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SQBG > SEC Filings for SQBG > Form 10-Q on 12-Aug-2013All Recent SEC Filings

Show all filings for SEQUENTIAL BRANDS GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SEQUENTIAL BRANDS GROUP, INC.


12-Aug-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®, Caribbean Joe® and Revo®. 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, as well as operated retail stores to sell our branded products. In connection with the change in our business model in 2011, 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

Revo Acquisition

As discussed further in Note 16 of the accompanying condensed consolidated financial statements, on August 2, 2013, we entered into the Revo Purchase Agreement, by and among us, SBG Revo and Oakley, pursuant to which SBG Revo agreed to purchase the Purchased Assets of Oakley and certain of its affiliates. Under the terms of the Revo Purchase Agreement, SBG Revo paid Oakley and certain of its affiliates an aggregate purchase price of approximately $20 million in cash and acquired the Purchased Assets. The Purchased Assets consisted of the Revo® brand, including related intellectual property and certain other assets, including certain inventory which was simultaneously sold to the Company's licensee.

2013 Private Placement Transaction

As further discussed in Note 14 of the accompanying condensed consolidated financial statements, on July 25, 2013, we entered into the 2013 Purchase Agreements with the Investors, pursuant to which we agreed to sell to the Investors an aggregate of 8,000,000 Securities, at a purchase price of $5.50 per share, for a total offering amount of $44,000. Certain affiliates, including Mr. Al Gossett, a member of our board of directors, and a fund affiliated with Tengram, of which three of our board members are controlling members, agreed to purchase 109,091 and 257,273 Securities, respectively, in the July Offering. Net proceeds, after the payment of legal and other expenses, amounted to approximately $40,480. As discussed further in Note 14 of the accompanying condensed consolidated financial statements, we entered into the 2013 Registration Rights Agreements with the Investors on July 26, 2013 in connection with the 2013 Purchase Agreements.

We intend to use the net proceeds from the July Offering for general corporate purposes, including to fund certain planned and other potential business acquisitions, and to pay the fees and expenses associated therewith.

2013 Stock Incentive Plan

As further discussed in Note 15 of the accompanying condensed consolidated financial statements, on July 24, 2013, our board of directors approved and adopted the 2013 Stock Incentive Plan and the filing of a registration statement on Form S-8 with the SEC. We filed such registration statement on Form S-8 with the SEC on August 2, 2013. The 2013 Stock Incentive Plan replaced the 2005 Plan. No new grants will be granted under the 2005 Plan as of July 24, 2013. Grants that were made under the 2005 Plan prior to board of directors' approval and adoption of the 2013 Stock Incentive Plan will continue in effect in accordance with their terms. The 2013 Stock Incentive Plan became effective on July 24, 2013 and, subject to the right of the board of directors to amend or terminate the 2013 Stock Incentive Plan in accordance with terms and conditions thereof, will remain in effect until all shares of the Company's common stock reserved for issuance under the 2013 Stock Incentive Plan have been delivered and any restrictions on such shares have lapsed. Notwithstanding the foregoing, no shares of our common stock may be granted under the 2013 Stock Incentive Plan on or after July 24, 2023.

Private Placement Transaction

As further discussed in Note 13 of the accompanying condensed consolidated financial statements, 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 Amended Registration Rights Agreement with the PIPE Investors on January 9, 2013, as amended on May 14, 2013, in connection with the PIPE Purchase Agreement.

Acquisition of Heelys

As further discussed in Note 6 of the accompanying condensed consolidated financial statements, 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 $1,605.

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 six months ended June 30, 2013, there were no material changes to these policies.

