Item 1. Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2018
(dollars in thousands (unless otherwise noted) except per share data)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Iconix Brand Group, Inc. (the “Company,” “we,” “us,” or “our”), all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2018 (“Current Quarter”) and the six months ended June 30, 2018 (“Current Six Months”) are not necessarily indicative of the results that may be expected for a full fiscal year.
The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
During the Current Six Months, the Company adopted seven new accounting pronouncements. Refer to Note 20 for further details.
Correction of an Immaterial Error
During the Current Six Months, the Company determined that the debt issuance costs associated with the Company’s issuance of its 5.75% Convertible Notes had been incorrectly capitalized in the Company’s consolidated balance sheet as of March 31, 2018. During the Current Six Months, the Company correctly expensed approximately $5.0 million of debt issuance costs to selling, general and administrative expenses in the Company’s condensed consolidated statement of operations. Management evaluated the materiality of the error from a quantitative and qualitative perspective and concluded that this adjustment was not material to the Company’s presentation and disclosures, and has no material impact on the Company’s financial position, results of operations and cash flows. Accordingly, no amendments to previously filed reports are deemed necessary. After taking into effect this adjustment, for the three months ended March 31, 2018, selling, general and administrative expenses would have been $33.6 million, operating income would have been $15.5 million, and net income from continuing operations attributable to Iconix Brand Group, Inc. would have been $27.8 million.
Certain reclassifications, which were immaterial, have been made to conform prior year data to the current presentation.
Assessment of Going Concern
These consolidated financial statements are prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in the normal course of business. Due to certain developments during the year ended December 31, 2017, including the decision by Target Corporation not to renew the existing Mossimo license agreement following its expiration in October 2018 and by Walmart, Inc. not to renew the existing Danskin Now license agreement following its expiration in January 2019, and the Company’s revised projected future earnings, the Company had initially forecasted that it would unlikely be in compliance with certain of its financial debt covenants in 2018 and beyond and that it may otherwise face possible liquidity challenges in 2018 and beyond. As a result, the Company amended its Senior Secured Term Loan to provide relief under certain covenants and implemented a cost savings plan to improve liquidity.
Following the completion of a transaction in which the Company exchanged (the “Exchange”) an aggregate principal amount of approximately $125 million of our 1.50% convertible senior subordinated notes due March 2018 (the “1.50% Convertible Notes”) with the same aggregate principal value of our new 5.75% convertible senior subordinated notes due August 2023 (the “5.75% Convertible Notes”), the Company received proceeds of the Second Delayed Draw Term Loan of $110 million, and used these proceeds, as well as cash on hand, to extinguish the remaining 1.50% Convertible Notes outstanding as of their maturity date, March 15, 2018. See Note 9 for further information on these financings.
While conditions and events do exist that may raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months, management believes as a result of the aforementioned (i) amendments to the Senior Secured Term Loan, (ii) Exchange, (iii) extinguishment of the 1.50% Convertible Notes at maturity, as well as (iv) implemented and planned cost savings, that its plans alleviate this substantial doubt, and therefore the management believes that it will continue as a going concern for the next twelve months.
8
For additional information, please refer to Note 1 of Notes
to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
2. Discontinued Operations
On May 9, 2017, the Company signed definitive agreements to sell its Entertainment segment for $349.1 million in cash, which included a customary working capital adjustment. The sale was completed on June 30, 2017. As a result of the sale, the Company has classified the results of its Entertainment segment as discontinued operations in its condensed consolidated statement of operations for the three months ended June 30, 2017 (“Prior Year Quarter”) and the six months ended June 30, 2017 (“Prior Year Six Months”).
The following table presents the details of the Entertainment segment for the Prior Year Quarter and Prior Year Six Months which were shown as income from discontinued operations, net of income taxes, in our unaudited condensed consolidated statement of operations:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Licensing revenue
|
|
$
|
—
|
|
|
$
|
25,669
|
|
|
$
|
—
|
|
|
$
|
53,129
|
|
Selling, general and administrative expenses
|
|
|
—
|
|
|
|
16,691
|
|
|
|
—
|
|
|
|
34,542
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
117
|
|
|
|
—
|
|
|
|
303
|
|
Operating income
|
|
|
—
|
|
|
|
8,861
|
|
|
|
—
|
|
|
|
18,284
|
|
Other expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
—
|
|
|
|
6,548
|
|
|
|
—
|
|
|
|
12,973
|
|
Interest income
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
—
|
|
|
|
(180
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
13,509
|
|
|
|
—
|
|
|
|
29,246
|
|
Foreign currency translation loss
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
169
|
|
Other expenses – net
|
|
|
—
|
|
|
|
20,001
|
|
|
|
—
|
|
|
|
42,208
|
|
Loss from operations of discontinued operations before
income taxes
|
|
|
—
|
|
|
|
(11,140
|
)
|
|
|
—
|
|
|
|
(23,924
|
)
|
Gain on sale of Entertainment segment
|
|
|
—
|
|
|
|
104,327
|
|
|
|
—
|
|
|
|
104,327
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
34,060
|
|
|
|
—
|
|
|
|
28,962
|
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
59,127
|
|
|
|
—
|
|
|
|
51,441
|
|
Less: Net income attributable to non- controlling interest
from discontinued operations
|
|
|
—
|
|
|
|
1,634
|
|
|
|
—
|
|
|
|
2,943
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
—
|
|
|
$
|
57,493
|
|
|
$
|
—
|
|
|
$
|
48,498
|
|
The cash proceeds from the sale of the Company’s Entertainment segment were utilized by the Company to make mandatory principal prepayments on both its Senior Secured Notes and 2016 Senior Secured Term Loan (as well as a corresponding prepayment premium). As a result, and in accordance with ASC 205-20-45-6, for the Prior Year Quarter and Prior Year Six Months, the Company allocated interest expense of $6.5 million (which includes $0.9 million of amortization of the original issue discount on the 2016 Senior Secured Term Loan) and $12.9 million (which includes $1.7 million of amortization of the original issue discount on the 2016 Senior Secured Term Loan, respectively, from continuing operations to discontinued operations. Additionally, for the Prior Year Six Months, the Company allocated the prepayment premium of $15.2 million related to the 2016 Senior Secured Term Loan as well as the write-off of the pro-rata portion of deferred financing costs and original issue discount of $9.4 and $4.7 million, respectively, from continuing operations to discontinued operations on the Company’s unaudited condensed consolidated statement of operations. Refer to Note 9 for further details.
The following table presents cash flow of the Entertainment segment during the Prior Year Six Months:
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash used in discontinued operating activities
|
|
$
|
—
|
|
|
$
|
(734
|
)
|
Net cash used in discontinued investing activities
|
|
$
|
—
|
|
|
$
|
(84
|
)
|
Net cash used in discontinued financing activities
|
|
$
|
—
|
|
|
$
|
(23,596
|
)
|
9
3. Revenue Recognition
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
On January 1, 2018, we adopted ASC Topic 606 –
Revenue from Contracts with Customers
(“Topic 606”), using the modified retrospective method applied to those license agreements which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605. Under Topic 605, the Company recognized minimum royalty revenue on a straight-line basis over the term of each contract year, as defined, in each license agreement and royalties exceeding the defined minimum amounts were recognized as income during the period corresponding to the licensee’s sales. Under Topic 606, the Company is recognizing the minimum royalty revenue on a straight-line basis over the entire contract term and royalties exceeding the defined minimum amounts are recognized only in the subsequent periods to when the minimum guarantee for the contract year has been achieved and when the later of the following events occur: (i) the subsequent sale occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied), as is discussed below.
We recorded a net increase to opening retained earnings and the corresponding amount to non-controlling interest of $16.5 million and $1.2 million, respectively, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to our revenues associated with license agreements which have escalating guaranteed minimum royalties in the contract years of the license agreement term. The impact to revenues was an increase of approximately $0.1 million for the Current Quarter and a decrease of $1.8 million for the Current Six Months as a result of applying Topic 606.
Revenue Recognition
Licensing Revenue
The Company licenses its brands across a broad range of product categories, including fashion apparel, footwear, accessories, sportswear, home furnishings and décor, and beauty and fragrance. The Company seeks licensees with the ability to produce and sell quality products in their licensed categories and to meet and exceed minimum sales and royalty payment thresholds.
The Company maintains direct-to-retail and traditional wholesale licenses. Typically, in a direct-to-retail license, the Company grants exclusive rights to one of its brands to a national retailer for a broad range of product categories. Direct-to-retail licenses provide retailers with proprietary rights to national brands at favorable economics. In a traditional wholesale license, the Company grants the right to a specific brand to a single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to multiple retailers within an approved distribution channel.
The Company’s license agreements typically require the licensee to pay the Company royalties based upon net sales with guaranteed minimum royalties in the event that net sales do not reach certain specified targets. The Company’s licenses also typically require the licensees to pay to the Company certain minimum amounts for the advertising and marketing of the respective licensed brands.
Licensing revenue is comprised of revenue related to the Company’s entry 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 amounts are recognized as revenue on a straight-line basis over the full contract term. Minimum royalties that escalate on an annual basis over the contract term are recognized on a straight-line basis over the full contract term. Royalties exceeding the defined minimum amounts in a specific contract year (sales-based royalties), as defined in each license agreement, are recognized only in the subsequent periods to when the minimum guarantee for the contract year has been achieved and when the later of the following events occur: (i) the subsequent sale occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied).
Within the Company's International segment, the Umbro business purchases replica soccer jerseys for resale to certain licensees. The Company generally does this as an accommodation to its licensees to consolidate ordering from the manufacturers. The revenue associated with such activity is included in licensing revenue and was approximately $0.6 million and $2.6 million in the Current Quarter and the Current Six Months, respectively. The associated cost of goods sold is included in selling general and administrative expenses and was approximately $0.6 million and $2.5 million in the Current Quarter and Current Year Six Months, respectively. There were no such sales or corresponding cost of goods sold in the Prior Year Six Months. Revenue for these sales are recognized upon the transfer of control of the promised product to the customer or licensee in an amount that reflects the consideration that we expect to receive in exchange for these products.
