10-Q 1 icon-10q_20200930.htm 10-Q icon-10q_20200930.htm

 

 

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 September 30, 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 November 7, 2020, 13,174,848 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)

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Assets

 

(Unaudited)

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents (includes VIE assets of $6,761 and $8,397, respectively)

 

$

70,530

 

 

$

55,465

 

Restricted cash

 

 

12,760

 

 

 

15,946

 

Accounts receivable, net (includes VIE assets of $4,485 and $8,673, respectively)

 

 

17,306

 

 

 

31,368

 

Contract asset (includes VIE assets of $1,087 and $548, respectively)

 

 

13,747

 

 

 

9,448

 

Other assets – current (includes VIE assets of $5,609 and $6,444, respectively)

 

 

7,924

 

 

 

21,440

 

Total Current Assets

 

 

122,267

 

 

 

133,667

 

Property and equipment:

 

 

 

 

 

 

 

 

Furniture, fixtures and equipment

 

 

20,542

 

 

 

20,087

 

Less: Accumulated depreciation

 

 

(18,403

)

 

 

(17,545

)

 

 

 

2,139

 

 

 

2,542

 

Other Assets:

 

 

 

 

 

 

 

 

Other assets

 

 

5,922

 

 

 

6,780

 

Contract asset (includes VIE assets of $1,480 and $1,593, respectively)

 

 

8,575

 

 

 

11,807

 

Right-of-use asset

 

 

5,052

 

 

 

6,254

 

Trademarks and other intangibles, net (includes VIE assets of $114,635 and $117,744, respectively)

 

 

253,590

 

 

 

274,084

 

Investments and joint ventures

 

 

21,946

 

 

 

44,827

 

Goodwill

 

 

26,099

 

 

 

26,099

 

 

 

 

321,184

 

 

 

369,851

 

Total Assets

 

$

445,590

 

 

$

506,060

 

Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (includes VIE liabilities of $968 and $5,243, respectively)

 

$

36,798

 

 

$

51,503

 

Deferred revenue (includes VIE liabilities of $1,761 and $422, respectively)

 

 

4,682

 

 

 

4,701

 

Current portion of long-term debt

 

 

42,767

 

 

 

61,976

 

Other liabilities – current

 

 

9,281

 

 

 

13,775

 

Total Current Liabilities

 

 

93,528

 

 

 

131,955

 

Deferred income tax liability

 

 

4,648

 

 

 

4,464

 

Long-term debt, less current maturities (includes $49,140 and $47,277, respectively, at fair value)

 

 

540,782

 

 

 

583,745

 

Other liabilities (includes VIE liabilities of $1,456 and $0, respectively)

 

 

23,411

 

 

 

7,794

 

Total Liabilities

 

 

662,369

 

 

 

727,958

 

Redeemable Non-Controlling Interest

 

 

25,497

 

 

 

34,461

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ Deficit:

 

 

 

 

 

 

 

 

Common stock, $.001 par value shares authorized 260,000; shares issued 16,650 and

   15,138, respectively

 

 

16

 

 

 

15

 

Additional paid-in capital

 

 

1,047,167

 

 

 

1,045,307

 

Accumulated losses

 

 

(422,309

)

 

 

(429,117

)

Accumulated other comprehensive loss

 

 

(48,930

)

 

 

(54,643

)

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

 

 

(844,526

)

 

 

(844,442

)

Total Iconix Brand Group, Inc. Stockholders’ Deficit

 

 

(268,582

)

 

 

(282,880

)

Non-Controlling Interest

 

 

26,306

 

 

 

26,521

 

Total Stockholders’ Deficit

 

 

(242,276

)

 

 

(256,359

)

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

 

$

445,590

 

 

$

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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Licensing revenue

 

$

24,462

 

 

$

35,471

 

 

$

74,688

 

 

$

105,806

 

 

Selling, general and administrative expenses

 

 

9,915

 

 

 

26,318

 

 

 

42,043

 

 

 

60,846

 

 

