hour

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2020 

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 1-10593

 

ICONIX BRAND GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

11-2481903

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1450 Broadway, New York, NY

 

10018

(Address of principal executive offices)

 

(Zip Code)

 

(212) 730-0030

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

ICON

 

The Nasdaq Global Select Market

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 every Interactive Data File required to be submitted 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 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

 

  

 

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  

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

As of May 8, 2020, 11,859,341 shares of the registrant’s Common Stock, par value $.001 were outstanding.

 

 

 


 

Part I. Financial Information

Item 1. Financial Statements

Iconix Brand Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except par value)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets

 

(Unaudited)

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,389

 

 

$

55,465

 

Restricted cash

 

 

9,052

 

 

 

15,946

 

Accounts receivable, net

 

 

29,936

 

 

 

31,368

 

Contract asset

 

 

9,345

 

 

 

9,448

 

Other assets – current

 

 

20,938

 

 

 

21,440

 

Total Current Assets

 

 

109,660

 

 

 

133,667

 

Property and equipment:

 

 

 

 

 

 

 

 

Furniture, fixtures and equipment

 

 

20,098

 

 

 

20,087

 

Less: Accumulated depreciation

 

 

(17,733

)

 

 

(17,545

)

 

 

 

2,365

 

 

 

2,542

 

Other Assets:

 

 

 

 

 

 

 

 

Other assets

 

 

6,630

 

 

 

6,780

 

Contract asset

 

 

12,772

 

 

 

11,807

 

Right-of-use asset

 

 

5,816

 

 

 

6,254

 

Trademarks and other intangibles, net

 

 

258,608

 

 

 

274,084

 

Investments and joint ventures

 

 

43,301

 

 

 

44,827

 

Goodwill

 

 

26,099

 

 

 

26,099

 

 

 

 

353,226

 

 

 

369,851

 

Total Assets

 

$

465,251

 

 

$

506,060

 

Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

41,556

 

 

$

51,503

 

Deferred revenue

 

 

5,662

 

 

 

4,701

 

Current portion of long-term debt

 

 

32,255

 

 

 

61,976

 

Other liabilities – current

 

 

14,040

 

 

 

13,775

 

Total Current Liabilities

 

 

93,513

 

 

 

131,955

 

Deferred income tax liability

 

 

4,556

 

 

 

4,464

 

Long-term debt, less current maturities (includes $46,485 and $47,277, respectively, at fair value)

 

 

602,732

 

 

 

583,745

 

Other liabilities

 

 

11,455

 

 

 

7,794

 

Total Liabilities

 

 

712,256

 

 

 

727,958

 

Redeemable Non-Controlling Interest

 

 

31,343

 

 

 

34,461

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ Deficit:

 

 

 

 

 

 

 

 

Common stock, $.001 par value shares authorized 260,000; shares issued 15,334 and

   15,138, respectively

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

1,045,085

 

 

 

1,045,307

 

Accumulated losses

 

 

(450,600

)

 

 

(429,117

)

Accumulated other comprehensive loss

 

 

(57,012

)

 

 

(54,643

)

Less: Treasury stock – 3,490 and 3,421 shares at cost, respectively

 

 

(844,507

)

 

 

(844,442

)

Total Iconix Brand Group, Inc. Stockholders’ Deficit

 

 

(307,019

)

 

 

(282,880

)

Non-Controlling Interest

 

 

28,671

 

 

 

26,521

 

Total Stockholders’ Deficit

 

 

(278,348

)

 

 

(256,359

)

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Deficit

 

$

465,251

 

 

$

506,060

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

2


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except earnings per share data)

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2020

 

 

2019

 

 

Licensing revenue

 

$

27,951

 

 

$

35,942

 

 

Selling, general and administrative expenses

 

 

17,150

 

 

 

18,094

 

 

Depreciation and amortization

 

 

273

 

 

 

492

 

 

Equity (earnings) loss on joint ventures

 

 

1,645

 

 

 

(1,042

)

 

Trademark impairment

 

 

13,733

 

 

 

 

 

Operating income (loss)

 

 

(4,850

)

 

 

18,398

 

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

Interest expense

 

 