10
The following table presents our revenues disaggregated by license type:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Licensing revenue by license type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-retail license
|
|
$
|
20,094
|
|
|
$
|
34,260
|
|
|
$
|
41,307
|
|
|
$
|
68,797
|
|
Wholesale licenses
|
|
|
29,418
|
|
|
|
27,294
|
|
|
|
54,557
|
|
|
|
51,451
|
|
Other licenses
(1)
|
|
|
700
|
|
|
|
93
|
|
|
|
2,897
|
|
|
|
122
|
|
|
|
$
|
50,212
|
|
|
$
|
61,647
|
|
|
$
|
98,761
|
|
|
$
|
120,370
|
|
(1)
|
Included in Other licenses for the Current Quarter and the Current Year Six Months is $0.6 million and $2.6 million, respectively, of revenue associated with the Umbro business purchases discussed above of which there was no comparable amounts in both the Prior Year Quarter and Prior Year Six Months.
|
The following table represents our revenues disaggregated by geography:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total licensing revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
34,225
|
|
|
$
|
45,327
|
|
|
$
|
67,102
|
|
|
$
|
89,945
|
|
Other
(1)
|
|
|
15,987
|
|
|
|
16,320
|
|
|
|
31,659
|
|
|
|
30,425
|
|
|
|
$
|
50,212
|
|
|
$
|
61,647
|
|
|
$
|
98,761
|
|
|
$
|
120,370
|
|
(1)
|
No single country represented 10% of the Company’s revenues in the periods presented.
|
Remaining Performance Obligation
We enter into long-term license agreements with our licensees across all operating segments. Revenues are recognized on a straight line basis consistent with the nature, timing and extent of our services, which primarily relate to the ongoing brand management and maintenance of the intellectual property. As of July 1, 2018, the Company and its joint ventures had a contractual right to receive over $450 million of aggregate minimum licensing revenue through the balance of all of their current licenses, excluding any renewals.
As of June 30, 2018, future minimum license revenue to be recognized is as follows: $66.1 million, $109.2 million, $82.2 million, $47.5 million, $40.0 million and $111.8 million for the remainder of FY 2018, FY 2019, FY 2020, FY 2021, FY 2022 and thereafter, respectively.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to licensees. We record a receivable when amounts are contractually due or when revenue is recognized prior to invoicing. Deferred revenue is recorded when amounts are contractually due prior to satisfying the performance obligations of the contracts. For multi-year license agreements, as the performance obligation is providing the licensee with the right of access to the Company’s intellectual property for the contractual term, the Company uses a time-lapse measure of progress and straight lines the guaranteed minimum royalties over the contract term.
Contract Asset
We record contract assets when revenue is recognized in advance of cash payment being due from our licensees. Contract assets due within one year of the most recent balance sheet date are recorded within Other assets – current and long term contract assets are recorded within Other assets on the Company’s condensed consolidated balance sheet. As of June 30, 2018, our contract assets – current and long term contract assets were $5.6 million and $12.7 million, respectively, which has been included within other assets – current and other assets, respectively, in the Company’s condensed consolidated balance sheet.
11
Deferred Revenue
We record deferred revenue when cash payment is received or due in advance of our performance, including amounts which are refundable. Advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred revenue at the time the payment is received. The increase in deferred revenues for the Current Six Months is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $5.4 million of revenues recognized that were included in the deferred revenue balance at the beginning of the period.
4. Goodwill and Trademarks and Other Intangibles, net
Goodwill
Goodwill by reportable operating segment and in total, and changes in the carrying amounts, as of the dates indicated are as follows:
|
|
Women's
|
|
|
Men's
|
|
|
Home
|
|
|
International
|
|
|
Consolidated
|
|
Net goodwill at December 31, 2017
|
|
$
|
37,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,070
|
|
|
$
|
63,882
|
|
Impairment
|
|
|
(37,812
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,812
|
)
|
Net goodwill at June 30, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,070
|
|
|
$
|
26,070
|
|
The annual evaluation of the Company’s goodwill, by segment, is typically performed as of October 1, the beginning of the Company’s fourth fiscal quarter.
As of June 30, 2018, based upon the results of step 1 of the goodwill impairment test in accordance with ASC 350 for the women’s segment, the Company noted that the carrying value of the women’s segment exceeded its fair value after first reflecting the impairment of the Mossimo trademark as discussed below. In accordance with step 2 of the goodwill impairment test, the Company recorded a non-cash impairment charge of $37.8 million in the Current Quarter, which is due to the projected decline in royalties associated with the license agreements for the Mossimo brand.
There was no impairment of the Company’s goodwill during the Prior Year Six Months.
Trademarks and Other Intangibles, net
Trademarks and other intangibles, net, consist of the following:
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Estimated
Lives in
Years
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Indefinite-lived trademarks
|
|
Indefinite
|
|
$
|
390,241
|
|
|
$
|
—
|
|
|
$
|
465,391
|
|
|
$
|
—
|
|
Definite-lived trademarks
|
|
10-15
|
|
|
8,958
|
|
|
|
8,938
|
|
|
|
8,958
|
|
|
|
8,917
|
|
Non-compete agreements
|
|
2-15
|
|
|
—
|
|
|
|
—
|
|
|
|
940
|
|
|
|
940
|
|
Licensing contracts
|
|
1-9
|
|
|
993
|
|
|
|
835
|
|
|
|
3,412
|
|
|
|
3,122
|
|
|
|
|
|
$
|
400,192
|
|
|
$
|
9,773
|
|
|
$
|
478,701
|
|
|
$
|
12,979
|
|
Trademarks and other intangibles, net
|
|
|
|
|
|
|
|
$
|
390,419
|
|
|
|
|
|
|
$
|
465,722
|
|
The trademarks of Candie’s, Bongo, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Waverly, Ecko, Zoo York, Ed Hardy, Umbro, Modern Amusement, Buffalo, Lee Cooper, Hydraulic and Pony have been determined to have an indefinite useful life. Each of these intangible assets are tested for impairment annually and as needed on an individual basis as separate single units of accounting representing domestic and various international assets, with any related impairment charge recorded to the income statement at the time of determining such impairment. The annual evaluation of the Company’s indefinite-lived trademarks is typically performed as of October 1, the beginning of the Company’s fourth fiscal quarter.
As of June 30, 2018, the Company revised its forecasted future earnings for the Mossimo brand and accordingly, conducted an indefinite-lived intangible asset impairment test in accordance with ASC 350. Consequently, the Company recorded a non-cash impairment charge of $73.3 million in the Current Quarter in the women segment to reduce the Mossimo trademark to fair value.
12
In accordance with ASC 350,
there was no impairment of the indefinite-lived trademarks during the Prior Year Six Months. Further, in accordance with ASC 360, there were no impairment charges to the Company’s definite-lived trademarks during the Current Six Months or Prior Year Six M
onths.
During the Current Six Months, the Company completed the sale of the Badgley Mischka and Sharper Image intellectual property and related assets from the Iconix Southeast Asia, Iconix MENA, Iconix Europe and Iconix Australia joint ventures. Refer to Note 6 for further details.
Other amortizable intangibles primarily include non-compete agreements and contracts, which are amortized on a straight-line basis over their estimated useful lives of 1 to 15 years. Certain trademarks are amortized using estimated useful lives of 10 to 15 years with no residual values.
Amortization expense for intangible assets for the Current Quarter was less than $0.1 million as compared to amortization expense for intangible assets of approximately $0.2 million for the Prior Year Quarter. Amortization expense for intangible assets for the Current Six Months was approximately $0.2 million as compared to amortization expense for intangible assets of $0.4 million for the Prior Year Six Months.
5. Joint Ventures and Investments
Joint Ventures
As of June 30, 2018, the following joint ventures are consolidated with the Company:
Entity Name
|
|
Date of Original
Formation
/ Investment
|
|
Iconix's Ownership %
as of June 30, 2018
|
|
|
Joint Venture Partner
|
|
Put / Call Options, as
applicable
(2)
|
|
Starter China Limited
(4)
|
|
March 2018
|
|
100%
|
|
|
Photosynthesis Holdings Co. Ltd.
|
|
|
—
|
|
Danskin China Limited
|
|
October 2016
|
|
100%
|
|
|
Li-Ning (China) Sports Goods Co. Ltd.
|
|
|
—
|
|
Umbro China Limited
|
|
July 2016
|
|
95%
|
|
|
Hong Kong MH Umbro International Co. Ltd.
|
|
Call Options
|
|
US Pony Holdings, LLC
|
|
February 2015
|
|
75%
|
|
|
Anthony L&S Athletics, LLC
|
|
|
—
|
|
Iconix MENA Ltd.
