Iconix Brand Group is a brand management company and owner of a diversified portfolio of approximately 30 global consumer brands across the Company’s operating segments: women’s, men’s, home and international. The Company’s business strategy is to maximize the value of its brands primarily through strategic licenses and joint venture partnerships around the world, as well as to grow the portfolio of brands through strategic acquisitions.
The Company principally looks to monetize the IP related to its brands throughout the world and in all relevant categories primarily by licensing directly with leading retailers, through consortia of wholesale licensees, through joint ventures in specific territories and through other activity such as corporate sponsorships and content as well as the sale of IP for specific categories or territories. Products bearing the Company’s brands are sold across a variety of distribution channels from the mass tier (e.g. Wal-Mart) to better department stores (e.g., Macy’s). The licensees are generally responsible for designing, manufacturing and distributing the licensed products. The Company supports its brands with advertising and promotional campaigns designed to increase brand awareness. Additionally, the Company provides its licensees with coordinated trend direction to enhance product appeal and help build and maintain brand integrity.
Licensees are selected based upon the Company’s belief that such licensees will be able to produce and sell quality products in the categories of their specific expertise and that they are capable of exceeding minimum sales targets and royalties that the Company generally requires for each brand. This licensing strategy is designed to permit the Company to operate its licensing business, leverage its core competencies of marketing and brand management with minimal working capital. The majority of the Company’s licensing agreements include minimum guaranteed royalty revenue, which provides the Company with greater visibility into future cash flows.
A key initiative in the Company’s global brand expansion plans has been the formation of international joint ventures. The strategy in forming international joint ventures is to partner with best-in-class, local partners to bring the Company’s brands to market more quickly and efficiently, generating greater short- and long-term value from its IP, than the Company believes is possible if it were to build-out wholly-owned operations ourselves across a multitude of regional or local offices. Since September 2008, the Company has established the following international joint ventures: Iconix China, Iconix Latin America, Iconix Europe, Iconix India, Iconix Canada, Iconix Australia, Iconix Southeast Asia, Iconix Israel, Iconix Middle East, Umbro China, Danskin China, Starter China and Lee Cooper China. Note that the Company now maintains a 100% ownership interest in, Iconix Latin America and Iconix Canada. In 2020, the Company sold all of its equity interests in Starter China and Umbro China, and has entered into an agreement to sell all of its interests in Lee Cooper China which was completed on March 23, 2021. Refer to Note 4 for further details.
The Company’s primary goal of maximizing the value of its IP also includes, in certain instances, the sale to third parties of a brand’s trademark in specific territories or categories. As such, the Company evaluates potential offers to acquire some or all of a brand’s IP by comparing whether the offer is more valuable than the Company’s estimate of the current and potential revenue streams to be earned via the Company’s traditional licensing model. Further, as part of the Company’s evaluation process it also considers whether or not the buyer’s future development of the brand may help to expand the brand’s overall recognition and global revenue potential.
1. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and, in accordance with U.S. GAAP and accounting for variable interest entities (where the Company is the primary beneficiary) and majority owned subsidiaries, the Company consolidates twelve joint ventures (Hardy Way, Icon Modern Amusement, Alberta ULC, Iconix Europe, Hydraulic IP Holdings, US PONY Holdings, Diamond Icon, Iconix Israel, Iconix Middle East, Danskin China, Lee Cooper China and Iconix Australia; see Note 4 for explanation). All significant intercompany transactions and balances have been eliminated in consolidation.
These consolidated financial statements are prepared on a going concern basis that contemplates the realization of cash flows from assets and discharge of liabilities, in each case, in the ordinary course of business consistent with the Company’s prior periods.
In accordance with Accounting Standards Codification (“ASC”) 810—Consolidation (“ASC 810”), the Company evaluates the following criteria to determine the accounting for its joint ventures: 1) consideration of whether the joint venture is a variable interest entity which includes reviewing the corporate structure of the joint venture, the voting rights, and the contributions of the Company and the joint venture partner to the joint venture, 2) if the joint venture is a VIE, whether or not the Company is the primary beneficiary, a determination based upon a variety of factors, including: i) the presence of installment payments, which constitutes a de facto agency relationship between the Company and the joint venture partner, and ii) an evaluation of whether the Company or the joint venture partner is more closely associated with the joint venture. If the Company determines that the entity is a variable interest entity and the Company is the primary beneficiary, then the joint venture is consolidated. For those entities that are not considered variable interest entities, or are considered variable interest entities but the Company is not the primary beneficiary, the Company uses the equity method as set forth in ASC 323—Investments (“ASC 323”), to account for those investments and joint ventures which are not required to be consolidated under US GAAP. Refer to Note 4 for further details.
These 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 $435.6 million as of December 31, 2020. Net losses incurred for the years ended December 31, 2020 and December 31, 2019 amounted to approximately $(3.0) million and $(99.9) million respectively. The Company has generated positive cash flows from operations in recent periods and has managed its cost structure, its relationships with licensees and sold non-strategic assets to mitigate the adverse impact of the COVID-19 pandemic on its operating results, liquidity and financial condition. The Company does not expect the occurrence of any payment defaults on its outstanding debt facilities in the next twelve months, and otherwise expects to generate sufficient cash to meet its operating cash flow needs and maintain compliance with the financial covenants set forth in its various debt facilities during such period. Accordingly, the Company believes there is no longer substantial doubt the Company can continue as an ongoing business for the next twelve months.
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 annual report on Form 10-K have been adjusted to reflect the Reverse Stock Split.
The purchase method of accounting requires that the total purchase price of an acquisition be allocated to the assets acquired and liabilities assumed based on their fair values on the date of the business acquisition. The results of operations from the acquired businesses are included in the accompanying consolidated statements of operations from the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. For further information on the Company’s accounting for joint ventures and investments, refer to Note 4.
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any adjustments when necessary.
Cash and cash equivalents consist of actual cash as well as cash equivalents, defined as short-term, highly liquid financial instruments with insignificant interest rate risk that are readily convertible to cash and have maturities of three months or less from the date of purchase. In addition, as of December 31, 2020, approximately $15.0 million, or 25 %, of our total cash (including restricted cash) was held in foreign subsidiaries. The Company has elected to treat its Luxembourg top tier subsidiary (“Luxco”) for US tax purposes. All the foreign operations under Luxco are treated as a branch for US tax purposes and subject to US taxation. As such, the Company will not have any earnings in foreign subsidiaries that are not currently subject to taxation for US purposes.
Restricted cash consists of actual cash deposits held in accounts primarily for debt service, as well as cash equivalents, defined as short-term, highly liquid financial instruments with insignificant interest rate risk that are readily convertible to cash and have maturities of three months or less from the date of purchase, the restrictions on all of which lapse every three months or less.
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of short-term cash investments and accounts receivable. The Company places its cash in investment-grade, short-term instruments with high quality financial institutions. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collectability of all accounts receivable.
One customer accounted for 10 % of the Company’s total revenue for the year ended December 31, 2020 (“FY 2020”) as compared to two customers accounting for 12% and 11% respectively, of the Company’s total revenue for the year ended December 31, 2019 (“FY 2019).
Accounts receivable are reported at amounts the Company expects to be collected, net of provision for doubtful accounts, based on the Company’s ongoing discussions with its licensees, and its evaluation of each licensee’s payment history and account aging. As of December 31, 2020 and 2019, the Company’s provision for doubtful accounts was $6.5 million and $14.3 million, respectively.
One customer accounted for 10% of the Company’s accounts receivable as of December 31, 2020 as compared with one customer accounting for 16% of the Company’s accounts receivable as of December 31, 2019.
The Company does not use financial instruments for trading or other speculative purposes. From time to time the Company uses derivative financial instruments to hedge the variability of anticipated cash flows of a forecasted transaction (a “cash flow hedge”). The Company had no such derivative instruments in FY 2020 or FY 2019.
Compensation cost for restricted stock is measured using the quoted market price of the Company’s common stock at the date the common stock is granted. For restricted stock where restrictions lapse with the passage of time (“time-based restricted stock”), compensation cost is recognized over the period between the issue date and the date that restrictions lapse. Time-based restricted stock is included in total common shares outstanding upon the lapse of any restrictions. Time-based restricted stock is included in total diluted shares outstanding which is calculated utilizing the treasury stock method.
For restricted stock where restrictions are based on performance measures (“performance-based restricted stock”), restrictions lapse when those performance measures have been deemed earned. Performance-based restricted stock is included in total common shares outstanding upon the lapse of any restrictions. Performance-based restricted stock is included in total diluted shares outstanding when the performance measures have been deemed earned but not issued.
For restricted stock, which is measured based on market conditions, the Company values the stock utilizing a Monte Carlo simulation factoring key assumptions such as the stock price at the beginning and end of the period, risk free interest rate, expected dividend yield when simulating total shareholder return, expected dividend yield when simulating the Company’s stock price, stock
Treasury stock is recorded at acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings.
The Company incurred costs (primarily professional fees and placement agent fees) in connection with borrowings under senior secured notes, the Senior Secured Term Loan and the 2016 Senior Secured Term Loan. These costs have been deferred and are being amortized using the effective interest method over the life of the related debt.
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are determined by the straight-line method over the estimated useful lives of the respective assets ranging from three to seven years. Leasehold improvements are amortized by the straight-line method over the initial term of the related lease or estimated useful life, whichever is less.
We determine if an arrangement contains a lease at inception. An arrangement contains a lease if it implicitly or explicitly identifies an asset to be used and conveys the right to control the use of the identified asset in exchange for consideration. As a lessee, we include operating leases in Right-of-use (“ROU”) -assets within non-current assets, Other liabilities – Current, and Other liabilities in our consolidated balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized upon commencement of the lease based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate based on the estimated rate of interest for fully amortizing borrowings over a similar term of the lease payments at commencement date to determine the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Expenses associated with operating leases are included in “Selling, general and administrative” within our Consolidated Statement of operations. Leases with a lease term of 12 months or less are not capitalized.
If circumstances mandate, the Company evaluates the recoverability of its long-lived assets, other than goodwill and other indefinite life intangibles (discussed below), by comparing estimated future undiscounted cash flows with the assets’ carrying value to determine whether a write-down to market value, based on discounted cash flow, is necessary.
Assumptions used in our fair value estimates are as follow: (i) discount rates; (ii) royalty rates; (iii) projected average revenue growth rates; and (iv) projected long-term growth rates. The testing also factors in economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances. During FY 2020, the Company recorded an impairment charge of $19.6 million resulted from a decline in the fair value of our Ecko Mark/Ecko joint venture in China and our equity interest in our Candies joint venture in China which was impacted by the effects of COVID-19 in that market. During FY 2019, the Company recorded an impairment charge in the amount of $17.0 million based on the estimated value that was to be realized on the disposition of the Company’s equity interest in Marcy Media Holdings, LLC, and an $9.6 million (inclusive of a $2.6 million of write off of advances made to the entity) impairment to its investment in MG Icon based on the poor performance of MG Icon. Refer to Note 4 for further details.
Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method of accounting. On an annual basis and as needed, the Company tests goodwill and indefinite life trademarks for impairment utilizing discounted cash flow models. Other intangibles with determinable lives, including certain
Certain of the Company’s consolidated joint ventures have put options which, if exercised by the Company’s joint venture partner, would require the Company to purchase all or a portion of the joint venture partner’s equity interest in the joint venture. The Company has determined that these put options are not derivatives under the guidelines prescribed in Accounting Standards Codification (“ASC”) 815. As such, and in accordance with ASC 480-10-S99, as the potential exercise of the put options is outside the control of the Company, the Company has recorded the portion of the non-controlling interest’s equity that may be put to the Company in mezzanine equity in the Company’s consolidated balance sheets as “redeemable non-controlling interest”. The initial value of the redeemable non-controlling interest represents the fair value of the put option at inception. This amount recorded at inception is accreted, over a period determined by when the put option becomes exercisable, to what the Company would be obligated to pay to the non-controlling interest holder if the put option was exercised. This accretion is recorded as a credit to redeemable non-controlling interest and a debit to retained earnings resulting in an impact to the consolidated balance sheet only. For each reporting period, the Company revisits the estimates used to determine the redemption value of the put option when it becomes exercisable and may adjust the remaining put option value and associated accretion accordingly through redeemable non-controlling interest and retained earnings, as necessary. The terms of each of the outstanding put options are included in the individual discussions of each joint venture, as applicable. For the Company’s consolidated joint ventures that do not have put options, the non-controlling interest is recorded within equity on the Company’s consolidated balance sheet.
The Company enters into various license agreements that provide revenues based on minimum royalties and advertising/ marketing fees and additional revenues based on a percentage of defined sales. Minimum royalty and advertising/ marketing revenue is recognized on a straight-line basis over the full contract term. Minimum royalties that escalate on an annual basis over the contract term are recognized on a straight-line basis over the full contract term. 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).
The Company’s consolidated joint ventures’ functional currency is U.S. dollars. The functional currencies of the Company’s international subsidiaries are the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive income (loss).
The Company uses the asset and liability approach of accounting for income taxes and provides deferred income taxes for temporary differences that will result in taxable or deductible amounts in future years based on the reporting of certain costs in different periods for financial statement and income tax purposes. Valuation allowances are recorded when uncertainty regarding their realizability exists.