16,713

 

 

 

14,504

 

 

Interest income

 

 

(40

)

 

 

(72

)

 

Other (income) loss, net

 

 

(795

)

 

 

(19,935

)

 

Foreign currency translation (gain) loss

 

 

(65

)

 

 

627

 

 

Other expenses (income) – net

 

 

15,813

 

 

 

(4,876

)

 

Income (loss) before income taxes

 

 

(20,663

)

 

 

23,274

 

 

(Benefit) Provision for income taxes

 

 

(5

)

 

 

1,968

 

 

Net income (loss)

 

 

(20,658

)

 

 

21,306

 

 

Less: Net income attributable to non-controlling interest

 

 

825

 

 

 

3,361

 

 

Net income (loss) attributable to Iconix Brand Group, Inc.

 

$

(21,483

)

 

$

17,945

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.86

)

 

$

2.12

 

 

Diluted

 

$

(1.86

)

 

$

(0.01

)

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

11,772

 

 

 

8,465

 

 

Diluted

 

 

11,772

 

 

 

44,786

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2020

 

 

2019

 

 

Net income (loss)

 

$

(20,658

)

 

$

21,306

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(2,369

)

 

 

(1,724

)

 

Total other comprehensive (loss) income

 

 

(2,369

)

 

 

(1,724

)

 

Comprehensive income (loss)

 

$

(23,027

)

 

$

19,582

 

 

Less: comprehensive income attributable to non-controlling interest

 

 

825

 

 

 

3,361

 

 

Comprehensive income (loss) attributable to Iconix Brand

   Group, Inc.

 

$

(23,852

)

 

$

16,221

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit

(in thousands)

 

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2020

 

 

2019

 

 

Beginning balance (shares)

 

 

15,138

 

 

 

11,162

 

 

Shares issued on vesting of restricted stock

 

 

196

 

 

 

87

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

 

 

 

958

 

 

Common Stock (shares)

 

 

15,334

 

 

 

12,207

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (amount)

 

$

15

 

 

$

11

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

 

 

 

1

 

 

Common Stock (amount)

 

$

15

 

 

$

12

 

 

Beginning balance

 

 

1,045,307

 

 

 

1,037,372

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

 

 

 

2,000

 

 

Change in redemption value of redeemable non-controlling interest

 

 

(394

)

 

 

 

 

Compensation expense in connection with restricted stock

 

 

172

 

 

 

140

 

 

Foreign currency translation

 

 

 

 

 

(38

)

 

Additional Paid-In Capital

 

$

1,045,085

 

 

$

1,039,474

 

 

Beginning balance

 

 

(429,117

)

 

 

(312,796

)

 

Change in redemption value of redeemable non-controlling interest

 

 

 

 

 

391

 

 

Net (loss) income

 

 

(21,483

)

 

 

17,945

 

 

Accumulated Losses

 

$

(450,600

)

 

$

(294,460

)

 

Beginning balance

 

 

(54,643

)

 

 

(53,068

)

 

Foreign currency translation

 

 

(2,369

)

 

 

(1,724

)

 

Accumulated Other Comprehensive Loss

 

$

(57,012

)

 

$

(54,792

)

 

Beginning balance

 

 

(844,442

)

 

 

(844,253

)

 

Shares repurchased on vesting of restricted stock

 

 

(65

)

 

 

(56

)

 

Treasury Stock

 

$

(844,507

)

 

$

(844,309

)

 

Beginning balance

 

 

26,521

 

 

 

26,999

 

 

Reclass from redeemable NCI

 

 

 

 

 

3,903

 

 

Net (loss) income

 

 

3,333

 

 

 

3,361

 

 

Distributions to joint ventures

 

 

(1,183

)

 

 

(2,649

)

 

Non-Controlling Interest

 

$

28,671

 

 

$

31,614

 

 

Total Stockholders' Deficit

 

$

(278,348

)

 

$

(122,461

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(20,658

)

 

$

21,306

 

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

269

 

 

 

465

 

Amortization of trademarks and other intangibles

 

 

4

 

 

 

27

 

Amortization of deferred financing costs and debt discount

 

 

2,458

 

 

