Item 1. Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019
(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, 2019 (“Current Quarter”) and the six months ended June 30, 2019 (“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, 2018.
During the Current Six Months, the Company adopted one new accounting pronouncement. Refer to Note 20 for further details.
Correction of an Immaterial Error
During the Current Six Months, the Company determined that the impact of the accretion of redeemable noncontrolling interest to the Company’s earnings per share calculation had been incorrectly recorded in the Company’s condensed consolidated statement of operations for the Prior Year Quarter, the Prior Year Six Months, the quarter ended September 30, 2018 and the nine months ended September 30, 2018. Basic and diluted earnings per share for the Prior Year Quarter and Prior Year Six Months have been corrected in this Form 10-Q. Management evaluated the materiality of this error from a quantitative and qualitative perspective and concluded that the adjustments to earnings per share were 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 quarter ended September 30, 2018 and the nine months ended September 30, 2018, basic earnings per share would have been income of $2.81 and a loss of $4.87, respectively, and diluted earnings per share would have been income of $0.26 and a loss of $7.35, respectively.
Certain reclassifications, which were immaterial, have been made to conform prior year data to the current presentation. During the Current Six Months, the Company also made a reclassification between redeemable noncontrolling interest and noncontrolling interest.
Liquidity
These consolidated financial statements are prepared on a going concern basis that contemplates the realization of cash flows from assets and discharge of liabilities, in each case, in the ordinary course of business consistent with the Company’s prior periods. The Company considered, among other things, the Sears Holdings Corporation’s bankruptcy filing on October 15, 2018, and determined that the bankruptcy filing is not expected to have a material adverse impact on the Company’s ability to continue as a going concern. Based on the Company’s financial plans and projections for 2019, which assumes the realization of significant cost savings, among other things, from the successful implementation of the Company’s current strategic initiatives, the Company does not expect the occurrence of any payment defaults on its outstanding debt facilities in the next twelve months, and otherwise expects to generate sufficient cash to meet its operating cash flow needs and maintain compliance with the financial covenants set forth in its various debt facilities during such period. In particular, management believes the allocation of residual royalty collections to a restricted reserve account (as is discussed in Note 9) is not expected to have a material adverse impact on the Company’s ability to meet such cash flow needs.
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, 2018.
Reverse Stock Split
On March 14, 2019, the Company effected a 1-for-10 reverse stock split (the “Reverse Stock Split”) of its common stock. Unless the context otherwise requires, all share and per share amounts in this quarterly report on Form 10-Q have been adjusted to reflect the Reverse Stock Split. Refer to Note 9 for further details.
8
2
. 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. In accordance with ASC Topic 606 –
Revenue from Contracts with Customers
(“Topic 606”), the Company recognizes the minimum royalty revenue on a straight-line basis over the entire contract term and 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 $0.2 million and $0.6 million in the Current Quarter and the three months ended June 30, 2018 (the “Prior Year Quarter”), respectively. The associated cost of goods sold is included in selling general and administrative expenses and was approximately $0.2 million and $0.6 million in the Current Quarter and Prior Year Quarter, respectively. The revenue associated with such activity is included in licensing revenue and was approximately $0.6 million and $2.6 million in the Current Six Months and the six months ended June 30, 2018 (the “Prior Year 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 Six Months and Prior Year Six Months, respectively. 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.
The following table presents our revenues disaggregated by license type:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Licensing revenue by license type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-retail license
|
|
$
|
10,364
|
|
|
$
|
20,094
|
|
|
$
|
20,117
|
|
|
$
|
41,307
|
|
Wholesale licenses
|
|
|
23,746
|
|
|
|
29,418
|
|
|
|
49,551
|
|
|
|
54,557
|
|
Other licenses
(1)
|
|
|
284
|
|
|
|
700
|
|
|
|
668
|
|
|
|
2,897
|
|
|
|
$
|
34,394
|
|
|
$
|
50,212
|
|
|
$
|
70,336
|
|
|
$
|
98,761
|
|
9
(1)
|
Included in Other licenses for the
Current Quarter, Current Six Months,
Prior Year Quarter
and Prior Year Six Months
is
$0.2
million
,
$0.6
million
,
$0.6
million, and
$2.6
million
, respecti
vely, of revenue associated with the Umbro business purchases discussed above.
|
The following table represents our revenues disaggregated by geography:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Total licensing revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
18,988
|
|
|
$
|
34,225
|
|
|
$
|
41,607
|
|
|
$
|
67,102
|
|
Other
(1)
|
|
|
15,406
|
|
|
|
15,987
|
|
|
|
28,729
|
|
|
|
31,659
|
|
|
|
$
|
34,394
|
|
|
$
|
50,212
|
|
|
$
|
70,336
|
|
|
$
|
98,761
|
|
(1)
|
No single country outside of the United States represented 10% or more 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, 2019, the Company and its joint ventures had a contractual right to receive over $384.0 million of aggregate minimum licensing revenue over the balance and the terms of their current licenses, excluding any renewals.
As of June 30, 2019, future minimum license revenue to be recognized under our existing licenses is as follows: $51.2 million, $82.2 million, $64.2 million, $54.1 million, $47.2 million and $85.1 million for the remainder of FY 2019, FY 2020, FY 2021, FY 2022, FY 2023 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. As of June 30, 2019, our contract assets – current and long term contract assets were $4.9 million and $16.0 million, respectively, as compared to our contract assets – current and long term contract assets as of December 31, 2018 which were $4.8 million and $14.6 million, respectively. For the Current Quarter, the Company incurred an impairment loss of its contract assets of $0.1 million as a result of certain contract modifications as compared to $0.4 million for the Prior Year Quarter. For the Current Six Months, the Company incurred an impairment loss of $0.6 million as a result of certain contract modifications as compared to $0.4 million for the Prior Year Six Months.
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 $3.8 million of revenues recognized that were included in the deferred revenue balance at the beginning of the period.
3. Goodwill and Trademarks and Other Intangibles, net
Goodwill
10
There were no changes
and no impairment of the Company’s goodwill
during the
Current Six Months
as compared to a non-cash impairment charge of $37.8 million recorded in the Prior Year Six Months, which was due to the projected decline in
royalties associated with the license agreements for the Mossimo brand
.
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
.
Trademarks and Other Intangibles, net
Trademarks and other intangibles, net, consist of the following:
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Estimated
Lives in
Years
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Indefinite-lived trademarks
|
|
Indefinite
|
|
$
|
340,814
|
|
|
$
|
—
|
|
|
$
|
337,631
|
|
|
$
|
—
|
|
Definite-lived trademarks
|
|
10-15
|
|
|
8,958
|
|
|
|
8,958
|
|
|
|
8,958
|
|
|
|
8,958
|
|
Licensing contracts
|
|
1-9
|
|
|
973
|
|
|
|
944
|
|
|
|
978
|
|
|
|
909
|
|
|
|
|
|
$
|
350,745
|
|
|
$
|
9,902
|
|
|
$
|
347,567
|
|
|
$
|
9,867
|
|
Trademarks and other intangibles, net
|
|
|
|
|
|
|
|
$
|
340,843
|
|
|
|
|
|
|
$
|
337,700
|
|
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 and territorial basis as separate single units of accounting, 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, or as deemed necessary due to the identification of a triggering event.
In April 2019, the Company bought back a revenue stream in the Ecko brand from a previous joint venture partner which resulted in an increase of $3.4 million to the Ecko trademark.
In accordance with ASC 350, there was no impairment of the indefinite-lived trademarks during the Current Quarter or the Current Six Months. In the Prior Year Quarter, as a result of the Company revising its forecasted future earnings for the Mossimo brand, the Company 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 Prior Year Quarter in the women’s segment to reduce the Mossimo trademark to fair value. Further, in accordance with ASC 360, there were no impairment charges to the Company’s definite-lived trademarks during the Current Quarter or Prior Year Quarter.
During the Prior Year 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 represents licensing contracts, which are amortized on a straight-line basis over their estimated useful lives of 1 to 9 years. Certain trademarks are amortized using estimated useful lives of 10 to 15 years with no residual values.
Amortization expense for intangible assets for both the Current Quarter and Prior Year Quarter was less than $0.1 million. Amortization expense for intangible assets for the Current Six Months was less than $0.1 million as compared to amortization expense for intangible assets of approximately $0.2 million for the Prior Year Six Months.