Results of Operations

Comparison of the Three Months Ended June 30, 2013 to the Three Months Ended
June 30, 2012

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

                                    Three Months Ended June 30,         Change         Change
                                     2013                2012          (Dollars)    (Percentage)
Net revenue                     $         4,347     $         1,045   $     3,302          316.0 %
Operating expenses                        2,294               1,650           644           39.0 %
(Loss) income from operations             2,053               (605)         2,658         -439.2 %
Other income                              (106)                   0         (106)          100.0 %
Interest expense, net                     1,336                 191         1,145          600.3 %
Income (loss) before income
taxes                                       823               (796)         1,513         -190.1 %
Provision for income taxes                    0                   1           (1)         -100.0 %
Income (loss) from continuing
operations                                  823               (797)         1,514         -190.0 %
Loss from discontinued
operations                                (102)                (81)          (21)           25.6 %
Net income (loss)                           721               (878)         1,493         -170.1 %
Noncontrolling interest from
continuing operations                      (28)                   0          (28)         -100.0 %
Net income (loss)
attributable to common
stockholders                    $           693     $         (878)   $     1,465         -166.9 %

Net revenue for the three months ended June 30, 2013 consists of license revenue earned from our license agreements related to Ellen Tracey®, William Rast®, Caribbean Joe®, DVS®, Heelys® and People's Liberation® brands. Net revenue for the three months ended June 30, 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.

Operating expenses of $2,294 for the three months ended June 30, 2013 are attributable to the day to day activities of our Company, and primarily consists of compensation of $671, advertising of $379, professional fees of $360, royalty expenses paid under our agreement with Tennman WR-T of $244, stock-based compensation expense of $193, depreciation and amortization expense of $147 and travel and other travel-related expenses of $141. Operating expenses of $1,650 for the three months ended June 30, 2012 primarily consists of compensation of $265, royalty expenses under the Tennman WR-T agreement of $133, and professional fees of $112. Additionally, operating expense for the three months ended June 30, 2012 include $772 related to deal costs incurred in connection with acquisitions.

Interest expense during the three months ended June 30, 2013 resulted primarily from the interest incurred on our Term Loans of approximately $1,174, as well as non-cash interest related to the accretion of the discount recorded associated with the warrants issued with the Term Loans of approximately $67, and non-cash interest related to the amortization of deferred financing costs of approximately $97 associated with the Term Loans, as more fully described in Note 9 to our condensed consolidated financial statements. Interest expense for the three months ended June 30, 2012 resulted primarily from interest at a rate of LIBOR on our Debentures and non-cash interest related to the accretion of the valuation discount and amortization of deferred financing costs associated with our Debentures.

The loss from discontinued operations for the three months ended June 30, 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. 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 June 30, 2012 is primarily attributable to our retail operations, offset by income from the wholesale business related to our People's Liberation® and William Rast® branded products. The loss from discontinued operations of our retail operations resulted primarily from expenses related to the closure of one our stores in the second quarter of 2012. The income from discontinued operations of our wholesale operations was primarily the result of revenues earned during the second quarter of 2012, offset by operating expenses.

Comparison of the Six Months Ended June 30, 2013 to the Six Months Ended June 30, 2012

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

                                  Six Months Ended June 30,        Change        Change
                                     2013             2012       (Dollars)    (Percentage)
Net revenue                     $         5,976    $     2,100   $    3,877          184.6 %
Operating expenses                        7,659          2,610        5,049          193.5 %
Loss from operations                    (1,683)          (510)      (1,173)          229.8 %
Other income                              (106)              0        (106)          100.0 %
Interest expense, net                    12,953            334       12,618         3774.3 %
Loss before income taxes               (14,530)          (844)     (13,791)         1633.6 %
Provision for income taxes                2,264             11        2,253        20670.6 %
Loss from continuing
operations                             (16,794)          (855)     (16,044)         1876.3 %
Loss from discontinued
operations                              (3,966)          (452)      (3,514)          777.9 %
Net loss                               (20,760)        (1,307)     (19,559)         1496.6 %
Noncontrolling interest from
continuing operations                      (54)              0         (54)         -100.0 %
Net loss attributable to
common stockholders             $      (20,814)    $   (1,307)   $ (19,612)         1500.7 %