Basic earnings (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, vesting of restricted stock, and potential conversion of our convertible debt. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options, convertible debt and restricted stock outstanding were exercised into common stock.
Advertising costs such as print and online media are expensed when the advertisement first occurs. Advertising expenses for FY 2020 and FY 2019 amounted to $5.5 million, and $13.7 million, respectively.
The Company also incurs co-operative advertising costs that represent reimbursements to certain licensees for shared marketing expenses related to the sale of its products. In accordance with ASC 606, these reimbursements are recorded as a reduction to licensing revenue.
Comprehensive income (loss) includes certain gains and losses that, under U.S. GAAP, are excluded from net income (loss) as such amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s comprehensive income (loss) is primarily comprised of net income (loss), and foreign currency translation.
In June 2016, the FASB issued ASU No. 2016-13 – Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions and held-to-maturity debt securities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Management is currently evaluating the impact of this ASU on its consolidated financial statements.
During the current year certain reclassifications, which were immaterial, have been made to conform prior year data to the current presentation. During FY 2019, the Company also made a reclassification between redeemable noncontrolling interest and noncontrolling interest.
2. Revenue Recognition
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. 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. Minimum royalty amounts are recognized as revenue on a straight-line basis over the full contract term. Minimum royalties that escalate on an annual basis over the contract term are recognized on a straight-line basis over the full contract term. 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 Umbro business purchases of certain products and samples 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 was approximately $0.9 million for FY 2020 and the associated cost of goods sold is included in selling general and administrative expenses and was approximately $0.8 million. There was approximately $0.9 million and $0.9 million, respectively, of such sales and corresponding cost of goods sold in FY 2019. Revenue for these sales are recognized upon the transfer of control of the promised product to the customer or licensee in an amount that reflects the consideration that we expect to receive in exchange for these products.
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 January 1, 2021, the Company and its joint ventures had a contractual right to receive approximately $380.9 million of aggregate minimum licensing revenue through the balance of their current licenses, excluding any renewals. Pursuant to these agreements, the Company expects to recognized revenue as follows: $63.4 million, $61.7 million, $58.2 million, $46.9 million, $39.5 million and $111.2 million for FY 2021, FY 2022, FY 2023, FY 2024, FY 2025 and thereafter, respectively.
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.
We record contract assets when revenue is recognized in advance of cash payment being due from our licensees. Contract assets due within one year of the most recent balance sheet date are recorded within Other assets – current and long-term contract assets are recorded within Other assets on the Company’s consolidated balance sheet. As of December 31, 2020 and December 31, 2019, our contract assets – current and long-term contract assets were $13.8 million and $11.4 million, and $9.4 million and $11.8 million respectively. For the years ended December 31, 2020 and December 31, 2019, the Company incurred an impairment loss of its contract assets of $4.5 million and $5.1 million, respectively, as a result of impairments or certain contract modifications.
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 consolidated balance sheet in deferred revenue at the time the payment is received. The decrease in deferred revenues for FY 2020 is inclusive of $4.1 million of revenues recognized that were included in the deferred revenue balance at the beginning of the period offset by cash payments received or due in advance of satisfying our performance obligations.
3. Goodwill and Trademarks and Other Intangibles, net
Goodwill
Goodwill by reportable operating segment and in total, and changes in the carrying amounts, as of the dates indicated are as follows:
|
|
|
Women's
|
|
|
Men's
|
|
|
Home
|
|
|
International
|
|
|
Consolidated
|
|
|
Net goodwill at January 1, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
26,099
|
|
|
$
|
26,099
|
|
|
Impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net goodwill at December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,099
|
|
|
|
26,099
|
|
|
Impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net goodwill at December 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,099
|
|
|
$
|
26,099
|
|
The Company identifies its operating segments according to how business activities are managed and evaluated. The Company has four distinct reportable operating segments: men’s, women’s, home, and international. These operating segments represent individual reporting units for purposes of evaluating goodwill for impairment. The fair value of the reporting unit is determined using discounted cash flow analysis and estimates of sales proceeds with consideration of market participant data. As a corroborative source of information, the Company evaluates the estimated aggregate fair values of its reporting units to within a reasonable range of its market capitalization, which includes an assumed control premium (an adjustment reflecting an estimated fair value on a control basis) to verify the reasonableness of the fair value of its reporting units. The control premium is estimated based upon control premiums observed in comparable market transactions. As none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations do not directly correlate to the Company’s stock price. The Company monitors changes in the share price to ensure that the market capitalization continues to exceed or is not significantly below the carrying value of our total net assets. In the event that our market capitalization is below the book value of the Company’s aggregate fair value of its reporting units, we consider the length and severity of the decline and the reason for the decline when evaluating whether potential goodwill impairment exists. Additionally, if a reporting unit does not appear to be achieving the projected growth plan used in determining its fair value, we will reevaluate the reporting unit for potential goodwill impairment based on revised projections, as deemed appropriate. The annual evaluation of goodwill is typically performed as of October 1, the beginning of the Company’s fourth fiscal quarter. Utilizing the Income Approach, the Company performed a goodwill impairment test and an intangible asset impairment test using a discounted cash flow analysis to evaluate whether the carrying value of each of its segments exceeded its fair value.
During the fourth quarter of FY 2020 and FY 2019, the Company evaluated its goodwill for potential impairment. Based upon the results a quantitative goodwill impairment test in accordance with ASC 350, the Company noted that the fair value of the international segment exceeded the carrying value, therefore no impairment was recorded.
Trademarks and Other Intangibles, net
Trademarks and other intangibles, net consist of the following:
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Estimated
Lives in
Years
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Indefinite-lived trademarks
|
|
Indefinite
|
|
$
|
246,786
|
|
|
$
|
—
|
|
|
$
|
274,080
|
|
|
$
|
—
|
|
|
Definite-lived trademarks
|
|
10-15
|
|
|
8,958
|
|
|
|
8,958
|
|
|
|
8,958
|
|
|
|
8,958
|
|
|
Licensing contracts
|
|
1-9
|
|
|
978
|
|
|
|
978
|
|
|
|
978
|
|
|
|
974
|
|
|
|
|
|
|
$
|
256,722
|
|
|
$
|
9,936
|
|
|
$
|
284,016
|
|
|
$
|
9,932
|
|
|
Trademarks and other intangibles, net
|
|
|
|
|
|
|
|
$
|
246,786
|
|
|
|
|
|
|
$
|
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 and accordingly, consistent with ASC Topic 350, no amortization has been recorded in the Company’s consolidated statements of operations. Instead, each of these intangible assets are tested for impairment annually and as needed on an individual brand and territorial basis as separate single units of accounting, with any related impairment charge recorded to the statement of operations 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.
68
As it relates to the Company’s impairment testing of goodwill and intangible assets, assumptions and inputs used in our fair value estimates include the following: (i) discount rates; (ii) royalty rates; (iii) projected average revenue growth rates; and (iv) projected long-term growth rates. Additionally, for those instances where core licenses have not been or will not be renewed and replacement licenses have not yet been identified, the Company’s estimate of fair value may incorporate a probability weighted average of projected cash flows based on several scenarios (e.g., DTR license, wholesale license, or direct-to-consumer model). Key inputs to these scenarios, which were selected based on the perspective of a market participant and include estimated future retail and wholesale sales and related royalties, are assessed a probability of occurrence to compensate for the uncertainty of success and timing of completion. The Company will continue to reassess these probabilities and inputs, as well as economic conditions and expectations of management, and may record additional impairment charges as these estimates are updated, all of which are subject to change in the future based on period-specific facts and circumstances.
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 during FY 2020. The Company recorded impairment charges for the Candies, Pony, Hydraulic, Joe Boxer, Cannon, Waverly, Fieldcrest, Royal Velvet, Rampage, Mudd, OP, Ecko, Zoo York and Umbro indefinite-lived trademarks, resulting in a total non-cash impairment charge of $35.1 million for FY 2020, which is comprised of $19.6 million in the women’s segment, $5.2 million in the men’s segment, $5.2 million in the home segment, and $5.1 million in the international segment to reduce various trademarks in those segments to fair value.
The Company recorded impairment charges for indefinite-lived intangible assets consisting of trademarks in FY 2019 based on a decline in the net sales as well as a decline in future guaranteed minimum royalties from license agreements for certain brands. As a result, the Company recorded a total non-cash asset impairment charge of $65.6 million which is comprised of $35.3 million in the women’s segment, $0.8 million in the men’s segment, $17.8 million in the home segment, and $11.7 million in the international segment to reduce various trademarks in those segments to fair value. Impairments primarily related to declines in Joe Boxer, Mudd, OP, Mossimo, Bongo, Rampage, Umbro, Fieldcrest and Royal Velvet brands.
The Company measured its indefinite-lived intangible assets for impairment in accordance with ASC-820-10-55-3F which states, “The income approach converts future amounts (for example cash flows) in income and expenses in a single current (that is, discounted) amount. When the income approach is used, fair value measurement reflects current market expectations about those future amounts. The Income Approach is based on the present value of future earnings expected to be generated by a business or asset. Income projections for a future period are discounted at a rate commensurate with the degree of risk associated with future proceeds. A residual or terminal value is also added to the present value of the income to quantify the value of the business beyond the projection period.”
Changes in estimates and assumptions used to determine whether impairment exists or changes in actual results compared to expected results could result in additional impairment charges in future periods.
There were no impairment charges to the Company’s definite-lived trademarks during FY 2020 or FY 2019.
During FY 2020, the Company completed the sale of Umbro China for $62.5 million in gross proceeds. The Umbro China sale included the sale of the Umbro trademark in the People’s Republic of China, Hong Kong, Taiwan and Macau. The Company received approximately $59.6 million in net proceeds from the sale of Umbro China and recorded a $59.6 million gain within operating income. Costs of $2.9 million directly associated with the sale primarily consisted of broker’s commission. The cost basis of Umbro China was immaterial. During FY 2020, the Company completed the sale of Starter China for gross proceeds of $16.0 million. The Starter China sale includes the sale of the Starter trademark in the mainland of China, Hong Kong, Taiwan and Macau. The Company received approximately $15.6 million in net proceeds from the sale of Starter China and recorded a $14.5 million gain within operating income. The cost basis of Starter China of $1.1 million consisted of the cost basis of the indefinite lived trademark. The Company separately wrote off $1.5 million of contract assets associated with Starter China. Refer to Note 5 for further details.
Amortization expense for intangible assets for FY 2020 and FY 2019 was less than $0.1 million and $0.1 million, respectively. The Company projects amortization expenses to be none in FY 2021 through FY 2025.
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4. Consolidated Entities, Joint Ventures and Investments
Consolidated Entities
The following entities and joint ventures are consolidated with the Company:
PONY
In February 2015, the Company, through its then newly-formed subsidiary, US Pony Holdings, LLC, (“Pony Holdings”) acquired the North American rights to the PONY brand. These rights include the rights in the US obtained from Pony, Inc. and Pony International, LLC, and the rights in Mexico and Canada obtained from Super Jumbo Holdings Limited. The purchase price paid by the Company was $37.0 million. Pony Holdings was owned 75% by the Company and 25% by its partner Anthony L&S Athletics, LLC (“ALS”). ALS contributed to Pony Holdings its perpetual license agreement in respect of the U.S. and Canadian territories for a 25% interest in Pony Holdings. In February 2021, the Company acquired the remaining 25% interest in Pony Holdings for $2.0 million.
Accounting Standards Codification (“ASC”) 810 - “Consolidations” (“ASC 810”) affirms that consolidation is appropriate when one entity has a controlling financial interest in another entity. The Company owns a 75% membership interest in Pony Holdings compared to the minority owner’s 25% membership interest. Further, the Company believes that the voting and veto rights of the minority shareholder are merely protective in nature and do not provide them with substantive participating rights in Pony Holdings. As such, Pony Holdings is subject to consolidation with the Company, which is reflected in the consolidated financial statements.
Iconix Middle East Joint Venture
In December 2014, the Company formed Iconix MENA (“Iconix Middle East”) a wholly owned subsidiary of the Company and contributed to it substantially all rights to its wholly-owned and controlled brands in the United Arab Emirates, Qatar, Kuwait, Bahrain, Saudi Arabia, Oman, Jordan, Egypt, Pakistan, Uganda, Yemen, Iraq, Azerbaijan, Kyrgyzstan, Uzbekistan, Lebanon, Tunisia, Libya, Algeria, Morocco, Cameroon, Gabon, Mauritania, Ivory Coast, Nigeria and Senegal (the “Middle East Territory”). Shortly thereafter, Global Brands Group Asia Limited (“GBG”), purchased a 50% interest in Iconix Middle East for approximately $18.8 million. GBG paid $6.3 million in cash upon the closing of the transaction and committed to pay an additional $12.5 million over the 24-month period following closing. This obligation was fully paid in FY 2017. As of December 31, 2020, the redeemable non-controlling interest of Iconix MENA was $13.1 million, which was recorded on the Company’s consolidated balance sheet as mezzanine equity.
Pursuant to the joint venture agreement entered into in connection with the formation of Iconix Middle East, each of GBG and the Company holds specified put and call rights, respectively, relating to GBG’s ownership interest in the joint venture.
