Lien Term Loan bears interest at 12.75%
per annum plus adjusted LIBOR (12.98% at June 30, 2014).
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%.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
During the three months
ended June 30, 2014 and 2013, accretion of the discount amounted to $66 and $67, respectively, which was recorded as a component
of interest expense in the accompanying unaudited condensed consolidated statements of operations. Contractual interest expense
on the Term Loans amounted to $1,063 and $1,172 for the three months ended June 30, 2014 and 2013, respectively, which was recorded
as a component of interest expense in the accompanying unaudited condensed consolidated statements of operations.
During the six months
ended June 30, 2014 and 2013, accretion of the discount amounted to $132 and $67 which was recorded as a component of interest
expense in the accompanying unaudited condensed consolidated statements of operations. Contractual interest expense on the Term
Loans amounted to $2,166 and $1,172 for the six months ended June 30, 2014 and 2013, respectively, which was recorded as a component
of interest expense in the accompanying unaudited condensed consolidated statements of operations.
During 2013, the Company
incurred legal and other fees associated with the closing of the Term Loans of approximately $1,929. These amounts have been recorded
as deferred financing costs and included in other assets in the accompanying condensed consolidated balance sheets, and are being
amortized as non-cash interest expense over the contractual term of the Term Loans. During the three months ended June 30, 2014
and 2013, amortization of these fees amounted to $102 and $97, respectively, which was recorded as a component of interest expense
in the accompanying unaudited condensed consolidated statements of operations. During the six months ended June 30, 2014 and 2013,
amortization of these fees amounted to $203 and $97, respectively, which was recorded as a component of interest expense in the
accompanying unaudited condensed consolidated statements of operations.
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. The Company is in compliance with its covenants as of June
30, 2014.
Interest Rate Swap
The Company currently
has exposure to variability in cash flows due to the impact of changes in interest rates for the Company’s Term Loans. During
2014, the Company entered into an interest rate swap agreement related to $55,000 notional value of the Term Loans (the “Swap
Agreement”).
The objective of the
interest rate swap agreement is to eliminate the variability in cash flows for the interest payments associated with the Term
Loans, which vary by a variable-rate: 1-month LIBOR. The Company has formally documented the Swap Agreement as a cash flow hedge
of the Company’s exposure to 1-month LIBOR. Because the critical terms of the Swap Agreement and the hedged item coincide
(notional amount, interest rate reset dates, interest rate payment dates, maturity/expiration date, and underlying index), the
hedge is expected to completely offset changes in expected cash flows due to fluctuations in the 1-month LIBOR rate over the term
of the hedge. The effectiveness of the hedge relationship will be periodically assessed during the life of the hedge by comparing
the current terms of the Swap Agreement and the debt to assure they continue to coincide and through an evaluation of the continued
ability of the counterparty to the Swap Agreement to honor its obligations under the Swap Agreement. Should the critical terms
no longer match exactly, hedge effectiveness (both prospective and retrospective) will be assessed by evaluating the cumulative
dollar offset for the actual hedging instrument relative to a hypothetical derivative whose terms exactly match the terms of the
hedged item.
The components of
the Company’s Swap Agreement as of June 30, 2014, are as follows:
|
|
Notional
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Derivative Asset
|
|
|
Derivative Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$
|
55,000
|
|
|
$
|
0
|
|
|
$
|
(89
|
)
|
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(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 “Tengram Securities Purchase Agreement”) with TCP WR
Acquisition, LLC (“TCP WR”), pursuant to which the Company issued variable rate senior secured convertible debentures
due January 31, 2015 (the “Debentures”) in the amount of $14,500, warrants to purchase up to 1,104,762 shares of common
stock (the “TCP 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
$2.63 per share, as adjusted for the reverse stock split (“Conversion Price”). The TCP Warrants, which had a fair
value of $4,215, are exercisable for five years at an exercise price of $2.63 per share, as adjusted for the reverse stock split.