11
4
. Joint Ventures and Investments
Joint Ventures
As of June 30, 2019, the following joint ventures are consolidated with the Company:
Entity Name
|
|
Date of Original
Formation
/ Investment
|
|
Iconix's
Ownership %
as of June 30, 2019
|
|
|
Joint Venture Partner
|
|
Put / Call Options, as
applicable
(2)
|
|
Lee Cooper China
Limited
|
|
June 2018
|
|
100%
|
|
|
POS Lee Cooper HK Co. Ltd.
|
|
|
—
|
|
Starter China Limited
|
|
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)(3)
|
|
December 2009
|
|
51%
|
|
|
Global Brands Group Asia Limited
|
|
Put / Call Options
|
|
Iconix Australia
(1)
|
|
September 2013
|
|
55%
|
|
|
Pac Brands USA, Inc.
|
|
Put / Call Options
|
|
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, 2018 for material terms of the put and call options associated with certain of the Company’s joint ventures.
|
(3)
|
In March 2019, the Company entered into amendment to the Iconix Europe LLC Operating Agreement to extend the five-year put/call options from the six month period commencing January 13, 2019 (as stipulated in the agreement) to a period commencing January 13, 2019 and ending on September 30, 2019.
|
Investments
Equity Method Investments
Entity Name
|
|
Date of Original
Formation / Investment
|
|
Partner
|
|
Put / Call Options, as
applicable
(2)
|
|
Iconix India joint venture
(1)
|
|
June 2012
|
|
Reliance Brands Ltd.
|
|
|
—
|
|
Iconix SE Asia, Ltd.
(1)(3)
|
|
October 2013
|
|
Global Brands Group Asia Limited
|
|
Put / Call Options
|
|
MG Icon
(1)
|
|
March 2010
|
|
Purim LLC
|
|
|
—
|
|
(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 records its investment under the equity method of accounting.
|
(2)
|
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for material terms of the put and call options associated with the Company’s joint venture.
|
(3)
|
In March 2019, the Company entered into amendment to the Iconix SE Asia, Ltd. Operating Agreement to extend the five-year put/call options from the six month period commencing October 1, 2018 (as stipulated in the agreement) to a period commencing October 1, 2018 and ending on September 30, 2019.
|
12
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:
|
|
|
|
Ownership
by
|
|
|
Value of Investment as of
|
|
Brands Placed
|
|
Partner
|
|
Iconix China
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Candie’s
|
|
Candies Shanghai Fashion Co. Ltd.
|
|
20%
|
|
|
$
|
10,612
|
|
|
$
|
10,529
|
|
Marc Ecko
|
|
Shanghai MuXiang Apparel & Accessory Co. Limited
|
|
15%
|
|
|
|
2,270
|
|
|
|
2,270
|
|
Material Girl
|
|
Ningbo Material Girl Fashion Co. Ltd.
(1)
|
|
20%
|
|
|
|
—
|
|
|
|
2,129
|
|
Ecko Unltd
|
|
Ai Xi Enterprise (Shanghai) Co. Limited
|
|
20%
|
|
|
|
10,283
|
|
|
|
10,400
|
|
|
|
|
|
|
|
|
|
$
|
23,165
|
|
|
$
|
25,328
|
|
(1)
|
In March 2019, the Company sold its 20% interest in Ningbo Material Girl Fashion Co. Ltd. (“Material Girl China”) to Ningbo Peacebird Fashion & Accessories Co. Ltd. for $3.0 million in cash. Pursuant to the agreement, the sale price is further reduced by the initial cash investment of $0.2 million as well as $0.6 million on brand management expenses incurred since the inception of the Material Girl China entity, to total net proceeds of $2.2 million. Additionally, Purim LLC, our MG Icon partner, is entitled to 33.3% of the net proceeds (or approximately $0.7 million) resulting in the Company’s portion of the net proceeds from the transaction to be approximately $1.5 million. As a result of this transaction, the Company recognized a gain of $0.2 million which has been recorded within Other Income in the Company’s condensed consolidated statement of operations for the Current Six Months.
|
Other Equity Investments
Entity Name
|
|
Date of Original
Formation / Investment
|
China Outfitters Holdings Ltd.
(2)
|
|
September 2008
|
Marcy Media Holdings, LLC
(1)
|
|
July 2013
|
(1)
|
In accordance with ASC 825, 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 March 31, 2019, there were no indicators of impairment for these investments.
|
(
2
)
|
As part of the
2015 purchase of our joint venture partners’ interest in Iconix China, the Company acquired an equity investment in China Outfitters Holdings Ltd. As of June 30, 2019 and December 31, 2018, the fair value of this investment was approximately $1.0 million and $1.0 million, respectively, with the decrease in fair value of less than $0.1 million recorded within Other Income on the Company’s condensed consolidated statement of operations.
|
13
5
. 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:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
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 Prior Year 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 Prior Year 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.
|
14
6
. 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
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.
Financial Instruments
As of June 30, 2019 and December 31, 2018, 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, 2019 or December 31, 2018. 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, 2019
|
|
|
December 31, 2018
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Long-term debt, including current portion
(1)
|
|
$
|
642,141
|
|
|
$
|
547,301
|
|
|
$
|
675,229
|
|
|
$
|
582,370
|
|
(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 $1.0 million as of June 30, 2019 with the changes in the fair value of the investment recorded in Other Income in the Company’s condensed consolidated statement of operations.
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.
15
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. There was no impairment, and therefore no write-down, of any of the Company’s long-lived assets during the Current Quarter or the Current Six Months. The Company recorded impairment charges on the Mossimo indefinite-lived trademark and women’s segment goodwill during the Prior Year Quarter.
7. Fair Value Option
The Company accounts for its 5.75% Convertible Notes under the fair value option. The fair value carrying amount of the 5.75% Convertible Notes as of June 30, 2019 and December 31, 2018 is $23.2 million and $48.1 million, respectively, as compared to the contractual principal outstanding balance which is $94.6 million and $109.7 million as of June 30, 2019 and December 31, 2018, respectively. The change of $20.3 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 Six Months and Prior Year Six Months, respectively, within Other Income. The change of $0.3 million and $32.1 million in the fair value of the 5.75% Convertible Notes accounted for under the fair value option are included Other Income in the Company’s condensed consolidated statement of operations for the Current Quarter and Prior Year Quarter, respectively.
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.
8. Debt Arrangements
The Company’s debt obligations consist of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Senior Secured Notes
|
|
$
|
353,163
|
|
|
$
|
365,481
|
|
Variable Funding Note, net of original issue discount
|
|
|
97,364
|
|
|
|
95,273
|
|
Senior Secured Term Loan, net of original issue discount
|
|
|
171,648
|
|
|
|
171,137
|
|
5.75% Convertible Notes
(1)
|
|
|
23,190
|
|
|
|
48,076
|
|
Unamortized debt issuance costs
|
|
|
(3,224
|
)
|
|
|
(4,738
|
)
|
Total debt
|
|
|
642,141
|
|
|
|
675,229
|
|
Less current maturities
|
|
|
67,163
|
|
|
|
54,263
|
|
Total long-term debt
|
|
$
|
574,978
|
|
|
$
|
620,966
|
|
(1)
|
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, 2019 and December 31, 2018. The actual principal outstanding balance of the 5.75% Convertible Notes is $94.6 million and $109.7 million as of June 30, 2019 and December 31, 2018, respectively.
|
16
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 Series 2012-1 4.229% Senior Secured Notes, Class A-2 (the “2012 Senior Secured Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”).
Simultaneously with the issuance of the 2012 Senior Secured Notes, the Co-Issuers also entered into a revolving financing facility of Series 2012-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes”), which allowed 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 allow for drawings on a revolving basis. Drawings and certain additional terms related to the Variable Funding Notes are governed by the Class A-1 Note Purchase Agreement dated November 29, 2012 (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 swingline lender and as administrative agent. The Variable Funding Notes are governed, in part, by the Variable Funding Note Purchase Agreement and by certain generally applicable terms contained in the Securitization Notes Indenture. Interest on the Variable Funding Notes is payable at per annum rates equal to the CP Rate, Base Rate or Eurodollar Rate, each as defined in the Variable Funding Note Purchase Agreement. In February 2015, the Company fully drew down the $100.0 million of available funding under the Variable Funding Notes, which remains outstanding as of June 30, 2019.
On June 21, 2013, the Co-Issuers issued $275.0 million aggregate principal amount of Series 2013-1 4.352% Senior Secured Notes, Class A-2 (the “2013 Senior Secured Notes” and, together with the 2012 Senior Secured Notes, the “Senior Secured Notes”) in an offering exempt from registration under the Securities Act.
