2019 SEQUENTIAL BRANDS GROUP ANNUAL REPORT
LETTER FROM THE CEO
My Fellow Shareholders,
April marks my third month as CEO and Director of Sequential Brands Group. When I started
writing this letter, my plan was to outline the Company’s accomplishments in 2019 and our
strategic priorities for 2020 and beyond. However, much has changed in just a few short weeks.
The coronavirus pandemic is having an unprecedented impact on the U.S. economy, including
the apparel and accessories industry. Mandatory social distancing measures, including store
closures, are affecting retailers that carry our brands, as well as our licensees who sell to
these retailers. We are unable to predict when retailers who have temporarily closed stores
will reopen or if additional future store closures will be needed or mandated. Given the profound
impact of the virus and these uncertainties, we have shifted our focus to weathering the storm
and positioning the Company to take advantage of opportunities that may arise in the future.
We have taken steps to increase available cash on hand including, but not limited to, targeted
reductions in expenses, short-term lender relief, and utilizing funds available under our revolving
credit facility. These measures are in addition to the significant cost savings we achieved in
2019 following the sale of our home division.
For 2020, our focus is on managing the business through the unexpected and unpredictable
environment that we face today. We remain focused on expense reductions across the board.
We expect these cost-cutting initiatives will help us achieve an operating expense base of
$30 million on an annualized run-rate basis starting this year, which is a meaningful reduction
compared to the Company’s approximately $70 million operating expense base prior to the
divestiture of the home division.
Late last year, the Board of Directors announced that we would be conducting a broad review of
strategic alternatives. We remain focused on exploring all opportunities that best position the
Company for long-term success and maximize value in these challenging times.
I’d like to personally thank all of our dedicated employees, our partners, our licensees, our
lenders, our Board of Directors and last, but certainly not least, our valued shareholders. Thank
you for your continued commitment to Sequential.
Sincerely,
David Conn
CHIEF EXECUTIVE OFFICER
Member of the Board of Directors
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to
.
For the fiscal year ended December 31, 2019
Commission file number 001-37656
SEQUENTIAL BRANDS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
47-4452789
(I.R.S. Employer
Identification No.)
601 West 26th Street, 9th Floor
New York, New York 10001
(Address of principal executive offices) (Zip code)
(646) 564-2577
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common stock, par value $0.01 per share
Trading Symbol
SQBG
Name of each exchange on which registered:
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, or a smaller reporting
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
☒
Non-accelerated filer
Emerging growth company ☐
☐
Accelerated filer
Smaller reporting 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 Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2019, the last business
day of the registrant’s most recently completed second fiscal quarter was $16,718,928 (based on the closing sales price of the registrant’s
common stock on that date).
At March 23, 2020, the registrant had 65,905,900 shares of common stock, $0.01 par value, outstanding.
Portions of the registrant’s proxy statement for its annual meeting of stockholders to be held on June 5, 2020 are incorporated by
reference in Items 10 through 14 of Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
SEQUENTIAL BRANDS GROUP, INC.
INDEX TO FORM 10-K
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B.
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Certain Relationships and Related Transactions, and Director Independence . . . . . . .
Item 14.
Principal Accounting Fees and Services
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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i
PART I
Unless otherwise noted, references in this Annual Report on Form 10-K to the “Sequential Brands
Group,” “Company,” “our Company,” “we,” “us,” “our” or similar pronouns refer to Sequential Brands
Group, Inc. and its subsidiaries. References to other companies may include their trademarks, which are the
property of their respective owners.
This 2019 Annual Report on Form 10-K, including the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). We use words such as “future,” “seek,” “could,”
“can,” “predict,” “believe,” “intend,” “expect,” “anticipate,” “plan,” “may,” “will,” “should,” “estimate,”
“potential,” “project” and similar expressions to identify forward-looking statements. Such statements
include, among others, those concerning our expected financial performance and strategic and operational
plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are
cautioned that any such forward-looking statements are not guarantees of future performance and that a
number of risks and uncertainties could cause actual results to differ materially from those anticipated in the
forward-looking statements. Such risks and uncertainties include, but are not limited to the following:
(i) risks and uncertainties discussed in the reports that the Company has filed with the Securities and
Exchange Commission (the “SEC”); (ii) general economic, market or business conditions; (iii) the Company’s
ability to identify suitable targets for acquisitions and to obtain financing for such acquisitions on
commercially reasonable terms; (iv) the Company’s ability to timely achieve the anticipated results of its
acquisitions and any potential future acquisitions; (v) the Company’s ability to successfully integrate
acquisitions into its ongoing business; (vi) the potential impact of the consummation of its acquisitions or
any potential future acquisitions on the Company’s relationships, including with employees, licensees,
customers and competitors; (vii) the Company’s ability to achieve and/or manage growth and to meet target
metrics associated with such growth; (viii) the Company’s ability to successfully attract new brands and to
identify suitable licensees for its existing and newly acquired brands; (ix) the Company’s substantial level of
indebtedness, including the possibility that such indebtedness and related restrictive covenants may adversely
affect the Company’s future cash flows, results of operations and financial condition and decrease its
operating flexibility; (x) the Company’s ability to achieve its guidance; (xi) continued market acceptance of
the Company’s brands; (xii) changes in the Company’s competitive position or competitive actions by other
companies; (xiii) licensees’ ability to fulfill their financial obligations to the Company; (xiv) concentrations
of the Company’s licensing revenues with a limited number of licensees and retail partners; (xv) risks related
to the effects of the sale of the Martha Stewart brand; (xvi) uncertainties related to the timing, proposals
or decisions arising from the Company’s strategic review, including the divestiture of one or more existing
brands; (xvii) uncertainties related to the Company’s leadership changes; (xviii) adverse effects on the
Company and its licensees due to natural disasters, pandemic disease and other unexpected events; and
(xix) other circumstances beyond the Company’s control.
Forward-looking statements speak only as of the date they are made and are based on current
expectations and assumptions. You should not put undue reliance on any forward-looking statement. We
are not under any obligation, and we expressly disclaim any obligation, to update forward-looking statements
to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities laws. If we do update one or more forward-
looking statements, no inference should be drawn that we will make additional updates with respect to
such or other forward-looking statements.
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Item 1.
Business
Corporate Overview
We own a portfolio of consumer brands in the active and lifestyle categories, including, Jessica
Simpson, AND1, Avia, Joe’s and GAIAM. We aim to maximize the value of our brands by promoting,
marketing and licensing the brands through various distribution channels, including to retailers, wholesalers
and distributors in the United States and in certain international territories. Our core strategy is to enhance
and monetize the global reach of our existing brands, and to pursue additional strategic acquisitions to grow
the scope of and diversify our portfolio of brands.
Our business is designed to maximize the value of our brands through license agreements with partners
that are responsible for manufacturing and distributing our licensed products. Our brands are licensed for a
broad range of product categories, including apparel, footwear, fashion accessories and home goods. We
seek to select licensees who have demonstrated the ability to produce and sell quality products in their
respective licensed categories and have the capability to meet or exceed the minimum sales thresholds and
guaranteed minimum royalty payments that we generally require.
We license our brands to both wholesale and direct-to-retail licensees. In a wholesale license, a wholesale
supplier is granted rights (typically on an exclusive basis) to a single or small group of related product
categories for a particular brand for sale to multiple accounts within an approved channel of distribution and
territory. In a direct-to-retail license, a single retailer is granted the right (typically on an exclusive basis) to
sell branded products in a broad range of product categories through its brick and mortar stores and
e-commerce sites. As of December 31, 2019, we had approximately one hundred licensees, with wholesale
licensees comprising a significant majority.
Strategy
We own, manage, and maximize the long-term value of a diversified portfolio of global consumer
brands. We aim to acquire well-known consumer brands with high potential for growth and strong brand
awareness. We additionally seek to diversify our portfolio by evaluating the strength of targeted brands and
the expected viability and sustainability of future royalty streams. Upon the acquisition of a brand, we
partner with leading wholesalers and retailers to drive incremental value and maximize brand equity. We
focus on certain key initiatives in our licensing and brand management business. These initiatives include:
• Maximizing the value of our existing brands by creating efficiencies, adding additional product
categories, expanding distribution and retail presence and optimizing sales through innovative
marketing that increases consumer brand awareness and loyalty;
• Expanding through e-commerce channels;
• Developing international expansion through additional licenses, partnerships and other arrangements
with leading retailers and wholesalers outside the United States; and
• Acquiring consumer brands (or the rights to such brands) with high consumer awareness, broad
appeal and applicability to a wide range of product categories.
Licensing Relationships
Our license agreements typically require a licensee to pay us royalties based upon net sales and, in most
cases, contain guaranteed minimum royalties. Our license agreements also require licensees to support the
brands by either paying or spending contractually guaranteed minimum amounts for the marketing and
advertising of the respective licensed brands. As of March 23, 2020, we had contractual rights to receive an
aggregate of $208.3 million in minimum royalty and marketing and advertising revenue from our licensees
through the balance of the current terms of such licenses, excluding any renewals.
Our license agreements stipulate specific geographical territories and distribution channels in which the
licensed products may be sold. Currently, the majority of our revenues are from license agreements with
stipulated distribution territories in the United States. As we grow our existing brands and acquire new
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brands, we intend to increase the share of our international revenue, primarily through additional licenses,
partnerships and other arrangements.
Our licensing revenues are concentrated with certain licensees and retail partners. During the year
ended December 31, 2019, three licensees represented at least 10% of net revenue, accounting for 19%, 16%
and 14% of the Company’s net revenue from continuing operations. For additional information, see
“Risk Factors Risks Related to our Business — A substantial portion of our licensing revenue is concentrated
with a limited number of licensees and retail partners, such that the loss of a licensee or retail partner
could materially decrease our revenue and cash flows” in Item 1A.
Description of Our Brands
Jessica Simpson
We acquired a majority ownership interest in the Jessica Simpson brand, including the Jessica Simpson
Collection master license and other rights, in 2015. Founded in 2005, the Jessica Simpson Collection is a
signature lifestyle concept inspired by and designed in collaboration with Jessica Simpson. The growing brand
offers multiple product categories including footwear, apparel, fragrance, fashion accessories, maternity
apparel, girls’ clothing and home products. The brand is supported by best-in-class licensees and has strong
department store and online distribution through Dillard’s, Macy’s, Belk, Nordstrom, Zappos.com, and
DSW, among other independent retailers. We have a license agreement with Camuto Group to manufacture
and distribute footwear under the Jessica Simpson Collection. The Jessica Simpson Collection is distributed
worldwide.
AND1
We acquired the AND1 brand in 2014, which was founded in 1993 and prides itself on being the
original street basketball brand focusing on the everyday player. Key licensees for the AND1 brand include
E.S. Originals, Inc. (“ESO”) for footwear and High Life, LLC for apparel. In addition, the AND1 brand is
licensed in product categories, such as hosiery, underwear, off-court/casual footwear and other accessories.
The AND1 brand is offered through Wal-Mart stores, sporting goods retailers and related e-commerce sites in
the United States and has a strong distribution network reaching over 20 countries.
Avia
We acquired the Avia brand in 2014, which was founded in 1979 and is best known for running and
activewear products designed to unite performance and function for athletes of every level. Since we acquired
Avia, we have expanded its licensed product categories to include wearable fitness accessories, hosiery,
sports bags and various other accessory products. The Avia brand is primarily offered through Wal-Mart
stores in the United States, with additional distribution through specialty retailers and related e-commerce
sites as well as globally in numerous countries including an international partnership in China.
GAIAM
We acquired the GAIAM brand in 2016. Founded in 1996 as an eco-living catalog company, GAIAM
evolved into a yoga brand by producing and distributing yoga videos and related products through multiple
channels of distribution. GAIAM has since expanded to include a full line of apparel, yoga mats, yoga
mat bags, yoga blocks and straps, yoga and fitness props, balance balls, bags, active sitting products, including
our balance ball chair, fitness kits and various other accessories. GAIAM is dedicated to making yoga,
fitness and wellness accessible to all through a wide distribution network that consists of approximately
38,000 retail doors, 19,000 store-within-a-stores, 5,000 category management locations and e-commerce. We
currently license the GAIAM brand to various licensees, including Fit For Life, LLC for yoga sporting
goods and High Life, LLC for apparel.
Joe’s
We acquired the Joe’s brand in 2015. Founded in 2001, Joe’s is a casual chic global lifestyle brand
synonymous with classic, modernized wardrobe staples ranging from premium denim to handcrafted
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collection pieces, and from contemporary accessories to footwear. Joe’s has since expanded to include kid’s
apparel and footwear, intimate apparel, hosiery, fragrance, cold weather, belts, men’s ties, small leather goods
and bags. Concurrently with the acquisition, we entered into a long-term license agreement for the brand’s
core categories with Centric Brands, Inc. Joe’s branded products are available at better department stores and
specialty boutiques in the United States and internationally.
Ellen Tracy
We acquired the Ellen Tracy brand in 2013, which was founded in 1949 and is a leading fashion
lifestyle brand focusing on polished and sophisticated style for modern women. The Ellen Tracy brand is
known for quality tailoring, timeless silhouettes and classic signature prints. Product offerings currently
include apparel, outerwear, sleepwear, intimate apparel, hosiery, eyewear, fragrance, fashion accessories,
swimwear, handbags and luggage. Licensees for the Ellen Tracy brand include GBG USA Inc. for sportswear
and dresses, Weatherproof for outerwear, Amerex for swimwear, and Komar for sleepwear and intimate
apparel. In addition, the Ellen Tracy brand has been licensed for jewelry, bath and body gifts, cosmetics and
home. The Ellen Tracy brand is offered in premium and regional department and specialty stores
throughout the United States as well as globally.
William Rast
The William Rast brand is a lifestyle fashion brand rounded in the iconography of biker culture with
designs that embody the “new America” sensibility and deliver an edgy yet tailored collection of premium
denim, fragrance and jewelry for both men and women. Product offerings include denim, knitwear, jewelry,
women’s footwear and fragrance. Licensees for the William Rast brand include One Jeanswear for men’s
and women’s apparel, Yoki Fashions Inc. for footwear and Bellevue Brands Inc. for fragrance. Distribution
includes several national retailers including Macy’s, Dillard’s, Belk, Lord & Taylor and Amazon.
Heelys
We acquired the Heelys brand in 2013, which was founded in 1999 and has been a breakout success in
the world of action sports among children and teens with its innovative, patented dual-purpose wheeled
footwear, featuring a stealth removable wheel in the heel. Heelys continues to grow into the ultimate kids’
active lifestyle brand. The primary licensee for the Heelys brand is BBC International LLC for wheeled
footwear and related accessories. The Heelys brand is offered through department stores, sporting goods
retailers, related e-commerce sites, as well as Heelys’ own e-commerce site in the United States and over
70 additional countries.
Caribbean Joe
We acquired the Caribbean Joe brand in 2013, which was founded in 1999 and is a casual, island
inspired, lifestyle brand. Originally rooted in apparel, Caribbean Joe’s product offerings have expanded to
include swimwear, fashion accessories and home textiles. Licensees for the Caribbean Joe brand include Levy
Group Inc. for all apparel and women’s swimwear and the Bentex Group for women’s sleepwear, loungewear
as well as men’s and kid’s swimwear. The Caribbean Joe brand is distributed in the United States through
mid-tier department stores, specialty stores, e-commerce sites and off-price retailers as well as internationally
through specialty retailers and distributors.
DVS
We own a 65% interest in the DVS brand through a joint venture with Elan Polo International, Inc.
(“Elan Polo”), a global organization which designs, sources and delivers men’s, women’s and children’s
shoes to retailers around the world. The DVS brand is a footwear brand dedicated to inspiring youth to
have fun and always push forward and is best known for its great style, technical features and input of some
of the best action sports athletes in the world. Product offerings for the brand currently include footwear,
backpacks and accessories. The primary licensee for the DVS brand is Elan Polo for footwear, with distribution
through specialty street skating and other specialty stores in the United States and internationally.
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The Franklin Mint
We acquired The Franklin Mint brand in 2013, which was founded in 1964 and is a brand in the
collectible and gift giving arena. The Franklin Mint brand has been licensed in multiple categories, including
coins, models, jewelry, games, décor, giftables, seasonal, and co-branded products through license
agreements. The Franklin Mint brand is currently offered via the franklinmint.com website.
Linens N Things
We acquired the Linens N Things brand in 2014, which was founded in 1975 and is a home textiles,
housewares and decorative home accessories brand.
SPRI
We acquired the SPRI brand in July 2016 as part of the GAIAM transaction. Founded in 1983 as the
Sports Performance Rehabilitative Institute, SPRI pioneered a line of rubber resistance products in the
fitness & training category. Over the past 30 years, SPRI has grown to be a leading exercise brand, offering
a full line of fitness accessories, training tools and educational materials. The SPRI brand today focuses on
distribution in both the commercial fitness (gyms, fitness clubs and hotels) and retail fitness channels. The
SPRI brand continues to show growth through expansion at Target with the “Ignite” by SPRI collection.
Nevados
We acquired the Nevados brand in 2014, which was founded in 1990 and was inspired by the 17,000-
foot Los Nevados National Natural Park in the Colombian Andes Mountains range. With a dedication to
comfort and durability, Nevados offers hiking boots and outdoor shoes to make sure you see the great
outdoors, and enjoy every step of the way. Today the brand is distributed through Amazon, as well as
select specialty stores in the United States and internationally.
Business Segment
We have a single operating and reportable segment, as described more fully in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Reportable Segment” in Item 7. See Item 6
of this Annual Report on Form 10-K for measures of our net revenues, consolidated net loss and total
assets as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017.
Corporate Organization/Information
We were formed in June 2015 in connection with a strategic combination resulting in our predecessors,
Sequential Brands Group, Inc. (“Old Sequential”) and MSLO, becoming our wholly-owned subsidiaries
(the “Mergers”). Old Sequential was incorporated under the laws of the State of Delaware in 1982 as People’s
Liberation, Inc. and changed its name to Sequential Brands Group, Inc. in 2012. Old Sequential’s common
stock began trading on the Nasdaq Capital Market (“Nasdaq”) under the ticker “SQBG” on September 24,
2013, and we succeeded to Old Sequential’s listing on December 7, 2015.
On June 10, 2019, we completed the sale of MSLO, a Delaware corporation and a wholly-owned
subsidiary of the Company, for $166 million in cash consideration, plus additional amounts in respect of
pre-closing accounts receivable that are received after the closing, subject to certain adjustments, pursuant
to the Purchase Agreement with the Buyer entered into on April 16, 2019. In addition, the Purchase Agreement
provides for an earnout of up to $40,000,000 payable to Sequential if certain performance targets are
achieved during the three calendar years ending December 31, 2020, December 31, 2021 and December 31,
2022. MSLO and its subsidiaries were engaged in the business of promoting, marketing and licensing the
Martha Stewart and the Emeril Lagasse brands through various distribution channels.
Due to the sale of MSLO during the second quarter of 2019 (see Note 4 of Notes to Consolidated
Financial Statements included in this Form 10-K), in accordance with Accounting Standards Codification
(“ASC”) 205, Discontinued Operations, we have classified the results of MSLO as discontinued operations in
our consolidated statements of operations and cash flows for all periods presented. Additionally, the
related assets and liabilities directly associated with MSLO are classified as held for disposition from
5
discontinued operations in our consolidated balance sheets for all periods presented. All amounts included
in the notes to the consolidated financial statements relate to continuing operations unless otherwise noted.
Competition
We operate in a highly competitive market, both for our individual brands and for the Company as a
whole.
Our brands are subject to extensive competition from various domestic and foreign brands. Each of
our brands has a number of competitors within its specific product categories and distribution channels
that compete with the product categories and distribution channels in which our brands’ products are sold.
Our brands also compete within the retail stores and other distribution channels that carry such brand’s
product lines with other products offered by these retail stores and distribution channel in the respective
product categories, including with products sold under our partners’ private labels. We also compete with the
e-commerce businesses of these stores and other websites that sell similar retail goods. Competitive factors
include design, style, quality, price, name recognition, service and advertising.
In addition, we face competition in establishing and maintaining licensee relationships for our existing
brands. Competitors may seek to enter into brand licensing arrangements with our current or potential
licensees, which may inhibit our ability to enter into or maintain licensing arrangements. In addition, the
retailers that currently sell our branded products may develop their own brands or acquire brands rather than
purchase products from our licensees, which could make it more difficult for our licensees to achieve their
sales targets.
We also compete with traditional apparel and consumer brand companies, as well as other brand
management companies, for acquisitions of accretive brands, particularly brands with high consumer
awareness, broad appeal and applicability to a wide range of product categories.
Trademarks
Our trademarks and associated marks are registered or pending registration with the U.S. Patent and
Trademark Office in block letter and/or logo formats, as well as in combination with a variety of ancillary
marks for use with respect to a broad range of product categories, including footwear, apparel, fragrance,
handbags, backpacks, watches, home goods and various other goods and services. We intend to renew
these registrations as appropriate prior to their expiration. In addition, we register our trademarks in other
countries and regions around the world. We also have domestic, foreign and international intellectual property
coverage for the technology and designs for several brands including for Heelys wheeled footwear and
certain Gaiam yoga-related products and SPRI products. We own the rights to 39 U.S. issued patents and
42 foreign issued patents within 24 territories.
We monitor on an ongoing basis unauthorized use and filings of our trademarks and patents and rely
primarily upon a combination of federal, state and local laws, as well as contractual restrictions, to protect
our intellectual property rights, both domestically and internationally.
Employees
As of March 23, 2020, we had a total of 42 employees and area-specific consultants working to
support our operations. None of our employees are represented by a labor union. We consider our
relationship with our employees to be satisfactory.
Available Information
Our corporate website address is www.sequentialbrandsgroup.com. The information contained on our
website is not part of this report. We file our annual, quarterly and current reports and other information
with the SEC. These reports, and any amendments to these reports, are made available on our website and can
be viewed and downloaded free of charge as soon as reasonably practicable after such reports are filed
with or furnished to the SEC. In addition, the SEC maintains an internet site that contains annual, quarterly
and current reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC, which is available at www.sec.gov.
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Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties that could adversely
affect our business, financial condition, results of operations, cash flows, prospects and/or the trading price
of our common stock. Although the risks and uncertainties listed below are those that we consider
significant, material risks and uncertainties that are not presently known to us may also adversely affect our
business, financial condition or results of operations. In evaluating our business and an investment in our
securities, you should consider the following risk factors, in addition to the other information presented in this
report, as well as the other reports we file from time to with the SEC:
Risks Related to Our Business
The recent coronavirus outbreak could have an adverse effect on our business, financial position and cash
flows.
Concerns are rapidly growing about the global outbreak of a novel strain of coronavirus (“COVID-19”
or “coronavirus”). The virus has spread rapidly across the globe, including the U.S. The pandemic is having
an unprecedented impact on the U.S. economy as federal, state and local governments react to this public
health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to,
the potential adverse effect of the pandemic on the economy, our licensees, customer sentiment in general, and
temporary closing of stores containing our brands. As the pandemic continues to grow, consumer fear
about becoming ill with the virus and recommendations and/or mandates from federal, state and local
authorities to avoid large gatherings of people or self-quarantine may continue to increase, which has already
affected, and may continue to affect, retailers, as well as our licensees who sell to these retailers. We are
unable to predict when retailers who have temporarily closed stores will reopen or if additional periods of
store closures will be needed or mandated. Continued impacts of the pandemic could materially adversely
affect our near-term and long-term revenues, earnings, liquidity and cash flows as our licensees may request
temporary relief, delay or not make scheduled payments. COVID-19 is adversely impacting sales in the
apparel and accessories industry. Diminished sales of products bearing our brands may have an adverse
effect on the estimated fair value of our intangible assets, including our trademarks. The extent of the impact
of the pandemic on our business and financial results will depend largely on future developments, including
the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets
and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot
be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of
currently. The potential impact of COVID-19 intensifies the business and operating risks that we face and
should be considered when reading the additional risk factors below.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of
our control may damage the facilities of our licensees on which we depend and could impact consumer spending.
If any of our licensees facilities, including manufacturing, finishing or distribution facilities, or the
facilities of our suppliers, third-party service providers, or customers, is affected by natural disasters, such as
earthquakes, tsunamis, power shortages or outages, floods or monsoons, public health crises, such as
pandemics and epidemics, political crises, such as terrorism, war, political instability or other conflict, or
other events outside of our control, it could have an adverse effect on our business. Disasters occurring at
our licensees’ facilities also could impact our reputation and our consumers’ perception of our brands.
Moreover, these types of events could negatively impact consumer spending in the impacted regions or
depending upon the severity, globally, which could adversely impact our results of operations. In March 2020,
the World Health Organization declared the coronavirus outbreak originating in Wuhan, China to be a
global pandemic. Certain licensees have been and may continue to be adversely impacted by the coronavirus
outbreak due to manufacturing facility closures, store closures and a decrease in consumer traffic. Although
the coronavirus outbreak is an ongoing phenomenon with uncertain scale, to date the outbreak has had severe
global macroeconomic and financial market impacts. The impact of the coronavirus on consumer demand
and on our results of operations remain uncertain; however, such impacts may be significant.
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The failure of our licensees to fulfill their financial obligations with respect to royalty payments under their
license agreements or to otherwise adequately produce, market and sell products bearing our brand names in their
license categories could have a material adverse effect on our business, financial condition and results of
operations.
Our revenues are almost entirely dependent on royalty payments made to us pursuant to license
agreements entered into with licensees of our brands. These license agreements often require that licensees
advance payment to us of a portion of the sales royalty payments due thereunder and, in most cases, provide
for guaranteed minimum royalty payments. The failure of our licensees to satisfy their financial obligations
under these agreements, or their inability to operate successfully or at all, could result in a breach of an
agreement, early termination of an agreement, non-renewal of an agreement or an amendment of an
agreement to reduce the guaranteed minimum royalty payments or sales royalties due thereunder, each of
which could eliminate some or all of that revenue stream. A decrease or elimination of revenue could have a
material adverse effect on our financial condition, results of operations and cash flows.
During the term of a license agreement, our revenues and the value of our brands substantially depend
upon our licensees’ ability to maintain the quality and marketability and market acceptance of the branded
products licensed to such licensee and their failure to do so could negatively affect consumer perception
of our brands and harm our future growth and prospects. Further, the failure of our licensees to meet their
production, manufacturing and distribution requirements, or a weak economy or softness in the retail,
apparel or home goods sectors, could cause our licensees to default on their obligations to make guaranteed
minimum royalty payments to us or cause a decline in their sales and potentially decrease the amount of
royalty payments in excess of guaranteed minimum royalty payments due to us. In addition, our licensees’
inability to maintain market acceptance of our brands or our failure to monitor our licensees’ compliance
with their license agreements or take appropriate corrective action when necessary may subject our intellectual
property assets to cancellation, loss of rights or devaluation and any devaluation of our trademarks or
other intellectual property could cause a material impairment in the carrying value of such intellectual
property, potentially resulting in a charge as an expense to our results of operations. If such developments
occur or our licensees are otherwise not successful, the value and recognition of our brands, as well as our
business, financial condition and results of operations, could be materially adversely affected.
Our business depends on continued market acceptance of our brands and the products bearing these brands.
The retail industry is highly susceptible to changes in consumer preferences and continued market
acceptance of our brands and our licensees’ products, as well as market acceptance of any future products
bearing our brands and is subject to a high degree of uncertainty. In order to generate revenues and profits,
our licensees must develop product offerings that appeal to consumers. We retain rights to monitor the
products our licensees’ design and produce and may retain the right to preview and approve such products,
we cannot assure you that licensees will develop, market and sell products that appeal to consumers. Any
significant changes in consumer preferences or any inability on our licensees’ part to anticipate or react to
such changes could reduce demand for our branded products and erode the competitiveness of such products,
which would negatively affect our financial condition, results of operations and cash flows.
The continued success of our brands and branded products and market acceptance of new products
and product categories also depend on our ability to continually improve the effectiveness of our marketing
efforts. We devote significant resources and expenditures to promoting our brands and new product
launches, but there can be no assurance as to our continued ability to effectively execute our marketing
programs. To the extent our licensees misjudge the market for our brands and branded products, or our
marketing efforts are unsuccessful, our business, results of operations and prospects will be adversely affected.
We have incurred a substantial amount of indebtedness in connection with our acquisitions, which could
adversely affect our financial condition and results of operations.
As of December 31, 2019, we had outstanding net indebtedness of $446.0 million, as described more
fully in Note 9 to our consolidated financial statements.
Our high level of indebtedness increases the possibility that we may be unable to generate cash
sufficient to pay when due the principal of, interest on or other amounts due in respect of such indebtedness.
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In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments,
joint ventures or for other purposes, subject to the restrictions contained in the documents that govern our
indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service
debt, would increase.
Our increased level of indebtedness could have other important consequences, which include, but are
not limited to, the following:
• a substantial portion of our cash flow from operations could be required to pay principal and
interest on our debt;
• our interest expense could increase if interest rates increase because our borrowings generally bear
interest at floating rates;
• our leverage could increase our vulnerability to general economic downturns and adverse competitive
and industry conditions, placing us at a disadvantage compared to those of our competitors that
are less leveraged;
• our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our
business and in the brand licensing industry;
• our failure to comply with the financial and other restrictive covenants in the documents governing
our indebtedness could result in an event of default that, if not cured or waived, results in foreclosure
on substantially all of our assets; and
• our level of debt may restrict us from raising additional financing on satisfactory terms to fund
strategic acquisitions, investments, joint ventures and other general corporate requirements.
We cannot be certain that our earnings will be sufficient to allow us to pay principal and interest on
our debt and meet our other obligations. In particular, we do not know at this time what the effects will be
of the coronavirus pandemic, including the effects of our licensees requesting delaying payments or failing to
make payments to us. If we do not have sufficient earnings, we may be required to seek to refinance all or
part of our then existing debt, sell assets, make additional borrowings or sell more securities, none of which
we can guarantee that we will be able to do and which, if accomplished, may adversely affect us.
We are subject to a number of restrictive covenants under our debt arrangements, including customary
operating restrictions and customary financial covenants. Our business, financial condition and results of
operations may be adversely affected if we are unable to maintain compliance with such covenants.
Our outstanding debt is generally guaranteed jointly and severally by each of our domestic subsidiaries.