(1)
|
|
December 2014
|
|
55%
|
|
|
Global Brands Group Asia Limited
|
|
Put / Call Options
|
|
Iconix Israel, LLC
(1)
|
|
November 2013
|
|
50%
|
|
|
MGS
|
|
|
—
|
|
Iconix Europe LLC
(1)
|
|
December 2009
|
|
51%
|
|
|
Global Brands Group Asia Limited
|
|
Put / Call Options
|
|
Hydraulic IP Holdings
LLC
(1)
|
|
December 2014
|
|
100%
(3)
|
|
|
Top On International
|
|
|
—
|
|
Diamond Icon
(1)
|
|
March 2013
|
|
51%
|
|
|
Albion Agencies Ltd.
|
|
|
|
|
Buffalo brand joint
venture
(1)
|
|
February 2013
|
|
51%
|
|
|
Buffalo International
|
|
|
—
|
|
Icon Modern Amusement,
LLC
(1)
|
|
December 2012
|
|
51%
|
|
|
Dirty Bird Productions
|
|
|
—
|
|
Hardy Way, LLC
|
|
May 2009
|
|
85%
|
|
|
Donald Edward Hardy
|
|
|
—
|
|
(1)
|
The Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and its respective joint venture partner, the entity is a variable interest entity (VIE) and, as the Company has been determined to be the primary beneficiary, is subject to consolidation. The Company has consolidated this joint venture within its consolidated financial statements since inception. The liabilities of the VIE are not material and none of the VIE assets are encumbered by any obligation of the VIE or other entity.
|
(2)
|
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for material terms of the put and call options associated with certain of the Company’s joint ventures.
|
(3)
|
In April 2018, pursuant to a letter agreement entered into simultaneously with the Company’s acquisition of a 51% equity interest in Hydraulic, the Company acquired the remaining 49% ownership interest from its joint venture partner for no cash consideration as a result of an affiliate of the joint venture partner not making its minimum guaranteed royalty payment obligations to the Company in accordance with the respective license agreement. This transaction resulted in the Company effectively increasing its ownership interest in Hydraulic to 100%. The Company will retain 100% ownership interest in Hydraulic unless the affiliate of such joint venture partner satisfies its outstanding payment obligations by making all payments of the minimum guaranteed royalties to the Company under the terminated license agreement.
|
13
(4)
|
In March 2018, the Company entered into an agreement with Photosynthesis Holdings, Co. Ltd. (“PHL”) to sell up to no less than a 50% interest and up to a total of 60% interest in its wholly-owned indirect subsidiary, Starter China Limited, a newly register
ed Hong Kong subsidiary of Iconix China (“Starter China”), and which will hold the Starter trademarks and related assets in respect of the Greater China territory. PHL’s purchase of the initial 50% equity interest in Starter China is expected to occur ove
r a three-year period commencing on January 15, 2020 for cash consideration of $20.0 million. The additional 10% equity interest (for a total equity interest of 60% interest) purchase right of PHL is expected to occur over a three-year period commencing J
anuary 16, 2022 for cash consideration equal to the greater of $2.7 million or 2.5% times the royalty received under the respective license agreement in the previous twelve months based on other terms and conditions specified in the share purchase agreemen
t.
|
As part of the formation of certain joint ventures, the Company entered into arrangements whereby the joint venture partner paid for its investment in the joint venture entity through payment of a portion of the purchase price in cash at closing and the remainder due over a pre-determined period of time.
As of June 30, 2018, the following amounts due from such joint venture partners remain recorded on the Company’s consolidated balance sheet:
Entity
|
|
Joint Venture Partner
|
|
Amount
|
|
|
Recorded in
|
Iconix India joint venture
|
|
Reliance Brands Ltd.
|
|
$
|
1,000
|
|
|
Other Assets - Current
|
Investments
Equity Method Investments
Entity Name
|
|
Date of Original
Formation / Investment
|
|
Partner
|
|
Put / Call Options, as
applicable
(3)
|
|
Iconix Australia, LLC
(1)(4)
|
|
September 2013
|
|
Pac Brands USA, Inc.
|
|
Put / Call Options
|
|
Iconix India joint venture
(1)
|
|
June 2012
|
|
Reliance Brands Ltd.
|
|
|
—
|
|
Iconix SE Asia, Ltd.
(5)
|
|
October 2013
|
|
Global Brands Group Asia Limited
|
|
Put / Call Options
|
|
MG Icon
(1)
|
|
March 2010
|
|
Purim LLC
|
|
|
—
|
|
Galore Media, Inc.
(1)(2)
|
|
April 2016
|
|
Various minority interest holders
|
|
|
—
|
|
(1)
|
The
Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and its respective joint venture partner, that the joint venture is not a VIE and not subject to consolidation. The Company has recorded its investment under the equity method of accounting since inception.
|
(2)
|
In September 2017, the Company entered into a stock repurchase agreement with Galore Media, Inc. (“Galore”) whereby the Company sold, and Galore agreed to repurchase, the Company’s 50,050 outstanding shares of Series A Preferred Stock of Galore for $0.5 million. Pursuant to the stock repurchase agreement, the Company received $0.3 million upon execution of the agreement and the remaining $0.2 million was received in December 2017. Additionally, pursuant to the stock repurchase agreement, the Company forfeited and surrendered the 46,067 shares of Series A Preferred Stock of Galore that were received in April 2016 upon the Company’s exercise of the initial warrant. All remaining warrants to purchase additional shares of Series A Preferred Stock of Galore were also forfeited as part of the stock repurchase arrangement. This transaction resulted in the Company’s ownership interest in Galore being reduced to zero.
|
(3)
|
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for material terms of the put and call options associated with the Company’s joint venture.
|
(4)
|
In July 2018, the Company entered into the Third Amended and Restated Shareholders Agreement for Iconix Australia in which the Company purchased an additional 5% ownership interest in Iconix Australia from Brand Collection (USA), Inc. (“BrandCo”) for $0.7 million in cash. Refer to Note 22 for further information.
|
(5)
|
In the Prior Year Quarter, the Company received the final purchase price installment payment due from its joint venture partner, in respect of such partner’s interest in the joint venture, which resulted in the Company no longer having a de facto agency relationship with the Iconix SE Asia, Ltd. joint venture partner. In accordance with ASC 810, the receipt of the final purchase price installment payment was considered a reconsideration event and although the joint venture remains a VIE, the Company is no longer the primary beneficiary. As a result, the Company deconsolidated the entity from its condensed consolidated balance sheet as of June 30, 2017 and recognized a pre-tax gain on deconsolidation of $3.8 million in its condensed consolidated statement of operations for the Prior Year Six Months. Subsequent to the deconsolidation of the joint venture, Iconix SE Asia, Ltd. is being accounted as an equity-method investment with earnings from the investment being recorded in equity earnings from joint ventures in the Company’s condensed consolidated statement of operations.
|
14
Additionally, through its ownership of Iconix China Holdings Limited, the Company has equity interests in the following private companies which are accounted for as equity method investments:
Brands Placed
|
|
Partner
|
|
Ownership by
Iconix China
|
|
|
Value of Investment
As of June 30, 2018
|
|
Candie’s
|
|
Candies Shanghai Fashion Co. Ltd.
|
|
20%
|
|
|
$
|
10,343
|
|
Marc Ecko
|
|
Shanghai MuXiang Apparel & Accessory Co. Limited
|
|
15%
|
|
|
|
2,270
|
|
Material Girl
|
|
Ningo Material Girl Fashion Co. Ltd.
|
|
20%
|
|
|
|
2,129
|
|
Ecko Unltd
|
|
Ai Xi Enterprise (Shanghai) Co. Limited
|
|
20%
|
|
|
|
10,568
|
|
|
|
|
|
|
|
|
|
$
|
25,310
|
|
Other Equity Investments
Entity Name
|
|
Date of Original
Formation / Investment
|
China Outfitters Holdings Ltd.
(3)
|
|
September 2008
|
Marcy Media Holdings, LLC
(1)
|
|
July 2013
|
Complex Media
(1)(2)
|
|
September 2013
|
iBrands International, LLC
(1)
|
|
April 2014
|
(1)
|
Historically, given that the Company does not have significant influence over the entity, its investment has been recorded under the cost method of accounting. During the three months ended March 31, 2018, the Company adopted ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
As a result of the adoption of the standard, given that these investments do not have readily determinable fair values and the Company does not have significant influence over the entity, the Company assesses these investments for potential impairment on a quarterly basis. As of June 30, 2018, there were no indicators of impairment for these investments.
|
(2)
|
In July 2016, the Company received $35.3 million in connection with the sale of its interest in Complex Media. An additional $3.7 million was held in escrow to satisfy specified indemnification claims, with a portion of such escrow released twelve months following the closing of the transaction and the remainder released eighteen months following the closing of the transaction, subject to any such claims, at which time, the Company recorded the gain within its consolidated statement of operations. The Company recognized a gain of $10.2 million as a result of this transaction which has been recorded in Other Income on the Company’s consolidated statement of operations during the third quarter of the year ended December 31, 2016. In July 2017, the Company received $2.7 million in cash of the total $3.7 million being held in escrow. As a result, the Company has recognized a gain of $2.7 million recorded within Other Income on the Company’s condensed consolidated statement of operations in FY 2017. In January 2018, the Company received the remaining $1.0 million in cash being held in escrow. As a result, the Company has recognized a gain of $1.0 million recorded within Other Income on the Company’s condensed consolidated statement of operations in the Current Six Months.
|
(3)
|
As part of the
2015 purchase of our joint venture partners’ interest in Iconix China, the Company acquired available-for-sale securities in China Outfitters Holdings Ltd. The Company historically recorded the change in fair value through accumulated other comprehensive income on the Company’s condensed consolidated balance sheet. In the three months ended March 31, 2018, the Company adopted ASU 2016-01 and accordingly, adjustments to the fair value of this entity will be recorded through other income on the Company’s condensed consolidated statement of operations prospectively. As of January 1, 2018, the Company reclassified the $3.2 million cumulative loss in fair value of these available-for-sale securities which were historically recorded in accumulated other comprehensive loss to accumulated losses in accordance with ASU 2016-01. As of June 30, 2018, the fair value of this investment was approximately $1.2 million.
|
15
6. Gains on Sale of Trademarks, Net
The following table details transactions comprising gains on sale of trademarks, net in the condensed consolidated statement of operations:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Interest in Sharper Image trademark in Iconix
Southeast Asia
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
236
|
|
|
$
|
—
|
|
Interest in Sharper Image trademark in Iconix
Europe
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
352
|
|
|
|
—
|
|
Interest in Sharper Image trademark in Iconix
MENA
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
—
|
|
Interest in Sharper Image trademark in Iconix
Australia
(1)
|
|
|
125
|
|
|
|
—
|
|
|
|
125
|
|
|
|
—
|
|
Interest in Badgley Mischka trademark in
Iconix Southeast Asia
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
478
|
|
|
|
—
|
|
Interest in Badgley Mischka trademark in
Iconix Europe
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
(244
|
)
|
|
|
—
|
|
Interest in Badgley Mischka trademark in
Iconix MENA
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
|
|
—
|
|
Net gains on sale of trademarks
|
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
1,268
|
|
|
$
|
—
|
|
(1)
|
In December 2016, the Company sold its rights to the Sharper Image intellectual property and related assets to 360 Holdings, Inc. The Sharper Image intellectual property and related assets within other foreign territories, which was owned by certain of the Company’s joint venture entities, required the Company to negotiate and finalize the sale of the intellectual property with its respective joint venture partners. As a result, in the Current Six Months, the Company recognized an additional combined gain of approximately $1.0 million upon final execution of the agreement for the sale of the Sharper Image intellectual property and related assets which were previously owned by the Iconix Southeast Asia, Iconix Europe, Iconix MENA and Iconix Australia joint ventures.
