20180630 10Q Q2



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 



 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



 

For the quarterly period ended June  30, 2018



or





 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



 

For the transition period from __________________ to ______________________.

 

Commission File Number 001-37656

 

SEQUENTIAL BRANDS GROUP, INC.

(Exact name of registrant as specified in its charter)

 



 

 

Delaware

 

47-4452789

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer Identification No.)

organization)

 

 

 

601 West 26th Street, 9th Floor
New York, New York 10001

(Address of principal executive offices) (Zip Code)

 

(646) 564-2577

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer

 

Non-accelerated filer (Do not check if a smaller reporting company)   Smaller reporting company Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of August 2, 2018, the registrant had 64,125,747 shares of common stock, par value $0.01 per share, outstanding.

 

 


 

 

 





 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

 



 

 

 

 

Page

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40 

 

 

 

Item 4.

Controls and Procedures

41 

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

41 

 

 

 

Item 1A.

Risk Factors

41 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42 

 

 

 

Item 6.

Exhibits

43 





 

 

2

 


 

 



Forward-Looking Statements

 

This quarterly report on Form 10-Q (this “Quarterly Report”), including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We use words such as “future,” “seek,” “could,” “can,” “predict,” “believe,” “intend,” “expect,” “anticipate,” “plan,” “may,” “will,” “should,” “estimate,” “potential,” “project” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events.  You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements.  Such risks and uncertainties include, but are not limited to the following: (i) risks and uncertainties discussed in the reports that the Company has filed with the Securities and Exchange Commission (the “SEC”); (ii) general economic, market or business conditions; (iii) the Company’s ability to identify suitable targets for acquisitions and to obtain financing for such acquisitions on commercially reasonable terms; (iv) the Company’s ability to timely achieve the anticipated results of recent acquisitions and any potential future acquisitions; (v) the Company’s ability to successfully integrate acquisitions into its ongoing business; (vi) the potential impact of the consummation of recent acquisitions or any potential future acquisitions on the Company’s relationships, including with employees, licensees, customers and competitors; (vii) the Company’s ability to achieve and/or manage growth and to meet target metrics associated with such growth; (viii) the Company’s ability to successfully attract new brands and to identify suitable licensees for its existing and newly acquired brands; (ix) the Company’s substantial level of indebtedness, including the possibility that such indebtedness and related restrictive covenants may adversely affect the Company’s future cash flows, results of operations and financial condition and decrease its operating flexibility; (x) the Company’s ability to achieve its guidance; (xi) continued market acceptance of the Company’s brands; (xii) changes in the Company’s competitive position or competitive actions by other companies; (xiii) licensees’ ability to fulfill their financial obligations to the Company; (xiv) concentrations of the Company’s licensing revenues with a limited number of licensees and retail partners; and (xv) other circumstances beyond the Company’s control.

 

Forward-looking statements speak only as of the date they are made and are based on current expectation and assumptions.  You should not put undue reliance on any forward-looking statement.  We are not under any obligation, and we expressly disclaim any obligation, to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws.  If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to such or other forward-looking statements.



Where You Can Find Other Information

 

Our corporate website address is www.sequentialbrandsgroup.com.  The information contained on our website is not part of this Quarterly Report.  We file our annual, quarterly and current reports and other information with the SEC.  These reports, and any amendments to these reports, are made available on our website and can be viewed and downloaded free of charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC.  The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549.  The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, which is available at www.sec.gov.



Unless otherwise noted, references in this Quarterly Report to the “Sequential Brands Group,” “Company,” “our Company,” “we,” “us,” “our” or similar pronouns refer to Sequential Brands Group, Inc. and its subsidiaries.  References to other companies may include their trademarks, which are the property of their respective owners.



 

3

 


 

 



PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)





 

 

 

 

 

 



 

 

June 30,

 

 

December 31,



 

 

2018

 

 

2017



 

 

(Unaudited)

 

 

(Note 2)

Assets

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$

13,607 

 

$

18,902 

Restricted cash

 

 

2,033 

 

 

1,531 

Accounts receivable, net

 

 

61,738 

 

 

60,102 

Prepaid expenses and other current assets

 

 

12,717 

 

 

8,635 

Total current assets

 

 

90,095 

 

 

89,170 



 

 

 

 

 

 

Property and equipment, net

 

 

9,892 

 

 

7,035 

Intangible assets, net

 

 

983,393 

 

 

995,170 

Other assets

 

 

6,757 

 

 

5,836 

Total assets

 

$

1,090,137 

 

$

1,097,211 



 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

13,264 

 

$

19,126 

Current portion of long-term debt

 

 

28,300 

 

 

28,300 

Current portion of deferred revenue

 

 

12,603 

 

 

8,102 

Total current liabilities

 

 

54,167 

 

 

55,528 



 

 

 

 

 

 

Long-term debt, net of current portion

 

 

589,430 

 

 

602,297 

Long-term deferred revenue, net of current portion

 

 

10,035 

 

 

11,845 

Deferred income taxes

 

 

69,746 

 

 

67,799 

Other long-term liabilities

 

