10-Q 1 icon-10q_20190630.htm 10-Q icon-10q_20190630.htm

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended June 30, 2019 

OR

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

For the Transition Period From                      to                     .

Commission file number 1-10593

 

ICONIX BRAND GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

11-2481903

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1450 Broadway, New York, NY

 

10018

(Address of principal executive offices)

 

(Zip Code)

 

(212) 730-0030

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

ICON

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company  

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes      No  

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

As of August 7, 2019, 11,630,515 shares of the registrant’s Common Stock, par value $.001 were outstanding.

 

 

 


 

Part I. Financial Information

Item 1. Financial Statements

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except par value)

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,426

 

 

$

66,609

 

Restricted cash

 

 

14,632

 

 

 

16,026

 

Accounts receivable, net

 

 

29,496

 

 

 

37,671

 

Contract asset

 

 

4,924

 

 

 

4,802

 

Other assets – current

 

 

42,800

 

 

 

28,057

 

Total Current Assets

 

 

144,278

 

 

 

153,165

 

Property and equipment:

 

 

 

 

 

 

 

 

Furniture, fixtures and equipment

 

 

22,884

 

 

 

22,525

 

Less: Accumulated depreciation

 

 

(18,573

)

 

 

(17,644

)

 

 

 

4,311

 

 

 

4,881

 

Other Assets:

 

 

 

 

 

 

 

 

Other assets

 

 

5,634

 

 

 

5,979

 

Contract asset

 

 

15,968

 

 

 

14,560

 

Right-of-use asset

 

 

7,425

 

 

 

 

Trademarks and other intangibles, net

 

 

340,843

 

 

 

337,700

 

Investments and joint ventures

 

 

89,581

 

 

 

89,691

 

Goodwill

 

 

26,099

 

 

 

26,099

 

 

 

 

485,550

 

 

 

474,029

 

Total Assets

 

$

634,139

 

 

$

632,075

 

Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

46,007

 

 

$

44,856

 

Deferred revenue

 

 

7,595

 

 

 

5,405

 

Current portion of long-term debt

 

 

67,163

 

 

 

54,263

 

Other liabilities – current

 

 

12,788

 

 

 

9,788

 

Total Current Liabilities

 

 

133,553

 

 

 

114,312

 

Deferred income tax liability

 

 

5,510

 

 

 

4,566

 

Long-term debt, less current maturities (includes $23,190 and $48,076, respectively, at fair value)

 

 

574,978

 

 

 

620,966

 

Other liabilities

 

 

9,195

 

 

 

3,829

 

Total Liabilities

 

 

723,236

 

 

 

743,673

 

Redeemable Non-Controlling Interest

 

 

34,343

 

 

 

34,137

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ Deficit:

 

 

 

 

 

 

 

 

Common stock, $.001 par value shares authorized 260,000; shares issued 14,928 and

   11,162, respectively

 

 

15

 

 

 

11

 

Additional paid-in capital

 

 

1,045,518

 

 

 

1,037,372

 

Accumulated losses

 

 

(293,580

)

 

 

(312,796

)

Accumulated other comprehensive loss

 

 

(53,671

)

 

 

(53,068

)

Less: Treasury stock – 3,369 and 3,323 shares at cost, respectively

 

 

(844,334

)

 

 

(844,253

)

Total Iconix Brand Group, Inc. Stockholders’ Deficit

 

 

(146,052

)

 

 

(172,734

)

Non-Controlling Interest, net of installment payments due from non-controlling

   interest holders

 

 

22,612

 

 

 

26,999

 

Total Stockholders’ Deficit

 

 

(123,440

)

 

 

(145,735

)

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

 

$

634,139

 

 

$

632,075

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

2


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except earnings per share data)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Licensing revenue

 

$

34,394

 

 

$

50,212

 

 

$

70,336

 

 

$

98,761

 

 

Selling, general and administrative expenses

 

 

16,435

 

 

 

28,643

 

 

 

34,528

 

 

 

62,241

 

 

Loss on termination of licenses

 

 

 

 

 

5,650

 

 

 

 

 

 

5,650

 

 

Depreciation and amortization

 

 

482

 

 

 

632

 

 

 

974

 

 

 

1,286

 

 

Equity earnings on joint ventures

 

 

(1,095

)

 

 

(1,149

)

 

 

(2,137

)

 

 

(1,245

)

 

Gain on sale of trademarks

 

 

 

 

 

(125

)

 