|
(2)
|
In February 2016, the Company sold its rights to the Badgley Mischka intellectual property and related assets to Titan Industries, Inc. in partnership with the founders, Mark Badgley and James Mischka, and the apparel license MJCLK LLC. The Badgley Mischka intellectual property and related assets within other foreign territories, which was owned by certain of the Company’s joint venture entities, required the Company to negotiate and finalize the sale of the intellectual property with its respective joint venture partners. As a result, in the Current Six Months, the Company recognized an additional combined net gain of approximately $0.3 million upon final execution of the agreement for the sale of the Badgley Mischka intellectual property and related assets which were previously owned by the Iconix Southeast Asia, Iconix Europe and Iconix MENA joint ventures.
|
7. Fair Value Measurements
ASC 820 “Fair Value Measurements” (“ASC 820”), establishes a framework for measuring fair value and requires expanded disclosures about fair value measurement. While ASC 820 does not require any new fair value measurements in its application to other accounting pronouncements, it does emphasize that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 established the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
Level 3: Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities
16
The valuation techniques that may be used to measure fair value are as follows:
(A) Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
(B) Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method
(C) Cost approach - Based on the amount that would currently be required to replace the service capacity of an asset (replacement cost)
To determine the fair value of certain financial instruments, the Company relies on Level 2 inputs generated by market transactions of similar instruments where available, and Level 3 inputs using an income approach when Level 1 and Level 2 inputs are not available. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.
Hedge Instruments
From time to time, the Company may purchase hedge instruments to mitigate income statement risk and cash flow risk of revenue and receivables. As of June 30, 2018, the Company had no hedge instruments.
Financial Instruments
As of June 30, 2018 and December 31, 2017, the fair values of cash, receivables and accounts payable approximated their carrying values due to the short-term nature of these instruments. The fair value of notes receivable and notes payable from and to our joint venture partners approximate their carrying values. The fair value of our other equity investments is not readily determinable and it is not practical to obtain the information needed to determine the value. However, there has been no indication of an impairment of these other equity investments as of June 30, 2018 or December 31, 2017. The estimated fair values of other financial instruments subject to fair value disclosures, determined based on Level One inputs including broker quotes or quoted market prices or rates for the same or similar instruments and the related carrying amounts are as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Long-term debt, including current portion
(1)
|
|
$
|
717,586
|
|
|
$
|
730,188
|
|
|
$
|
800,842
|
|
|
$
|
747,818
|
|
(1)
|
Carrying amounts include aggregate unamortized debt discount and debt issuance costs.
|
Additionally, the fair value of the other equity investments acquired as part of the 2015 purchase of our joint venture partners’ interest in Iconix China was approximately $1.2 million as of June 30, 2018. Due to the adoption of ASU 2016-01, changes in fair value of this other equity investment will be prospectively recorded in the Company’s condensed consolidated statement of operations in future periods.
Financial instruments expose the Company to counterparty credit risk for nonperformance and to market risk for changes in interest. The Company manages exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties and procedures to monitor the amount of credit exposure. The Company’s financial instrument counterparties are investment or commercial banks with significant experience with such instruments as well as certain of our joint venture partners – see Note 5.
Non-Financial Assets and Liabilities
The Company accounts for non-recurring adjustments to the fair values of its non-financial assets and liabilities under ASC 820 using a market participant approach. The Company uses a discounted cash flow model with Level 3 inputs to measure the fair value of its non-financial assets and liabilities. The Company also adopted the provisions of ASC 820 as it relates to purchase accounting for its acquisitions. The Company has goodwill, which is tested for impairment at least annually, as required by ASC 350- “Intangibles- Goodwill and Other” (“ASC 350”). Further, in accordance with ASC 350, the Company’s indefinite-lived trademarks are tested for impairment at least annually, on an individual basis as separate single units of accounting. Similarly, consistent with ASC 360- “Property, Plant and Equipment” (“ASC 360”), as it relates to accounting for the impairment or disposal of long-lived assets, the Company assesses whether or not there is impairment of the Company’s definite-lived trademarks. The Company recorded impairment charges on the Mossimo indefinite-lived trademark and women’s segment goodwill during the Current Quarter. There was no impairment, and therefore no write-down, of any of the Company’s long-lived assets during the Prior Year Six Months.
17
8. Fair Value Option
During the Current Six Months, the Company elected to account for its 5.75% Convertible Notes under the fair value option. The fair value carrying amount and the contractual principal outstanding balance of the 5.75% Convertible Notes accounted for under the fair value option as of June 30, 2018 is $73.1 million and $111.0 million, respectively. The change of $32.1 million and $56.5 million in the fair value of the 5.75% Convertible Notes accounted for under the fair value option are included in the Company’s condensed consolidated statement of operations for the Current Quarter and Current Six Months, respectively, within Other Income.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the 5.75% Convertible Notes (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The 5.75% Convertible Notes contain bifurcatable embedded derivatives and do not require settlement by physical delivery of non-financial assets.
The significant inputs to the valuation of the 5.75% Convertible Notes at fair value are Level 1 inputs as they are based on the quoted prices of the notes in the active market.
9. Debt Arrangements
The Company’s debt obligations consist of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Senior Secured Notes
|
|
$
|
386,827
|
|
|
$
|
408,174
|
|
1.50% Convertible Notes
|
|
|
—
|
|
|
|
233,898
|
|
Variable Funding Note, net of original issue discount
|
|
|
93,254
|
|
|
|
91,363
|
|
Senior Secured Term Loan, net of original issue discount
|
|
|
170,661
|
|
|
|
74,813
|
|
5.75% Convertible Notes
(1)
|
|
|
73,128
|
|
|
|
—
|
|
Unamortized debt issuance costs
|
|
|
(6,284
|
)
|
|
|
(7,406
|
)
|
Total debt
|
|
|
717,586
|
|
|
|
800,842
|
|
Less current maturities
|
|
|
46,549
|
|
|
|
44,349
|
|
Total long-term debt
|
|
$
|
671,037
|
|
|
$
|
756,493
|
|
(1)
|
On February 12, 2018, the Company entered into the Exchange Agreements and consummated the Note Exchange on February 22, 2018, pursuant to which the Company exchanged approximately $125.0 million aggregate principal amount of its 1.50% Convertible Notes for 5.75% Convertible Notes issued by the Company in an aggregate principal amount of approximately $125.0 million. See below for further details.
|
Senior Secured Notes and Variable Funding Note
On November 29, 2012, Icon Brand Holdings, Icon DE Intermediate Holdings LLC, Icon DE Holdings LLC and Icon NY Holdings LLC, each a limited-purpose, bankruptcy remote, wholly-owned direct or indirect subsidiary of the Company, (collectively, the “Co-Issuers”) issued $600.0 million aggregate principal amount of 2012 Senior Secured Notes in an offering exempt from registration under the Securities Act.
Simultaneously with the issuance of the 2012 Senior Secured Notes, the Co-Issuers also entered into a revolving financing facility of Variable Funding Notes, which allows for the funding of up to $100 million of Variable Funding Notes and certain other credit instruments, including letters of credit. The Variable Funding Notes were issued under the Indenture and allow for drawings on a revolving basis. Drawings and certain additional terms related to the Variable Funding Notes are governed by the Variable Funding Note Purchase Agreement, among the Co-Issuers, Iconix, as manager, certain conduit investors, financial institutions and funding agents, and Barclays Bank PLC, as provider of letters of credit, as swing line lender and as administrative agent. The Variable Funding Notes will be governed, in part, by the Variable Funding Note Purchase Agreement and by certain generally applicable terms contained in the Indenture. Interest on the Variable Funding Notes will be payable at per annum rates equal to the CP Rate, Base Rate or Eurodollar Rate, as defined in the Variable Funding Note Purchase Agreement.
On June 21, 2013, the Co-Issuers issued $275.0 million aggregate principal amount of 2013 Senior Secured Notes in an offering exempt from registration under the Securities Act.
18
The Senior Secured Notes and the Variable Funding Notes are referred to collectively as the “Securitization Notes.” The Securitization Notes were issued in securitization transactions pursuant to which the Securitized Assets, were transferred to and are cu
rrently held by the Co-Issuers. The Securitized Assets do not include revenue generating assets of (x) the Iconix subsidiaries that own the Ecko Unltd trademarks, the Mark Ecko trademarks, the Artful Dodger trademarks, the Umbro trademarks, and the Lee Coo
per trademarks, (y) the Iconix subsidiaries that own Iconix’s other brands outside of the United States and Canada or (z) the joint ventures in which Iconix and certain of its subsidiaries have investments and which own the Modern Amusement trademarks, the
Buffalo trademarks, the Pony trademarks, and the Hydraulic trademarks.
The Securitization Notes were issued under the Securitization Notes Indenture among the Co-Issuers and Citibank, N.A., as Trustee and securities intermediary. The Securitization Notes Indenture allows the Co-Issuers to issue additional series of notes in the future subject to certain conditions.
In February 2015, the Company received $100.0 million proceeds from the Variable Funding Notes. There is a commitment fee on the unused portion
of the Variable Funding Notes facility of 0.5% per annum. Following the anticipated repayment date in January 2020, additional interest will accrue on the Variable Funding Notes equal to 5% per annum. The Variable Funding Notes and other credit instruments issued under the Variable Funding Note Purchase Agreement are secured by the collateral described below.