Five-Year and Eight-Year Put/Call Options: At any time during the six-month period commencing July 1, 2022, GBG may deliver a put notice to the Company, and the Company may deliver a call notice to GBG, in each case, for the Company’s purchase of all equity in the joint venture held by GBG. In the event of the exercise of such put or call rights, the purchase price for GBG’s equity in Iconix Middle East is an amount equal to (x) the Agreed Value (in the event of GBG put) or (y) 120% of Agreed Value (in the event of an Iconix call). The purchase price is payable in cash.
Agreed Value—Five-Year Put/Call: (i) Percentage of Iconix Middle East owned by GBG, multiplied by (ii) 5.5, multiplied by (iii) aggregate royalty generated by Iconix Middle East for the year ending December 31, 2019; provided, however, that such Agreed Value cannot be less than $12.0 million.
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Agreed Value—Eight-Year Put/Call: (i) Percentage of Iconix Middle East owned by GBG, multiplied by (ii) 5.5, multiplied by (iii) aggregate royalty generated by Iconix Middle East for the year ending December 31, 2022; provided, however, that the Agreed Value cannot be less than $12.0 million.
The Company serves as Iconix Middle East’s administrative manager, responsible for arranging for or providing back-offices services, including legal maintenance of trademarks (e.g. renewal of trademark registrations) for the brands in respect of Iconix Middle East Territory. Further Iconix Middle East has access to general brand marketing materials prepared and owned by the Company to refit for use by the joint venture in marketing brands in the Middle East Territory. GBG serves as Iconix Middle East’s local manager, responsible for providing market experience in respect of the applicable territory, managing the joint venture on a day-to-day basis (other than back-office services), identifying potential licensees and assisting the Company in enforcement of license agreements in respect of the applicable territory. The Company receives a monthly fee in connection with the performance of its services as administrative manager in an amount equal to 5% of Iconix Middle East’s gross revenue collected in the prior month (other than in respect of the Umbro and Lee Cooper brands). GBG receives a monthly fee in connection with the performance of its services as local manager in an amount equal to 15% of Iconix Middle East’s gross revenue collected in the prior month (other than in respect of the Umbro and Lee Cooper brands). In addition, following the closing of GBG’s purchase of 50% of Iconix Middle East, GBG received from the Company $3.1 million for expenses related to its diligence and market analysis in the Iconix Middle East Territory, which reduced the cash received by the Company in relation to this transaction as of December 31, 2014.
In December 2016, the Company irrevocably exercised its call right to acquire an additional 5% equity interest in Iconix Middle East from GBG for total cash consideration of $1.8 million. After taking into effect this transaction and as of December 31, 2016, the Company’s ownership interest in Iconix Middle East effectively increased to 55%. Such acquisition closed in February 2017. In addition to the increase in ownership interest, the joint venture agreement gives the Company the sole discretion and power to direct the activities of the Iconix Middle East joint venture that most significantly impact the joint venture’s economic performance. As a result of this transaction, the Company continues to consolidate this joint venture in its consolidated financial statements in accordance with ASC 810.
The Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and GBG, that Iconix Middle East 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.
Iconix Israel Joint Venture
In November 2013, the Company formed Iconix Israel. LLC (“Iconix Israel”), a wholly-owned subsidiary of the Company, and contributed substantially all rights to its wholly-owned and controlled brands in the State of Israel and the geographical regions of the West Bank and the Gaza Strip (together, the “Israel Territory”) through an agreement with Iconix Israel. Shortly thereafter, M.G.S. Sports Trading Limited (“MGS”) purchased a 50% interest in Iconix Israel for approximately $3.3 million.
In December 2016, the Company amended the Iconix Israel joint venture agreement to obtain the sole discretion and power to direct the activities of the Iconix Israel joint venture that most significantly impact its economic performance which requires the Company to continue to consolidate this joint venture in its consolidated financial statements in accordance with ASC 810.
The Company serves as Iconix Israel’s administrative manager, responsible for arranging for or providing back-offices services, including legal maintenance of trademarks (e.g., renewal of trademark registrations) for the brands in respect of the Israel Territory. Further, Iconix Israel has access to general brand marketing materials, prepared and owned by the Company to refit for use by the joint venture in the Israel Territory. MGS serves as Iconix Israel’s local manager, responsible for providing market experience in respect of the applicable territory, managing the joint venture on a day-to-day basis (other than back-office services), identifying potential licensees and assisting the Company in enforcement of license agreements in respect of the applicable territory. Each of the Company and MGS is reimbursed for all out-of-pocket costs incurred in performing its respective services.
The Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and MGS, that Iconix Israel is a 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.
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Iconix Europe
In December 2009, the Company contributed substantially all rights to its brands in the European Territory (defined as all member states and candidate states of the European Union and certain other European countries) to Iconix Europe LLC, a then newly formed wholly-owned subsidiary of the Company (“Iconix Europe”). Also, in December 2009 and shortly after the formation of Iconix Europe, an investment group led by The Licensing Company and Albion Equity Partners LLC purchased a 50% interest in Iconix Europe through Brand Investments Vehicles Group 3 Limited (“BIV”), to assist the Company in developing, exploiting, marketing and licensing the Company’s brands in the European Territory. In consideration for its 50% interest in Iconix Europe, BIV paid $4.0 million.
At inception and prior to the January 2014 transaction described below, the Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and BIV, that Iconix Europe is not a VIE and was not subject to consolidation. The Company had recorded its investment under the equity method of accounting.
In January 2014, the Company consented to the purchase of BIV’s 50% ownership interest in Iconix Europe by GBG. In exchange for this consent, the Company recorded a $1.5 million receivable due from GBG. As a result of this transaction, the Company recorded revenue of $1.5 million, which is included in licensing revenue in the Company’s consolidated statement of operations for FY 2014. In addition, the Company acquired an additional 1% equity interest in Iconix Europe from GBG, and amended the operating agreement (herein referred to as the “IE Operating Agreement”) thereby increasing its ownership in Iconix Europe to a controlling 51% interest and reducing its preferred profit distribution from Iconix Europe to $3.0 million after which all profits and losses are recognized 51/49 in accordance with each principal’s membership interest percentage.
ASC Topic 810 affirms that consolidation is appropriate when one entity has a controlling financial interest in another entity. As a result of this transaction, the Company owns a 51% membership interest in Iconix Europe compared to the minority owner’s 49% membership interest. Further, the Company believes that the voting and veto rights of the minority shareholder are merely protective in nature and do not provide the minority shareholder with substantive participating rights in Iconix Europe. As such, Iconix Europe is subject to consolidation with the Company, which is reflected in the consolidated financial statements as of December 31, 2016.
Pursuant to the IE Operating Agreement, for a period following the fifth anniversary of the January 2014 transaction and again following the eighth anniversary of the January 2014 transaction, the Company has a call option to purchase, and GBG has a put option to initiate the Company’s purchase of GBG’s 49% equity interests in Iconix Europe for a calculated amount as described below.
Five-Year and Eight-Year Put/Call Options: At any time during the six-month period commencing July 1, 2022, GBG may deliver a put notice to the Company, and the Company may deliver a call notice to GBG, in each case, for the Company’s purchase of all equity in the joint venture held by GBG. In the event of the exercise of such put or call rights, the purchase price for GBG’s equity in Iconix Europe is an amount equal to (x) the Agreed Value (in the event of GBG’s put) or (y) 120% of Agreed Value (in the event of an Iconix call). The purchase price is payable in cash.
Agreed Value-Five-Year Put/Call: (i) (x) percentage of Iconix Europe owned by GBG, multiplied by (y) 5.5, multiplied by (z) the greater of aggregate royalty generated by Iconix Europe for the year ended December 31, 2013 and the year ended December 31, 2018; plus (ii) percentage of Iconix Europe owned by GBG multiplied by the aggregate amount of cash in Iconix Europe which is available for distribution to the members.
Agreed Value-Eight-Year Put/Call: (i) (x) percentage of Iconix Europe owned by GBG, multiplied by (y) 5.5, multiplied by (z) the greater of aggregate royalty generated by Iconix Europe for the year ended December 31, 2013 and the year ended December 31, 2021; plus (ii) percentage of Iconix Europe owned by GBG multiplied by the aggregate amount of cash in Iconix Europe which is available for distribution to the members.
As a result of the January 2014 transaction, the Company records this redeemable non-controlling interest as mezzanine equity on the Company’s consolidated balance sheet. As of December 31, 2020, the redeemable non-controlling interest for Iconix Europe was $8.2 million, which was recorded on the Company’s consolidated balance sheet as mezzanine equity.
Hydraulic IP Holdings, LLC
In December 2014, the Company formed a joint venture with Top On International Group Limited (“Top On”). The name of the joint venture is Hydraulic IP Holdings, LLC (“Hydraulic IPH”), a Delaware limited liability company. The Company paid $6.0 million, which was funded entirely from cash on hand, in exchange for a 51% controlling ownership of Hydraulic IPH. Top On owns the remaining 49% interest in Hydraulic IPH. Hydraulic IPH owns the IP rights, licenses and other assets relating principally to the Hydraulic brand. Concurrently, Hydraulic IPH and iBrands International, LLC (“iBrands”) entered into a license agreement pursuant
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to which Hydraulic IPH licensed the Hydraulic brand to iBrands as licensee in certain categories and geographies. Additionally, the Company and Top On entered into a limited liability company agreement with respect to their ownership of Hydraulic IPH. As of December 31, 2020, the Company maintains a 15% ownership interest in iBrands. In FY 2018, the Company recorded a full impairment of its investment in iBrands of $2.5 million.
In April 2018, pursuant to a condition in a letter agreement entered into simultaneously with the Company’s acquisition of a 51% equity interest in Hydraulic IPH in December 2014, the Company acquired the remaining 49% ownership interest from its joint venture partner for no cash consideration as a result of an affiliate of the joint venture partner not making its minimum guaranteed royalty payment obligations to the Company in accordance with the respective license agreement. This transaction resulted in the Company effectively increasing its ownership interest in Hydraulic to 100%. The Company will retain 100% ownership interest in Hydraulic unless the affiliate of such joint venture partner satisfies its outstanding payment obligations by making all payments of the minimum guaranteed royalties to the Company under the terminated license agreement.
Buffalo Brand Joint Venture
In February 2013, Iconix CA Holdings, LLC (“ICA Holdings”), a Delaware limited liability company and a wholly-owned subsidiary of the Company, formed a joint venture with Buffalo International ULC (“BII”). The name of the joint venture is 1724982 Alberta ULC (“Alberta ULC”), an Alberta, Canada unlimited liability company. The Company, through ICA Holdings, paid $76.5 million, which was funded entirely from cash on hand, in exchange for a 51% controlling ownership of Alberta ULC which consists of a combination of equity and a promissory note. BII owns the remaining 49% interest in Alberta ULC. Alberta ULC owns the IP rights, licenses and other assets relating principally to the Buffalo David Bitton brand (the “Buffalo brand”).
The Buffalo brand trademarks have been determined by management to have an indefinite useful life and accordingly, consistent with ASC Topic 350, no amortization is being recorded in the Company’s consolidated statement of operations. The goodwill and trademarks are subject to a test for impairment on an annual basis.
The Company has consolidated this joint venture within its consolidated financial statements since inception.
Icon Modern Amusement
In December 2012, the Company entered into an interest purchase and management agreement with Dirty Bird Productions, Inc., a California corporation, in which the Company effectively purchased a 51% controlling interest in the Modern Amusement trademarks and related assets for $5.0 million, which was funded entirely from cash on hand. To acquire its 51% controlling interest in the trademark, the Company formed a new joint venture company, Icon Modern Amusement LLC (“Icon MA”), a Delaware limited liability company.
Hardy Way
In May 2009, the Company acquired a 50% interest in Hardy Way, the owner of the Ed Hardy brands and trademarks, for $17.0 million, comprised of $9.0 million in cash and 58,868 shares of the Company’s common stock valued at $8.0 million as of the closing. In addition, the sellers of the 50% interest received an additional $1.0 million in shares of the Company’s common stock pursuant to an earn-out based on royalties received by Hardy Way for 2009.
On April 26, 2011, Hardy Way acquired substantially all of the licensing rights to the Ed Hardy brands and trademarks from its licensee, Nervous Tattoo, Inc. (“NT”) pursuant to an asset purchase agreement by and among Hardy Way, NT and Audigier Brand Management Group, LLC (“ABMG”). Immediately prior to the closing of the transactions contemplated by the asset purchase agreement, the Company contributed $62.0 million to Hardy Way, thereby increasing the Company’s ownership interests in Hardy Way from 50% to 85% of the outstanding membership interests.
Umbro China
In July 2016, the Company executed an agreement with MH Umbro International Co. Limited (MHMC) to sell up to an aggregate 50% interest in a newly registered company in Hong Kong, which holds the Umbro intellectual property in respect of the Greater China territory, for total cash consideration of $25.0 million. The acquisition of such equity is expected to occur over a four-year period. As stipulated in the agreement, on each anniversary subsequent to the close of the transaction, MHMC will pay a portion of the total cash consideration to the Company in return for a percentage of the total potential 50% equity interest. In July 2016, the Company received $2.5 million in cash from MHMC for a 5% interest in Umbro China. In accordance with ASC 810, the Company has recorded noncontrolling interest of $1.8 million for the sale of 5% interest in Umbro China to MHMC and the corresponding gain associated with the sale of this interest is recorded in additional paid in capital on the Company’s consolidated balance sheet.