Depreciation and amortization

 

 

315

 

 

 

421

 

 

 

894

 

 

 

1,393

 

 

Equity (earnings) loss on joint ventures

 

 

27

 

 

 

(153

)

 

 

1,455

 

 

 

(2,290

)

 

Gain on sale of investment

 

 

 

 

 

 

 

 

(1,600

)

 

 

 

 

Gain on sale of trademarks

 

 

(74,105

)

 

 

 

 

 

(74,105

)

 

 

 

 

Investment impairment

 

 

17,145

 

 

 

17,000

 

 

 

17,245

 

 

 

17,000

 

 

Trademark impairment

 

 

4,814

 

 

 

 

 

 

23,709

 

 

 

 

 

Operating income (loss)

 

 

66,351

 

 

 

(8,115

)

 

 

65,047

 

 

 

28,857

 

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

18,489

 

 

 

14,430

 

 

 

52,249

 

 

 

43,399

 

 

Interest (income)

 

 

(1

)

 

 

(96

)

 

 

(51

)

 

 

(259

)

 

Other (income) loss, net

 

 

(285

)

 

 

11,971

 

 

 

1,851

 

 

 

(6,821

)

 

Foreign currency translation loss

 

 

531

 

 

 

391

 

 

 

596

 

 

 

760

 

 

Other expenses – net

 

 

18,734

 

 

 

26,696

 

 

 

54,645

 

 

 

37,079

 

 

Income (loss) before income taxes

 

 

47,617

 

 

 

(34,811

)

 

 

10,402

 

 

 

(8,222

)

 

Provision (Benefit) for income taxes

 

 

915

 

 

 

(585

)

 

 

39

 

 

 

1,253

 

 

Net income (loss)

 

 

46,702

 

 

 

(34,226

)

 

 

10,363

 

 

 

(9,475

)

 

Less: Net income attributable to non-controlling interest

 

 

976

 

 

 

1,482

 

 

 

3,555

 

 

 

7,017

 

 

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

 

$

45,726

 

 

$

(35,708

)

 

$

6,808

 

 

$

(16,492

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.66

 

 

$

(3.07

)

 

$

0.55

 

 

$

(1.62

)

 

Diluted

 

$

1.51

 

 

$

(3.07

)

 

$

0.37

 

 

$

(1.62

)

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,517

 

 

 

11,631

 

 

 

12,051

 

 

 

10,169

 

 

Diluted

 

 

31,189

 

 

 

11,631

 

 

 

33,801

 

 

 

10,169

 

 

 

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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Net income (loss)

 

$

46,702

 

 

$

(34,226

)

 

$

10,363

 

 

$

(9,475

)

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

5,736

 

 

 

(4,044

)

 

 

5,713

 

 

 

(4,647

)

 

Total other comprehensive (loss) income

 

 

5,736

 

 

 

(4,044

)

 

 

5,713

 

 

 

(4,647

)

 

Comprehensive income (loss)

 

$

52,438

 

 

$

(38,270

)

 

$

16,076

 

 

$

(14,122

)

 

Less: comprehensive income attributable to non-controlling interest

 

 

976

 

 

 

1,482

 

 

 

3,555

 

 

 

7,017

 

 

Comprehensive income (loss) attributable to Iconix Brand

   Group, Inc.

 

$

51,462

 

 

$

(39,752

)

 

$

12,521

 

 

$

(21,139

)

 

 

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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Beginning balance (shares)

 

 

15,334

 

 

 

14,928

 

 

 

15,138

 

 

 

11,162

 

 

Shares issued on vesting of restricted stock

 

 

 

 

 

 

 

 

196

 

 

 

95

 

 

Shares issued as payment of interest on 5.75% Convertible Notes

 

 

1,316

 

 

 

 

 

 

1,316

 

 

 

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

 

 

 

56

 

 

 

 

 

 

3,727

 

 

Common Stock (shares)

 

 

16,650

 

 

 

14,984

 

 

 

16,650

 

 