 

9,712 

 

 

6,204 

Total liabilities

 

 

733,090 

 

 

743,673 



 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 



 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Preferred stock Series A, $0.01 par value; 10,000,000 shares authorized; none issued and
outstanding at June 30, 2018 and December 31, 2017

 

 

 -

 

 

 -

Common stock, $0.01 par value; 150,000,000 shares authorized; 65,369,906 and 63,652,721 shares issued at June 30, 2018 and December 31, 2017, respectively, and 63,915,385 and 63,227,727 shares outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

651 

 

 

635 

Additional paid-in capital

 

 

512,043 

 

 

508,444 

Accumulated other comprehensive income

 

 

293 

 

 

80 

Accumulated deficit

 

 

(222,916)

 

 

(225,369)

Treasury stock, at cost; 1,454,521 and 424,994 shares at June 30, 2018 and December 31,
2017, respectively

 

 

(3,801)

 

 

(1,799)

Total Sequential Brands Group, Inc. and Subsidiaries stockholders’ equity

 

 

286,270 

 

 

281,991 

Noncontrolling interests

 

 

70,777 

 

 

71,547 

Total equity

 

 

357,047 

 

 

353,538 

Total liabilities and equity

 

$

1,090,137 

 

$

1,097,211 



















See Notes to Condensed Consolidated Financial Statements.

 

4


 

 





SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

42,207 

 

$

42,144 

 

$

80,311 

 

$

81,544 

Operating expenses

 

 

18,449 

 

 

17,900 

 

 

36,499 

 

 

41,308 

Loss on sale of assets

 

 

1,975 

 

 

 -

 

 

7,117 

 

 

 -

Income from operations

 

 

21,783 

 

 

24,244 

 

 

36,695 

 

 

40,236 

Other expense (income)

 

 

31 

 

 

1,801 

 

 

(104)

 

 

1,767 

Interest expense, net

 

 

15,647 

 

 

14,877 

 

 

31,039 

 

 

29,363 

Income before income taxes

 

 

6,105 

 

 

7,566 

 

 

5,760 

 

 

9,106 

Provision for income taxes

 

 

1,416 

 

 

3,115 

 

 

1,375 

 

 

3,700 

Net income

 

 

4,689 

 

 

4,451 

 

 

4,385 

 

 

5,406 

Net income attributable to noncontrolling interests

 

 

(1,102)

 

 

(1,921)

 

 

(3,062)

 

 

(4,056)

Net income attributable to Sequential Brands Group, Inc. and Subsidiaries

 

$

3,587 

 

$

2,530 

 

$

1,323 

 

$

1,350 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Sequential Brands Group, Inc. and Subsidiaries:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06 

 

$

0.04 

 

$

0.02 

 

$

0.02 

Diluted

 

$

0.06 

 

$

0.04 

 

$

0.02 

 

$

0.02 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

63,583,280 

 

 

62,925,565 

 

 

63,408,679 

 

 

62,693,925 

Diluted

 

 

64,029,972 

 

 

62,980,508 

 

 

64,329,308 

 

 

62,911,394 





















 

See Notes to Condensed Consolidated Financial Statements.

 

5


 

 



SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands, except share data)

 

 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Preferred
Stock

 

Common
Stock

 

 

Additional Paid-in

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

Treasury
Stock

 

 

Total Sequential Brands Group, Inc. and Subsidiaries Stockholders'

 

 

Noncontrolling

 

 

Total



 

Shares

 

 

Amount

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

Shares

 

 

Amount

 

 

Equity

 

 

Interests

 

 

Equity

Balance at January 1, 2018

 

 -

 

$

 -

 

63,652,721 

 

$

635 

 

$

508,444 

 

$

80 

 

$

(225,369)

 

(424,994)

 

$

(1,799)

 

$

281,991 

 

$

71,547 

 

$

353,538 

Cumulative effect of revenue recognition accounting change

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,130 

 

 -

 

 

 -

 

 

1,130 

 

 

355 

 

 

1,485 

Stock-based compensation

 

 -

 

 

 -

 

1,717,185 

 

 

16 

 

 

3,599 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

3,615 

 

 

 -

 

 

3,615 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(228)

 

 

 -

 

 -

 

 

 -

 

 

(228)

 

 

 -

 

 

(228)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate cap

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

441 

 

 

 -

 

 -

 

 

 -

 

 

441 

 

 

 -

 

 

441 

Repurchase of common stock

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(1,029,527)

 

 

(2,002)

 

 

(2,002)

 

 

 -

 

 

(2,002)

Noncontrolling interest distributions

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(4,187)

 

 

(4,187)

Net income attributable to noncontrolling interests

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

3,062 

 

 

3,062 

Net income attributable to common stockholders

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,323 

 

 -

 

 

 -

 

 

1,323 

 

 

 -

 

 

1,323 

Balance at June 30, 2018

 

 -

 

$

 -

 

65,369,906 

 

$

651 

 

$

512,043 

 

$

293 

 

$

(222,916)

 

(1,454,521)

 

$

(3,801)

 

$

286,270 

 

$

70,777 

 

$

357,047 















 

See Notes to Condensed Consolidated Financial Statements.