The Senior Secured Notes and the Variable Funding Notes are referred to collectively as the “Securitization Notes.”
The Securitization Notes were issued under a base indenture (the “Securitization Notes Base Indenture”) and related supplemental indentures (the “Securitization Notes Supplemental Indentures” and, collectively with the Securitization Notes Base Indenture, 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.
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.
While the Securitization Notes are outstanding, payments of interest are required to be made on the 2012 Senior Secured Notes and the 2013 Senior Secured Notes, in each case, on a quarterly basis. Initially, 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 has since changed in subsequent periods due to the prepayments made under the Securitization Notes Indenture. See below for further discussion.
The legal final maturity date of the Securitization Notes is in January of 2043. If the Co-Issuers have not repaid or refinanced the Securitization Notes prior to January 2020 (the “anticipated repayment date”), additional interest will accrue on amounts outstanding under the Securitization Notes at a rate equal to (A) in respect of the Variable Funding Notes, 5% per annum, (B) in respect of the 2012 Senior Secured Notes and the 2013 Senior Secured Notes, the greater of (1) 5% per annum and (2) a per annum interest rate equal to the excess, if any, by which the sum of (x) 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 (y) 5% per annum plus (z) with respect to the 2012 Senior Secured Notes, 3.4% per annum, or with respect to the 2013 Senior Secured Notes, 3.14% per annum, exceeds the original interest rate. Pursuant to the Securitization Notes Indenture, such additional interest is not due to be paid by the Company until January 2043 (the legal maturity date) and does not compound annually. The Securitization Notes rank
pari passu
with each other.
17
Pursuant to the Securitization Notes Indenture, the Securitization Notes are the joint and sever
al obligations of the Co-Issuers only. The Securitization Notes are secured under the Securitization Notes Indenture by a security interest in certain of the assets of the Co-Issuers (the “Securitized Assets”), which includes, among other things, (i) intel
lectual 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, Mud
d, 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 ri
ghts to receive payments) and obligations under all license agreements for use of those trademarks in such territories; (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. The Securitized A
ssets 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 Cooper 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 and the Buffalo trademarks, the Pony trademarks, and
the Hydraulic trademarks.
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 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.
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, 2019, the Company is in compliance with all covenants under the Securitization Notes.
The Company’s Securitization Notes include a financial test, known as the debt service coverage ratio (“DSCR”) 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. As a result of a decline in royalty collections during the twelve months ended March 31, 2019, the DSCR fell below 1.10x as of March 31, 2019. Beginning April 1, 2019, the Senior Secured Notes experienced a Rapid Amortization Event pursuant to the Securitization Notes Indenture. Upon a Rapid Amortization Event, any residual amounts available will immediately be used to pay down the principal.
The Securitization Notes are 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, including as a result of not paying or redeeming the Securitization Notes in full prior to the anticipated repayment date, the management fee payable to the Company would remain payable pursuant to the priority of payments set forth under the Securitization Indenture, but no residual amounts would be payable to the Company thereafter. As noted above, a Rapid Amortization Event occurred beginning April 1, 2019.
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 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.
18
In July 2017, i
n 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’ defer
red financing costs of $2.0 million as well as paid a prepayment penalty of $0.3 million.
As a result of this transaction
, 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, 2019 and December 31, 2018, the total outstanding principal balance of the Securitization Notes was $453.2 million and $465.5 million, respectively, of which $47.9 million and $46.0 million, respectively, is included in the current portion of long-term debt on the consolidated balance sheet. As of June 30, 2019 and December 31, 2018, $13.7 million and $15.2 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.
For the Current Quarter and Prior Year Quarter, cash interest expense relating to the Securitization Notes was approximately $5.3 million and $5.6 million, respectively. For the Current Six Months and the Prior Year Six Months, cash interest expense relating to the Securitization Notes was approximately $10.8 million and $11.2 million, respectively. For the Current Quarter and Prior Year Quarter, the Company recorded an expense for the amortization of original issue discount relating to the Variable Funding Notes of $1.1 million and $1.0 million, respectively. For the Current Six Months and Prior Year Six Months, the Company recorded an expense for the amortization of original issue discount relating to the Variable Funding Notes of $2.1 million and $1.9 million, respectively.
Senior Secured Term Loan
On August 2, 2017, the Company entered into a credit agreement (as amended or otherwise modified, unless context provides otherwise 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 (the “Guarantors”), Cortland Capital Market Services LLC, as administrative agent and collateral agent (“Cortland”) and the lenders party thereto from time to time, including Deutsche Bank AG, New York Branch.
Pursuant to the Senior Secured Term Loan, the lenders provided to IBG Borrower a senior secured term loan (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 (the “Interest Rate”).
On August 2, 2017, the net cash proceeds of the Senior Secured Term Loan were deposited into an escrow account and 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 (as defined below). Prior to the First Amendment (as discussed below), 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.
Prior to the First Amendment, 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.
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.
19
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 (the “First Amendment”) 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 to the then-current term loan balance of approximately $57.8 million, (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 (the “First Delayed Draw Term Loan”), and (ii) a $140.7 million Second Delayed Draw Term Loan (the “Second Delayed Draw Term Loan” and, together, with the First Delayed Draw Term Loan, the “Delayed Draw Term Loan Facility”) for the purpose of repaying the 1.50% Convertible Notes; (c) an 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. Indebtedness issued under the Delayed Draw Term Loan Facility was issued with original issue discount.
As a result of the First Amendment, on October 27, 2017, the Company repaid $231.0 million on the Senior Secured Term Loan which represented $240.7 million of outstanding principal balance. As this transaction was accounted for as a debt modification in accordance with 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 original issue discount and deferred financing costs of $9.3 million and $5.4 million, respectively. As a result of this transaction, the Company’s outstanding principal balance of the Senior Secured Term Loan was reduced to $57.8 million as of such date.
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, net of the $1.0 million of original issue discount.
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, 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, certain potential defaults and events of default arising under the Senior Secured Term Loan.
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 estimated that it could be responsible for payments on account of Flex in an aggregate total amount of up to $12.0 million. As of March 31, 2019, the Company has paid a total of approximately $5.0 million in Flex. 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 Senior Secured Term Loan.
Third Amendment
20
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 Se
nior Secured Term Loan, as amended, to permit (i) IBG Borrower to enter into the 5.75% Notes Indenture (as defined below) and a related intercreditor agreement and (ii) the Note Exchange (as defined below). 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 a
ccount 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 on March 12, 2018. The Fourth Amendment provided, among other things, that the funding date for the Second Delayed Draw Term Loan would be March 14, 2018 instead of March 15, 2018.
The conditions to the availability of the Second Delayed Draw Term Loan 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.
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: (i) 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; (ii) the failure to extend of the Series 2012-1 Class A-1 Senior Notes Renewal Date (as defined in the Senior Secured Term Loan); (iii) 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 (iv) 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.
As of June 30, 2019 and December 31, 2018, the outstanding principal balance of the Senior Secured Term Loan was $171.6 million (which is net of $15.8 million of original issue discount) and $171.1 million (which is net of $18.3 million of original issue discount), respectively, of which $19.3 million and $11.6 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 in the Current Quarter as compared to $4.6 million in the Prior Year Quarter. The Company recorded cash interest expense of approximately $9.1 million relating to the Senior Secured Term Loan in the Current Six Months as compared to $8.0 million (which included a commitment fee) in the Prior Year Six Months.
The Company recorded an expense for the amortization of original issue discount and deferred financing fees of approximately $1.4 million relating to the Senior Secured Term Loan, included in interest expense on the consolidated statement of operations, during the Current Quarter as compared to $1.2 million during the Prior Year Quarter. The Company recorded an expense for the amortization of original issue discount and deferred financing fees of approximately $2.6 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 approximately $1.8 million during the Prior Year Six Months.
21
5.75% Convertible Notes
On February 22, 2018, the Company consummated an exchange (the “Note Exchange”) of approximately $125 million previously outstanding 1.50% Convertible Senior Subordinated Notes due 2018 (the “1.50% Convertible Notes”), pursuant to which it issued approximately $125 million of new 5.75% Convertible Notes due 2023 (the 5.75% Convertible Notes”). The 5.75% Convertible Notes were issued pursuant to an indenture, dated February 22, 2018, by and among the Company, each of the guarantors thereto and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (the “Indenture”).