 

 

 

 

(1,268

)

 

Goodwill impairment

 

 

 

 

 

37,812

 

 

 

 

 

 

37,812

 

 

Trademark impairment

 

 

 

 

 

73,335

 

 

 

 

 

 

73,335

 

 

Operating income (loss)

 

 

18,572

 

 

 

(94,586

)

 

 

36,971

 

 

 

(79,050

)

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

14,465

 

 

 

14,827

 

 

 

28,970

 

 

 

29,376

 

 

Interest income

 

 

(90

)

 

 

(92

)

 

 

(162

)

 

 

(214

)

 

Other income, net

 

 

1,140

 

 

 

(32,083

)

 

 

(18,795

)

 

 

(58,215

)

 

Gain on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

(4,473

)

 

Foreign currency translation (gain) loss

 

 

(258

)

 

 

704

 

 

 

369

 

 

 

152

 

 

Other expenses (income) – net

 

 

15,257

 

 

 

(16,644

)

 

 

10,382

 

 

 

(33,374

)

 

Income (loss) before income taxes

 

 

3,315

 

 

 

(77,942

)

 

 

26,589

 

 

 

(45,676

)

 

(Benefit) provision for income taxes

 

 

(130

)

 

 

(2,804

)

 

 

1,838

 

 

 

(1,154

)

 

Net income (loss)

 

 

3,445

 

 

 

(75,138

)

 

 

24,751

 

 

 

(44,522

)

 

Less: Net income attributable to non-controlling interest

 

 

2,174

 

 

 

4,291

 

 

 

5,535

 

 

 

7,148

 

 

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

 

$

1,271

 

 

$

(79,429

)

 

$

19,216

 

 

$

(51,670

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

(12.04

)

 

$

2.04

 

 

$

(8.26

)

 

Diluted

 

$

0.12

 

 

$

(12.04

)

 

$

0.08

 

 

$

(8.26

)

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,377

 

 

 

6,598

 

 

 

9,426

 

 

 

6,257

 

 

Diluted

 

 

10,377

 

 

 

6,598

 

 

 

44,779

 

 

 

6,257

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss)

 

$

3,445

 

 

$

(75,138

)

 

$

24,751

 

 

$

(44,522

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

1,121

 

 

 

(5,541

)

 

 

(603

)

 

 

(2,780

)

Total other comprehensive (loss) income

 

 

1,121

 

 

 

(5,541

)

 

 

(603

)

 

 

(2,780

)

Comprehensive income (loss)

 

$

4,566

 

 

$

(80,679

)

 

$

24,148

 

 

$

(47,302

)

Less: comprehensive income attributable to non-controlling interest

 

 

2,174

 

 

 

4,291

 

 

 

5,535

 

 

 

7,148

 

Comprehensive income (loss) attributable to Iconix Brand

   Group, Inc.

 

$

2,392

 

 

$

(84,970

)

 

$

18,613

 

 

$

(54,450

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit

(in thousands)

 

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Beginning balance (shares)

 

 

12,207

 

 

 

9,682

 

 

 

11,162

 

 

 

9,016

 

 

Shares issued on vesting of restricted stock

 

 

8

 

 

 

4

 

 

 

95

 

 

 

29

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

2,713

 

 

 

463

 

 

 

3,671

 

 

 

1,104

 

 

Common Stock (shares)

 

 

14,928

 

 

 

10,149

 

 

 

14,928

 

 

 

10,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (amount)

 

$

12

 

 

$

10

 

 

$

11

 

 

$

9

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

3

 

 

 

 

 

 

4

 

 

 

1

 

 

Common Stock (amount)

 

$

15

 

 

$

10

 

 

$

15

 

 

$

10

 

 

Beginning balance

 

 

1,039,474

 

 

 

1,031,171

 

 

 

1,037,372

 

 

 

1,044,599

 

 

Shares issued on conversion of 5.75% Convertible Notes

 

 

4,179

 

 

 

3,947

 

 

 

6,179

 

 

 

12,693

 

 

Write-off of equity component of 1.50% Convertible Notes

 

 

 

 

 

 

 

 

 

 

 

(23,250

)

 

Elimination of non-controlling interest related to the acquisition of additional interest in Hydraulic joint venture

 

 

 

 

 

2,097

 

 

 

 

 

 

2,097

 

 

Change in redemption value of redeemable non-controlling interest

 

 

1,586

 

 

 

 

 

 

1,586

 

 