The fair value of the TCP 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 the Conversion Price (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 a nominal
fee of $14.50 (unrounded) 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 TCP 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.
Termination of Material Agreements
The proceeds received
from the Term Loans were used in part to repay the following indebtedness of the Company and its subsidiaries: (a) all indebtedness
owed by Rast Sourcing under its factoring facility with Rosenthal & Rosenthal; (b) all indebtedness owed by Rast Licensing
to Mobility Specialty Situations I, LLC pursuant to a promissory note in the aggregate principal amount of $750; and (c) all indebtedness
owed by Rast Licensing to Monto Holdings (Pty) Ltd. pursuant to a promissory note in the aggregate principal amount of $1,000.
In connection with the repayments, all security agreements, assignment agreements, and guarantee agreements were terminated.
|
9.
|
Commitments
and Contingencies
|
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.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
|
10.
|
Stock-based
Compensation
|
Stock
Options
The following table
summarizes the Company’s stock option activity for the six months ended June 30, 2014:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Average Exercise
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Price
|
|
|
(in Years)
|
|
|
Intrinsic Value
|
|
Outstanding - January 1, 2014
|
|
|
423,667
|
|
|
$
|
4.45
|
|
|
|
2.7
|
|
|
$
|
812
|
|
Granted
|
|
|
27,500
|
|
|
|
9.18
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(65,667
|
)
|
|
|
(4.63
|
)
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding - June 30, 2014
|
|
|
385,500
|
|
|
$
|
4.76
|
|
|
|
2.3
|
|
|
$
|
3,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - June 30, 2014
|
|
|
353,000
|
|
|
$
|
4.40
|
|
|
|
2.1
|
|
|
$
|
3,428
|
|
A summary of the changes
in the Company’s unvested stock options is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Options
|
|
|
Date Fair Value
|
|
Unvested - January 1, 2014
|
|
|
62,000
|
|
|
$
|
3.21
|
|
Granted
|
|
|
27,500
|
|
|
|
9.18
|
|
Vested
|
|
|
(57,000
|
)
|
|
|
(1.06
|
)
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
Unvested - June 30, 2014
|
|
|
32,500
|
|
|
$
|
2.44
|
|
During the three months
ended June 30, 2014, the Company granted 10,000 stock options to an employee for future services. The options are exercisable
at an exercise price of $13.68 per share over a five-year term and vest over two years. These options had a fair value of $38
using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
0.92
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
37.52
|
%
|
Expected life
|
|
|
3.25 years
|
|
The Company did
not record compensation expense during the three months ended June 30, 2014 pertaining to this grant as the options were
granted on June 25, 2014.
During the three months
ended March 31, 2014, the Company granted 17,500 stock options to employees for future services. The options are exercisable at
an exercise price of $5.75 (2,500 options) and $6.75 (15,000 options) per share over a five-year term and vest over one to three
years. These options had a fair value of $33 using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
1.15
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
37.67
|
%
|
Expected life
|
|
|
3.5 years
|
|
The Company recorded
$4 and $5 during the three and six months ended June 30, 2014, respectively, as compensation expense pertaining to these grants.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
During the three and
six months ended June 30, 2013, the Company granted 20,000 stock options to a consultant for future services. The options are
exercisable at an exercise price of $6.00 per share over a ten-year term and vest over one year. These options had a fair value
of $80 using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
2.02
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
56.72
|
%
|
Expected life
|
|
|
5.5 years
|
|
The Company recorded
$7 during the three and six months ended June 30, 2013 as compensation expense pertaining to this grant.
Total compensation
expense related to stock options for the three months ended June 30, 2014 and 2013 was approximately $16 and $7, respectively.
Total compensation expense related to stock options for the six months ended June 30, 2014 and 2013 was approximately $36 and
$10, respectively. Total unrecognized compensation expense related to unvested stock option awards at June 30, 2014 amounted to
$70 and is expected to be recognized over a weighted average period of approximately two years.