 

2,963

 

Stock-based compensation expense

 

 

172

 

 

 

140

 

Provision for doubtful accounts

 

 

2,392

 

 

 

452

 

Periodic lease cost

 

 

565

 

 

 

549

 

Earnings on equity investments in joint ventures

 

 

1,645

 

 

 

(1,042

)

Contract asset impairment

 

 

468

 

 

 

448

 

Trademark impairment

 

 

13,733

 

 

 

 

Mark to market adjustment on convertible note

 

 

(792

)

 

 

(19,956

)

Loss (gain) on debt to equity conversions

 

 

 

 

 

188

 

Gain on sale of trademarks and other investments

 

 

 

 

 

(209

)

Income on other equity investment

 

 

 

 

 

42

 

Deferred income tax expense

 

 

95

 

 

 

333

 

(Gain) Loss on foreign currency translation

 

 

(65

)

 

 

627

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,484

)

 

 

362

 

Other assets – current

 

 

3,041

 

 

 

(490

)

Other assets

 

 

(905

)

 

 

(746

)

Deferred revenue

 

 

602

 

 

 

2,085

 

Accounts payable and accrued expenses

 

 

(5,122

)

 

 

(9,556

)

Other liabilities

 

 

3,723

 

 

 

(473

)

Net cash used in operating activities

 

 

(1,859

)

 

 

(2,485

)

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(113

)

 

 

(257

)

Acquisition of trademarks from Iconix Southeast Asia

 

 

(2,067

)

 

 

(2,067

)

Issuance of loan to equity investee

 

 

(2,750

)

 

 

 

Proceeds from sale of other investments

 

 

 

 

 

3,000

 

Other investments

 

 

(165

)

 

 

(337

)

Net cash provided by (used in) investing activities

 

 

(5,095

)

 

 

339

 

Cash flows (used in) financing activities:

 

 

 

 

 

 

 

 

Payment of long-term debt

 

 

(12,400

)

 

 

(8,366

)

Distributions to non-controlling interests

 

 

(1,183

)

 

 

(2,461

)

Distributions to redeemable non-controlling interests

 

 

(1,003

)

 

 

(188

)

Cost of shares repurchased on vesting of restricted stock

 

 

(66

)

 

 

(56

)

Net cash used in financing activities

 

 

(14,652

)

 

 

(11,071

)

Effect of exchange rate changes on cash and restricted cash

 

 

(364

)

 

 

20

 

Net decrease in cash and cash equivalents, and restricted cash

 

 

(21,970

)

 

 

(13,197

)

Cash, cash equivalents, and restricted cash, beginning

   of period

 

 

71,411

 

 

 

82,635

 

Cash, cash equivalents, and restricted cash, end of period

 

$

49,441

 

 

$

69,438

 

 

6


 

Supplemental disclosure of cash flow information:

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Income taxes (net of refunds received)

 

$

1,996

 

 

$

2,127

 

Interest

 

$

11,712

 

 

$

13,083

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Non-cash additions to operating lease assets

 

$

-

 

 

$

10,462

 

Shares issued upon conversion of debt to equity

 

$

-

 

 

$

2,001

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

7


 

Iconix Brand Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(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 March 31, 2020 (“Current Quarter”) 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, 2019.

During the Current Quarter, the Company adopted one new accounting pronouncement.  Refer to Note 19 for further details.

Certain reclassifications, which were immaterial, have been made to conform prior year data to the current presentation. During the year ended December 31,2019 (“FY 2019”), the Company also made a reclassification between redeemable noncontrolling interest and noncontrolling interest.    

Liquidity

These condensed consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities, in each case, in the ordinary course of business consistent with the Company’s prior periods.  The Company has experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of $450.6 million as of March 31, 2020. Net losses incurred for the years ended December 31, 2019 and 2018 amounted to approximately $101.9 million and $89.7 million, respectively. While the Company had positive cash flows from operations in recent periods, the potential adverse impact of the COVID-19 pandemic on its operating results, liquidity and financial condition raises substantial doubt the Company can continue as an ongoing business for the next twelve months.