 

 

 

Compensation expense in connection with restricted stock

 

 

258

 

 

 

499

 

 

 

398

 

 

 

1,518

 

 

Tax benefit related to amortization of convertible notes' discount

 

 

 

 

 

 

 

 

 

 

 

35

 

 

Foreign currency translation

 

 

21

 

 

 

(44

)

 

 

(17

)

 

 

(22

)

 

Additional Paid-In Capital

 

$

1,045,518

 

 

$

1,037,670

 

 

$

1,045,518

 

 

$

1,037,670

 

 

Beginning balance

 

 

(294,460

)

 

 

(182,105

)

 

 

(312,796

)

 

 

(223,718

)

 

Cumulative effect of accounting change for adoption of ASU 606

 

 

 

 

 

 

 

 

 

 

 

16,540

 

 

Cumulative effect of accounting change for adoption of ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

(3,177

)

 

Change in redemption value of redeemable non-controlling interest

 

 

(391

)

 

 

504

 

 

 

 

 

 

995

 

 

Net (loss) income

 

 

1,271

 

 

 

(79,429

)

 

 

19,216

 

 

 

(51,670

)

 

Accumulated Losses

 

$

(293,580

)

 

$

(261,030

)

 

$

(293,580

)

 

$

(261,030

)

 

Beginning balance

 

 

(54,792

)

 

 

(45,342

)

 

 

(53,068

)

 

 

(51,280

)

 

Cumulative effect of accounting change for adoption of ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

3,177

 

 

Foreign currency translation

 

 

1,121

 

 

 

(5,541

)

 

 

(603

)

 

 

(2,780

)

 

Accumulated Other Comprehensive Loss

 

$

(53,671

)

 

$

(50,883

)

 

$

(53,671

)

 

$

(50,883

)

 

Beginning balance

 

 

(844,309

)

 

 

(844,055

)

 

 

(844,253

)

 

 

(844,030

)

 

Shares repurchased on vesting of restricted stock

 

 

(25

)

 

 

(121

)

 

 

(81

)

 

 

(146

)

 

Treasury Stock

 

$

(844,334

)

 

$

(844,176

)

 

$

(844,334

)

 

$

(844,176

)

 

Beginning balance

 

 

31,614

 

 

 

25,495

 

 

 

26,999

 

 

 

23,444

 

 

Cumulative effect of accounting change for adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

1,176

 

 

Elimination of non-controlling interest related to the acquisition of additional interest in Hydraulic joint venture

 

 

 

 

 

(2,097

)

 

 

 

 

 

(2,097

)

 

Payments from non-controlling interest holders, net of imputed interest

 

 

 

 

 

 

 

 

 

 

 

195

 

 

Reclass from redeemable NCI

 

 

(4,759

)

 

 

 

 

 

(856

)

 

 

 

 

Net (loss) income

 

 

1,238

 

 

 

4,291

 

 

 

4,599

 

 

 

7,148

 

 

Distributions to joint ventures

 

 

(5,481

)

 

 

(3,583

)

 

 

(8,130

)

 

 

(5,760

)

 

Non-Controlling Interest

 

$

22,612

 

 

$

24,106

 

 

$

22,612

 

 

$

24,106

 

 

Total Stockholders' Deficit

 

$

(123,440

)

 

$

(94,303

)

 

$

(123,440

)

 

$

(94,303

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5


 

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

For the Six Months

Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

24,751

 

 

$

(44,522

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

934

 

 

 

1,135

 

Amortization of trademarks and other intangibles

 

 

40

 

 

 

151

 

Amortization of deferred financing costs and debt discount

 

 

6,044

 

 

 

1,587

 

Amortization of convertible note discount

 

 

 

 

 

5,411

 

Third party fees associated with the issuance of 5.75% Convertible Notes

 

 

 

 

 

4,958

 

Stock-based compensation (benefit) expense

 

 

398

 

 

 

1,518

 

Provision for doubtful accounts

 

 

(244

)

 

 

1,744

 

Writeoff of contract assets

 

 

573

 

 

 

417

 

Periodic lease cost

 

 

1,101

 

 

 

 

Earnings on equity investments in joint ventures

 

 

(2,137

)

 

 

(1,245

)

Distributions from equity investments

 

 

 

 

 

1,913

 

Gain on sale of trademarks, net

 

 

 

 

 

(1,268

)

Trademark impairment

 

 

 

 

 

73,335

 

Goodwill impairment

 

