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SQBG > SEC Filings for SQBG > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for SEQUENTIAL BRANDS GROUP, INC.


15-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with our accompanying consolidated condensed financial statements and related notes. See the cautionary statement regarding forward-looking statements on page 3 of this Quarterly Report for a description of important factors that could cause actual results to differ from expected results.

Overview

We own a portfolio of consumer brands, including William Rast®, People's Liberation®, DVS®, Heelys®, Ellen Tracy® and Caribbean Joe®. We promote, market, and license these brands and intend to grow our portfolio by acquiring rights to additional brands. We have licensed and intend to license our brands in a variety of categories to retailers, wholesalers and distributors in the United States and in certain international territories. In our licensing arrangements, our licensing partners are responsible for designing, manufacturing and distributing our licensed products, subject to our continued oversight and marketing support. In our direct-to-retail license, we grant the retailer the exclusive right to distribute branded apparel in a broad range of product categories through its stores, consumer-direct mail and consumer-direct ecommerce distribution channels. In our wholesale licenses, we grant rights to a single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to multiple stores within an approved channel of distribution.

In the second half of 2011, we changed our business model to focus on licensing and brand management. Prior to our change in business model and since 2005, we designed, marketed and provided on a wholesale basis branded apparel and apparel accessories. Commencing in July 2008, we implemented a retail strategy and opened retail stores to sell our branded products. In connection with the change in our business model, we discontinued our wholesale distribution of branded apparel and apparel accessories, liquidated our existing inventory and closed our remaining retail stores. To reflect our business transition, in March 2012, we changed our corporate name from People's Liberation, Inc. to Sequential Brands Group, Inc.

Recent Developments

Private Placement Transaction

On December 21, 2012, we entered into the PIPE Purchase Agreement with the PIPE Investors, pursuant to which we agreed to sell to the PIPE Investors an aggregate of 4,966,667 shares of our common stock, par value $0.001, at a purchase price of $4.50 per share, for a total offering amount of approximately $22,350. Net proceeds, after the payment of legal and other expenses, amounted to approximately $21,212.

The Offering was consummated on January 9, 2013, and a portion of the proceeds was used to fund the acquisition of Heelys. Affiliates of the Company purchased 744,444 shares, with our Chief Executive Officer purchasing 11,111 shares and TCP SQBG, a fund affiliated with TCP WR, purchasing 733,333 shares. Our directors, William Sweedler, Matthew Eby and Richard Gersten, are co-managing members of Tengram, which is the managing member of TCP WR and TCP SQBG. As discussed further in Note 13 of the accompanying condensed consolidated financial statements, we entered into the Registration Rights Agreement with the PIPE Investors on January 9, 2013 in connection with the PIPE Purchase Agreement.

Acquisition of Heelys

On January 24, 2013, we completed our acquisition of Heelys pursuant to the Heelys Merger Agreement, dated as of December 7, 2012, by and among us, Heelys and Wheels Merger Sub, Inc., a Delaware corporation and our wholly-owned subsidiary. In accordance with the Heelys Merger Agreement, we acquired all of the outstanding shares of common stock of Heelys for $2.25 per share in cash, for an aggregate consideration of approximately $62,974. As further described in Note 6 of the accompanying condensed consolidated financial statements, the acquisition was funded with cash and investments from both us and Heelys. The acquisition of Heelys was effected to develop and build our diversified portfolio of consumer brands. In connection with the acquisition, we incurred legal and other costs related to the transaction of approximately $1,576.

In connection with the acquisition of Heelys, we entered into a multi-country exclusive Heelys License Agreement with BBC to license the trademark "Heelys" and all existing derivative Marks. The Heelys License Agreement granted an exclusive, nontransferable, non-assignable license, without the right to sub-license, to use the Marks and certain proprietary rights, including patents, in connection with the manufacturing, distribution, advertising and sale of the License Products, subject to the terms and conditions stated in the Heelys License Agreement. The term of the Heelys License Agreement expires on June 30, 2019.