In view of these matters, continuation as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The Company has taken steps to reduce expenses and discretionary cash outlays and actively pursuing asset sales, in order to satisfy liquidity needs and financial covenants. In April 2020, the Company announced that it had entered into a share purchase agreement with HK Qiaodan Investment Limited to sell its equity in Umbro China for approximately $62.5 million (the “Umbro China Sale”). The Umbro China Sale includes the sale of the Umbro sports brand in the People’s Republic of China, Hong Kong, Taiwan and Macau. The Umbro China Sale is anticipated to close on or prior to September 15, 2020. The Company anticipates using the net proceeds from the Umbro China Sale to repay amounts due under its existing financing arrangements, and otherwise for general corporate purposes.

The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.

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, 2019.

 

COVID-19 Pandemic

The spread of the novel coronavirus or COVID-19 (“COVID-19”) during the first quarter of 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic is an ongoing phenomenon with uncertain scale and has had severe global macroeconomic and financial market impacts. Certain of our licensees have been and may continue to be adversely impacted by the pandemic due to manufacturing facility closures, store closures, impacts to their distribution networks and a general decrease in customer traffic. We are, in many cases, suspending or deferring capital expenditures. We are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses. We are also taking certain precautions to provide a safe work environment for our employees. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

 

8


 

As the pandemic continues to unfold, the extent of the pandemic’s effect on our operational and financial performance and liquidity will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include changes in the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Any prolonged material disruption on discretionary spending and consumer demand could negatively affect our licenses and impact our financial position, results of operations and cash flows.

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 8 for further details.

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 Company purchases licensed products 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 the associated cost of goods sold is included in selling general and administrative expenses and was approximately equal to revenue.  

The following table presents our revenues disaggregated by license type:

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2020

 

 

2019

 

 

Licensing revenue by license type:

 

 

 

 

 

 

 

 

 

Direct-to-retail license

 

$

7,808

 

 

$

9,753

 

 

Wholesale licenses

 

 

19,879

 

 

 

25,806

 

 

Other licenses

 

 

264

 

 

 

383

 

 

 

 

$

27,951

 

 

$

35,942

 

 

9


 

 

The following table represents our revenues disaggregated by geography:

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2020

 

 

2019

 

 

Total licensing revenue by geographic region:

 

 

 

 

 

 

 

 

 

United States

 

$

16,216

 

 

$

22,619

 

 

Other (1)

 

 

11,735

 

 

 

13,323

 

 

 

 

$

27,951

 

 

$

35,942

 

 

(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 April 1, 2020, the Company and its joint ventures had a contractual right to receive over $376.1 million of aggregate minimum licensing revenue over the balance and the terms of their current licenses, excluding any renewals.

As of March 31, 2020, future minimum license revenue to be recognized under our existing licenses is as follows: $65.1 million, $71.5 million, $61.4 million, $52.9 million, $37.4 million and $87.8 million for the remainder of FY 2020, FY 2021, FY 2022, FY 2023, FY 2024 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 March 31, 2020, current and long term contract assets were $9.3 million and $12.8 million, respectively. Our current and long term contract assets as of December 31, 2019, which were $9.4 million and $11.8 million, respectively.  For the Current Quarter, the Company incurred an impairment loss of its contract assets of $0.5 million as a result of impairments and certain contract modifications as compared to $0.4 million for the three months ended March 31, 2019 (“Prior Year Quarter”).  

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 condensed consolidated balance sheet in deferred revenue at the time the payment is received.  The increase in deferred revenues as of March 31, 2020 as compared to December 31, 2019 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $3.1 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

There were no changes and no impairment of the Company’s goodwill during the Current Quarter or in the Prior Year Quarter. 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.  In accordance with ASC 350, during the Current Quarter, the Company reassessed the fair value of its goodwill considering the impact of the COVID 19 pandemic on current and future cash flows of its International reporting unit.  