Our and our subsidiaries’ obligations under the Debt Facilities (as defined in Note 9 to our consolidated
financial statements) and the associated guarantees are secured, in each case, by first priority liens (subject,
in the case of the Amended KKR Credit Agreement, to the liens under the Amended BoA Credit Agreement
on, and security interests in, substantially all of the present and after acquired assets of us and each of our
subsidiaries, subject to certain customary exceptions). The Debt Facilities contain a number of restrictive
covenants, representations and warranties, including representations relating to the intellectual property
owned by us and our subsidiaries and the status of our material license agreements. In addition, the Debt
Facilities include covenants and events of default, including, in the case of the Amended BoA Credit
Agreement, requirements that we (i) maintain a positive net income (as defined), (ii) satisfy a maximum
loan to value ratio (as calculated pursuant to the Amended BoA Credit Agreement) and (iii) satisfy a
maximum consolidated first lien leverage ratio (as calculated pursuant to the Amended BoA Credit
Amendment), and, in the case of the Amended KKR Credit Agreement, to satisfy (i) a maximum
consolidated total leverage ratio (as calculated pursuant to the Amended KKR Credit Agreement) and (ii) a
maximum consolidated first lien leverage ratio (as calculated pursuant to the Amended KKR Credit
Agreement).
If our business, financial condition or results of operations are adversely affected by one or more of
the risk factors described in this Annual Report on Form 10-K or elsewhere in our filings with the SEC,
including by the effect of coronavirus, we may be unable to maintain compliance with these financial
covenants. If we fail to comply with such covenants, our lenders could demand immediate payment of
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amounts outstanding. Under such circumstances, we would need to seek alternative financing sources to
fund our ongoing operations and to repay amounts outstanding and satisfy our other obligations under our
existing borrowing and financing arrangements. Such financing may not be available on favorable terms,
or at all. Consequently, we may be restricted in how we fund ongoing operations and strategic initiatives and
deploy capital and in our ability to make acquisitions. As a result, our business, financial condition and
results of operations may be further adversely affected if we are unable to maintain compliance with our
debt covenants.
We or our licensees may not be able to continue to compete successfully because of intense competition within
our licensees’ markets, the strength of some of their competitors or other factors.
Our trademark licenses are for products primarily in the apparel, footwear, fashion and home accessories
markets, in which our licensees face intense competition. Competitive factors in these markets include design,
quality, price, style, name recognition, service and advertising. Changing customer preferences and the
limited availability of shelf space can adversely affect the competitive position of our licensees’ products.
Many of our licensees’ competitors have greater financial, distribution, marketing and other resources than
our licensees and have achieved significant name recognition for their brands. Our licensees may be
unable to successfully compete in the markets for their products, which would adversely affect our revenues
and cash flows, and we may not be able to continue to compete successfully with respect to our licensing
arrangements.
We and our licensees are subject to risks and uncertainties relating to operating outside of the United States,
foreign manufacturing and the price, availability and quality of raw materials, which could result in interruptions
to their operations or increase their operating costs, thereby affecting their ability to deliver goods to the
market, reducing or delaying their sales and decreasing our revenues.
We market and license our brands outside the United States, and many of our licensees operate outside
the United States. We face numerous risks in doing business outside the United States, including: (i) unusual
or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements;
(ii) tariffs, trade protection measures, import or export licensing requirements, trade embargoes, sanctions
and other trade barriers; (iii) competition from foreign companies; (iv) less effective and less predictable
protection and enforcement of our intellectual property; (v) changes in the political or economic condition
of a specific country or region (including, without limitation, as a result of political unrest), particularly in
emerging markets; (vi) fluctuations in the value of foreign currency versus the U.S. dollar and the cost of
currency exchange; (vii) potentially adverse tax consequences; and (viii) cultural differences in the conduct
of business. Any one or more of such factors could impact current or future international sales of our brands
or inhibit our ability to expand internationally. In addition, our business practices in international markets
are subject to the requirements of the U.S. Foreign Corrupt Practices Act and all other applicable anti-
bribery laws, any violation of which could subject us to significant fines, criminal sanctions and other
penalties.
Further, a significant portion of the products sold by our licensees are manufactured overseas. There
are substantial risks associated with foreign manufacturing, including (i) changes in laws relating to quotas,
and the payment of tariffs and duties, (ii) fluctuations in foreign currency exchange rates, (iii) shipping
delays and (iv) international political, regulatory and economic developments. Further, our licensees may
experience fluctuations in the price, availability and quality of fabrics and raw materials used by them in their
manufactured apparel or purchased finished goods. Any of these risks could increase our licensees’
operating costs. Our licensees also import finished products and assume all risk of loss and damage with
respect to these goods once they are shipped by their suppliers. If these goods are destroyed or damaged
during shipment, the revenues of our licensees could be reduced as a result of our licensees’ inability to deliver
or their delay in delivering their products. A reduction in the revenues generated by our licensees would
reduce the amount of our royalty revenues in excess of guaranteed minimum royalty payments and, in extreme
circumstances, result in failures to make guaranteed minimum royalty payments to us.
A substantial portion of our licensing revenue is concentrated with a limited number of licensees and retail
partners, such that the loss of a licensee or retail partner could materially decrease our revenue and cash flows.
Our licensing revenues are concentrated with a limited number of licensees and retail partners. During
the year ended December 31, 2019, three licensees represented at least 10% of net revenue, accounting for
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19%, 16% and 14% of the Company’s net revenue from continuing operations. During the year ended
December 31, 2018, three licensees represented at least 10% of net revenue, accounting for 18%, 12% and
11% of the Company’s net revenue from continuing operations. Our revenue and cash flows would be
materially and adversely affected if any of them were to have financial difficulties affecting their ability to
make payments, elected not to renew or extend any existing license agreements or arrangements with us or
significantly reduced their sales of these licensed products under any of these license agreements or
arrangements, and we were not able to replace the revenue generated by such licensees.
We may not be able to adequately protect our intellectual property rights, which could compromise our
competitive position and decrease the value of our brands.
We own, through our subsidiaries, U.S. federal trademark registrations and foreign trademark
registrations for our brands that are vital to the success and further growth of our business. In addition, we
own domestic, foreign and international intellectual property registrations for the technology and designs
incorporated into Heelys wheeled footwear and Gaiam yoga products. The loss of or inability to enforce
our proprietary rights could materially and adversely affect our business and financial condition. For instance,
if any third party independently develops similar products to those marketed and distributed by our
licensees or manufactures knock-offs of such products, it may harm the reputation of our brands, decrease
their value or cause a decline in our licensees’ sales and thus our revenues. Additionally, the laws of foreign
countries may provide inadequate protection for intellectual property rights, making it difficult to enforce
such rights in those countries.
We may need to bring legal claims to enforce or protect our intellectual property rights. Any litigation,
whether successful or unsuccessful, could result in substantial costs and diversions of resources and negatively
impact our business operations. In addition, notwithstanding the rights we have secured in our intellectual
property, third parties may bring claims against us or our licensees alleging that we or our licensees have
infringed on their intellectual property rights or that our or our licensees’ intellectual property rights are
not valid. Any claims against us or our licensees, with or without merit, could be time consuming and costly
to defend or litigate and therefore could adversely affect our business. In addition, to the extent that any of
our intellectual property assets is deemed to violate the proprietary rights of third parties in any litigation or
proceeding or as a result of any claim, then we and our licensees may be prevented from using it, which
could cause a breach or termination of license agreements. If our licensees are prevented from using the
intellectual property we have licensed to them, the revenues of our licensees will be reduced with respect to
those intellectual property assets, and the related royalty payments we receive could be reduced. Litigation
with respect to our intellectual property or breaches of our license agreements could result in a judgment
or monetary damages.
We depend upon the services of our key executives, including our Chief Executive Officer, Mr. David Conn. If
we lose the services of Mr. David Conn or other key executives, we may not be able to fully implement our
business plan and future growth strategy, which would harm our business and prospects.
Our success is largely dependent upon the expertise and knowledge of our Chief Executive Officer,
Mr. David Conn, and other key members of the executive team, whom we rely upon to formulate our
business strategies. Our key executives’ leadership and experience in the licensing industry is important to
the successful implementation of our business and marketing strategy. We do not carry key person life
insurance covering our key executives. The loss of the services of our key executives could have a material
adverse effect on our business prospects, financial condition, results of operations and cash flows.
Our results of operations may fluctuate significantly, which may make it difficult to predict our performance
and result in volatility in our stock price.
We have in the past experienced substantial variations in our revenue and results of operations from
quarter to quarter, and we expect to continue to experience such substantial variations. This variability is
affected by numerous factors, including:
• the timing of the introduction of new licensed products by our licensees;
• the level of consumer acceptance of our brands and licensed products;
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• seasonality resulting in higher revenues in the second half of the year;
• general economic and industry conditions that affect consumer spending and retailer purchasing;
• the availability of viable licensees that meet our brand criteria; and
• the timing of marketing expenditures.
Because of these fluctuations in our revenues, operating expenses and cash flows it may be difficult to
make period-to-period comparisons of our result of operations and liquidity and it may be difficult for
securities analysts and investors to predict our performance. As a result, our results of operations in any
particular quarter may be below the expectations of securities analysts or investors. Fluctuations in our
performance and the failure to meet analyst expectations could cause declines or volatility in our stock price.
Demand for our brands and branded products may be materially and adversely affected by reductions in
disposable income, which in turn depends on general economic conditions and the global economy.
Our performance is subject to worldwide economic conditions and their impact on levels of consumer
spending that affect not only the ultimate consumer, but also retailers and distributors, who license our
brands. Consumer spending has fluctuated significantly and may become depressed or be subject to
deterioration in the near future. The worldwide apparel and consumer products industries are heavily
influenced by general economic cycles. Purchases of apparel, footwear and accessories tend to decline in
periods of recession or uncertainty regarding future economic prospects, as disposable income declines.
During periods of recession or economic uncertainty, our licensees may not be able to maintain or increase
sales of our branded products to existing customers, make sales to new customers, open or operate new retail
stores or maintain sales levels at existing stores as consumers may shift discretionary income spending to
other areas other than our licensee’s products. As a result, our results of operations may be adversely and
materially affected by downward trends in the United States or global economy.
The market price of our common stock has declined significantly and may be volatile, which could reduce the
demand for our common stock.
The publicly traded shares of our common stock have experienced, and may continue to experience,
significant price fluctuations, ranging between $2.48 and $0.22 during our last two fiscal years. Due to the
continued, sustained decline in our stock price during 2017, we recorded a goodwill impairment charge of
$304.1 million in the fourth quarter of 2017. See Note 8 to our consolidated financial statements for further
information on our goodwill impairment. Future decreases or volatility in our stock price could reduce
demand for our common stock, regardless of our operating performance. The trading price of our common
stock could also change significantly over short periods of time in response to write-downs or actual or
anticipated variations in our quarterly results of operations, announcements by us, our licensees or our
respective competitors, factors affecting our licensees’ markets generally or changes in national or regional
economic conditions.
Our largest stockholders control a significant percentage of our common stock and are represented on our
board of directors, which may enable such stockholders, alone or together with our other significant stockholders,
to exert influence over corporate transactions and other matters affecting the rights of our stockholders.
As of March 23, 2020, Tengram Capital Partners Gen2 Fund, L.P. (“Tengram”) beneficially owns
approximately 11.6%, Carlyle Galaxy Holdings, L.P. (“Carlyle”) beneficially owns approximately 9.7% and
Ms. Martha Stewart beneficially owns approximately 12.5% of our outstanding shares of common stock.
Mr. William Sweedler, chairman of our board of directors, is a principal of Tengram and Ms. Martha
Stewart became a director in connection with the closing of the Mergers and remained a director post the
sale of MSLO. As a result, each of Tengram, Carlyle and Ms. Martha Stewart, individually or collectively, are
able to exercise substantial influence over our board of directors and matters requiring stockholder
approval, including the election of directors and approval of significant corporate actions, such as mergers
and other business combination transactions.
Circumstances may occur in which the interests of these stockholders could conflict with the interests
of our other stockholders. The voting power of these stockholders also could discourage others from seeking
to acquire control of us, which may reduce the market price of our common stock.
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We may be deemed a former shell company and therefore resales of shares of our restricted common stock in
reliance on Rule 144 may be subject to additional requirements and Rule 144 may be unavailable at all if we fail
to comply with our reporting obligations.
From time to time we have issued shares of our common stock in transactions exempt from registration
requirements, and such shares are “restricted securities” within the meaning of Rule 144. Rule 144 generally
permits the resale, subject to various terms and conditions, of restricted securities after they have been
held for six months. However, one of our predecessors was a former shell company and, as a result, securities
laws also might deem us to be a former shell company. If we are deemed a former shell company, Rule 144
may be unavailable for resales of our restricted common stock unless we have satisfied certain reporting
requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the
twelve months preceding the time of sale. However, we cannot assure you that future reports or other
materials will be filed as necessary to maintain the availability of the exemption under Rule 144. If we are
deemed a former shell company and we fail to comply with our reporting obligations under the Exchange Act,
Rule 144 will be unavailable to holders of our restricted common stock, which may limit the holders’
ability to sell such restricted shares. In addition, because of the on-going reporting requirements under
Rule 144, restrictive legends on certificates for shares of our common stock cannot be removed except in
connection with an actual sale that is subject to an effective registration statement under, or an applicable
exemption from the registration requirements of, the Securities Act.
While we audit our licensees from time to time in the ordinary course, we otherwise rely on the accuracy of our
licensees’ retail sales reports for reporting and collecting our revenues, and if these reports are untimely or
incorrect, our revenue could be delayed or inaccurately reported.
Under our existing agreements, our licensees pay us licensing fees based in part on the retail value of
products sold. We rely on our licensees to accurately report the retail sales in collecting our license fees,
preparing our financial reports, projections, budgets, and directing our sales and marketing efforts. Our
license agreements permit us to audit our licensees. If any of our licensee reports understate the retail sales
of products they sell, we may not collect and recognize revenue to which we are entitled, or may endure
significant expense to obtain compliance.
We do not foresee paying dividends in the foreseeable future.
We have not paid dividends on our common stock and do not anticipate paying dividends in the
foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing licensing
operations, further develop our brands and finance the acquisition of additional brands.
We have a significant amount of intangible assets, including our trademarks, recorded on our balance sheet. As
a result of changes in market conditions and declines in the estimated fair value of these assets, we have been
required to write-down all of our goodwill and a portion of our other intangible assets and may be required to
record impairments of our intangible assets in the future which could adversely affect our results of operations.
As of December 31, 2019, intangible assets represented $600 million, or 82.9% of our total consolidated
assets. Under current accounting principles generally accepted in the United States (“GAAP”), indefinite-
lived intangible assets are not amortized, but instead are subject to impairment evaluation based on related
estimated fair values, with such testing to be done at least annually. Our trademarks are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. Any write-down of intangible assets resulting from future periodic evaluations would, as
applicable, either decrease our net income or increase our net loss and those decreases or increases could be
material. We recorded non-cash impairment charges of $33.1 million and $17.9 million for indefinite-
lived intangible assets for certain brands in the third quarter of 2019 and 2018, respectively; the impairments
arose due to reduced growth expectations and the impact of licensee transitions for these brands. Due to
the continued, sustained decline in our stock price, we recorded a goodwill impairment charge of
$304.1 million in the fourth quarter of 2017. See Note 7 and Note 8 to our consolidated financial statements
for further information on these impairment charges.
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Our use of certain tax attributes may be limited.
We have significant net operating losses (“NOLs”). A valuation allowance has been provided as of
December 31, 2019 which primarily relates to state net operating losses and capital loss carryforwards. As of
December 31, 2019, we have federal NOLs available to carryforward to future periods of $107.8 million
which begin expiring in 2029 and we have state NOLs available to carryforward to future periods of
$179 million which begin expiring in 2020. We have foreign tax credits available to carryforward to future
periods of $0.5 million as of December 31, 2019 which begin expiring in 2020. We have experienced several
changes of ownership under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)
which place various limitations on the use of NOLs. The limitation on NOLs is based upon a formula
provided under Section 382 of the Code that utilizes the fair market value of us and prevailing interest rates
at the time of the ownership change. An “ownership change” is generally a 50% increase in ownership
over a three-year period by stockholders who directly or indirectly own at least five percent of a company’s
stock. The limitations on the use of the NOLs under Section 382 could affect our ability to offset future
taxable income.
We may be a party to litigation in the normal course of business, which could affect our financial position and
liquidity.
From time to time, we may be made a party to litigation in the normal course of business. For example,
as the owner of a trademark, we may be named as a defendant in a lawsuit relating to a product designed
and manufactured by a licensee of that trademark. If we are alleged to have infringed the intellectual property
rights of another party, any resulting litigation could be costly and could damage our reputation. Litigation
also diverts the time and resources of management, regardless of the merits of the claim. In most cases,
our licensees under the existing license agreements are obligated to defend and indemnify us, as licensor, and
our affiliates with respect to such litigation. We also maintain insurance for certain risks, but it is not
possible to obtain insurance to protect against all possible liabilities. Although historically the litigation
involving us has not been material to our financial position or our liquidity, any litigation has an element of
uncertainty and if any such litigation were to be adversely determined and/or a licensee were to fail to
properly indemnify us and/or we did not have appropriate insurance coverage, such litigation could affect
our financial position and liquidity.
Because the bid price of our ordinary shares is below the minimum requirement for the Nasdaq Capital
Market, we cannot assure you that our common stock will continue to trade on that market or another national
securities exchange.
On June 5, 2019, we received a notice from Nasdaq Stock Market (“Nasdaq”) stating that, for the
prior 30 consecutive trading days, the closing bid price for our common stock was below the minimum of
$1.00 per share required for continued listing on the exchange. The notification letter stated that we would be
afforded 180 calendar days, or until December 2, 2019, to regain compliance with the minimum bid price
requirement. In order to regain compliance with the listing standards, the closing bid price for our common
stock must be at least $1.00 for 10 consecutive trading days. We have considered our available options to
regain compliance, including whether to effect a reverse stock split. We cannot assure you about whether we
will be able to regain compliance with Nasdaq listing requirements. If we are unable to do so and our
common stock is no longer listed on Nasdaq or another national securities exchange, the liquidity and market
price of our common stock may be adversely affected. On February 11, 2020, the stockholders approved
the vote to effect a reverse stock split of our issued and outstanding common stock at a ratio of 1 share-
for-10 shares up to a ratio of 1 share-for-40 shares, to be determined by our Board of Directors.
Our business, financial condition and results of operations could suffer in the event of security breaches, cyber-
attacks or unauthorized disclosures of personal information.
In conducting their business, including their e-commerce business, our licensees and retail partners
obtain and transmit confidential information about their customers, including credit card information,
through their websites and their information technology systems. If our licensees or retail partners experience
such a security breach or cyber-attack, it could adversely affect their business and operations, including
damaging their reputation and their relationships with their customers, exposing them to risks of litigation
14
and liability including under data privacy laws and regulations, all of which could have a material adverse
effect on their ability to meet their minimum net sales requirements and to make guaranteed minimum royalty
payments to us in accordance with the terms of their respective license agreements. We cannot assure you
that our licensees and retail partners will not experience any future security breaches, cyber-attacks or
unauthorized disclosures. In addition, as a result of recent security breaches at a number of prominent
retailers, the media and public scrutiny of information security and privacy has become more intense and
the regulatory environment has become more uncertain. As a result, our licensees and retail partners may
incur significant costs to comply with laws regarding the protection and unauthorized disclosure of personal
information, which could also negatively affect their ability to generate sales and make royalty payments to
us, resulting in a material adverse effect on our business, financial condition and results of operations.
We are subject to risks and uncertainties related to our strategic review.
On October 7, 2019, we announced that our Board of Directors has initiated a broad review of
strategic alternatives focused on maximizing shareholder value. Such strategic alternatives may include the
divestiture of one or more existing brands, the acquisition of one or more new brands, a stock buyback
program, and other initiatives. We also announced that the Board had engaged Stifel to serve as financial
advisor to assist in this process. We cannot assure you that the review of strategic alternatives will result in any
transaction, and the process of exploring strategic alternatives will involve the dedication of significant
resources and the incurrence of significant costs and expenses. In addition, speculation and uncertainty
regarding the strategic review process may cause or result in disruption of our business; distraction of our
employees; difficulty in recruiting, hiring, motivating, and retaining talented and skilled personnel; difficulty
in maintaining or negotiating and consummating new business or strategic relationships or transactions;
and increased stock price volatility. If we are unable to mitigate these or other potential risks related to the
uncertainty caused by the strategic review process, it may adversely affect our business or adversely impact our
net sales, operating results, and financial condition.
Changes in the U.S. trade environment, including the imposition of import tariffs, could adversely affect the
amount or timing of our revenues, results of operations or cash flows.
The U.S. government has proposed, and in some case, implemented new or higher tariffs on specified
imported products, and certain governments have responded by proposing new or higher tariffs on specified
products imported from the United States (including, but not limited to, the Trump Administration’s
tariffs on China and China’s retaliatory tariffs on certain products from the U.S.). These tariffs, which do
not apply directly to our branding business, may materially and adversely affect our licensees by imposing
tariffs on goods they import. The imposition of tariffs may negatively affect key licensees or the suppliers,
manufacturers and customers of goods produced under our trademarks. For example, tariffs may result
in or have resulted in increasing our licensees’ costs to produce goods and decrease their sales and gross
margins and demand for their products. Such outcomes could adversely affect the amount or timing of our
revenues, results of operations or cash flows, and continuing uncertainty about changes in the U.S. trade
environment could cause our licensees to experience sales volatility, price fluctuations or supply shortages
or advances or delays in the manufacture and sale of products produced under our trademarks.
Changes in the method for determining LIBOR and the potential replacement of the LIBOR benchmark
interest rate could increase our borrowing costs.
Some of our borrowings bear interest at a variable rate based on LIBOR. In July 2017, the United
Kingdom’s Financial Conduct Authority (“FCA”), a regulator of financial services firms and financial
markets in the United Kingdom, stated that it will plan for a phase out of regulatory oversight of LIBOR
interest rates indices. The FCA has indicated they will support the LIBOR indices through 2021, to allow for
an orderly transition to an alternative reference rate. The Alternative Reference Rates Committee has
proposed the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR, and
the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to
be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.
We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest
rate, including the possibility of SOFR as the dominant replacement. Introduction of an alternative rate
15
also may introduce additional basis risk for market participants as an alternative index is utilized along with
LIBOR. There can be no guarantee that SOFR will become widely used and that alternatives may or may
not be developed with additional complications. We are not able to predict whether LIBOR will cease to be
available after 2021, whether SOFR will become a widely accepted benchmark in place of LIBOR, or what the
impact of such a possible transition to SOFR may have on our results of operations.
Risks Related to Our Acquisitions
If we are unable to identify and successfully acquire additional brands or to finance the acquisition of such
brands, our rate of growth may be reduced and, even if additional trademarks are acquired, we may not realize
anticipated benefits due to integration or licensing difficulties.
A key component of our growth strategy is the acquisition of additional brands. In 2016, we acquired
GAIAM, and in 2015, we acquired Jessica Simpson and Joe’s and are continually exploring new acquisition
opportunities. However, we face extensive competition for new brand acquisitions, both from other brand
management companies as well as traditional consumer brand companies, retailers and private equity
groups, which could increase the price of the acquisitions and make it more difficult for us to find suitable
acquisition targets. In addition, even if we successfully acquire additional brands or the rights to use additional
brands, we may not be able to achieve or maintain profitability levels that justify our investment in, or
realize planned benefits with respect to, those additional brands.
Although we seek to temper our acquisition risks, all acquisitions, whether they are of additional
intellectual property assets or of the companies that own them, entail numerous risks, any of which could
detrimentally affect our results of operations and/or the value of our equity. These risks include, among
others:
• unanticipated costs associated with the target acquisition;
• negative effects on reported results of operations from acquisition related charges and amortization
of acquired intangibles;
• diversion of management’s attention from other business concerns;
• the challenges of maintaining focus on, and continuing to execute, core strategies and business plans
as our brand and license portfolio grows and becomes more diversified;
• inability to find suitable licensees for our newly acquired brands;
• adverse effects on our existing licensing relationships, including our existing licensees terminating
their license agreements with us;
• potential difficulties associated with the retention of key employees and the assimilation of any
other employees, who may be retained by us in connection with or as a result of our acquisitions;
and
• risks of entering new domestic and international markets (whether it be with respect to new licensed
product categories or new licensed product distribution channels) or markets in which we have
limited prior experience.
In the event we acquire intellectual property assets or the companies that own them, our due diligence
reviews are subject to inherent uncertainties and may not reveal all potential risks. We may therefore fail to
discover or inaccurately assess undisclosed or contingent liabilities, including liabilities for which we may have
responsibility as a successor to the seller or the target company. In addition, as a successor, we may be
responsible for any past or continuing violations of law by the seller or the target company. Although we
generally attempt to seek contractual protections through representations, warranties and indemnities, we
cannot be sure that we will obtain such provisions in our acquisitions or that such provisions will fully protect
us from all unknown, contingent or other liabilities or costs. Finally, claims against us relating to any
acquisition may necessitate our seeking claims against the seller for which the seller may not, or may not be
able to, indemnify us or that may exceed the scope, duration or amount of the seller’s indemnification
obligations.
16
Acquiring additional brands could also have a significant effect on our financial condition and could
cause substantial fluctuations in our liquidity, cash balances and quarterly and yearly results of operations.
Acquisitions could result in the recording of significant goodwill and intangible assets on our financial
statements, the amortization or impairment of which would reduce our reported earnings in subsequent years.
We cannot make assurances with respect to the timing, likelihood or financial or business effect of any
possible transaction. Moreover, our ability to grow through the acquisition of additional brands will also
depend on the availability of capital to complete the necessary acquisition arrangements. We may elect to
pursue acquisitions through debt financing or the issuance of shares of our common stock or convertible
securities. The use of equity as transaction consideration could dilute our common stock, reduce our
earnings per share or reduce the market price of our common stock. We cannot guarantee that our
stockholders will achieve greater returns as a result of any future acquisitions we complete.
We may not realize all of the anticipated benefits of our acquisitions or those benefits may take longer to
realize than expected.
Our ability to realize the anticipated benefits of our acquisitions depends, to a large extent, on our
ability to implement changes to acquired businesses in a manner that facilitates growth opportunities and
realizes anticipated synergies. We will be required to devote significant management attention, resources and
costs to realigning the business practices and operations of acquired businesses to our brand management
model. We generally expect to benefit from operational synergies from our acquisitions resulting from the
consolidation of capabilities and elimination of redundancies, as well as greater efficiencies from increased
scale and market integration. However, this process may preclude or impede realization of the benefits expected
from acquisitions and could adversely affect current revenues and investments in future growth, which
could adversely affect our results of operations. We cannot be certain that we will not be required to
implement further realignment activities, make additions or other changes to our workforce based on other
cost reduction measures or changes in the markets and industry in which we compete. In addition, future
business conditions and events may impact our ability to continue to realize any benefits of these initiatives.
If we are not able to successfully achieve these objectives, the anticipated benefits of our acquisitions may
not be realized fully or at all or may take longer to realize than expected.
The failure to successfully integrate new businesses and operations as a result of acquisitions may adversely
affect our future results.
Businesses that we have acquired or may acquire in the future have operated historically as independent
companies. We may face significant challenges in consolidating certain businesses and functions of these
businesses, integrating their organizations, procedures, policies and operations, addressing differences in the
business cultures and retaining key personnel. The integration process and other disruptions resulting
from the business combinations mentioned above may also disrupt each company’s ongoing businesses or
cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships
with employees, business partners, customers and others with whom we have business or other dealings, or
limit our ability to achieve the anticipated benefits of the acquisitions. In addition, difficulties in integrating
the businesses mentioned above could harm our reputation.
If we are not able to successfully combine our businesses in an efficient, effective and timely manner,
the anticipated benefits and cost savings of the acquisitions may not be realized fully, or at all, or may take
longer to realize than expected, and the value of our common stock may be affected adversely.
Our success depends in part on the continued success of our celebrity based brands and the reputation and
popularity of those celebrities. Any adverse reactions to publicity relating to those celebrities, or the loss of their
services, could adversely affect our revenues and results of operations as well as our ability to maintain or
generate a consumer base.
We believe that maintaining and enhancing our celebrity based brands is important to our business,
financial condition and results of operations. Our celebrity based brands may be negatively impacted by a
number of factors, including the reputation of its content and products, the uniqueness and relevance of
celebrity branded content, and the reputation and popularity of those celebrities. If we fail to maintain and
17
enhance these brands, or if excessive expenses are incurred in an effort to do so, our business, financial
condition and results of operations could be materially and adversely affected.
Moreover, we believe our celebrities’ image, reputation, popularity and talent are material to the
success of their brand. Any repeated or sustained negative shifts in public or industry perceptions of such
celebrities could have a material adverse effect on these brands and, consequently, our business.
We may require additional capital to finance the acquisition of additional brands, and our inability to raise
such capital on beneficial terms or at all could limit our growth.
We may, in the future, require additional capital to help fund all or part of potential acquisitions. If, at
the time required, we do not have sufficient cash to finance those additional capital needs, we will need to
raise additional funds through equity and/or debt financing. We cannot guarantee that, if and when needed,
additional financing will be available to us on acceptable terms or at all. If additional capital is needed and
is either unavailable or cost prohibitive, our growth may be limited as we may need to change our business
strategy to slow the rate of, or eliminate, our expansion plans. In addition, any additional financing we
undertake could impose additional covenants upon us that restrict our operating flexibility, and, if we issue
equity securities to raise capital, our existing stockholders may experience dilution or the new securities
may have rights senior to those of our common stock.
We expect to incur transaction costs in connection with our acquisitions.
We have incurred and expect to continue to incur significant costs and expenses in connection with
past and future acquisitions, including financial advisory, legal, accounting, consulting and other advisory
fees and expenses, reorganization and restructuring costs, litigation defense costs, severance/employee benefit-
related expenses, filing fees, printing expenses and other related charges. There are also a large number of
processes, policies, procedures, operations, technologies and systems that must be integrated in connection
with our acquisitions. There are many factors beyond our control that could affect the total amount or timing
of the integration and implementation expenses. These costs and expenses could reduce the benefits and
income we expect to achieve from our acquisitions.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our principal offices are located at 601 West 26th Street, 9th Floor — Suite 915, New York, New York
10001, and our telephone number is (646) 564-2577.
We lease the following properties as of December 31, 2019:
Location
New York, NY
New York, NY
Los Angeles, CA
Type
Corporate Headquarters
Office and Showroom
Office
Square Footage
(Approximate)
82,300
10,900
4,724
Expiration Date
December 31, 2033
September 12, 2024
July 31, 2020
We believe that the facilities we utilize are well maintained, in good operating condition and adequate
to meet our current and foreseeable needs.
18
Item 3.
