UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

(mark one)

 

x

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

 

For the quarterly period ended March 31, 2012

 

¨

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

 

For the transition period from __________________ to ______________________.

 

Commission file number 0-16075

 

SEQUENTIAL BRANDS GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware		86-0449546
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1065 Avenue of Americas, Suite 1705
New York, NY 10018

(Address of principal executive offices) (Zip Code)

 

(646) 564-2577

(Registrant’s telephone number, including area code)

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ¨	Accelerated filer ¨
Non-accelerated filer       ¨  (Do not check if smaller reporting company)	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ Nox

 

As of May 15, 2012, the registrant had 2,400,171 shares of common stock, par value $.001 per share, issued and outstanding (as adjusted to reflect a 1-for-15 reverse stock split of the registrant’s common stock which took effect on September 11, 2012).

 

 

 

Explanatory Note

 

We are filing this Amended Quarterly report on Form 10-Q/A to our Quarterly Report on Form 10-Q for the three months ended March 31, 2012 and 2011 (the “Original Filing”) to amend and restate our unaudited consolidated financial statements and related disclosures for the three months ended March 31, 2012 and 2011, as discussed in Note 15 to the accompanying restated unaudited consolidated financial statements. The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on May 15, 2012.

 

Background of the Restatement

 

Recognition of License Revenue

 

In the first quarter of 2013, management and the audit committee of our board of directors (the “Audit Committee”) determined that our accounting treatment pertaining to revenue recognition on certain of our license agreements should be modified. This change in accounting treatment resulted in a restatement of revenue, operating expenses, loss from continuing operations and loss attributable to common stockholders on the Company’s statement of operations and accounts receivable, deferred license revenue, accounts payable and accrued expenses, and accumulated deficit on its balance sheet, as of and for the three months ended March 31, 2012.

 

Valuation of Senior Secured Convertible Debentures

 

In the first quarter of 2013, an accounting review by management and the Audit Committee revealed that the accounting treatment relating to the valuation of our variable rate senior secured convertible debentures (the “Debentures) should be modified. Management initially concluded that the valuation date of the two closings of the transaction was on the same date, February 3, 2012. After further review, management determined that there should be two separate valuation dates, one for each of the closings, on February 3, 2012 and February 22, 2012, respectively. The change in the valuation date of the second closing created a beneficial conversion feature to the holders of the Debentures. This change in accounting treatment resulted in a restatement of non-cash interest expense, loss from continuing operations and loss attributable to common stockholders and basic and diluted loss per common share on our statements of operations and other assets, the Debentures, additional paid-in capital and accumulated deficit on our balance sheet, as of and for the three months ended March 31, 2012.

 

Revision to Notes to Condensed Consolidated Financial Statements (unaudited)

 

In the first quarter of 2013, as a result of a review by management and the Audit Committee, we concluded that the notes to the financial statements omitted certain required interim disclosures. As a result, we have amended the notes to our financial statements to include additional disclosures for intangible assets and fair value of financial instruments.

 

As a result of these non-cash adjustments, we have announced that the previously issued unaudited consolidated financial statements for the three month period ended March 31, 2012, the three and six month periods ended June 30, 2012, and the three and nine month periods ended September 30, 2012, in our Forms 10-Q for those respective periods should no longer be relied upon (collectively, the “Affected Periods”). This restatement reflects the appropriate current period correction for the quarter ended March 31, 2012.

 

This Form 10-Q/A amends and restates Item 1 of Part I, “Financial Statements”, Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 4 of Part I, “Controls and Procedures,” of the Original Filing, in each case, solely as a result of, and to reflect, the modifications made to the accounting treatment of certain items, as discussed above.  Pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain the currently-dated certifications from the Company’s principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Company’s principal executive officer and principal financial officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.1.

 

For the convenience of the reader, this Quarterly Report on Form 10-Q/A sets forth the Original Filing in its entirety. Other than as described above, to reflect a 1-for-15 reverse stock split of our common stock which took effect on September 11, 2012 and to correct typographical errors contained in the Original Filing, none of the other disclosures in the Original Filing have been amended or updated. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events that occurred or facts that became known to the Company after the filing of the Original Filing, and such forward-looking statements should be read in their historical context. Accordingly, this Quarterly Report on Form 10-Q/A should be read in conjunction with the Company's filings with the Securities and Exchange Commission filed subsequent to the Original Filing.

 

 

SEQUENTIAL BRANDS GROUP, INC.

 

INDEX to form 10-q

 

				Page
PART I		FINANCIAL INFORMATION		4
Item 1.		Financial Statements		4
		Unaudited Condensed Consolidated Balance Sheets as of March 31, 2012 (restated) and December 31, 2011		4
		Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 (restated) and March 31, 2011		5
		Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 (restated) and March 31, 2011		6
		Unaudited Notes to Condensed Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		43
Item 4.		Controls and Procedures		43
PART II		OTHER INFORMATION		44
Item 1.		Legal Proceedings		44
Item 1A.		Risk Factors		44
Item 6.		Exhibits		45

 

 

PART I
FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

SEQUENTIAL BRANDS GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2012				December 31, 2011
			(As restated)
			(see Note 15)
Assets
Current Assets:
Cash and cash equivalents		$	9,804,590			$	242,791
Restricted cash			35,289				35,268
Accounts receivable, license agreements			20,000				-
Prepaid expenses and other current assets			15,116				50,000
Current assets held for disposition from discontinued operations of wholesale business subsidiary			421,532				339,184
Current assets held for disposition from discontinued operations of retail subsidiary			48,955				60,883
Total current assets			10,345,482				728,126
Property and equipment, net of accumulated depreciation and amortization			256,884				300,049
Trademarks, net of accumulated amortization			383,259				391,575
Goodwill			428,572				428,572
Deferred financing costs, net and other assets			834,661				25,092
Long-term assets held for disposition from discontinued operations of wholesale business			8,500				54,160
Long-term assets held for disposition from discontinued operations of retail subsidiary			236,431				260,825
Total assets		$	12,493,789			$	2,188,399
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Accounts payable and accrued expenses		$	958,421			$	1,618,374
Deferred license revenue, current portion			844,387				1,325,500
Note payable to related parties			-				750,000
Note payable			-				1,000,000
Current liabilities held for disposition from discontinued operations of wholesale business			1,295,069				1,762,552
Current liabilities held for disposition from discontinued operations of retail subsidiary			243,535				403,805
Total current liabilities			3,341,412				6,860,231
Long-Term Liabilities:
Deferred license revenue, long-term portion			111,799				455,200
Deferred lease obligations held for disposition from discontinued operations of retail subsidiary			298,184				288,765
Senior secured convertible debentures			3,024,557				-
Total long-term liabilities			3,434,540				743,965
Total liabilities			6,775,952				7,604,196
Stockholders’ equity (deficit):
Preferred stock Series A, $0.001 par value, 19,400 shares authorized; 14,500 shares issued and outstanding at March 31, 2012; no preferred shares issued or outstanding as of December 31, 2011			15				-
Common stock, $0.001 par value, 150,000,000 shares authorized; 2,400,171 shares issued and outstanding at March 31, 2012 and December 31, 2011			2,400				2,400
Additional paid-in capital			13,935,003				2,372,367
Accumulated deficit			(8,219,581	)			(7,790,564	)
Total stockholders’ equity (deficit)			5,717,837				(5,415,797	)
Total liabilities and stockholders’ (equity) deficit		$	12,493,789			$	2,188,399

 

See Notes to Condensed Consolidated Financial Statements.