 

6


 

 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)





  



 

 

 

 

 

 



 

Six Months Ended June 30,



 

2018

 

2017



 

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

 

Net income

 

$

4,385 

 

$

5,406 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Provision for bad debts

 

 

 -

 

 

121 

Depreciation and amortization

 

 

1,628 

 

 

2,415 

Stock-based compensation

 

 

3,615 

 

 

5,020 

Amortization of deferred financing costs

 

 

1,889 

 

 

1,974 

Income from equity method investment

 

 

 -

 

 

(31)

Loss on disposal of property and equipment

 

 

 -

 

 

Realized loss on sale of available-for-sale securities

 

 

 -

 

 

1,916 

Loss on sale of assets

 

 

7,117 

 

 

 -

Deferred income taxes

 

 

1,484 

 

 

3,610 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

4,699 

 

 

3,843 

Prepaid expenses and other assets

 

 

(4,790)

 

 

(167)

Accounts payable and accrued expenses

 

 

(6,240)

 

 

(4,569)

Deferred revenue

 

 

(1,696)

 

 

(4,267)

Other liabilities

 

 

4,633 

 

 

768 

Cash Provided By Operating Activities

 

 

16,724 

 

 

16,041 



 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

 

Investments in intangible assets, including registration and renewal costs

 

 

(143)

 

 

(215)

Proceeds from sale of available-for-sale securities

 

 

 -

 

 

5,757 

Purchases of property and equipment

 

 

(3,735)

 

 

(239)

Proceeds from sale of property and equipment

 

 

 -

 

 

Proceeds from sale of trademarks

 

 

4,356 

 

 

 -

Cash Provided By Investing Activities

 

 

478 

 

 

5,305 



 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

 

Stock registration costs

 

 

 -

 

 

(20)

Payment of long-term debt

 

 

(14,756)

 

 

(14,150)

Guaranteed payments in connection with acquisitions

 

 

(1,050)

 

 

(1,300)

Repurchases of common stock

 

 

(2,002)

 

 

(1,064)

Noncontrolling interest distributions

 

 

(4,187)

 

 

(4,211)

Cash Used In Financing Activities

 

 

(21,995)

 

 

(20,745)



 

 

 

 

 

 

Cash and Restricted Cash:

 

 

 

 

 

 

Net (Decrease) Increase In Cash and Restricted Cash

 

 

(4,793)

 

 

601 

Balance — Beginning of period

 

 

20,433 

 

 

20,654 

Balance — End of period

 

$

15,640 

 

$

21,255 



 

 

 

 

 

 

Supplemental Disclosures Of Cash Flow Information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

29,566 

 

$

27,281 

Taxes

 

$

 -

 

$

90 



 

 

 

 

 

 

Non-cash Investing And Financing Activities

 

 

 

 

 

 

Accrued purchases of property and equipment at period end

 

$

303 

 

$

593 

Unrealized loss on available-for-sale securities during the period

 

$

228 

 

$

 -

Unrealized gain (loss) on interest rate cap, net during the period

 

$

441 

 

$

(411)

 





 

See Notes to Condensed Consolidated Financial Statements.

 

7


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 









 

 

 

1.

Organization and Nature of Operations

 

Overview

 

Sequential Brands Group, Inc. (the “Company”) owns a portfolio of consumer brands in the fashion, active and home categories.  The Company aims to maximize the strategic value of its brands by promoting, marketing and licensing its global brands through various distribution channels, including to retailers, wholesalers and distributors in the United States and in certain international territories.  The Company’s core strategy is to enhance and monetize the global reach of its existing brands, and to pursue additional strategic acquisitions to grow the scope of and diversify its portfolio of brands.  The Company licenses brands to both wholesale and direct-to-retail licensees.  In a wholesale license, a wholesale supplier is granted rights (typically on an exclusive basis) to a single or small group of related product categories for a particular brand for sale to multiple accounts within an approved channel of distribution and territory.  In a direct-to-retail license, a single retailer is granted the right (typically on an exclusive basis) to sell branded products in a broad range of product categories through its brick and mortar stores and e-commerce sites.  As of June  30, 2018, the Company had more than one-hundred twenty-five licensees, with wholesale licensees comprising a significant majority.







 

 

 

2.

Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”).  Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting.  Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations or cash flows.  It is the Company’s opinion, however, that the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 16, 2018, which contains the audited consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the years ended December 31, 2017, 2016 and 2015.  The financial information as of December 31, 2017 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The interim results for the six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any future interim periods.



Reclassification of Prior Year Presentation



On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which changes the presentation of restricted cash on the statement of cash flows.  ASU 2016-18 requires an entity to show the changes in total cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. 



As a result of the adoption of ASU 2016-18, the Company no longer shows the changes in restricted cash on the statement of cash flows and reconciles to the total cash and restricted cash balance, which are presented separately on the condensed consolidated balance sheets.



Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.

 

 

8


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

Use of Estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.