Legal Proceedings
General Legal Matters
From time to time, we are involved in legal matters arising in the ordinary course of business. While we
believe that such matters are currently not material, there can be no assurance that matters arising in the
ordinary course of business for which we are, or could be, involved in litigation, will not have a material
adverse effect on our business, financial condition or results of operations. Contingent liabilities arising from
potential litigation are assessed by management based on the individual analysis of these proceedings and
on the opinion of our lawyers and legal consultants.
With respect to our outstanding legal matters, based on our current knowledge, we believe that the
amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material
adverse effect on our business, financial condition or results of operations or cash flows. However, the
outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. Further,
regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement
costs, diversion of management resources and other factors.
Note 12 of the Notes to Consolidated Financial Statements in this Form 10-K is incorporated by
reference into this Item 3.
Item 4. Mine Safety Disclosures
Not applicable.
19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
Equity Securities
Common Stock Trading
Our common stock trades on the Nasdaq Capital Market under the symbol “SQBG”. As of March 23,
2020, there were approximately 1,275 holders of record of our common stock.
Dividends
We have not paid or declared cash distributions or dividends on our common stock during the last two
fiscal years or any subsequent interim period. We do not intend to pay cash dividends on our common stock
in the near future. We currently intend to retain all earnings, if and when generated, to finance our
operations. The declaration of cash dividends in the future will be determined by the Board based upon our
earnings, financial condition, capital requirements, contractual obligations which may prohibit the payment
of dividends, including our current or any future indebtedness, and other relevant factors. Our ability to pay
dividends on our common stock and repurchase our common stock is restricted by certain of our current
indebtedness and may be restricted or prohibited under future indebtedness.
Equity Compensation Plan
The table below sets forth the information regarding our equity compensation plans as of December 31,
2019:
Plan category
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
(a)
(b)
Equity compensation plans approved by
security holders(1) . . . . . . . . . . . . . . . .
Equity compensation plans not approved
by security holders . . . . . . . . . . . . . . .
229,501
—
$12.68
N/A
Total
. . . . . . . . . . . . . . . . . . . . . . . . . .
229,501
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
—
N/A
—
(1) Consists of options to purchase our common stock issued under our 2005 Stock Incentive Plan (the
“2005 Stock Incentive Plan”) and the Sequential Brands Group, Inc. 2013 Stock Incentive Compensation
Plan (the “2013 Stock Incentive Plan”). The 2005 Stock Incentive Plan was replaced by the 2013
Stock Incentive Plan. No new grants were granted under the 2005 Stock Incentive Plan since August 2013,
when the 2013 Stock Incentive Plan came into effect. For a description of our 2013 Stock Incentive
Plan, see Note 14 to our consolidated financial statements.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the period covered by this Annual Report on
Form 10-K that were not previously disclosed in a Quarterly Report on Form 10-Q or a Current Report on
Form 8-K.
20
Common Stock Repurchase Programs
During the quarter ended December 31, 2019, we repurchased 70,275 shares of our common stock
from employees for income tax withholdings related to the vesting of restricted stock. We do not currently
have in place a repurchase program with respect to our common stock.
Period
October 1 – 31 . . . . . . .
November 1 – 30 . . . . . .
December 1 – 31 . . . . . .
Total . . . . . . . . . . . . . . . .
(a) Total Number of
Shares (or Units)
Purchased(1)
(b) Average Price Paid
per Share (or Unit)
15,217
32,232
22,826
70,275
$0.29
$0.37
$0.35
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
(d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
N/A
N/A
N/A
—
N/A
N/A
N/A
—
(1) During the fourth quarter of 2019, 70,275 shares were purchased from employees for tax withholding
purposes related to the vesting of restricted stock and restricted stock units.
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative total stockholder return
on our common stock during the period beginning on December 31, 2014 and ending on December 31, 2019
with the cumulative total return on the Standard & Poor’s 500 Composite Index (“S&P 500”) and a
Custom Peer Group, which includes Carter’s Inc., Apex Global Brands, Inc., Columbia Sportswear Company,
Guess ? Inc., Hanesbrands, Inc., Iconix Brand Group Inc., PVH Corp. and Xcel Brands Inc. The
comparison assumes that $100 was invested on December 31, 2014 in our common stock, S&P 500 and
Custom Peer Group. The stock performance shown on the graph should not be considered indicative of
future performance.
$200
$150
$100
$50
$0
2014
Comparison of Cumulative Five Year Total Return
Among Sequential Brands Group, Inc., the S&P 500 index,
and a Custom Peer Group
2015
2016
2017
2018
2019
Sequential Brands Group, Inc.
S&P 500 Index
Peer Group
21
Item 6.
Selected Financial Data
The following table presents our selected historical financial data for the periods indicated. The selected
historical financial data has been derived from our audited consolidated financial statements referred to under
Item 8 of this Annual Report on Form 10-K as well as prior 10-K filings. The following selected historical
financial data should be read in conjunction with the consolidated financial statements and notes thereto that
appear elsewhere in this Annual Report on Form 10-K and in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” set forth in Item 7 of this Annual Report on Form 10-K. The
historical consolidated financial statements for Old Sequential for periods prior to the Mergers are
considered to be the historical financial statements of Sequential Brands Group, Inc. and thus, our
consolidated financial statements for fiscal 2015 reflect Old Sequential’s consolidated financial statements
for the period from January 1, 2015 through December 4, 2015. We have not declared dividends during the
periods presented below.
2019
Year Ended December 31,
2017
(in thousands, except share and per share data)
2016
2018
2015
Consolidated Statements of
Operations Data:
Net revenue . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . .
Impairment charges
. . . . . . . . .
Loss on sale of assets . . . . . . . . .
. .
Income (loss) from operations
(Loss) income from continuing
$
$
101,576
61,671
33,109
—
6,796
127,290
60,223
17,899
7,117
42,051
$
$
124,780
53,752
340,628
—
(269,600)
105,766
57,753
—
—
48,013
$
82,852
47,139
—
—
35,713
operations
. . . . . . . . . . . . . .
(40,376)
(11,962)
(286,161)
(14,101)
8,488
Net loss (income) from
continuing operations
attributable to noncontrolling
interest . . . . . . . . . . . . . . . . .
Loss from continuing operations
attributable to Sequential
Brands Group, Inc. and
Subsidiaries
. . . . . . . . . . . . .
(Loss) income from discontinued
operations, net of tax . . . . . . .
Net loss attributable to
Sequential Brands Group, Inc.
and Subsidiaries . . . . . . . . . .
Continuing operations:
(Loss) earnings per share –
6,036
(5,506)
(4,172)
(7,452)
(5,287)
(34,340)
(17,468)
(290,333)
(21,553)
3,201
(125,063)
6,984
104,615
20,732
(6,072)
$ (159,403) $
(10,484) $ (185,718) $
(821) $
(2,871)
basic . . . . . . . . . . . . . . . . .
$
(0.53) $
(0.27) $
(4.62) $
(0.35) $
(Loss) earnings per share
diluted . . . . . . . . . . . . . . .
(0.53)
(0.27)
(4.62)
(0.35)
0.08
0.07
Discontinued Operations:
(Loss) earnings per share –
basic . . . . . . . . . . . . . . . . .
$
(1.93) $
0.11
$
1.66
$
0.33
$
(0.15)
(Loss) earnings per share –
diluted . . . . . . . . . . . . . . .
(1.93)
0.11
1.66
0.33
(0.15)
Loss per share attributable to
Sequential Brands Group, Inc.
and Subsidiaries:
Basic and diluted . . . . . . . . . .
Weighted average common shares
outstanding:
Basic . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . .
$
(2.46) $
(0.16) $
(2.95) $
(0.01) $
(0.07)
64,760,823
64,760,823
63,700,081
64,992,059
62,861,743
63,093,437
61,912,410
62,680,182
41,177,523
43,387,116
22
2019
2018
2017
2016
2015
As of December 31,
(in thousands)
Consolidated Balance Sheet Data:
Cash . . . . . . . . . . . . . . . . . . . . . . . .
Working capital(a) . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . .
Long-term debt, including current
portion . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . .
$ 6,264
$
14,106
$
18,902
$
19,133
$
41,560
11,461
599,967
723,244
446,000
173,040
19,615
634,827
23,639
664,984
16,008
699,901
22,753
558,265
1,078,668
1,097,211
1,434,863
1,289,837
610,787
344,644
630,597
353,538
645,035
537,568
542,065
525,649
(a) Net working capital is defined as current assets minus current liabilities, excluding restricted cash and
discontinued operations.
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read together with our consolidated financial statements
and related notes thereto included elsewhere in this Annual Report on Form 10-K, as well as the disclosures
about forward-looking statements in Item 1 and the section “Risk Factors” contained in Item 1A. This
discussion summarizes the significant factors affecting our consolidated operating results, financial condition
and liquidity and cash flows for the fiscal year ended December 31, 2019. Except for historical information,
the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results
of Operations are forward-looking statements that involve risks and uncertainties and are based upon
judgments concerning various factors that are beyond our control.
Licensing and Brand Management Business
We own a portfolio of consumer brands in the active and lifestyle categories, including Jessica Simpson,
AND1, Avia, Joe’s and GAIAM. We aim to maximize the value of our brands by promoting, marketing and
licensing the brands through various distribution channels, including to retailers, wholesalers and
distributors in the United States and in certain international territories. Our core strategy is to enhance and
monetize the global reach of our existing brands, and to pursue additional strategic acquisitions to grow
the scope of and diversify our portfolio of brands.
We aim to acquire well-known consumer brands with high potential for growth and strong brand
awareness. We additionally seek to diversify our portfolio by evaluating the strength of targeted brands and
the expected viability and sustainability of future royalty streams. Upon the acquisition of a brand, we
partner with leading wholesalers and retailers to drive incremental value and maximize brand equity. We
focus on certain key initiatives in our licensing and brand management business. These initiatives include:
• Maximizing the value of our existing brands by creating efficiencies, adding additional product
categories, expanding distribution and retail presence and optimizing sales through innovative
marketing that increases consumer brand awareness and loyalty;
• Expanding through e-commerce channels;
• Developing international expansion through additional licenses, partnerships and other arrangements
with leading retailers and wholesalers outside the United States; and
• Acquiring consumer brands (or the rights to such brands) with high consumer awareness, broad
appeal and applicability to a wide range of product categories.
Our business is designed to maximize the value of our brands through license agreements with partners
that are responsible for manufacturing and distributing our licensed products and primarily responsible for
the design of such licensed products. Our brands are licensed for a broad range of product categories, including
apparel, footwear, fashion accessories and home goods. We seek to select licensees who have demonstrated
the ability to produce and sell quality products in their respective licensed categories and have the capability
to meet or exceed the minimum sales thresholds and guaranteed minimum royalty payments that we
generally require.
We license our brands to both wholesale and direct-to-retail licensees. In a wholesale license, a wholesale
supplier is granted rights (typically on an exclusive basis) to a single or small group of related product
categories for a particular brand for sale to multiple accounts within an approved channel of distribution and
territory. In a direct-to-retail license, a single retailer is granted the right (typically on an exclusive basis) to
sell branded products in a broad range of product categories through its brick and mortar stores and
e-commerce sites. As of December 31, 2019, we had approximately one hundred licensees, with wholesale
licensees comprising a significant majority.
Our license agreements typically require a licensee to pay us royalties based upon net sales and, in most
cases, contain guaranteed minimum royalties. Our license agreements also require licensees to support the
brands by either paying or spending contractually guaranteed minimum amounts for the marketing and
advertising of the respective licensed brands. As of March 23, 2020, we had contractual rights to receive an
aggregate of $208.3 million in minimum royalty and marketing and advertising revenue from our licensees
through the balance of the current terms of such licenses, excluding any renewals.
24
Reclassification of Prior Periods
On June 10, 2019, we completed the sale of MSLO, a Delaware corporation and a wholly-owned
subsidiary of the Company, for $166 million in cash consideration, plus additional amounts in respect of
pre-closing accounts receivable that are received after the closing, subject to certain adjustments, pursuant
to an equity purchase agreement (the “Purchase Agreement”) with Marquee Brands LLC (the “Buyer”)
entered into on April 16, 2019. In addition, the Purchase Agreement provides for an earnout of up to
$40,000,000 payable to Sequential if certain performance targets are achieved during the three calendar years
ending December 31, 2020, December 31, 2021 and December 31, 2022. MSLO and its subsidiaries were
engaged in the business of promoting, marketing and licensing the Martha Stewart and the Emeril Lagasse
brands through various distribution channels.
Due to the sale of MSLO during the second quarter of 2019 (see Note 4 of Notes to Consolidated
Financial Statements included in this Form 10-K), in accordance with Accounting Standards Codification
(“ASC”) 205, Discontinued Operations, we have classified the results of MSLO as discontinued operations in
our consolidated statements of operations and cash flows for all periods presented. Additionally, the
related assets and liabilities directly associated with MSLO are classified as discontinued operations in our
consolidated balance sheets for all periods presented. All amounts included in the notes to the consolidated
financial statements relate to continuing operations unless otherwise noted.
Recently Issued Accounting Standards
Refer to “Recently Issued Accounting Standards” in Note 2 of Notes to Consolidated Financial
Statements included in this Form 10-K.
Critical Accounting Policies, Judgments and Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires
management to exercise its judgment. We exercise considerable judgment with respect to establishing sound
accounting policies and in making estimates and assumptions that affect the reported amounts of our
assets and liabilities, our recognition of revenues and expenses, and our disclosure of commitments and
contingencies at the date of the financial statements. On an on-going basis, we evaluate our estimates and
judgments. We base our estimates and judgments on a variety of factors, including our historical experience,
knowledge of our business and industry and current and expected economic conditions, that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. We periodically
re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when
circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide
us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee
that the results will always be accurate. Since the determination of these estimates requires the exercise of
judgment, actual results could differ from such estimates.
A description of significant accounting policies that require us to make estimates and assumptions in
the preparation of our consolidated financial statements is as follows:
Revenue Recognition. We recognize revenue in accordance with ASC 606, which became effective as
of January 1, 2018 (See Notes 2 and 5 in this Form 10-K for impact of adoption and other related disclosures).
ASC 606 requires a five-step approach to determine the appropriate method of revenue recognition for
each contractual arrangement:
Step 1: Identify the Contract(s) with a Customer
Step 2: Identify the Performance Obligation(s) in the Contract
Step 3: Determine the Transaction Price
Step 4: Allocate the Transaction Price to the Performance Obligation(s) in the Contract
Step 5: Recognize Revenue when (or as) the Entity Satisfies a Performance Obligation
25
We have entered into various license agreements for our owned trademarks. Under ASC 606, our
agreements are generally considered symbolic licenses, which contain the characteristics of a right-to-access
license since the customer is simultaneously receiving the intellectual property (“IP”) and benefiting from
it throughout the license period. We assess each license agreement at inception and determine the performance
obligation(s) and appropriate revenue recognition method. As part of this process, we apply judgments
based on historical trends when estimating future revenues and the period over which to recognize revenue.
We generally recognize revenue for license agreements under the following methods:
1. Licenses with guaranteed minimum royalties (“GMRs”): Generally, guaranteed minimum royalty
payments (fixed revenue) are recognized on a straight-line basis over the term of the contract, as
defined in each license agreement.
2. Licenses with both GMRs (fixed revenue) and earned royalties (variable revenue): Earned
royalties in excess of fixed revenue are only recognized when we are reasonably certain that the
guaranteed minimum payments for the period, as defined in each license agreement, will be exceeded.
Additionally, we have categorized certain contracts as variable when there is a history and future
expectation of exceeding GMRs. We recognize income for these contracts during the period
corresponding to the licensee’s sales.
3. Licenses that are sales-based only or earned royalties: Earned royalties (variable revenue) are
recognized as income during the period corresponding to the licensee’s sales.
Payments received as consideration for the grant of a license or advanced royalty payments are
recorded as deferred revenue at the time payment is received and recognized into revenue under the methods
described above.
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the
consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the
current portion of deferred revenue on the consolidated balance sheets.
We disaggregate revenue into two categories: licensing agreements and other, which is comprised of
revenue from sources such as sales commissions and vendor placement commissions.
Commission revenues and vendor placement commission revenues are recorded in the period the
commission is earned.
Goodwill and Intangible Assets. Goodwill is tested for impairment at the reporting unit level (operating
segment or one level below an operating segment) on an annual basis (on October 1st) and between annual
tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. The Company considered its market capitalization and the carrying
value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. In
evaluating goodwill for impairment, we first assessed qualitative factors to determine whether it was more
likely than not that the fair value of a reporting unit was less than its carrying amount. Qualitative factors
considered included, for example, macroeconomic and industry conditions, overall financial performance,
and other relevant entity-specific events. If we bypassed the qualitative assessment, or concluded that it
was more likely than not that the fair value of a reporting unit was less than its carrying value, we then
performed a quantitative goodwill impairment test to identify potential goodwill impairment and measure
the amount of goodwill impairment to be recognized, if any. If the carrying value of the reporting unit’s
goodwill exceeded the implied fair value of the goodwill, an impairment loss was recognized in the amount
of that excess, not to exceed the carrying amount of goodwill. See Note 2 — Summary of Significant
Accounting Policies in Notes to our Consolidated Financial Statements for further information.
Intangible assets represent trademarks, customer agreements and patents related to our brands. Finite-
lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets.
Indefinite-lived intangible assets are not amortized, but instead are subject to impairment evaluation. On an
annual basis (October 1st) and as needed, we test indefinite lived trademarks for impairment through the
use of discounted cash flow models. Assumptions used in our discounted cash flow models include: (i) discount
rates; (ii) projected annual revenue growth rates; and (iii) projected long-term growth rates. Our estimates
26
also factor in economic conditions and expectations of management, which may change in the future based
on period-specific facts and circumstances. Other intangibles with determinable lives, including certain
trademarks, customer agreements and patents, are evaluated for the possibility of impairment when certain
indicators are present, and are otherwise amortized on a straight-line basis over the estimated useful lives
of the assets (currently ranging from 2 to 15 years).
When conducting our impairment assessment of indefinite-lived intangible assets, we initially perform
a qualitative evaluation of whether it is more likely than not that the asset is impaired. If it is determined by
a qualitative evaluation that it is more likely than not that the asset is impaired, we then test the asset for
recoverability. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of the asset to its future discounted net cash flows. If the carrying amount of such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Due to the identification of impairment indicators during the quarter ended September 30, 2019,
specifically the impairment of certain tradenames due to reduced growth expectations and the impact of
licensee transitions for these brands, we performed impairment testing of our indefinite-lived assets at
September 30, 2019, which replaced our October 1st annual test. As a result of our testing, we recorded a
non-cash impairment charge of $33.1 million consisting of $28.5 million related to the Jessica Simpson
trademark and $4.6 million related to the Joe’s trademark.
Due to the identification of impairment indicators during the quarter ended September 30, 2018,
specifically the impairment of certain tradenames due to reduced growth expectations and the impact of
licensee transitions for these brands, we performed impairment testing of our indefinite-lived assets at
September 30, 2018, which replaced our October 1st annual test. As a result of our testing, we recorded a
non-cash impairment charge of $17.9 million relating to our indefinite-lived intangible assets during the
quarter ended September 30, 2018.
Due to the identification of impairment indicators during the quarter ended September 30, 2017,
specifically the impairment of certain tradenames due to reduced contractual minimums or reduced sales
forecasts in key distribution channels, we performed impairment testing of our goodwill and indefinite-lived
assets at September 30, 2017, which replaced our October 1st annual test. As a result of our testing, we
recorded a non-cash impairment charge of $36.5 million relating to our indefinite-lived intangible assets
during the quarter ended September 30, 2017.
Due to the identification of impairment indicators during the year ended December 31, 2017, we
performed impairment testing of our goodwill and indefinite-lived assets during the fourth quarter of 2017.
As a result of our testing, we recorded a non-cash goodwill impairment charge of $304.1 million during
the fourth quarter of 2017.
Leases. The Company has operating leases for certain properties for its offices and showrooms and
for copiers. The Company adopted ASU No. 2016-02, Leases (“ASU 2016-02” or “ASC 842”) as of January 1,
2019 using the modified retrospective method as of the period of adoption. The Company elected the
package of practical expedients upon transition where the Company did not reassess the lease classification
and initial direct costs for leases that existed prior to adoption. Additionally, the Company did not reassess
contracts entered into prior to adoption to determine whether the arrangement was or contained a lease. In
accordance with ASU 2016-02, for leases over twelve months the Company records a right-of-use asset
and a lease liability representing the present value of future lease payments. Rent expense is recognized on a
straight-line basis over the term of the lease. The Company will test its ROU assets for impairment in
accordance with ASC 360. See Note 11 to our consolidated financial statements for further information.
Income Taxes. Current income taxes are based on the respective periods’ taxable income for federal,
foreign and state income tax reporting purposes. Deferred tax liabilities and assets are determined based on
the difference between the financial statement and income tax bases of assets and liabilities, using statutory
tax rates in effect for the year in which the differences are expected to reverse. In accordance with
ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, all deferred income taxes are reported
and classified as non-current. A valuation allowance is required if, based on the weight of available evidence,
27
it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management
considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based on consideration of these items and tax provisions under
the Tax Act, primarily the limitation on interest expense deductions, management had determined that
enough certainty existed to warrant the release of the valuation allowance recorded against substantially all
of the Company’s deferred tax assets as of December 31, 2017. See Note 15 to our consolidated financial
statements for further information on the release of our valuation allowance.
We apply the FASB guidance on accounting for uncertainty in income taxes. The guidance clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance
with other authoritative GAAP and prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The guidance also addresses derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. During the years ended December 31, 2019 and 2018, the Company did
not have any reserves or accrued interest and penalties recorded through current income tax expense in
accordance with ASC 740, Income Taxes (“ASC 740”). Interest and penalties related to uncertain tax
positions, if any, are recorded in income tax expense. Tax years that remain open for assessment for federal
and state tax purposes include the years ended December 31, 2016 through December 31, 2019.
Stock-Based Compensation. 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
and restricted stock units, for which restrictions lapse with the passage of time (“time-based restricted
stock”), compensation cost is recognized on a straight-line basis over the period between the issue date and
the date that restrictions lapse. Time-based restricted stock is included in total shares of common stock
outstanding upon the lapse of applicable restrictions. For restricted stock, for which restrictions are based
on performance measures (“performance stock units” or “PSUs”), restrictions lapse when those performance
measures have been deemed achieved. Compensation cost for PSUs is recognized on a straight-line basis
during the period from the date on which the likelihood of the PSUs being earned is deemed probable and
(x) the end of the fiscal year during which such PSUs are expected to vest or (y) the date on which awards of
such PSUs may be approved by the compensation committee of the Company’s board of directors (the
“Compensation Committee”) on a discretionary basis, as applicable. PSUs are included in total shares of
common stock outstanding upon the lapse of applicable restrictions. PSUs are included in total diluted shares
of common stock outstanding when the performance measures have been deemed achieved but the PSUs
have not yet been issued.
Fair value for stock options and warrants is calculated using the Black-Scholes valuation model and is
expensed on a straight-line basis over the requisite service period of the grant. Compensation cost is reduced
for forfeitures as they occur in accordance with Accounting Standards Update (“ASU”) 2016-09, Simplifying
the Accounting for Share-Based Payments (“ASU 2016-09”).
The Company adopted ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-07”) as of January 1, 2019 on a modified retrospective basis. In accordance with
ASU 2018-07, the Company recognizes compensation cost for grants to non-employees on a straight-line
basis over the period of the grant. Prior periods have not been restated and were accounted for under the
previous method where at each reporting period prior to the lapse of restrictions on warrants, time-based
restricted stock and PSUs granted to non-employees, the Company remeasured the aggregate compensation
cost of such grants using the Company’s fair value at the end of such reporting period and revised the
straight-line recognition of compensation cost in line with such remeasured amount.
Reportable Segment. An operating segment, in part, is a component of an enterprise whose operating
results are regularly reviewed by the chief operating decision maker (the “CODM”) to make decisions about
resources to be allocated to the segment and assess its performance. Operating segments may be aggregated
only to a limited extent. Our CODM, the Chief Executive Officer, reviews financial information presented on
a consolidated basis, accompanied by disaggregated information about revenues for purposes of making
operating decisions and assessing financial performance. Accordingly, we have determined that we have a
single operating and reportable segment. In addition, we have no foreign operations or any assets in foreign
locations. Nearly all of our operations consist of a single revenue stream, which is the licensing of our
trademark portfolio, with additional revenues derived from certain commissions.
28
Results of Operations
Comparison of the Years Ended December 31, 2019 and 2018
The following table summarizes our results of operations for the years indicated and is derived from
our consolidated financial statements:
Year Ended December 31,
Change
2019
2018
(Dollars)
(in thousands)
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 101,576
$127,290
$ (25,714)
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,671
33,109
—
6,796
2,107
60,223
17,899
7,117
42,051
693
Interest expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,760
55,264
Loss from continuing operations before income taxes . . . . . . . . . . . .
Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(49,071)
(8,695)
(13,906)
(1,944)
(1,448)
(15,210)
7,117
(35,255)
(1,414)
1,504
(35,165)
(6,751)
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss (income) attributable to noncontrolling interests from
(40,376)
(11,962)
(28,414)
continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,036
(5,506)
11,542
Loss from continuing operations attributable to Sequential Brands
Group, Inc. and Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income taxes . . . .
(34,340)
(125,063)
(17,468)
6,984
(16,872)
(132,047)
Net loss attributable to Sequential Brands Group, Inc. and
Subsidiaries
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(159,403) $ (10,484) $(148,919)
Net Revenue. Net revenue decreased $25.7 million to $101.6 million for the year ended December 31,
2019 compared to $127.3 million for the year ended December 31, 2018. The decrease in net revenue for the
year ended December 31, 2019 compared to the year ended December 31, 2018 is primarily attributable to
revenue earned during the year ended December 31, 2018 for facilitating certain distribution arrangements of
$3.1 million and for Avia sales commission revenue of $2.8 million, as well as the absence of FUL and
Revo revenue due to the sale of the trademarks in 2018. The year-over-year change is also attributable to
decreases driven by certain licensee transitions and a licensee termination for the Jessica Simpson brand, lower
contractual GMRs for the Gaiam brand and reduced sales year-over-year for Ellen Tracy and Joe’s brands.
Operating expenses. Operating expenses increased $1.5 million for the year ended December 31, 2019
to $61.7 million compared to $60.2 million for the year ended December 31, 2018. This increase was primarily
driven by increased bad debt expense of $2.6 million primarily driven by the write-off of an outstanding
receivable balance from TCI, a related party, as TCI could not adhere to its original payment terms and new
extended payment terms have been negotiated, as well as increases in litigation contingencies and claims of
approximately $2.0 million, legal costs of $1.2 million and commissions of $1.0 million. These increases were
offset by the absence of $4.2 million fee incurred in 2018 related to a settlement with a licensee as part of a
strategic shift to a direct to retail license and the absence of third-party fees related to debt refinancing of
$1.1 million incurred in 2018.
Impairment charges. During the year ended December 31, 2019, the Company recorded non-cash
impairment charges of $33.1 million consisting of $28.5 million related to the Jessica Simpson trademark
and $4.6 million related to the Joe’s trademark. During the year ended December 31, 2018, the Company
recorded non-cash impairment charges of $17.9 million for indefinite-lived intangible assets related to the
trademarks of two of the Company’s brands: Ellen Tracy and Caribbean Joe. Fair value for each trademark
29
was determined based on the income approach using estimates of future discounted cash flows. The
impairments arose due to reduced growth expectations and the impact of licensee transitions for these
brands.
Loss on sale of assets. During the year ended December 31, 2018, the Company recorded a loss on
sale of assets of $7.1 million related to the sale of the Revo trademark on April 19, 2018, recognized during
the first quarter of 2018, and the FUL trademark on May 30, 2018, recognized during the second quarter of
2018.
Other expense. Other expense was $2.1 million for the year ended December 31, 2019 compared to
other expense of $0.7 million for the year ended December 31, 2018 primarily due to the loss on our interest
rate swaps.
Interest expense, net.
Interest expense decreased $1.5 million compared to the prior year. Interest
expense, net during the year ended December 31, 2019 includes interest incurred under our loan agreements
of $48.2 million, non-cash interest related to the amortization of deferred financing costs of $5.6 million,
the expensing of $0.8 million of deferred financing costs as a result of a partial extinguishment on the
Revolving and Term loans in accordance with ASC 470 — Debt and non-cash interest income of $0.8 million
related to the accretion of the present value of certain payment arrangements. Interest expense, net during
the year ended December 31, 2018 includes interest incurred under our loan agreements of $50.9 million,
non-cash interest related to the amortization of deferred financing costs of $4.5 million, the expensing of
$0.1 million of deferred financing costs as a result of a partial extinguishment of the Amended BoA Credit
Agreement in accordance with ASC 470 — Debt in connection with the Company’s entry into the
Amended BoA Credit Agreement and non-cash interest income of $0.3 million related to the accretion of
the present value of certain payment arrangements.
Income taxes. The benefit from income taxes in continuing operations for the year ended December 31,
2019 differs from the statutory rate primarily for state, local and foreign jurisdiction taxes offset by tax
provisions attributable to noncontrolling interest and further decreased by non-deductible compensation. The
benefit for income taxes in continuing operations for the year ended December 31, 2018 differs from the
statutory rate primarily for additional tax benefit attributable to noncontrolling interest offset by
non-deductible compensation and an increase in the valuation allowance on state tax attributes.
Noncontrolling interest. Noncontrolling interest for the year ended December 31, 2019 represents net
loss allocations of $6.2 million to With You, Inc., a member of With You LLC (the partnership between us
and Jessica Simpson) and $0.5 million to JALP, LLC, a member of FUL IP Holdings, LLC (“JALP,
LLC”) and a net income allocation of $0.7 million to Elan Polo International, Inc., a member of DVS LLC.
Noncontrolling interest for the year ended December 31, 2018 represents net income allocations of
$5.6 million to With You, Inc., a member of With You LLC (the partnership between us and Jessica
Simpson), $0.6 million to Elan Polo International, Inc., a member of DVS LLC, and a noncontrolling
interest loss allocation of $0.7 million to JALP, LLC.
Discontinued Operations. The Company completed the sale of MSLO during the year ended
December 31, 2019. As a result, we have classified the results of MSLO as discontinued operations in our
consolidated statements of operations for all periods presented. The related assets and liabilities directly
associated with MSLO are classified as discontinued operations in our consolidated balance sheets for all
periods presented. See Note 4 in this Form 10-K for further discussion.
30
Comparison of the Years Ended December 31, 2018 and 2017
The following table summarizes our results of operations for the periods indicated and is derived from
our consolidated financial statements:
Year Ended December 31,
Change
2018
2017
(Dollars)
(in thousands, except percentages)
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$127,290
60,223
$ 124,780
53,752
$
2,510
(6,471)
Impairment charges
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations
. . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,899
7,117
42,051
693
55,264
340,628
322,729
—
(7,117)
(269,600)
1,984
59,000
311,651
1,291
3,736
Loss from continuing operations before income taxes . . . . . . . . . . . .