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Pursuant to the Shareholder Agreement entered into in connection with the formation of Umbro China, each of MHMC and the Company holds specified call rights to purchase its partners’ ownership interest in the joint venture as described below. 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 which resulted in the Company owning 100% of Umbro China. As described above, the Company completed the sale of Umbro China in July 2020. As a result of this transaction, the Company recognized a gain of $59.6 million, which has been recorded within Operating Income in the Company’s condensed consolidated statement of operations during FY 2020.
Danskin China
In October 2016, the Company entered into an agreement with Li-Ning (China) Sports Goods Co., Ltd. (“LiNing”) to sell up to a 50% interest (and no less than a 30% interest) in its wholly-owned indirect subsidiary, Danskin China Limited (“Danskin China”), a new Hong Kong registered company, which holds the Danskin trademarks and related assets in respect of mainland China and Macau. As a result of disruptions caused in the People’s Republic of China, the Company has agreed to extend the date of LiNing’s purchase of the equity interest in Danskin China until June 30, 2020 (the “First Closing”) for cash consideration of $5.4 million. The aggregate cash consideration paid by Li Ning for its ownership of Danskin China may, based on the percentage interest in Danskin China that Li Ning elects to purchase on each anniversary of the First Closing, increase to up to $8.6 million. On June 30, 2020, the Company sold a 10% interest in Danskin China Ltd. to Li Ning Sports (Hong Kong) Company Ltd for $1.6 million. In March of 2021, the Company sold an additional 10% interest in Danskin China Ltd. to Li Ning Sports (Hong Kong) Company Ltd for $1.8 million.
Starter China
In March 2018, the Company entered into an agreement with Photosynthesis Holdings, Co. Ltd. (“PHL”) to sell up to no less than a 50% interest and up to a total of 60% interest in its wholly-owned indirect subsidiary, Starter China Limited, a newly registered Hong Kong subsidiary of Iconix China (“Starter China”), and which will hold the Starter trademarks and related assets in respect of the Greater China territory. As a result of disruptions caused in the People’s Republic of China, the Company has agreed to extend the date of PHL’s purchase of the initial 50% equity interest in Starter China until June 30, 2020 for cash consideration of $20.0 million. The additional 10% equity interest (for a total equity interest of 60% interest) purchase right of PHL is expected to occur over a three-year period commencing January 16, 2022 for cash consideration equal to the greater of $2.7 million or 2.5 times the royalty received under the respective license agreement in the previous twelve months based on other terms and conditions specified in the share purchase agreement. The Company completed the sale of Starter China in September, 2020. As a result of this transaction, the Company recognized a gain of $14.5 million, which has been recorded within Operating Income in the Company’s condensed consolidated statement of operations during FY 2020.
Lee Cooper China
In June 2018, the Company entered into an agreement with POS Lee Cooper HK Co. Ltd. (“PLC”) to sell up to no less than a 50% interest in its wholly-owned indirect subsidiary, Lee Cooper China Limited, a newly registered Hong Kong subsidiary of Iconix China (“Lee Cooper China”), and which will hold the Lee Cooper trademarks and related assets in respect of the Greater China territory. On December 2, 2020, the Company entered into a share purchase agreement to sell all of the equity interests of Lee Cooper China Limited (the “Lee Cooper China Sale”), for consideration of $16.0 million. The Lee Cooper China Sale includes the sale of the Lee Cooper brand in the People’s Republic of China, Hong Kong, Taiwan and Macau. The Lee Cooper China Sale was completed on March 23, 2021.
Iconix Australia Joint Venture
In September 2013, the Company formed Iconix Australia, LLC (“Iconix Australia”), a Delaware limited liability company and a wholly-owned subsidiary of the Company, and contributed substantially all rights to its wholly-owned and controlled brands in Australia and New Zealand (the “Australia territory”) through an agreement with Iconix Australia. Shortly thereafter Pac Brands USA, Inc. (“Pac Brands”) purchased a 50% interest in Iconix Australia for $7.2 million in cash, all of which was received upon closing of this transaction in September 2013. As a result of this transaction, the Company recorded a gain of $4.1 million in FY 2013 for the difference between the cash consideration received by the Company and the book value of the brands contributed to the joint venture.
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In July 2018, the Company purchased an additional 5% ownership interest in Iconix Australia from Brand Collective (USA), Inc. (“BrandCo”) for $0.7 million in cash. As a result of this transaction, the Company’s ownership interest in Iconix Australia effectively increased to 55% and reduced BrandCo’s ownership interest in Iconix Australia to 45%. This purchase resulted in a change in rights, duties and obligations of the Company and BrandCo in their capacity as joint venture partners in respects of the Iconix Australia joint venture. Additionally, as a result of this transaction and in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and BrandCo, Iconix Australia has been determined to be a VIE, and thus is subject to consolidation and included in the Company’s consolidated financial statements on and after July 2018.
The Iconix Australia trademarks have been determined by management to have an indefinite useful life and accordingly, no amortization is being recorded in the Company’s consolidated statement of operations. The goodwill and trademarks are subject to a test for impairment on an annual basis. Additionally, as a result of the acquisition, the Company recognized a $5.9 million non-controlling interest associated with BrandCo’s 45% ownership interest in the Iconix Australia joint venture on the date of consolidation. As of December 31, 2020, the redeemable non-controlling interest for Iconix Australia was $3.0 million, which was recorded on the Company’s consolidated balance sheet as mezzanine equity.
Additionally, pursuant to the Amended Agreement, the specified put and call rights held by BrandCo and the Company, respectively, relating to BrandCo’s ownership interest in the joint venture, were amended and restated as follows:
Two-Year Put/Call Option: At any time from December 30, 2022 and before June 1, 2023, BrandCo may deliver a put notice to the Company and the Company may deliver a call notice to BrandCo, in each case, for the Company’s purchase of all units in the joint venture held by BrandCo. Upon the exercise of such put/call, the purchase price for BrandCo’s units in the joint venture will be an amount equal to (i) the percentage interest represented by BrandCo’s units, multiplied by (ii) 5, multiplied by (iii) RR, where RR is equal to:
A + (A x (100% + CAGR))
2
A = trailing 12 months royalty revenue; and
CAGR = 36 month compound annual rate
Equity Method Investments
During the fourth quarter of FY 2020 and FY 2019, the Company reassessed the fair values of the underlying assets and liabilities of its equity method investments as compared to their book values. In the fourth quarter of 2019, the Company recognized an investment impairment associated with its investment in MG Icon. See below in section “MG Icon” for further details. In the third quarter of FY 2019, the Company recognized an investment impairment of its investment in Marcy Media Holdings LLP. See below in section “Marcy Media Holdings LLP” for further details. In the third quarter and fourth quarter of FY 2020, the Company recorded impairment charges of $17.2 million and $2.4 million respectively, related to the decline in the fair value of the Company’s investments in its Ecko/Mark Ecko Joint venture in China and the Company’s interest in its Candies Joint Venture in China See below section “Investments in Iconix China”.
The following joint ventures are recorded using the equity method of accounting:
Iconix Southeast Asia Joint Venture
In October 2013, the Company formed Iconix SE Asia Limited (“Iconix SE Asia”), a wholly owned subsidiary of the Company, and contributed substantially all rights to its wholly-owned and controlled brands in Indonesia, Thailand, Malaysia, Philippines, Singapore, Vietnam, Cambodia, Laos, Brunei, Myanmar, and East Timor (the “South East Asia Territory”). Shortly thereafter, GBG (f/k/a Li + Fung Asia Limited) purchased a 50% interest in Iconix SE Asia for approximately $12.0 million. GBG paid $7.5 million in cash upon the closing of the transaction and committed to pay an additional $4.5 million over the 24-month period following closing.
In June 2014, the Company contributed substantially all rights to its wholly-owned and controlled brands in the Republic of Korea, and its Ecko, Zoo York, Ed Hardy and Sharper Image Brands in the European Union, and Turkey, in each case, to Iconix SE Asia. In return, GBG agreed to pay the Company $15.9 million, of which $4.0 million was paid in cash at closing. The Company guaranteed minimum distributions of $2.5 million in the aggregate through FY 2015 to GBG from the exploitation in the European Union and Turkey of the brands contributed to Iconix SE Asia as part of this transaction. As a result of this transaction, the Company incurred $5.4 million of marketing costs, which were accounted for as a reduction to the cash received. In September 2014, the Company’s subsidiaries contributed substantially all rights to their Lee Cooper and Umbro brands in the People’s Republic of China, Hong Kong, Macau and Taiwan (together, the “Greater China Territory”), to Iconix SE Asia. In return, GBG agreed to pay the
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Company $21.5 million, of which $4.3 million was paid at closing. The Company guaranteed minimum distributions of $5.1 million in the aggregate through FY 2017 to GBG from the exploitation in the Greater China Territory of the brands contributed to Iconix SE Asia as part of this transaction. In December 2015, the Company purchased GBG’s effective 50% interest in such brands as described below.
Pursuant to the operating agreement entered into in connection with the formation of Iconix SE Asia, as amended, each of GBG and the Company holds specified put and call rights, respectively, relating to GBG’s ownership interest in the joint venture.
Five-Year and Eight-Year Put/Call Options on South East Asia Territory Rights, Europe/Turkey Rights and Korea Rights: At any time during the six-month period commencing July 1, 2022, GBG may deliver a put notice to the Company, and the Company may deliver a call notice to GBG, in each case, for the Company’s purchase of the Europe/Turkey Rights, South East Asia Territory Rights and/or Korea Rights. In the event of the exercise of such put or call rights, the purchase price for such rights is an amount equal to (x) the Agreed Value (in event of a GBG put) or (y) 120% of Agreed Value (in event of a Company call). The purchase price is payable in cash. As of December 31, 2020, the contractual value of the option was $ 19.5 million.
Agreed Value—Five-Year Put/Call: (i) Percentage of Iconix SE Asia owned by GBG, multiplied by (ii) 5.5, multiplied by (iii) the greater of the aggregate royalty generated by Iconix SE Asia in respect of the Europe/Turkey Rights, South East Asia Territory Rights and/or Korea Rights (as applicable) for the year ending December 31, 2015 and the year ending December 31, 2018; provided, that the Agreed Value attributable to the Europe/Turkey Rights shall not be less than $7.6 million, plus (iv) in the case of a Full Exercise (i.e., and exercise of all of the Europe/Turkey Rights, South East Asia Territory Rights and Korea Rights), the amount of cash in Iconix SE Asia at such time.
Agreed Value—Eight-Year Put/Call: (i) Percentage of Iconix SE Asia owned by GBG, multiplied by (ii) 5.5, multiplied by (iii) the greater of the aggregate royalty generated by Iconix SE Asia in respect of the Europe/Turkey Rights, South East Asia Territory Rights and/or Korea Rights (as applicable) for the year ending December 31, 2018 and the year ending December 31, 2021; provided, that the Agreed Value attributable to the Europe/Turkey Rights shall not be less than $7.6 million, plus (iv) in the case of a Full Exercise (i.e., and exercise of all of the Europe/Turkey Rights, South East Asia Territory Rights and Korea Rights), the amount of cash in Iconix SE Asia at such time.
The Company serves as Iconix SE Asia’s administrative manager, responsible for arranging for or providing back-office services including legal maintenance of trademarks (e.g., renewal of trademark registrations) for the brands in respect of the territories included in Iconix SE Asia. Further, Iconix SE Asia has access to general brand marketing materials, prepared and owned by the Company, to refit for use by the joint venture in territories included in Iconix SE Asia. GBG serves as Iconix SE Asia’s local manager, responsible for providing market experience in respect of the applicable territory, managing the joint venture on a day-to-day basis (other than back-office services), identifying potential licensees and assisting the Company in enforcement of license agreements in respect of the applicable territory. The Company receives a monthly fee in connection with the performance of its services as administrative manager in an amount equal to 5% of Iconix SE Asia’s gross revenue collected in prior month. GBG receives a monthly fee in connection with the performance of its services as local manager in an amount equal to 15% of Iconix SE Asia’s gross revenue collected in prior month.
The Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and GBG, that Iconix SE Asia was a VIE and, as the Company was determined to be the primary beneficiary, was subject to consolidation. The Company had consolidated this joint venture within its consolidated financial statements since inception and up to June 30, 2017. The liabilities of the VIE were not material and none of the VIE assets were encumbered by any obligation of the VIE or other entity. See discussion below for the deconsolidation of the joint venture on June 30, 2017.
In December 2015, the Company purchased GBG’s effective 50% interest in the Umbro and Lee Cooper trademarks in Greater China for $24.7 million. The Company, through its wholly-owned subsidiaries, paid consideration of $24.7 million to GBG which represents GBG’s 50% ownership interest in these trademarks. Immediately prior to the consummation of this transaction, the Company, and its wholly owned subsidiaries, had a receivable from GBG of $9.4 million, which represented the balance still owed by GBG from the original September 2014 transaction. It was agreed upon by both parties that this balance would be set off against the consideration to be paid by the Company. At closing, the Company paid $3.5 million in cash to GBG and recorded amounts owed to GBG of approximately $5.2 million and $5.4 million paid to GBG, net of discounts, in accounts payable and other accrued expenses and other long-term liabilities, respectively, on the consolidated balance sheet. As of December 31, 2020, all remaining amounts due to GBG for the above have been paid. The excess of the purchase price over the non-controlling interest balance was $2.2 million which was recorded to additional paid-in-capital.