 

 

SEQUENTIAL BRANDS GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
		(As restated)
		(see Note 15)
Net revenue		$	1,054,514			$	-
Operating expenses			958,719				8,202
Income (loss) from operations			95,795				(8,202	)
Interest expense, net			143,589				15,000
Loss before income taxes			(47,794	)			(23,202	)
Provision for income taxes			10,000				800
Loss from continuing operations			(57,794	)			(24,002	)
Discontinued Operations:
(Loss) income from discontinued operations of wholesale business			(215,958	)			955,132
Loss from discontinued operations of retail subsidiary			(155,265	)			(330,406	)
Loss from discontinued operations of J. Lindeberg subsidiaries			-				(262,563	)
(Loss) income from discontinued operations			(371,223	)			362,163
Net (loss) income			(429,017	)			338,161
Noncontrolling interest in continued operations			-				12,001
Noncontrolling interest in discontinued operations of wholesale business							1,264,178
Noncontrolling interest in discontinued operations of retail subsidiary			-				165,203
Noncontrolling interest in discontinued operations of J. Lindeberg subsidiaries			-				131,281
			-				1,572,663
Net (loss) income attributable to common stockholders		$	(429,017	)		$	1,910,824
Basic and diluted income (loss) per share:
Continuing operations			(0.02	)			(0.01	)
Discontinued operations			(0.15	)			0.81
Attributable to common stockholders			(0.17	)			0.80
Basic and diluted weighted average common shares outstanding			2,400,171				2,400,171

 

See Notes to Condensed Consolidated Financial Statements.

 

 

SEQUENTIAL BRANDS GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three Months Ended March 31,
		2012				2011
		(As restated)
		(see Note 15)
Cash flows from operating activities:
Net (loss) income		$	(429,017	)		$	338,161
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Loss from discontinued operations of J. Lindeberg subsidiaries			-				262,563
Loss (income) from discontinued operations of wholesale business			215,958				(955,132	)
Loss from discontinued operations of retail subsidiary			155,265				330,406
Depreciation and amortization			45,032				68,427
Stock based compensation			937				18,552
Amortization of valuation discount and deferred financing costs			128,184				-
Loss on disposal of fixed assets			6,448				-
Changes in operating assets and liabilities:
Receivables			(20,000	)						-
Prepaid expenses and other current assets			34,884				-
Other assets			(12,247	)			-
Accounts payable and accrued expenses			(644,518	)			-
Deferred license revenue			(824,514	)			-
Income taxes payable			(10,447	)			800
Net cash flows (used in) provided by operating activities from continuing operations			(1,354,035	)			63,777
Net cash flows provided by operating activities from discontinued operations of J. Lindeberg subsidiaries			-				1,385,776
Net cash flows used in operating activities from discontinued operations of wholesale business			(720,129	)			(1,516,457	)
Net cash flows used in operating activities from discontinued operations of retail subsidiary			(269,794	)			(195,986	)
Net cash flows used in operating activities			(2,343,958	)			(262,890	)
Cash flows from investing activities:
(Increase) decrease in restricted cash			(21	)			121,092
Acquisition of trademarks			-				(17,496	)
Acquisition of property and equipment			-				(94,473	)
Net cash flows (used in) provided by investing activities from continuing operations			(21	)			9,123
Net cash flows used in investing activities from discontinued operations of J. Lindeberg subsidiaries			-				(9,213	)
Net cash flows used in investing activities from discontinued operations of wholesale business			-				(2,518	)
Net cash flows used in investing activities from discontinued operations of retail subsidiary			-				(1,350	)
Net cash flows used in investing activities			(21	)			(3,958	)

 

Condensed Consolidated Statements of Cash Flows are continued on the following page.

 

 

SEQUENTIAL BRANDS GROUP, INC.

(FORMERLY PEOPLE’S LIBERATION, INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)

 

		Three Months Ended March 31,
		2012				2011
		(As restated)
		(see Note 15)
Cash flows from financing activities:
Repayment of note payable		$	(1,000,000	)		$	-
Proceeds from senior secured convertible debentures			14,500,000				-
Deferred financing costs			(844,222	)			-
Repayment of note payable to related parties			(750,000	)			-
Net cash flows provided by financing activities from continuing operations			11,905,778				-
Net increase (decrease) in cash and cash equivalents			9,561,799				(266,848	)
Cash and cash equivalents, beginning of period			242,791				1,184,743
Cash and cash equivalents, end of period		$	9,804,590			$	917,895
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest		$	81,127			$	47,870
Income taxes paid			23,047				28,885
Noncash financing transaction:
Fair value of warrants issued in financing transaction			4,214,857				-
Debt discount – beneficial conversion feature on senior secured convertible debentures			7,346,857				-

 

See Notes to Condensed Consolidated Financial Statements.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Presentation of Interim Information

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments that, in the opinion of the management of Sequential Brands Group, Inc. (the “Company”) and subsidiaries are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Form 10-K/A for the year ended December 31, 2011.

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  The significant assets and liabilities that require management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements included inventories, accounts receivable and due to factor, intangible assets, deferred taxes, accrued expenses, income taxes, stock based compensation and noncontrolling interest.  Management is also required to make significant estimates and assumptions related to its disclosure of litigation and the recording of related contingent assets or liabilities, if any.

 

Reverse Stock Split

 

On September 11, 2012, the Company effected a 1-for-15 reverse stock split of its common stock. As a result of the reverse stock split, every fifteen shares of common stock of the Company were combined into one share of common stock. Immediately after the September 11, 2012 effective date, the Company had approximately 2.4 million shares of common stock issued and outstanding. All share and per share amounts have been retroactively restated to reflect the reverse stock split.

 

2.

Organization and Nature of Operations

 

Overview

 

Since the Company’s formation in 2005, the Company has been a designer, marketer and wholesale provider of branded apparel and apparel accessories. Commencing in July 2008, the Company implemented a retail strategy and opened retail stores to sell its branded products. In the second half of 2011, the Company decided to change its business model to focus on licensing and brand management. In connection with the change in the Company’s business model, the Company is presently winding down the wholesale distribution of its branded apparel and apparel accessories, liquidating its existing inventory and closing its remaining retail stores. The Company expects to complete its transition from a wholesale and retail company to a licensing and brand management company during the second or third quarter of 2012. To reflect the Company’s business transition, in March 2012, the Company’s corporate name was changed from People’s Liberation, Inc. to Sequential Brands Group, Inc. The Company’s wholesale and retail operations are referred to as “Historical Operations” in these notes to the Company’s condensed consolidated financial statements.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Licensing and Brand Management Business

 

As a licensing and brand management company, the Company plans to promote, market, and license a portfolio of consumer brands. Presently, the Company’s brands include William Rast® and People’s Liberation® and the Company intends to grow its portfolio of brands by acquiring rights to additional brands. The Company has licensed and intends to license its brands in a variety of categories to retailers, wholesalers and distributors in the United States and in certain international territories. In the Company’s licensing arrangements, the Company’s licensing partners will be responsible for designing, manufacturing and distributing the Company’s licensed products, subject to the Company’s continued oversight and marketing support.  Currently, the Company has one direct-to-retail and three traditional wholesale licenses. In its direct-to-retail license, the Company granted JC Penney, a national retailer, the exclusive right to distribute William Rast branded apparel in a broad range of product categories through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce distribution channels which are targeted to consumers in the United States. In the Company’s traditional wholesale licenses, the Company grants rights to a single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to multiple stores within an approved channel of distribution.