Making estimates requires management to exercise significant judgment.  It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited condensed consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events.  Accordingly, the actual results could differ significantly from estimates.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), which became effective for the Company as of January 1, 2018 (See Note 4 for impact of adoption and other related disclosures).   ASC 606 requires a five-step approach to determine the appropriate method of revenue recognition for each contractual arrangement:



Step 1: Identify the Contract(s) with a Customer 

Step 2: Identify the Performance Obligation(s) in the Contract 

Step 3: Determine the Transaction Price 

Step 4: Allocate the Transaction Price to the Performance Obligation(s) in the Contract 

Step 5: Recognize Revenue when (or as) the Entity Satisfies a Performance Obligation 



The Company has entered into various license agreements for its owned trademarks.  Under ASC 606, the Company’s agreements are generally considered symbolic licenses, which contain the characteristics of a right-to-access license since the customer is simultaneously receiving the intellectual property (“IP”) and benefiting from it throughout the license period.  The Company assesses each license agreement at inception and determines the performance obligation(s) and appropriate revenue recognition method. As part of this process, the Company applies judgments based on historical trends when estimating future revenues and the period over which to recognize revenue.

The Company generally recognizes revenue for license agreements under the following methods:

1.

Licenses with guaranteed minimum royalties (“GMRs”):  Generally, guaranteed minimum royalty payments (fixed revenue) are recognized on a straight-line basis over the term of the contract, as defined in each license agreement. 

2.

Licenses with both GMRs (fixed revenue) and earned royalties (variable revenue):  Earned royalties in excess of fixed revenue are only recognized when the Company is reasonably certain that the guaranteed minimum payments for the period, as defined in each license agreement, will be exceeded. Additionally, the Company has categorized certain contracts as variable when there is a history and future expectation of exceeding GMRs.  The Company recognizes income for these contracts during the period corresponding to the licensee’s sales.

3.

Licenses that are sales-based only or earned royalties: Earned royalties (variable revenue) are recognized as income during the period corresponding to the licensee’s sales. 



Payments received as consideration for the grant of a license or advanced royalty payments are recorded as deferred revenue at the time payment is received and recognized into revenue under the methods described above.



Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the current portion of deferred revenue on the condensed consolidated balance sheets.



The Company disaggregates its revenue into two categories: licensing agreements and other, which is comprised of revenue from sources such as editorial content for books, television sponsorships, and commissions.



With respect to editorial content for books, the Company receives advance payments from the Company’s publishers and recognizes revenue when manuscripts are delivered to and accepted by the publishers.  Revenue is also earned from book publishing when sales on a unit basis exceed the advanced royalty.

 

 

9


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

Television sponsorship revenues are generally recorded ratably across the period when new episodes initially air.  Revenue from media content is recognized at a point in time, when the content is delivered and accepted.



Commission revenues are recorded in the period the commission is earned.



The Company entered into a transaction with a media company for which it receives advertising credits as part of the consideration exchanged.  These transactions are recorded at the estimated fair value of the advertising credits received, as their fair value is deemed more readily determinable than the fair value of the trademark licensing right provided by the Company, in accordance with ASC 845, Nonmonetary Transactions. The fair value of the advertising credits are recorded as revenue and in other assets when earned, and expensed when the advertising credits are utilized.   The Company recorded $0.4 million of revenue for the three and six months ended June 30, 2018 related to the advertising credits.  The Company recorded $0.2 million of expense related to the advertising credits utilized for the three and six months ended June 30, 2018.



Restricted Cash



Restricted cash consists of cash deposited with a financial institution required as collateral for the Company’s cash-collateralized letter of credit facilities.



Accounts Receivable

 

Accounts receivable are recorded net of allowances for doubtful accounts, based on the Company’s ongoing discussions with its licensees and other customers and its evaluation of their creditworthiness, payment history and account aging.  Accounts receivable balances deemed to be uncollectible are written off after all means of collection have been exhausted and the potential for recovery is considered remote.  The allowance for doubtful accounts was $0.5 million and $0.6 million as of June 30, 2018 and December 31, 2017, respectively.



The Company’s accounts receivable, net amounted to $61.7 million and $60.1 million as of June 30, 2018 and December 31, 2017, respectively.  Two licensees accounted for approximately 38%  (19% each)  of the Company’s total consolidated accounts receivable balance as of June 30, 2018 and three licensees accounted for approximately 53%  (25%,  15% and 13%) of the Company’s total consolidated accounts receivable balance as of December 31, 2017.  The Company does not believe the accounts receivable balance from these licensees represents a significant collection risk based on past collection experience. 