Prior to June 30, 2017, the Company consolidated this joint venture in accordance with ASC 810. In June 2017, the Company received the final purchase price installment payment due from its joint venture partner, in respect of such partner’s interest in the joint venture, which resulted in the Company no longer having a de facto agency relationship with the Iconix SE Asia, Ltd. joint venture partner. In accordance with ASC 810, the receipt of the final purchase price installment payment was considered a reconsideration event and although the joint venture remains a VIE, the Company is no longer the primary beneficiary. As a result, the Company deconsolidated this entity from its consolidated balance sheet as of June 30, 2017 and recognized a pre-tax gain on deconsolidation of
76
$3.8 million in its FY 2017 consolidated statement of operations. The Company recorded an equity-method investment at fair value in Iconix SE Asia, Ltd. of $17.4 million in the consolidated balance sheet and all assets and liabilities of the joint venture are no longer reflected in the Company’s consolidated balance sheet as of June 30, 2017. Fair value of the equity-method investment was determined utilizing the income method with Level 3 inputs in accordance with ASC 820. Subsequent to June 30, 2017, Iconix SE Asia, Ltd. is accounted for as an equity-method investment with earnings from the investment being recorded in equity earnings from joint ventures in the Company’s consolidated statement of operations.
Iconix India Joint Venture
In June 2012, the Company formed Imaginative Brand Developers Private Limited (“Iconix India”), a wholly-owned subsidiary of the Company, and contributed substantially all rights to its wholly-owned and controlled brands in India through an agreement with Iconix India. Shortly thereafter Reliance Brands Limited (“Reliance”), an affiliate of the Reliance Group, purchased a 50% interest in Iconix India for $6.0 million of which approximately $2.0 million was paid in cash upon the closing of this transaction and the remaining $4.0 million of which is a note, to be paid over a 48- month period following closing. As a result of this transaction, the Company recognized a gain of approximately $2.3 million in FY 2013 for the difference between the consideration (cash and notes receivable) received by the Company and the book value of the brands contributed to the joint venture. Additionally, pursuant to the terms of the transaction, the Company and Reliance each agreed to contribute 100 million Indian rupees (approximately $2.0 million) to Iconix India only upon the future mutual agreement of the parties, of which 25 million Indian rupees (approximately $0.5 million) was contributed at closing.
As of December 31, 2020, the $1.0 million note receivable, which is the remaining amount due to the Company from Reliance, was reserved on the Company’s consolidated balance sheet with the offset recorded to bad debt expense on the Company’s consolidated statement of operations in FY 2018.
The Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and Reliance, that Iconix India is not a VIE and not subject to consolidation. The Company has recorded its investment under the equity method of accounting since inception.
MG Icon
In March 2010, the Company acquired a 50% interest in MG Icon, the owner of the Material Girl and Truth or Dare brands and trademarks and other rights associated with the artist, performer and celebrity known as “Madonna”, from Purim LLC (“Purim”) for $20.0 million, $4.0 million of which was paid at closing. In connection with the launch of Truth or Dare brand and based on certain qualitative criteria, Purim is entitled to an additional $3.0 million. The total cash consideration was fully paid in FY 2016.
At inception, the Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and Purim, MG Icon is a VIE and not subject to consolidation, as the Company is not the primary beneficiary of MG Icon. The Company has recorded its investment under the equity method of accounting.
Pursuant to the terms of the MG Icon operating agreement and subject to certain conditions, the Company is entitled to recognize a preferred profit distribution from MG Icon of at least $23.0 million, after which all profits and losses are recognized 50/50 in accordance with each principal’s membership interest percentage. Since the third quarter of FY 2017 (at which time the Company had achieved the $23.0 million in distributions from its interest in MG Icon), the Company has been recognizing 50/50 of all profits and losses in accordance with each principal’s membership interest percentage.
As a result of the investment impairment test performed in the fourth quarter of FY 2019, the Company recorded an impairment of its investment in MG Icon of $9.6 million (inclusive of a write off of $2.6 million of advances made to the entity) to fully impair its investment due to reduced revenue forecasts for the Material Girl brand.
77
Investments in Iconix China
Through our ownership of Iconix China (see above), we have equity interests in the following private companies which are accounted for as equity method investments:
|
|
|
|
|
Ownership
by
|
|
|
Carrying Value of Investment as of
|
|
|
Brands Placed
|
|
Partner
|
|
Iconix China
|
|
|
December 31, 2020
|
|
|
Candie’s
|
|
Candies Shanghai Fashion Co. Ltd. (2)
|
|
20%
|
|
|
$
|
—
|
|
|
Marc Ecko
|
|
Shanghai MuXiang Apparel & Accessory Co. Limited (3)
|
|
0%
|
|
|
|
—
|
|
|
Material Girl
|
|
Ningbo Material Girl Fashion Co. Ltd. (1)
|
|
0%
|
|
|
|
—
|
|
|
Ecko Unltd
|
|
Ai Xi Enterprise (Shanghai) Co. Limited
|
|
20%
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
$
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 was reduced by an initial cash investment of $0.2 million, as well as $0.6 million of brand management expenses incurred since the inception of the Material Girl China entity, resulting in 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 consolidated statement of operations during FY 2019.
|
|
(2)
|
As a result of recent losses, primarily due to the impact of COVID-19 on the retail industry, the Company determined that the losses associated with this investment were other than temporary and determined that the fair value of its investment was de minimis. Accordingly, the Company recorded an impairment charge of $9.8 million during FY 2020.
|
|
(3)
|
In August 2020, the Company rescinded the trademark rights for the Ecko/Marc Ecko brand in exchange for its equity interest in the joint venture and recorded an impairment charge of $9.7 million during FY 2020.
|
Marcy Media Holdings, LLC
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. At inception, the Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company that Marcy Media is not a VIE and not subject to consolidation.
In the third quarter of 2019, the Company recorded an impairment charge of $17 million on its investment in Marcy Media. During the fourth quarter of 2019, the Company sold its interests in Marcy Media for $15 million.
5. Gains on Sale of Trademarks, net
The following table details transactions comprising gains on sales of trademarks, net in the consolidated statement of operations:
|
|
|
For the Twelve Months Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Interest in Umbro trademark in Iconix China (1)
|
|
$
|
59,582
|
|
|
$
|
—
|
|
|
Interest in Starter trademark in Iconix China (2)
|
|
|
14,523
|
|
|
|
—
|
|
|
Net gains on sale of trademarks
|
|
$
|
74,105
|
|
|
$
|
—
|
|
(1) In July 2020, the Company completed the sale of all of its equity interests of Umbro China, Limited (the “Umbro China Sale”) for gross consideration of $62.5 million. The Umbro China Sale includes the sale of the Umbro sports brand in the People’s Republic of China, Hong Kong, Taiwan and Macau (refer to Note 1 and Note 3).
(2) In September 2020, the Company completed the sale of all of its equity interests of Starter China, Limited (the “Starter China Sale”) for gross consideration of $16.0 million. The Starter China Sale includes the sale of the Starter brand in the People’s Republic of China, Hong Kong, Taiwan and Macau (refer to Note 1 and Note 3).
78
6. Fair Value Measurements
ASC Topic 820 “Fair Value Measurements”, 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.
Hedge Instruments
From time to time, the Company will purchase hedge instruments to mitigate statement of operations risk and cash flow risk of revenue and receivables. As of December 31, 2020, the Company had no hedge instruments.
Financial Instruments
As of December 31, 2020 and December 31, 2019, the fair values of cash, accounts receivable and accounts payable approximated their carrying values due to the short-term nature of these instruments. The fair value of notes receivable and note payable from and to our joint venture partners approximate their carrying values. The fair value of certain of our other equity investments is generally not readily determinable, and it is not practical to obtain the information needed to determine the value. For FY 2020, the Company recorded $19.6 million of impairment charges to other equity investments primarily related to a decline in fair value of the Company’s investment in its Ecko/Mark Ecko Joint venture in China and the Company’s interest in its Candies China joint venture (refer to Note 4). 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 December 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:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Long-term debt, including current portion (1)
|
|
$
|
564,401
|
|
|
$
|
442,751
|
|
|
$
|
645,721
|
|
|
$
|
556,187
|
|
|
(1)
|
Carrying amounts include aggregate unamortized debt discount and debt issuance costs.
|
79
Financial instruments expose the Company to counterparty credit risk for nonperformance and to market risk for changes in interest. The Company manages exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties and procedures to monitor the amount of credit exposure. The Company’s financial instrument counterparties are investment or commercial banks with significant experience with such instruments, as well as certain of our joint venture partners – see Note 4.
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. The Company recorded impairment charges on certain indefinite-lived intangible assets during FY 2020 and FY 2019. Refer to Note 3 for further information. The Company recorded asset impairment charges of $0.1 million and $1.8 million in FY 2020 and FY 2019 respectively, related to the consolidation and partial sublease of its New York office space.
7. Fair Value Option
During the first quarter of FY 2018, the Company elected to account for its 5.75% Convertible Notes under the fair value option. The fair value carrying amount of the 5.75% Convertible Notes accounted for under the fair value option as of December 31, 2020 and December 31, 2019 is $50.9 million and $47.3 million, respectively as compared to the contractual principal outstanding balance which was $94.4 million as of December 31, 2020 and December 31, 2019. The change of $3.6 million and $3.9 million in the fair value of the 5.75% Convertible Notes accounted for under the fair value option are included in the Company’s consolidated statement of operations for FY 2020 and FY 2019 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 2 inputs, as they are based on the quoted prices of the notes.
8. Debt Arrangements
The Company’s net carrying amount of debt is comprised of the following:
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
Senior Secured Notes
|
|
$
|
317,856
|
|
|
$
|
338,130
|
|
|
Variable Funding Note, net of original issue discount
|
|
|
100,000
|
|
|
|
99,610
|
|
|
Senior Secured Term Loan, net of original issue discount
|
|
|
94,755
|
|
|
|
162,418
|
|
|
5.75% Convertible Notes (1)
|
|
|
50,868
|
|
|
|
47,277
|
|
|
Payroll Protection Program Loan
|
|
|
1,307
|
|
|
|
—
|
|
|
Unamortized debt issuance costs
|
|
|
(385
|
)
|
|
|
(1,714
|
)
|
|
Total debt
|
|
|
564,401
|
|
|
|
645,721
|
|
|
Less current maturities
|
|
|
28,433
|
|
|
|
61,976
|
|
|
Total long-term debt
|
|
$
|
535,968
|
|
|
$
|
583,745
|
|
|
|
(1)
|
Reflects the debt carrying amount, which is accounted for under the Fair Value Option in the consolidated balance sheet as of December 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 December 31, 2020 and December 31, 2019, respectively.
|
80
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.
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 December 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.
In July 2017, in connection with the sale of the businesses underlying the Company’s previous entertainment segment, the Company made a mandatory principal prepayment on its Senior Secured Notes of $152.2 million.
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, (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 accrues 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.
81
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 December 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 approximate cash flow available to pay such principal and interest. As a result of the 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 Indenture. Upon a Rapid Amortization Event, any residual amounts available will immediately be used to pay down the principal.
The Securitization Notes are also 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.
As of December 31, 2020 and December 31, 2019, the total outstanding principal balance of the Securitization Notes was $417.9 million and $438.1 million, respectively, of which $8.4 million and $42.7 million, respectively is included in the current portion of long-term debt on the consolidated balance sheet. As of December 31, 2020 and December 31, 2019, $8.5 million and $14.9 million, 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.
82
For FY 2020 and FY 2019, interest expense relating to the Securitization Notes was approximately $18.5 million and $20.7 million, respectively. For FY 2020 and FY 2019, the Company long-term accrued interest expense related to the Securitization Notes was $21.7 million and zero, respectively. For FY 2020 and FY 2019, the Company recorded an expense for the amortization of original issue discount and deferred financing costs related to the Variable Funding Notes of $1.1 million and $7.0 million, respectively. The effective interest rate on such notes is 3.7%.
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). 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.
83
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”), 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 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, which were both recorded to interest expense on the Company’s consolidated statement of operations for FY 2017. As a result of this transaction, the Company’s outstanding principal balance of the Senior Secured Term Loan was reduced to $57.8 million at that time and the Company recorded a gain on modification of debt of $8.8 million (which is net of $0.8 million of additional deferred financing costs associated with the First Amendment), which has been recorded in interest expense on the Company’s consolidated statement of operations for FY 2017.
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.
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 that was executed and (ii) the Note Exchange (as defined below).
Fourth Amendment
The Company, through IBG Borrower, entered into the Fourth Amendment to the Senior Secured Term Loan as of 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.
84
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: 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; the failure to extend of the Series 2012-1 Class A-1 Senior Notes Renewal Date (as defined in the Senior Secured Term Loan); 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 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 for FY 2019 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 a result of the Umbro China Sale and the Starter China Sale, the Company made additional principal repayments of $44.7 million and $11.7 million on the Senior Secured Term Loan in the third and fourth quarter of 2020, respectively. As of December 31, 2020 and December 31, 2019, the outstanding principal balance of the Senior Secured Term Loan was $94.8 million (which is net of $5.1 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 interest expense of approximately $12.2 million relating to the Senior Secured Term Loan in FY 2020 as compared to $18.0 million for FY 2019.