(13,906)
(330,584)
316,678
Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,944)
(44,423)
42,479
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests from continuing
(11,962)
(286,161)
274,199
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,506)
(4,172)
(1,334)
Loss from continuing operations attributable to Sequential Brands
Group, Inc. and Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of income taxes . . . . . . . . .
(17,468)
6,984
(290,333)
104,615
(272,865)
97,631
Net loss attributable to Sequential Brands Group, Inc. and
Subsidiaries
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (10,484) $(185,718) $(175,234)
Net Revenue. Net revenue increased $2.5 million to $127.3 million for the year ended December 31,
2018 compared to $124.8 million for the year ended December 31, 2017. The increase is primarily driven by
revenue earned for facilitating certain distribution arrangements of $3.1 million and for Avia sales
commission revenue of $2.8 million, offset by decreases in revenue for Avia, Nevados, William Rast, and
Jessica Simpson, and the absence of FUL and Revo revenue due to the sale of the trademarks during the first
half of 2018.
Operating expenses. Operating expenses increased $6.5 million for the year ended December 31, 2018
to $60.2 million compared to $53.7 million for the year ended December 31, 2017. This increase was primarily
driven by increased advertising costs of $5.8 million, increased settlement fees due to a $4.2 million
settlement with a licensee as part of a strategic shift to a direct-to-retail license in the third quarter of 2018,
increased bad debt expense of $1.3 million, third-party fees related to debt refinancing of $1.2 million
expensed in accordance with ASC 470 — Debt, increased consulting fees of $0.7 million, partially offset by
the absence of $6.7 million severance costs in connection with the Company’s former CEO transition.
Impairment charges. During the year ended December 31, 2018, the Company recorded non-cash
impairment charges of $17.9 million for indefinite-lived intangible assets related to the trademarks of two
of the Company’s brands: Ellen Tracy and Caribbean Joe. Fair value for each trademark was determined
based on the income approach using estimates of future discounted cash flows. The impairments arose due to
reduced growth expectations and the impact of licensee transitions for these brands. During the year
ended December 31, 2017, we recorded non-cash impairment charges of $304.1 million related to our
goodwill and $36.5 million for indefinite-lived intangible assets related to the trademarks of five of our
non-core brands: Caribbean Joe, Revo, Franklin Mint, Nevados, and FUL. Fair value for each trademark was
determined based on estimates of future discounted cash flows. The trademark impairments arose due to
reduced contractual minimums or reduced sales forecasts in key distribution channels for these brands. The
goodwill impairment was triggered in the fourth quarter of 2017 by the continued decline of our stock
price and the related decline in our market capitalization. During the fourth quarter of 2017, our stock price
31
and market capitalization declined approximately 41%, consistent with the decline in market capitalization
of similar companies in our sector.
Loss on sale of assets. During the year ended December 31, 2018, the Company recorded a loss on
sale of assets of $7.1 million related to the sale of the Revo trademark on April 19, 2018, recognized during
the first quarter of 2018, and the FUL trademark on May 30, 2018, recognized during the second quarter of
2018.
Other expense. Other expense during the year ended December 31, 2018 consists of immaterial items.
Other expense during the year ended December 31, 2017 consisted of a $1.9 million loss recorded in
connection with the sale of equity securities and other immaterial items.
Interest expense, net.
Interest expense decreased $3.7 million compared to the prior year. Interest
expense, net during the year ended December 31, 2018 includes interest incurred under our loan agreements
of $50.9 million, non-cash interest related to the amortization of deferred financing costs of $4.5 million,
the expensing of $0.1 million of deferred financing costs as a result of a partial extinguishment of the
Amended BoA Credit Agreement in accordance with ASC 470 — Debt in connection with the Company’s
entry into the New Amended BoA Credit Agreement and non-cash interest income of $0.3 million related
to the accretion of the present value of certain payment arrangements. Interest expense, net during the year
ended December 31, 2017 includes interest incurred under our loan agreements of $55.1 million and
non-cash interest related to the amortization of deferred financing costs of $3.9 million.
Income taxes. The benefit for income taxes in continuing operations for the year ended December 31,
2018 differs from the statutory rate primarily for additional tax benefit attributable to noncontrolling interest
offset by non-deductible compensation and an increase in the valuation allowance on state tax attributes.
The benefit from income taxes for the year ended December 31, 2017 primarily represents a tax benefit
recognized due to the decrease in deferred tax liabilities as a result of the reduction in the future corporate tax
rate from 35% to 21% and the release of the valuation allowance recorded against substantially all of the
Company’s deferred tax assets prior to December 31, 2017, offset by the non-tax deductible goodwill
impairment.
Noncontrolling interest. Noncontrolling interest for the year ended December 31, 2018 represents net
income allocations of $5.6 million to With You, Inc., a member of With You LLC (the partnership between
us and Jessica Simpson), $0.6 million to Elan Polo International, Inc., a member of DVS LLC, and a
noncontrolling interest loss allocation of $0.7 million to JALP, LLC, a member of FUL IP Holdings, LLC
(“JALP, LLC”). Noncontrolling interest for the year ended December 31, 2017 represents net income
allocations of $5.8 million to With You, Inc., a member of With You LLC (the partnership between us and
Jessica Simpson), $0.6 million to Elan Polo International, Inc., a member of DVS LLC, and a noncontrolling
interest loss allocation of $2.2 million to JALP, LLC.
Discontinued Operations. The Company completed the sale of MSLO during the year ended
December 31, 2019. As a result, we have classified the results of MSLO as discontinued operations in our
consolidated statements of operations for all periods presented. The related assets and liabilities directly
associated with MSLO are classified as discontinued operations in our consolidated balance sheets for all
periods presented. See Note 4 in this Form 10-K for further discussion.
Liquidity and Capital Resources
Liquidity
As of December 31, 2019, we had cash on hand, including restricted cash, of $8.3 million and a net
working capital balance (defined below) of $11.5 million. Additionally, we had outstanding debt obligations
under our loan agreements of $468.2 million excluding $22.2 million of deferred financing fees. As of
December 31, 2018, we had cash on hand, including restricted cash, of $16.1 million and a net working
capital balance (defined below) of $19.6 million. Additionally, we had outstanding debt obligations under
our loan agreements of $634.9 million excluding $24.1 million of deferred financing fees. Net working capital
is defined as current assets minus current liabilities, excluding restricted cash and discontinued operations.
We currently believe that cash from operations and our currently available cash (including available borrowings
32
under our existing financing arrangements) will be sufficient to satisfy our anticipated working capital
requirements for at least twelve months from the date of filing this Form 10-K. However, because of the
coronavirus outbreak, there is significant uncertainty surrounding the potential impact on our results of
operations and cash flows. We are proactively taking steps to increase available cash on hand including, but
not limited to, targeted reductions in discretionary operating expenses, and utilizing funds available under
our Revolving Credit Facility. We currently believe we will continue to satisfy our covenants in our existing
financing arrangements for at least twelve months from the date of filing this Form 10-K. The beliefs are
based on facts and circumstances existing as of the date of this filing. However, we cannot predict the
extent to which the effects of the coronavirus will impair our ability to continue to satisfy the covenants in
our existing financing arrangements. See Item 1a. Risk Factors for further information. There are no material
capital expenditure commitments as of December 31, 2019.
Cash Flows from Continuing Operations
Cash flows from continuing operations for operating, financing and investing activities for the years
ended December 31, 2019, 2018 and 2017 are summarized in the following table:
Year Ended December 31,
2019
2018
2017
(in thousands)
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
$ (36,914) $ 23,535
(92)
(34,023)
166,186
(176,806)
$ (83,105)
2,940
(28,294)
Net decrease in cash and restricted cash . . . . . . . . . . . . . .
$ (47,534) $(10,580) $(108,459)
Operating Activities
Net cash used in operating activities from continuing operations was $36.9 million for the year ended
December 31, 2019, compared to net cash provided by operating activities from continuing operations of
$23.5 million for the year ended December 31, 2018. The $60.4 million decrease was primarily attributable
to an increase in net loss of $28.4 million, a decrease in non-cash items of $30.3 million driven by deferred
income taxes and a decrease in other liabilities of $15.5 million offset by increases in accounts receivable
of $4.1 million, accounts payable and accrued expenses of $0.9 million, in prepaid expenses and other assets
of $6.6 million, and in deferred revenue of $2.2 million on a year-over-year basis.
Investing Activities
Net cash provided by investing activities was $166.2 million for the year ended December 31, 2019,
compared to net cash used in investing activities of $0.1 million for the year ended December 31, 2018. This
change is driven primarily by the cash proceeds from the sale of MSLO of $165.9 million. During the year
ended December 31, 2017, we sold equity securities for $5.8 million.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2019 amounted to $176.8 million
compared to $34.0 million for the year ended December 31, 2018. During the year ended December 31, 2019,
we made principal repayments of $21.7 million under our loan agreements in accordance with contractual
terms as well as repaid $154 million of principal in connection with the sale of MSLO, paid lender fees of
$4.6 million related to loan amendments and made $5.4 million of distributions to certain noncontrolling
interest partners. During the year ended December 31, 2018, we made principal payments of $28.9 million
under our loan agreements in accordance with contractual terms and $6.7 million of distributions to certain
noncontrolling interest partners. In addition, we received loan proceeds as part of our debt refinancing of
$107.6 million, made prepayments of $88.6 million under the Amended FS/KKR Credit Agreement, and paid
$14.6 million of related lender and third-party fees during the year ended December 31, 2018. During the
year ended December 31, 2017, we made principal payments of $28.3 million under our loan agreements in
33
accordance with contractual terms, $7.4 million of distributions to certain noncontrolling interest partners
and repurchased common stock from employees for tax withholding purposes related to the vesting of
restricted stock of $1.2 million.
Debt
As of December 31, 2019, we were party to the First Amendment to the Third Amended and Restated
First Lien Credit Agreement with Bank of America, N.A. as administrative and collateral agent (the
“Amended BoA Credit Agreement”) and the First Amendment to the Third Amended and Restated Credit
Agreement with Wilmington Trust, National Association as administrative agent and collateral agent (the
“Amended FS/KKR Credit Agreement”), referred to as our loan agreements. Refer to Note 9 of Notes to
Consolidated Financial Statements in this Form 10-K for a discussion of our borrowings and the terms of
these debt facilities. As of December 31, 2019 and 2018, our long-term debt, including current portion,
was $468.2 million and $634.9 million, excluding $22.2 million and $24.1 million of deferred financing fees,
respectively. As of December 31, 2019, we had $15.4 million available under the current revolving credit
facility (the “Revolving Credit Facility”). We may request an increase in (i) the Revolving Credit Facility and
Tranche A Loans as would not cause the consolidated first lien leverage ratio, determined on a pro forma
basis after giving effect to any such increase, to exceed 2.80:1.00 and (ii) the Tranche A-1 Loans, as would not
cause the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect to any
such increase, to exceed (a) with respect to any increase, the proceeds of which will be used solely to finance
an acquisition, 3.00:1.00 and (b) with respect to any other increase, 2.90:1.00, subject to the satisfaction of
certain conditions in the Amended BoA Credit Agreement. We may request one or more additional term loan
facilities or the increase of term loan commitments under the Amended FS/KKR Credit Agreement as
would not cause the consolidated total leverage ratio, determined on a pro forma basis after giving effect to
any such addition and increase, to exceed 6.00:1.00, subject to the satisfaction of certain conditions in the
Amended FS/KKR Credit Agreement. We made $21.7 million of principal repayments under our loan
agreements during the year ended December 31, 2019, in addition to the aforementioned $154.0 million
payment.
Contractual Obligations
Our material contractual obligations as of December 31, 2019 are summarized as follows:
Contractual Obligations
Total
2020
2021
2022
2023
2024
Thereafter
Payments Due by Period
Operating leases . . . . . . . . .
Long-term debt obligations:
$ 87,618
$ 6,807
$ 6,718
$ 6,721
$
6,707
$
6,856
$53,809
(in thousands)
Term Loans . . . . . . . . . .
453,831
12,750
17,750
20,000
111,631
291,700
Revolving Loan . . . . . . . .
14,358
—
—
—
14,358
—
—
—
Total
. . . . . . . . . . . . . . .
$555,807
$19,557
$24,468
$26,721
$132,696
$298,556
$53,809
Future Capital Requirements
We believe cash on hand and cash from operations will be sufficient to meet our capital requirements
for the twelve months following the filing of this Form 10-K. We intend to continue financing future brand
acquisitions through a combination of cash from operations, bank financing and the issuance of additional
equity or debt securities. The extent of our future capital requirements will depend on many factors, including
our results of operations and growth through the acquisition of additional brands, and we cannot be
certain that we will be able to obtain additional financing in sufficient amounts or on acceptable terms in
the near future, if at all.
Off-Balance Sheet Arrangements
At December 31, 2019 and 2018, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose entities,
34
which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As a result, we are not exposed to any financing, liquidity, market
or credit risk that could arise if we had engaged in such relationships.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for a full description of recent accounting
pronouncements including the respective expected dates of adoption and effects on financial conditions and
results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We limit exposure to foreign currency fluctuations by requiring payment under the majority of our
licenses to be denominated in U.S. dollars. One of our licenses is denominated in Canadian dollars. If there
were an adverse change in the exchange rate from Canadian to U.S. dollars of 10%, the expected effect on
net income would be immaterial.
Our earnings may also be affected by changes in LIBOR interest rates as a result of our loan agreements.
As further discussed in Note 9 to our consolidated financial statements, we have entered into interest rate
swaps and interest rate caps to mitigate the effects of a change in LIBOR interest rates. An increase in LIBOR
interest rates of one percent affecting the loan agreements would not have had a material effect on our
results of operations during the years ended December 31, 2019, 2018 and 2017.
Item 8.
Financial Statements and Supplementary Data
The financial statements and supplementary data required to be submitted in response to this Item 8
are set forth after Part IV, Item 15 of this Annual Report on Form 10-K and are incorporated by reference
into this Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and
Interim Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31,
2019, the end of the period covered by this report. Based on, and as of the date of such evaluation, the
Chief Executive Officer and the Interim Chief Financial Officer have concluded that our disclosure controls
and procedures were effective as of December 31, 2019 such that the information required to be disclosed
in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and is accumulated and
communicated to our management, including our principal executive officer and principal financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal
control over financial reporting is a process designed under the supervision of our Chief Executive Officer
and Interim Chief Financial Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for external reporting purposes in accordance
with GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to
35
permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Our management, under the supervision and with the participation of our Chief Executive Officer and
Interim Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting
as of the end of the period covered by this report. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control — Integrated Framework, as issued in 2013. Based on this assessment, our management
concluded that our internal control over financial reporting was effective as of December 31, 2019, based
on those criteria.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the degree of compliance with
policies or procedures may deteriorate. The effectiveness of our internal control over financial reporting as
of December 31, 2019 has been audited by CohnReznick LLP, an independent registered public accounting
firm, as stated in their report provided below.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter
ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sequential Brands Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Sequential Brands Group, Inc. and Subsidiaries’ (the Company’s) internal control
over financial reporting as of December 31, 2019, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control —
Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of
operations, comprehensive (loss) income, changes in equity and cash flows and the financial statement
schedule listed in the index appearing under Item 15(a) of the Company and our report dated March 31,
2020, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ CohnReznick LLP
New York, New York
March 31, 2020
37
Item 9B. Other Information
On March 30, 2020, the Company amended its Third Amended and Restated Credit Agreement (the
“New FS/KKR Credit Agreement”) with Wilmington Trust, National Association, as administrative agent
and collateral agent and the lenders party thereto. Pursuant to the New FS/KKR Credit Agreement, no
mandatory amortization payments are required until September 30, 2020. Thereafter, the loans under the
New FS/KKR Credit Agreement will be subject to quarterly amortization payments of approximately
$2.1 million. The New FS/KKR Credit Agreement modifies the calculation of Consolidated EBITDA (as
defined in the agreement) by permitting additional addbacks. The New FS/KKR Credit Agreement allows for
the netting of up to $5 million in cash of the Company and its subsidiaries for purposes of calculating the
leverage ratio covenants, except for the quarter ended March 31, 2020 which allows for netting of up to
$10 million in cash. If the Consolidated Total Leverage Ratio is not equal to or less than 5:50:1:00 (on a
pro forma basis) on July 31, 2020, Sequential shall amend its organization documents to add one new
independent director acceptable to the lenders under the New FS/KKR Credit Agreement to sit on its Board
of Directors.
38
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be contained under the captions “Directors and Executive
Officers” and “Corporate Governance” in the definitive proxy statement for the annual meeting of
stockholders to be held on June 5, 2020 (the “Proxy Statement”) to be filed with the SEC within 120 days
after December 31, 2019, which information is incorporated herein by reference in response to this item.
Code of Ethics
We have adopted a Code of Ethics applicable to all members of our Board and to all of our employees
and executive officers, including our Chief Executive Officer and Interim Chief Financial Officer. The Code
of Ethics constitutes a “code of ethics” as defined by applicable SEC rules and a “code of conduct” as
defined by applicable Nasdaq rules. Our code of ethics is posted on our website located at
www.sequentialbrandsgroup.com in the section titled “Investor Relations — Corporate Governance.” You
may also request a copy of the Code of Ethics by writing or calling us at:
SEQUENTIAL BRANDS GROUP, INC.
Attn: Investor Relations
601 West 26th Street, Suite 915
New York, New York 10001
Tel.: (646) 564-2577
Any amendment or waiver of the Code of Ethics pertaining to a member of our Board or one of our
executive officers will be disclosed on our website within four business days.
Item 11.
Executive Compensation
The information required by this item will be contained under the caption “Executive Compensation”
in the Proxy Statement, which information is incorporated herein by reference in response to this item.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item will be contained under the caption “Security Ownership of
Certain Beneficial Owners and Management” in the Proxy Statement, which information is incorporated
herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained under the captions “Certain Relationships and
Related Transactions” and “Corporate Governance” in the Proxy Statement, which information is
incorporated herein by reference in response to this item.
Item 14.
Principal Accounting Fees and Services
The information required by this item will be contained under the caption “Principal Accounting Fees
and Services” in the Proxy Statement, which information is incorporated herein by reference in response to
this item.
39
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
1.
Financial Statements.
See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial
statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith
in response to this Item.
2.
Financial Statement Schedules.
Schedule II — Valuation and Qualifying Accounts is required to be filed by Item 8 of the Annual
Report on Form 10-K.
All other schedules are omitted because the information is inapplicable or presented in the Notes
to the Consolidated Financial Statements.
3. Exhibits. See Item 15(b) below.
(b) Exhibits. See Exhibit Index, which is incorporated herein by reference.
(c) Financial Statement Schedule. See Item 15(a) above.
40
Exhibit
Number
3.1
3.2
4.1+
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
EXHIBIT INDEX
Description
Amended and Restated Certificate of Incorporation of Sequential Brands Group, Inc.
Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed as an
8-K12B, on December 4, 2015.
Amended and Restated Bylaws of Sequential Brands Group, Inc., effective as of
December 4, 2015. Incorporated by reference to Exhibit 3.2 to our Current Report on
Form 8-K, filed as an 8-K12B, filed on December 4, 2015.
Description of Common Stock.
Preemptive Rights and Board Nominee Agreement by and between Sequential Brands
Group, Inc. (as successor to SQBG) and Tennman WR-T, Inc. effective as of October 1,
2011. Incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q of
SQBG, Inc. (previously known as Sequential Brands Group, Inc.) (SEC File No. 001-36082)
(“SQBG”) filed on November 21, 2011.
Sequential Brands Group, Inc. 2013 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.1 to our Registration Statement on Form S-8 (Registration No. 333-208343) filed
on December 4, 2015.†
2005 Stock Incentive Plan of People’s Liberation. Incorporated by reference to Exhibit 10.2
to our Registration Statement on Form S-8 (Registration No. 333-208343) filed on
December 4, 2015†
Registration Rights Agreement, dated as of August 15, 2014, by and between SQBG and
Carlyle Equity Opportunity GP, L.P., as the representative of the former stockholders and
optionholders of Galaxy Brand Holdings, Inc. Incorporated by reference to Exhibit 10.1 to
SQBG’s Current Report on Form 8-K filed on August 18, 2014.
Registration Rights Agreement, dated as of June 22, 2015, by and among Sequential Brands
Group, Inc., Martha Stewart, Martha Stewart Family Limited Partnership, Alexis Stewart,
the Martha Stewart 1999 Family Trust, the Martha Stewart 2000 Family Trust and the
Martha and Alexis Stewart Charitable Foundation. Incorporated by reference to
Exhibit 10.2 to our Registration Statement on Form S-4 (File No. 333-205940) filed on
July 30, 2015.
Form of Sequential Brands Group, Inc. 2013 Stock Incentive Compensation
Plan Nonqualified Stock Option Award Agreement and form of related Notice.
Incorporated by reference to Exhibit 10.36 to our Annual Report on Form 10-K filed on
March 14, 2016.†
Form of Sequential Brands Group, Inc. 2013 Stock Incentive Compensation Plan Restricted
Stock Award Agreement and form of related Notice. Incorporated by reference to
Exhibit 10.37 to our Annual Report on Form 10-K filed on March 14, 2016. †
Form of Sequential Brands Group, Inc. 2013 Stock Incentive Compensation
Plan Performance Stock Unit Award Agreement. Incorporated by reference to Exhibit 10.38
to our Annual Report on Form 10-K filed on March 14, 2016.†
Third Amended and Restated Credit Agreement, dated as of July 1, 2016, between
Sequential Brands Group, Inc., certain subsidiaries of Sequential Brands Group, Inc. named
therein, Bank of America, N.A., as administrative agent and collateral agent and the lenders
party thereto. Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 7, 2016.
41
Exhibit
Number
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Description
First Amendment, dated August 7, 2018, to the Third Amended and Restated Credit
Agreement, dated as of July 1, 2016, between Sequential Brands Group, Inc., certain
subsidiaries of Sequential Brands Group, Inc. named therein, Bank of America, N.A., as
administrative agent and collateral agent and the lenders party thereto. Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 8, 2018.
Third Amended and Restated Credit Agreement, dated as of July 1, 2016, between
Sequential Brands Group, Inc., certain subsidiaries of Sequential Brands Group, Inc. named
therein, Wilmington Trust, National Association, as administrative agent and collateral
agent and the lenders party thereto. Incorporated by reference to Exhibit 10.3 to our Current
Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2016.
First Amendment, dated August 7, 2018, to the Third Amended and Restated Credit
Agreement, dated as of July 1, 2016, between Sequential Brands Group, Inc., certain
subsidiaries of Sequential Brands Group, Inc. named therein, Wilmington Trust, National
Association, as administrative agent and collateral agent and the lenders party thereto.
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 8, 2018.
Amendment No. 1, dated as of July 1, 2016, to the Intercreditor Agreement, dated as of
December 4, 2015, between Bank of America, N.A., as administrative agent and collateral
agent and Wilmington Trust, National Association, as administrative agent and collateral
agent, and acknowledged by Sequential Brands Group, Inc. and the guarantors party
thereto. Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 7, 2016.
Equity Purchase Agreement by and between Sequential Brands Group, Inc. as the Seller, and
Marquee Brands LLC, as the Buyer dated as of April 16, 2019. Incorporated by reference to
Exhibit 10.1 to Sequential Brand Group, Inc.’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on August 9, 2019.
Transition agreement between the Company and Ms. Murray, dated October 1, 2019.
Incorporated by reference to Exhibit 10.1 to Sequential Brand Group, Inc.’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on October 7, 2019.
Second Amendment to Third Amended and Restated Credit Agreement, dated as of
June 10, 2019, between Sequential Brands Group, Inc., certain subsidiaries of Sequential
Brands Group, Inc. named therein, Wilmington Trust, National Association, as
administrative agent and collateral agent and the lenders party thereto. Incorporated by
reference to Exhibit 10.1 to Sequential Brand Group, Inc.’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 14, 2019.
Third Amendment to Third Amended and Restated Credit Agreement, dated as of
August 12, 2019, between Sequential Brands Group, Inc., certain subsidiaries of Sequential
Brands Group, Inc. named therein, Wilmington Trust, National Association, as
administrative agent and collateral agent and the lenders party thereto. Incorporated by
reference to Exhibit 10.2 to Sequential Brand Group, Inc.’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 14, 2019.
Second Amendment to Third Amended and Restated Credit Agreement, dated as of
June 10, 2019, between Sequential Brands Group, Inc., certain subsidiaries of Sequential
Brands Group, Inc. named therein, Bank of America, N.A., as administrative agent and
collateral agent and the lenders party thereto. Incorporated by reference to Exhibit 10.1 to
Sequential Brand Group, Inc.’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 2, 2020.
42
Exhibit
Number
10.19
10.20
10.21+
21.1+
23.1+
31.1+
31.2+
32.1+
Description
Third Amendment to Third Amended and Restated Credit Agreement, dated as of
December 30, 2019, between Sequential Brands Group, Inc., certain subsidiaries of
Sequential Brands Group, Inc. named therein, Bank of America, N.A., as administrative
agent and collateral agent and the lenders party thereto. Incorporated by reference to
Exhibit 10.2 to Sequential Brand Group, Inc.’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 2, 2020.
Employment Agreement between Sequential Brands Group, Inc. and David Conn, dated
January 6, 2020. Incorporated by reference to Exhibit 10.1 to Sequential Brand Group, Inc.’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on
January 9, 2020.
Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of
March 30, 2020, between Sequential Brands Group, Inc., certain subsidiaries of Sequential
Brands Group, Inc. named therein, Wilmington Trust, National Association, as
administrative agent and collateral agent and the lenders party thereto.
Subsidiaries of Sequential Brands Group, Inc.
Consent of Independent Registered Public Accounting Firm.
Certification of Principal Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Principal Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101.INS+
XBRL Instance Document
101.SCH+
XBRL Taxonomy Extension Schema Document
101.CAL+
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF+
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB+
XBRL Taxonomy Extension Label Linkbase Document
101.PRE+
XBRL Taxonomy Extension Presentation Linkbase Document
*
†
Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this agreement have been omitted. The
Registrant undertakes to supplementally furnish a copy of the omitted schedules to the Securities
and Exchange Commission upon request.
Each a management contract or compensatory plan or arrangement required to be filed as an exhibit
to this Annual Report on Form 10-K.
+ Filed herewith.
Item 16.
Form 10-K Summary
None.
43
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SIGNATURES
SEQUENTIAL BRANDS GROUP, INC.
Date: March 31, 2020
By:
/s/ David Conn
David Conn
Title: Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ David Conn
David Conn
/s/ Daniel Hanbridge
Daniel Hanbridge
/s/ William Sweedler
William Sweedler
/s/ Rodney Cohen
Rodney Cohen
/s/ Al Gossett
Al Gossett
/s/ Aaron Hollander
Aaron Hollander
/s/ Gary Johnson
Gary Johnson
/s/ Stewart Leonard, Jr.
Stewart Leonard, Jr.
/s/ Martha Stewart
Martha Stewart
Chief Executive Officer, Director
(Principal Executive Officer)
March 31, 2020
Senior Vice President and Interim Chief
Financial Officer
(Principal Financial and Accounting
Officer)
March 31, 2020
Chairman of the Board of Directors
March 31, 2020
March 31, 2020
March 31, 2020
March 31, 2020
March 31, 2020
March 31, 2020
March 31, 2020
Director
Director
Director
Director
Director
Director
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 2019 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017 . . . F-4
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019, 2018
and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2019, 2018 and
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sequential Brands Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sequential Brands Group, Inc. and
Subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements
of operations, comprehensive loss, changes in equity, and cash flows for each of the years in the three-year
period ended December 31, 2019, and the related notes and the financial statement schedule listed in the
index appearing under Item 15(a) (collectively referred to as the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2019, and 2018, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 31, 2020, expressed an unqualified opinion.
Change in Accounting Principle
As discussed in Notes 2 and 11 to the consolidated financial statements, the Company has changed its
method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards
Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our opinion.
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2013.
New York, New York
March 31, 2020
F-2
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Current Assets:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-of-use assets – operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term assets from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets
Current Liabilities:
Liabilities and Equity
Total current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of lease liabilities – operating leases . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred revenue, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liabilities – operating leases, net of current portion . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities
December 31,
2019
2018
$
6,264
2,043
39,452
4,228
6,839
58,826
5,349
599,967
50,320
8,782
—
$ 723,244
$ 15,721
12,750
6,977
3,035
1,959
40,442
433,250
4,604
14,351
54,168
3,389
—
550,204
$
14,106
2,032
49,600
3,981
23,845
93,564
8,391
634,827
—
11,222
330,664
$1,078,668
$
11,600
28,300
8,172
—
15,450
63,522
582,487
8,224
67,002
—
9,160
3,629
734,024
Commitments and contingencies
Equity:
Preferred stock Series A, $0.01 par value; 10,000,000 shares authorized; none issued and
outstanding at December 31, 2019 and December 31, 2018 . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $0.01 par value; 150,000,000 shares authorized; 66,877,494 and
65,990,179 shares issued at December 31, 2019 and December 31, 2018, respectively, and
65,780,738 and 64,327,582 shares outstanding at December 31, 2019 and December 31,
2018, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit
Treasury stock, at cost; 1,096,756 and 1,662,597 shares at December 31, 2019 and
672
514,496
(4,096)
(394,126)
657
513,764
(1,554)
(234,723)
December 31, 2018, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Sequential Brands Group, Inc. and Subsidiaries stockholders’ equity . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,230)
113,716
59,324
173,040
$ 723,244
(4,226)
273,918
70,726
344,644
$1,078,668
See Notes to Consolidated Financial Statements.
F-3
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations before income taxes . . . . . . .
Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations
Net loss (income) attributable to noncontrolling interests from
. . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
$
2019
101,576
61,671
33,109
—
6,796
2,107
53,760
(49,071)
(8,695)
(40,376)
$
2018
127,290
60,223
17,899
7,117
42,051
693
55,264
(13,906)
(1,944)
(11,962)
2017
124,780
53,752
340,628
—
(269,600)
1,984
59,000
(330,584)
(44,423)
(286,161)
continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,036
(5,506)
(4,172)
Loss from continuing operations attributable to Sequential
Brands Group, Inc. and Subsidiaries . . . . . . . . . . . . . . . . .
(34,340)
(17,468)
(290,333)
(Loss) income from discontinued operations, net of income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(125,063)
6,984
104,615
Net loss attributable to Sequential Brands Group, Inc. and
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (159,403) $
(10,484) $ (185,718)
Continuing Operations:
Loss per share – basic and diluted . . . . . . . . . . . . . . . . . . .