Investments

 

The Company had marketable securities that were classified as available-for-sale securities under ASC 320, Investments – Debt and Equity Securities.  Such available-for-sale securities are reported at fair value in the condensed consolidated balance sheets and, at the time of purchase, were reported in the unaudited condensed consolidated statements of cash flows as an investing activity.  The Company reviewed its available-for-sale securities at each reporting period to determine whether a decline in fair value is other-than-temporary.  Any decline in fair value that was determined to be other-than-temporary would result in an adjustment for an impairment charge in the accompanying unaudited condensed consolidated statements of operations.  The primary factors the Company considers in its determination are (i) the length of time that the fair value of the available-for-sale security is below the Company’s carrying value, (ii) the financial condition and operating performance of the available-for-sale security, (iii) the reason for decline in fair value and (iv) the Company’s intent and ability to hold the investment in available-for-sale security for a period of time sufficient to allow for a recovery in fair value.  Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific-identification basis.  The Company did not hold any material investments at June 30, 2018 or December 31, 2017.

 

Equity Method Investment



For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation, the Company uses the equity method of accounting.  On July 1, 2016, the Company acquired a 49.9% noncontrolling interest in Gaiam Pty. Ltd. in connection with its acquisition of Gaiam Brand Holdco, LLC, which is included in other assets in the condensed consolidated balance sheets.  The Company’s share of earnings from its equity method investee, which was not material for the three and six months ended June 30, 2018 and 2017, is included in other income in the unaudited condensed consolidated statements of operations.



The Company evaluates its equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investment may not be recoverable.  The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other-than-temporary.



 

10


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method of accounting. On an annual basis (October 1st) and as needed, the Company tests goodwill and indefinite lived trademarks for impairment through the use of discounted cash flow models. Other intangibles with determinable lives, including certain trademarks, customer agreements, patents and a favorable lease, are evaluated for the possibility of impairment when certain indicators are present, and are otherwise amortized on a straight-line basis over the estimated useful lives of the assets (currently ranging from 2 to 15 years). Assumptions used in our discounted cash flow models are as follows: (i) discount rates; (ii) projected average revenue growth rates; and (iii) projected long-term growth rates. Our estimates also factor in economic conditions and expectations of management, which may change in the future based on period-specific facts and circumstances.  The Company does not have any goodwill reported on its consolidated balance sheets at June 30, 2018 and December 31, 2017.



Treasury Stock



Treasury stock is recorded at cost as a reduction of equity in the condensed consolidated balance sheets.



Stock-Based Compensation



Compensation cost for restricted stock is measured using the quoted market price of the Company’s common stock at the date the common stock is granted.  For restricted stock and restricted stock units, for which restrictions lapse with the passage of time (“time-based restricted stock”), compensation cost is recognized on a straight-line basis over the period between the issue date and the date that restrictions lapse.  Time-based restricted stock is included in total shares of common stock outstanding upon the lapse of applicable restrictions.  For restricted stock, for which restrictions are based on performance measures (“performance stock units” or “PSUs”), restrictions lapse when those performance measures have been deemed achieved.  Compensation cost for PSUs is recognized on a straight-line basis during the period from the date on which the likelihood of the PSUs being earned is deemed probable and (x) the end of the fiscal year during which such PSUs are expected to vest or (y) the date on which awards of such PSUs may be approved by the compensation committee of the Company’s board of directors (the “Compensation Committee”) on a discretionary basis, as applicable.  PSUs are included in total shares of common stock outstanding upon the lapse of applicable restrictions.  PSUs are included in total diluted shares of common stock outstanding when the performance measures have been deemed achieved but the PSUs have not yet been issued.



Fair value cost for stock options and warrants is calculated using the Black-Scholes valuation model and is expensed on a straight-line basis over the requisite service period of the grant.  Compensation cost is reduced for forfeitures as they occur in accordance with ASU 2016-09 “Simplifying the Accounting for Share-Based Payments” (“ASU 2016-09”)



At each subsequent reporting period prior to the lapse of restrictions on warrants, time-based restricted stock and PSUs granted to non-employees, the Company remeasures the aggregate compensation cost of such grants using the Company’s fair value at the end of such reporting period and revises the straight-line recognition of compensation cost in line with such remeasured amount.



Leases



The Company leases certain properties for its offices and showrooms.  Certain of the Company's lease agreements contain rent escalation clauses, free rent periods and tenant inducement payments.  Rent expense for noncancelable operating leases with scheduled rent increases is recognized on a straight-line basis over the expected lease term.  The difference between straight-line rent expense and the scheduled payment amounts is recorded as a deferred rent asset or liability.



Income Taxes

 

Current income taxes are based on the respective periods’ taxable income for federal, foreign and state income tax reporting purposes.  Deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities, using statutory tax rates in effect for the year in which the differences are expected to reverse.  In accordance with ASU No. 2015-17 “Balance Sheet Classification of Deferred Taxes,” all deferred income taxes are reported and classified as non-current.  A valuation allowance is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

11


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118 which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act ("TCJA"). The purpose of SAB No. 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB No. 118 addresses situations where the accounting is incomplete for certain income tax effects of the TJCA upon issuance of a company’s financial statements for the reporting period that includes the enactment date. SAB No. 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB No. 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.  The Company’s accounting for certain elements of the TCJA was incomplete as of the period ended December 31, 2017, and remains incomplete as of June 30, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items at December 31, 2017.