 

 

 

 

37,812

 

Settlement of note receivable related to formation of Buffalo joint venture

 

 

 

 

 

1,141

 

Mark to market adjustment on convertible note

 

 

(20,275

)

 

 

(56,496

)

Loss (gain) on debt to equity conversions

 

 

1,572

 

 

 

(1,057

)

Gain on sale of Complex Media

 

 

 

 

 

(958

)

Gain on sale of interest in Ningbo Material Girl

 

 

(209

)

 

 

 

Gain on extinguishment of debt

 

 

 

 

 

(4,473

)

Income on other equity investment

 

 

117

 

 

 

296

 

Deferred income tax benefit

 

 

999

 

 

 

(5,253

)

Loss on foreign currency translation

 

 

369

 

 

 

152

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,130

 

 

 

18,668

 

Other assets – current

 

 

(2,447

)

 

 

2,779

 

Other assets

 

 

(1,635

)

 

 

(2,481

)

Deferred revenue

 

 

2,198

 

 

 

3,715

 

Accounts payable and accrued expenses

 

 

(9,227

)

 

 

(457

)

Other tax liabilities

 

 

 

 

 

(531

)

Other liabilities

 

 

(1,100

)

 

 

1,357

 

Net cash provided by operating activities

 

 

9,952

 

 

 

39,348

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(367

)

 

 

(571

)

Acquisition of trademarks from Iconix Southeast Asia

 

 

(2,067

)

 

 

(2,120

)

Acquisition of remaining interest in Iconix Canada

 

 

 

 

 

(4,875

)

Acquisition of Badgley Mischka and Sharper Image trademarks in certain

   international joint ventures

 

 

 

 

 

(1,289

)

Proceeds from sale of interest in Badgley Mischka in certain international joint

   ventures

 

 

 

 

 

2,500

 

Proceeds from sale of interest in Ningbo Material Girl

 

 

3,000

 

 

 

 

Proceeds from sale of Complex Media

 

 

 

 

 

958

 

Proceeds from note receivable from formation of Buffalo joint venture

 

 

 

 

 

1,409

 

Additions to trademarks

 

 

(3,825

)

 

 

(256

)

Net cash used in investing activities

 

 

(3,259

)

 

 

(4,244

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Prepaid financing costs

 

 

 

 

 

(5,423

)

Proceeds from long-term debt, net of discount and fees

 

 

 

 

 

95,700

 

Payment of long-term debt

 

 

(14,246

)

 

 

(134,018

)

Proceeds from sale of trademarks and related notes receivable from consolidated

   JVs

 

 

 

 

 

195

 

Distributions to non-controlling interests

 

 

(8,130

)

 

 

(10,168

)

Tax benefit related to amortization of convertible notes' discount

 

 

 

 

 

35

 

Cost of shares repurchased on vesting of restricted stock

 

 

(81

)

 

 

(146

)

Net cash used in financing activities

 

 

(22,457

)

 

 

(53,825

)

Effect of exchange rate changes on cash and restricted cash

 

 

187

 

 

 

(411

)

Net decrease in cash and cash equivalents, and restricted cash

 

 

(15,577

)

 

 

(19,132

)

Cash, cash equivalents, and restricted cash, beginning

   of period

 

 

82,635

 

 

 

114,693

 

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

 

$

67,058

 

 

$

95,561

 

 

6


 

Supplemental disclosure of cash flow information:

 

 

 

For the Six Months

Ended June 30,

 

 

 

2019

 

 

2018

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Income taxes (net of refunds received)

 

$

3,997

 

 

$

5,031

 

Interest

 

$

19,941

 

 

$

20,246

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Non-cash additions to operating lease assets

 

$

10,462

 

 

$

 

Shares issued upon conversion of debt to equity

 

$

6,183

 

 

$

12,694

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

7


 

Iconix Brand Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2019

(dollars in thousands (unless otherwise noted) except per share data)

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Iconix Brand Group, Inc. (the “Company,” “we,” “us,” or “our”), all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2019 (“Current Quarter”) and the six months ended June 30, 2019 (“Current Six Months”) are not necessarily indicative of the results that may be expected for a full fiscal year.  The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

During the Current Six Months, the Company adopted one new accounting pronouncement.  Refer to Note 20 for further details.