Discontinued Operations:
(Loss) earnings per share – basic . . . . . . . . . . . . . . . . . . . .
(Loss) earnings per share – diluted . . . . . . . . . . . . . . . . . .
Loss per share attributable to Sequential Brands Group, Inc.
and Subsidiaries:
$
$
(0.53) $
(0.27) $
(4.62)
(1.93) $
(1.93)
$
0.11
0.11
1.66
1.66
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(2.46) $
(0.16) $
(2.95)
Weighted-average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,760,823
63,700,081
62,861,743
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,760,823
64,992,059
63,093,437
See Notes to Consolidated Financial Statements.
F-4
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2019
2018
2017
Net loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
$ (40,376) $(11,962) $(286,161)
Other comprehensive (loss) income:
Unrealized (loss) gain on interest rate caps . . . . . . . . . . . . . . . . . . . .
Unrealized loss on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . .
—
(5,628)
(5,628)
(80)
(1,554)
(1,634)
224
—
224
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(46,004)
(13,596)
(285,937)
Comprehensive loss (income) from continuing operations attributable
to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,036
(5,506)
(4,172)
Comprehensive loss from continuing operations attributable to
Sequential Brands Group, Inc. and Subsidiaries . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income taxes . . . .
(39,968)
(125,063)
(19,102)
6,984
(290,109)
104,615
Comprehensive loss attributable to Sequential Brands Group, Inc. and
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(165,031) $(12,118) $(185,494)
See Notes to Consolidated Financial Statements.
F-5
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SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2019
Year Ended December 31,
2018
(Note 2)
2017
$ (40,376) $(11,962) $(286,161)
104,615
6,984
(125,063)
Cash flows from operating activities
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of tax . . . . . . . . . . .
Adjustments to reconcile loss from continuing operations to net cash
provided by operating activities:
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (income) from equity method investment . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on interest rate swaps
Loss on disposal of property and equipment . . . . . . . . . . . . . . . . .
Realized loss on equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities
Cash (used in) provided by operating activities from continuing
4,123
4,923
1,871
—
6,381
33,109
123
78
1,029
70
—
6,261
—
(52,651)
6,025
1,534
3,092
(4,815)
(7,691)
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by operating activities from discontinued operations .
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .
(36,914)
40,321
3,407
Cash flows from investing activities
Investments in intangible assets, including registration and renewal
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of trademarks . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equity securities
. . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of discontinued operations . . . . . . . . . . . . . . . .
Cash provided by (used in) investing activities from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in investing activities from discontinued operations . . . . .
Cash provided by (used in) investing activities . . . . . . . . . . . . . . . .
(136)
(64)
—
458
165,928
166,186
(44)
166,142
See Notes to Consolidated Financial Statements.
F-7
1,546
2,738
2,911
148
4,481
17,899
—
(61)
—
131
—
—
7,117
(1,260)
1,884
(5,041)
2,135
(6,967)
7,836
23,535
9,365
32,900
(239)
(4,209)
4,356
—
—
(92)
(80)
(172)
484
2,236
5,911
—
3,862
340,628
—
(22)
—
—
1,916
—
—
(132,669)
(12,800)
(3,541)
(1,256)
(2,676)
983
(83,105)
111,315
28,210
(298)
(3,019)
500
5,757
—
2,940
(77)
2,863
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
2019
Year Ended December 31,
2018
(Note 2)
2017
Cash flows from financing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term debt
Stock registration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed payments in connection with acquisitions . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest distributions . . . . . . . . . . . . . . . . . . . . . .
Cash used in financing activities from continuing operations . . . . . .
Cash used in financing activities from discontinued operations
. . . .
Cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in cash and restricted cash . . . . . . . . . . . . . . . . . . .
Balance – Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance – End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciliation to amounts on consolidated balance sheets
107,607
9,000
—
—
(117,456)
(175,661)
(475)
—
(14,590)
(4,507)
(2,427)
(272)
(6,682)
(5,366)
(34,023)
(176,806)
(3,000)
(574)
(37,023)
(177,380)
(4,295)
(7,831)
16,138
20,433
8,307 $ 16,138
$
10,000
(20)
(28,300)
(1,375)
—
(1,161)
(7,438)
(28,294)
(3,000)
(31,294)
(221)
20,654
$ 20,433
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
6,264 $ 14,106
2,032
2,043
$ 18,902
1,531
8,307 $ 16,138
$ 20,433
Supplemental disclosures of cash flow information
Cash paid for:
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash investing and financing activities
$ 52,747 $ 58,681
90
$
1,102 $
$ 55,755
163
$
Accrued purchases of property and equipment at year end . . . . . . .
Unrealized gain on equity securities during the year . . . . . . . . . . . .
$
$
— $
— $
18
1,554
$
$
Unrealized (loss) gain on interest rate cap, net during the year . . . . .
Unrealized loss on interest rate swaps, net during the year . . . . . . . .
— $
$
$ (2,542) $
$
(80)
— $
152
—
224
—
See Notes to Consolidated Financial Statements.
F-8
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS
Overview
Sequential Brands Group, Inc. (the “Company”) owns a portfolio of consumer brands in the active
and lifestyle categories. The Company aims to maximize the strategic value of its brands by promoting,
marketing and licensing its global brands through various distribution channels, including to retailers,
wholesalers and distributors in the United States and in certain international territories. The Company’s core
strategy is to enhance and monetize the global reach of its existing brands, and to pursue additional
strategic acquisitions to grow the scope of and diversify its portfolio of brands. The Company licenses
brands to both wholesale and direct-to-retail licensees. In a wholesale license, a wholesale supplier is granted
rights (typically on an exclusive basis) to a single or small group of related product categories for a particular
brand for sale to multiple accounts within an approved channel of distribution and territory. In a
direct-to-retail license, a single retailer is granted the right (typically on an exclusive basis) to sell branded
products in a broad range of product categories through its brick and mortar stores and e-commerce sites. As
of December 31, 2019, the Company had approximately one hundred licensees, with wholesale licensees
comprising a significant majority.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassification of Prior Year Presentation
On June 10, 2019, the Company completed the sale of Martha Stewart Living Omnimedia, Inc.
(“MSLO”), a Delaware corporation and a wholly-owned subsidiary of the Company, for $166 million in
cash consideration, plus additional amounts in respect of pre-closing accounts receivable that are received
after the closing, subject to certain adjustments, pursuant to an equity purchase agreement (the “Purchase
Agreement”) with Marquee Brands LLC (the “Buyer”) entered into on April 16, 2019. In addition, the
Purchase Agreement provides for an earnout of up to $40,000,000 payable to the Company if certain
performance targets are achieved during the three calendar years ending December 31, 2020, December 31,
2021 and December 31, 2022. MSLO and its subsidiaries were engaged in the business of promoting,
marketing and licensing the Martha Stewart and the Emeril Lagasse brands through various distribution
channels.
Due to the sale of MSLO during the second quarter of 2019 (see Note 4), in accordance with Accounting
Standards Codification (“ASC”) 205, Discontinued Operations, we have classified the results of MSLO as
discontinued operations in our consolidated statements of operations and cash flows for all periods presented.
Additionally, the related assets and liabilities directly associated with MSLO are classified as held for
disposition from discontinued operations in our consolidated balance sheets for all periods presented. All
amounts included in the notes to the consolidated financial statements relate to continuing operations unless
otherwise noted.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries. All significant inter-company accounts and transactions
have been eliminated in the consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
F-9
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting periods.
Making estimates requires management to exercise significant judgment. It is at least reasonably
possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the
date of the consolidated financial statements, which management considered in formulating its estimate,
could change in the near term due to one or more future confirming events. Accordingly, actual results could
differ significantly from estimates.
Discontinued Operations
The Company accounted for the sale of MSLO in accordance with ASC 360, Accounting for Impairment
or Disposal of Long-Lived Assets (“ASC 360”) and Accounting Standard Update (“ASU”) No. 2014-08,
Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity
(“ASU 2014-08”). The Company followed the held-for-sale criteria as defined in ASC 360. ASC 360
requires that a component of an entity that has been disposed of or is classified as held for sale and has
operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets
held for sale and discontinued operations. In the period a component of an entity has been disposed of or
classified as held for sale, the results of operations for the periods presented are reclassified into separate
line items in the statements of operations. Assets and liabilities are also reclassified into separate line items
on the related balance sheets for the periods presented. The statements of cash flows for the periods presented
are also reclassified to reflect the results of discontinued operations as separate line items. ASU 2014-08
requires that only a disposal of a component of an entity, or a group of components of an entity, that
represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and
financial results be reported in the financial statements as discontinued operations. ASU 2014-08 also provides
guidance on the financial statement presentations and disclosures of discontinued operations.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers
(“ASC 606”), which became effective for the Company as of January 1, 2018 (see Note 5 for impact of
adoption and other related disclosures). ASC 606 requires a five-step approach to determine the appropriate
method of revenue recognition for each contractual arrangement:
Step 1: Identify the Contract(s) with a Customer
Step 2: Identify the Performance Obligation(s) in the Contract
Step 3: Determine the Transaction Price
Step 4: Allocate the Transaction Price to the Performance Obligation(s) in the Contract
Step 5: Recognize Revenue when (or as) the Entity Satisfies a Performance Obligation
The Company has entered into various license agreements for its owned trademarks. Under ASC 606,
the Company’s agreements are generally considered symbolic licenses, which contain the characteristics of a
right-to-access license since the customer is simultaneously receiving the intellectual property (“IP”) and
benefiting from it throughout the license period. The Company assesses each license agreement at inception
and determines the performance obligation(s) and appropriate revenue recognition method. As part of
this process, the Company applies judgments based on historical trends when estimating future revenues
and the period over which to recognize revenue.
F-10
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
The Company generally recognizes revenue for license agreements under the following methods:
1. Licenses with guaranteed minimum royalties (“GMRs”): Generally, guaranteed minimum royalty
payments (fixed revenue) comprising the transaction price are recognized on a straight-line basis
over the term of the contract, as defined in each license agreement.
2. Licenses with both GMRs (fixed revenue) and earned royalties (variable revenue): Earned
royalties in excess of fixed revenue are only recognized when the Company is reasonably certain
that the guaranteed minimum payments for the period, as defined in each license agreement, will be
exceeded. Additionally, the Company has categorized certain contracts as variable when there is
a history and future expectation of exceeding GMRs. The Company recognizes income for these
contracts during the period corresponding to the licensee’s sales.
3. Licenses that are sales-based only or earned royalties: Earned royalties (variable revenue) are
recognized as income during the period corresponding to the licensee’s sales.
Payments received as consideration for the grant of a license or advanced royalty payments are
recorded as deferred revenue at the time payment is received and recognized into revenue under the methods
described above.
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the
consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the
current portion of deferred revenue on the consolidated balance sheets.
The Company disaggregates its revenue into two categories: licensing agreements and other, which is
comprised of revenue from sources such as sales commissions and vendor placement commissions.
Commission revenues and vendor placement commission revenues are recorded in the period the
commission is earned.
Restricted Cash
Restricted cash at December 31, 2019 consists of cash deposited with a financial institution required as
collateral for the Company’s cash-collateralized letter of credit facilities.
Accounts Receivable
Accounts receivable are recorded net of allowances for doubtful accounts, based on the Company’s
ongoing discussions with its licensees and other customers and its evaluation of their creditworthiness,
payment history and account aging. Accounts receivable balances deemed to be uncollectible are charged to
the allowance for doubtful accounts after all means of collection have been exhausted and the potential
for recovery is considered remote. The allowance for doubtful accounts was $5.8 million and $1.8 million at
December 31, 2019 and 2018, respectively.
On June 10, 2019, the Company completed the sale of MSLO. As a result, accounts receivable, net,
decreased $16.6 million which was recorded within current assets from discontinued operations as of
December 31, 2018.
The Company’s accounts receivable, net amounted to $39.5 million and $49.6 million as of December 31,
2019 and 2018, respectively. Two licensees accounted for approximately 51% (33% and 18%) of the Company’s
total consolidated accounts receivable, net balance as of December 31, 2019 and two licensees accounted
for approximately 41% (25% and 16%) of the Company’s total consolidated accounts receivable, net balance
as of December 31, 2018. The Company does not believe the accounts receivable balances from these
licensees represents a significant collection risk based on past collection experience.
F-11
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Investments
The Company accounts for equity securities under ASC 321, Investments — Equity Securities
(“ASC 321”). Such securities are reported at fair value in the consolidated balance sheets and, at the time of
purchase, are reported in the consolidated statements of cash flows as an investing activity. Gains and
losses on equity securities are recognized through net loss. The Company recognized a loss on its equity
securities for $0.1 million and $0.9 million recorded in other expense on the consolidated statements of
operations for the years ended December 31, 2019 and 2018, respectively.
Prior to adoption of ASC 321 in 2018, the Company accounted for its equity securities under ASC 320,
Investments — Debt and Equity Securities. During the second quarter of 2017, the Company sold equity
securities for $5.8 million. The book cost basis of the equity securities was approximately $7.7 million, which
was determined using the specific identification method. The sale resulted in a net realized loss of
$1.9 million, which is recorded in other expense in the consolidated statement of operations for the year
ended December 31, 2017. The Company did not hold these equity securities as of December 31, 2017.
Equity Method Investment
For investments in entities over which the Company exercises significant influence but which do not
meet the requirements for consolidation, the Company uses the equity method of accounting. On July 1,
2016, the Company acquired a 49.9% noncontrolling interest in Gaiam Pty. Ltd. in connection with its
acquisition of Gaiam Brand Holdco, LLC. The value of the Company’s equity method investment was
$0.6 million and $0.7 million as of December 31, 2019 and 2018, respectively, and is included in other assets in
the consolidated balance sheets. The Company’s share of earnings from its equity method investee, which
was not material for the years ended December 31, 2019, 2018 and 2017, is included in other expense in the
consolidated statements of operations.
The Company evaluates its equity method investment for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such investment may not be recoverable. The difference
between the carrying value of the equity method investment and its estimated fair value is recognized as
an impairment charge when the loss in value is deemed other-than-temporary.
Goodwill and Intangible Assets
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. The Company does not have any
goodwill reported on its consolidated balance sheets at December 31, 2019 or 2018.
On an annual basis and as needed, the Company tests goodwill and indefinite lived trademarks for
impairment through the use of discounted cash flow models. Assumptions used in our discounted cash flow
models are as follows: (i) discount rates; (ii) projected annual revenue growth rates; and (iii) projected
long-term growth rates. Our estimates also factor in economic conditions and expectations of management,
which may change in the future based on period-specific facts and circumstances. Other intangibles with
determinable lives, including certain trademarks, customer agreements, patents and a favorable lease, are
evaluated for the possibility of impairment when certain indicators are present, and are otherwise amortized
on a straight-line basis over the estimated useful lives of the assets (currently ranging from 2 to 15 years).
On June 10, 2019, the Company completed the sale of MSLO. As a result, indefinite-lived intangible
assets decreased by $330.1 million which was recorded within assets from discontinued operations as of
December 31, 2018. During the first quarter of 2019, the Company recorded non-cash impairment charges
of $161.2 million for indefinite-lived intangible assets related to the Martha Stewart and Emeril Lagasse
trademarks. The impairments arose as a result of the sale process for the Martha Stewart and Emeril
Lagasse brands (as discussed in Note 4) due to the difference in the fair value as indicated by the sales price
as compared to the carrying values of the intangible assets included in the transaction. The sale of the Martha
F-12
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Stewart and Emeril Lagasse brands was approved by the Board of Directors on April 15, 2019, to allow the
Company to achieve one of its top priorities in significantly reducing its debt. Going forward the
Company’s strategy is to focus on higher margin brands that are well suited for growing health, wellness and
beauty categories. These charges are included in discontinued operations in the consolidated statements of
operations.
During the year ended December 31, 2019, the Company recorded non-cash impairment charges of
$33.1 million consisting of $28.5 million related to the Jessica Simpson trademark and $4.6 million related
to the Joe’s trademark. During the year ended December 31, 2018, the Company recorded non-cash
impairment charges of $17.9 million for indefinite-lived intangible assets related to the trademarks of two
of the Company’s non-core brands: Ellen Tracy and Caribbean Joe. The impairments arose due to reduced
growth expectations and the impact of licensee transitions for these brands. Fair value for each trademark was
determined based on the income approach using estimates of future discounted cash flows.
Due to the identification of impairment indicators during the quarter ended September 30, 2017, the
Company performed impairment testing of its goodwill and indefinite-lived assets at September 30, 2017,
which replaced its October 1st annual test. As a result of its testing, the Company recorded a non-cash
impairment charge of $36.5 million relating to its indefinite-lived intangible assets during the quarter ended
September 30, 2017.
Due to the identification of impairment indicators during the quarter ended December 31, 2017, the
Company performed impairment testing of its goodwill and indefinite-lived assets at December 31, 2017.
As a result of its testing, the Company recorded a non-cash goodwill impairment charge of $304.1 million
during the quarter ended December 31, 2017. See Notes 3, 7 and 8 for further details.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization.
Maintenance and repairs are charged to expense as incurred. Upon retirement or other disposition of
property and equipment, applicable cost and accumulated depreciation and amortization are removed from
the accounts and any gains or losses are included in results of operations.
Depreciation and amortization of property and equipment is computed using the straight-line method
based on estimated useful lives of the assets as follows:
Furniture and fixtures
Computer hardware/equipment
Leasehold improvements
Computer software
Automobiles and trucks
Websites
Deferred Financing Costs
5 years
5 to 7 years
Term of the lease or the estimated life of the related
improvements, whichever is shorter.
5 years
5 years
3 years
Deferred financing costs represent lender fees, legal and other third-party costs incurred in connection
with issuing debt securities or obtaining debt or other credit arrangements. Deferred financing costs are
recorded as a deduction of the carrying value of debt and are amortized as interest expense, using the effective
interest method, over the term of the related debt. Debt discounts are amortized to interest expense over
the term of the related debt.
Treasury Stock
Treasury stock is recorded at cost as a reduction of equity in the consolidated balance sheets.
F-13
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Preferred Stock
Preferred stock subject to mandatory redemption (if any) is classified as a liability instrument and is
measured at fair value. The Company classifies conditionally redeemable preferred stock (if any), which
includes preferred stock that features redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as
temporary equity. At all other times, the Company classifies preferred stock as a component of equity.
The Company’s preferred stock does not feature any redemption rights within the holders’ control or
conditional redemption features not solely within its control as of December 31, 2019 and 2018. Accordingly,
all issuances of preferred stock are presented as a component of equity. The Company did not have any
preferred stock outstanding as of December 31, 2019 and 2018.
Common Stock Purchase Warrants and Derivative Financial Instruments
The Company classifies as equity any contracts that (i) require physical settlement or net-share
settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical
settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that
(i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and
if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement
or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of
its common stock purchase warrants and other freestanding derivatives, if any, at each reporting date to
determine whether a change in classification between assets and liabilities is required. The Company
determined that its outstanding common stock purchase warrants satisfied the criteria for classification as
equity instruments at December 31, 2019 and 2018.
Advertising
Advertising costs related to media ads are charged to expense as of the first date the advertisements
take place. Advertising costs related to campaign ads, such as production and talent, are expensed over the
term of the related advertising campaign. Advertising expenses included in operating expenses from continuing
operations approximated $12.0 million, $11.1 million and $5.3 million for the years ended December 31,
2019, 2018 and 2017, respectively. As of December 31, 2019 and 2018, the Company had no capitalized
advertising costs recorded on the consolidated balance sheets.
Stock-Based Compensation
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 and restricted stock units, for
which restrictions lapse with the passage of time (“time-based restricted stock”), compensation cost is
recognized on a straight-line basis over the period between the issue date and the date that restrictions lapse.
Time-based restricted stock is included in total shares of common stock outstanding upon the lapse of
applicable restrictions. For restricted stock, for which restrictions are based on performance measures
(“performance stock units” or “PSUs”), restrictions lapse when those performance measures have been
deemed achieved. Compensation cost for PSUs is recognized on a straight-line basis during the period from
the date on which the likelihood of the PSUs being earned is deemed probable and (x) the end of the fiscal
year during which such PSUs are expected to vest or (y) the date on which awards of such PSUs may be
approved by the compensation committee of the Company’s board of directors (the “Compensation
Committee”) on a discretionary basis, as applicable. PSUs are included in total shares of common stock
outstanding upon the lapse of applicable restrictions. PSUs are included in total diluted shares of common
stock outstanding when the performance measures have been deemed achieved but the PSUs have not yet
been issued.
F-14
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Fair value for stock options and warrants is calculated using the Black-Scholes valuation model and is
expensed on a straight-line basis over the requisite service period of the grant. Compensation cost is reduced
for forfeitures as they occur in accordance with ASU 2016-09, Simplifying the Accounting for Share-Based
Payments (“ASU 2016-09”).
The Company adopted ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-07”) as of January 1, 2019 on a modified retrospective basis. In accordance with
ASU 2018-07, the Company recognizes compensation cost for grants to non-employees on a straight-line
basis over the period of the grant. Prior periods have not been restated and were accounted for under the
previous method where at each reporting period prior to the lapse of restrictions on warrants, time-based
restricted stock and PSUs granted to non-employees, the Company remeasured the aggregate compensation
cost of such grants using the Company’s fair value at the end of such reporting period and revised the
straight-line recognition of compensation cost in line with such remeasured amount.
Leases
The Company has operating leases for certain properties for its offices and showrooms and for copiers.
The Company adopted ASU No. 2016-02, Leases (“ASU 2016-02” or “ASC 842”) as of January 1, 2019 using
the modified retrospective method as of the period of adoption. The Company elected the package of
practical expedients upon transition where the Company did not reassess the lease classification and initial
direct costs for leases that existed prior to adoption. Additionally, the Company did not reassess contracts
entered into prior to adoption to determine whether the arrangement was or contained a lease. In
accordance with ASU 2016-02, for leases over twelve months the Company records a right-of-use asset and
a lease liability representing the present value of future lease payments. Rent expense is recognized on a
straight-line basis over the term of the lease. The Company will test its right-of-use (“ROU”) assets for
impairment in accordance with ASC 360. See Note 11 for further information.
Income Taxes
Current income taxes are based on the respective periods’ taxable income for federal, foreign and state
income tax reporting purposes. Deferred tax liabilities and assets are determined based on the difference
between the financial statement and income tax bases of assets and liabilities, using statutory tax rates in effect
for the year in which the differences are expected to reverse. In accordance with ASU No. 2015-17, Balance
Sheet Classification of Deferred Taxes, all deferred income taxes are reported and classified as non-current. A
valuation allowance is required if, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The Company applies the FASB guidance on accounting for uncertainty in income taxes. The guidance
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in
accordance with other authoritative GAAP and prescribes a recognition threshold and measurement process
for financial statement recognition and measurement of a tax position taken or expected to be taken in a
tax return. The guidance also addresses derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. During the years ended December 31, 2019 and 2018, the Company
did not have any reserves or interest and penalties to record through current income tax expense in
accordance with ASC 740, Income Taxes (“ASC 740”). Interest and penalties related to uncertain tax
positions, if any, are recorded in income tax expense. Tax years that remain open for assessment for federal
and state tax purposes include the years ended December 31, 2016 through December 31, 2019.
Earnings Per Share
Basic loss per share (“EPS”) attributable to Sequential Brands Group, Inc. and Subsidiaries is computed
by dividing net loss attributable to Sequential Brands Group, Inc. and Subsidiaries by the weighted-average
number of common shares outstanding during the reporting period, excluding the effects of any potentially
F-15
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
dilutive securities. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the
reporting period, including stock options, PSUs and warrants, using the treasury stock method, and
convertible debt, using the if-converted method. Diluted EPS excludes all potentially dilutive shares of
common stock if their effect is anti-dilutive. In periods when there is a net loss, diluted loss per share is equal
to basic loss per share, since the effect of including any common stock equivalents would be anti-dilutive.
Basic weighted-average common shares outstanding is equivalent to diluted weighted-average common shares
outstanding for the years ended December 31, 2019, 2018 and 2017 for the calculation of basic loss per
share attributable to Sequential Brands Group, Inc. and Subsidiaries.
The computation of diluted EPS attributable to Sequential Brands Group, Inc. and Subsidiaries for
the years ended December 31, 2019, 2018 and 2017 excludes the common stock equivalents of the following
potentially dilutive securities because their inclusion would be anti-dilutive:
Year Ended December 31,
2019
2018
2017
Unvested restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance based restricted stock . . . . . . . . . . . . . . . . . . . . .
475,387
—
1,233,703
58,275
166,607
65,087
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
475,387
1,291,978
231,694
The weighted-average common shares outstanding used to calculate diluted EPS from discontinued
operations for the years ended December 31, 2019, 2018 and 2017 are 64,760,823, 64,992,059 and 63,093,437,
respectively.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk consist primarily of cash,
restricted cash, accounts receivable and equity securities. Cash is held to meet working capital needs and
future acquisitions. Restricted cash is pledged as collateral for a comparable amount of irrevocable standby
letters of credit for certain of the Company’s leased properties. Substantially all of the Company’s cash,
restricted cash and equity securities are deposited with high quality financial institutions. At times, however,
such cash, restricted cash and equity securities may be in deposit accounts that exceed the Federal Deposit
Insurance Corporation insurance limit. The Company has not experienced any losses in such accounts as of
December 31, 2019.
Concentration of credit risk with respect to accounts receivable is minimal due to the collection history
and the nature of the Company’s revenue arrangements. The Company performs periodic credit evaluations
of its customers’ financial condition. The allowance for doubtful accounts is based upon the expected
collectability of all accounts receivable.
Customer Concentrations
The Company recorded net revenues from continuing operations of $101.6 million, $127.3 million and
$124.8 million during the years ended December 31, 2019, 2018 and 2017, respectively. During the year ended
December 31, 2019, three licensees represented at least 10% of net revenue, accounting for 19%, 16% and
14% of the Company’s net revenue from continuing operations. During the year ended December 31, 2018,
three licensees represented at least 10% of net revenue, each accounting for 18%, 12% and 11% of the
Company’s net revenue from continuing operations. During the year ended December 31, 2017, three licensees
represented at least 10% of net revenue, accounting for 15%, 14% and 14% of the Company’s net revenue
from continuing operations.
Loss Contingencies
The Company recognizes contingent losses that are both probable and estimable. In this context,
probable means circumstances under which events are likely to occur. The Company records legal costs
pertaining to contingencies as incurred.
F-16
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Noncontrolling Interests
Noncontrolling interest recorded for the year ended December 31, 2019 represents an income allocation
to Elan Polo International, Inc., a member of DVS Footwear International, LLC (“DVS LLC”) and loss
allocations to With You, Inc., a member of With You LLC (the partnership between the Company and Jessica
Simpson) and JALP, LLC (“JALP”), a member of FUL IP Holdings, LLC (“FUL IP”). Noncontrolling
interest recorded for the years ended December 31, 2018 and 2017 represents income allocations to DVS LLC,
With You, Inc. and loss allocations to JALP. The following table sets forth the noncontrolling interest for
the years ended December 31, 2019, 2018 and 2017:
Year Ended December 31,
2019
2018
2017
(in thousands)
With You LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(6,230) $5,607
$ 5,816
DVS LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FUL IP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
659
(465)
614
(715)
581
(2,225)
Net (loss) income attributable to noncontrolling interests . . . . . .
$(6,036) $5,506
$ 4,172
The following table sets forth the noncontrolling interest as of December 31, 2019 and 2018:
DVS LLC
FUL IP With You LLC
Total
(in thousands)
Balance at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to noncontrolling interests
. . .
Impact of adoption of ASC 606 . . . . . . . . . . . . . . . . . . . . .
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .
. . .
Net income (loss) attributable to noncontrolling interests
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . .
$2,668
614
—
(581)
2,701
659
(614)
$2,746
$2,186
(715)
—
(975)
496
(465)
—
31
$
$66,693
5,607
355
(5,126)
67,529
(6,230)
(4,752)
$56,547
$71,547
5,506
355
(6,682)
70,726
(6,036)
(5,366)
$59,324
During the year ended December 31, 2019, the Company wrote-off a receivable related to the previous
sale of the FUL trademark. During the year ended December 31, 2018, the Company recorded a loss on
sale of assets of $2.0 million related to the sale of the FUL trademark.
Reportable Segment
An operating segment, in part, is a component of an enterprise whose operating results are regularly
reviewed by the chief operating decision maker (the “CODM”) to make decisions about resources to be
allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited
extent. The Company’s CODM, the Chief Executive Officer, reviews financial information presented on a
consolidated basis, accompanied by disaggregated information about revenues for purposes of making
operating decisions and assessing financial performance. Accordingly, the Company has determined that it
has a single operating and reportable segment. In addition, the Company has no foreign operations or any
assets in foreign locations. The majority of the Company’s operations consist of a single revenue stream,
which is the licensing of its trademark portfolio, with additional revenues derived from certain commissions.
F-17
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Recently Issued Accounting Standards
ASU No. 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes
(Topic 740) (“ASU 2019-12”), which simplifies the accounting for income taxes by eliminating certain
exceptions to the guidance in ASC 740 related to intraperiod tax allocations, the methodology for calculating
income taxes in an interim period and the recognition of deferred tax liabilities related to outside basis
differences. The standard also simplifies GAAP for other areas of ASC 740 by clarifying and amending
existing guidance related to accounting for franchise taxes and accounting for transactions that result in a
step-up in the tax basis of goodwill.
ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020, and early
adoption is permitted. The Company does not expect the adoption of ASU 2019-12 to have a material impact
on the Company’s consolidated financial statements.
ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808
and Topic 606”
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808):
Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”). ASU 2018-18 amends
ASC 808, Collaborative Arrangements (“ASC 808”) and ASC 606, Revenue from Contracts with Customers
(“ASC 606”) to clarify that certain transactions between participants in a collaborative arrangement should
be accounted for under ASC 606 when the counterparty is a customer.
ASU 2018-18 is effective for annual and interim periods beginning after December 15, 2019, and early
adoption is permitted. The Company does not expect the adoption of ASU 2018-18 to have a material impact
on the Company’s consolidated financial statements.
ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure
Requirements for Fair Value Measurement”
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”).
ASU 2018-13 eliminates, amends, and adds certain disclosure requirements for fair value measurements.
ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019, and early
adoption is permitted for the entire standard or for the provisions that eliminate or amend disclosure
requirements. The Company does not expect the adoption of ASU 2018-13 to have a material impact on the
Company’s consolidated financial statements.