The Company applies the Financial Accounting Standards Board (“FASB”) guidance on accounting for uncertainty in income taxes.  The guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with other authoritative GAAP and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The guidance also addresses derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Interest and penalties related to uncertain tax positions, if any, are recorded in income tax expense.  Tax years that remain open for assessment for federal and state tax purposes include the years ended December 31, 2014 through December 31, 2017.



Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Sequential Brands Group, Inc. and Subsidiaries by the weighted-average number of common shares outstanding during the reporting period, excluding the effects of any potentially dilutive securities.  Diluted EPS gives effect to all potentially dilutive common shares outstanding during the reporting period, including stock options, PSUs and warrants, using the treasury stock method, and convertible debt, using the if-converted method.  Diluted EPS excludes all potentially dilutive shares of common stock if their effect is anti-dilutive.  The shares used to calculate basic and diluted EPS consist of the following:







 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

63,583,280 

 

62,925,565 

 

63,408,679 

 

62,693,925 

Warrants

 

 -

 

 -

 

 -

 

 -

Stock options

 

 -

 

 -

 

 -

 

 -

Performance based restricted stock

 

12,138 

 

 -

 

40,094 

 

131,253 

Unvested restricted stock

 

434,554 

 

54,943 

 

880,535 

 

86,216 

Diluted weighted-average common shares outstanding

 

64,029,972 

 

62,980,508 

 

64,329,308 

 

62,911,394 





 The computation of diluted EPS for the three and six months ended June 30, 2018 and 2017 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

Warrants

 

332,000 

 

801,760 

 

332,000 

 

801,760 

Stock options

 

58,500 

 

84,000 

 

58,500 

 

84,000 

Performance based restricted stock

 

 -

 

 -

 

 -

 

 -

Unvested restricted stock

 

840,066 

 

519,489 

 

357,501 

 

419,489 

Total

 

1,230,566 

 

1,405,249 

 

748,001 

 

1,305,249 



 

 

 

 

 

 

 

 



 

12


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

Concentration of Credit Risk

 

Financial instruments which potentially expose the Company to credit risk consist primarily of cash, restricted cash and accounts receivable.  Cash is held to meet working capital needs and future acquisitions.  Restricted cash is pledged as collateral for a comparable amount of irrevocable standby letters of credit for certain of the Company’s leased properties.  Substantially all of the Company’s cash and restricted cash are deposited with high quality financial institutions.  At times, however, such cash and restricted cash may be in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.  The Company has not experienced any losses in such accounts as of June 30, 2018.



Concentration of credit risk with respect to accounts receivable is minimal due to the collection history.  The Company performs periodic credit evaluations of its customers’ financial condition.  The allowance for doubtful accounts is based upon the expected collectability of all accounts receivable.



Customer Concentrations

 

The Company recorded net revenues of $42.2 million and $42.1 million during the three months ended June 30, 2018 and 2017, respectively.  During the three months ended June 30, 2018, one licensee represented at least 10% of net revenue, accounting for 14% of the Company’s net revenue.  During the three months ended June 30, 2017, two licensees represented at least 10% of net revenue, accounting for 12% and 11% of the Company’s net revenue.



The Company recorded net revenues of $80.3 million and $81.5 million during the six months ended June 30, 2018 and 2017, respectively.  During the six months ended June 30, 2018, two licensees represented at least 10% of net revenue, accounting for 13% and 10% of the Company’s net revenue.  During the six months ended June 30, 2017, two licensees represented at least 10% of net revenue, accounting for 12% and 11% of the Company’s net revenue.





Loss Contingencies

 

The Company recognizes contingent losses that are both probable and estimable.  In this context, probable means circumstances under which events are likely to occur.  The Company records legal costs pertaining to contingencies as incurred.



Contingent Consideration



The Company recognizes the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree or assets of the acquiree in a business combination.  The contingent consideration is classified as either a liability or equity in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.  If classified as a liability, the liability is remeasured to fair value at each subsequent reporting date until the contingency is settled.  Increases in fair value are recorded as losses, while decreases are recorded as gains.  If classified as equity, contingent consideration is not remeasured and subsequent settlement is accounted for within equity.



Noncontrolling Interest



Noncontrolling interest recorded for the three and six months ended June 30, 2018 represents income (loss) allocations to Elan Polo International, Inc., a member of DVS Footwear International, LLC, JALP, LLC (“JALP”), a member of FUL IP Holdings, LLC (“FUL IP”) and With You, Inc., a member of With You LLC (the partnership between the Company and Jessica Simpson).  Noncontrolling interest recorded for the three and six months ended June 30, 2017 represents income allocations to Elan Polo International, Inc., With You, Inc. and JALP.



Reportable Segment

 

An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker (the “CODM”) to make decisions about resources to be allocated to the segment and assess its performance.  Operating segments may be aggregated only to a limited extent.  The Company’s CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance.  Accordingly, the Company has determined that it has a single operating and reportable segment.  In addition, the Company has no foreign operations or any assets in foreign locations.  Nearly all of the Company’s operations consist of a single revenue stream, which is the licensing of its trademark portfolio, with an immaterial portion of revenues derived from television, book, café operations and certain commissions.