 

14,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (amount)

 

$

15

 

 

$

15

 

 

$

15

 

 

$

11

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

 

 

 

 

 

 

 

 

 

4

 

 

Shares issued as payment of interest on 5.75% Convertible Notes

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

Common Stock (amount)

 

$

16

 

 

$

15

 

 

$

16

 

 

$

15

 

 

Beginning balance

 

 

1,045,408

 

 

 

1,045,518

 

 

 

1,045,307

 

 

 

1,037,372

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

 

 

 

46

 

 

 

 

 

 

6,225

 

 

Shares issued as payment of interest on 5.75% Convertible Notes

 

 

1,423

 

 

 

 

 

 

1,422

 

 

 

 

 

Re-purchase of Umbro China Equity

 

 

 

 

 

(770

)

 

 

 

 

 

(770

)

 

Change in redemption value of redeemable non-controlling interest

 

 

140

 

 

 

 

 

 

(171

)

 

 

1,586

 

 

Equity compensation expense

 

 

196

 

 

 

362

 

 

 

609

 

 

 

760

 

 

Foreign currency translation

 

 

 

 

 

(59

)

 

 

 

 

 

(76

)

 

Additional Paid-In Capital

 

$

1,047,167

 

 

$

1,045,097

 

 

$

1,047,167

 

 

$

1,045,097

 

 

Beginning balance

 

 

(468,035

)

 

 

(293,580

)

 

 

(429,117

)

 

 

(312,796

)

 

Net (loss) income

 

 

45,726

 

 

 

(35,708

)

 

 

6,808

 

 

 

(16,492

)

 

Accumulated Losses

 

$

(422,309

)

 

$

(329,288

)

 

$

(422,309

)

 

$

(329,288

)

 

Beginning balance

 

 

(54,666

)

 

 

(53,671

)

 

 

(54,643

)

 

 

(53,068

)

 

Foreign currency translation

 

 

5,736

 

 

 

(4,044

)

 

 

5,713

 

 

 

(4,647

)

 

Accumulated Other Comprehensive Loss

 

$

(48,930

)

 

$

(57,715

)

 

$

(48,930

)

 

$

(57,715

)

 

Beginning balance

 

 

(844,526

)

 

 

(844,334

)

 

 

(844,442

)

 

 

(844,253

)

 

Shares repurchased on vesting of restricted stock

 

 

 

 

 

 

 

 

(84

)

 

 

(81

)

 

Treasury Stock

 

$

(844,526

)

 

$

(844,334

)

 

$

(844,526

)

 

$

(844,334

)

 

Beginning balance

 

 

27,464

 

 

 

22,612

 

 

 

26,521

 

 

 

26,999

 

 

Re-purchase of Umbro China Equity

 

 

 

 

 

(495

)

 

 

 

 

 

(495

)

 

Reclass from redeemable NCI

 

 

 

 

 

 

 

 

 

 

 

(856

)

 

Net income

 

 

595

 

 

 

895

 

 

 

5,335

 

 

 

5,494

 

 

Distributions to joint ventures

 

 

(1,753

)

 

 

(1,279

)

 

 

(5,550

)

 

 

(9,409

)

 

Non-Controlling Interest

 

$

26,306

 

 

$

21,733

 

 

$

26,306

 

 

$

21,733

 

 

Total Stockholders' Deficit

 

$

(242,276

)

 

$

(164,492

)

 

$

(242,276

)

 

$

(164,492

)

 

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 Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

10,363

 

 

$

(9,475

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

894

 

 

 

1,393

 

Amortization of deferred financing costs and debt discount

 

 

8,092

 

 

 

9,250

 

Interest expense on 5.75% Convertible Notes paid in shares

 

 

1,423

 

 

 

 

Stock-based compensation expense

 

 

609

 

 

 

760

 

Provision for doubtful accounts

 

 

2,584

 

 

 

(1,215

)

Periodic lease cost

 

 

1,683

 

 

 

1,648

 