10


 

Trademarks and Other Intangibles, net

Trademarks and other intangibles, net, consist of the following:

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Estimated

Lives in

Years

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

Indefinite-lived trademarks

 

Indefinite

 

$

258,608

 

 

$

 

 

$

274,080

 

 

$

 

Definite-lived trademarks

 

10-15

 

 

8,958

 

 

 

8,958

 

 

 

8,958

 

 

 

8,958

 

Licensing contracts

 

1-9

 

 

978

 

 

 

978

 

 

 

978

 

 

 

974

 

 

 

 

 

$

268,544

 

 

$

9,936

 

 

$

284,016

 

 

$

9,932

 

Trademarks and other intangibles, net

 

 

 

 

 

 

 

$

258,608

 

 

 

 

 

 

$

274,084

 

 

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 accordance with ASC 350, the Company reassessed the fair values of its indefinite-lived trademarks considering the impact of the COVID-19 pandemic on current and future cash flows. The Company recorded impairment charges of $13.7 million primarily to the Rampage, Joe Boxer, Waverly, Fieldcrest and Umbro indefinite-lived trademarks during the Current Quarter, and none in the Prior Year Quarter.  Further, in accordance with ASC 360, there were no impairment charges to the Company’s definite-lived trademarks during any periods presented.

 

Other amortizable intangibles represent 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.  

 

 

 

4. Joint Ventures and Investments

Joint Ventures

As of March 31, 2020, the following joint ventures are consolidated with the Company:

 

Entity Name

 

Date of Original

Formation / Investment

 

Iconix's

Ownership %

as of March 31, 2020

 

 

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

 

100% (3)

 

 

Hong Kong MH Umbro International Co. Ltd.

 

 

 

US Pony Holdings, LLC

 

February 2015

 

75%

 

 

Anthony L&S Athletics, LLC

 

 

 

Iconix MENA Ltd. (1)

 

December 2014

 

55%

 

 

Global Brands Group Asia Limited

 

Put / Call Options

 

Iconix Israel, LLC (1)

 

November 2013

 

50%

 

 

MGS

 

 

 

Iconix Europe LLC (1)

 

December 2009

 

51%

 

 

Global Brands Group Asia Limited

 

Put / Call Options

 

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

 

 

 

 

11


 

(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, 2019 for material terms of the put/call options associated with certain of the Company’s joint ventures. 

(3)

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.  As a result of this transaction, the Company now maintains 100% ownership interest in Umbro China. In April of 2020, the Company announced that it had entered into an agreement to sell its interests in the entity to HK Qiaodan International Limited for approximately $62.5 million. The transaction is anticipated to close on or before September 15, 2020.

 

 

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, 2019 for material terms of the put/call options associated with the Company’s joint venture.

(3)

In March 2020, the Company entered into an amendment to the Iconix SE Asia, Ltd. Operating Agreement to extend the put/call options from the six-month period commencing on December 31, 2019 to the period commencing March 31, 2021 and ending on September 30, 2021.

 

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

 

 

March 31, 2020

 

 

December 31, 2019

 

Candie’s

 

Candies Shanghai Fashion Co. Ltd.

 

20%

 

 

$

10,156

 

 

$

10,100

 

Marc Ecko

 

Shanghai MuXiang Apparel & Accessory Co. Limited

 

15%

 

 

 

1,492

 

 

 

2,270

 

Material Girl

 

Ningbo Material Girl Fashion Co. Ltd.(1)

 

0%

 

 

 

 

 

 

 

Ecko Unltd

 

Ai Xi Enterprise (Shanghai) Co. Limited

 

20%

 

 

 

9,758

 

 

 

10,216

 

 

 

 

 

 

 

 

 

$

21,406

 

 

$

22,586

 

 

(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 during FY 2019.

Other Equity Investments

 

In July 2013, the Company purchased a minority interest in Marcy Media Holdings, LLC (“Marcy Media”), resulting in the Company’s indirect ownership of a 5% interest in Roc Nation, LLC for $32 million. In the third quarter of 2019, the Company

12


 

recorded an impairment charge of $17.0 million on its investment in Marcy Media. During the fourth quarter of 2019, the Company sold its interests in Marcy Media for $15.0 million.