Correction of an Immaterial Error

During the Current Six Months, the Company determined that the impact of the accretion of redeemable noncontrolling interest to the Company’s earnings per share calculation had been incorrectly recorded in the Company’s condensed consolidated statement of operations for the Prior Year Quarter, the Prior Year Six Months, the quarter ended September 30, 2018 and the nine months ended September 30, 2018.  Basic and diluted earnings per share for the Prior Year Quarter and Prior Year Six Months have been corrected in this Form 10-Q.  Management evaluated the materiality of this error from a quantitative and qualitative perspective and concluded that the adjustments to earnings per share were not material to the Company’s presentation and disclosures, and has no material impact on the Company’s financial position, results of operations and cash flows.  Accordingly, no amendments to previously filed reports are deemed necessary.  After taking into effect this adjustment, for the quarter ended September 30, 2018 and the nine months ended September 30, 2018, basic earnings per share would have been income of $2.81 and a loss of $4.87, respectively, and diluted earnings per share would have been income of $0.26 and a loss of $7.35, respectively.  

Certain reclassifications, which were immaterial, have been made to conform prior year data to the current presentation. During the Current Six Months, the Company also made a reclassification between redeemable noncontrolling interest and noncontrolling interest.    

Liquidity

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.  The Company considered, among other things, the Sears Holdings Corporation’s bankruptcy filing on October 15, 2018, and determined that the bankruptcy filing is not expected to have a material adverse impact on the Company’s ability to continue as a going concern.  Based on the Company’s financial plans and projections for 2019, which assumes the realization of significant cost savings, among other things, from the successful implementation of the Company’s current strategic initiatives, 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.   In particular, management believes the allocation of residual royalty collections to a restricted reserve account (as is discussed in Note 9) is not expected to have a material adverse impact on the Company’s ability to meet such cash flow needs.

For additional information, please refer to Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Reverse Stock Split

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

8


 

2. Revenue Recognition

Licensing Revenue

The Company licenses its brands across a broad range of product categories, including fashion apparel, footwear, accessories, sportswear, home furnishings and décor, and beauty and fragrance.  The Company seeks licensees with the ability to produce and sell quality products in their licensed categories and to meet and exceed minimum sales and royalty payment thresholds.

The Company maintains direct-to-retail and traditional wholesale licenses.  Typically, in a direct-to-retail license, the Company grants exclusive rights to one of its brands to a national retailer for a broad range of product categories.  Direct-to-retail licenses provide retailers with proprietary rights to national brands at favorable economics.  In a traditional wholesale license, the Company grants the right to a specific brand to a single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to multiple retailers within an approved distribution channel.

The Company’s license agreements typically require the licensee to pay the Company royalties based upon net sales with guaranteed minimum royalties in the event that net sales do not reach certain specified targets.  The Company’s licenses also typically require the licensees to pay to the Company certain minimum amounts for the advertising and marketing of the respective licensed brands.  

Licensing revenue is comprised of revenue related to the Company’s entry into various trade name license agreements that provide revenues based on minimum royalties and advertising/marketing fees and additional revenues based on a percentage of defined sales.  In accordance with ASC Topic 606 – Revenue from Contracts with Customers (“Topic 606”), the Company recognizes the minimum royalty revenue on a straight-line basis over the entire contract term and royalties exceeding the defined minimum amounts in a specific contract year (sales-based royalties), as defined in each license agreement, are recognized only in the subsequent periods to when the minimum guarantee for the contract year has been achieved and when the later of the following events occur: (i) the subsequent sale occurs, or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied).  

Within the Company's International segment, the Umbro business purchases replica soccer jerseys 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 $0.2 million and $0.6 million in the Current Quarter and the three months ended June 30, 2018 (the “Prior Year Quarter”), respectively. The associated cost of goods sold is included in selling general and administrative expenses and was approximately $0.2 million and $0.6 million in the Current Quarter and Prior Year Quarter, respectively.  The revenue associated with such activity is included in licensing revenue and was approximately $0.6 million and $2.6 million in the Current Six Months and the six months ended June 30, 2018 (the “Prior Year Six Months”), respectively. The associated cost of goods sold is included in selling general and administrative expenses and was approximately $0.6 million and $2.5 million in the Current Six Months and Prior Year Six Months, respectively.  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.

The following table presents our revenues disaggregated by license type:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Licensing revenue by license type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct-to-retail license

 

$

10,364

 

 

$

20,094

 

 

$

20,117

 

 

$

41,307

 

Wholesale licenses

 

 

23,746

 

 

 

29,418

 

 

 

49,551

 

 

 

54,557