(Earnings) loss on equity investments in joint ventures

 

 

1,455

 

 

 

(2,290

)

Distributions from equity investments

 

 

 

 

 

1,981

 

Contract asset impairment

 

 

3,168

 

 

 

4,622

 

Trademark impairment

 

 

23,709

 

 

 

 

Impairment of equity method investment

 

 

17,245

 

 

 

17,000

 

Mark to market adjustment on convertible note

 

 

1,862

 

 

 

(8,350

)

Loss (gain) on debt to equity conversions

 

 

 

 

 

1,568

 

Gain on sale of trademarks and other investments

 

 

(75,705

)

 

 

(209

)

Income on other equity investment

 

 

 

 

 

200

 

Deferred income tax expense

 

 

184

 

 

 

944

 

(Gain) Loss on foreign currency translation

 

 

596

 

 

 

760

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10,475

 

 

 

10,209

 

Other assets – current

 

 

8,070

 

 

 

(6,684

)

Other assets

 

 

3,171

 

 

 

151

 

Deferred revenue

 

 

(164

)

 

 

858

 

Accounts payable and accrued expenses

 

 

(13,442

)

 

 

(6,254

)

Other liabilities

 

 

13,416

 

 

 

(970

)

Net Cash provided by operating activities

 

 

19,688

 

 

 

15,897

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(490

)

 

 

(429

)

Acquisition of trademarks and other investments

 

 

(2,294

)

 

 

(5,965

)

Issuance of loan to equity investee

 

 

(2,750

)

 

 

 

Proceeds from loan to equity investee

 

 

2,750

 

 

 

 

Proceeds from sale of trademarks and investments

 

 

80,101

 

 

 

3,000

 

Net cash provided by (used in) investing activities

 

 

77,317

 

 

 

(3,394

)

Cash flows (used in) financing activities:

 

 

 

 

 

 

 

 

Payment of long-term debt

 

 

(73,434

)

 

 

(26,369

)

Proceeds from Paycheck Protection Program Loan

 

 

1,307

 

 

 

 

Distributions to non-controlling interests

 

 

(5,550

)

 

 

(9,072

)

Distributions to redeemable non-controlling interests

 

 

(7,355

)

 

 

(337

)

Cost of shares repurchased on vesting of restricted stock

 

 

(84

)

 

 

(81

)

Net cash (used in) financing activities

 

 

(85,116

)

 

 

(35,859

)

Effect of exchange rate changes on cash and restricted cash

 

 

(10

)

 

 

(104

)

Net increase (decrease) in cash and cash equivalents, and restricted cash

 

 

11,879

 

 

 

(23,460

)

Cash, cash equivalents, and restricted cash, beginning

   of period

 

 

71,411

 

 

 

82,635

 

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

 

$

83,290

 

 

$

59,175

 

 

6


 

Supplemental disclosure of cash flow information:

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Income taxes (net of refunds received)

 

$

(2,075

)

 

$

5,996

 

Interest

 

$

28,856

 

 

$

35,666

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Non-cash additions to operating lease assets

 

$

-

 

 

$

10,462

 

Shares issued upon conversion of debt to equity

 

$

-

 

 

$

6,229

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

7


 

Iconix Brand Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 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 September 30, 2020 (“Current Quarter”) and the nine months ended September 30, 2020 (“Current Nine Months”) are not necessarily indicative of the results that may be expected for a full fiscal year.  The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

During first quarter of 2020, the, the Company adopted one new accounting pronouncement.  Refer to Note 20 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 non-controlling interest and non-controlling 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 $422.3 million as of September 30, 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 is actively pursuing asset sales, in order to satisfy liquidity needs and financial covenants. In July 2020, the Company completed the sale of its equity in Umbro China for approximately $62.5 million (the “Umbro China Sale”), which included the sale of the Umbro sports brand in the People’s Republic of China, Hong Kong, Taiwan and Macau. The Company received approximately $59.8 million in net proceeds from the Umbro China Sale and in August 2020, repaid approximately $44.7 million under its Senior Secured Term Loan (as defined below).