On August 18, 2017, the Company entered into an amendment to the Securitization Notes Supplemental Indenture to, among other things, (i) extend the anticipated repayment date for the Variable Funding Notes from January 2018 to January 2020, (ii) decrease the L/C Commitment and the Swingline Commitment (as such terms are defined in the amendment) available under the Variable Funding Notes to $0 as of the closing date, (iii) replace Barclays Bank PLC with Guggenheim Securities Credit Partners, LLC, as provider of letters of credit, as swingline lender and as administrative agent under the purchase agreement and (iv) provide that, upon the disposition of intellectual property assets by the Co-Issuers as permitted by the Securitization Notes Base Indenture, (x) the holders of the Variable Funding Notes will receive a mandatory prepayment, pro rata based on the amount of Variable Funding Notes held by such holder, and (y) the maximum commitment will be permanently reduced by the amount of the mandatory prepayment.
At the issuance of the Securitization Notes, the Company was required to make principal payments of interest on a quarterly basis while the Securitization Notes are outstanding. To the extent funds were available, principal payments in the amount of $10.5 million and $4.8 million were required to be made on the 2012 Senior Secured Notes and 2013 Senior Secured Notes, respectively, on a quarterly basis. The amount of quarterly principal payments changed in subsequent periods due to the prepayments made on the Securitization Notes. See below for further discussion.
The legal final maturity date of the Senior Secured Notes is in January of 2043, but it is anticipated that, unless earlier prepaid to the extent permitted under the Securitization Notes Indenture, the Senior Secured Notes will be repaid in January of 2020. If the Co-Issuers have not repaid or refinanced the Senior Secured Notes prior to the anticipated repayment date, additional interest will accrue on the Senior Secured Notes at a rate equal to the greater of (A) 5% per annum and (B) a per annum interest rate equal to the excess, if any, by which the sum of (i) the yield to maturity (adjusted to a quarterly bond-equivalent basis), on the anticipated repayment date of the United States treasury security having a term closest to 10 years plus (ii) 5% plus (iii) with respect to the 2012 Senior Secured Notes, 3.4%, or with respect to the 2013 Senior Secured Notes, 3.14%, exceeds the original interest rate. The Senior Secured Notes rank pari passu with the Variable Funding Notes.
Pursuant to the Securitization Notes Indenture, the Securitization Notes are the joint and several obligations of the Co-Issuers only. The Securitization Notes are secured under the Indenture by a security interest in substantially all of the assets of the Co-Issuers (the “Collateral”), which includes, among other things, (i) intellectual property assets, including the U.S. and Canadian registered and applied for trademarks for the following brands and other related IP assets: Candie’s, Bongo, Joe Boxer (excluding Canadian trademarks, none of which are owned by Iconix), Rampage, Mudd, London Fog (other than the trademark for outerwear products sold in the United States), Mossimo, Ocean Pacific and OP, Danskin and Danskin Now, Rocawear, Starter, Waverly, Fieldcrest, Royal Velvet, Cannon, and Charisma; (ii) the rights (including the rights to receive payments) and obligations under all license agreements for use of those trademarks; (iii) the following equity interests in the following joint ventures: an 85% interest in Hardy Way LLC which owns the Ed Hardy brand, a 50% interest in MG Icon LLC which owns the Material Girl and Truth or Dare brands, and a 100% interest in ZY Holdings LLC which owns the Zoo York brand; and (iv) certain cash accounts established under the Securitization Notes Indenture.
If the Company contributes an Additional IP Holder to Icon Brand Holdings LLC or Icon DE Intermediate Holdings LLC, that Additional IP Holder will enter into a guarantee and collateral agreement in a form provided for in the Securitization Notes Base Indenture pursuant to which such Additional IP Holder will guarantee the obligations of the Co-Issuers in respect of any Securitization Notes issued under the Securitization Notes Indenture and the other related documents and pledge substantially all of its assets to secure those guarantee obligations pursuant to a guarantee and collateral agreement.
19
Neither the Company nor any subsidiary of the Company, other than the Securitization Entities, will guarantee or in any way be liable for the obligations of the Co-Issuers under the Securitization Notes Indenture or the Securitization Notes.
The Securitization Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Co-Issuers maintain specified reserve accounts to be used to make required payments in respect of the Securitization Notes, (ii) provisions relating to optional and mandatory prepayments, including mandatory prepayments in the event of a change of control (as defined in the Securitization Notes Supplemental Indentures) and the related payment of specified amounts, including specified make-whole payments in the case of the Senior Secured Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the transfers of the assets pledged as collateral for the Securitization Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. As of June 30, 2018, the Company is in compliance with all covenants under the Securitization Notes.
The Company’s Securitization Notes include a test that measures the amount of principal and interest required to be paid on the Co-Issuers’ debt to the approximate cash flow available to pay such principal and interest; the test is referred to as the debt service coverage ratio (“DSCR”). As a result in the decline in royalty collections received by the Co-Issuers during the twelve months ended June 30, 2018, the DSCR fell below 1.45x as of June 30, 2018. Beginning July 1, 2018, the Co-Issuers are required to allocate 25% of residual royalty collections (i.e. collections less debt service, management, servicing, administrative and other fees) to a restricted reserve account administered by the securitization program’s trustee, which will result in cash remaining inside the securitization program. The cash required to be maintained inside the securitization program may be released if the DSCR is at least 1.45x for two consecutive quarters.
The Securitization Notes are also subject to customary rapid amortization events provided for in the Securitization Notes Indenture, including events tied to (i) the failure to maintain a stated DSCR, (ii) certain manager termination events, (iii) the occurrence of an event of default and (iv) the failure to repay or refinance the Securitization Notes on the anticipated repayment date. If a rapid amortization event were to occur, Icon DE Intermediate Holdings LLC and Icon Brand Holdings LLC would be restricted from declaring or paying distributions on any of its limited liability company interests.
The Company used approximately $150.4 million of the proceeds received from the issuance of the 2012 Senior Secured Notes to repay amounts outstanding under its revolving credit facility (see below) and approximately $20.9 million to pay the costs associated with the 2012 Senior Secured Notes financing transaction. In addition, approximately $218.3 million of the proceeds from the 2012 Senior Secured Notes were used for the Company’s purchase of the Umbro brand. The Company used approximately $7.2 million of the proceeds received from the issuance of the 2013 Senior Secured Notes to pay the costs associated with the 2013 Senior Secured Notes securitized financing transaction.
In June 2014, the Company sold the “sharperimage.com” domain name and the exclusive right to use the Sharper Image trademark in connection with the operation of a branded website and catalog distribution in specified jurisdictions, in which the Senior Secured Notes had a security interest pursuant to the Indenture. As a result of this permitted disposition, the Company paid an additional $1.6 million in principal in July 2014.
In January 2017, in connection with the sale of the Sharper Image intellectual property and related assets, the Company made a mandatory principal prepayment on its Senior Secured Notes of $36.7 million. The Company wrote off a pro-rata portion of the Senior Secured Notes’ deferred financing costs of $0.5 million. As a result of this transaction, the Company recognized a loss on extinguishment of debt of $0.5 million which has been recorded on the Company’s consolidated statement of operations. Additionally, the quarterly principal payments on the 2012 Senior Secured notes and 2013 Senior Secured Notes were reduced to $9.9 million and $4.5 million, respectively.
In July 2017, in connection with the sale of the businesses underlying the Entertainment segment, the Company made a mandatory principal prepayment on its Senior Secured Notes of $152.2 million. The Company wrote off a pro-rata portion of the Senior Secured Notes’ deferred financing costs of $2.0 million as well as paid a prepayment penalty of $0.3 million. As a result of this transaction, the Company recognized a loss on extinguishment of debt of $2.3 million which has been allocated to discontinued operations on the Company’s consolidated statement of operations in FY 2017. Additionally, the quarterly principal payments on the 2012 Senior Secured Notes and 2013 Senior Secured Notes were reduced to $7.3 million and $3.4 million, respectively.
As of June 30, 2018 and December 31, 2017, the total outstanding principal balance of the Securitization Notes was $486.8 million and $508.2 million, respectively, of which $42.7 million is included in the current portion of long-term debt on the consolidated balance sheet for both periods. As of June 30, 2018 and December 31, 2017, $23.3 million and $29.9 million, respectively, is included in restricted cash on the consolidated balance sheet and represents short-term restricted cash consisting of collections on behalf of the Securitized Assets, restricted to the payment of principal, interest and other fees on a quarterly basis under the Senior Secured Notes.
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For the Current Quarter and the Prior Year Quarter, cash interest expense relating to the Securitizatio
n Notes was approximately $5.6 million and $7.5 million, respectively. For the Current Six Months and the Prior Year Six Months, cash interest expense relating to the Senior Secured Note was approximately $11.2 million and $15.1 million, respectively.
Senior Secured Term Loan
On August 2, 2017, the Company entered into the Senior Secured Term Loan, among IBG Borrower, the Company’s wholly-owned direct subsidiary, as borrower, the Company and certain wholly-owned subsidiaries of IBG Borrower, as Guarantors, Cortland, as administrative agent and collateral agent and the lenders party thereto from time to time, including Deutsche Bank AG, New York Branch which was a privately negotiated transaction.
Pursuant to the Senior Secured Term Loan, the lenders provided to IBG Borrower the Senior Secured Term Loan, scheduled to mature on August 2, 2022 in an aggregate principal amount of $300 million and bearing interest at LIBOR plus an applicable margin of 7% per annum.
Pursuant to the terms of the Senior Secured Term Loan, the net proceeds of the Senior Secured Term Loan were to be used to repay the Company’s 1.50% Convertible Notes on or before their maturity (with any remaining funds going toward general corporate purposes).
On the Closing Date the net cash proceeds of the Senior Secured Term Loan were deposited into an escrow account. Effective as of the Closing Date, the funds in the escrow account were subject to release to IBG Borrower from time to time, subject to the satisfaction of customary conditions precedent upon each withdrawal, to finance repurchases of, or at the maturity date thereof to repay in full, the 1.50% Convertible Notes. The Company had the ability to make these repurchases in the open market or privately negotiated transactions, depending on prevailing market conditions and other factors.