 

Historical Operations

 

Wholesale Operations

 

Since the Company’s inception in 2005 in the United States, the Company has distributed its William Rast branded merchandise and, through April 26, 2011, its J. Lindeberg branded merchandise to better specialty stores, boutiques and department stores, such as Nordstrom, Saks Fifth Avenue and Neiman Marcus, as well as online at various websites including williamrast.com, jlindebergusa.com and Zappos.com. In 2012, the Company decided to discontinue its wholesale operations completely. For the remainder of 2012, the Company will continue to sell William Rast and People’s Liberation branded apparel on a limited basis through its domestic wholesale operations in order to liquidate its existing inventory.

 

As part of the Company’s Historical Operations, the Company also sold its William Rast branded apparel products internationally in select countries directly and through agents and distributors to better department stores and boutiques. The Company’s distributors purchased products at wholesale prices for resale in their respective territories and marketed, sold, warehoused and shipped William Rast branded apparel products at their expense. The Company’s agents were paid a commission on net sales of the Company’s William Rast products. In 2012, the Company expects to have an immaterial amount of sales of its William Rast and People’s Liberation branded apparel from its international wholesale operations.

 

Retail Operations

 

The Company’s Historical Operations also include the sale of William Rast branded apparel and accessories through its William Rast branded retail stores and also through its William Rast branded outlet store. As part of the Company’s transition from a wholesale and retail provider of apparel and apparel accessories to a brand management and licensing business, the Company closed its William Rast retail stores located in Miami and San Jose in November 2011. The Company’s two remaining William Rast retail stores are expected to be closed in 2012. The Company expects to have limited sales from these locations in 2012.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Through April 26, 2011, the Company’s J. Lindeberg branded apparel and accessories were sold through its three full-price J. Lindeberg branded retail stores. The Company sold its interest in its J. Lindeberg business to the Company’s joint venture partner in April 2011, including its three retail stores.

 

Corporate Structure

 

Sequential Brands Group, Inc., formerly People’s Liberation Inc., is the parent holding company of Versatile Entertainment, Inc. (“Versatile”) and Bella Rose, LLC (“Bella Rose”), both of which were consolidated under and became wholly-owned subsidiaries of People’s Liberation on November 22, 2005.

Versatile conducts the Company’s People’s Liberation brand business and the Company’s William Rast brand business is conducted through Bella Rose, LLC.

 

Structure of William Rast Business

 

William Rast Sourcing, LLC and William Rast Licensing, LLC are consolidated under Bella Rose, and through September 30, 2011 were each owned 50% by Bella Rose and 50% by Tennman WR-T, Inc., an entity owned in part by Justin Timberlake.

 

Effective as of October 1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. As further described under Note 5 to the Company’s Consolidated Financial Statements, the recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as other consideration. Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by TWR, and Bella Rose is entitled to all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing or William Rast Licensing that is not paid to TWR.

 

William Rast Retail, LLC, a California limited liability company, was formed on August 26, 2009 and is a wholly-owned subsidiary of William Rast Sourcing. William Rast Retail was formed to operate the Company’s William Rast retail stores. The operations of William Rast Retail are shown as discontinued operations in the accompanying unaudited condensed consolidated financial statements.

 

Structure of J. Lindeberg Business

 

Prior to its sale on April 26, 2011, the Company’s J. Lindeberg brand business was conducted through Bella Rose. From July 1, 2008 through April 26, 2011, J. Lindeberg USA, LLC was consolidated under Bella Rose and was owned 50% by Bella Rose and 50% by J. Lindeberg USA Corp. an entity owned by J. Lindeberg AB, a Swedish corporation. J. Lindeberg USA Retail, LLC, a California limited liability company, was formed on August 21, 2009 and is a wholly-owned subsidiary of J. Lindeberg USA. J. Lindeberg Retail was formed to operate the Company’s J. Lindeberg retail stores. The operations of J. Lindeberg are shown as discontinued operations in the accompanying unaudited condensed consolidated financial statements.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.

Summary of Significant Accounting Policies

 

Discontinued Operations

 

The Company accounted for the sale of its 50% member interest in J. Lindeberg, USA and the decisions to close down its wholesale and retail operations as discontinued operations in accordance with the guidance provided in FASB ASC 360, Accounting for Impairment or Disposal of Long-Lived Assets, which 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.

 

Fair Value Measurement

 

FASB 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 generally 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 flow.

  

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 360-15.

 

ASC820-10 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.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

·

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. As a result, the unrealized gains and losses for assets within the Level 3 classification may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.

 

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 asset or liability 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.

 

As of March 31, 2012 and December 31, 2011, there are no assets or liabilities that are required to be measured at fair value on a recurring basis.

 

At March 31, 2012 and December 31, 2011, the Company determined that the carrying value of its Level 1 assets, consisting of cash and cash equivalents and restricted cash, approximated fair value. At March 31, 2012 and December 31, 2011, the Company determined that the carrying value of its Level 2 assets, consisting of accounts receivable and accounts payable, approximated fair value. At March 31, 2012 and December 31, 2011, the Company determined that the carrying value of its Level 3 assets, consisting of notes payable and notes payable to related party approximated fair value. The fair value of the senior secured subordinated debentures was approximately $13,918,000 at March 31, 2012.

 

The carrying amounts of the Company’s cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities. The remaining financial assets and liabilities that are only disclosed at fair value are comprised of convertible debentures, notes payable and notes payable to related parties. The Company estimated the fair value of its convertible debentures by performing discounted cash flow analyses using an appropriate market discount rate. The Company calculated the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or LIBOR rates for variable-rate debt, for maturities that correspond to the maturities of our debt adding an appropriate credit spreads derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as the Company’s credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.

 

For purposes of this fair value disclosure, the Company based its fair value estimate for notes payable and notes payable to related party on an internal valuation whereby the Company applies the discounted cash flow method to its expected cash flow payments due under these debt agreements based on market interest rate quotes as of March 31, 2012 and December 31, 2011 for debt with similar risk characteristics and maturities.

 

 

Earnings Per Share (Restated)

 

Basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the year. The diluted income (loss) per share calculation gives effect to all potentially dilutive common shares outstanding during the year using the treasury stock method for warrants and options.

 

Warrants representing 2,217,428 shares of common stock at exercise prices ranging from $1.20 to $7.50 per share, stock options representing 451,467 shares of common stock at exercise prices ranging from $2.25 to $18.75 per share and convertible debentures representing 5,523,809 shares at an exercise price of $2.63 per share were outstanding as of March 31, 2012, but were excluded from the average number of common shares outstanding in the calculation of diluted earnings per share for the three months ended March 31, 2012 because the effect of including these shares would have been antidilutive.