The 5.75% Convertible Notes mature on August 15, 2023. 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 into common stock of the Company. The 5.75% Convertible Notes are convertible into shares of the Company’s common stock based on a conversion rate of 52.1919 shares of the Company’s common stock, per $1,000 principal amount of the 5.75% Convertible Notes (which is equal to an initial conversion price of approximately $19.16 per share), subject to adjustment from time to time pursuant to the 5.75% Convertible Note Indenture.
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 (as defined in the Indenture) 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 February 22, 2019, the Company may redeem for cash all or part of the 5.75% Convertible Notes at 100% of the principal amount of the 5.75% Convertible Notes, plus accrued and unpaid interest, if any, 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.
During the Current Quarter and Current Six Months, certain noteholders converted an aggregate outstanding principal balance of $11.2 million and $15.1 million, respectively, of their 5.75% Convertible Notes into approximately 0.6 million and 0.8 million shares, respectively, of the Company’s common stock. Pursuant to the Indenture, the Company also made Conversion Make-Whole Payments of approximately 2.1 million and 2.9 million shares of the Company’s common stock to those converting noteholders during the Current Quarter and Current Six Months, respectively. As a result of the difference in the fair market value versus the carrying value of the 5.75% Convertible Notes that were converted during the Current Quarter and Current Six Months, an aggregate $1.4 million loss and an aggregate $1.6 million loss was recorded within Other Income in the Company’s condensed consolidated statement of operations in the Current Quarter and Current Six Months, respectively.
22
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, 2019
an
d
December 31, 2018
, while the debt balance recorded at fair value on the Company’s consolidated balance sheet is
$23.2
million and
$48.1
million,
respectively,
the actual outstanding principal balance of the 5.75% Convertible Notes is
$94.6
million and
$109.7
million
, respectively
.
The Company recorded interest expense of approximately $1.4 million relating to the 5.75% Convertible Notes in the Current Quarter as compared to $1.6 million in the Prior Year Quarter. The Company recorded interest expense of approximately $2.9 million relating to the 5.75% Convertible Notes in the Current Six Months as compared to $2.3 million for the Prior Year Six Months.
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 issued pursuant to that certain Indenture, dated as of March 15, 2013, by and between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the “1.50% Notes Indenture”), in a private offering to certain institutional investors with net proceeds of 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 0.7 million shares of the Company’s common stock. 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).
On February 22, 2018, the Company completed the Note Exchange. On March 15, 2018, 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, and no further 1.50% Convertible Notes remained outstanding. 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 in the Prior Year Six Months.
For the Prior Year Quarter and the Prior Year Six Months, the Company recorded none (refer to the extinguishment of the debt as is discussed above) and approximately $2.4 million, respectively, of additional non-cash interest expense 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 Prior Year Quarter and the Prior Year Six Months, the Company recorded none (refer to the extinguishment of the debt as discussed above) and approximately $0.7 million, respectively, of cash interest expense relating to the 1.50% Convertible Notes.
Debt Maturities
As of June 30, 2019, the Company’s debt maturities on a calendar year basis are as follows:
|
|
Total
|
|
|
July 1
through
December 31,
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
Thereafter
|
|
Senior Secured Notes
|
|
$
|
353,163
|
|
|
$
|
30,375
|
|
|
$
|
38,851
|
|
|
$
|
42,693
|
|
|
$
|
42,693
|
|
|
$
|
42,693
|
|
|
$
|
155,858
|
|
Variable Funding Notes
(1)
|
|
$
|
97,364
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97,364
|
|
Senior Secured Term Loan
(2)
|
|
$
|
171,648
|
|
|
|
9,642
|
|
|
|
19,284
|
|
|
|
19,284
|
|
|
|
123,438
|
|
|
|
—
|
|
|
|
—
|
|
5.75% Convertible Notes
(3)
|
|
$
|
23,190
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,190
|
|
|
|
—
|
|
Total
|
|
$
|
645,365
|
|
|
$
|
40,017
|
|
|
$
|
58,135
|
|
|
$
|
61,977
|
|
|
$
|
166,131
|
|
|
$
|
65,883
|
|
|
$
|
253,222
|
|
(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, 2019. The actual principal outstanding balance of the Variable Funding Notes is $100.0 million as of June 30, 2019.
|
(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, 2019. The actual principal outstanding balance of the Senior Secured Term Loan is $187.5 million as of June 30, 2019.
|
(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, 2019. The actual principal outstanding balance of the 5.75% Convertible Notes is $94.6 million as of June 30, 2019.
|
23
9. Stockholders’ Equity
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 0.2 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 0.19 million shares.
Shares Reserved for Issuance
As of June 30, 2019, there were approximately 0.1 million common shares available for issuance under the 2016 Plan.
Reverse Stock Split
On March 14, 2019, the Company effected a 1-for-10 reverse stock split (the “Reverse Stock Split”) of its common stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares of common stock had their holdings rounded up to the next whole share. Proportional adjustments were made to the Company’s outstanding stock options and other equity securities and to the Company’s incentive plans, and the conversion ratio of the 5.75% Convertible Notes, to reflect the Reverse Stock Split, in each case, in accordance with the terms thereof. Unless the context otherwise requires, all share and per share amounts in this quarterly report on Form 10-Q have been adjusted to reflect the Reverse Stock Split.
Stock Options
Stock options outstanding and exercisable as of June 30, 2019 were issued under previous equity incentive plans of the Company. There was no grants of stock options or warrants and no compensation expense related to stock option grants or warrant grants during the Current Six Months or Prior Year Six Months as all prior awards have been fully expensed.
As of June 30, 2019, there was a total of 1,500 stock options outstanding and exercisable at a weighted average exercise price of $171.60. During the Current Six Months, there were no canceled, exercised or expired/forfeited stock options. The weighted average contractual term (in years) of options outstanding and exercisable as of June 30, 2019 was 0.23.
Restricted stock
Compensation cost for restricted stock is measured as the excess, if any, of the quoted market price of the Company’s stock at the date the common stock is issued over the amount the employee must pay to acquire the stock (which is generally zero). The compensation cost, net of projected forfeitures, is recognized over the period between the issue date and the date any restrictions lapse, with compensation cost for grants with a graded vesting schedule recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The restrictions do not affect voting and dividend rights.
The following table summarizes information about unvested restricted stock transactions:
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Non-vested, January 1, 2019
|
|
|
315,396
|
|
|
$
|
108.63
|
|
Granted
|
|
|
329,145
|
|
|
|
1.70
|
|
Vested
|
|
|
(86,975
|
)
|
|
|
8.65
|
|
Forfeited/Canceled
|
|
|
(296
|
)
|
|
|
75.20
|
|
Non-vested, June 30, 2019
|
|
|
557,270
|
|
|
$
|
63.79
|
|
24
The Company has awarded time-based restricted shares of common stock to certain employees. The awards have restriction periods tied to employment and vest over a maximum period of approximately 3 years. The cost of the time-based restricted stock awards, w
hich is the fair market value on the date of grant net of estimated forfeitures, is expensed ratably over the vesting period.
The Company has awarded performance-based restricted shares of common stock to certain employees. The awards have restriction periods tied to certain performance measures. The cost of the performance-based restricted stock awards, which is the fair market value on the date of grant net of estimated forfeitures, is expensed when the likelihood of those shares being earned is deemed probable.
Compensation expense related to restricted stock grants (inclusive of the restricted stock grants awarded as part of the long-term incentive plans discussed below) for the Current Quarter and Prior Year Quarter was approximately $0.2 million and $1.2 million, respectively. Compensation expense related to restricted stock grants (inclusive of the restricted stock grants awarded as part of the long-term incentive plans discussed below) for the Current Six Months and Prior Year Six Months was approximately $0.4 million and $1.7 million, respectively.
An additional amount of $0.7 million of expense of compensation expense related to restricted stock grants (inclusive of the restricted stock grants awarded as part of the long-term incentive plans discussed below) is expected to be expensed evenly over a period of approximately three years.
For both the Current Quarter and Prior Year Quarter, the Company repurchased shares valued at less than $0.1 million of its common stock in connection with net share settlement of restricted stock grants. For the both the Current Six Months and Prior Year Six Months, the Company repurchased shares valued at approximately $0.1 million of its common stock in connection with the net share settlement of restricted stock grants.