F-18
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
NOTE 3 — FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), defines fair value, establishes a
framework for measuring fair value in GAAP and provides for expanded disclosure about fair value
measurements. ASC 820-10 applies to all other accounting pronouncements that require or permit fair value
measurements.
The Company determines or calculates the fair value of financial instruments using quoted market
prices in active markets when such information is available or using appropriate present value or other
valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments while estimating for non-performance and liquidity risk. These
techniques are significantly affected by the assumptions used, including the discount rate, credit spreads
and estimates of future cash flows.
Assets and liabilities typically recorded at fair value on a non-recurring basis to which ASC 820-10
applies include:
• non-financial assets and liabilities initially measured at fair value in an acquisition or business
combination, and
• long-lived assets measured at fair value due to an impairment assessment under ASC 360-10-15,
Impairment or Disposal of Long-Lived Assets.
This topic defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date and establishes a three-
level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. ASC 820-10 requires that assets and liabilities recorded at
fair value be classified and disclosed in one of the following three categories:
• Level 1 — inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities
that the Company has the ability to access.
• Level 2 — inputs utilize other-than-quoted prices that are observable, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such
as interest rates and yield curves that are observable at commonly quoted intervals.
• Level 3 — inputs are unobservable and are typically based on the Company’s own assumptions,
including situations where there is little, if any, market activity. Both observable and unobservable
inputs may be used to determine the fair value of positions that are classified within the Level 3
classification.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the Company classifies such financial assets or liabilities based on the lowest level
input that is significant to the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment and
considers factors specific to the asset or liability.
On June 10, 2019, the Company completed the sale of MSLO. As a result, indefinite-lived intangible
assets decreased by $330.1 million which was recorded within assets from discontinued operations as of
December 31, 2018. During the first quarter of 2019, the Company had recorded non-cash impairment
charges of $161.2 million for these indefinite-lived intangible assets related to the Martha Stewart and Emeril
Lagasse trademarks. The impairments arose during the sale process for the Martha Stewart and Emeril
Lagasse brands (as discussed in Notes 4 and 7) due to the difference in the fair value as indicated by the sales
price as compared to the carrying values of the intangible assets included in the transaction. The sale of
the Martha Stewart and Emeril Lagasse brands was approved by the Board of Directors during the second
quarter of 2019, to allow the Company to achieve one of its top priorities in significantly reducing its debt.
F-19
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Going forward the Company’s strategy is to focus on higher margin brands that are well suited for growing
health, wellness and beauty categories.
During the year ended December 31, 2019, the Company recorded non-cash impairment charges of
$33.1 million consisting of $28.5 million related to the Jessica Simpson trademark and $4.6 million related
to the Joe’s trademark. The impairments arose due to reduced growth expectations and the impact of licensee
transitions for these brands. Fair value for each trademark was determined based on the income approach
using estimates of future discounted cash flows, a Level 3 measurement within the fair value hierarchy. The
following table shows the change in indefinite-lived intangible assets for the year ended December 31,
2019 (in thousands):
Balance at January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$624,985
82
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(33,109)
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$591,958
During the year ended December 31, 2018, the Company recorded non-cash impairment charges of
$17.9 million for indefinite-lived intangible assets related to the trademarks of two of the Company’s
brands: Ellen Tracy and Caribbean Joe. The impairments arose due to reduced growth expectations and the
impact of licensee transitions for these brands. Fair value for each trademark was determined based on
the income approach using estimates of future discounted cash flows, a Level 3 measurement within the fair
value hierarchy. The Company determined that certain trademarks which had been impaired during the
year ended December 31, 2018 should no longer be classified as indefinite-lived intangible assets. The
Company recorded $0.3 million in amortization during the year ended December 31, 2018 related to these
trademarks. The following table shows the change in indefinite-lived intangible assets for the year ended
December 31, 2018 (in thousands):
Balance at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassified to finite-lived intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$660,789
216
(17,899)
(6,951)
(11,170)
Ending balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$624,985
During the year ended December 31, 2017, the Company recorded non-cash impairment charges of
$36.5 million for indefinite-lived intangible assets related to the trademarks of five of the Company’s
brands: Caribbean Joe, Revo, Franklin Mint, Nevados, and FUL. Fair value for each trademark was
determined based on the income approach using estimates of future discounted cash flows, a Level 3 measure
within the fair value hierarchy. The impairments arose due to reduced contractual minimums or reduced
sales forecasts in key distribution channels for these brands. When an intangible asset’s useful life is no longer
considered to be indefinite, it must be amortized over the remaining period that it is expected to contribute
to cash flows. The Company determined that certain trademarks which had been impaired during the year
ended December 31, 2017 should no longer be classified as indefinite-lived intangible assets. The Company
recorded less than $0.1 million in amortization during the year ended December 31, 2017 related to these
trademarks.
During the year ended December 31, 2017, the Company recorded a non-cash goodwill impairment
charge of $304.1 million. The quantitative evaluation of goodwill impairment included an assessment of
fair value under the income approach using estimates of future discounted cash flows, a Level 3 measure
within the fair value hierarchy. See Note 8 for further details.
F-20
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
As of December 31, 2019 and 2018, there were no assets or liabilities that are required to be measured
at fair value on a recurring basis, except for the Company’s equity securities (see Note 2) and interest rate
swaps (see Note 9). There was no change to fair value level hierarchy classification for the years ended
December 31, 2019 and 2018. The following table sets forth the carrying value and the fair value of the
Company’s financial assets and liabilities required to be disclosed at December 31, 2019 and 2018:
Financial Instrument
Level
12/31/2019
12/31/2018
12/31/2019
12/31/2018
Carrying Value
Fair Value
(in thousands)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps – liability . . . . . . . . . . . . . . . . .
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving loan . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
2
2
2
$
47
$ 6,514
$
$
627
2,019
$
$
47
6,514
$
$
627
2,019
$453,831
$519,850
$451,483
$515,742
$ 14,358
$115,000
$ 14,323
$114,827
The carrying amounts of the Company’s cash, restricted cash, accounts receivable and accounts
payable approximate fair value due to their short-term maturities.
On December 10, 2018, the Company entered into interest rate swap agreements related to its term
loans (the “2018 Swap Agreements”) with certain financial institutions. The Company recorded its interest
rates swaps in accrued expense and other long-term liabilities on the consolidated balance sheets at fair value
using Level 2 inputs. The 2018 Swap Agreements have a $300 million notional value and $150 million
matures on December 31, 2021 and $150 million matures on January 4, 2022.
The Company’s risk management objective and strategy with respect to the 2018 Swap Agreements is
to reduce its exposure to variability in cash flows on a portion of the Company’s floating-rate debt. The
2018 Swap Agreements protect the Company from increases in changes in its cash flows attributable to
changes in a contractually specified interest rate on an amount of borrowing equal to the then outstanding
swap notional. The Company will periodically assess the effectiveness of the hedge (both prospective and
retrospective) by performing a single regression analysis that was prepared at the inception of the hedging
relationship. To the extent the hedging relationship is highly effective, the gain or loss on the swap will be
recorded in accumulated other comprehensive loss and reclassified into interest expense in the same period
during which the hedged transactions affect earnings.
During the year ended December 31, 2019, the Company determined that a portion of one of the
hedges was no longer effective due to the repayment of certain debt with the proceeds from the sale of
MSLO (see Note 9). As a result, in accordance with ASC 815-30-40-6A, the Company de-designated it as a
cash flow hedge and reclassified a loss of $0.4 million from other comprehensive loss to other expense in
the consolidated statement of operations. Changes in the fair value of the de-designated interest rate swap
after the de-designation date are being recognized through continuing operations. The Company recorded a
loss of $0.6 million in other expense from continuing operations in the consolidated statements of
operations for the year ended December 31, 2019.
The components of the 2018 Swap Agreements as of December 31, 2019 are as follows:
Notional Value Derivative Asset Derivative Liability
(in thousands)
LIBOR based loans . . . . . . . . . . . . . . . . . . . . .
$300,000
$—
$6,514
For purposes of this fair value disclosure, the Company based its fair value estimate for the Term
Loans and Revolving Loan (each, as defined in Note 9) on its internal valuation whereby the Company
applied the discounted cash flow method to its expected cash flow payments due under the loan agreements
based on interest rates as of December 31, 2019 and 2018 for debt with similar risk characteristics and
maturities.
F-21
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
NOTE 4 — DISCONTINUED OPERATIONS
On June 10, 2019, the Company completed the sale of MSLO, a Delaware corporation and a wholly-
owned subsidiary of the Company, for $166 million in cash consideration, plus additional amounts in respect
of pre-closing accounts receivable that are received after the closing, subject to certain adjustments,
pursuant to the Purchase Agreement with the Buyer entered into on April 16, 2019. In addition, the Purchase
Agreement provides for an earnout of up to $40,000,000 payable to the Company if certain performance
targets are achieved during the three calendar years ending December 31, 2020, December 31, 2021 and
December 31, 2022. MSLO and its subsidiaries were engaged in the business of promoting, marketing and
licensing the Martha Stewart and the Emeril Lagasse brands through various distribution channels. The
Company recorded a pre-tax loss of $4.3 million on the sale of MSLO during the year ended December 31,
2019 which is recorded in discontinued operations in the consolidated statements of operations.
During the first quarter of 2019, the Company recorded non-cash impairment charges of $161.2 million
for indefinite-lived intangible assets related to the Martha Stewart and Emeril Lagasse trademarks. The
impairments arose during the sale process for the Martha Stewart and Emeril Lagasse brands due to the
difference in the fair value as indicated by the sales price as compared to the carrying values of the intangible
assets included in the transaction. The sale of the Martha Stewart and Emeril Lagasse brands was approved
by the Board of Directors on April 15, 2019, to allow the Company to achieve one of its top priorities in
significantly reducing its debt. Going forward the Company’s strategy is to focus on higher margin brands
that are well suited for growing health, wellness and beauty categories. These charges are included in
discontinued operations in the consolidated statements of operations. The Company recorded a net loss
from discontinued operations of $125.0 million for the year ended December 31, 2019.
The financial results of MSLO through December 31, 2019 are presented as (loss) income from
discontinued operations, net of income taxes in the consolidated statements of operations. The following
table presents the discontinued operations in the consolidated statements of operations:
Year Ended December 31,
2019
2018
2017
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,771
$42,665
$ 42,684
Operating expenses
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of MSLO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,481
161,224
4,273
27,544
—
—
(Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(163,207)
15,121
Other expense (income)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
485
3,570
(Loss) income from discontinued operations before income taxes . . . . . .
(167,262)
(Benefit from) provision for income taxes . . . . . . . . . . . . . . . . . . . . . .
(42,199)
—
6,888
8,233
1,249
25,691
—
—
16,993
(401)
891
16,503
(88,112)
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . .
$(125,063) $ 6,984
$104,615
The Company used cash proceeds from the MSLO sale to make mandatory prepayments of
$109.6 million on the Revolving Credit Facility and voluntary prepayments of $44.4 million on its
Tranche A-1 Term Loans (see Note 9). In accordance with ASC 205-20-45-6, Presentation of Financial
Statements —Discontinued Operations, the Company has allocated interest expense of $3.6 million and
$6.9 million for the years ended December 31, 2019 and 2018, respectively, related to the portion of debt that
was required to be paid as part of the transaction and accretion on certain MSLO legacy and guaranteed
payments. No interest expense, except for the accretion on certain MSLO legacy and guaranteed payments
of $0.9 million, was allocated for the year ended December 31, 2017.
F-22
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
During the year ended December 31, 2019, the Company recorded $6.0 million in transaction costs
directly related to the sale of MSLO which are recorded in discontinued operations in the consolidated
statements of operations.
The following table presents the assets and liabilities from discontinued operations as of December 31,
2019 and December 31, 2018:
December 31,
2019
2018
Carrying amount of assets included as part of discontinued operations:
Current Assets:
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 16,602
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . .
Total current assets from discontinued operations . . . . . . . . . . . . . . . .
6,839
6,839
7,243
23,845
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net
580
—
— 330,084
Total assets from discontinued operations
. . . . . . . . . . . . . . . . . . . . .
$6,839
$354,509
Carrying amount of liabilities included as part of discontinued operations:
Current Liabilities:
. . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses
Current portion of deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,959
—
$ 11,927
3,523
Total current liabilities from discontinued operations . . . . . . . . . . . . . .
1,959
15,450
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
3,629
Total liabilities from discontinued operations . . . . . . . . . . . . . . . . . . .
$1,959
$ 19,079
The prepaid expenses and other current assets at December 31, 2019 consists of a $6.8 million
receivable due to the Company from the Buyer in accordance with the terms of the Purchase Agreement.
The following table presents the cash flow from discontinued operations for the years ended
December 31, 2019, 2018 and 2017:
Year Ended December 31,
2019
2018
2017
(in thousands)
Cash provided by discontinued operating activities
. . . . . . . . . .
Cash used in discontinued investing activities . . . . . . . . . . . . . .
$40,321
$
(44) $
$ 9,365
(80)
$111,315
(77)
Cash used in discontinued financing activities . . . . . . . . . . . . . .
$ (574) $(3,000)
(3,000)
F-23
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
NOTE 5 — REVENUE
The Company has entered into various license agreements that provide revenues in exchange for use of
the Company’s IP. Licensing agreements are the Company’s primary source of revenue. The Company also
derives revenue from other sources such as commissions and vendor placement commissions.
Adoption
On January 1, 2018, the Company adopted ASC 606 on a modified retrospective basis for all open
contracts as of January 1, 2018. The core principle of ASC 606 is the recognition of revenue when a
company transfers promised goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled to in exchange for those goods or services. The new guidance defines
a five-step approach to achieve this core principle and, in doing so, requires greater use of judgment and
estimates and requires expanded disclosures related to the amounts of revenue recognized and judgements
made. Under the modified retrospective basis, results for reporting periods beginning after January 1, 2018 are
presented under ASC 606. In connection with the adoption of ASC 606 on January 1, 2018, the Company
recorded a net increase of $1.1 million to the opening balance of retained earnings (a reduction of the
accumulated deficit).
Disaggregated Revenue
The following table presents revenue disaggregated by source for the years ended December 31, 2019,
2018 and 2017:
Year Ended December 31,
2019
2018
2017
(in thousands)
Licensing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101,161
$120,350
$123,948
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
415
6,940
832
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101,576
$127,290
$124,780
Contract Balances
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the
consolidated balance sheets. Contract liabilities represent unearned revenues and are presented within the
current portion of deferred revenue on the consolidated balance sheets.
The below table summarizes the Company’s contract assets and contract liabilities:
Contract assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2019
December 31,
2018
(in thousands)
$1,803
3,040
$2,484
4,923
On June 10, 2019, the Company completed the sale of MSLO, as a result contract assets decreased
$0.7 million and contract liabilities decreased $0.1 million, and are recorded in current assets and liabilities
from discontinued operations as of December 31, 2018.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the
customer. The Company has reviewed its various revenue streams for its existing contracts under the five-
step approach. The Company has entered into various license agreements that provide revenues based on
F-24
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
guaranteed minimum royalty payments with additional royalty revenues based on a percentage of defined
sales. Guaranteed minimum royalty payments (fixed revenue) are recognized on a straight-line basis over the
term of the contract, as defined in each license agreement. Earned royalties and earned royalties in excess
of the fixed revenue (variable revenue) are recognized as income during the period corresponding to the
licensee’s sales. Earned royalties in excess of fixed revenue are only recognized when the Company is reasonably
certain that the guaranteed minimums payments for the period, as defined in each license agreement, will
be exceeded.
Licensing for trademarks is the Company’s largest revenue source. Under ASC 606, the Company’s
agreements are generally considered symbolic licenses which contain the characteristics of a right-to-access
license since the customer is simultaneously receiving the IP and benefiting from it throughout the license
period. As such, the Company primarily records revenue from licenses on a straight-line basis over the
license period as the performance obligation is satisfied over time. The Company applies its judgment based
on historical trends when estimating future revenues and the period over which to recognize revenue when
evaluating its licensing contracts.
Deferred revenue will be recognized as the Company fulfills its performance obligations over periods of
approximately one to five years.
The below table summarizes amounts related to future performance obligations from continuing
operations under fixed contractual arrangements as of December 31, 2019 and the periods in which they
are expected to be earned and recognized as revenue:
2020
2021
2022
2023
2024
Thereafter
(in thousands)
Future Performance Obligations . . . . . . . . . . . . .
$43,535
$27,127
$6,778
$4,280
$36
$—
The Company does not disclose the amount attributable to unsatisfied or partially satisfied performance
obligations for variable revenue contracts in accordance with the optional exemption allowed for under
ASC 606. The Company has categorized certain contracts as variable when there is a history and future
expectation of exceeding guaranteed minimum royalties.
NOTE 6 — PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31,
2019
2018
(in thousands)
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,114
$ 5,114
Computer hardware/equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
277
6,162
570
169
524
6,154
715
304
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,292
12,811
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . .
(6,943)
(4,420)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,349
$ 8,391
In June 2019, the Company completed the sale of MSLO. As a result, property and equipment, net
decreased by $0.6 million which was recorded within assets from discontinued operations as of December 31,
2018.
F-25
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
There were no impairments of property and equipment recorded in the consolidated statements of
operations for the years ended December 31, 2019, 2018 and 2017. The Company reviews the estimated
lives of its fixed assets on an ongoing basis. The review indicated that the lives of certain leasehold
improvements were shorter than the estimated useful lives used for depreciation purposes. As a result,
effective December 1, 2019, the Company changed its estimates of the useful lives of the leasehold
improvements to better reflect the estimated periods during which the assets will remain in service. The
remaining useful life is four months for these assets. The effect of the change was an increase of $1.5 million
to depreciation and amortization expense from continuing operations for the year ended December 31,
2019. Depreciation and amortization expense from continuing operations amounted to $3.0 million,
$1.7 million and $1.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
NOTE 7 — INTANGIBLE ASSETS
Intangible assets are summarized as follows:
December 31, 2019
Finite-lived intangible assets:
Useful Lives
(Years)
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in thousands)
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer agreements . . . . . . . . . . . . . . . . . . . . . . .
5 – 15
4
Patents
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
$12,491
2,200
95
$(4,515)
(2,198)
(64)
$14,786
$(6,777)
Indefinite-lived intangible assets:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,976
2
31
8,009
591,958
$599,967
December 31, 2018
Finite-lived intangible assets:
Useful Lives
(Years)
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in thousands)
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 – 15
$12,438
$(2,689)
$
9,749
Customer agreements . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents
4
10
2,200
361
(2,147)
(321)
53
40
$14,999
$(5,157)
9,842
Indefinite-lived intangible assets:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . .
624,985
$634,827
F-26
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Future annual estimated amortization expense is summarized as follows:
Years Ended December 31,
(in thousands)
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,839
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,837
1,814
1,388
326
805
$8,009
Amortization expense from continuing operations amounted to $1.9 million, $1.0 million and
$0.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Finite-lived intangible assets represent certain trademarks, customer agreements and patents related to
the Company’s brands. Finite-lived intangible assets are amortized on a straight-line basis over the estimated
useful lives of the assets. The carrying value of finite-lived intangible assets and other long-lived assets is
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Indefinite-lived intangible assets are not amortized, but instead are subject to impairment evaluation.
As of December 31, 2019, the trademarks of Jessica Simpson, Avia, AND1, Joe’s, GAIAM, Caribbean Joe,
and Ellen Tracy 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
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 performed as of October 1, the beginning of the Company’s fourth fiscal quarter.
When conducting its impairment assessment of indefinite-lived intangible assets, the Company initially
performs a qualitative evaluation of whether it is more likely than not that the asset is impaired. If it is
determined by a qualitative evaluation that it is more likely than not that the asset is impaired, the Company
then tests the asset for recoverability. The Company tests its indefinite-lived intangible assets for recovery
in accordance with ASC-820-10-55-3D. 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. As such, recoverability of assets to be held and used is measured by a comparison of
the carrying amount of the asset to its expected future discounted net cash flows. If the carrying amount of
such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the recoverability of the assets. Assumptions used in our
estimates are as follows: (i) discount rates; (ii) projected annual revenue growth rates; and (iii) projected
long-term growth rates. Our estimates also factor in economic conditions and expectations of management
which may change in the future based on period-specific facts and circumstances. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
In June 2019, the Company completed the sale of MSLO. As a result, indefinite-lived intangible assets
decreased by $330.1 million which was recorded within assets classified as held for disposition from
discontinued operations as of December 31, 2018. During the first quarter of 2019, the Company recorded
non-cash impairment charges of $161.2 million for indefinite-lived intangible assets related to the Martha
F-27
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Stewart and Emeril Lagasse trademarks reflected in discontinued operations on the consolidated statements
of operations. The impairments arose during the sale process for the Martha Stewart and Emeril Lagasse
brands (as discussed in Note 4) due to the difference in the fair value as indicated by the sales price as
compared to the carrying values of the intangible assets included in the transaction. The sale of the Martha
Stewart and Emeril Lagasse brands was approved by the Board of Directors during the second quarter of
2019, to allow the Company to achieve one of its top priorities in significantly reducing its debt. Going
forward the Company’s strategy is to focus on higher margin brands that are well suited for growing health,
wellness and beauty categories.
During the year ended December 31, 2019, the Company recorded non-cash impairment charges of
$33.1 million consisting of $28.5 million related to the Jessica Simpson trademark and $4.6 million related
to the Joe’s trademark. During the year ended December 31, 2018, the Company recorded non-cash
impairment charges of $17.9 million for indefinite-lived intangible assets related to the trademarks of two
of the Company’s non-core brands: Ellen Tracy and Caribbean Joe. The impairments arose due to reduced
growth expectations and the impact of licensee transitions for these brands. Fair value for each trademark was
determined based on the income approach using estimates of future discounted cash flows. These charges
are included in impairment charges in the consolidated statements of operations.
Due to the identification of impairment indicators during the quarter ended September 30, 2017, the
Company performed impairment testing of its goodwill and indefinite-lived assets at September 30, 2017,
which replaced its October 1st annual test. As a result of its testing, during the quarter ended September 30,
2017, the Company recorded a non-cash impairment charge of $36.5 million relating to its indefinite-lived
intangible assets related to the trademarks of Caribbean Joe, Revo, Franklin Mint, Nevados, and FUL. The
impairments arose due to reduced contractual minimums or reduced sales forecasts in key distribution
channels for these brands. In addition, in connection with its goodwill impairment testing performed at
December 31, 2017, the Company performed impairment testing of its indefinite-lived assets at December 31,
2017, noting no additional impairment of its indefinite-lived intangible assets. See Note 8 — Goodwill for
further details. When an intangible asset’s useful life is no longer considered to be indefinite, it must be
amortized over the remaining period that it is expected to contribute to cash flows. The Company
determined that certain trademarks which had been impaired during the year ended December 31, 2017
should no longer be classified as indefinite-lived intangible assets. The Company recorded less than
$0.1 million in amortization during the year ended December 31, 2017 related to these trademarks.
During the year ended December 31, 2018, the Company sold both the Revo and FUL trademarks and
incurred a loss on the sale of the assets of $7.1 million.
NOTE 8 — GOODWILL
Goodwill was tested for impairment at the reporting unit level (the Company has determined that it
has a single reporting unit) on an annual basis (October 1st) and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying value. As discussed below, during 2017, due to impairment indicators noted in between annual
tests, the Company performed impairment testing at September 30, 2017, which replaced its October 1st
annual test. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine
whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount.
Qualitative factors considered include, for example, macroeconomic and industry conditions, overall financial
performance and other relevant entity-specific events. If the Company bypasses the qualitative assessment,
or concludes that it is more likely than not that the fair value of its reporting unit is less than its carrying value,
it then performs a quantitative impairment test to identify potential goodwill impairment and measure the
amount of goodwill impairment to be recognized, if any. If the carrying value of the reporting unit’s goodwill
exceeds the implied fair value of the goodwill, an impairment loss is recognized in the amount of that
excess, not to exceed the carrying amount of goodwill.
F-28
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Due to impairment indicators noted during the third quarter of 2017, specifically the impairment of
certain tradenames due to reduced contractual minimums or reduced sales forecasts in key distribution
channels, the Company, with the assistance of a third party valuation specialist, performed a quantitative
assessment at September 30, 2017, which replaced its October 1st annual test. Fair value for the quantitative
assessment was determined under an income approach using estimates of discounted future cash flows.
The income approach relies on assumptions such as the Company’s projected future earnings and appropriate
discount rates.
Significant assumptions used in the income approach were as follows: (i) discount rates; (ii) projected
annual revenue growth rates; and (iii) projected long-term growth rates. The Company’s estimates also factor
in economic conditions and expectations of management which may change in the future based on period-
specific facts and circumstances. The Company corroborated the results of the income approach by reconciling
to within a reasonable range of the Company’s market capitalization, (calculated as total common shares
outstanding multiplied by the common equity price per share, as adjusted for a control premium factor). The
control premium was estimated based upon control premiums observed in comparable market transactions.
Reconciling items identified included the benefit of the Company’s fully reserved tax assets for which the
market may not have been giving full value and depressed market multiples experienced by the entities within
our brand licensing peer group. Based on the results of the quantitative assessment, the Company
determined that goodwill was not impaired as of September 30, 2017.
Due to additional impairment indicators noted during the fourth quarter of 2017, specifically a sharp
and continued decline in its stock price and the related decline in its market capitalization, the Company
determined that there was a fourth quarter impairment indicator and a quantitative impairment test was
required to be performed at December 31, 2017. During the fourth quarter of 2017, the Company’s stock price
and market capitalization declined approximately 41%, consistent with the decline in market capitalization
of similar companies in the Company’s sector. The Company evaluated the fair value of its reporting unit
under the income approach (in the same manner as noted above in its assessment at September 30, 2017),
adjusting its assumptions to reflect additional market risk in the discount rate (from 10.25% to 11.25%), as
well as adjusted future effective tax rates, noting that the fair value of its reporting unit indicated by the
income approach at December 31, 2017 was no longer in excess of its carrying value.
At December 31, 2017, after comparing the results of the income approach to the market capitalization
approach, the Company noted it could no longer corroborate the results of the income approach by reconciling
to within a reasonable range of the Company’s market capitalization, including an assumed control
premium. As discussed above, the two primary differences between the market approach and income
approach were determined to be the Company’s fully reserved tax assets, for which the market may not have
been giving full value and depressed market multiples experienced by all entities within the brand licensing
peer group. The reconciliation was significantly impacted by the decreased market capitalization, as well as
the enactment in December 2017 of the Tax Cuts and Jobs Act, which reduced the aforementioned
reconciling item for fully reserved tax assets. As such, the Company determined that the value indicated by
the market capitalization approach, calculated using the December 31, 2017 closing stock price of $1.78 and
an estimated control premium factor of 20%, was the most appropriate measure of the fair value of the
Company as of December 31, 2017. Based on this analysis, the fair value of the Company’s single reporting
unit was below its carrying value by an amount greater than the carrying value of goodwill, and the
Company recorded an impairment charge of $304.1 million in the fourth quarter of 2017 to fully write off
its goodwill.
F-29
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
NOTE 9 — LONG-TERM DEBT
The components of long-term debt are as follows:
December 31,
2019
2018
(in thousands)
Secured Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$453,831
$519,850
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,358
115,000
Unamortized deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . .
(22,189)
(24,063)
Total long-term debt, net of unamortized deferred financing costs . . . . . .
446,000
610,787
Less: current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . .
12,750
28,300
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$433,250
$582,487
Debt Facilities
On December 30, 2019, the Company amended its Third Amended and Restated Credit Agreement
(the “Amended BoA Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral
agent and the lenders party thereto (the “BoA Facility Loan Parties”). The loans under the Amended BoA
Credit Agreement will be subject to quarterly amortization payments of $2.5 million through September 30,
2020, $3.25 million through September 30, 2021 and $4 million for each fiscal quarter thereafter. The
Amended BoA Credit Agreement modifies the calculation of Consolidated EBITDA (as defined in the
agreement) by permitting additional addbacks and specifying the EBITDA amounts for the quarters ended
September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019. The Amended BoA Credit
Agreement allows for the netting of up to $5 million in cash of the Company and its subsidiaries for purposes
of calculating the leverage ratio covenant. The Company reduced the available commitments under the
revolving facility to $80 million. During the year ended December 31, 2019, the Company incurred $1.3 million
in lender fees associated with the amendment which was recorded in deferred financing costs in accordance
with ASC 470, Debt and included in long-term debt, net of current portion in the consolidated balance
sheet. These fees are being amortized using the effective interest rate method over the remainder of the term
of the Amended BoA Credit Agreement.
On August 12, 2019, the Company amended its Third Amended and Restated First Lien Credit
Agreement (the “Amended FS/KKR Credit Agreement”) with Wilmington Trust, National Association, as
administrative agent and collateral agent (the “FS/KKR Agent”) and the lenders party thereto (the “FS/KKR
Facility Loan Parties”). Pursuant to the Amended FS/KKR Credit Agreement, no mandatory amortization
payments are required until September 30, 2020. Thereafter, the loans under the Amended FS/KKR
Credit Agreement will be subject to quarterly amortization payments of $1.0 million. Pursuant to the
Amended FS/KKR Credit Agreement, no payment with proceeds of any consolidated excess cash flow will
be required to be made prior to the fiscal year ending December 31, 2020. The Amended FS/KKR Credit
Agreement modified the calculation of Consolidated EBITDA (as defined in the agreement) by permitting
additional addbacks and specifying the EBITDA amounts for the quarters ended September 30, 2018,
December 31, 2018, March 31, 2019 and June 30, 2019. The Amended FS/KKR Credit Agreement allows
for the netting of up to $5 million in cash of the Company and its subsidiaries for purposes of calculating the
leverage ratio covenant. The Company also agreed under the Amended FS/KKR Credit Agreement not to
borrow more than $30 million under the Bank of America Revolving Credit Facility. During the year ended
December 31, 2019, the Company incurred $3.3 million in lender fees associated with the amendment
which was recorded in deferred financing costs in accordance with ASC 470, Debt and included in long-term
debt, net of current portion in the consolidated balance sheet. These fees are being amortized using the
effective interest rate method over the remainder of the term of the Amended FS/KKR Credit Agreement.
F-30
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
On June 10, 2019, the Company completed the sale of MSLO. The Company used cash proceeds from
the MSLO sale to make mandatory prepayments of $109.6 million of the Revolving Credit Facility and
voluntary prepayments of $44.4 million on its Tranche A-1 Term Loans.
The Company expensed $0.8 million of deferred financing costs during the year ended December 31,
2019, included in Interest expense, net in the consolidated statement of operations.