 

Warrants representing 29,333 shares of common stock at exercise prices ranging from $6.00 to $7.50 per share and stock options representing 572,667 shares of common stock at exercise prices ranging from $2.25 to $18.75 per share were outstanding as of March 31, 2011, but were excluded from the average number of common shares outstanding in the calculation of diluted earnings per share because the average trading price of the Company’s common shares during the period was lower than the exercise price of any of outstanding equity instruments, and therefore were antidilutive.

 

Customer and Supplier Concentrations (Restated)

 

During the three months ended March 31, 2012, two customers comprised greater than 10% of the Company’s net revenue. Revenue derived from these customers amounted to 78.8% and 14.2%, respectively, for the three months ended March 31, 2012. During the three months ended March 31, 2011, one customer comprised 14.7% of net revenue. At March 31, 2012, there were no amounts due from these customers. At March 31, 2011, the majority of receivables due from this customer were sold to the factor and were included in the due to factor balance.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the three months ended March 31, 2012, there were no suppliers that comprised greater than 10% of our purchases. During the three months ended March 31, 2011, two suppliers comprised greater than 10% of the Company’s purchases. Purchases from these suppliers amounted to 33.9% and 25.5% for the three months ended March 31, 2011. At March 31, 2011, accounts payable and accrued expenses included an aggregate of approximately $1.7 million, due to these vendors.

 

During the three months ended March 31, 2011, the Company purchased all of its J. Lindeberg brand products from J. Lindeberg AB in Sweden, the beneficial owner of 50% of the Company’s former subsidiary, J. Lindeberg USA. Total purchases from J. Lindeberg AB for the three months ended March 31, 2011 amounted to approximately $1.7 million.

 

Off Balance Sheet Risk and Contingencies

 

The Company is subject to certain legal proceedings and claims arising in connection with its business (see Note 14).

 

In accordance with the bylaws of the Company, officers and directors are indemnified for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the lifetime of the officer or director. The maximum potential amount of future payments the Company could be required to make under the indemnification provisions of its bylaws is unlimited. At this time, the Company believes the estimated fair value of the indemnification provisions of its bylaws is minimal and therefore, the Company has not recorded any related liabilities.

 

In addition to the indemnification required by the Company’s Amended and Restated Certificate of Incorporation and bylaws, the Company has entered into indemnity agreements with each of its current officers, former officers Darryn Barber and Thomas Nields, directors and key employees. These agreements provide for the indemnification of the Company’s directors, officers, former officers and key employees for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were the Company’s agents. The Company believes these indemnification provisions and agreements are necessary to attract and retain qualified directors, officers and employees.

 

The Company enters into indemnification provisions under its agreements in the normal course of business, typically with suppliers, customers, distributors and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has not recorded any related liabilities.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Recently Issued Accounting Standards

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company adopted ASU No. 2011-04 effective January 1, 2012 and it did not affect the Company’s results of operations, financial condition or liquidity.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. The Company adopted ASU 2011-05 effective January 1, 2012 and it had no affect on the Company’s disclosures in its financial statements.

 

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. The Company does not believe that the adoption of this new accounting guidance will have a significant effect on its goodwill impairment assessments in the future.

 

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption of this standard to have a material impact on its consolidated financial statement disclosures.

 

4.

Trademarks

 

Trademarks are summarized as follows:

 

		March 31, 2012				December 31, 2011
Trademarks, at cost		$	499,298			$	499,298
Less: accumulated amortization			(116,039	)			(107,723	)
		$	383,259			$	391,575

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Future annual estimated amortization expense is summarized as follows:

 

Years Ending December 31:
2012 (nine months)		$	24,948
2013			33,264
2014			33,264
2015			33,264
2016			33,264
2017			33,264
Thereafter			191,991
		$	383,259

 

The Company’s trademarks have a definite life and are amortized on a straight-line basis over their estimated useful lives of 15 years. Amortization expense amounted to $8,316 and $8,172 for the three months ended March 31, 2012 and 2011, respectively.

 

5.

William Rast Ownership Recapitalization (Restated)

 

Effective as of October 1, 2011, the Company recapitalized the ownership of its William Rast branded apparel business. The recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing, LLC (“WRS”) and William Rast Licensing, LLC (“WRL”) in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as other consideration.

 

As a result of the recapitalization, both WRS and WRL are now owned 82% by Bella Rose and 18% by TWR, and Bella Rose is entitled to all of the distributable cash from operations and all of the distributable cash from a sale of WRS or WRL that is not paid to TWR. In connection with the ownership recapitalization, TWR, WRS and WRL entered into a Royalty Agreement. Pursuant to the Royalty Agreement, WRS is obligated to pay TWR a royalty in the amount of 5.0% of its wholesale net sales, plus 2.5% of its retail net sales and 25.0% of its sublicensee gross consideration during the period commencing July 1, 2011 and continuing until the earlier of (i) the date that WRS pays a liquidating payment to TWR or (ii) the date that TWR or any of its affiliates no longer owns Class B membership interests in WRS. During the term of the agreement, WRS is obligated to pay TWR a guaranteed minimum royalty of $200,000 for the calendar year ended December 31, 2011 and $400,000 for each calendar year thereafter. The Royalty Agreement also provides that WRL shall pay to TWR an amount equal to 50.0% of all gross receipts of WRL in respect of royalties or other compensation earned with respect to the license by WRL of rights to the William Rast mark, subject to certain offsets, during the period commencing July 1, 2011 and continuing until the earlier of (i) the date that WRL pays a liquidating payment to TWR or (ii) the date that TWR or any of its affiliates no longer owns Class B membership interests in WRL. During the three months ended March 31, 2012, the Company recorded approximately $248,000 in royalty expense related to royalties due under the Royalty Agreement.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.

Charlotte Russe Litigation

 

Beginning October of 2009, the Company had been in litigation with Charlotte Russe and its affiliates in relation to an exclusive distribution agreement between the parties. On February 3, 2011, the Company (along with the other parties to the litigation) settled its litigation with Charlotte Russe. Pursuant to the settlement agreement, the Company received $3.5 million, after the distribution of amounts owed under the terms of an asset purchase agreement entered into by the Company with two related parties pursuant to which the Company sold 50% of the net proceeds, after contingent legal fees and expenses, that may be received by the Company as a result of the litigation. The settlement included the dismissal with prejudice of all claims pending between the parties as well as mutual releases, without any admission of liability or wrongdoing by any of the parties to the actions. The settlement amount of $3.5 million is included in loss from operations of wholesales business included in the Company’s statement of operations for the three months ended March 31, 2011.

 

7.

License Agreements (Restated)

 

The Company has entered into various trade name license agreements that provide revenues based on minimum royalties and design fees and additional revenues based on a percentage of defined sales. Minimum royalty and design fee revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee's sales. Payments received as consideration of the grant of a license or advanced royalty payments are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheet under the caption of “Deferred License Revenue.” Revenue is not recognized unless collectability is reasonably assured. For the three months ended March 31, 2012, the Company recorded total license revenue related to its license agreements of approximately $1.1 million. There was no license revenue earned during the three months ended March 31, 2011. Deferred revenue as of March 31, 2012 amounted to approximately $956,000.