Warrants
A summary of warrant
activity for the six months ended June 30, 2014 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Average Exercise
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(in Years)
|
|
|
Intrinsic Value
|
|
Outstanding - January 1, 2014
|
|
|
1,744,922
|
|
|
$
|
3.88
|
|
|
|
3.5
|
|
|
$
|
3,323
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding - June 30, 2014
|
|
|
1,744,922
|
|
|
$
|
3.88
|
|
|
|
3.0
|
|
|
$
|
17,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - June 30, 2014
|
|
|
1,704,922
|
|
|
$
|
3.83
|
|
|
|
3.0
|
|
|
$
|
17,010
|
|
A summary of the changes
in the Company’s unvested warrants is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Warrants
|
|
|
Date Fair Value
|
|
Unvested - January 1, 2014
|
|
|
40,000
|
|
|
$
|
3.00
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
Unvested - June 30, 2014
|
|
|
40,000
|
|
|
$
|
3.00
|
|
During the three months
ended March 31, 2013, in connection with the Heelys acquisition, the Company issued five-year warrants to purchase up to an aggregate
of 28,000 shares of the Company’s common stock at an exercise price of $6.01 per share.
During the three months
ended March 31, 2013, in connection with the Second Lien Loan Agreement, the Company issued five-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.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
During the three months
ended March 31, 2013, in connection with the Ellen Tracy and Caribbean Joe Acquisition, the Company issued five-year warrants
to purchase up to an aggregate of 125,000 shares of the Company’s common stock at an exercise price of $10.00 per share.
Total compensation
expense related to warrants for the three and six months ended June 30, 2014 was approximately $8 and $16, respectively. The Company
did not record any compensation expense related to warrants for the three and six months ended June 30, 2013.
Restricted Stock
During the three months
ended June 30, 2014, the Company issued 23,120 shares of restricted stock to members of the Company’s board of directors.
Total compensation related to the restricted stock grants amounted to approximately $200, of which $33 was recorded in operating
expenses in the Company’s unaudited condensed consolidated statements of operations for the three and six months ended June
30, 2014, respectively.
During the three months
ended March 31, 2014, the Company issued 200,000 shares of restricted stock to a consultant and employee for future services.
Total compensation related to the restricted stock grants amounted to approximately $1,120, of which $191 and $279 was recorded
in operating expenses in the Company’s condensed consolidated statements of operations for the three and six months ended
June 30, 2014.
A summary of the restricted
stock activity for the six months ended June 30, 2014 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
(in Years)
|
|
|
Intrinsic Value
|
|
Unvested - January 1, 2014
|
|
|
464,847
|
|
|
$
|
5.71
|
|
|
|
2.9
|
|
|
$
|
20
|
|
Granted
|
|
|
223,120
|
|
|
|
5.92
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(61,878
|
)
|
|
|
6.03
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Unvested - June 30, 2014
|
|
|
626,089
|
|
|
$
|
5.75
|
|
|
|
2.1
|
|
|
$
|
5,044
|
|
Total compensation
expense related to the restricted stock grants for the three months ended June 30, 2014 and 2013 was approximately $636 and $186,
respectively. Total compensation expense related to the restricted stock grants for the six months ended June 30, 2014 and 2013
was approximately $1,072 and $354, respectively.
|
11.
|
Related
Party Transactions
|
Consulting Services
Agreement with Tengram Capital Management, L.P.
Pursuant to an agreement
with Tengram Capital Management, L.P. (“TCM”), an affiliate of Tengram, the Company, effective as of January 1, 2013,
has engaged TCM to provide services to the Company pertaining to (i) mergers and acquisitions, (ii) debt and equity financing,
and (iii) such other related areas as the Company may reasonably request from time to time (the “TCM Consulting Services
Agreement”). TCM is entitled to receive compensation, including fees and reimbursement of out-of-pocket expenses in connection
with performing its services under the TCM Consulting Services
Agreement. The TCM Consulting Services
Agreement remains in effect for a period continuing through the earlier
of five years or the date on which TCM and its affiliates cease to own in excess of 5% of the outstanding shares of common stock
in the Company. The Company made no payments under the TCM Consulting Services
Agreement for the three months ended June 30, 2014 and 2013.