Retention Stock
On January 7, 2016, the Company awarded to certain employees a retention stock grant of approximately 1.3 million shares in the aggregate with a then current value of approximately $7.5 million. The awards cliff vest in three years based on the Company’s total shareholder return measured against a peer group, as described in the Company’s Form 10-K/A filed on April 29, 2016. The grant date fair value of the awards issued on January 7, 2016 was $42.50. As of December 31, 2018, pursuant to the terms of the awards and based upon the Company’s performance over the vesting period, no shares were issued upon expiration of the grant.
Mr. John Haugh, the Company’s former Chief Executive Officer, was issued an employment inducement award pursuant to his employment agreement. The terms of the Employment Inducement Award are similar to the retention stock awards provided to all other employees as described above. The grant date fair value of Mr. Haugh’s award issued on February 23, 2016 was $57.50. As of June 15, 2018, Mr. Haugh, the Company’s former Chief Executive Officer and President, was no longer an employee of the Company or member of the Company’s board of directors. As of Mr. Haugh’s termination date, given that the retention stock awards were not earning out, the vesting of shares associated with Mr. Haugh’s awards resulted in zero shares issuable.
On October 15, 2018, the Company hired Robert C. Galvin as its Chief Executive Officer and President and was appointed to the Company’s board of directors. Mr. Galvin was issued an Employment Inducement Award pursuant to his employment agreement. The terms of the Employment Inducement Award are similar to the retention stock awards provided to other employees as described above. The grant date fair value of Mr. Galvin’s award issued on October 15, 2018 was $1.80.
Compensation expense related to the retention stock awards was less than $0.1 million and $0.2 million for the Current Quarter and Prior Year Quarter, respectively. Compensation expense related to the retention stock awards was approximately $0.1 million and $0.5 million for the Current Six Months and Prior Year Six Months, respectively. An additional amount of $0.3 million of expense of compensation expense related to Mr. Galvin’s retention stock awards is expected to be expensed evenly over a period of approximately 2.5 years.
Long-Term Incentive Compensation
On March 31, 2016, the Company approved a new grant for long-term incentive compensation (the “2016 LTIP”) for key employees and granted equity awards under the 2016 LTIP in the aggregate amount of approximately 0.1 million shares at a weighted average share price of $73.10 with a then current value of approximately $5.2 million. The awards granted were a combination of restricted stock units (“RSUs”) and target level performance stock units (“PSUs”). Pursuant to the terms of the awards and based upon the Company’s performance over the vesting period, less than 0.1 million were issued upon expiration of the grant on March 31, 2019.
25
On March 7, 2017, the Company approved a new
grant
for long-term incentive compensation (the “2017 LTIP”) for certain employees and granted equity awards under the 2017 LTIP in the
aggregate amount of
approximately 0.
1
million
shares at a weighted average share price of $7
5.20
with a then current value of $6.6 million.
The awards granted were a combination of
RSUs
and
target level PSUs. The material terms of the PSUs and RSUs are substantially similar to those set forth in the 2016 LTIP. Specifically, the RSUs vest one third annually on each of March 30, 2018, March 30, 2019 and March 30, 2020. The PSUs vest based on
performance metrics approved by the Compensation Committee, which, for the performance period commencing January 1, 2017 and ending on December 31, 2019, are based on the Company’s achievement of an aggregate adjusted operating income performance target a
s set forth in the applicable award agreements, and continued employment through December 31, 2019. For the
Current Six Months
,
less than
0.1
million shares were forfeited in respect of the 2017 LTIP.
The weighted average remaining contractual term (in y
ears) of the PSUs is
one year
.
On March 15, 2018, the Company approved a new grant for long-term incentive compensation (the “2018 LTIP”) for certain employees which consisted of (i) PSU equity awards in the aggregate amount of approximately 0.2 million shares at a weighted average share price of $13.80 with a then current value of $3.1 million and (ii) cash awards in the aggregate amount of approximately $3.1 million (the “2018 Cash Grant”). The Cash Grants comprising the 2018 LTIP vest in 48 equal semi-monthly installments on the 15
th
and last days of each month, beginning March 31, 2018 and ending March 15, 2020, subject in each case to continued employment through the applicable vesting date. Each installment is paid within 15 days of the applicable vesting date. Upon the end of an employee’s employment with the Company, any remaining unpaid portion of the 2018 Cash Grant is forfeited. The PSUs vest based on performance metrics approved by the Compensation Committee over three separate performance periods, commencing on January 1 of each of 2018, 2019 and 2020 and ending on December 31 of each of 2018, 2019 and 2020, which, for each such performance period, are based on the Company’s achievement of an aggregated adjusted operating income performance target to be set by the Compensation Committee prior to March 30 of each applicable performance period, and continued employment through the settlement date. For the Current Six Months, less than 0.1 million shares were forfeited in respect of the 2018 LTIP. The weighted average remaining contractual term (in years) of the PSUs is two years.
On March 15, 2019, the Company approved a new grant for long-term incentive compensation (the “2019 LTIP”) for certain employees which consisted of (i) PSU equity awards in the aggregate amount of approximately 0.4 million shares at a weighted average share price of $2.02 with a then current value of $0.8 million and (ii) cash awards in the aggregate amount of approximately $1.0 million (the “2019 Cash Grant”). As part of the 2019 LTIP, pursuant to his employment agreement, the Company’s Chief Executive Officer and President was granted 0.3 million shares of the Company’s common stock with an aggregate fair market value of $0.3 million upon final execution of the RSU agreement in April 2019. The 2019 Cash Grant and the PSUs vest based on performance metrics approved by the Compensation Committee over two separate performance periods, commencing on January 1 of each of 2019 and 2020 and ending on December 31 of each of 2019 and 2020, which, for each such performance period, are based on the Company’s achievement of an aggregated adjusted EBITDA performance target to be set by the Compensation Committee prior to March 30 of each applicable performance period, and continued employment through the settlement date. The weighted average remaining contractual term (in years) of the PSUs is approximately two years.
In the Current Quarter, the Company recognized compensation benefit related to the PSUs granted as part of the long-term incentive plans of less than $0.1 million as compared to a compensation benefit of $0.9 million in the Prior Year Quarter. In the Current Six Months, the Company recognized compensation expense related to the PSUs granted as part of the long-term incentive plans of $0.1 million as compared to compensation benefit of $0.6 million in the Prior Year Six Months. An additional amount of $0.4 million of expense of compensation expense related to the PSUs granted is expected to be expensed evenly over a period of approximately two years.
10. Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects, in periods in which they have a dilutive effect, the effect of restricted stock-based awards, common shares issuable upon exercise of stock options and warrants and shares underlying convertible notes potentially issuable upon conversion. The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options outstanding were exercised, and all convertible notes have been converted into common stock.
For the Current Quarter, of the total potentially dilutive shares related to restricted stock-based awards and stock options, approximately 0.5 million shares were anti-dilutive, as compared to approximately 0.2 million shares that were anti-dilutive for the Prior Year Quarter.
26
For the
Current Quarter
,
approximately
0.2
million
of the performance related restricted stock-based awards issued to the Company’s named executive officers were
anti-
dilutive as compared t
o approximately
0.3
million
of the performance related restricted stock-based awards issued to the Company’s named executive officers were anti-dilutive in the
Prior Year Quarter
.
A reconciliation of weighted average shares used in calculating basic and diluted earnings per share follows:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Basic
|
|
|
10,377
|
|
|
|
6,598
|
|
|
|
9,426
|
|
|
|
6,257
|
|
Effect of convertible notes subject
to conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
35,327
|
|
|
|
—
|
|
Effect of assumed vesting of dilutive shares
|
|
|
—
|
|
|
|
—
|
|
|
|
26
|
|
|
|
—
|
|
Diluted
|
|
|
10,377
|
|
|
|
6,598
|
|
|
|
44,779
|
|
|
|
6,257
|
|
In accordance with ASC 480, the Company considers its redeemable non-controlling interest in its computation of both basic and diluted earnings per share. In addition, in accordance with ASC 260, the Company considers its 5.75% Convertible Notes in its computation of diluted earnings per share. For the Current Quarter, Prior Year Quarter, Current Six Months, and Prior Year Six Months, adjustments to the Company’s redeemable non-controlling interest and effects of potential conversion on the 5.75% Convertible Notes had impacts on the Company’s earnings per share calculations as follows:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
For earnings (loss) per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Iconix Brand
Group, Inc.