On August 7, 2018, the Company and certain of its subsidiaries entered into the Amended BoA Credit
Agreement with the BoA Facility Loan Parties and (ii) the Amended FS/KKR Credit Agreement with the
FS/KKR Agent and the FS/KKR Facility Loan Parties. The Company used a portion of the proceeds of the
$335.0 million loans made to the Company under the Amended BoA Credit Agreement to prepay loans
under the FS/KKR Credit Agreement.
During 2018, the Company incurred $14.6 million in lender and certain third-party fees associated
with debt refinancing, which was recorded as deferred financing costs in accordance with ASC 470 — Debt
and included in Long-term debt, net of current portion in the consolidated balance sheet at December 31,
2018. These fees are being amortized using the effective interest rate method over the terms of the Amended
BoA Credit Agreement and Amended FS/KKR Credit Agreement. The Company expensed $0.1 million
of deferred financing costs, included in Interest Expense, net in the consolidated statement of operations, as
a result of a partial extinguishment of the BoA Credit Agreement in accordance with ASC 470 — Debt in
connection with the Company’s entry into the Amended BoA Credit Agreement.
The Amended BoA Credit Agreement provides for several five-year senior secured credit facilities,
consisting of (i) Tranche A Term Loans in an aggregate principal amount of $150.0 million (the “Amended
Tranche A Loans”), (ii) Tranche A-1 Term Loans in an aggregate principal amount of $70.0 million (the
“Amended Tranche A-1 Loans” and, together with the Tranche A Loans, the “Amended BoA Term Loans”)
and (iii) revolving credit commitments in the aggregate principal amount of $130.0 million (the “Amended
Revolving Credit Commitments” and, the loans under the Revolving Credit Commitments, the “Amended
Revolving Loans”). On the Closing Date, the total amount outstanding under the New Amended BoA
Credit Agreement was $335.0 million, including (i) $150.0 million of Amended Tranche A Loans,
(ii) $70.0 million of Amended Tranche A-1 Loans and (iii) $115.0 million of Amended Revolving Loans.
The loans under the Amended BoA Credit Agreement bear interest, at the Company’s option, at a rate
equal to (i) with respect to the Amended Revolving Loans and the Amended Tranche A Loans (a) the LIBOR
rate plus 3.50% per annum or (b) the base rate plus 2.50% per annum and (ii) with respect to the Amended
Tranche A-1 Loans (a) the LIBOR rate plus 7.00% per annum or (b) the base rate plus 6.00% per annum. The
loans under the New Amended BoA Credit Agreement provide for interest rate reductions if certain
leverage ratios are achieved, with minimum interest rates equal to (i) with respect to the Amended Revolving
Loans and the Amended Tranche A Loans (a) the LIBOR rate plus 3.00% per annum or (b) the base rate
plus 2.00% per annum and (ii) with respect to the Amended Tranche A-1 Loans (a) the LIBOR rate plus
6.00% per annum or (b) the base rate plus 5.00% per annum. The undrawn portions of the Revolving Credit
Commitments are subject to a commitment fee of 0.375% per annum.
The Company may make voluntary prepayments of the loans outstanding under the Amended BoA
Credit Agreement, subject to the payment of customary “breakage” costs with respect to LIBOR-based
borrowings and, in certain cases, to the prepayment premium set forth in the Amended BoA Credit Agreement.
Additionally, the Company is mandated to make prepayments (without payment of a premium or penalty)
under the Amended BoA Credit Agreement amounting to: (i) the loans outstanding under the Amended BoA
Credit Agreement plus, (a) where intellectual property is disposed, 50.0% of the disposed intellectual
property’s orderly liquidation value, and (b) where any other assets constituting collateral are disposed or
upon the receipt of certain insurance proceeds, 100% of the net proceeds thereof, subject to certain
reinvestment rights; and (ii) the Amended Tranche A-1 Loans to the extent that the outstanding principal
amount thereof exceeds 15.0% of the orderly liquidation value of the registered trademarks owned by the
BoA Facility Loan Parties. The loans under the Amended BoA Credit Agreement are subject to quarterly
F-31
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
amortization payments of $2.5 million through September 30, 2020, $3.25 million through September 30,
2021 and $4 million for each fiscal quarter thereafter.
The Amended BoA Credit Agreement contains customary representations and warranties and
customary affirmative and negative covenants applicable to the BoA Facility Loan Parties and their
subsidiaries. Moreover, the Amended BoA Credit Agreement contains financial covenants that require the
BoA Facility Loan Parties and their subsidiaries to (i) maintain a positive net income (as defined in the
Amended BoA Credit Agreement) (ii) satisfy a maximum loan to value ratio initially set at 50.0% (applicable
to the Amended Revolving Loans and Amended Tranche A Loans) decreasing over the term of the Amended
BoA Credit Agreement until reaching a final maximum loan to value ratio of 42.5% and (iii) satisfy a
maximum consolidated first lien leverage ratio, initially set at 3.875:1.00, decreasing over the term of the
Amended BoA Credit Agreement until reaching a final maximum ratio of 2.875:1.00 for the fiscal quarter
ending September 30, 2022 and thereafter.
The Amended BoA Credit Agreement contains certain customary events of default, including a
change of control. If an event of default occurs and is not cured within any applicable grace period or not
waived, the Bank of America Agent, at the request of the lenders under the Amended BoA Credit Agreement,
must take various actions, including, without limitation, the acceleration of all amounts due under the
Amended BoA Credit Agreement.
The Company may request an increase in (i) the Revolving Credit Facility and Tranche A Loans as
would not cause the consolidated first lien leverage ratio, determined on a pro forma basis after giving effect
to any such increase, to exceed 2.80:1.00 and (ii) the Tranche A-1 Loans, as would not cause the consolidated
first lien leverage ratio, determined on a pro forma basis after giving effect to any such increase, to exceed
(a) with respect to any increase, the proceeds of which will be used solely to finance an acquisition, 3.00:1.00
and (b) with respect to any other increase, 2.90:1.00, subject to the satisfaction of certain conditions in the
Amended BoA Credit Agreement. At December 31, 2019, the Company is in compliance with the covenants
included in the Amended BoA Credit Agreement.
The Amended FS/KKR Credit Agreement provides for a five and a half-year $314.0 million senior
secured term loan facility. The Company may request one or more additional term loan facilities or the
increase of term loan commitments under the Amended FS/KKR Credit Agreement as would not have
caused the consolidated total leverage ratio, determined on a pro forma basis after giving effect to any such
addition and increase, to exceed 6.00:1.00, subject to the satisfaction of certain conditions in the Amended
FS/KKR Credit Agreement.
The loans under the Amended FS/KKR Credit Agreement bear interest, at the Company’s option, at a
rate equal to either (i) the LIBOR rate plus 8.75% per annum or (ii) the base rate plus 7.75% per annum.
The Company may make voluntary prepayments of the loans outstanding under the Amended
FS/KKR Credit Agreement, subject to the payment of customary “breakage” costs with respect to
LIBOR-based borrowings and, in certain cases, to the prepayment premium set forth in the Amended
FS/KKR Credit Agreement. The Company is mandated to make prepayments (without payment of a
premium or penalty) of loans outstanding under the Amended FS/KKR Credit Agreement amounting to:
(i) where intellectual property was disposed, 50.0% of the disposed intellectual property’s orderly liquidation
value, (ii) where any other asset constituting collateral is disposed or upon the receipt of certain insurance
proceeds, 100% of the net proceeds thereof, subject to certain reinvestment rights, and (iii) any consolidated
excess cash flow, in an amount equal to (a) in the event the consolidated total leverage ratio was at least
4.00:1.00, 75% thereof, (b) in the event the consolidated total leverage ratio was less than 4.00:1.00 but at
least 3.00:1.00, 50% thereof and (c) in the event the consolidated total leverage ratio was less than 3.00:1.00,
0% thereof. No mandatory amortization payments are required until September 30, 2020. Thereafter, the
loans under the Amended FS/KKR Credit Agreement will be subject to quarterly amortization payments of
$1.0 million.
F-32
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
The Amended FS/KKR Credit Agreement contains customary representations and warranties and
customary affirmative and negative covenants applicable to the FS/KKR Facility Loan Parties and their
subsidiaries. Moreover, the Amended FS/KKR Credit Agreement contains financial covenants that require
the FS/KKR Facility Loan Parties and their subsidiaries to satisfy (i) a maximum consolidated total leverage
ratio, initially set at 7.25:1.00, decreasing over the term of the Amended FS/KKR Credit Agreement until
reaching a final maximum ratio of 6.25:1.00 for the fiscal quarter ending September 30, 2022 and thereafter
and (ii) a maximum consolidated first lien leverage ratio, initially set at 3.875:1.00, decreasing over the
term of the Amended FS/KKR Credit Agreement until reaching a final maximum ratio of 2.875:1.00 for
the fiscal quarter ending September 30, 2022 and thereafter. At December 31, 2019, the Company is in
compliance with the covenants included in the Amended FS/KKR Credit Agreement.
The Amended FS/KKR Credit Agreement contains certain customary events of default, including a
change of control. If an event of default occurs and is not cured within any applicable grace period or is
not waived, the FS/KKR Agent, at the request of the lenders under the Amended FS/KKR Credit Agreement,
is required to take various actions, including, without limitation, the acceleration of amounts due
thereunder.
The Company may request one or more additional term loan facilities or the increase of term loan
commitments under the Amended FS/KKR Credit Agreement as would not have caused the consolidated
total leverage ratio, determined on a pro forma basis after giving effect to any such addition and increase, to
exceed 6.00:1.00, subject to the satisfaction of certain conditions in the Amended FS/KKR Credit
Agreement.
Interest Expense from Continuing Operations
Interest expense, net during the year ended December 31, 2019 includes interest incurred under our
loan agreements of $48.2 million, non-cash interest related to the amortization of deferred financing costs
of $5.6 million, the expensing of $0.8 million of deferred financing costs as a result of a partial extinguishment
on the Revolving and Term loans in accordance with ASC 470 — Debt and non-cash interest income of
$0.8 million related to the accretion of the present value of certain payment arrangements.
Interest expense, net during the year ended December 31, 2018 includes interest incurred under our
loan agreements of $50.9 million, non-cash interest related to the amortization of deferred financing costs
of $4.5 million, the expensing of $0.1 million of deferred financing costs as a result of a partial extinguishment
of the BoA Credit Agreement in accordance with ASC 470 — Debt in connection with the Company’s
entry into the Amended BoA Credit Agreement and non-cash interest income of $0.3 million related to the
accretion of the present value of certain payment arrangements.
Interest expense, net during the year ended December 31, 2017 includes interest incurred under our
loan agreements of $55.1 million and non-cash interest related to the amortization of deferred financing
costs of $3.9 million.
Interest Rate Swaps
On December 10, 2018, the Company entered into the 2018 Swap Agreements with certain financial
institutions. The Company recorded its interest rate swaps in accrued expenses and other long-term liabilities
on the consolidated balance sheets at fair value using Level 2 inputs. The 2018 Swap Agreements have a
$300 million notional value, and $150 million matures on December 31, 2021 and $150 million matures on
January 4, 2022.
The Company’s risk management objective and strategy with respect to the 2018 Swap Agreements is
to reduce its exposure to variability in cash flows on a portion of the Company’s floating-rate debt. The
2018 Swap Agreements protect the Company from changes in its cash flows attributable to changes in a
contractually specified interest rate on an amount of borrowing equal to the then outstanding swap notional.
F-33
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
The Company will periodically assess the effectiveness of the hedge (both prospective and retrospective) by
performing a single regression analysis that was prepared at the inception of the hedging relationship. To the
extent the hedging relationship is highly effective, the gain or loss on the swap will be recorded in
accumulated other comprehensive loss and reclassified into interest expense in the same period during
which the hedged transactions affect earnings.
During the year ended December 31, 2019, the Company determined that a portion of one of the
hedges was no longer effective due to the repayment of certain debt with the proceeds from the sale of
MSLO (see Note 4). As a result, in accordance with ASC 815-30-40-6A, the Company de-designated it as a
cash flow hedge and reclassified a loss of $0.4 million from other comprehensive loss to other expense in
the consolidated statement of operations. Changes in the fair value of the de-designated interest rate swap
after the de-designation date are being recognized through continuing operations. The Company recorded a
loss of $0.6 million in other expense from continuing operations in the consolidated statements of operation
for the year ended December 31, 2019.
Debt Maturities
As of December 31, 2019, the Company’s debt maturities for the next five years and thereafter on a
calendar year basis are as follows:
Total
2020
2021
2022
2023
2024
Thereafter
(in thousands)
Term Loans . . . . . . . . . . . .
Revolving Loan . . . . . . . . .
$453,831
14,358
$12,750
—
$17,750
—
$20,000
—
$111,631
14,358
$291,700
—
Total . . . . . . . . . . . . . . . . .
$468,189
$12,750
$17,750
$20,000
$125,989
$291,700
$—
—
$—
NOTE 10 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES
In June 2019, the Company completed the sale of MSLO. As a result, accounts payable and accrued
expenses decreased by $11.9 million which was recorded within current liabilities from discontinued
operations as of December 31, 2018.
Accounts payable and accrued expenses from continuing operations consist of the following:
December 31,
2019
2018
(in thousands)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,942
$ 2,775
Accrued expenses
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and commissions
Professional services fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap liability – current
Licensee settlement payable – current . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,025
2,395
1,402
2,181
3,124
940
1,712
2,401
2,741
920
112
528
1,883
240
Total accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . .
$15,721
$11,600
NOTE 11 — LEASES
The Company has operating leases for certain properties for its offices and showrooms and for copiers.
The Company adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective method as of
F-34
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
the period of adoption. The Company elected the package of practical expedients upon transition where
the Company did not reassess the lease classification and initial direct costs for leases that existed prior to
adoption. Additionally, the Company did not reassess contracts entered into prior to adoption to determine
whether the arrangement was or contained a lease. At January 1, 2019, the Company did not have any
leases that had not yet commenced. The Company also elected the practical expedient to not recognize ROU
assets or lease liabilities for leases with a term of twelve months or less.
The Company determines if an arrangement contains a lease and the lease term at contract inception
based on the terms of each arrangement. The Company’s operating leases contain options to extend and
early termination options. The Company will evaluate the terms on a lease-by-lease basis and include options
to extend or early termination options when it is reasonably certain that the Company will exercise the
option. For arrangements that are identified as leases and are over twelve months the Company records a
ROU asset and a lease liability representing the present value of future lease payments. Under ASC 842, the
present value of future lease payments must be discounted by using the interest rate implicit in the lease,
or if not readily determinable, its incremental borrowing rate. The Company used an average cost of debt of
6.76% as the discount rate for the leases as it is representative of the interest rate that would be charged to
borrow an amount equal to the lease payments on a fully collateralized basis.
The Company evaluates its ROU assets for impairment in accordance with ASC 360. No impairment
of ROU assets existed as of December 31, 2019.
The operating lease assets and liabilities recorded on the consolidated balance sheet as of December 31,
2019 are summarized as follows:
Classification on Balance Sheet
Assets
Non-current . . . . . . . . . . . . . . . Right-of-use assets – operating leases
Liabilities
. . . . . . . . . . . . . . . . . . Current portion of lease liabilities – operating leases
Current
Non-current . . . . . . . . . . . . . . . Lease liabilities – operating leases, net of current portion
Total operating lease liabilities . . .
Weighted average remaining lease
term (in years) . . . . . . . . . . . .
December 31,
2019
(in thousands)
$50,320
$ 3,035
54,168
$57,203
13.3
Rent expense is recognized on a straight-line basis over the term of the lease. Rent expense for operating
leases was $6.3 million, $6.0 million and $5.7 million for the years ended December 31, 2019, 2018 and 2017,
respectively. Sublease income was $1.0 million, $0.7 million and $0.2 million for the years ended
December 31, 2019, 2018 and 2017, respectively. All of the aforementioned amounts are included in
continuing operations.
F-35
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
As of December 31, 2019, the maturities of the Company’s lease liabilities were as follows:
Operating Leases
(in thousands)
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,807
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,718
6,721
6,707
6,856
53,809
87,618
30,415
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$57,203
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is in a dispute with a former licensee concerning certain payments allegedly owed to the
licensee which the Company disputes. The Company intends to vigorously defend against these claims and
pursue a counterclaim. Litigation costs in this matter may be significant.
The Company was served with a lawsuit in March 2020 alleging trademark infringement on the
Company’s Swisstech brand. The Company intends to vigorously defend against these claims and potentially
pursue a counterclaim. Litigation costs in this matter may be significant.
We have been cooperating with an investigation by the Securities and Exchange Commission (the
“SEC”) into the Company’s controls and practices surrounding impairment analyses of goodwill and
intangible assets in 2016 and 2017. In the late third quarter and the fourth quarter of 2019, the SEC began
interviewing witnesses in connection with this matter. We believe we complied with generally accepted
accounting principles during such periods in all financial matters including goodwill and intangible assets
but can provide no assurance that the SEC will agree. We cannot predict the duration or outcome of this
matter. Costs related to this matter may be significant.
In addition, from time to time, the Company is involved in legal matters arising in the ordinary course
of business. While the Company believes that such matters are currently not material, there can be no
assurance that matters arising in the ordinary course of business for which the Company is, or could be,
involved in litigation, will not have a material adverse effect on its business, financial condition, results of
operations or cash flows. Contingent liabilities arising from potential litigation are assessed by management
based on the individual analysis of these proceedings and on the opinion of the Company’s lawyers and
legal consultants.
During the year ended December 31, 2019, the Company accrued approximately $2.0 million related to
litigation contingencies and claims.
During the year ended December 31, 2018, the Company accrued $3.2 million related to a legacy
litigation settlement claim. These charges are included in discontinued operations in the consolidated
statements of operations.
Assignment Right
The Company had entered into a license agreement for its Avia trademark which includes a clause that
if the licensee pays to the Company cumulative total royalties of $100.0 million, the licensee has the right to
F-36
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
require the Company to assign full title and ownership of the trademark to the licensee. The first term of
the agreement ends on December 31, 2022, but automatically renews in three-year increments unless
terminated by the licensee. Based on current projections, the option to exercise this right would come into
effect in approximately six years. Until such time, the Company continues to pursue and sign license
agreements outside the U.S. and within certain channels of distribution within the U.S. and collect royalties
therefrom.
NOTE 13 — PREFERRED STOCK
As of December 31, 2019 and 2018, the Company had 10,000,000 shares of preferred stock authorized
with a par value of $0.01 per share, none of which were designated or issued and outstanding. The board of
directors of the Company (the “BOD”) is authorized, with the limitations and restrictions set forth in the
Company’s certificate of incorporation, to designate from time to time the terms of the preferred stock.
NOTE 14 — STOCK INCENTIVE PLAN, OPTIONS AND WARRANTS
Stock Options
2005 Stock Incentive Plan
On January 5, 2006, the Company adopted the 2005 Stock Incentive Plan, which authorized the
granting of a variety of stock-based incentive awards. The 2005 Stock Incentive Plan was administered by
the Company’s BOD, or a committee appointed by the BOD, which determined the recipients and terms of
the awards granted. The 2005 Stock Incentive Plan provided for the issuance of both incentive stock
options (“ISOs”) and non-qualified stock options (“NQOs”). ISOs could only be granted to employees and
NQOs could be granted to directors, officers, employees, consultants, independent contractors and
advisors. The 2005 Stock Incentive Plan provided for a total of 366,667 shares of common stock to be
reserved for issuance under the 2005 Stock Incentive Plan.
2013 Stock Incentive Plan
On July 24, 2013, the BOD approved and adopted the 2013 Stock Incentive Plan. The 2013 Stock
Incentive Plan replaced the 2005 Stock Incentive Plan. No new grants will be granted under the 2005 Stock
Incentive Plan as of July 24, 2013. Grants that were made under the 2005 Stock Incentive Plan prior to
the BOD’s approval and adoption of the 2013 Stock Incentive Plan will continue to be administered in effect
in accordance with their terms. The 2013 Stock Incentive Plan became effective on July 24, 2013 and,
subject to the right of the BOD to amend or terminate the 2013 Stock Incentive Plan in accordance with
terms and conditions thereof, will remain in effect until all shares of the Company’s common stock reserved
for issuance thereunder have been delivered and any restrictions on such shares have lapsed. Notwithstanding
the foregoing, no shares of the Company’s common stock may be granted under the 2013 Stock Incentive
Plan on or after July 24, 2023.
On December 4, 2015, the Company filed a registration statement, whereby the 2013 Stock Incentive
Plan authorizes the issuance of not more than 2,500,000 shares of the Company’s common stock.
The 2013 Stock Incentive Plan is administered by the Compensation Committee. Under the 2013 Stock
Incentive Plan, the Compensation Committee is authorized to grant awards to employees, consultants and
any other persons to whom the 2013 Stock Incentive Plan is applicable and to determine the number and types
of such awards and the terms, conditions, vesting and other limitations applicable to each such award. The
Compensation Committee has the power to interpret the 2013 Stock Incentive Plan and to adopt such rules
and regulations as it considers necessary or appropriate for purposes of administering the 2013 Stock
Incentive Plan.
F-37
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
On May 26, 2016, the Company’s stockholders approved an amendment to the 2013 Stock Incentive
Plan to increase the number of authorized shares of common stock for issuance by 3,500,000 shares.
The following types of awards or any combination of awards may be granted under the 2013 Stock
Incentive Plan: (i) NQOs, (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units,
(v) performance-based awards, (vi) other stock-based awards, (vii) dividend equivalents and (viii) cash-
based awards. The aggregate number of shares of the Company’s common stock that are reserved for awards
to be granted under the 2013 Stock Incentive Plan is 6,000,000 shares, subject to adjustments for stock
splits, recapitalizations and other specified events.
Stock-based Compensation Expense
The fair value of options is estimated on the date of grant using the Black-Scholes option pricing
model. The valuation determined by the Black-Scholes pricing model is affected by the Company’s stock
price as well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. The risk free rate is based on the U.S. Treasury rate for
the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer
companies and the expected life is based on the estimated average of the life of options using the simplified
method as prescribed by ASC 718, Compensation — Stock Compensation. The Company utilizes the simplified
method to determine the expected life of the options due to insufficient exercise activity during recent years
as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on
the Company’s history and expectation of dividend payouts.
In accordance with the provisions of ASU 2016-09, the Company reduces compensation cost for actual
forfeitures as they occur.
The following table summarizes the Company’s outstanding options:
Number of
Options
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Life
(in Years)
(in thousands, except share and per share data)
Outstanding – January 1, 2017 . . . . . . . . . . . . . . . . . . . . . .
129,501
$ 9.65
2.3
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . .
(45,500)
Outstanding – January 1, 2018 . . . . . . . . . . . . . . . . . . . . . .
84,001
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(34,500)
Outstanding – January 1, 2019 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,501
—
—
—
—
$(11.49)
$ 8.65
—
—
$ (6.41)
$ 10.22
—
—
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,000)
(12.98)
Outstanding at December 31, 2019 . . . . . . . . . . . . . . . . . . .
29,501
Exercisable – December 31, 2019 . . . . . . . . . . . . . . . . . . . .
29,501
$ 8.35
$ 8.35
A summary of the changes in the Company’s unvested stock options is as follows:
F-38
2.1
2.3
2.4
2.4
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Number of Options
Weighted-Average Grant Date
Fair Value
Unvested – January 1, 2017 . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
—
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,000)
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . .
Unvested – December 31, 2017 . . . . . . . . . . . . . . . .
—
—
$ 1.96
—
(1.96)
—
$ —
There was no compensation expense related to stock options for the years ended December 31, 2019
and 2018. Total compensation expense related to stock options for the year ended December 31, 2017 was
less than $0.1 million. At December 31, 2019, there is no unrecognized compensation expense related to stock
options.
Warrants
The following table summarizes the Company’s outstanding warrants:
Number of
Warrants
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Life
(in Years)
Aggregate
Intrinsic Value
(in thousands, except share and per share data)
Outstanding – January 1, 2017 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . .
Outstanding – January 1, 2018 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . .
Outstanding – January 1, 2019 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2019 . . . . . . . . .
801,760
—
—
(31,600)
770,160
—
—
(570,160)
200,000
—
—
—
200,000
Exercisable – December 31, 2019 . . . . . . . . . .
200,000
$ 7.87
—
—
$ (5.75)
$ 7.87
—
—
$ (6.07)
$13.32
—
—
—
$13.32
$13.32
3.1
$51
2.2
$—
6.4
$—
5.4
5.4
$—
$—
A summary of the changes in the Company’s unvested warrants is as follows:
Unvested – January 1, 2017 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . .
Unvested – December 31, 2017 . . . . . . . . . . . . . . .
Number of Warrants
50,000
—
(50,000)
—
—
Weighted-Average Grant Date
Fair Value
$6.32
—
6.32
—
$ —
There was no compensation expense related to warrants for the years ended December 31, 2019 and
2018. Total compensation expense related to warrants for the year ended December 31, 2017 was less than
$0.1 million. At December 31, 2019 there is no unrecognized compensation expense related to warrants.
F-39
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Restricted Stock
A summary of the time-based restricted stock activity for the years ended December 31, 2019, 2018
and 2017 is as follows:
Unvested – January 1, 2017 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Shares
258,787
111,112
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(174,363)
Unvested – January 1, 2018 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested – January 1, 2019 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195,536
235,296
(137,843)
292,989
464,576
(235,296)
Unvested – December 31, 2019 . . . . . . . . . . . . . . . . . .
522,269
Weighted-Average
Grant Date Fair
Value
Weighted-Average
Remaining
Contractual Life
(in Years)
$ 8.45
3.60
(6.73)
$ 7.23
1.70
(5.25)
$ 3.72
0.86
(1.70)
$ 0.85
2.1
1.8
0.9
0.5
During the year ended December 31, 2019, the Company granted 464,576 shares of time-based
restricted stock to members of the Company’s BOD. These shares had a grant date fair value of $0.4 million
and vest over a period of one year. The Company recorded $0.3 million during the year ended December 31,
2019 as compensation expense in operating expenses from continuing operations pertaining to these
grants.
During the year ended December 31, 2018, the Company granted 235,296 shares of time-based
restricted stock to members of the Company’s BOD. These shares had a grant date fair value of $0.4 million
and vest over a period of one year. The Company recorded $0.1 million and $0.3 million during the years
ended December 31, 2019 and 2018, respectively, as compensation expense in operating expenses from
continuing operations pertaining to these grants.
During the year ended December 31, 2017, the Company granted 111,112 shares of time-based
restricted stock to members of the Company’s BOD. These shares had a grant date fair value of $0.4 million
and vest over a period of one year. The Company recorded $0.1 million and $0.3 million during the years
ended December 31, 2018 and 2017, respectively, as compensation expense in operating expenses from
continuing operations pertaining to these grants.
Total compensation expense recorded in operating expenses from continued operations related to time-
based restricted stock grants for the years ended December 31, 2019, 2018 and 2017 was $0.4 million,
$0.5 million, and $0.6 million, respectively. Total unrecognized compensation expense related to time-based
restricted stock grants at December 31, 2019 amounted to $0.2 million and is expected to be recognized
over a weighted average period of 0.5 years.
F-40
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Restricted Stock Units
A summary of the time-based restricted stock unit activity for the years ended December 31, 2019,
2018 and 2017 is as follows:
Weighted-Average
Grant Date Fair
Value
Weighted-Average
Remaining
Contractual Life
(in Years)
Number of Shares
Unvested – January 1, 2017 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . .
Unvested – January 1, 2018 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . .
Unvested – January 1, 2019 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . .
326,667
688,836
(219,103)
(60,000)
736,400
2,678,743
(1,732,523)
(66,667)
1,615,953
—
(997,644)
(190,000)
Unvested – December 31, 2019 . . . . . . . . . . . . . . . . . .
428,309
$ 8.52
3.18
(8.29)
(4.89)
$ 3.89
1.77
(2.18)
(3.20)
$ 2.24
—
(2.44)
(1.00)
$ 1.42
2.5
2.2
2.2
1.3
The Company did not grant time-based restricted stock units during the year ended December 31,
2019.
During the year ended December 31, 2018, the Company granted 1,835,257 time-based restricted
stock units to certain employees and consultants for future services. These shares of time-based restricted
stock units had a grant date fair value of $3.2 million and vest immediately to over a period of five years. The
Company recorded $0.5 million and $0.8 million during the years ended December 31, 2019 and 2018,
respectively, as compensation expense in operating expenses from continuing operations pertaining to these
grants.
During the year ended December 31, 2018, the Company issued 843,486 time-based restricted stock units
to an employee for a 2017 performance-based bonus pursuant to their employment agreement. The bonus
was paid in restricted stock in the first quarter of 2018, based on the average closing stock price for the 30 days
preceding March 1, 2018. Compensation expense recorded in operating expenses from continuing operations
of $1.5 million was fully recognized in 2017 related to this grant.
During the year ended December 31, 2017, the Company granted 688,836 time-based restricted
stock units to certain employees and consultants for future services. These shares of time-based restricted
stock units had a grant date fair value of $2.2 million and vest over a period of six months to three years.
Included in this were 33,334 shares of time-based restricted stock units for the Company’s former Chief
Executive Officer which were accelerated during the year ended December 31, 2019. The Company recorded
$0.2 million, $0.4 million and $0.2 million during the years ended December 31, 2019, 2018 and 2017,
respectively, as compensation expense in operating expenses from continuing operations pertaining to these
grants.
During the year ended December 31, 2017, the Company accelerated the vesting of 83,334 shares of time-
based restricted stock units for the Company’s former Chief Executive Officer in connection with the CEO
transition and an employee pursuant to their termination agreement. Total compensation expense related to
F-41
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
these shares of $0.8 million was recorded in operating expenses from continued operations in the consolidated
statement of operations for the year ended December 31, 2017.
During the year ended December 31, 2016, the Company granted 260,000 shares of time-based
restricted stock units to employees for future services. These shares of time-based restricted stock had a
grant date fair value of $1.8 million and vest over a period of three years. Included in this were 58,334 shares
of time-based restricted stock units for the Company’s former President which were accelerated during the
year ended December 31, 2019. The Company recorded $0.3 million, $0.5 million and $0.7 million during
the years ended December 31, 2019, 2018 and 2017, respectively, as compensation expense pertaining to
this grant.
Total compensation expense recorded as operating expenses from continuing operations related to time-
based restricted stock units grants for the years ended December 31, 2019, 2018 and 2017 was $1.2 million,
$1.6 million and $1.7 million, respectively. Total accrued compensation expense related to performance-
based restricted stock units for the year ended December 31, 2017 was $1.5 million. Total unrecognized
compensation expense related to time-based restricted stock units grants at December 31, 2019 amounted
to $0.4 million and is expected to be recognized over a weighted average period of 1.3 years.