 

Future annual minimum royalty and design fee revenue is summarized as follows:

 

Years Ending December 31,
2012 (nine months)		$	3,571,097
2013			5,441,548
2014			5,176,667
2015			4,690,417
2016			392,917
Thereafter			-
		$	19,272,646

 

Exclusive License Agreement – JC Penney

 

In November 2011, the Company entered into an exclusive license agreement with JC Penney pursuant to which the Company granted JC Penney a license to use its William Rast trademark in connection with the manufacture, sale and marketing of men’s apparel and accessories, women’s apparel, handbags, footwear, sunglasses, watches and luggage. The product categories are subject to certain exceptions as outlined in the license agreement. The Company will provide design, marketing and branding support for William Rast branded apparel and apparel accessories to JC Penney under the terms of the contract.

 

The license granted to JC Penney is exclusive (subject to certain exceptions) with respect to JC Penney’s right to sell and market William Rast branded products through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce distribution channels which are targeted to consumers in the United States. During the term of the agreement, the Company agrees to refrain from selling or authorizing any other party to sell, with certain exception as outlined in the agreement, any line of William Rast branded apparel products in the United States through any distribution channel; provided, however, that the Company continues to have the right to sell William Rast branded products without restriction until June 30, 2012.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The agreement with JC Penney will continue through January 30, 2016 and JC Penney may elect to extend the term of the agreement for one additional renewal term of five years.

 

During each royalty period during the term, JC Penney has agreed to pay the Company royalties based upon a percentage of JC Penney’s net sales of William Rast branded products and has also agreed to pay the Company minimum annual royalties and design fees.

Product License Agreements

 

The Company has three agreements for the license of its William Rast products as follows:

 

VIVA Optique: Effective December 3, 2009, the Company entered into a license agreement with Viva Optique, Inc. for the worldwide license of William Rast branded eyewear for men and women. The initial term of the license agreement ends on December 31, 2013 and includes an option to renew for an additional three-year term through December 2016. The license agreement provides for the payment of royalties based on net sales at a negotiated rate and minimum royalty amounts for each contract year.

 

RGA Leatherworks: Effective April 14, 2011, the Company entered into a multi-year licensing agreement with RGA Leatherworks to design, produce and distribute in the United States and Canada William Rast branded leather goods. Product categories include men’s wallets, small leather goods, messenger bags, totes, belts, travel kits and electronic cases. The license agreement expires on December 31, 2014. The license agreement provides for the payment of royalties based on net sales at a negotiated rate and minimum royalty amounts for each contract year.

 

How Fashions International: Effective September 9, 2011, the Company entered into a multi-year licensing agreement with How Fashions International Inc. to design, produce and distribute in Canada William Rast branded apparel. Product categories include men’s and women’s denim, knit tops, woven shirts and outerwear. The William Rast branded apparel collection is available in upscale department stores and specialty retailers in Canada. The initial term of the license agreement ends on September 30, 2026 and includes an option to renew for an additional five-year term through September 2031. The license agreement provides for the payment of royalties based on net sales at a negotiated rate and minimum royalty amounts for each contract year.

 

8.

Discontinued Operations of Wholesale Business

 

In 2012, the Company’s Board of Directors decided to discontinue its wholesale business completely and as a result, will no longer sell its People’s Liberation and William Rast brands to wholesale and retail customers. For the remainder of 2012, the Company will continue to sell William Rast and People’s Liberation branded apparel on a limited basis through its domestic wholesale operations in order to liquidate its existing inventory.

 

The discontinuation of the Company’s wholesale business has been accounted for as a discontinued operation and, accordingly, all prior periods presented in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted to conform to this presentation.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes certain selected components of the discontinued operations of the Company’s wholesale business for the periods ended March 31, 2012 and 2011:

 

		Three Months Ended March 31,
		2012				2011
Net Revenue		$	444,726			$	1,837,076
Net (loss) income		$	(215,958	)		$	955,132
Noncontrolling interest		$	-			$	1,264,178
Net (loss) income attributable to discontinued operations		$	(215,958	)		$	2,219,310
Basic and diluted (loss) income per share from discontinued operations		$	(0.09	)		$	0.92

 

The following table summarizes certain selected components of the discontinued operations of the Company’s wholesale business as of March 31, 2012 and December 31, 2011, the periods covered by this report:

 

		March 31, 2012				December 31, 2011
Current assets		$	421,532			$	339,184
Long-term assets		$	8,500			$	54,160
Current liabilities		$	1,295,069			$	1,762,552

 

9.

Discontinued Operations of Retail Subsidiary

 

In the second half of 2011, the Company’s Board of Directors decided to transition the Company’s business from a wholesale and retail provider of branded apparel and apparel accessories to a brand management and licensing business. As a result, the Company’s retail operations included in the Company’s subsidiary, William Rast Retail, LLC, which consisted of four retail stores, were discontinued. As of March 31, 2012, the Company had closed two of its retail stores and the remaining two stores are expected to be closed in the second and third quarters of 2012.

 

The closing of the Company’s retail stores has been accounted for as a discontinued operation and, accordingly, all prior periods presented in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted to conform to this presentation.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes certain selected components of the discontinued operations of William Rast Retail for the three months ended March 31, 2012 and 2011:

 

		Three Months Ended March 31,
		2012				2011
Net Revenue		$	265,184			$	477,364
Net loss		$	(155,265	)		$	(330,406	)
Noncontrolling interest		$	-			$	165,203
Net loss attributable to discontinued operations		$	(155,265	)		$	(165,203	)
Basic and diluted loss per share from discontinued operations		$	(0.06	)		$	(0.07	)

 

The following table summarizes certain selected components of the discontinued operations of William Rast Retail as of March 31, 2012 and December 31, 2011, the periods covered by this report:

 

		March 31, 2012				December 31, 2011
Current assets		$	48,955			$	60,883
Long-term assets		$	236,431			$	260,825
Current liabilities		$	243,535			$	403,805
Long-term liabilities		$	298,184			$	288,765

 

As a result of the expected closure of the Company’s two remaining retail stores and other costs to be incurred in future periods related to the winding down of William Rast Retail’s operations, the Company expects to incur additional expenses for the remainder of 2012 ranging from $350,000 to $450,000. The expected losses include costs to close the Company’s stores, store rent, lease termination settlements and fees, fixed asset write-offs, employee severance costs, litigation costs, if any, and related professional fees. The Company recognizes costs incurred to close its retail stores upon the “cease use date” of the retail store.

 

10.

Discontinued Operations of J. Lindberg USA, LLC Subsidiaries

 

On April 26, 2011, the Company and its wholly owned subsidiary, Bella Rose, LLC, completed the sale of Bella Rose’s 50% membership interest in J. Lindeberg USA, LLC (“Lindeberg USA”) to J. Lindeberg USA Corp. (“Buyer”) pursuant to the terms of a Unit Purchase Agreement entered into by the parties on April 7, 2011.  Prior to the closing of the transaction and since July 1, 2008, Lindeberg USA was owned 50% by Bella Rose and 50% by Buyer.