The Company recorded an expense for the amortization of original issue discount and deferred financing fees of approximately $8.7 million relating to the Senior Secured Term Loan, included in interest expense on the consolidated statement of operations, during FY 2020 as compared to $5.5 million during FY 2019. The effective interest rate on the Senior Secured Term Loan is 11.6%, as of December 31, 2020.
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”).
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.
85
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 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) prior to maturity, each holder will have the right at its option, but subject in all respects to the terms of the Intercreditor Agreement and the Senior Secured Term Loan, 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 FY 2020, noteholders did not convert any of the aggregate outstanding principal balance 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 7 for further details. As of December 31, 2020, while the debt balance recorded at fair value on the Company’s consolidated balance sheet is $50.9 million, the actual outstanding principal balance of the 5.75% Convertible Notes is $94.4 million.
The Company recorded interest expense of approximately $5.5 million relating to the 5.75% Convertible Notes during the FY 2020 as compared to $5.7 for FY 2019. The Company issued approximately 1.3 million common shares to noteholders in lieu of $1.4 million of cash interest due on August 15, 2020.
As of December 31, 2020, the Company’s debt maturities on a calendar year basis are as follows:
|
|
|
Total
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
|
Senior Secured Notes
|
|
$
|
317,856
|
|
|
$
|
3,451
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
314,405
|
|
|
Variable Funding Notes
|
|
$
|
100,000
|
|
|
|
4,914
|
|
|
|
7,031
|
|
|
|
7,031
|
|
|
|
7,031
|
|
|
|
7,031
|
|
|
|
66,962
|
|
|
Senior Secured Term Loan (1)
|
|
$
|
94,755
|
|
|
|
19,284
|
|
|
|
75,471
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
5.75% Convertible Notes (2)
|
|
$
|
50,868
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,868
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Payroll Protection Program Loan (3)
|
|
$
|
1,307
|
|
|
|
784
|
|
|
|
523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
564,786
|
|
|
$
|
28,433
|
|
|
$
|
83,025
|
|
|
$
|
57,899
|
|
|
$
|
7,031
|
|
|
$
|
7,031
|
|
|
$
|
381,367
|
|
|
(1)
|
Reflects the net debt carrying amount, effected by the outstanding balance of the original issue discount, in the consolidated balance sheet as of December 31, 2020. The actual principal outstanding balance of the Senior Secured Term Loan is $99.9 million as of December 31, 2020.
|
|
(2)
|
Reflects the debt carrying amount which is accounted for under the Fair Value Option in the consolidated balance sheet as of December 31, 2020. The actual principal outstanding balance of the 5.75% Convertible Notes is $94.4 million as of December 31, 2020.
|
86
|
(3)
|
The Payroll Protection Program Loan and related accrued interest are eligible for forgiveness, in whole or in part based on the usage of the proceeds. The Company intends to submit an application for the loan to be forgiven in conformity with the loan’s terms. The Company believes it qualifies for such forgiveness. However, there is no assurance the Company will be successful in obtaining approval from the U.S. Small Business Administration.
|
9. Stockholders’ Equity
2016 Omnibus Incentive Plan
On November 4, 2016, the Company’s stockholders approved the Company’s 2016 Omnibus Incentive Plan (“2016 Plan”). The 2016 Plan replaced and superseded the Company’s Amended and Restated 2009 Equity Incentive Plan. Under the 2016 Plan, all employees, directors, officers, consultants and advisors of the Company, including those of the Company’s subsidiaries, are eligible to be granted common stock, options or other stock-based awards. At inception, there were approximately 0.2 million shares of the Company’s common stock available for issuance under the 2016 Plan. The 2016 Plan was amended at the 2017 Annual Meeting of Stockholders to increase the number of shares available under the plan by 0.19 million shares.
Shares Reserved for Issuance
As of December 31, 2020, there were approximately 0.2 million common shares available for issuance under the 2016 Plan.
Shares Issued on Payment of Interest of 5.75% Convertible Notes
On August 15, 2020, The Company settled a portion of its interest obligation on its 5.75% Convertible Notes by issuing approximately 1.3 million shares for $1.4 million and paid the remaining balance in cash for approximately $1.3 million. On February 15, 2021, The Company settled its February 2021 interest obligation on its 5.75% Convertible Notes in shares of its common stock by issuing approximately 1.0 million shares.
Reverse Stock Split
On March 14, 2019, the Company effected a Reverse Stock Split of its common stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares of common stock had their holdings rounded up to the next whole share. Unless the context otherwise requires, all share and per share amounts in this annual report on Form 10-K have been adjusted to reflect the Reverse Stock Split.
Stock Options
There were no grants of stock options and no compensation expense related to stock option grants during FY 2020 or FY 2019, as all prior awards have been fully expensed. During FY 2019, the remaining 1,500 stock options previously granted with a weighted average exercise price of $171.60 expired.
Restricted stock
Compensation cost for restricted stock is measured as the excess, if any, of the quoted market price of the Company’s stock at the date the common stock is issued over the amount the employee must pay to acquire the stock (which is generally zero). Compensation cost is recognized over the period between the issue date and the date any restrictions lapse, with compensation cost recognized on a straight-line basis over the requisite service period. The restrictions do not affect voting and dividend rights.
87
The following tables summarize information about unvested restricted stock transactions:
|
|
|
FY 2020
|
|
|
FY 2019
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Non-vested, January 1,
|
|
|
326,844
|
|
|
$
|
1.94
|
|
|
|
239,077
|
|
|
$
|
2.68
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
329,145
|
|
|
|
1.70
|
|
|
Vested
|
|
|
(196,332
|
)
|
|
|
1.97
|
|
|
|
(241,082
|
)
|
|
|
2.26
|
|
|
Forfeited/Canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
(296
|
)
|
|
|
75.20
|
|
|
Non-vested, December 31,
|
|
|
130,512
|
|
|
$
|
1.90
|
|
|
|
326,844
|
|
|
$
|
1.94
|
|
The Company has awarded time-based restricted shares of common stock to certain employees. The awards have restriction periods tied to employment and vest over a maximum period of approximately 3 years. The cost of the time-based restricted stock awards, which is the fair market value on the date of grant net of estimated forfeitures, is expensed ratably over the vesting period. During FY 2020 and FY 2019, the Company awarded approximately 0 million and 0.3 million restricted shares, respectively, with a fair market value of approximately $0 million and $0.6 million, respectively.
Compensation expense related to restricted stock grants for FY 2020 and FY 2019 was approximately $0.2 million and $0.8 million, respectively. An additional amount of $0.1 million of compensation expense related to restricted stock grants (inclusive of the restricted stock grants awarded as part of the long-term incentive plan discussed below) is expected to be expensed evenly over a period of approximately twelve to fifteen months. During FY 2020 and FY 2019, the Company repurchased shares valued at less than $0.1 million and $0.2 million, respectively, of its common stock in connection with net share settlement of restricted stock grants.
Retention Stock
On October 15, 2018, the Company hired Robert C. Galvin as its Chief Executive Officer and President and he was appointed to the Company’s board of directors. Mr. Galvin was issued an Employment Inducement Award pursuant to his employment agreement. The terms of the Employment Inducement Award are based upon the Company’s performance over the vesting period. The grant date fair value of Mr. Galvin’s award issued on October 15, 2018 was $1.80 per share.
Compensation related to the retention stock awards was an expense of approximately $0.1 million and an expense of approximately $0.2 million for FY 2020 and FY 2019, respectively. An additional amount of $0.1 million of compensation expense related to retention stock awards is expected to be expensed over a period of approximately twelve months.
Long-Term Incentive Compensation
On March 31, 2016, the Company approved a new plan for long-term incentive compensation (the “2016 LTIP”) for key employees and granted equity awards under the 2016 LTIP in the aggregate amount of approximately 0.7 million shares at a weighted average share price of $73.10 with a then current value of approximately $5.2 million. The awards granted were a combination of restricted stock units (“RSUs”) and target level performance stock units (“PSUs”). Pursuant to the terms of the awards and based upon the Company’s performance over the vesting period, less than 0.1 million were issued upon expiration of the grant on March 31, 2019.
On March 7, 2017, the Company approved a new plan for long-term incentive compensation (the “2017 LTIP”) for certain employees and granted equity awards under the 2017 LTIP in the aggregate amount of approximately 0.1 million shares at a weighted average share price of $75.20 with a then current value of $6.6 million. The awards granted were a combination of RSUs and target level PSUs. The material terms of the PSUs and RSUs are substantially similar to those set forth in the 2016 LTIP. Specifically, the RSUs vest one third annually on each of March 30, 2018, March 30, 2019 and March 30, 2020. The PSUs vest based on performance metrics approved by the Compensation Committee, which, for the performance period commencing January 1, 2017 and ending on December 31, 2019, are based on the Company’s achievement of an aggregated adjusted operating income performance target as set forth in the applicable award agreements, and continued employment through December 31, 2019. None of the 2017 LTIP PSUs vested.
88
On March 15, 2018, the Company approved a new plan for long-term incentive compensation (the “2018 LTIP”) for certain employees which consisted of (i) equity awards in the aggregate amount of approximately 0.2 million shares at a weighted average share price of $13.80 with a then current value of $3.1 million and (ii) cash awards in the aggregate amount of approximately $3.1 million (the “Cash Grant”). The Cash Grants comprising the 2018 LTIP vest in 48 equal semi-monthly installments on the 15th and last days of each month, beginning March 31, 2018 and ending March 15, 2020, subject in each case to continued employment through the applicable vesting date. Each installment is paid within 15 days of the applicable vesting date. Upon the end of an employee’s employment with the Company, any remaining unpaid portion of the Cash Grant is forfeited. The PSUs vest based on performance metrics approved by the Compensation Committee over three separate performance periods, commencing on January 1 of each of 2018, 2019 and 2020 and ending on December 31 of each of 2018, 2019 and 2020, which, for each such performance period, are based on the Company’s achievement of an aggregated adjusted operating income performance target to be set by the Compensation Committee prior to March 30 of each applicable performance period, and continued employment through the settlement date. For FY 2020, less than 0.1 million shares forfeited in respect of the 2018 LTIP. As of December 31, 2020, none of the performance targets have been met. The weighted average remaining contractual term of the PSUs is less than one year.
Compensation recognized related to the PSUs granted as part of the long-term incentive plans was an expense of approximately $0.5 million as compared to a compensation expense of less than $0.1 million in FY 2020 and FY 2019, respectively. An additional amount of $0.1 million of compensation expense related to the PSUs granted as part of the various LTIPs is expected to be expensed over a period of less than one year.
10. Earnings (Loss) Per Share
Basic earnings (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect, in periods in which they have a dilutive effect, the effect of restricted stock-based awards, common shares issuable upon exercise of stock options and shares underlying convertible notes potentially issuable upon conversion. The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options outstanding were exercised, and all convertible notes have been converted into common stock.
As of December 31, 2020, of the total potentially dilutive shares related to restricted stock-based awards, less than 0.1 million were anti-dilutive, compared to less than 0.1 million that were anti-dilutive as of December 31, 2019. Additionally, as of December 31, 2020, of total potentially dilutive shares related to potential conversion of the Company’s 5.75% Convertible Notes, all of the shares (or approximately 21.7 million) were anti-dilutive, compared to approximately 33.7 million, were anti-dilutive as of December 31, 2019.
As of December 31, 2020, of the performance related restricted stock-based awards issued in connection with the Company’s named executive officers, approximately 0.3 million shares were anti-dilutive compared to 0.3 million that were anti-dilutive as of December 31, 2019.
A reconciliation of weighted average shares used in calculating basic and diluted earnings per share follows:
|
|
|
For the Year
Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
|
Basic
|
|
|
12,334
|
|
|
|
10,559
|
|
|
|
Effect of convertible notes subject
to conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
Effect of assumed vesting of dilutive shares
|
|
|
—
|
|
|
|
—
|
|
|
|
Diluted
|
|
|
12,334
|
|
|
|
10,559
|
|
|
As a result of the Company being in a net loss position during FY 2020 and FY 2019, dilution from the exercise of vesting of restricted stock has been excluded in the diluted earnings per share calculation.