Amended and Restated Stockholders Agreement

As previously disclosed, on February 22, 2012, we, TCP WR and Colin Dyne, our former chief executive officer, chief financial officer and director entered into the Stockholders Agreement. In connection with the Ellen Tracy and Caribbean Joe Acquisition, we entered into the A&R Stockholders Agreement, dated as of March 27, 2013, pursuant to which Mr. Dyne was removed as a party to such agreement. The terms of the A&R Stockholders Agreement are otherwise substantially similar to those in the Stockholders Agreement.

Acquisition of Ellen Tracy® and Caribbean Joe® and Financing

As discussed further in Note 6 of the accompanying condensed consolidated financial statements, on March 28, 2013, we entered into the BM Purchase Agreement, by and among us, ETPH and Brand Matter, pursuant to which we acquired all of the outstanding equity interests of Brand Matter for an aggregate purchase price consisting of (i) approximately $62,285 of cash, subject to adjustment as set forth in the Purchase Agreement, (ii) 2,833,590 shares of our common stock, and (iii) 5-year warrants to purchase up to an aggregate of 125,000 shares of our common stock at an exercise price equal to $10.00 per share. In connection with the Ellen Tracy and Caribbean Joe Acquisition, we entered into (i) the First Lien Loan Agreement, which provides for term loans of up to $45,000, and (ii) the Second Lien Loan Agreement, which provides for term loans of up to $20,000. The proceeds from the Term Loans were used to fund the Ellen Tracy and Caribbean Joe Acquisition, repay existing debt, pay fees and expenses in connection with the foregoing, finance capital expenditures and for general corporate purposes. In connection with the Second Lien Loan Agreement, we also issued 5-year warrants to purchase up to an aggregate of 285,810 shares of our common stock at an exercise price of $4.50 per share. The Ellen Tracy and Caribbean Joe Acquisition was effected to complete our base platform through acquiring two strong brands, Ellen Tracy® and Caribbean Joe®, with a proven team. The Term Loans were drawn in full on March 28, 2013 and are required to be repaid on March 28, 2018. We are required to make quarterly scheduled amortization payments during the term of the Loan Agreements.

Conversion of the Debentures

As discussed further in Note 9 of the accompanying condensed consolidated financial statements, on March 28, 2013, TCP WR converted the aggregate principal amount outstanding under the Debentures into 5,523,810 shares of our common stock at a conversion rate of $2.625 per share. At the time of the TCP Conversion, the aggregate principal amount outstanding under the Debentures was $14,500, plus accrued and unpaid interest. In connection with the TCP Conversion, we also redeemed all of the 14,500 issued and outstanding shares of Series A Preferred Stock held by TCP WR for an aggregate redemption price (unrounded) of $14.50, pursuant to the Designation of Rights, Preferences and Limitations for the Series A Preferred Stock.

Fiscal Year

Our fiscal year ends on December 31. Each quarter of each fiscal year ends on March 31, June 30, September 30 and December 31.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the financial statements.

We base our estimates and judgments on a variety of factors including our historical experience, knowledge of our business and industry, and current and expected economic conditions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.

While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.

Please refer to our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on April 1, 2013, for a discussion of our critical accounting policies. During the three months ended March 31, 2013, there were no material changes to these policies.

Results of Operations



Comparison of the Three Months Ended March 31, 2013 to the Three Months Ended
March 31, 2012



The following table sets forth, for the periods indicated, results of operation
information from our unaudited condensed consolidated financial statements:



                                           Three Months Ended March 31,           Change            Change
                                              2013                 2012          (Dollars)       (Percentage)

Net revenue                             $          1,629       $      1,055     $       574               54.5 %
Operating expenses                                 5,365                959           4,406              459.6 %
(Loss) income from operations                     (3,736 )               96          (3,832 )          -3999.9 %
Interest expense, net                             11,617                144          11,473             7990.4 %
Loss before income taxes                         (15,353 )              (48 )       (15,305 )          32023.0 %
Provision for income taxes                         2,264                 10           2,254            22540.0 %
Loss from continuing operations                  (17,617 )              (58 )       (17,559 )          30382.2 %
Loss from discontinued operations                 (3,864 )             (371 )        (3,493 )            941.1 %
Net loss                                         (21,481 )             (429 )       (21,052 )           4907.2 %
Noncontrolling interest from
continuing operations                                (26 )                0             (26 )           -100.0 %
Net loss attributable to common
stockholders                            $        (21,507 )     $       (429 )   $   (21,078 )           4913.0 %