|
|
$
|
1,271
|
|
|
$
|
(79,429
|
)
|
|
$
|
19,216
|
|
|
$
|
(51,670
|
)
|
Accretion of redeemable non-controlling
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income attributable to Iconix Brand
Group, Inc. after the effect of accretion of
redeemable non-controlling interest for
basic earnings (loss) per share
|
|
$
|
1,271
|
|
|
$
|
(79,429
|
)
|
|
$
|
19,216
|
|
|
$
|
(51,670
|
)
|
For earnings (loss) per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Iconix Brand
Group, Inc.
|
|
$
|
1,271
|
|
|
$
|
(79,429
|
)
|
|
$
|
19,216
|
|
|
$
|
(51,670
|
)
|
Effect of potential conversion of 5.75%
Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,762
|
)
|
|
|
—
|
|
Net income attributable to Iconix Brand
Group, Inc. after the effect of potential
conversion of 5.75% Convertible Notes
for diluted earnings (loss) per share
|
|
$
|
1,271
|
|
|
$
|
(79,429
|
)
|
|
$
|
3,454
|
|
|
$
|
(51,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
(12.04
|
)
|
|
$
|
2.04
|
|
|
$
|
(8.26
|
)
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
(12.04
|
)
|
|
$
|
0.08
|
|
|
$
|
(8.26
|
)
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,377
|
|
|
|
6,598
|
|
|
|
9,426
|
|
|
|
6,257
|
|
Diluted
|
|
|
10,377
|
|
|
|
6,598
|
|
|
|
44,779
|
|
|
|
6,257
|
|
11. Contingencies
In May 2016, Supply Company, LLC, (“Supply”), a former licensee of the Ed Hardy trademark, commenced the action against the Company and its affiliate, Hardy Way, LLC, (“Hardy Way”, and, together with the Company, the “Iconix Defendants”) seeking damages of $50 million, including punitive damages, attorneys’ fees and costs. Supply alleges that Hardy Way breached the parties’
27
license agreement by failing to reimburse Supply for markdown reimburseme
nt requests that Supply received from a certain retailer. Supply also alleges that the Company is liable for fraud because it made purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark in order to induce Supply
to enter into the license agreement and to induce Supply to enter into a separate agreement with a certain retailer. The Iconix Defendants are vigorously defending against the claims, and have filed a motion to dismiss the Complaint, which is awaiting Co
urt decision. At this time, the Company is unable to estimate the ultimate outcome of this matter.
Two shareholder derivative complaints captioned James v. Cuneo et al, Docket No. 1:16-cv-02212 and Ruthazer v. Cuneo et al, Docket No. 1:16-cv-04208 have been consolidated in the United States District Court for the Southern District of New York, and three shareholder derivative complaints captioned De Filippis v. Cuneo et al. Index No. 650711/2016, Gold v. Cole et al, Index No. 53724/2016 and Rosenfeld v. Cuneo et al., Index No. 510427/2016 have been consolidated in the Supreme Court of the State of New York, New York County. The complaints name the Company as a nominal defendant and assert claims for breach of fiduciary duty, insider trading and unjust enrichment against certain of the Company's current and former directors and officers arising out of the Company's restatement of financial reports and certain employee departures. At this time, the Company is unable to estimate the ultimate outcome of these matters.
The Company continues to cooperate in the previously disclosed SEC and Southern District of New York (“SDNY”) investigations.
Three securities class actions have been consolidated in the United States District Court for the Southern District of New York, under the caption In re Iconix Brand Group, Inc., et al., Docket No. 1:15-cv-4860, against the Company and certain former officers and one current officer (the “Class Action”). The plaintiffs in the Class Action purport to represent a class of purchasers of the Company’s securities from February 22, 2012 to November 5, 2015, inclusive, and claim that the Company and individual defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, by making allegedly false and misleading statements regarding certain aspects of the Company’s business operations and prospects. On October 25, 2017, the Court granted the motion to dismiss the consolidated amended complaint filed by the Company and the individual defendants with leave to amend. On November 14, 2017, the plaintiffs filed a second consolidated amended complaint. On February 2, 2018, the defendants moved to dismiss the second consolidated amended complaint. The Company and the individual defendants intend to vigorously defend against such claims. At this time, the Company is unable to estimate the ultimate outcome of these matters, but has recorded a preliminary estimate of a settlement, which the Company believes will fully be covered by insurance.
From time to time, the Company is also made a party to litigation incurred in the normal course of business. In addition, in connection with litigation commenced against licensees for non-payment of royalties, certain licensees have asserted unsubstantiated counterclaims against the Company. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not, individually or in the aggregate, have a material effect on the Company’s financial position or future liquidity.
28
1
2
. Related Party Transactions
The Company has entered into certain license agreements in which the core licensee is also one of our joint venture partners. In the case of Sports Direct International plc (“Sports Direct”), the Company maintains license agreements with Sports Direct, but in addition, during the Prior Year Six Months, the Company entered into a cooperation agreement with Sports Direct that allowed Sports Direct to appoint two members to the Company’s Board of Directors. For the Current Quarter, Prior Year Quarter, Current Six Months, and Prior Year Six Months, the Company recognized the following royalty revenue amounts:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Joint Venture Partner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Brands Group Asia Limited
(1)
|
|
$
|
—
|
|
|
$
|
6,138
|
|
|
$
|
—
|
|
|
$
|
11,767
|
|
Rise Partners, LLC / Top On International
Group Limited
|
|
|
—
|
|
|
|
242
|
|
|
|
—
|
|
|
|
483
|
|
M.G.S. Sports Trading Limited
|
|
|
103
|
|
|
|
182
|
|
|
|
218
|
|
|
|
336
|
|
Pac Brands USA, Inc.
|
|
|
79
|
|
|
|
23
|
|
|
|
108
|
|
|
|
124
|
|
Albion Equity Partners LLC / GL Damek
|
|
|
568
|
|
|
|
633
|
|
|
|
1,162
|
|
|
|
1,218
|
|
Anthony L&S
|
|
|
—
|
|
|
|
600
|
|
|
|
—
|
|
|
|
617
|
|
MHMC
|
|
|
—
|
|
|
|
732
|
|
|
|
7
|
|
|
|
1,463
|
|
Sports Direct International plc
|
|
|
448
|
|
|
|
—
|
|
|
|
574
|
|
|
|
—
|
|
|
|
$
|
1,198
|
|
|
$
|
8,550
|
|
|
$
|
2,069
|
|
|
$
|
16,008
|
|
(1)
|
Prior to 2019, Global Brand Group Asia Limited maintained the Buffalo and Zoo York license agreements. However, in October 2018, Centric Brands Inc. acquired a significant portion of Global Brands Group Asia Limited’s North American licensing business. The Company’s license agreement for the Buffalo and Zoo York brands in the United States are now maintained with Centric Brands Inc. which is not a related party or affiliated entity to the Company.
|
13. Income Taxes
The Company computes its expected annual effective income tax rate in accordance with ASC 740 and makes changes on a quarterly basis, as necessary, based on certain factors such as changes in forecasted annual pre-tax income; changes to actual or forecasted permanent book to tax differences; impacts from tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are unusual and non-recurring in nature and treats these as discrete events. The tax effect of discrete items is recorded in the quarter in which the discrete events occur. Due to the volatility of these factors, the Company's consolidated effective income tax rate can change significantly on a quarterly basis.
With the exception of the Buffalo brand joint venture, Iconix Middle East joint venture, Diamond Icon joint venture and Umbro China joint venture, the Company is not responsible for the income taxes related to the non-controlling interest’s share of the joint venture’s earnings. Therefore, the tax liability associated with the non-controlling interest share of the joint venture’s earnings is not reported in the Company’s income tax expense, despite the joint venture’s entire income being consolidated in the Company’s reported income before income tax expense. As such, the joint venture’s earnings have the effect of lowering our effective tax rate. This effect is more pronounced in periods in which joint venture earnings are higher relative to our other earnings. Since the Buffalo brand joint venture is a taxable entity in Canada, the Iconix Middle East joint venture and Diamond Icon joint venture are taxable entities in the United Kingdom, the Company is required to report its tax liability, including taxes attributable to the non-controlling interest, in its statement of operations. All other consolidated joint ventures are partnerships and treated as pass-through entities not subject to taxation in their local tax jurisdiction, and therefore the Company includes only the tax attributable to its proportionate share of income from the joint venture in income tax expense.
The Company files income tax returns in the U.S. federal and various state and local jurisdictions. For federal income tax purposes, during the fourth quarter of 2016, the Internal Revenue Service initiated an audit of the 2014 federal tax return which is ongoing. The Company also files returns in numerous foreign jurisdictions that have varied years remaining open for examination, but generally the statute of limitations is three to four years from when the return is filed.