 

13


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 







 

 

 

3.

Fair Value Measurement of Financial Instruments

 

ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), defines fair value, establishes a framework for measuring fair value in GAAP and provides for expanded disclosure about fair value measurements.  ASC 820-10 applies to all other accounting pronouncements that require or permit fair value measurements.



The Company determines or calculates the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments while estimating for non-performance and liquidity risk.  These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads and estimates of future cash flows.



Assets and liabilities typically recorded at fair value on a non-recurring basis to which ASC 820-10 applies include:

 



 

 

 

non-financial assets and liabilities initially measured at fair value in an acquisition or business combination, and

 

long-lived assets measured at fair value due to an impairment assessment under ASC 360-10-15, Impairment or Disposal of Long-Lived Assets.



This topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 820-10 requires that assets and liabilities recorded at fair value be classified and disclosed in one of the following three categories:





 

 

 

Level 1 - inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2 - inputs utilize other-than-quoted prices that are observable, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 - inputs are unobservable and are typically based on the Company’s own assumptions, including situations where there is little, if any, market activity.  Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 classification.



In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the Company classifies such financial assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.



As of June 30, 2018 and December 31, 2017, there were no assets or liabilities that are required to be measured at fair value on a recurring basis, except for interest rate caps and Legacy Payments (as defined below) to Ms. Martha Stewart.  The following table sets forth the carrying value and the fair value of the Company’s financial assets and liabilities required to be disclosed at June 30, 2018 and December 31, 2017:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Carrying Value

 

Fair Value

Financial Instrument

 

Level

 

6/30/2018

 

12/31/2017

 

6/30/2018

 

12/31/2017



 

 

 

 

(in thousands)

Interest rate caps

 

 

2

 

$

1,348 

 

$

1,239 

 

$

1,348 

 

$

1,239 

2016 Term Loans

 

 

3

 

$

537,157 

 

$

551,913 

 

$

527,845 

 

$

542,655 

2016 Revolving Loan

 

 

3

 

$

92,787 

 

$

92,787 

 

$

92,352 

 

$

92,389 

Legacy Payments

 

 

3

 

$

2,391 

 

$

2,256 

 

$

2,391 

 

$

2,256 



The carrying amounts of the Company’s cash, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.



 

14


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

During 2016, the Company entered into interest rate cap agreements related to its 1-month London Interbank Offered Rate (“LIBOR”) rates related to the Company’s loan agreements (the “2016 Cap Agreements”) with certain financial institutions.  The 2016 Cap Agreements have a $500 million notional value, strike rate of 1.50% and mature on November 23, 2018.  The Company recorded its interest rate caps on the condensed consolidated balance sheets at fair value using Level 2 inputs.  The valuation technique used to determine the fair value of the 2016 Cap Agreements approximated the net present value of future cash flows, taking into account current interest rates.



The Company’s risk management objective and strategy with respect to the 2016 Cap Agreements is to reduce its exposure to variability in expected future cash outflows (forecasted interest payments) attributable to changes in 1-month LIBOR rates, the designated benchmark interest rate being hedged, relating to a portion of its outstanding floating-rate debt.  The 2016 Cap Agreements protect the Company from increases in hedged cash flows on its floating-rate debt attributable to changes in 1-month LIBOR rates above the strike rate.  Should 1-month LIBOR rates exceed 1.50% on a rate reset date during the terms of the 2016 Cap Agreements, the financial institutions will pay the Company for an amount equivalent to the excess interest over the strike rate.  To the extent the hedging relationship is perfectly effective, changes in the fair value of the hedging instrument each period will be deferred in accumulated other comprehensive income in the condensed consolidated statement of changes in equity, and the upfront hedging instrument purchase price will be reclassified to interest expense, net in the unaudited condensed consolidated statements of operations according to its caplet values.  If hedge ineffectiveness exists, accumulated other comprehensive income will be adjusted to a balance that reflects the lesser of either the cumulative change in the fair value of the hedging or the cumulative change in the fair value of the hypothetically “perfect” derivative.  The amount of ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in the fair value of the hedging instrument over the cumulative change in the fair value of the hypothetical derivative.



The components of the 2016 Cap Agreements as of June 30, 2018 are as follows:







 

 

 

 

 

 

 

 



Notional Value

 

Derivative Asset

 

Derivative Liability



 

 

 

 

 

 

 

 



 

(in thousands)



 

 

 

 

 

 

 

 

LIBOR based loans

$

500,000 

 

$

652 

 

$

 -



For purposes of this fair value disclosure, the Company based its fair value estimate for the 2016 Term Loans and 2016 Revolving Loan (each, as defined in Note 7) on its internal valuation whereby the Company applied the discounted cash flow method to its expected cash flow payments due under the loan agreements based on interest rates as of June 30, 2018 and December 31, 2017 for debt with similar risk characteristics and maturities.