Net revenue for the three months ended March 31, 2013 consists of license revenue earned from our license agreements related to our William Rast, DVS, Heelys and People's Liberation brands. Net revenues for the three months ended March 31, 2013 do not include license revenue from our Ellen Tracy and Caribbean Joe brands, as these brands were acquired on March 28, 2013 and only include two months of revenues related to our Heelys brand, as this brand was acquired on January 24, 2013. Net revenue for the three months ended March 31, 2012 consists of license revenue earned only from our license agreements related to our William Rast brand, as we did not either own or license any of the other brands during that period.

Our expense structure for the three months ended March 31, 2013 is not representative of what we expect our normalized brand management and licensing business to be in the future. Of the total operating expenses for the three months ended March 31, 2013, approximately $2,357 is related to deal costs incurred in connection with acquisitions that have or are expected to occur; and approximately $3,008 is related to the day to day activities of our Company, which is primarily compensation, professional fees, advertising, stock-based compensation expense and royalty expenses paid under our agreement with Tennman WR-T. Operating expenses for the three months ended March 31, 2012 primarily consists of compensation of approximately $360, royalty expenses under the Tennman WR-T agreement of $226, and professional fees of $142 mainly related to our 2011 year-end audit. As part of our acquisition strategy, we may incur additional deal costs, however those costs are neither certain nor predictable, nor are they considered representative of our core business.

Interest expense during the three months ended March 31, 2013 resulted primarily from the conversion of the Debentures, as more fully described in Note 9 to our condensed consolidated financial statements. As a result of the TCP Conversion, the remaining unamortized discount of $11,028 recorded in connection with the beneficial conversion feature and Warrants issued in connection with the Debentures, as well as the remaining unamortized balance of deferred financing costs of $586, were recognized as non-cash interest expense. Interest expense for the three months ended March 31, 2012 resulted primarily from interest due on our promissory notes payable in the aggregate principal amount of $1,750 through the date of their repayment on February 3, 2012, interest at a rate of LIBOR on our Debentures and interest related to the accretion of the valuation discount and amortization of deferred financing costs associated with our Debentures.

The provision for income taxes as of March 31, 2013 represents the non-cash deferred tax expense created by the amortization of the acquired trademarks related to our Ellen Tracy and Caribbean Joe brands. The provision for income taxes for the three months ended March 31, 2012 represents the minimum tax payments due for state and local purposes, including gross receipts tax on sales generated by our limited liability companies, and estimated federal and state taxes due at statutory effected tax rates, if any.

The loss from discontinued operations for the three months ended March 31, 2013 is primarily attributable to the wind down costs associated with the Heelys legacy operating business, as a result of our decision to discontinue our wholesale business related to the Heelys brand. As of March 31, 2013, these costs mainly represent severance expense, lease termination costs and professional and other fees. We expect to complete the wind down of Heelys legacy operations by the end of 2013. The loss from discontinued operations for the three months ended March 31, 2012 is primarily attributable to the wholesale business related to our People's Liberation and William Rast branded products and the retail operations included in our subsidiary, Rast Retail.

Liquidity and Capital Resources

As of March 31, 2013, our continuing operations had cash of approximately $16,365 and a working capital balance of approximately $3,224. As of December 31, 2012, our continuing operations had cash of approximately $2,624, a working capital deficit of approximately $524. We believe that cash from future operations and our currently available cash will be sufficient to satisfy our anticipated working capital requirements for the foreseeable future. We intend to continue financing future brand acquisitions through a combination of cash from operations, bank financing and the issuance of additional equity and/or debt securities. See Notes 9 and 13 to our condensed consolidated financial statements for a description of certain prior financings consummated by us.