Borrowings under the Senior Secured Term Loan were to amortize quarterly at 0.5% of principal, commencing on September 30, 2017. IBG Borrower was obligated to make mandatory prepayments annually from excess cash flow and periodically from net proceeds of certain asset dispositions and from net proceeds of certain indebtedness, if incurred (in each case, subject to certain exceptions and limitations provided for in the Senior Secured Term Loan).
IBG Borrower’s obligations under the Senior Secured Term Loan are guaranteed jointly and severally by the Company and the other Guarantors pursuant to a separate facility guaranty. IBG Borrower’s and the Guarantors’ obligations under the Senior Secured Term Loan are secured by first priority liens on and security interests in substantially all assets of IBG Borrower, the Company and the other Guarantors and a pledge of substantially all equity interests of the Company’s subsidiaries (subject to certain limits including with respect to foreign subsidiaries) owned by the Company, IBG Borrower or any other Guarantor. However, the security interests will not cover certain intellectual property and licenses owned, directly or indirectly by the Company’s subsidiary Iconix Luxembourg Holdings SÀRL or those subject to the Company’s securitization facility. In addition, the pledges exclude certain equity interests of Marcy Media Holdings, LLC, and the subsidiaries of Iconix China Holdings Limited and any interest in the proceeds related to the Company’s previously announced sale of its equity interest in Complex Media, Inc.
In connection with the Senior Secured Term Loan, IBG Borrower, the Company and the other Guarantors made customary representations and warranties and have agreed to adhere to certain customary affirmative covenants. Additionally, the Senior Secured Term Loan mandates that IBG Borrower, the Company and the other Guarantors enter into account control agreements on certain deposit accounts, maintain and allow appraisals of their intellectual property, perform under the terms of certain licenses and other agreements scheduled in the Senior Secured Term Loan and report significant changes to or terminations of licenses generating guaranteed minimum royalties of more than $0.5 million. Prior to the First Amendment (as discussed below), IBG Borrower was required to satisfy a minimum asset coverage ratio of 1.25:1.00 and maintain a leverage ratio of no greater than 4.50:1.00.
Amendments to Senior Secured Term Loan
First Amendment
On October 27, 2017, the Company entered into the First Amendment to the Senior Secured Term Loan pursuant to which, among other things, the remaining escrow balance of approximately $231 million (after taking into account approximately $59.2 million that was used to buy back 1.50% Convertible Notes in open market purchases in the third quarter of 2017) was returned to the lenders.
The First Amendment also provided for, among other things, (a) a reduction in the existing $300 million term loan, (b) a new senior secured delayed draw term loan facility in the aggregate amount of up to $165.7 million, consisting of (i) a $25 million First Delayed Draw Term Loan to be drawn on or prior to March 15, 2018, which was drawn on October 27, 2017 and (ii) a $140.7 million Second Delayed Draw Term Loan to be drawn on March 14, 2018 for the purpose of repaying the 1.50% Convertible Notes; (c) an
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increase of the Total Leverage Ratio permitted under the Senior Secured Term Loan from 4.50:1.00 to 5.75:1.00; (d) a
reduction in the debt service coverage ratio multiplier in the Company’s asset coverage ratio under the Senior Secured Term Loan; (e) an increase in the existing amortization rate from 2 percent per annum to 10 percent per annum commencing July 2019; and
(f) amendments to the mandatory prepayment provisions to (i) permit the Company not to prepay borrowings under the Senior Secured Term Loan from the first $100 million of net proceeds resulting from Permitted Capital Raising Transactions (as defined in the
Senior Secured Term Loan) effected prior to March 15, 2018, and (ii) eliminate the requirement that the Company pay a Prepayment Premium (as defined in the Senior Secured Term Loan) on any payments or prepayments made prior to December 31, 2018. Indebtedn
ess issued under the Delayed Draw Term Loan Facility was issued with original issue discount.
Conditions to the availability of the Second Delayed Draw Term Loan included (i) the Company raising additional funds through various sources (and/or achieving a reduction in the outstanding principal amount of the 2018 Notes) in an aggregate amount of at least $100 million which will be utilized to repay the 2018 Notes and provide at least $25 million of additional cash to enhance liquidity and be used for general corporate purposes, (ii) the Company being in financial covenant compliance, on a pro forma basis as of the time of the requested borrowing and on a projected basis for the succeeding 12 months, and (iii) there not existing a default or event of default as of the time of the borrowing.
Second Amendment
Given that the Company was unable to timely file its quarterly financial statements for the quarter ended September 30, 2017 with the SEC
by November 14, 2017 and became in default under the terms of the
Senior Secured Term Loan, as amended by the First Amendment, o
n November 24, 2017, the Company entered into the
Second Amendment to the Senior Secured Term Loan. Pursuant to the Second Amendment,
among other things, the lenders under the Senior Secured Term Loan agreed, subject to the Company’s compliance with the requirements set forth in the Second Amendment, to waive until December 22, 2017, the potential defaults and events of default arising under the Senior Secured Term Loan (a) from the failure to furnish to the Administrative Agent for the Senior Secured Term Loan (i) the financial statements, reports and other documents as required under Section 6.01(b) of the Senior Secured Term Loan with respect to the fiscal quarter of the Company ended September 30, 2017 and (ii) the related deliverables required under Sections 6.02(b), 6.02(c) and 6.02(e) of the Senior Secured Term Loan or (b) relating to certain other affirmative covenants that may have been abrogated by such failure to make such timely deliveries.
In connection with the Second Amendment, Deutsche Bank was granted additional pricing flex in the form of price protection upon syndication of the Senior Secured Term Loan (“Flex”)
and ticking fees on the unfunded portion of the loan. The Second Amendment allows, among other things, for cash payments on account of the Flex and ticking fees to be paid from the proceeds of the First Delayed Draw Term Loan, which was previously fully funded in accordance with the terms of the Senior Secured Term Loan. After giving effect to the additional Flex provided in the Second Amendment, the Company estimates that it could be responsible for payments on account of Flex in an aggregate total amount of up to $12.0 million. As of June 30, 2018, the Company has paid a total of approximately $5.0 million in Flex which is being amortized over the remaining life of the debt facility utilizing the effective interest rate method with the amortization expense being recorded in interest expense on the Company’s condensed consolidated statement of operations.
The Senior Secured Term Loan, as amended, contains customary negative covenants and events of default. The Senior Secured Term Loan limits the ability of IBG Borrower, the Company and the other Guarantors, with respect to themselves, their subsidiaries and certain joint ventures, from, among other things, incurring and prepaying certain indebtedness, granting liens on certain assets, consummating certain types of acquisitions, making fundamental changes (including mergers and consolidations), engaging in substantially different lines of business than those in which they are currently engaged, making restricted payments and amending or terminating certain licenses scheduled in the Senior Secured Term Loan. Such restrictions, failure to comply with which may result in an event of default under the terms of the Senior Secured Term Loan, are subject to certain customary and specifically negotiated exceptions, as set forth in the Senior Secured Term Loan.
If an event of default occurs, in addition to the Interest Rate increasing by an additional 3% per annum, Cortland shall, at the request of lenders holding more than 50% of the then-outstanding principal of the Senior Secured Term Loan, declare payable all unpaid principal and accrued interest and take action to enforce payment in favor of the lenders. An event of default includes, among other events: a change of control by which a person or group becomes the beneficial owner of 35% of the voting stock of the Company or IBG Borrower; the failure to extend of the Series 2012-1 Class A-1 Senior Notes Renewal Date (as defined in the Senior Secured Term Loan); the failure of any of Icon Brand Holdings LLC, Icon NY Holdings LLC, Icon DE Intermediate Holdings LLC, Icon DE Holdings LLC and their respective subsidiaries (the “Securitization Entities”) to perform certain covenants; and the entry into amendments to the securitization facility that would be materially adverse to the lenders or Cortland without consent. Subject to the terms of the Senior Secured Term Loan, both voluntary and certain mandatory prepayments will trigger a premium of 5% of the aggregate principal amount during the first year of the loan and a premium of 3% of the aggregate principal amount during the second year of the loan, with no premiums payable in subsequent periods.
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As a result of the First Amendment, on October 27, 2017, the Company repaid $231.0 million which represented $240.7
million of outstanding principal balance. As this transaction was accounted for as a debt modification in accordance ASC 470-50-40, and based on the Company’s accounting policy for debt modifications, the Company wrote-off a pro-rata portion of the origi
nal issue discount and deferred financing costs of $9.3 million and $5.4 million, respectively, which were both recorded to interest expense on the Company’s consolidated statement of operations for FY 2017. As a result of this transaction, the Company’s
outstanding principal balance of the Senior Secured Term Loan was reduced to $57.8 million at that time and the Company recorded a gain on modification of debt of $8.8 million (which is net of $0.8 million of additional deferred financing costs associated
with the First Amendment) which has been recorded in interest expense on the Company’s consolidated statement of operations for FY 2017.
On November 2, 2017, the Company drew down the full amount of $25.0 million on the First Delayed Draw Term Loan of which the Company received $24.0 million in cash as this amount was net of the $1.0 million of original issue discount.
As a result of the Second Amendment, the Company incurred $0.2 million of additional deferred financing costs. In accordance with ASC 470-50-40, the Company accounted for this amendment as a debt modification and has recorded the additional deferred financing costs against the gain on modification of debt on the Company’s consolidated statement of operations for FY 2017.
On December 7, 2017, the Company paid approximately $5.0 million of Flex of which the Company has recorded this amount against the outstanding principal balance of Senior Secured Term Loan on the Company’s consolidated balance sheet and is being amortized over the remaining term of loan.
Third Amendment
On February 12, 2018, the Company, through IBG Borrower, entered into the Third Amendment to the Senior Secured Term Loan. The Third Amendment provides for, among other things, amendments to certain restrictive covenants and other terms set forth in the Senior Secured Term Loan, as amended, to permit (i) IBG Borrower to enter into the 5.75% Notes Indenture (as described above) and a related intercreditor agreement that was executed and (ii) the Note Exchange. In connection with the Third Amendment, Deutsche Bank was granted additional pricing flex in the form of price protection upon syndication of the loan (“Third Amendment Flex”). After giving effect to the additional Third Amendment Flex, the Company estimates that it could be responsible for payments on account of the Third Amendment Flex in an aggregate total amount of up to $6.1 million.