89
In accordance with ASC 480, the Company considers its redeemable non-controlling interest in its computation of both basic and diluted earnings per share. In addition, in accordance with ASC 260, the Company considers its 5.75% Convertible Notes in its computation of diluted earnings per share. For FY 2020 and FY 2019, adjustments to the Company’s redeemable non-controlling interest and effects of the potential conversion of the 5.75% Convertible Notes had impacts on the Company’s earnings per share calculations as follows:
|
|
|
For the Year
Ended December 31,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
For earnings (loss) per share - basic:
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Iconix Brand Group, Inc.
|
|
$
|
(7,336
|
)
|
|
$
|
(109,522
|
)
|
|
|
Accretion of redeemable non-controlling interest
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
Net loss attributable to Iconix Brand Group, Inc.
after the effect of accretion of redeemable
non-controlling interest for basic earnings (loss) per share
|
|
$
|
(7,365
|
)
|
|
$
|
(109,522
|
)
|
|
|
For earnings (loss) per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Iconix Brand Group, Inc.
|
|
$
|
(7,336
|
)
|
|
$
|
(109,522
|
)
|
|
|
Effect of potential conversion of 5.75% Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
Accretion of redeemable non-controlling interest
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
Net loss attributable to Iconix Brand Group, Inc.
after the effect of potential conversion of 5.75%
Convertible Notes for diluted earnings (loss) per share
|
|
$
|
(7,365
|
)
|
|
$
|
(109,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.60
|
)
|
|
$
|
(10.37
|
)
|
|
|
Diluted
|
|
$
|
(0.60
|
)
|
|
$
|
(10.37
|
)
|
|
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,334
|
|
|
|
10,559
|
|
|
|
Diluted
|
|
|
12,334
|
|
|
|
10,559
|
|
|
|
(1)
|
There was no effect of potential conversion of the Company’s 5.75% Notes on the Company’s diluted earnings per share calculation for FY 2020 and FY 2019, as the effect was anti-dilutive.
|
11. Contingencies
In May 2016, Supply Company, LLC, (“Supply”), a former licensee of the Ed Hardy trademark, commenced an action against the Company and its affiliate, Hardy Way, LLC, (“Hardy Way” and together with the Company, the “Iconix Defendants”) seeking damages of $50 million, including punitive damages, attorneys’ fees and costs (the “Supply Litigation”). Supply alleges that Hardy Way breached the parties’ license agreement by failing to reimburse Supply for markdown reimbursement requests that Supply received from a certain retailer. Supply also alleges that the Company is liable for fraud because it made purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark in order to induce Supply to enter into the license agreement and to induce Supply to enter into a separate agreement with a certain retailer. The Iconix Defendants filed a motion to dismiss the Complaint. In addition, Hardy Way commenced an action against Kevin Yap (“Yap”), the principal of Supply, to enforce the terms of his guarantee of Supply’s obligations under the Supply-Hardy Way license agreement for the Ed Hardy trademark (the “Yap Litigation”). In response, Yap filed counterclaims against Hardy Way asserting two declaratory judgment claims seeking similar damages as in the Supply Litigation, including the reimbursement of Supply for losses allegedly suffered because of the markdown reimbursement requests, as well as rescission of the Supply-Hardy Way license agreement, other damages and attorneys’ fees and costs. Hardy Way filed a pre-discovery motion for summary judgment on its affirmative claim and to dismiss Yap’s counterclaims.
On August 10, 2020, the Court issued a consolidated decision (the “Decision”) resolving the Iconix Defendants’ motion to dismiss the Supply Litigation and Hardy Way’s motion for summary judgment and to dismiss counterclaims in the Yap Litigation. In the Supply Litigation, the Court granted the Iconix Defendants’ motion to dismiss in all respects, except one, and denied Supply’s cross-motion for leave to amend its complaint. As a result of the Decision, the only claim that remains in the Supply Litigation is Supply’s claim of fraudulent inducement based on the Iconix Defendants’ purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark. In the Yap Litigation, the Court denied Hardy Way’s motion for pre-discovery summary
90
judgment on its affirmative claim as premature because of Yap’s allegation that he was fraudulently induced into entering into the guarantee by Hardy Way’s purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark. The Court dismissed Yap’s counterclaims related to the markdown reimbursement request and denied Yap’s cross-motion for leave to amend his answer to assert additional defenses. As a result of the Decision, the claims that remain in the Yap Litigation are Hardy Way’s affirmative claim against Yap on his guarantee and Yap’s counterclaim for declaratory judgment based on Hardy Way’s purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark. The Decision is subject to normal appellate rights of all parties.
The Iconix Defendants will continue to vigorously defend the Supply Litigation and the Yap Litigation. At this time, the Company is unable to estimate the ultimate outcomes of the Supply Litigation or the Yap Litigation.
Two shareholder derivative complaints captioned James v. Cuneo et al, Docket No. 1:16-cv-02212 and Ruthazer v. Cuneo et al, Docket No. 1:16-cv-04208 have been consolidated in the United States District Court for the Southern District of New York, and three shareholder derivative complaints captioned De Filippis v. Cuneo et al. Index No. 650711/2016, Gold v. Cole et al, Index No. 53724/2016 and Rosenfeld v. Cuneo et al., Index No. 510427/2016 have been consolidated in the Supreme Court of the State of New York, New York County. The complaints name the Company as a nominal defendant and assert claims for breach of fiduciary duty, insider trading and unjust enrichment against certain of the Company's current and former directors and officers arising out of the Company's restatement of financial reports and certain employee departures. At this time, the Company is unable to estimate the ultimate outcome of these matters.
From time to time, the Company is also made a party to litigation incurred in the normal course of business. In addition, in connection with litigation commenced against licensees for non-payment of royalties, certain licensees have asserted unsubstantiated counterclaims against the Company. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not, individually or in the aggregate, have a material effect on the Company’s financial position or future liquidity.
12. Related Party Transactions
The Company has entered into certain license agreements in which the core licensee is also one of our joint venture partners. In the case of Sports Direct International plc (“Sports Direct”), the Company maintains license agreements with Sports Direct, but in addition, during FY 2018, the Company entered into a cooperation agreement with Sports Direct that allowed Sports Direct to appoint two members to the Company’s Board of Directors. The cooperation agreement expired pursuant to its terms during the first quarter of 2019. As of December 31, 2020 and December 31, 2019, the Company recognized the following royalty revenue amounts:
|
|
|
For the Twelve Months
Ended December 31,
|
|
|
|
Joint Venture Partner
|
|
2020
|
|
|
2019
|
|
|
|
M.G.S. Sports Trading Limited
|
|
|
400
|
|
|
|
440
|
|
|
|
Pac Brands USA, Inc.
|
|
|
329
|
|
|
|
363
|
|
|
|
Albion Equity Partners LLC / GL Damek
|
|
|
2,412
|
|
|
|
2,350
|
|
|
|
Li Ning
|
|
|
617
|
|
|
|
—
|
|
|
|
MHMC (1)
|
|
|
—
|
|
|
|
7
|
|
|
|
Sports Direct International plc
|
|
|
1,829
|
|
|
|
1,188
|
|
|
|
|
|
$
|
5,587
|
|
|
$
|
4,348
|
|
|
|
(1)
|
As detailed in Note 4, as of July 2019, MHMC is no longer a related party.
|
13. Operating Leases
The Company is a lessee in several noncancelable operating leases, primarily for its corporate office, additional office space and certain office equipment. Beginning January 1, 2019, the Company accounts for leases in accordance with ASC Topic 842, Leases. The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a ROU asset and a lease liability at the lease commencement date. Refer to Note 1.
For operating leases, the ROU asset is initially measured at the initial measurement amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the lease incentive received. For operating leases, the ROU asset is subsequently measured at cost, less accumulated amortization, less any accumulated impairment losses. Lease expense is recognized on a straight-line basis over the lease term.
91
Variable lease payments associated with the Company’s leases are recognized in the period in which the obligation for those payments is incurred. Variable lease payments are presented as operating expense in the Company’s consolidated statement of operations in the same line item as the expense arising from fixed lease payments.
Operating lease ROU assets are presented as Right-of-use-assets within Other assets on the consolidated balance sheet. The current portion of operating lease liabilities is included in other liabilities-current and the long-term portion is included in Other liabilities on the consolidated balance sheet.
The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases of office space and office equipment as an expense on a straight-line basis over the lease term. The Company’s leases may include non-lease components such as common area maintenance. The Company has elected the practical expedient to account for the lease and non-lease components as a single lease component, therefore, for all of our operating leases, the lease payments used to measure the lease liability include all of the fixed consideration in the contract.
The Company’s operating leases expire over the next four years. The Company’s operating leases may contain renewal options however, because the Company is not reasonably certain to exercise these renewal options, the options are not included in the lease term and associated potential option payments are excluded from lease payments. Payments due under the lease contracts include fixed payments and in certain of the Company’s leases, variable payments. Variable lease payments consist of the Company’s proportionate share of the building’s property taxes, insurance, electricity and other common area maintenance costs.
For the twelve months ended December 31, components of lease cost were as follows:
|
|
|
For the Year
Ended December 31, 2020
|
|
|
For the Year
Ended December 31, 2019
|
|
|
|
Operating lease cost
|
|
$
|
2,238
|
|
|
$
|
2,215
|
|
|
|
Short-term lease cost
|
|
|
148
|
|
|
|
537
|
|
|
|
Variable lease cost
|
|
|
376
|
|
|
|
396
|
|
|
|
|
|
$
|
2,762
|
|
|
$
|
3,148
|
|
|
As of December 31, 2020, the operating lease ROU assets and operating lease liabilities were $4.9 million and $7.1 million, respectively.
For FY 2020 and FY 2019, cash paid for lease liabilities for operating leases was $2.7 and $2.6 million, respectively. For FY 2020 and FY2019, the Company recorded $0.3 and $0.1 million, respectively of ROU assets and $0.3 and $0.1 million, respectively of operating lease obligations for new leases. There were no ROU assets exchanged and no operating lease obligations assumed during FY 2020 and FY 2019. In FY 2020 and FY 2019, there were no reductions to ROU assets resulting from reductions to lease obligations. In FY 2020 and FY 2019, the Company recorded $0.1 million and $0.5 million respectively of impairment charges to its ROU assets and $0.0 and $1.3 million respectively of impairments to Leasehold Improvements related to the partial sublet of its New York office space.
Because we generally do not have access to the rate implicit in the lease, the Company utilizes our incremental borrowing rate as the discount rate. As of December 31, 2020, the weighted average remaining operating lease term is 3.2 years and the weighted average discount rate for the operating leases is 8.4%.
Maturities of lease liabilities under non-cancellable leases as of December 31, 2020 are as follows:
|
|
|
Operating Leases
|
|
|
2021
|
|
$
|
2,767
|
|
|
2022
|
|
|
2,171
|
|
|
2023
|
|
|
2,109
|
|
|
2024
|
|
|
1,079
|
|
|
Total undiscounted lease payments
|
|
$
|
8,126
|
|
|
Less: Imputed interest
|
|
|
1,004
|
|
|
Total lease liabilities
|
|
$
|
7,122
|
|
92
14. Benefit and Incentive Compensation Plans and Other
The Company sponsors a 401(k) Savings Plan (the “Savings Plan”) that covers all eligible full-time employees. Participants may elect to make pretax contributions subject to applicable limits. At its discretion, the Company may contribute additional amounts to the Savings Plan. During FY 2020 and FY 2019, the Company made contributions to the Savings Plan of approximately $0.2 million and $0.2 million, respectively.
15. Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these items and the cumulative pretax losses (primarily resulting from asset impairment expenses), management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance for all taxing jurisdictions as of December 31, 2020. In addition, the Company has deferred tax liabilities related to indefinite lived intangibles on the balance sheet in an amount of approximately $4.9 million, which cannot be considered to be a source of taxable income to offset deferred tax assets.
At December 31, 2020, the Company has approximately $250.7 million in federal net operating loss carryforwards (NOLs), approximately $26.0 million of which will expire in FY 2036, and the remaining have unlimited lives. The Company also has foreign tax credit carryforwards of approximately $8.7 million, which will expire in 2023 and 2024 if unused. The Company also has $143.0 million of foreign net operating losses primarily in Luxembourg, where the losses incurred before 2016 have unlimited lives. The Company also has approximately $100.7 million apportioned state and local NOLs that will begin to expire in 2034 if not used.
Our use of our NOL carryforwards are limited under Section 382 of the Internal Revenue Code, as we have had a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Internal Revenue Code. These complex changes of ownership rules generally focus on ownership changes involving shareholders owning directly or indirectly 5% or more of our stock, including certain public “groups” of shareholders as set forth under Section 382 of the Internal Revenue Code, including those arising from new stock issuances and other equity transactions.
As a result of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") signed into law on March 27, 2020, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration ("SBA"). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. As of December 31, 2020, the Company has recorded a $6.5 million benefit resulting from carrying back their 2018 Net Operating Loss to offset 2013 taxable income.
The Company’s consolidated effective tax rate was 42.6% and -6.0% for the year ended December 31, 2020 and December 31, 2019, respectively. The effective tax rate for the FY 2020 increased as compared to the FY 2019 primarily due to a $6.7 million tax benefit generated during 2020 related to the CARES Act which is calculated against a pre-tax loss as compared to 2019 where the company calculated a current tax expense due to foreign withholding taxes calculated against a pre-tax loss.
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
93
Pre-tax book loss for FY 2020 and FY 2019 were as follows:
|
|
|
FY 2020
|
|
|
FY 2019
|
|
|
Domestic
|
|
$
|
(92,883
|
)
|
|
$
|
(130,149
|
)
|
|
Foreign
|
|
|
87,702
|
|
|
|
35,907
|
|
|
Total pre-tax loss
|
|
$
|
(5,181
|
)
|
|
$
|
(94,242
|
)
|
The income tax provision (benefit) for federal, and state and local income taxes in the consolidated statement of operations consists of the following:
|
|
|
Year Ended
December 31,
2020
|
|
|
Year Ended
December 31,
2019
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(6,509
|
)
|
|
$
|
(1,012
|
)
|
|
State and local
|
|
|
21
|
|
|
|
(10
|
)
|
|
Foreign
|
|
|
3,552
|
|
|
|
6,785
|
|
|
Total current
|
|
$
|
(2,936
|
)
|
|
$
|
5,763
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(185
|
)
|
|
|
23
|
|
|
State and local
|
|
|
402
|
|
|
|
(103
|
)
|
|
Foreign
|
|
|
514
|
|
|
|
—
|
|
|
Total deferred
|
|
|
731
|
|
|
|
(80
|
)
|
|
Total Provision
|
|
$
|
(2,205
|
)
|
|
$
|
5,683
|
|
As of December 31, 2020, the Company is not indefinitely reinvested in any foreign earnings.