In September 2020, the Company completed the sale of its equity interests of Starter China Limited, a wholly-owned subsidiary of Iconix China (the “Starter China Sale”), for consideration of $16.0 million. The Starter China Sale includes the sale of the Starter brand in the mainland of China, Hong Kong, Taiwan and Macau. The Company received approximately $15.6 million in net proceeds from the Starter China Sale and in October 2020, repaid approximately $11.7 million under its Senior Secured Term Loan.

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 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

8


 

are, in many cases, suspending or deferring capital expenditures and 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.

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. Notably, certain countries have begun re-enacting lockdowns, which, if re-enacted in the United States, could further negatively impact our business and results of operations. 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. Also, the Company has taken impairment charges during the Current Nine Months as a result of the impact of COVID-19 and may in the future have additional impairment charges. See “Note 3. Goodwill and Trademarks and Other Intangibles, net” below for additional information.

Reverse Stock Split

On March 14, 2019, the Company effected a 1-for-10 reverse stock split (the “Reverse Stock Split”) of its common stock.  Unless the context otherwise requires, all share and per share amounts in this quarterly report on Form 10-Q have been adjusted to reflect the Reverse Stock Split.  Refer to Note 9 for further details.

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.  

9


 

The following table presents our revenues disaggregated by license type:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Licensing revenue by license type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct-to-retail license

 

$

6,490

 

 

$

11,146

 

 

$

21,460

 

 

$

31,263

 

 

Wholesale licenses

 

 

17,878

 

 

 

24,206

 

 

 

52,787

 

 

 

73,758

 

 

Other licenses

 

 

94

 

 

 

119

 

 

 

441

 

 

 

785

 

 

 

 

$

24,462

 

 

$

35,471

 

 

$

74,688

 

 

$

105,806

 

 

 

The following table represents our revenues disaggregated by geography:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Total licensing revenue by geographic region:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

15,006

 

 

$

21,613

 

 

$

42,269

 

 

$

63,219

 

 

Other (1)

 

 

9,456

 

 

 

13,858

 

 

 

32,419

 

 

 

42,587

 

 

 

 

$

24,462

 

 

$

35,471

 

 

$

74,688

 

 

$

105,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 October 1, 2020, the Company and its joint ventures had a contractual right to receive over $380.7 million of aggregate minimum licensing revenue over the balance and the terms of their current licenses, excluding any renewals.

As of September 30, 2020, future minimum license revenue to be recognized under our existing licenses is as follows: $19.3 million, $68.4 million, $66.6 million, $61.0 million, $44.7 million and $120.7 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 September 30, 2020, current and long-term contract assets were $13.7 million and $8.6 million, respectively. Our current and long- term contract assets as of December 31, 2019, were $9.4 million and $11.8 million, respectively.  For the Current Quarter, the Company incurred an impairment loss of its contract assets of $2.0 million as a result of impairments including $1.5 million associated with the Starter China Sale and certain contract modifications as compared to $4.0 million for the three months ended September 30, 2019 (“Prior Year Quarter”). For the Current Nine Months, the Company incurred an impairment loss of $3.2 million as a result of impairments and certain contract modifications as compared to $4.6 million in Nine Months ended September 30, 2019 (“Prior Year Nine Months”).

10


 

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 September 30, 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 $3.8 million of revenues recognized that were included in the deferred revenue balance at the beginning of the period.

3. Goodwill and Trademarks and Other Intangibles, net

 

Goodwill

There were no changes and no impairment of the Company’s goodwill during the Current Nine Months or in the Prior Year Nine Months. 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 or as deemed necessary due to the identification of a triggering event.  In accordance with ASC 350, during the First Quarter of 2020, 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.  No triggering event was identified during the Current Quarter that would require a reassessment of the Company’s Goodwill.

Trademarks and Other Intangibles, net

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

 

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

 

Estimated

Lives in

Years

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Gross

Carrying

Amount