The Company paid TCM $0 and $250 for services under the TCM Consulting Services
Agreement for the six months ended June 30, 2014 and 2013, respectively.
As of June 30, 2014 and 2013, there were no amounts owed to TCM.
In connection
with the Galaxy Merger Agreement (as defined below), (i) a $3,500 transaction fee is payable to TCM upon consummation of the
Galaxy Acquisition (as defined below) and (ii) the Company and TCM have agreed to enter into an amendment to the TCM
Consulting Services Agreement, pursuant to which the annual fees payable to TCM thereunder will be $900 per annum.
The Company has prepaid $500 of the $3,500 as of June 30, 2014.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
Transactions with
Tennman WR-T, Inc.
As discussed in Note
7, on May 5, 2014 the Company acquired the remaining 18% interest in Rast Sourcing and Rast Licensing. Under the prior royalty
agreement among Tennman WR-T, Rast Sourcing and Rast Licensing, royalties paid by Rast Sourcing to Tennman WR-T, a minority interest
holder of Rast Sourcing, amounted to $356 and $122 for the three months ended June 30, 2014 and 2013, respectively. Royalties
paid by Rast Sourcing to Tennman WR-T amounted to $613 and $750 for the six months ended June 30, 2014 and 2013, respectively.
At June 30, 2014 and December 31, 2013, amounts owed to Tennman WR-T of $159 and $244, respectively, are included in accounts
payable and accrued expenses in the accompanying condensed consolidated balance sheets. During the three months ended June 30,
2014 and 2013, the Company recorded approximately $88 and $244, respectively, in royalty expense, all of which is included in
operating expenses from continuing operations. During the six months ended June 30, 2014 and 2013, the Company recorded approximately
$384 and $367, respectively, in royalty expense, all of which is included in operating expenses from continuing operations.
|
12.
|
Galaxy
Brands Holding, Inc. Acquisition
|
On June 24, 2014,
the Company entered into an agreement and plan of merger (the “Galaxy Merger Agreement”) with SBG Universe Brands,
LLC, a Delaware limited liability company and direct wholly owned subsidiary of the Company (“LLC Sub”), Universe
Galaxy Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of LLC Sub, Galaxy Brand Holdings, Inc., a
Delaware corporation (“Galaxy”), Carlyle Equity Opportunity GP, L.P., a Delaware limited partnership, solely in its
capacity as the representative of the Galaxy stockholders and optionholders, and, for limited purposes described therein, Carlyle
Galaxy Holdings, L.P., a Delaware limited partnership (“Carlyle”). Pursuant to the Galaxy Merger Agreement, the Company
will acquire four consumer brands that include the fitness brand
Avia
, basketball brand
AND1
, outdoor brand
Nevados
and home goods brand
Linens
‘
N
Things
for an aggregate purchase price consisting of (i) $100,000
of cash, subject to adjustment as set forth in the Galaxy Merger Agreement, (ii) 13,750,000 shares of the Company’s common
stock and (iii) warrants to purchase an aggregate of up to 3,000,000 additional shares of the Company’s common stock subject
to the terms and conditions set forth in the Galaxy Merger Agreement (the “Galaxy Acquisition”).
The warrants will
be exercisable for an aggregate of up to an additional 3,000,000 shares (the “Warrant Shares”) of the Company’s
common stock, with an exercise price of $11.20 per share based upon the performance of the Linens ‘n Things brand following
the closing. Specifically, (i) if the
Linens ‘N Things
brand generates net royalties equal to or in excess of $10,000
in calendar year 2016, 500,000 Warrant Shares will vest, (ii) if the
Linens ‘N Things
brand generates net royalties
equal to or in excess of $15,000 in calendar year 2016, an additional 1,000,000 Warrant Shares will vest, (iii) if the
Linens
‘N Things
brand generates net royalties equal to or in excess $10,000 in calendar year 2017, 500,000 Warrant Shares
will vest, and (iv) if the
Linens ‘N Things
brand generates net royalties equal to or in excess $15,000 in calendar
year 2017, an additional 1,000,000 Warrant Shares will vest. There can be no assurances that any or all of the Warrant Shares
will vest; Galaxy currently does not derive any royalties from the
Linens ‘N Things
brand.