 

5. 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 March 31, 2020, and December 31, 2019, 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 not carried at fair value is not readily determinable, and it is not practical to obtain the information needed to determine the value. For FY 2019, the Company recorded a $9.6 million (inclusive of $2.6 million of advances made to the entity) impairment charge to its equity investment in MG Icon based upon a decline in the fair value of the investment due to poor performance and an impairment of its investment in Marcy Media Holdings, LLC in the amount of $17.0 million based on the estimated value that would be realized on the disposition of our equity interest. There has been no indication of impairment of other equity investments as of March 31, 2020 and December 31, 2019. 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:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Long-term debt, including current portion (1), (2)

 

$

634,987

 

 

$

514,996

 

 

$

645,721

 

 

$

556,187

 

 

(1)

Carrying amounts include aggregate unamortized debt discount and debt issuance costs.

(2)

Includes the 5.75% Convertible Notes accounted for under the fair value option. See to Note 6.

Additionally, the fair value of the other equity investments acquired as part of the FY 2015 purchase of our joint venture partners’ interest in Iconix China, was $0.0 million as of March 31, 2020 as the investment was sold in FY 2019.

13


 

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.  During the first quarter of 2020, the Company recorded impairment charges on the Rampage, Joe Boxer, Umbro and Fieldcrest indefinite-lived trademarks. The Company recorded an impairment on its investment in Marcy Media Holdings, LLC during FY 2019 and the Company recorded impairment charges on the Joe Boxer, Mudd, OP, Bongo, Rampage, Mossimo, Fieldcrest, Royal Velvet and Umbro indefinite-lived trademarks during FY 2019.

 

 

6. 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 March 31, 2020 and December 31, 2019 is $46.5 million and $47.3 million, respectively, as compared to the contractual principal outstanding balance which is $94.4 million and $94.4 million as of March 31, 2020 and December 31, 2019, respectively. The change of $0.8 million and $20.0 million in the fair value of the 5.75% Convertible Notes accounted for under the fair value option are included in the Company’s condensed consolidated statement of operations for the Current Quarter and Prior Year Quarter, respectively, within Other Income.

The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the 5.75% Convertible Notes (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives.  The 5.75% Convertible Notes contain bifurcatable embedded derivatives and do not require settlement by physical delivery of non-financial assets.  

The significant inputs to the valuation of the 5.75% Convertible Notes at fair value are Level 1 inputs as they are based on the quoted prices of the notes in the active market.

7. Debt Arrangements

The Company’s debt obligations consist of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Senior Secured Notes

 

$

330,551

 

 

$

338,130

 

Variable Funding Note, net of original issue discount

 

 

100,000

 

 

 

99,610

 

Senior Secured Term Loan, net of original issue discount

 

 

158,892

 

 

 

162,418

 

5.75% Convertible Notes (1)

 

 

46,485

 

 

 

47,277

 

Unamortized debt issuance costs

 

 

(941

)

 

 

(1,714

)

Total debt

 

 

634,987

 

 

 

645,721

 

Less current maturities

 

 

32,255

 

 

 

61,976

 

Total long-term debt

 

$

602,732

 

 

$

583,745

 

 

(1)

Reflects the debt carrying amount which is accounted for under the Fair Value Option in the condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019.  The actual principal outstanding balance of the 5.75% Convertible Notes is $94.4 million and $94.4 million as of March 31, 2020 and December 31, 2019, respectively.

14


 

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 March 31, 2020.

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, (the “anticipated repayment date”), (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. The Company did not repay or refinance the Securitization Notes prior to the anticipated repayment date, and as a result, during the first quarter of 2020, additional interest began accruing 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 Company reflects additional accrued interest as interest expense and Other Liabilities – Long term in its consolidated financial statements. The Securitization Notes rank pari passu with each other.

15


 

Pursuant to the Securitization Notes Indenture, the Securitization Notes are the joint and several obligations of the Co-Issuers only. The Securitization Notes are secured under the 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) intellectual property assets, including the U.S. and Canadian registered and applied for trademarks for the following brands and other related IP assets: Candie’s, Bongo, Joe Boxer (excluding Canadian trademarks, none of which are owned by Iconix), Rampage, Mudd, London Fog (other than the trademark for outerwear products sold in the United States), Mossimo, Ocean Pacific and OP, Danskin and Danskin Now, Rocawear, Starter, Waverly, Fieldcrest, Royal Velvet, Cannon, and Charisma; (ii) the rights (including the rights to receive payments) and obligations under all license agreements for use of those trademarks 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 Assets do not include revenue generating assets of (x) the Iconix subsidiaries that own the Ecko Unltd trademarks, the Mark Ecko trademarks, the Artful Dodger trademarks, the Umbro trademarks, and the Lee 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 March 31, 2020, 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.