Fourth Amendment
The Company, through IBG Borrower, entered into the Fourth Amendment to the Senior Secured Term Loan as of March 12, 2018. The Fourth Amendment provides, among other things, that the funding date for the Second Delayed Draw Term Loan is March 14, 2018 instead of March 15, 2018.
Accordingly, the conditions to the availability of the Second Delayed Draw Term Loan (described above) were satisfied as of March 14, 2018 due, in part, to the transactions contemplated by the Note Exchange, and the Company was able to draw on the Second Delayed Draw Term Loan.
On March 14, 2018, the Company drew down $110 million under the Second Delayed Draw Term Loan and used those proceeds, along with cash on hand, to make a payment to the trustee under the indenture governing the 1.50% Convertible Notes to repay the remaining 1.50% Convertible Notes at maturity on March 15, 2018.
As of June 30, 2018 and December 31, 2017, the outstanding principal balance of the Senior Secured Term Loan is $170.7 million (which is net of $20.7 million of original issue discount) and $74.8 million (which is net of $8.0 million of original issue discount) of which $3.9 million and $1.7 million is recorded in current portion of long term debt on the Company’s consolidated balance sheet, respectively.
The Company recorded cash interest expense of approximately $4.6 million relating to the Senior Secured Term Loan during the Current Quarter as compared to none for the Prior Year Quarter. The Company recorded cash interest expense (including a commitment fee) of approximately $8.0 million relating to the Senior Secured Term Loan during the Current Six Months as compared to none for the Prior Year Six Months, respectively.
The Company recorded an expense for the amortization of original issue discount and deferred financing fees of approximately $1.2 million relating to the Senior Secured Term Loan, included in interest expense on the unaudited condensed consolidated statement of operations, during the Current Quarter as compared to none for the Prior Year Quarter. The Company recorded an expense for the amortization of original issue discount and deferred financing fees of approximately $1.8 million relating to the Senior Secured Term Loan, included in interest expense on the unaudited condensed consolidated statement of operations, during the Current Six Months as compared to none for the Prior Year Six Months.
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5.75% Convertible Notes
On February 12, 2018, the Company entered into the Exchange Agreements which was an offering exempt from registration under the Securities Act. On February 22, 2018, the Company consummated the Note Exchange, pursuant to which the Company exchanged approximately $125 million aggregate principal amount of 1.50% Convertible Notes for 5.75% Convertible Notes issued by the Company in an aggregate principal amount of approximately $125 million.
Consummation of the Note Exchange satisfied one of the principal conditions to the availability of the Second Delayed Draw Term Loan under the Senior Secured Term Loan that the Company achieve a reduction in the outstanding principal amount of the 1.50% Convertible Notes of at least $100.0 million. In addition, the Company satisfied the remaining conditions to the availability of the Second Delayed Draw Term Loan, which included (i) the Company being in financial covenant compliance, on a pro forma basis as of the time of the requested borrowing and on a projected basis for the succeeding 12 months based on projections reasonably acceptable to the lenders, and (ii) there not existing a default or event of default under the Senior Secured Term Loan as of the time of the borrowing. On March 14, 2018, the Company drew down $110 million under the Second Delayed Draw Term Loan and used those proceeds, along with cash on hand, to make a payment to the trustee under the indenture governing the 1.50% Convertible Notes in an amount to repay the remaining 1.50% Convertible Notes at maturity on March 15, 2018.
Interest on the 5.75% Convertible Notes may be paid in cash, shares of the Company’s common stock, or a combination of both, at the Company’s election. If the Company elects to pay all or a portion of an interest payment in shares of common stock, the number of shares of common stock payable will be equal to the applicable interest payment divided by the average of the 10 individual volume-weighted average prices for the 10-trading day period ending on and including the trading day immediately preceding the relevant interest payment date.
The 5.75% Convertible Notes are (i) secured by a second lien on the same assets that secure the obligations of IBG Borrower under the Senior Secured Term Loan and (ii) guaranteed by IBG Borrower and same guarantors as those under the Senior Secured Term Loan, other than the Company.
Subject to certain conditions and limitations, the Company may cause all or part of the 5.75% Convertible Notes to be automatically converted.
Holders converting their 5.75% Convertible Notes (including in connection with a mandatory conversion) shall also be entitled to receive a payment from the Company equal to the Conversion Make-Whole Payment if such conversion occurs after a regular record date and on or before the next succeeding interest payment date, through and including the maturity date (determined as if such conversion did not occur).
If the Company elects to pay all or a portion of a Conversion Make-Whole Payment in shares of common stock, the number of shares of common stock payable will be equal to the applicable Conversion Make-Whole Payment divided by the average of the 10 individual volume-weighted average prices for the 10-trading day period immediately preceding the applicable conversion date.
Subject to certain limitations pursuant to the Senior Secured Term Loan, from and after the one-year anniversary of the closing of the Note Exchange, the Company may redeem for cash all or part of the 5.75% Convertible Notes at any time by providing at least 30 days’ prior written notice to holders of the 5.75% Convertible Notes.
If the Company undergoes a fundamental change (which would occur if the Company experiences a change of control or is delisted from NASDAQ) prior to maturity, each holder will have the right, at its option, to require the Company to repurchase for cash all or a portion of such holder’s 5.75% Convertible Notes at a fundamental change purchase price equal to 100% of the principal amount of the 5.75% Convertible Notes to be repurchased, together with interest accrued and unpaid to, but excluding, the fundamental change purchase date.
The Company is subject to certain restrictive covenants pursuant to the 5.75% Convertible Note Indenture, including limitations on (i) liens, (ii) indebtedness, (iii) asset sales, (iv) restricted payments and investments, (v) prepayments of indebtedness and (vi) transactions with affiliates.
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On various dates subsequent to the Exchange on February 22, 2018 and through March 16, 2018, certain noteholders converted an aggregate outstanding principal balance of $8.8 million of their 5.75% Convertible Notes in to approximately 4.5 milli
on shares of the Company’s common stock. Pursuant to the note agreement, the Company was required to make a conversion make-whole payment which was also settled in the issuance of approximately 1.9 million shares of the Company’s common stock. As a resul
t of this transaction, the conversion of the outstanding principal balance of $8.8 million of its 5.75% Convertible Notes represented a reduction of $9.6 million in the fair value of the 5.75% Convertible Notes and $0.8 million was recorded for the differe
nce in the fair value of the debt and the fair value of the common stock issued has been recorded within Other Income in the Company’s condensed consolidated statement of operations for the first quarter of 2018.
Additionally, in April 2018 and June 2018, certain noteholders converted an aggregate outstanding principal balance of $5.2 million of their 5.75% Convertible Notes in to approximately 2.7 million shares of the Company’s common stock. Pursuant to the note agreement, the Company was required to make a conversion make-whole payment which was also settled in the issuance of approximately 2.0 million shares of the Company’s common stock. As a result of this transaction, the conversion of the outstanding principal balance of $5.2 million of its 5.75% Convertible Notes represented a reduction of $4.2 million in the fair value of the 5.75% Convertible Notes and $0.2 million was recorded for the difference in the fair value of the debt and the fair value of the common stock issued has been recorded within Other Income in the Company’s condensed consolidated statement of operations for the Current Quarter.
The Company has elected to account for the 5.75% Convertible Notes based on the Fair Value Option accounting as outlined in ASC 825. Refer to Note 8 for further details. As of June 30, 2018, while the debt balance recorded at fair value on the Company’s condensed consolidated balance sheet is $73.1 million, the actual outstanding principal balance of the 5.75% Convertible Notes is $111.0 million.
The Company recorded interest expense of approximately $1.6 million relating to the 5.75% Convertible Notes during the Current Quarter as compared to none for the Prior Year Quarter. The Company recorded interest expense of approximately $2.3 million relating to the 5.75% Convertible Notes during the Current Six Months as compared to none for the Prior Year Six Months. The Company has elected to pay accrued interest in shares for the first interest payment date of August 15, 2018.
1.50% Convertible Notes
On March 18, 2013, the Company completed the issuance of $400.0 million principal amount of the Company’s 1.50% Convertible Notes in a private offering to certain institutional investors which was exempt from registration under the Securities Act. The net proceeds received by the Company from the offering, excluding the net cost of hedges and sale of warrants (described below) and including transaction fees, were approximately $390.6 million.
During FY 2016, the Company repurchased $104.9 million par value of the 1.50% Convertible Notes with a combination of $36.7 million in cash (including interest and trading fees) and the issuance of approximately 7.4 million shares of the Company’s common stock. The Company accounted for this transaction in accordance with ASC 470-20 resulting in the recognition of a $9.6 million gain which is included in gain on extinguishment of debt, net in the Company’s consolidated statement of income for FY 2016, and a reacquisition of approximately $1.2 million of the embedded conversion option recorded within additional paid in capital on the Company’s consolidated balance sheet.
During FY 2017, the Company repurchased $58.9 million par value of the 1.50% Convertible Notes for $59.3 million in cash (including interest and trading fees). The Company accounted for this transaction in accordance with ASC 470-20 resulting in the recognition of a $1.5 million loss which was included in loss on extinguishment of debt in the Company’s consolidated statement of operations during FY 2017.
On February 22, 2018, the Company exchanged $125 million of aggregate principal amount of 1.50% Convertible Notes for $125 million of aggregate principal amount of 5.75% Convertible Notes, and on March 15, 2018 (the maturity date), the Company repaid the remaining outstanding principal balance of $111.2 million of the 1.50% Convertible Notes, with the proceeds of the Second Delayed Draw Term Loan of $110 million plus cash on hand, effectively extinguishing the 1.50% Convertible Notes by its terms. The exchange of the 1.50% Convertible Notes for the 5.75% Convertible Notes was accounted for as a debt extinguishment in accordance with ASC 470 and resulted in the Company recording a gain on extinguishment of debt of $4.5 million, which is recorded in the Company’s condensed consolidated statement of operations for the Current Quarter.