In
connection with the Galaxy Merger Agreement, the Company has entered into (i) a commitment letter with Bank of America, N.A.
(“Bank of America”), dated June 24, 2014, with respect to a senior secured first-lien credit facility (the
“First-Lien Facility”), pursuant to which the Company may borrow up to $75,000 of term loans and up to $25,000 of
revolving loans and (ii) a commitment letter with GSO Capital Partners LP (“GSO”), dated June 24, 2014, with
respect to a senior secured second-lien credit facility (the “Second-Lien Facility”) pursuant to which the
Company may borrow up to $90,000 of term loans. The proceeds of the First-Lien Facility and the Second-Lien Facility will be
used to fund the transactions contemplated by the terms of the Galaxy Merger Agreement, to repay existing debt, to pay fees
and expenses in connection with the foregoing, for working capital, capital expenditures and other lawful corporate purposes
of the Company and its subsidiaries. The commitments of Bank of America, N.A. and GSO under the respective commitment letters
are subject to various conditions, including the negotiation and execution of definitive financing agreements prior to
December 31, 2014, and the consummation of the transactions contemplated by the terms and conditions set forth in the Galaxy
Merger Agreement. In addition, Bank of America and GSO have agreed through the accordion feature to provide up to an
additional $60,000 under the First-Lien Facility and $70,000 under the Second-Lien Facility respectively, subject to certain
conditions.
In connection with
the consummation of the transactions contemplated by the Galaxy Merger Agreement, the Company and the stockholder representative,
on behalf of the former Galaxy stockholders and optionholders, will enter into a registration rights agreement, which grants the
stockholder representative, on behalf of former Galaxy stockholders and optionholders, customary registration rights with respect
to certain shares of the Company’s common stock and the warrants to be issued pursuant to the Galaxy Merger Agreement. In
addition, conditioned upon and effective upon the closing of the Galaxy Merger Agreement, Mr. Matthew Eby has tendered his resignation
as a Class II director of the Company and Mr. Rodney Cohen has been appointed to serve as a Class II director of the Company to
fill the vacancy created by the resignation.
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2014
(UNAUDITED)
(dollars are in thousands unless otherwise
noted, except share and per share data)
|
13.
|
New
Accounting Pronouncements
|
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU
2014-09 provides guidance for revenue recognition and affects any entity that either enters into contracts with customers to transfer
goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements
in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The core principle of ASU 2014-09 is the
recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. ASU
2014-09
defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment and make
more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate
performance obligation. ASU 2014-09 is effective for fiscal years beginning after December 15, 2016 and interim periods therein,
using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard
in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective approach with the
cumulative effect of initially adopting
ASU
2014-09
recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company
is currently evaluating the method and impact the adoption of ASU
2014-09
will have on the Company’s condensed consolidated financial statements and disclosures.
In June 2014, the
FASB issued ASU No. 2014-12, “Compensation - Stock Compensation” (Topic 718): Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period (“ASU
2014-12”). ASU 2014-12 affects entities that grant their employees stock-based payments in which terms of the award provide
that a performance target that affects vesting could be achieved after the requisite service period. The amendments in ASU 2014-12
require that a performance target that affects vesting and that could be achieved after the requisite service period be treated
as a performance condition. ASU 2014-12 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted.
The Company is currently evaluating the method and impact the adoption of ASU 2014-12 will have on the Company’s condensed
consolidated financial statements and disclosures.