The significant components of net deferred tax assets and liabilities of the Company consist of the following:
|
|
|
2020
|
|
|
2019
|
|
|
State net operating loss carryforwards
|
|
$
|
6,117
|
|
|
$
|
4,064
|
|
|
U.S. Federal net operating loss carryforwards
|
|
|
54,349
|
|
|
|
36,391
|
|
|
Receivable reserves
|
|
|
1,344
|
|
|
|
280
|
|
|
Interest expense limitation
|
|
|
20,387
|
|
|
|
16,779
|
|
|
Intangibles
|
|
|
59,358
|
|
|
|
96,177
|
|
|
Equity compensation
|
|
|
1,988
|
|
|
|
1,838
|
|
|
Foreign Tax Credit
|
|
|
8,722
|
|
|
|
5,252
|
|
|
Other
|
|
|
5,895
|
|
|
|
9,293
|
|
|
Total deferred tax assets
|
|
|
158,160
|
|
|
|
170,074
|
|
|
Valuation allowance
|
|
|
(136,661
|
)
|
|
|
(143,453
|
)
|
|
Net deferred tax assets
|
|
$
|
21,499
|
|
|
$
|
26,621
|
|
|
Depreciation
|
|
|
—
|
|
|
|
(284
|
)
|
|
Convertible notes
|
|
|
(5,917
|
)
|
|
|
(6,451
|
)
|
|
Investment in joint ventures
|
|
|
(20,778
|
)
|
|
|
(24,350
|
)
|
|
Total deferred tax liabilities
|
|
|
(26,695
|
)
|
|
|
(31,085
|
)
|
|
Total net deferred tax liabilities
|
|
$
|
(5,196
|
)
|
|
$
|
(4,464
|
)
|
|
Balance Sheet detail on total net deferred tax
assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Non-current portion of net deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
|
Non-current portion of net deferred tax liabilities
|
|
$
|
(5,196
|
)
|
|
$
|
(4,464
|
)
|
94
The following is a rate reconciliation between the amount of income tax provision (benefit) at the Federal rate of 21% and provision (benefit) from taxes on loss before income taxes for FY 2020 and FY 2019, respectively:
|
|
|
2020
|
|
|
2019
|
|
|
Income tax benefit computed at the federal rate of 21%
|
|
$
|
(1,089
|
)
|
|
$
|
(19,791
|
)
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
State and local income taxes (benefit), net of federal
income tax
|
|
|
420
|
|
|
|
(115
|
)
|
|
Non-controlling interest
|
|
|
(1,146
|
)
|
|
|
(2,552
|
)
|
|
Valuation allowance
|
|
|
1,330
|
|
|
|
21,842
|
|
|
Interest on income tax receivable
|
|
|
—
|
|
|
|
(1,253
|
)
|
|
Non-deductible interest expense
|
|
|
1,143
|
|
|
|
1,192
|
|
|
Non-deductible executive compensation
|
|
|
332
|
|
|
|
150
|
|
|
Foreign Earnings (rate differential)
|
|
|
3,467
|
|
|
|
8,300
|
|
|
Prior Year True Up
|
|
|
(8
|
)
|
|
|
(2,400
|
)
|
|
US Tax Reform / CARES Act
|
|
|
(6,686
|
)
|
|
|
23
|
|
|
Other, net
|
|
|
32
|
|
|
|
287
|
|
|
Total
|
|
$
|
(2,205
|
)
|
|
$
|
5,683
|
|
With the exception of the Buffalo brand joint venture, Diamond Icon Joint Venture and Iconix Middle East joint venture, the Company is not responsible for the income taxes related to the non-controlling interest’s share of the joint venture’s earnings. Therefore, the tax liability associated with the non-controlling interest share of the joint venture’s earnings is not reported in the Company’s income tax expense, despite the joint venture’s entire income being consolidated in the Company’s reported income before income tax expense. As such, the joint venture’s earnings have the effect of lowering our effective tax rate. This effect is more pronounced in periods in which joint venture earnings are higher relative to our other earnings. Since the Buffalo brand joint venture is a taxable entity in Canada, and the Diamond Icon joint venture and Iconix Middle East joint venture are taxable entities in the United Kingdom, the Company is required to report its tax liability, including taxes attributable to the non-controlling interest, in its statement of operations. All other consolidated joint ventures are partnerships and treated as pass-through entities not subject to taxation in their local tax jurisdiction, and therefore the Company includes only the tax attributable to its proportionate share of income from the joint venture in income tax expense.
The Company files income tax returns in the U.S. federal and various state and local jurisdictions. For federal income tax purposes, during FY 2020, the Internal Revenue Service initiated an audit of the Company’s 2018 federal tax return. The audit is currently ongoing. The Company also files returns in numerous foreign jurisdictions that have varied years remaining open for examination, but generally the statute of limitations is three to four years from when the return is filed.
At December 31, 2020 and December 31, 2019, the total unrecognized tax benefit was approximately $0 million for both periods. Approximately $0 million of unrecognized tax benefits at December 31, 2020 would affect the Company's effective tax rate if recognized.
The Company is continuing its practice of recognizing interest and penalties to income tax matters in income tax expense. Total interest related to uncertain tax positions for FY 2020 and FY 2019 was $0 million for both periods.
16. Accumulated Other Comprehensive Loss
The following table sets forth the activity in accumulated other comprehensive loss for the years ended December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December, 31
|
|
|
Accumulated Other Comprehensive Loss
|
|
2020
|
|
|
2019
|
|
|
Beginning Balance
|
|
$
|
(54,643
|
)
|
|
$
|
(53,068
|
)
|
|
Foreign currency translation income (loss)
|
|
|
12,018
|
|
|
|
(1,575
|
)
|
|
Current period other comprehensive income (loss)
|
|
|
12,018
|
|
|
|
(1,575
|
)
|
|
Balance at December 31,
|
|
$
|
(42,625
|
)
|
|
$
|
(54,643
|
)
|
|
|
|
|
|
|
|
|
|
|
95
17. Segment and Geographic Data
The Company identifies its operating segments for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer, the Company’s Chief Operating Decision Maker (“CODM”), in deciding how to allocate resources and in assessing performance. The Company discloses the following operating segments: women’s, men’s, home, and international. Since the Company does not track, manage and analyze its assets by segments, no disclosure of segmented assets is reported.
The reportable operating segments described below represent the Company’s activities for which separate financial information is available and which is utilized on a regular basis by the Company’s CODM to evaluate performance and allocate resources. In identifying the Company’s operating segments, the Company considers its management structure and the economic characteristics, customers, sales growth potential and long-term profitability of its operating segments. As such, the Company configured its operations into the following four operating segments:
|
|
•
|
Women’s segment – consists of the Company’s women’s brands in the United States.
|
|
|
•
|
Men’s segment – consists of the Company’s men’s brands in the United States.
|
|
|
•
|
Home segment – consists of the Company’s home brands in the United States.
|
|
|
•
|
International segment – consists of the Company’s men’s, women’s and home brands in international markets.
|
Items not allocated to any segment are allocated to the Corporate level. Corporate, for segment reporting purposes, includes compensation, benefits and occupancy costs for corporate employees, as well as other corporate-related expenses such as: audit, legal, and information technology used in managing our business.
The Company’s Chief Executive Officer has been identified as the CODM. The Company’s measure of segment profitability is licensing revenue and operating income. The accounting policies of the Company’s operating segments are the same as those described in Note 1 – Summary of Significant Accounting Policies.
The geographic regions consist of the United States and Other (which principally represent Latin America and Europe). Revenues attributable to each region are based on the location in which licensees are located and where they principally do business. Refer to Note 2 for further details.
Reportable data for the Company’s operating segments were as follows:
|
|
|
For the Twelve Months
Ended December 31,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Licensing revenue:
|
|
|
|
|
|
|
|
|
|
|
Women's
|
|
$
|
25,248
|
|
|
$
|
37,491
|
|
|
|
Men's
|
|
|
22,737
|
|
|
|
36,793
|
|
|
|
Home
|
|
|
16,194
|
|
|
|
14,753
|
|
|
|
International
|
|
|
44,397
|
|
|
|
59,947
|
|
|
|
|
|
$
|
108,576
|
|
|
$
|
148,984
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
Women's
|
|
$
|
3,652
|
|
|
$
|
(961
|
)
|
|
|
Men's
|
|
|
10,103
|
|
|
|
24,878
|
|
|
|
Home
|
|
|
9,486
|
|
|
|
(4,932
|
)
|
|
|
International
|
|
|
20,621
|
|
|
|
23,487
|
|
|
|
Corporate
|
|
|
23,739
|
|
|
|
(74,004
|
)
|
|
|
|
|
$
|
67,601
|
|
|
$
|
(31,532
|
)
|
|
96
18. Other Assets- Current and Long-Term
Other Assets – Current
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
Other assets - current consisted of the following:
|
|
|
|
|
|
|
|
|
|
US federal tax receivables
|
|
$
|
—
|
|
|
$
|
1,115
|
|
|
Insurance receivable
|
|
|
—
|
|
|
|
15,000
|
|
|
Prepaid advertising
|
|
|
209
|
|
|
|
275
|
|
|
Prepaid expenses
|
|
|
678
|
|
|
|
1,207
|
|
|
Prepaid income taxes
|
|
|
457
|
|
|
|
1,119
|
|
|
Prepaid insurance
|
|
|
372
|
|
|
|
2,042
|
|
|
Due from related parties
|
|
|
86
|
|
|
|
86
|
|
|
Other prepaid taxes
|
|
|
474
|
|
|
|
596
|
|
|
Other current assets
|
|
$
|
2,276
|
|
|
$
|
21,440
|
|
Other Assets – Long Term
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
Other noncurrent assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
Prepaid interest
|
|
$
|
4,322
|
|
|
$
|
4,868
|
|
|
Deposits
|
|
|
357
|
|
|
|
707
|
|
|
Other noncurrent assets
|
|
|
1,117
|
|
|
|
1,205
|
|
|
Other noncurrent assets
|
|
$
|
5,796
|
|
|
$
|
6,780
|
|
19. Other Liabilities – Current
As of December 31, 2020 and December 31, 2019, Other current liabilities was $3.9 million and $13.8 million respectively, which related to amounts due to certain joint ventures that are not consolidated with the Company, as well as the current portion of operating lease liabilities.
20. Foreign Currency Translation
The functional currency of Iconix Luxembourg and Red Diamond Holdings, which are wholly owned subsidiaries of the Company, located in Luxembourg, is the Euro. However, the companies have certain dollar denominated assets, in particular cash and notes receivable, that are maintained in U.S. Dollars, which are required to be revalued each quarter. Due to fluctuations in currency in FY 2020 and FY 2019, the Company recorded a $1.6 million currency translation loss and a $0.9 million currency translation loss, respectively, that is included in the consolidated statements of operations.
Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity. Our comprehensive income is primarily comprised of net income and foreign currency translation gain or loss. During FY 2020 and FY 2019, the Company recognized as a component of our comprehensive income (loss), a foreign currency translation gain of $12.0 million and a foreign currency translation loss of $1.6 million, respectively, due to changes in foreign exchange rates.
21. Subsequent Events
As previously disclosed, on January 27, 2021, the “Company, received written confirmation from the Nasdaq Office of General Counsel that the Company has regained compliance with The Nasdaq Stock Market’s (“Nasdaq”) market value of publicly held securities rule, and that the Company is in compliance with other applicable listing standards as of the date thereof. The January 27, 2021 letter also confirmed that the Company’s pending hearing before the Nasdaq Hearings Panel has been cancelled and the
97
Company’s common stock will continue to be listed and traded on the Nasdaq Stock Market. The Company had received notice from the Nasdaq on December 28, 2020 that the Company’s common stock would be delisted if Minimum Market Value was not reestablished.
On February 15, 2021, the Company settled its $2.7 million February 2021 interest obligation on its 5.75% Convertible Notes in shares of its common stock by issuing approximately 1.0 million shares.
On March 23, 2021, the Company completed its previously announced sale of Lee Cooper China for net proceeds of $15.8 million. The Lee Cooper China Sale includes the sale of the Lee Cooper brand in the People’s Republic of China, Hong Kong, Taiwan and Macau. In March of 2021, the Company repaid approximately $11.8 million under the Senior Secured Term Loan with the proceeds received from the Lee Cooper China Sale.
In March 2021, the Company amended its operating agreements with GBG for its MENA Ltd, Iconix Europe and Iconix SE Asia Ltd, joint ventures. The amendments changed the timing of the put/call option windows, to a six-month period commencing July 1, 2022. The Company also amended its operating agreement with Pac Brands USA, Inc. for its Iconix Australia joint venture. The amendment changed the timing of the put/call option to any time after December 31, 2022 and before June 1, 2023.
22. Other Matters
During FY 2020 and FY 2019, the Company included in its selling, general and administrative expenses approximately $9.7 million and $19.6 million, respectively, of charges for professional fees associated with the continuing correspondence with the Staff of the SEC, the SEC investigation and the class action and derivative litigations.
98