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For the Current Quarter, the Company recorded no non-cash interest expense (given the extinguishment of the debt as is discussed above) as compared to $3.5 million for the Pri
or Year Quarter, representing the difference between the stated interest rate on the 1.50% Convertible Notes and the rate for a similar instrument that does not have a conversion feature. For the Current Six Months and the Prior Year Six Months, the Compa
ny recorded additional non-cash interest expense of approximately $2.4 million and $6.7 million, respectively, representing the difference between the stated interest rate on the 1.50% Convertible Notes and the rate for a similar instrument that does not h
ave a conversion feature.
For the Current Quarter, the Company recorded no cash interest expense relating to the 1.50% Convertible Notes (given the extinguishment of the debt as is discussed above) as compared to approximately $1.1 million in the Prior Year Quarter. For the Current Six Months and the Prior Year Six Months, the Company recorded cash interest expense relating to the 1.50% Convertible Notes of approximately $0.7 million and $2.2 million, respectively.
2016 Senior Secured Term Loan
On March 7, 2016, the Company entered into a credit agreement (the “Credit Agreement”), among IBG Borrower LLC, the Company’s wholly-owned direct subsidiary, as borrower (“IBG Borrower”), the Company and certain wholly-owned subsidiaries of IBG Borrower, as guarantors (the “Guarantors”), Cortland Capital Market Services LLC, as administrative agent and collateral agent (“Cortland”) and the lenders party thereto from time to time (the “Lenders”), including CF ICX LLC and Fortress Credit Co LLC (“Fortress”) which was a privately negotiated transaction. Pursuant to the Credit Agreement, the Lenders are providing to IBG Borrower a 2016 Senior Secured Term Loan (the “2016 Senior Secured Term Loan”), scheduled to mature on March 7, 2021, in an aggregate principal amount of $300 million and bearing interest at LIBOR (with a floor of 1.50%) plus an applicable margin of 10% per annum.
The net cash proceeds of the 2016 Senior Secured Term Loan, which were approximately $264.2 million (after deducting financing, investment banking and legal fees), were, pursuant to the terms of the Credit Agreement, deposited by the Lenders into an escrow account on April 4, 2016. IBG Borrower deposited into the escrow account certain additional funds, so that the total amount of cash on deposit in the escrow account was sufficient to pay all outstanding obligations, plus accrued interest, under the Company’s 2.50% Convertible Notes due June 2016. In accordance with the terms of the 2016 Senior Secured Term Loan, the funds in the escrow account were used to repay the 2.50% Convertible Notes (see above discussion on repayment of the 2.50% Convertible Notes) on or before their maturity, with any remaining funds going toward general corporate purposes permitted under the terms of the Credit Agreement.
In December 2016, as a result of the sale of the Sharper Image intellectual property and related assets and in accordance with the Credit Agreement, the Company was required to make a mandatory principal prepayment of $28.7 million and a corresponding prepayment premium of $4.3 million. The Company wrote off a pro-rata portion of the 2016 Senior Secured Term Loan’s original issue discount and deferred financing costs of $2.1 million and $1.0 million, respectively. As a result of this transaction, the Company recognized a loss on extinguishment of debt of $7.4 million which has been recorded on the Company’s consolidated statement of operations in FY 2016.
In January 2017, the Company made a voluntary prepayment and an additional mandatory prepayment of $23.0 million and $23.5 million, respectively, as well as a corresponding prepayment premium of $3.4 million and $3.4 million, respectively. As the Company was contractually obligated to pay the prepayment premium prior to December 31, 2016, the Company recorded the aggregate $6.8 million of prepayment premium in accrued expenses on the Company’s consolidated balance sheet as of December 31, 2016, with a corresponding amount recorded in loss on extinguishment of debt on the Company’s consolidated statement of operations for FY 2016. For each of the voluntary prepayment of $23.0 million and the mandatory prepayment of $23.5 million, the Company wrote off a pro-rata portion of the 2016 Senior Secured Term Loan’s original issue discount and deferred financing costs of $1.7 million and $0.8 million, respectively, which resulted in an aggregate loss on extinguishment of debt of $5.0 million recorded in the Company’s consolidated statement of operations in FY 2017.
26
On June 30, 2017, in connection with the sale o
f the Entertainment segment, the Company made a mandatory prepayment of $140.0 million with a corresponding prepayment premium of $15.2 million of the 2016 Senior Secured Term Loan, of which the prepayment premium was allocated to discontinued operations i
n the Company’s consolidated statement of operations. As part of this mandatory prepayment, the Company wrote-off a pro-rata portion of the original issue discount and deferred financing costs of $9.4 million and $4.7 million, respectively, which was also
allocated to discontinued operations in the Company’s consolidated statement of operations in FY 2017. Additionally, on June 30, 2017, the Company made a voluntary prepayment of $66.0 million with a corresponding prepayment premium of $7.2 million of whi
ch the prepayment premium was recorded in loss on extinguishment of debt within continuing operations on the Company’s consolidated statement of operations in FY 2017. Accordingly, the Company wrote off the remaining portion of the original issue discount
and deferred financing costs of $4.4 million and $2.3 million, respectively, which was recorded in loss on extinguishment of debt in the Company’s consolidated statement of operations in FY 2017. As a result of these prepayments, the Company’s outstandin
g principal balance of the 2016 Senior Secured Term Loan was zero as of June 30, 2017 and the facility has since been terminated.
Given the principal balance of the loan was reduced to zero as of June 30, 2017, the Company recorded no cash interest during the Current Quarter as compared to $6.1 million in the Prior Year Quarter and recorded no interest during the Current Six Months as compared to $12.4 million in the Prior Year Six Months.
Debt Maturities
As of June 30, 2018, the Company’s debt maturities on a calendar year basis are as follows:
|
|
Total
|
|
|
July 1
through
December 31,
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
Senior Secured Notes
|
|
$
|
386,827
|
|
|
$
|
21,347
|
|
|
$
|
42,693
|
|
|
$
|
42,693
|
|
|
$
|
42,693
|
|
|
$
|
42,693
|
|
|
$
|
194,708
|
|
Variable Funding Notes
(1)
|
|
$
|
93,254
|
|
|
|
—
|
|
|
|
—
|
|
|
|
93,254
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Senior Secured Term Loan
(2)
|
|
$
|
170,661
|
|
|
|
1,928
|
|
|
|
11,570
|
|
|
|
19,284
|
|
|
|
19,284
|
|
|
|
118,595
|
|
|
|
—
|
|
5.75% Convertible Notes
(3)
|
|
$
|
73,128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
73,128
|
|
Total
|
|
$
|
723,870
|
|
|
$
|
23,275
|
|
|
$
|
54,263
|
|
|
$
|
155,231
|
|
|
$
|
61,977
|
|
|
$
|
161,288
|
|
|
$
|
267,836
|
|
(1)
|
Reflects the net debt carrying amount, effected by the outstanding balance of the original issue discount, in the unaudited condensed consolidated balance sheet as of June 30, 2018. The actual principal outstanding balance of the Variable Funding Notes is $100.0 million as of June 30, 2018.
|
(2)
|
Reflects the net debt carrying amount, effected by the outstanding balance of the original issue discount, in the unaudited condensed consolidated balance sheet as of June 30, 2018. The actual principal outstanding balance of the Senior Secured Term Loan is $191.3 million as of June 30, 2018.
|
(3)
|
Reflects the debt carrying amount which is accounted for under the Fair Value Option in the unaudited condensed consolidated balance sheet as of June 30, 2018. The actual principal outstanding balance of the 5.75% Convertible Notes is $111.0 million as of June 30, 2018.
|
10. Stockholders’ Equity
2009 Equity Incentive Plan
On August 13, 2009, the Company’s stockholders approved the Company’s 2009 Equity Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the granting of common stock options or other stock-based awards covering up to 3.0 million shares of the Company’s common stock. All employees, directors, consultants and advisors of the Company, including those of the Company’s subsidiaries, are eligible to be granted non-qualified stock options and other stock-based awards (as defined) under the 2009 Plan, and employees are also eligible to be granted incentive stock options (as defined) under the 2009 Plan. No new awards may be granted under the Plan after August 13, 2019.
On August 15, 2012, the Company’s stockholders approved the Company’s Amended and Restated 2009 Plan (“Amended and Restated 2009 Plan”), which, among other items and matters, increased the shares available under the 2009 Plan by an additional 4.0 million shares to a total of 7.0 million shares issuable under the Amended and Restated 2009 Plan, and extended the 2009 Plan termination date through August 15, 2022.
27
2015 Executive Incentiv
e Plan
On December 4, 2015, the Company’s stockholders approved the Company’s 2015 Executive Incentive Plan (“2015 Plan”). Under the 2015 Plan, the Company’s officers and other key employees designated by the Compensation Committee are eligible to receive awards of cash, common stock or stock units issuable under the Amended and Restated 2009 Plan, or any other combination thereof. Awards under the 2015 Plan are based on the achievement of certain pre-determined, non-discretionary performance goals established by the Compensation Committee and are further subject, among other things, the 2015 Plan participant’s continuous employment with the Company until the applicable payment date.
2016 Omnibus Incentive Plan
On November 4, 2016, the Company’s stockholders approved the Company’s 2016 Omnibus Incentive Plan (“2016 Plan”). The 2016 Plan replaced and superseded the Amended and Restated 2009 Plan. Under the 2016 Plan, all employees, directors, officers, consultants and advisors of the Company, including those of the Company’s subsidiaries, are eligible to be granted common stock, options or other stock-based awards. At inception, there were 2.4 million shares of the Company’s common stock available for issuance under the 2016 Plan. The 2016 Plan was amended at the 2017 Annual Meeting of Stockholders to increase the number of shares available under the plan by 1.9 million shares.
Shares Reserved for Issuance
As of June 30, 2018, there were approximately 3.2 million common shares available for issuance under the 2016 Plan. On May 7, 2018, the Company filed a Form S-8 to register the 1.9 million shares available for issuance under the 2016 Plan that were approved at the 2017 Annual Meeting of Stockholders.