The legal final maturity date of the Securitization Notes is in January of 2043. As discussed above, the Company did not repay or refinance the Securitization Notes prior to the anticipated repayment date. Beginning January 2020, the Company is no longer required to make previously designated contractual principal payments. Future principal payments will be formulaically based on a percentage of receipts of royalty revenue.

    In July 2017, in connection with the sale of the businesses underlying the Entertainment segment, the Company made a mandatory principal prepayment on its Senior Secured Notes of $152.2 million.

As of March 31, 2020 and December 31, 2019, the total outstanding principal balance of the Securitization Notes was $430.6 million and $438.1 million, respectively, of which $13.0 million and $42.7 million, respectively, is included in the current portion of long-term debt on the consolidated balance sheet. As of March 31, 2020 and December 31, 2019, $8.1 million and $14.9 million,

16


 

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, interest expense relating to the Securitization Notes was approximately $4.6 million and $5.4 million, respectively. For the Current Quarter and Prior Year Quarter long-term accrued interest expense related to the Securitization Notes was $4.3 million and zero respectively. For the Current Quarter and Prior Year Quarter, the Company recorded an expense for the amortization of original issue discount and deferred financing costs relating to the Securitization Notes of $1.1 million and $1.7 million, respectively. The effective interest rate on such notes is 5.3%

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.

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”),

17


 

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, on 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, 2020, 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

On February 12, 2018, the Company, through IBG Borrower, entered into the Third Amendment to the Senior Secured Term Loan. The Third Amendment provides for, among other things, amendments to certain restrictive covenants and other terms set forth in the Senior Secured Term Loan, as amended, to permit (i) IBG Borrower to enter into the 5.75% Notes Indenture (as 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 account of the Third Amendment Flex in an aggregate total amount of up to $6.1 million.

18


 

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.

Fifth Amendment

 

On March 30, 2020, the Company entered into the fifth amendment and waiver to the Senior Secured Term Loan (the “Fifth Amendment”). The Fifth Amendment, among other things, (i) waived an event of default under the Senior Secured Term Loan due to the Company’s receipt of a going concern qualified audit opinion and (ii) modified the asset sale prepayment obligation to obligate the Company to pay 75% of the net proceeds from one or more asset sales in any fiscal year to the extent the aggregate amount of asset sale net proceeds exceed $5.0 million.

As of March 31, 2020 and December 31, 2019, the outstanding principal balance of the Senior Secured Term Loan was $158.9 million (which is net of $11.9 million of original issue discount) and $162.4 million (which is net of $13.2 million of original issue discount), respectively, of which $19.3 million and $19.3 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 $4.0 million relating to the Senior Secured Term Loan in the Current Quarter as compared to $4.5 million in the Prior Year Quarter.

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 $1.3 million during the Prior Year Quarter. The effective interest rate on the Senior Secured Term loan is 13.2%

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”).

19


 

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, noteholders converted an aggregate outstanding principal balance of $0.0 million, of their 5.75% Convertible Notes into shares of the Company’s common stock.

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 6 for further details.  As of March 31, 2020 and December 31, 2019, while the debt balance recorded at fair value on the Company’s consolidated balance sheet is $46.5 million and $47.3 million, respectively, the actual outstanding principal balance of the 5.75% Convertible Notes is $94.4 million and $94.4 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 $1.5 million in the Prior Year Quarter.

 

 

 

20


 

Debt Maturities

As of March 31, 2020, the Company’s debt maturities on a calendar year basis are as follows:

 

 

 

Total

 

 

April 1

through

December 31,

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

Senior Secured Notes (1)

 

$

330,551

 

 

$

9,808

 

 

$

12,032

 

 

$

10,651

 

 

$

10,651

 

 

$

10,651