Cash Flows from Continuing Operations



Cash flows from continuing operations for operating, financing and investing
activities for the three months ended March 31, 2013 and 2012 are summarized in
the following table:



                                        Three Months Ended March 31,
                                          2013                 2012
              Operating activties    $        (1,892 )     $      (1,354 )
              Investing activities           (67,245 )                 -
              Financing activities            84,267              11,906
              Net increase in cash   $        15,130       $      10,552

Operating Activities

Net cash used in operating activities from continuing operations was $1,892 for the three months ended March 31, 2013, compared to $1,354 for the three months ended March 31, 2012. Net loss for the three months ended March 31, 2013 of $21,481 includes net non-cash expenses of $11,614 of amortization of debt discount and deferred financing costs and $2,239 of deferred income taxes. Net loss for the three months ended March 31, 2013 also includes $3,864 of loss from discontinued operations. Changes in operating assets and liabilities provided $1,513 in cash. Net loss for the three months ended March 31, 2012 of $429 includes $371 of loss from discontinued operations and $128 of amortization of debt discount and deferred financing costs. Changes in operating assets and liabilities used $1,476 in cash.

Investing Activities

Net cash used in investing activities from continuing operations was $67,245 for the three months ended March 31, 2013, primarily consisting of $67,221 of net cash paid for the acquisitions of our Heelys, Ellen Tracy and Caribbean Joe brands, as further discussed in Note 6 to our condensed consolidated financial statements.

Financing Activities

Net cash provided by financing activities from continuing operations for the three months ended March 31, 2013 amounted to $84,267, compared to $11,906 for the three months ended March 31, 2012. In January 2013, we received proceeds of $22,350 in connection with the Offering of our common stock. A portion of the proceeds was used to fund the acquisition of Heelys. In March 2013, we received $65,000 of proceeds under the Term Loans, for which the proceeds were mainly used in the Ellen Tracy and Caribbean Joe Acquisition, pay fees and expenses in connection with the foregoing, finance capital expenditures and for general corporate purposes. Cash paid for fees and other costs incurred in connection with the Offering and the Term Loans amounted to $3,111. In February 2012, we received $14,500 in gross proceeds from the sale of the Debentures. Net proceeds from this transaction after the payment of closing, legal and other costs and the repayment of outstanding obligations related to notes payable and our factoring facility amounted to approximately $11,700.

Future Capital Requirements

We believe the cash received from the sale of our common stock in January 2013 and cash received from the Term Loans in March 2013 will be sufficient to meet our capital requirements for the next twelve months, as they relate to our current operations. The extent of our future capital requirements will depend on many factors, including our results of operations and growth through the acquisition of additional brands and we cannot be certain that we will be able to obtain additional financing in sufficient amounts and/or on acceptable terms in the near future, if at all.

Contractual Obligations



The following summarizes our contractual obligations at March 31, 2013 and the
effects such obligations are expected to have on liquidity and cash flows in
future periods:



                                                   Payments Due by Period
                                        Less than 1                                       After 5
Contractual Obligations    Total           Year           1-3 Years       4-5 Years        Years
Operating leases          $  2,267     $         833     $     1,434     $         0     $       0
Minimum royalties due        2,400               400           1,200             800             *
Term loans                  65,000             8,000          24,000          33,000             0
Total                     $ 69,667     $       9,233     $    26,634     $    33,800     $       0

* Pursuant to the royalty agreement between Rast Sourcing, William Rast Licensing, LLC ("Rast Licensing") and Tennman WR-T, Rast Sourcing is obligated to pay Tennman WR-T a guaranteed minimum royalty of $400,000 per calendar year, with such payments continuing until the earlier of (i) the date that Rast Sourcing pays a liquidating payment to Tennman WR-T or (ii) the date Tennman WR-T or any of its affiliates no longer owns Class B membership interests in Rast Sourcing.

Off-Balance Sheet Arrangements

At March 31, 2013 and 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncements

See Note 2 to the accompanying condensed consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

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