 

In consideration for Bella Rose’s 50% membership interest in Lindeberg USA, Buyer agreed to pay to the Company an aggregate of $1,650,000, of which $900,000 was paid upon the closing of the transaction and $750,000 was received in the form of a receivable that was non-interest bearing and to be paid on the six month anniversary of the closing of the transaction.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The divestiture of the Company’s membership interest in Lindeberg USA has been accounted for as a discontinued operation and, accordingly, all prior periods presented in the accompanying consolidated balance sheets, statements of operations and cash flows have been adjusted to conform to this presentation.

 

The Company recorded a gain in the second quarter of 2011 related to this divestiture as follows:

 

Carrying value of net assets of J. Lindeberg USA		$	(1,501,404	)
Noncontrolling interest on date of divestiture			1,863,727
Carrying value of net assets attributable to J. Lindeberg USA			362,323
Cash proceeds received at closing			900,000
Receivable from Buyer			750,000
Gain on sale of member interest in subsidiary		$	2,012,323

 

The following table summarizes certain selected components of the discontinued operations of J. Lindeberg USA for the three months ended March 31, 2011:

 

Net Revenue		$	2,641,474
Net loss		$	(262,563	)
Noncontrolling interest		$	131,281
Net loss attributable to discontinued operations		$	(131,282	)
Basic and diluted loss per share from discontinued operations		$	(0.05	)

 

11.

Stock Based Compensation

 

Stock Options

 

On January 5, 2006, the Company adopted its 2005 Stock Incentive Plan (the “Plan”), which authorized the granting of a variety of stock-based incentive awards. The Plan is administered by the Board of Directors, or a committee appointed by the Board of Directors, which determines the recipients and terms of the awards granted. The Plan provides for a total of 366,667 shares of common stock to be reserved for issuance under the Plan.

 

On September 11, 2012, the Company effected a 1-for-15 reverse stock split of its common stock as further described in Note 1. As a result of the reverse stock split, every fifteen shares of common stock of the Company were combined into one share of common stock. The number of shares and exercise price of outstanding stock options and warrants are presented below after giving retroactive effect to the reverse stock split that occurred on September 11, 2012.

 

The Company recognizes stock-based compensation costs on a straight-line basis over the vesting period of each award, which is generally between one to four years.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the three months ended March 31, 2012, the Company did not grant any options. During the three months ended March 31, 2011, the Company granted 68,667 options to employees and an officer within the Plan at an exercise price of $2.25 and 333,333 options to two employees and an officer outside the Plan, also at an exercise price of $2.25. Plan options to purchase 176,481 and 166,926 shares were exercisable as of March 31, 2012 and 2011, respectively. Options granted outside the Plan to purchase 200,000 shares were exercisable as of March 31, 2012 and 2011. Total stock based compensation expense for the three months ended March 31, 2012 and 2011 was approximately $1,000 and $19,000, respectively. There were no stock options or warrants exercised during the three months ended March 31, 2012 and 2011.

 

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. Stock price volatility is estimated based on a peer group of public companies and expected term is estimated using the “safe harbor” provisions provided in accordance with generally accepted accounting principles. The safe harbor provisions were extended beyond December 31, 2007 for companies that did not have sufficient historical data to calculate the expected term of their related options. The Company does not have sufficient historical data to calculate expected term and the safe harbor provisions were used to calculate expected term for options granted during the periods. The weighted-average assumptions the Company used as inputs to the Black-Scholes pricing model for options granted during the three months ended March 31, 2011 included a dividend yield of zero, a risk-free interest rate of 2.2%, expected term of 5.8 years and an expected volatility of 64%.

 

For stock-based awards issued to employees, directors and officers, stock-based compensation is attributed to expense using the straight-line single option method. Stock-based compensation expense recognized in the Statement of Operations for the three months ended March 31, 2012 and 2011 is included in operating expenses and is based on awards ultimately expected to vest. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three months ended March 31, 2011, the Company used historical data to calculate the expected forfeiture rate.

 

Options awarded to non-employees are charged to expense when the services are performed and benefit is received as provided by FASB ASC Topic 505-50.

 

The following table summarizes the activity within the Plan:

 

		Number of Shares				Weighted Average Exercise Price
Options outstanding – January 1, 2012			251,467				6.30
Granted			-				-
Exercised			-				-
Forfeited			-				-
Options outstanding – March 31, 2012			251,467			$	6.30

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of the changes in the Company’s unvested stock options within the Plan is as follows:

 

		Number of Shares				Weighted Average Grant Date Fair Value
Unvested stock options – January 1, 2012			85,139				0.15
Granted			-				-
Vested			(10,153	)			(0.15	)
Forfeited			-				-
Unvested stock options – March 31, 2012			74,986			$	0.15

 

The following table summarizes the activity outside of the Plan:

 

		Number of Shares				Weighted Average Exercise Price
Options outstanding – January 1, 2012			200,000				2.25
Granted			-				-
Exercised			-				-
Forfeited			-				-
Options outstanding – March 31, 2012 (fully vested)			200,000			$	2.25

 

Additional information relating to stock options outstanding and exercisable at March 31, 2012, summarized by exercise price, is as follows:

 

						Outstanding Weighted Average												Exercisable Weighted Average
										Life				Exercise								Exercise
Exercise Price Per Share						Shares				(years)				Price				Shares				Price
$	2.25			(options)			252,000				8.9			$	2.25				224,049			$	2.25
$	3.00			(options)			56,867				9.5			$	3.00				9,887			$	3.00
$	4.50			(options)			2,000				6.3			$	4.50				2,000			$	4.50
$	4.65			(options)			1,600				5.3			$	4.65				1,600			$	4.65
$	5.70			(options)			16,000				5.4			$	5.70				16,000			$	5.70
$	6.00			(options)			30,000				6.3			$	6.00				30,000			$	6.00
$	6.90			(options)			25,667				5.3			$	6.90				25,667			$	6.90
$	7.50			(options)			38,000				5.7			$	7.50				37,945			$	7.50
$	18.75			(options)			29,333				4.3			$	18.75				29,333			$	18.75
							451,467				7.9			$	4.50				376,481			$	4.50

 

As of March 31, 2012, there were 176,481 of vested stock options within the Plan and 200,000 of vested options outside the Plan. As of March 31, 2012, there was approximately $6,000 of total unrecognized compensation expense related to share-based compensation arrangements granted within the Plan. The cost is expected to be recognized on a weighted-average basis over the next three years. There was no unrecognized compensation expense related to share-based compensation arrangements granted outside the Plan as of March 31, 2012. The aggregate intrinsic value of stock options outstanding was approximately $886,000 at March 31, 2012. The aggregate intrinsic value of stock options outstanding was zero at March 31, 2011 as the market value of the options was lower than the exercise value.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Warrants

 

The following table summarizes the Company’s outstanding warrants:

 

		Number of Shares				Weighted Average Exercise Price
Warrants outstanding – January 1, 2012			1,112,666				1.80
Granted			1,104,762				2.63
Exercised			-				-
Forfeited			-				-
Warrants outstanding – March 31, 2012 (fully vested)			2,217,428			$	2.25

 

Additional information relating to warrants outstanding and exercisable at March 31, 2012, summarized by exercise price, is as follows:

 

						Outstanding Weighted Average												Exercisable Weighted Average
										Life				Exercise								Exercise
Exercise Price Per Share						Shares				(years)				Price				Shares				Price
$	1.20			(warrants)			833,333				4.4			$	1.20				833,333			$	1.20
$	2.63			(warrants)			1,104,762				4.9			$	2.63				1,104,762			$	2.63
$	3.00			(warrants)			250,000				4.3			$	3.00				250,000			$	3.00
$	6.00			(warrants)			10,000				0.6			$	6.00				10,000			$	6.00
$	7.50			(warrants)			19,333				0.7			$	7.50				19,333			$	7.50
							2,217,428				4.5			$	2.25				2,217,428			$	2.25

 

The aggregate intrinsic value of warrants outstanding was approximately $6.8 million at March 31, 2012. The aggregate intrinsic value of warrants outstanding was zero at March 31, 2011 as the market value of the warrants was lower than the exercise value.