Performance Stock Units
A summary of the PSUs activity for the years ended December 31, 2019, 2018 and 2017 is as follows:
Weighted-Average
Grant Date Fair
Value
Weighted-Average
Remaining
Contractual Life
(in Years)
Number of Shares
Unvested – January 1, 2017 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . .
Unvested – January 1, 2018 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . .
2,803,367
716,600
(701,233)
(773,100)
2,045,634
785,000
(350,408)
(260,408)
Unvested – January 1, 2019 . . . . . . . . . . . . . . . . . . . .
2,219,818
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(289,671)
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . .
(1,800,218)
$ 8.18
3.17
(10.97)
(7.22)
$ 5.83
1.98
(4.71)
(7.32)
$ 4.47
—
(4.68)
(4.43)
2.4
2.0
0.8
Unvested – December 31, 2019 . . . . . . . . . . . . . . . . . .
129,929
$ 4.51
—
On March 27, 2019, the Compensation Committee voted to approve, on a discretionary basis, vesting
of 231,396 PSUs to employees and consultants previously granted during the years ended December 31,
2016, 2017 and 2018 subject to achievement of certain of the Company’s performance metrics within each
fiscal year. The fair value and expense recorded for such PSUs was based on the closing price of the Company’s
common stock on the date the modification of the performance metric was communicated to employees
and consultants. Total compensation expense related to these PSUs of $0.2 million was recorded as operating
expenses from continuing operations in the consolidated statement of operations for the year ended
December 31, 2019.
During the year ended December 31, 2018, the Company granted 135,000 PSUs to employees pursuant
to their employment agreements. These PSUs had a grant date fair value of $0.3 million, vest over a period
F-42
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
of one to two years and require achievement of certain performance metrics within each fiscal year for such
PSUs to be earned. The Company issued 83,250 PSUs to an employee related to this grant. The fair value
and expense recorded for such PSUs was based on the closing price of the Company’s common stock on the
date the performance metric was communicated to the employee. The Company recorded $0.2 million in
compensation expense during the year ended December 31, 2018 as operating expenses from continued
operations in the consolidated statement of operations.
On February 20, 2018, the Compensation Committee voted to approve, on a discretionary basis,
vesting of 208,883 PSUs to employees and consultants previously granted during the years ended
December 31, 2016 and 2017 subject to achievement of certain of the Company’s performance metrics
within each fiscal year. The fair value and expense recorded for such PSUs was based on the closing price of
the Company’s common stock on the date the modification of the performance metric was communicated
to employees and consultants. Total compensation expense related to these PSUs of $0.5 million was recorded
as operating expenses in the consolidated statement of operations for the year ended December 31, 2018.
On July 25, 2017, the Compensation Committee voted to approve, on a discretionary basis, an award
of 41,600 PSUs to employees and consultants. The fair value and expense recorded for such PSUs was
based on the closing price of the Company’s common stock on the date the modification of the performance
metric was communicated to employees and consultants. The Company recorded expense related to this
award for the year ended December 31, 2018 as part of the discretionary vesting approved by the
Compensation Committee on February 20, 2018. No additional expense was recorded during the year
ended December 31, 2018 as the likelihood of these PSUs being earned was not probable. The Company
did not record any compensation expense during the year ended December 31, 2017 as the likelihood of these
PSUs being earned was not probable.
During the year ended December 31, 2017, the Company granted 175,000 PSUs to the Company’s
former Chief Executive Officer pursuant to an employment agreement, dated April 3, 2017. These PSUs
had a grant date fair value of $0.7 million and vest over a period of three years and require achievement of
certain of the Company’s performance metrics within each fiscal year for such PSUs to be earned. The
Company recorded $0.2 million in compensation expense during the year ended December 31, 2018 as the
performance metrics were achieved pursuant to fiscal year end results. The Company recorded $0.1 million in
compensation expense during the year ended December 31, 2018 as the likelihood of these PSUs being
earned was considered probable for the current fiscal year. No compensation expense was recorded for the
year ended December 31, 2019 related to this grant.
During the year ended December 31, 2017, the Company accelerated the vesting of 200,000 PSUs for
the Company’s former Chief Executive Officer in connection with the CEO transition. Total compensation
expense related to these PSUs of $2.9 million was recorded as operating expenses in the consolidated statement
of operations for the year ended December 31, 2017.
On February 28, 2017, the Compensation Committee voted to approve, on a discretionary basis, an
award of 164,978 PSUs to employees and consultants. Included in the above award were 60,000 PSUs and
36,000 PSUs for the Company’s former Chief Executive Officer and Chief Financial Officer, respectively. The
fair value and expense recorded for such PSUs was based on the closing price of the Company’s common
stock on the date the modification of the performance metric was communicated to employees and
consultants. Total compensation expense related to these PSUs of $0.6 million was recorded as operating
expenses from continuing operations in the consolidated statement of operations for the year ended
December 31, 2017.
Total compensation expense related to the PSUs for the years ended December 31, 2019, 2018 and 2017
was $0.2 million, $0.9 million and $3.5 million, respectively.
F-43
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
NOTE 15 — INCOME TAXES
The benefit from income taxes from continuing operations consists of the following:
For the Year Ended December 31,
2019
2018
2017
(in thousands)
Federal:
Current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $
—
Deferred provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,751)
(2,670)
(52,878)
Foreign:
Current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State:
Current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,751)
(2,670)
(52,878)
57
—
57
—
(1,001)
(1,001)
84
—
84
30
612
642
134
—
134
178
8,143
8,321
Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(8,695) $(1,944) $(44,423)
The difference between the benefit from income taxes and the expected income tax provision determined
by applying the statutory federal and state income tax rates to pre-tax income are as follows:
For the Year Ended December 31,
2019
2018
2017
Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.0% 21.0%
35.0%
State taxes, net of federal tax benefit . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Cuts and Jobs Act
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in state tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.6
—
(2.6)
—
(1.6)
(0.1)
(0.6)
—
—
2.0
—
8.3
(7.3)
(5.7)
(0.5)
(3.1)
—
(0.8)
—
(32.2)
0.5
5.3
(0.1)
—
(0.7)
5.6
—
17.7% 13.9%
13.4%
The Tax Cuts and Jobs Act
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted
fundamental changes to the taxation of multinational corporations. The Tax Act includes changes to the
taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-
deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax
Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative
minimum tax, expensing of capital investment, and limitation of the deduction for interest expense.
F-44
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S.
shareholder’s historical undistributed earnings of foreign affiliates. Although the Tax Act was generally
effective as of January 1, 2018, GAAP required recognition of the tax effects of new legislation during the
reporting period that included the enactment date, which was December 22, 2017.
The components of the Company’s consolidated deferred income tax balances as of December 31,
2019 and 2018 are as follows:
December 31,
2019
2018
(in thousands)
Deferred income tax assets
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32,565
$ 51,042
Capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets – finite life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credits carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,997
3,137
286
—
—
1,148
1,939
9,984
—
13,215
4,791
70,062
4,417
3,261
439
3,649
799
1,281
2,755
8,644
1,053
—
3,585
80,925
Deferred income tax liability – long-term
Intangible assets – indefinite-lived . . . . . . . . . . . . . . . . . . . . . . . . . .
(57,343)
(130,818)
Right-of-use asset – operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment
(11,625)
(193)
—
—
Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,252)
(17,109)
Net deferred income tax liability – long-term . . . . . . . . . . . . . . . . . . . . .
$(14,351) $ (67,002)
(69,161)
(130,818)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this
assessment. Based on consideration of these items and tax provisions under the Tax Act, primarily the new
limitation on interest expense deductions, management determined that enough certainty existed to
warrant the release of the valuation allowance recorded against substantially all the Company’s deferred tax
assets as of December 31, 2017. As of December 31, 2019 and 2018, a valuation allowance of $15.3 million
and $17.1 million, respectively, has been recognized for deferred income taxes that may not be realized by the
Company in future periods. The valuation allowance at December 31, 2019 and 2018 primarily relates to
state net operating losses and capital loss carryforwards.
F-45
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
The Company has federal NOLs available to carryforward to future periods of $107.8 million as of
December 31, 2019 which begin expiring in 2029. The Company has state NOLs available to carryforward
to future periods of $179.0 million as of December 31, 2019 which begin expiring in 2020. The Company has
foreign tax credits available to carryforward to future periods of $0.5 million as of December 31, 2019
which begin expiring in 2020. The Company has experienced several changes of ownership under Section 382
of the Internal Revenue Code of 1986, as amended (the “Code”), which places various limitations on the
NOLs. The limitations on NOLs are based upon a formula provided under Section 382 of the Code that is
based on the fair market value of the Company and prevailing interest rates at the time of the ownership
change. An “ownership change” is generally a 50% increase in ownership over a three-year period by
stockholders who directly or indirectly own at least five percent of a company’s stock. The limitations on
the use of the NOLs under Section 382 could affect the Company’s ability to offset future taxable income.
The Company currently files U.S. federal tax returns and various state tax returns. Tax years that
remain open for assessment for federal and state purposes include years ended December 31, 2016 through
December 31, 2019.
The Company recognizes interest and penalties related to unrecognized tax benefits in the tax provision.
The Company has no unrecognized tax benefits at December 31, 2019 and 2018.
NOTE 16 — RELATED PARTY TRANSACTIONS
Consulting Services Agreement with Tengram Capital Partners, L.P. (f/k/a Tengram Capital Management
L.P.)
Pursuant to an agreement with Tengram Capital Partners, L.P., formerly known as Tengram Capital
Management, L.P. (“TCP”), an affiliate of Tengram Capital Partners Gen2 Fund, L.P., which is one of the
Company’s largest stockholders, the Company had engaged TCP, effective as of January 1, 2013, to provide
services to the Company pertaining to (i) mergers and acquisitions, (ii) debt and equity financing and
(iii) such other related areas as the Company may reasonably request from time to time (the “TCP
Agreement”). TCP was entitled to receive annual compensation of $1.0 million, including fees and
reimbursement of out-of-pocket expenses in connection with performing its services under the TCP
Agreement. The TCP Agreement remained in effect for a period continuing through the earlier of five years
or the date on which TCP and its affiliates cease to own in excess of 5% of the outstanding shares of
common stock in the Company. On August 15, 2014, the Company consummated transactions pursuant to
an agreement and plan of merger, dated as of June 24, 2014 (the “Galaxy Merger Agreement”) with SBG
Universe Brands LLC, a Delaware limited liability company and the Company’s direct wholly-owned
subsidiary (“LLC Sub”), Universe Galaxy Merger Sub, Inc., a Delaware corporation and direct wholly-
owned subsidiary of LLC Sub, Galaxy Brand Holdings, Inc. and Carlyle Galaxy Holdings, L.P. (such
transactions, collectively, the “Galaxy Acquisition”). In connection with the Galaxy Merger Agreement, the
Company and TCP entered into an amendment to the TCP Agreement (the “Amended TCP Agreement”),
pursuant to which, among other things, TCP was entitled to receive annual fees of $0.9 million beginning with
fiscal year 2014. The Amended TCP Agreement terminated as of December 31, 2019.
The Company paid TCP $0.9 million, $0.7 million, and $0.9 million for services under the Amended
TCP Agreement during the years ended December 31, 2019, 2018 and 2017, respectively. The Company
reimbursed TCP $0.1 million for the year ended December 31, 2019 and less than $0.1 million for each of
the years ended December 31, 2018 and 2017 for out-of-pocket expenses in connection with their services.
These amounts are included in operating expenses from continuing operations in the Company’s consolidated
financial statements. At December 31, 2019, there was $0.2 million due to TCP for services and less than
$0.1 million due for reimbursement of expenses. At December 31, 2018, there was $0.2 million due to TCP
for services and less than $0.1 million due for reimbursement of expenses. The Company paid $1.8 million in
transaction fees to TCP related to the sale of MSLO during the year ended December 31, 2019 recorded in
discontinued operations in the Company’s consolidated financial statements.
F-46
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
Additionally, in July 2013, the Company entered into a consulting arrangement with an employee of
TCP (the “TCP Employee”), pursuant to which the TCP Employee provides legal and other consulting
services at the request of the Company from time to time. The TCP Employee was also issued 125,000 shares
of restricted stock, vesting over a four-year period and 180,000 PSUs, vesting over three years in increments
of 20% for 2014, 20% for 2015 and 60% for 2016. During the year ended December 31, 2016, the TCP
employee was granted 200,000 PSUs, vesting over three years in increments of 33.3% for 2017, 33.3% for
2018 and 33.4% for 2019. During the year ended December 31, 2018, the TCP employee was granted 150,000
shares of time-based restricted stock units, vesting over a three year period and 300,000 shares of time-
based restricted stock units, vesting over a three year period with 25% vesting immediately. The Company
paid the TCP Employee $0.3 million, $0.3 million and $0.4 million for services under the consulting
arrangement during the years ended December 31, 2018, 2017 and 2016, respectively. These amounts are
included in operating expenses from continuing operations in the Company’s consolidated financial
statements. The Company and the TCP Employee terminated the consulting arrangement during the third
quarter of 2019. The Company accelerated the vesting of the unvested shares of the TCP Employee’s time-
based restricted stock units. At December 31, 2019, no amounts were due to the TCP Employee. At
December 31, 2018, less than $0.1 million was due to the TCP Employee.
Transactions with Tommie Copper, Inc.
The Company entered into an agreement with Tommie Copper, Inc. (“TCI”), an affiliate of TCP,
under which the Company received a vendor placement fee for facilitating certain distribution arrangements.
The Company recorded $3.1 million of revenue from continuing operations for the year ended December 31,
2018. At December 31, 2018, the Company had a current receivable of $1.1 million from TCI in accounts
receivable and a long-term receivable of $1.9 million from TCI in other assets in the consolidated balance
sheet. During the year ended December 31, 2019, the Company reserved $2.9 million related to the outstanding
receivable balance recorded in operating expenses from continuing operations in the consolidated statement
of operations as TCI could not adhere to its original payment terms and new extended payment terms
have been negotiated. At December 31, 2019, the Company had a net current receivable of $0.1 million due
from TCI.
Transactions with E.S. Originals, Inc.
A division president of the Company maintains a passive ownership interest in one of the Company’s
licensees, E.S. Originals, Inc. (“ESO”). The Company receives royalties from ESO under license agreements
for certain of the Company’s brands in the footwear category. The Company recorded $4.9 million,
$8.4 million and $18.1 million of revenue for the years ended December 31, 2019, 2018 and 2017, respectively,
for royalties, commissions and advertising revenue earned from ESO license agreements. At December 31,
2019 and 2018, the Company had $2.8 million and $6.2 million, respectively, recorded as accounts receivable
and $0.2 million and $1.9 million, respectively, as a long-term receivable in other assets from ESO in the
consolidated balance sheets.
In addition, the Company entered into a license-back agreement with ESO under which the Company
reacquired the rights to certain international territories in order to re-license these rights to an unrelated
party. The Company recorded approximately $1.3 million and $0.3 million in license-back expense for
the years ended December 31, 2019 and 2018, respectively.
Transactions with Centric Brands Inc. (f/k/a Differential Brands Group, Inc.)
During the fourth quarter of 2018, Centric Brands, Inc. (“Centric”) acquired a significant portion of
Global Brands Group Holding Limited’s (“GBG”) North American licensing business. The Company
entered into an agreement with Centric, an affiliate of TCP, under which the Company received a rights
transfer fee of $4.0 million related to the Joe’s license. During the fourth quarter of 2019, the Company and
Centric entered into a license agreement under the Jessica Simpson brand. The Company recorded
F-47
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
$6.6 million and approximately $1.2 million for royalty revenue earned from continuing operations from
Centric for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the
Company had $1.0 million and $0.8 million, respectively, recorded as accounts receivable from Centric in the
consolidated balance sheets.
Acquisition of FUL
On November 17, 2014, the Company made a strategic investment in FUL IP. FUL IP is a collaborative
investment between the Company and JALP. FUL IP was formed for the purpose of licensing the FUL
trademark to third parties in connection with the manufacturing, distribution, marketing and sale of FUL
branded bags, backpacks, duffels, luggage and apparel accessories. JALP contributed the FUL trademark
with a fair value of $8.9 million. In exchange for a 50.5% economic interest in FUL IP the Company paid
JALP $4.5 million. JALP’s minority member interest in FUL IP has been reflected as noncontrolling interest
on the Company’s consolidated balance sheets. One of the Company’s directors, Mr. Al Gossett, has a
partial ownership interest in JALP. There was $0.5 million, $0.7 million and $2.2 million of noncontrolling
interest loss recorded during the years ended December 31, 2019, 2018 and 2017, respectively. The Company
sold the FUL trademark during the year ended December 31, 2018. The noncontrolling interest loss for
the year ended December 31, 2019 was due to the write off of a $0.9 million receivable related to the previous
sale of the FUL trademark.
Investment in Equity Securities
In September 2015, the Company purchased equity securities of Iconix Brand Group, Inc., an
unaffiliated third-party publicly traded company, from Tengram Capital Partners, L.P., which is an affiliate
of Tengram Capital Partners Gen2 Fund, L.P., one of the Company’s largest stockholders, for an aggregate
purchase price of $12.0 million (plus related transaction expenses), which was the purchase price paid by
Tengram Capital Partners, L.P. upon the acquisition of such equity securities in open market transactions.
The Company did not pay a fee or any compensation to Tengram Capital Partners, L.P. in connection with the
Company’s investment in the equity securities. The Company sold its equity securities during the year
ended December 31, 2017.
Registration Rights Agreement
On June 22, 2015, Martha Stewart, the Martha Stewart Family Limited Partnership, Alexis Stewart,
the Martha Stewart 1999 Family Trust, the Martha Stewart 2000 Family Trust and the Martha and Alexis
Stewart Charitable Foundation (collectively, the “Stewart Stockholders”) entered into an agreement (the
“Registration Rights Agreement”) with the Company, which grants the Stewart Stockholders certain
“demand” registration rights for up to two offerings of greater than $15 million each, certain “S-3”
registration rights for up to three offerings of greater than $5 million each and “piggyback” registration
rights with respect to the shares of the Company’s common stock held by the Stewart Stockholders (whether
issued pursuant Mergers or acquired thereafter) and their transferees. All reasonable expenses incident to
such registrations generally are required to be borne by the Company. The Registration Rights Agreement
became effective on December 4, 2015.
NOTE 17 — PROFIT SHARING PLAN
The Company has established a 401(k) profit-sharing plan for the benefit of eligible employees. The
Company may make contributions to the plan as determined by the BOD. The Company accrued a matching
contribution, net of forfeitures, of $0.3 million, $0.1 million and $0.5 million for the years ended
December 31, 2019, 2018, and 2017, respectively.
F-48
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
NOTE 18 — QUARTERLY DATA (UNAUDITED)
Unaudited quarterly consolidated financial information from continuing operations for 2019 and 2018
is summarized as follows:
2019
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . .
Loss from continuing operations before income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Loss from continuing operations
Net (income) loss from continuing operations
First
Quarter
Second
Third
Fourth
Quarter
Quarter
Quarter
(in thousands, except per share data)
Full Year
$ 25,524
9,978
$26,415
12,508
$ 25,392
(19,964)
$ 24,245
4,274
$ 101,576
6,796
(3,473)
(3,232)
(2,214)
(1,835)
(33,855)
(27,820)
(9,529)
(7,489)
(49,071)
(40,376)
attributable to noncontrolling interests . . . . . .
(1,539)
(1,455)
9,449
(419)
6,036
Loss from continuing operations attributable to
Sequential Brands Group, Inc. and
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of
(4,771)
(3,290)
(18,371)
(7,908)
(34,340)
income taxes . . . . . . . . . . . . . . . . . . . . . . . .
(120,574)
(1,309)
(309)
(2,871)
(125,063)
Net loss attributable to Sequential Brands
Group, Inc. and Subsidiaries . . . . . . . . . . . . .
$(125,345) $ (4,599) $(18,680) $(10,779) $(159,403)
Basic and diluted loss per share:
. . . . . . . . . . . . . . . . .
Continued operations
Discontinued operations
. . . . . . . . . . . . . . .
Attributable to Sequential Brands Group, Inc.
and Subsidiaries . . . . . . . . . . . . . . . . . . . .
2018
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . .
(Loss) income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from continuing operations . . . . . . .
Net income from continuing operations attributable
$
(0.07) $ (0.05) $
(1.88)
(0.02)
(0.28) $
(0.00)
(0.12)
(0.04)
(1.95)
(0.07)
(0.29)
(0.16)
First
Quarter
Fourth
Third
Second
Quarter
Quarter
Quarter
(in thousands, except per share data)
Full Year
$29,463
11,183
$33,126
17,723
$ 29,455
(3,858)
$35,246
17,003
$127,290
42,051
(2,478)
(1,555)
3,742
3,301
(17,689)
(8,881)
2,519
(4,827)
(13,906)
(11,962)
to noncontrolling interests . . . . . . . . . . . . . . . . .
(1,960)
(1,102)
(1,581)
(863)
(5,506)
(Loss) income from continuing operations
attributable to Sequential Brands Group, Inc. and
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to Sequential Brands
(3,515)
2,199
(10,462)
(5,690)
(17,468)
1,253
1,388
847
3,496
6,984
Group, Inc. and Subsidiaries . . . . . . . . . . . . . . .
$ (2,262) $ 3,587
$ (9,615) $ (2,194) $ (10,484)
Basic (loss) earnings per share:
Continued operations . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . .
Attributable to Sequential Brands Group, Inc. and
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.06) $
0.02
0.03
0.03
$
(0.16) $ (0.09)
0.05
0.01
(0.04)
0.06
(0.15)
(0.03)
F-49
SEQUENTIAL BRANDS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
First
Quarter
Second
Third
Fourth
Quarter
Quarter
Quarter
(in thousands, except per share data)
Full Year
Diluted (loss) earnings per share:
Continued operations . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . .
Attributable to Sequential Brands Group, Inc. and
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . .
$(0.06)
0.02
$0.02
0.02
$(0.16)
0.01
$(0.09)
0.05
(0.04)
0.06
(0.15)
(0.03)
NOTE 19 — SUBSEQUENT EVENTS
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease
(“COVID-19”) as a pandemic, which continues to spread throughout the U.S. COVID-19 is having an
unprecedented impact on the U.S. economy as federal, state and local governments react to this public health
crisis. Due to the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on
the Company’s results of operations and cash flows. Continued impacts of the pandemic could materially
adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows as our licensees
may request temporary relief, delay or not make scheduled payments. The Company is proactively taking steps
to increase available cash on hand including utilizing funds available under its Revolving Credit Facility.
Subsequent to December 31, 2019, and through March 31, 2020, the Company made net borrowings
of $7.1 million on its Revolving Credit Facility. As of March 31, 2020, the Company had a total of
$22.7 million drawn down under its Revolving Credit Facility.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted
and signed into law. Certain provisions of the CARES Act impact the 2019 income tax provision computations
of the Company and will be reflected in the first quarter of 2020, or the period of enactment. The CARES
Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020.
The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted
taxable income to 50% of adjusted taxable income. This modification would significantly increase the
allowable interest expense deduction of the Company and result in significantly less taxable income for the
year-ended 2019, resulting in less utilization of net operating losses in that year. The change in the interest
expense limitation pursuant to the CARES Act will not have an impact to the first quarter of 2020, other
than an increase in the net operating loss deferred tax asset. As a result of the CARES Act, it is anticipated
that the Company will fully utilize all interest expense that was deferred beginning in 2018 with no
additional disallowed interest expense in 2020.
On March 30, 2020, the Company entered into the Fourth Amendment to its Third Amended and
Restated Credit Agreement (the “New FS/KKR Credit Agreement”) with the FS/KKR Agent and the
FS/KKR Facility Loan Parties. Pursuant to the New FS/KKR Credit Agreement, no mandatory amortization
payments are required until September 30, 2020. Thereafter, the loans under the New FS/KKR Credit
Agreement will be subject to quarterly amortization payments of approximately $2.1 million. The New
FS/KKR Credit Agreement modifies the calculation of Consolidated EBITDA (as defined in the agreement)
by permitting additional addbacks. The New FS/KKR Credit Agreement allows for the netting of up to
$5 million in cash of the Company and its subsidiaries for purposes of calculating the leverage ratio covenants,
except for the quarter ended March 31, 2020 which allows for netting of up to $10 million in cash. If the
Consolidated Total Leverage Ratio is not equal to or less than 5:50:1:00 (on a pro forma basis) on July 31,
2020, Sequential shall amend its organization documents to add one new independent director acceptable to
the lenders under the New FS/KKR Credit Agreement to sit on its Board of Directors.
F-50
Schedule II — Valuation and Qualifying Accounts
Sequential Brands Group, Inc.
(in thousands)
Balance at
Beginning of
Period
Additions
Charged to
Costs and
Expenses
Deductions
Balance at End
of Period
$ 1,819
$
$
372
221
$4,123
$1,547
$ 482
$
$
$
(105)
(100)
(331)
$ 5,837
$ 1,819
$
372
$15,252
$17,109
$17,404
Description
Reserves and allowance deducted from asset accounts:
Accounts receivable(a):
Year Ended December 31, 2019 . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2018 . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2017 . . . . . . . . . . . . . . . . . .
Valuation allowance on deferred tax assets(b):
Year Ended December 31, 2019 . . . . . . . . . . . . . . . . . .
$ 17,109
$ — $ (1,857)
Year Ended December 31, 2018 . . . . . . . . . . . . . . . . . .
$ 17,404
$ — $
(295)
Year Ended December 31, 2017 . . . . . . . . . . . . . . . . . .
$110,829
$ — $(93,425)
(a) These amounts include reserves for doubtful accounts.
(b) Changes are recognized in the provision for (benefit from) income taxes.
F-51
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements on Form S-8
(File No. 333-215508), Form S-3 (File No. 333-208120) and Form S-8 (File No. 333-208343) of Sequential
Brands Group, Inc. of our reports dated March 31, 2020 on our audits of the consolidated financial statements
and financial statement schedule of Sequential Brands Group, Inc. and Subsidiaries as of December 31,
2019 and 2018 and each of the years in the three-year period ended December 31, 2019, and the effectiveness
of internal control over financial reporting of Sequential Brands Group, Inc. and Subsidiaries as of
December 31, 2019, included in this Annual Report on Form 10-K of Sequential Brands Group. Inc. for the
year ended December 31, 2019.
/s/ CohnReznick LLP
New York, New York
March 31, 2020
Certification of Principal Executive Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, David Conn, certify that:
1. I have reviewed this Annual Report on Form 10-K of Sequential Brands Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2020
/s/ David Conn
David Conn
Chief Executive Officer
53
EXHIBIT 31.2
Certification of Principal Financial Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Daniel Hanbridge, certify that:
1. I have reviewed this Annual Report on Form 10-K of Sequential Brands Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2020
/s/ Daniel Hanbridge
Daniel Hanbridge
Senior Vice President and Interim Chief Financial Officer
54
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, in connection with the filing of the Annual Report on Form 10-K for the Year Ended December 31,
2019 (the ‘Report’) by Sequential Brands Group, Inc. (‘Registrant’), the undersigned hereby certify that, to the
best of their knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of Registrant.
Date: March 31, 2020
Date: March 31, 2020
/s/ David Conn
David Conn
Chief Executive Officer (Principal Executive Officer)
/s/ Daniel Hanbridge
Daniel Hanbridge
Senior Vice President and Interim Chief Financial
Officer (Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to Sequential
Brands Group, Inc. and will be retained by Sequential Brands Group, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
CORPORATE INFORMATION
Board of Directors
David Conn
Chief Executive Officer and Secretary
Sequential Brands Group, Inc.
Class I Director
Martha Stewart
Chief Creative Officer
Marquee Brands
Class I Director
Gary Johnson (2, 3)
Chairman, CAN Capital
Class II Director
Al Gossett (1, 2, 3)
President and Chief Executive Officer
Gossett Motor Cars
Class III Director
William Sweedler
Co-Founder and Managing Partner
Tengram Capital Partners
Class I Director, Chairman of the Board
Rodney S. Cohen
Head of Private Equity
Black Diamond Capital Management
Class II Director
Stewart Leonard, Jr. (1, 3)
President and Chief Executive Officer
Stew Leonard’s
Class II Director
Aaron Hollander (1, 2)
Chairman, Chief Executive Officer and
President, First Aviation Services, Inc.
Class III Director
1 – Audit Committee Member 2 – Compensation Committee Member 3 – Governance Committee Member
Management
David Conn
Chief Executive Officer and Secretary
Daniel Hanbridge
SVP and Interim Chief Financial Officer
Chad Wagenheim
President
Corporate Office
Sequential Brands Group, Inc.
601 West 26th Street, 9th Floor
New York, NY 10001
www.sequentialbrandsgroup.com
Annual Meeting
Friday June 5, 2020 10:00 a.m. at the Company’s Corporate Office
Independent Auditors
CohnReznick LLP
1301 Avenue of the Americas
New York, NY 10019
Transfer Agent
Computershare Trust Co. N.A.
Tel.: (877) 373-6374
Outside U.S. Tel.: (781) 575-2879
Mailing Addresses:
Shareholder correspondence should be mailed to:
Computershare Investor Services
P.O. BOX 505000
Louisville, KY 40233-5000
Overnight correspondence should be sent to:
Computershare Investor Services
462 South 4th Street
Suite 1600
Louisville, KY 40202
Questions and Inquires via Website: http://www.computershare.com
Hearing Impaired # TDD: (800) 952-9245
Information Requests
A copy of the Company’s Annual Report on Form 10-K, including the
exhibits thereto, as filed with the Securities and Exchange Commission is
available free of charge to stockholders either on the Company’s
website or upon request to:
Sequential Brands Group, Inc.
Attn: Investor Relations
601 West 26th Street, 9th Floor
New York, NY 10001
Tel.: (646) 564-2577
About Sequential Brands Group, Inc.
Sequential Brands Group, Inc. (Nasdaq: SQBG) owns, promotes, markets, and licenses a portfolio of
consumer brands in the lifestyle and active categories. Sequential seeks to ensure that its brands continue
to thrive and grow by employing strong brand management and marketing teams. Sequential has licensed
and intends to license its brands in a variety of consumer categories to retailers, wholesalers and
distributors in the United States and around the world. For more information, please visit Sequential's
website at: www.sequentialbrandsgroup.com. To
licensing opportunities, please
email: newbusiness@sbg-ny.com.
inquire about
C O R P O R A T E
H E A D Q U A R T E R S
6 0 1 W 2 6 t h S T , 9 t h F L O O R
N E W Y O R K , N Y 1 0 0 0 1
6 4 6 . 5 6 4 . 2 5 7 7
W W W . S E Q U E N T I A L B R A N D S G R O U P. C O M