Net revenue for the six months ended June 30, 2013 consists of license revenue earned from our license agreements related to Ellen Tracey®, William Rast®, Caribbean Joe®, DVS®, Heelys® and People's Liberation® brands. Net revenues for the six months ended June 30, 2013 do not include a full six months of license revenue from our Ellen Tracy® and Caribbean Joe® brands, as these brands were acquired on March 28, 2013 and only include five months of revenues related to our Heelys® brand, as this brand was acquired on January 24, 2013. Net revenue for the six months ended June 30, 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 six months ended June 30, 2013 is not representative of what we expect our normalized brand management and licensing business to be in the future as it includes a large amount of deal costs. Of the total operating expenses of $7,659 for the six months ended June 30, 2013, approximately $2,370 is related to deal costs incurred in connection with acquisitions that have or are expected to occur; and approximately $5,289 is related to the day to day activities of our Company, which is primarily professional fees of $1,442, compensation of $1,017, advertising of $876, royalty expenses paid under our agreement with Tennman WR-T of $367, stock-based compensation expense of $364, travel and other travel-related expenses of $240 and depreciation and amortization of $223. Operating expenses of $2,610 for the six months ended June 30, 2012 primarily consists of compensation of $624, royalty expenses under the Tennman WR-T agreement of $359, and professional fees of $254. Additionally, operating expense for the six months ended June 30, 2012 include $772 related to deal costs incurred in connection with acquisitions.

Interest expense during the six months ended June 30, 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. Additionally, interest expense during the six months ended June 30, 2013 primarily includes interest incurred on our Term Loans of approximately $1,174, as well as non-cash interest related to the accretion of the discount recorded associated with the warrants issued with the Term Loans of approximately $67, and non-cash interest related to the amortization of deferred financing costs of approximately $97 associated with the Term Loans, as more fully described in Note 9 to our condensed consolidated financial statements. Interest expense for the six months ended June 30, 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 non-cash 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 June 30, 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 six months ended June 30, 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 six months ended June 30, 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 June 30, 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 six months ended June 30, 2012 is primarily attributable to the wholesale business related to our People's Liberation® and William Rast® branded products and our retail operations.

Liquidity and Capital Resources

As of June 30, 2013, our continuing operations had cash of approximately $13,356, a working capital balance of approximately $2,444 and outstanding debt obligations under our Term Loans of $61,798. As of December 31, 2012, our continuing operations had cash of approximately $2,624, a working capital deficit of approximately $524 and outstanding debt obligations under our Debentures of $3,502. Working capital is defined as current assets minus current liabilities, excluding restricted cash and discontinued operations. 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, 13 and 14 to our condensed consolidated financial statements for a description of certain 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:


                                                       Six Months Ended June 30,
                                                          2013             2012
   Operating activties                               $       (2,877)    $  (1,169)
   Investing activities                                     (67,302)       (4,972)
   Financing activities                                       82,329        14,030
   Net increase in cash from continuing operations   $        12,150    $    7,889

Operating Activities

Net cash used in operating activities from continuing operations was $2,877 for the six months ended June 30, 2013, compared to $1,169 for the six months ended June 30, 2012. Net loss for the six months ended June 30, 2013 of $20,760 includes net non-cash expenses of $11,778 of amortization of debt discount and deferred financing costs and $2,239 of deferred income taxes. Net loss for the six months ended June 30, 2013 also includes $3,966 of loss from discontinued operations. Changes in operating assets and liabilities used $800 in cash. Net loss for the six months ended June 30, 2012 of $1,307 includes $452 of loss from discontinued operations and $311 of amortization of debt discount and deferred financing costs. Changes in operating assets and liabilities used $718 in cash.

Investing Activities

Net cash used in investing activities from continuing operations was $67,302 for the six months ended June 30, 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. Net cash used in investing activities from continuing operations for the six months ended June 30, 2012 consisted primarily of $4,960 of net cash paid for the DVS acquisition in June 2012 and related sale of DVS non-core assets.

Financing Activities

Net cash provided by financing activities from continuing operations for the six months ended June 30, 2013 amounted to $82,329, compared to $14,030 for the six months ended June 30, 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. We made $2,000 of repayments under the Term Loans during the six months ended June 30, 2013. Cash paid for fees and other costs incurred in connection with the Offering and the Term Loans amounted to $3,064. 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 . . .

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