 

12.

Securities Purchase Agreement and Repayment of Indebtedness (Restated)

 

Entry into Securities Purchase Agreement

 

On February 2, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with TCP WR Acquisition, LLC (“TCP”). Pursuant to the Purchase Agreement, the Company sold to TCP a total of $14,500,000 in principal amount of Debentures, issued to TCP Warrants to purchase 1,104,762 shares of common stock and issued to TCP 14,500 shares of Series A Preferred Stock. The Debentures are convertible into 5,523,809 shares of common stock. Aggregate net proceeds from this transaction amounted to approximately $13.7 million after the payment of legal and other fees.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Pursuant to the terms of the Purchase Agreement, the Company sold $14,500,000 in principal amount of Variable Rate Senior Secured Convertible Debentures (the “Debentures”), convertible into shares of the Company’s common stock, $0.001 par value per share (“Common Stock”), at an initial conversion price of $2.63 per share (the “Conversion Price”). The Debentures have an interest rate of the one month LIBOR rate, and in the event payment on the Debentures is accelerated as a result of an event of default, the rate of interest will increase to the lesser of 18% per annum or the maximum amount permitted under applicable law. Interest on the Debentures is payable, at the Company’s option, in cash or in Common Stock upon conversion of a Debenture (with respect to the principal amount then being converted) and on their maturity date. The Debentures are payable on or before January 31, 2015 and a Debenture may not be prepaid without the consent of the holder of the Debenture.

 

At any time after their issuance, the Debentures are convertible at the Conversion Price into shares of Common Stock at the option of a Debenture holder. On the maturity date, the Company may, in whole or in part, convert the then outstanding principal amount of each Debenture into shares of Common Stock at the Conversion Price. The Conversion Price is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The Conversion Price is also subject to adjustment based on the occurrence of certain events as further described in the Purchase Agreement.

 

In connection with the sale of the Debentures, the Company issued to TCP warrants to purchase 1,104,762 shares of the Company’s Common Stock (the “Warrants”). The Warrants are exercisable immediately after issuance and have a term of five years. The Warrants may be exercised at an initial exercise price per share of $2.63, which is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The warrants were valued at approximately $4.2 million using the Black-Scholes pricing model and recorded as a valuation discount to the Debentures. The assumptions the Company used as inputs to the Black-Scholes pricing model for the valuation of the warrants included a dividend yield of zero, a risk-free interest rate of 1.4%, expected term of five years and an expected volatility of 64%.

 

Also in connection with the sale of the Debentures, the Company agreed to issued one share of Series A Preferred Stock, par value $0.001 per share (“Series A Preferred Stock”), for every $1,000 of principal amount of Debentures purchased by TCP. The Series A Preferred Stock is designed to give holders of the Debentures certain voting rights while the Debentures remain outstanding and each share of Series A Preferred Stock is entitle to vote 381 votes. The Series A Preferred Stock will be redeemed on the conversion or repayment of the Debentures for a nominal amount.

 

The Company has recorded a valuation discount of approximately $7.3 million related to the beneficial conversion feature of the Debentures. The Company also recorded deferred financing costs of approximately $844,000, included in other assets, related to legal and other fees associated with the financing. The valuation discount and deferred financing costs are being amortized to interest expense over the term of the Debentures based upon the effective interest method. The unamortized amount of the valuation discount has been presented as an offset to the face amount of the Debentures in the Company’s consolidated balance sheet. Included in interest expense for the three months ended March 31, 2012 is approximately $128,000 of amortization related to the valuation discount and deferred financing costs.

 

The components of the Senior Secured Convertible Notes as of March 31, 2012 are as follows:

 

Face value of the senior secured convertible notes		$	14,500,000
Valuation discount			(11,480,430	)
Accrued interest			4,987
		$	3,024,557

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Description of Subsidiary Guarantee and Security Agreement

 

In connection with the financing, the Company’s subsidiaries, Versatile Entertainment, Bella Rose, William Rast Sourcing, William Rast Licensing and William Rast Retail executed a Subsidiary Guarantee in favor of TCP pursuant to which such subsidiaries guarantee the Company’s obligations under the Debentures (the “Subsidiary Guarantee”). In addition, the Company and the above mentioned subsidiaries entered into a security agreement (the “Security Agreement”) with TCP pursuant to which such parties granted to TCP a first priority security interest in all of their assets to secure the Company’s obligations under the Debentures and such subsidiaries’ obligations under the Subsidiary Guarantee.

 

Termination of Material Agreements

 

The proceeds received from the financing were used in part to repay the following indebtedness of the Company and its subsidiaries:

 

Rosenthal Indebtedness

 

All indebtedness owed by William Rast Sourcing under its factoring facility with Rosenthal & Rosenthal. In connection with the repayment, the following agreements were terminated: (i) Factoring Agreement effective as of October 7, 2010 by and between Rosenthal & Rosenthal, Inc. and William Rast Sourcing; (ii) Inventory Security Agreement effective as of October 7, 2010 by William Rast Sourcing in favor of Rosenthal & Rosenthal, Inc.; (iii) Assignment Agreement effective as of October 7, 2010 by and between William Rast Licensing and Rosenthal & Rosenthal, Inc.; and (iv) guarantees of the Company, Bella Rose, Versatile and Colin Dyne in favor of Rosenthal.

 

Mobility Indebtedness

 

All indebtedness owed by William Rast Licensing to Mobility Special Situations I, LLC (“Mobility”), pursuant to that certain promissory note in the original aggregate principal amount of $750,000 issued to Mobility. Prior to its repayment, the promissory note was secured by the assets of William Rast Licensing and was guaranteed by the Company, William Rast Sourcing, William Rast Retail, Bella Rose and Versatile. In connection with the repayment, the following agreements were terminated (other than with respect to obligations that survive the termination of such agreements): (i) the Promissory Note entered into on August 13, 2010 by William Rast Licensing in favor of Mobility; (ii) Borrower Security Agreement entered into on August 13, 2010 by William Rast Licensing in favor of Mobility; (iii) Guarantor Security Agreement entered into on August 13, 2010 by People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William Rast Retail in favor of Mobility; (iv) Guaranty dated August 13, 2010 granted in favor of Mobility by People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William Rast Retail. Mobility is an entity owned in part by Mark Dyne, the brother of the Company’s Chief Executive Officer, Colin Dyne, and New Media Retail Concepts, LLC, an entity owned by Gerard Guez, a significant beneficial owner of the Company’s Common Stock.