29
In assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some or all of the recorded deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income in the periods in which those temporary differences b
ecome deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these items and the consecutive years of pretax losses (resulting
from impairment), management determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance for all taxing jurisdictions as of December 31, 2018. In
addition, the Company continues to have deferred tax liabilities related to indefinite lived intangibles on the condensed consolidated balance sheet a portion of which cannot be considered to be a source of taxable income to offset deferred tax assets.
The Company’s consolidated effective tax rate for the Current Quarter was -4% which resulted in a $0.1 million income tax benefit as compared to the consolidated effective tax rate for the Prior Year Quarter of 4% which resulted in a $2.8 million income tax benefit.
The decrease in the effective tax rate was due to trademark impairment recorded in the Prior Year Quarter, for which the Company recognized a tax benefit against a pretax loss.
The Company’s consolidated effective tax rate for Current Six Months was 7% which resulted in a $1.8 million income tax provision as compared to the consolidated effective tax rate for the Prior Year Six Months of 3% which resulted in a $1.2 million income tax benefit.
The increase in tax expense is due to trademark impairment recorded in the Prior Year Six Months, for which the Company recognized a tax benefit.
Management has not recorded a tax provision for current ongoing tax examinations; however, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
The Company has net operating loss (“NOL”) carryforwards for federal and state income tax purposes which, generally, can be used to reduce future taxable income. Use of the NOL carryforwards is limited under Section 382 of the Internal Revenue Code, as we have had a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Internal Revenue Code. These complex changes of ownership rules generally focus on ownership changes involving shareholders owning directly or indirectly 5% or more of our stock, including certain public “groups” of shareholders as set forth under Section 382 of the Internal Revenue Code, including those arising from new stock issuances and other equity transactions. Some of these NOL carryforwards will expire if they are not used within certain periods. At this time, we consider it more likely than not that we will not have sufficient taxable income in the future that will allow us to realize these NOL carryforwards.
14. Accumulated Other Comprehensive Income
The following table sets forth the activity in accumulated other comprehensive income for the Current Six Months and Prior Year Six Months:
|
|
Foreign currency
translation
adjustments
|
|
|
Unrealized
losses of
available for
sale securities
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
(53,068
|
)
|
|
$
|
—
|
|
|
$
|
(53,068
|
)
|
Changes before reclassifications
|
|
|
(603
|
)
|
|
|
—
|
|
|
|
(603
|
)
|
Current period other comprehensive income
|
|
|
(603
|
)
|
|
|
—
|
|
|
|
(603
|
)
|
Balance at June 30, 2019
|
|
$
|
(53,671
|
)
|
|
$
|
—
|
|
|
$
|
(53,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustments
|
|
|
Unrealized
losses of
available for
sale securities
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
(48,103
|
)
|
|
$
|
(3,177
|
)
|
|
$
|
(51,280
|
)
|
Changes before reclassifications
|
|
|
(2,780
|
)
|
|
|
—
|
|
|
|
(2,780
|
)
|
Cumulative adjustment for adoption of ASU 2016-01
|
|
|
—
|
|
|
|
3,177
|
|
|
|
3,177
|
|
Current period other comprehensive income
|
|
|
(2,780
|
)
|
|
|
3,177
|
|
|
|
397
|
|
Balance at June 30, 2018
|
|
$
|
(50,883
|
)
|
|
$
|
—
|
|
|
$
|
(50,883
|
)
|
30
1
5
. Segment and Geographic Data
The Company identifies its operating segments for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer, the Company’s chief operating decision maker, in deciding how to allocate resources and in assessing performance. The Company has disclosed the following operating segments: men’s, women’s, home, and international. Since the Company does not track, manage and analyze its assets by segments, no disclosure of segmented assets is reported.
The geographic regions consist of the United States and Other (which principally represent Latin America and Europe). Revenues attributable to each region are based on the location in which licensees are located and where they principally do business.
Reportable data for the Company’s operating segments is as follows:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Licensing revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women's
|
|
$
|
8,171
|
|
|
$
|
16,871
|
|
|
$
|
16,538
|
|
|
$
|
33,469
|
|
Men's
|
|
|
6,614
|
|
|
|
10,526
|
|
|
|
17,550
|
|
|
|
20,470
|
|
Home
|
|
|
4,285
|
|
|
|
6,961
|
|
|
|
7,775
|
|
|
|
13,473
|
|
International
|
|
|
15,324
|
|
|
|
15,854
|
|
|
|
28,473
|
|
|
|
31,349
|
|
|
|
$
|
34,394
|
|
|
$
|
50,212
|
|
|
$
|
70,336
|
|
|
$
|
98,761
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women's
|
|
$
|
8,622
|
|
|
$
|
(95,694
|
)
|
|
$
|
16,249
|
|
|
$
|
(81,066
|
)
|
Men's
|
|
|
4,952
|
|
|
|
664
|
|
|
|
12,498
|
|
|
|
6,538
|
|
Home
|
|
|
3,782
|
|
|
|
6,589
|
|
|
|
6,787
|
|
|
|
12,332
|
|
International
|
|
|
10,766
|
|
|
|
8,082
|
|
|
|
19,189
|
|
|
|
14,569
|
|
Corporate
|
|
|
(9,550
|
)
|
|
|
(14,227
|
)
|
|
|
(17,752
|
)
|
|
|
(31,423
|
)
|
|
|
$
|
18,572
|
|
|
$
|
(94,586
|
)
|
|
$
|
36,971
|
|
|
$
|
(79,050
|
)
|
16. Other Assets - Current and Long-Term
Other Assets - Current
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Other assets - current consisted of the following:
|
|
|
|
|
|
|
|
|
US federal tax receivables
|
|
$
|
15,855
|
|
|
$
|
16,757
|
|
Insurance receivable
(1)
|
|
|
12,876
|
|
|
|
—
|
|
Prepaid advertising
|
|
|
914
|
|
|
|
1,100
|
|
Prepaid expenses
|
|
|
1,643
|
|
|
|
2,451
|
|
Prepaid taxes
|
|
|
6,171
|
|
|
|
1,755
|
|
Prepaid insurance
|
|
|
822
|
|
|
|
1,446
|
|
Due from related parties
|
|
|
3,885
|
|
|
|
3,903
|
|
Other current assets
|
|
|
634
|
|
|
|
645
|
|
Other current assets
|
|
$
|
42,800
|
|
|
$
|
28,057
|
|
(1)
|
During the Current Quarter, the Company recorded an asset of approximately $12.9 million related to insurance claims that the Company believes are probable of recovery from various insurance carriers. These claims pertain to expenses incurred related to certain litigation claims against the Company and related expenses that are discussed throughout Note 11.
|
31
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Other noncurrent assets consisted of the following:
|
|
|
|
|
|
|
|
|
Prepaid interest
|
|
$
|
5,148
|
|
|
$
|
5,496
|
|
Deposits
|
|
|
482
|
|
|
|
482
|
|
Other noncurrent assets
|
|
|
4
|
|
|
|
1
|
|
Other noncurrent assets
|
|
$
|
5,634
|
|
|
$
|
5,979
|
|
17. Leases
The Company is a lessee in several noncancelable operating leases, primarily for its corporate office, additional office space and certain office equipment. Beginning January 1, 2019, the Company accounts for leases in accordance with ASC Topic 842,
Leases
. Refer to Note 20. The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right of use (ROU) asset and a lease liability at the lease commencement date.
For operating leases, the ROU asset is initially measured at the initial measurement amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the lease incentive received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense is recognized on a straight-line basis over the lease term.
Variable lease payments associated with the Company’s leases are recognized in the period in which the obligation for those payments is incurred. Variable lease payments are presented as operating expense in the Company’s condensed consolidated statement of operations in the same line item as expense arising from fixed lease payments.
Operating lease ROU assets are presented as operating lease right of use assets within non-current assets on the consolidated balance sheet. The current portion of operating lease liabilities is included in other current liabilities and the long-term portion is included in other liabilities on the consolidated balance sheet.
The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases of office space and office equipment as an expense on a straight-line basis over the lease term. The Company’s leases may include nonlease components such as common area maintenance. The Company has elected the practical expedient to account for the lease and nonlease components as a single lease component, therefore, for all of our operating leases, the lease payments used to measure the lease liability include all of the fixed consideration in the contract.