In connection with the acquisition of Martha Stewart Living Omnimedia (“MSLO”), beginning with calendar years commencing on or after January 1, 2026, the Company will pay Ms. Stewart three and one-half percent (3.5%) of Gross Licensing Revenues (as defined in Ms. Stewart’s employment agreement) for each such calendar year for the remainder of Ms. Stewart’s life (with a minimum of five (5) years of payments, to be made to Ms. Stewart’s estate if Ms. Stewart dies before December 31, 2030) (the “Legacy Payments”).  The Company recorded $0.1 million of accretion during each of the three and six-month periods ended June 30, 2018 and 2017 related to the Legacy Payments and recorded the expense within interest expense, net in the unaudited condensed consolidated statements of operations.    





 

4.

Revenues



Adoption

On January 1, 2018, the Company adopted ASC 606 on a modified retrospective basis for all open contracts as of January 1, 2018.  The core principle of the new guidance is the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services.  The new guidance defines a five-step approach to achieve this core principle and, in doing so, requires greater use of judgment and estimates and requires expanded disclosures related to the amounts of revenue recognized and judgements made.  Under the modified retrospective basis, results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, “Revenue Recognition” (“ASC 605”). 



In connection with the adoption of the new guidance, the Company recorded a net increase of $1.1 million to the opening balance of retained earnings (a reduction of the accumulated deficit).  The adjustments consisted of increases of $6.3 million to accounts receivable (resulting in unbilled receivables) and $4.4 million to deferred revenue (contract liability) offset by a noncontrolling interests opening balance adjustment of $0.4 million and an income tax impact of $0.5 million.  The adjustments are recorded in the condensed consolidated financial statements as the cumulative effect of revenue recognition accounting change. 



 

15


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 





Changes to the balances at January 1, 2018 resulting from the adoption of ASC 606 are as follows:







 

 

 

 

 

 



 

December 31,

 

Impact of

 

January 1,



 

2017
(As Reported)

 

Adoption of
ASC 606

 

2018



 

(in thousands)

Assets

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

  Accounts receivable, net

$

60,102 

$

6,335 

$

66,437 



 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 Current portion of deferred revenue

$

8,102 

$

4,387 

$

12,489 

Deferred income taxes

 

67,799 

 

463 

 

68,262 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

Accumulated deficit

$

(225,369)

$

1,130 

$

(224,239)

Noncontrolling interests

 

71,547 

 

355 

 

71,902 

Deferred revenue will be recognized as the Company fulfills its performance obligations over periods of approximately one to five years.

 

16


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 

The impact to revenue for the three and six months ended June 30, 2018 was a decrease of $0.8 million and $2.0 million, respectively, due to the adoption of ASC 606.  The impact to the provision for income taxes for the three and six months ended June 30, 2018 was a decrease of $0.2 million and $0.4 million, respectively, due to the adoption of ASC 606.  The tables below summarize the impact of the adoption on the condensed consolidated statement of operations for the three and six months ended June 30, 2018:

 

17


 

SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(UNAUDITED)

 







 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended June 30,

 



 

 

2018

 



 

 

(in thousands)

 



 

 

As
Reported

 

 

Adjustments due to
ASC 606

 

 

Under previous guidance
(ASC 605)

 



 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

42,207 

 

$

(778)

 

$

42,985 

 

Operating expenses

 

 

18,449 

 

 

 -

 

 

18,449 

 

Loss on sale of asset

 

 

1,975 

 

 

 -

 

 

1,975 

 

Income from operations

 

 

21,783 

 

 

(778)

 

 

22,561 

 

Other expense

 

 

31 

 

 

 -

 

 

31 

 

Interest expense, net

 

 

15,647 

 

 

 -

 

 

15,647 

 

Income before income taxes

 

 

6,105 

 

 

(778)

 

 

6,883 

 

Provision for income taxes

 

 

1,416 

 

 

(165)

 

 

1,581 

 

Net income

 

 

4,689 

 

 

(613)

 

 

5,302 

 

Net income attributable to noncontrolling interests

 

 

(1,102)

 

 

183 

 

 

(1,285)

 

Net income attributable to Sequential Brands Group, Inc. and Subsidiaries

 

$

3,587 

 

$

(430)

 

$

4,017 

 



 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Sequential Brands Group, Inc. and Subsidiaries:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06 

 

$

(0.00)

 

$

0.06 

 

Diluted

 

$

0.06 

 

$

(0.00)

 

$

0.06 

 



 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

63,583,280 

 

 

63,583,280 

 

 

63,583,280 

 

Diluted

 

 

64,029,972 

 

 

64,029,972 

 

 

64,029,972 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30,

 



 

 

2018

 



 

 

(in thousands)

 



 

 

As
Reported

 

 

Adjustments due to
ASC 606

 

 

Under previous guidance
(ASC 605)

 



 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

80,311 

 

$

(2,045)

 

$

82,356 

 

Operating expenses

 

 

36,499 

 

 

 -

 

 

36,499 

 

Loss on sale of assets

 

 

7,117 

 

 

 -

 

 

7,117 

 

Income from operations

 

 

36,695 

 

 

(2,045)

 

 

38,740 

 

Other (income) expense

 

 

(104)

 

 

 -

 

 

(104)