The Company’s operating leases expire over the next five years. The Company’s operating leases may contain renewal options however, because the Company is not reasonably certain to exercise these renewal options, the options are not included in the lease term and associated potential option payments are excluded from lease payments. Payments due under the lease contracts include fixed payments and in certain of the Company’s leases, variable payments. Variable lease payments consist of the Company’s proportionate share of the building’s property taxes, insurance, electricity and other common area maintenance costs.
For the Current Quarter and Current Six Months, components of lease cost were as follows:
|
|
For the Three Months
Ended June 30, 2019
|
|
|
For the Six Months
Ended June 30, 2019
|
|
Operating lease cost
|
|
$
|
552
|
|
|
$
|
1,101
|
|
Short-term lease cost
|
|
|
70
|
|
|
|
197
|
|
Variable lease cost
|
|
|
52
|
|
|
|
211
|
|
|
|
$
|
674
|
|
|
$
|
1,509
|
|
For the Prior Year Quarter and Prior Year Six Months, minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Rental expense for operating leases during the Prior Year Quarter and Prior Year Six Months amounted to $1.1 million and $2.0 million, respectively.
32
As of
June 30, 2019
, the operating lease
ROU
assets and operating lease liabilities were
$7.4
million and
$9.6
million, respectively.
For the Current Six Months, cash paid for lease liabilities for operating leases was $0.6 million. Additionally, for the Current Six Months, the Company obtained a ROU asset of $0.1 million exchanged for operating lease obligations of $0.1 million. There were no ROU assets exchanged and no operating lease obligations assumed during the Current Quarter. In the Current Six Months, there were no reductions to ROU assets resulting from reductions to lease obligations.
Because we generally do not have access to the rate implicit in the lease, the Company utilizes our incremental borrowing rate as the discount rate. As of June 30, 2019, the weighted average remaining operating lease term is 4.66 years and the weighted average discount rate for the operating leases is 8.61%.
Maturities of lease liabilities under non-cancellable leases as of June 30, 2019 are as follows:
|
|
Operating Leases
|
|
Remainder of 2019
|
|
$
|
1,254
|
|
2020
|
|
|
2,590
|
|
2021
|
|
|
2,447
|
|
2022
|
|
|
2,164
|
|
2023
|
|
|
2,109
|
|
Thereafter
|
|
|
1,078
|
|
Total undiscounted lease payments
|
|
$
|
11,642
|
|
Less: Imputed interest
|
|
|
2,037
|
|
Total lease liabilities
|
|
$
|
9,605
|
|
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancellable leases were as follows:
|
|
Operating Leases
|
|
2019
|
|
|
2,650
|
|
2020
|
|
|
2,726
|
|
2021
|
|
|
2,583
|
|
2022
|
|
|
2,191
|
|
2023
|
|
|
2,109
|
|
Thereafter
|
|
|
1,078
|
|
|
|
$
|
13,337
|
|
18. Other Liabilities – Current
As of June 30, 2019, other current liabilities of $12.8 million relates to amounts due to certain joint ventures that are not consolidated with the Company as well as the current portion of the lease liabilities (refer to Note 17 for further details) as compared to $9.8 million as of December 31, 2018 which relates solely to amounts due to certain joint ventures that are not consolidated with the Company.
19. Foreign Currency Translation
The functional currency of Iconix Luxembourg and Red Diamond Holdings, which are wholly owned subsidiaries of the Company located in Luxembourg, is the Euro. However, the companies have certain dollar denominated assets, in particular cash and notes receivable, that are maintained in U.S. Dollars, which are required to be revalued each quarter. Due to fluctuations in currency in the Current Quarter and the Prior Year Quarter, the Company recorded a $0.3 million currency translation gain and a $0.7 million currency translation loss, respectively, that is included in the condensed consolidated statement of operations. Due to fluctuations in currency in the Current Six Months and the Prior Year Six Months, the Company recorded a $0.4 million currency translation loss and a $0.2 million currency translation loss, respectively, that is included in the condensed consolidated statement of operations.
33
Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income as such amounts are recorded direct
ly as an adjustment to stockholders’ equity. The Company’s comprehensive income is primarily comprised of net income and foreign currency translation gain or loss. During the
Current Quarter
and the
Prior Year Quarter
, the Company recognized as a component
of its comprehensive income, a foreign currency translation
gain
of
$1.1
million and foreign currency translation
loss
of
$5.5
million, respectively, due to changes in foreign exchange rates during the
Current Quarter
and the
Prior Year Quarter
,
respectively.
During the Current Six Months and the Prior Year Six Months, the Company recognized as a component of its comprehensive income, a foreign currency translation loss of
$0.6
million and foreign currency translation
loss
of
$2.8
million, respec
tively, due to changes in foreign exchange rates during the Current Six Months and the Prior Year Six Months, respectively.
20. Accounting Pronouncements
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
Additionally, FASB issued ASU No. 2018-11,
Targeted Improvements,
which allows companies to adopt Topic 842 without revising comparative period reporting or disclosures. ASU 2016-02 and ASU 2018-11 are effective for the Company and t
he Company adopted the new standard on January 1, 2019. The Company adopted ASU 2016-02 using the optional transition approach as of the effective date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (ie. January 1, 2019). The Company has elected to adopt the package of transition practical expedients and therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification of existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date.
The adoption of ASU 2016-02 had a material impact to the Company’s condensed consolidated balance sheet, but did not materially impact the consolidated statement of operations. The most significant changes to the condensed consolidated balance sheet relate to the recognition of new ROU assets and lease liabilities for operating leases. The adoption of ASU 2016-02 also had no material impact on operating, investing or financing cash flows in the consolidated statement of cash flows. See Note 17 for further details.
As a result of adopting ASU 2016-02, the Company recognized operating lease liabilities of $10.4 million (of which $1.7 million was current and $8.7 million was noncurrent) with corresponding ROU assets of $8.0 million as of January 1, 2019.
I
n February 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The ASU is effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. This ASU should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will adopt this accounting guidance in future periods.
21. Other Matters
During the Current Quarter and the Prior Year Quarter, the Company included in its selling, general and administrative expenses approximately $3.2 million and $2.7 million, respectively, of charges related to professional fees associated with the continuing correspondence with the Staff of the SEC, the SEC and related SDNY investigations and the class action and derivative litigations. During the Current Six Months and the Prior Year Six Months, the Company included in its selling, general and administrative expenses approximately $6.0 million and $5.4 million, respectively, of charges related to professional fees associated with the continuing correspondence with the Staff of the SEC, the SEC and related SDNY investigations and the class action and derivative litigations.
22. Subsequent Events
In July 2019, pursuant to the operating agreement, the Company reacquired the remaining 5% ownership interest in Umbro China from MHMC, its joint venture partner, for approximately $1.3 million in cash. As a result of this transaction, the Company maintains 100% ownership interest in Umbro China.
34
As previously disclosed, o
n July 8, 2019, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market notifying the Company that the minimum bid price per share for its common stock
fell below $1.00 for a period of 30 consecutive business days (from May 23, 2019 to July 5, 2019) and that therefore the Company did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules.
The letter also states that pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company will be provided 180 calendar days, or until January 6, 2020, to regain compliance with the minimum bid price requirement. In accordance with Rule 5810(c)(3)(A), the Company can regain compliance with the minimum bid price requirement, if, at any time during such 180-day period, the closing bid price of the Company’s common stock is at least $1.00 for a minimum period of 10 consecutive business days. If by January 6, 2020, the Company does not regain compliance with the Nasdaq Listing Rules, the Company may be eligible for additional time to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(ii). To qualify, the Company would need to submit a Transfer Application and a $5,000 application fee. In addition, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the minimum bid price requirement. In addition, the Company would need to provide written notice to Nasdaq of its intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. As part of its review process, the Nasdaq staff will make a determination of whether it believes the Company will be able to cure this deficiency. Should the Nasdaq staff conclude that the Company will not be able to cure the deficiency, or should the Company determine not to submit a Transfer Application or make the required representation, Nasdaq will provide notice that the Company’s shares of common stock will be subject to delisting.
If the Company does not regain compliance within the allotted compliance period(s), including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company’s shares of common stock will be subject to delisting. At such time, the Company may appeal the delisting determination to a Hearings Panel.
The Company intends to monitor its closing bid price for its common stock between now and January 6, 2020, and will consider available options to resolve the Company’s noncompliance with the minimum bid price requirement, as may be necessary. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.
35