 

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Monto Indebtedness

 

All indebtedness owed by William Rast Licensing to Monto Holdings (Pty) Ltd. (“Monto”), pursuant to that certain promissory note in the original aggregate principal amount of $1,000,000. Prior to its repayment, the promissory note was secured by the assets of William Rast Licensing and was guaranteed by the Company, William Rast Sourcing, William Rast Retail, Bella Rose, and Versatile. In connection with the repayment, the following agreements were terminated (other than with respect to obligations that survive the termination of such agreements): (i) the Promissory Note entered into on August 18, 2011 by William Rast Licensing in favor of Monto; (ii) Borrower Security Agreement entered into on August 18, 2011 by William Rast Licensing in favor of Monto; (iii) Guarantor Security Agreement entered into on August 18, 2011 by People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William Rast Retail in favor of Monto; (iv) Guaranty dated August 18, 2011 granted in favor of Monto by People’s Liberation, Versatile, Bella Rose, William Rast Sourcing and William Rast Retail.

 

Other terms

 

The Purchase Agreement provides TCP with piggyback registration rights with respect to TCP’s shares of common stock, requires the Company to seek approval from its stockholders to amend the Company’s certificate of incorporation to increase the authorized number of shares of the Company’s Common Stock to at least 300 million, requires the Company to pay TCP a fee of $362,500 plus all legal and other fees and expenses incurred by TCP in connection with the Purchase Agreement, and requires the Company to pay TCP an annual monitoring fee of $250,000 so long as TCP has the right under the Stockholders Agreement to nominate one or more directors to the Company’s Board.

 

In addition, the Purchase Agreement contains negative covenants that prohibit the Company and its subsidiaries from taking certain actions without TCP’s prior consent until the later of February 3, 2014 and the date that TCP’s beneficial ownership of Common Stock is less than 40% of the Company’s fully diluted Common Stock. The negative covenants apply to, with certain exceptions, issuing debt or equity securities; acquiring assets or equity interests of third parties, disposing of assets or equity interests of subsidiaries, entering into joint ventures, or engaging in other types of mergers and acquisitions transactions; paying or declaring dividends; settling litigation; entering into transactions with affiliates; dissolving or commencing bankruptcy proceedings; or changing the Company’s principal lines of business.

 

13.

Preferred Stock

 

On February 3, 2012, the Company amended its certificate of incorporation by creating a new series of preferred stock designated Series A Preferred Stock, by filing with the Delaware Secretary of State a Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock. The Certificate of Designation sets forth the rights, preferences, privileges and restrictions of the Series A Preferred Stock, which include the following:

 

·

The authorized number of shares of Series A Preferred Stock is 19,400, having a par value $0.001 per share and a stated value of $1,000 per share (“Stated Value”).

 

·

Holders of Series A Preferred Stock are not entitled to dividends or any liquidation preference.

 

·

Series A Preferred Stock may only be transferred by a holder of such stock to a transferee if such transfer also includes a transfer to the transferee of $1,000 in principal amount of Debentures for each one share of transferred Series A Preferred Stock.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

·

The holders of Series A Preferred Stock vote together as a single class with the holders of Common Stock on all matters requiring approval of the holders of Common Stock, except that each share of Preferred Stock is entitled to 381 votes per share (which is the number of shares of Common Stock a Debenture holder would receive if it converted $1,000 in principal amount of Debentures into Common Stock at a conversion price of $2.63), which number of votes per share is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions relating to the Company’s Common Stock.

 

·

As long as any shares of Series A Preferred Stock are outstanding, the Company will not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock or alter or amend the Certificate of Designation, (b) amend the Company’s certificate of incorporation or other charter documents in any manner that adversely affects any rights of such holders, (c) increase the number of authorized shares of Series A Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

 

·

Upon conversion of the principal amount of a Debenture, in whole or in part, into shares of Common Stock or upon the repayment of the principal amount of a Debenture, in whole or in part, by the Company, the Company has the right to and will redeem from the Debenture holder at a price of $0.001 per share, a number of shares of Series A Preferred Stock determined by dividing (i) the outstanding principal amount of the Debenture that has been repaid or converted into Common Stock, as applicable by (ii) the Stated Value.

 

14.

Shareholder Derivative Complaint

 

On January 17, 2012, plaintiff RP Capital, LLC filed a shareholders’ derivative complaint in the Superior Court of the State of California, County of Los Angeles, Case Number BC477118 against Colin Dyne, Kenneth Wengrod, Susan White, Dean Oakey and the Company. The case alleges that the defendants (i) breached their fiduciary duties to the Company for failing to properly oversee and manage the Company, (ii) were unjustly enriched, (iii) abused their control, (iv) grossly mismanaged the Company, (v) wasted corporate assets, (vi) engaged in self-dealing, and (vii) breached their fiduciary duties by disseminating false and misleading information. The plaintiffs seek (i) judgment against the defendants in favor of the Company for the amount of damages sustained by the Company as a result of the defendants’ alleged breaches of their fiduciary duties; (ii) judgment directing the Company to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws; (iii) an award to the Company of restitution from the defendants and an order from the court to disgorge all profits, benefits and other compensation obtained by the defendants from their alleged wrongful conduct and alleged fiduciary breaches and (iv) an award of costs and disbursements of the action, including reasonable fees for profession services. The Company believes, in consultation with legal counsel, that these claims are without merit or substance, and intends to vigorously defend against these claims. The derivative complaint is in the early stages of discovery and the Company, in consultation with legal counsel, is unable to determine the outcome, whether favorable or unfavorable, or a range of possible loss, if any, to the Company.

 

15.

Restatement of Financial Statements

 

Recognition of License Revenue

 

In the first quarter of 2013, management and the audit committee of the Company’s board of directors (the “Audit Committe”) determined that the Company’s accounting treatment pertaining to revenue recognition on certain of its license agreements should be modified. This change in accounting treatment resulted in a restatement of revenue, operating expenses, loss from continuing operations and loss attributable to common stockholders on the Company’s statement of operations and accounts receivable, deferred license revenue, accounts payable and accrued expenses, and accumulated deficit on its balance sheet, as of and for the three months ended March 31, 2012.

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Valuation of Senior Secured Convertible Debentures

 

In the first quarter of 2013, an accounting review by management and the Audit Committee revealed that the Company’s accounting treatment relating to the valuation of its variable rate senior secured convertible debentures (the “Debentures”) should be modified. Management initially concluded that the valuation date of the two closings of the transaction was on the same date, February 3, 2012. After further review, management determined that there should be two separate valuation dates, one for each of the closings, on February 3, 2012 and February 22, 2012, respectively. The change in the valuation date of the second closing created a beneficial conversion feature to the holders of the Debentures. This change in accounting treatment resulted in a restatement of non-cash interest expense, loss from continuing operations and loss attributable to common stockholders and basic and diluted loss per common share on the Company’s statements of operations and other assets, the Debentures, additional paid-in capital and accumulated deficit on its balance sheet, as of and for the three months ended March 31, 2012.

 

Revision to Notes to Condensed Consolidated Financial Statements (unaudited)

 

In the first quarter of 2013, as a result of a review by management and the Audit Committee, the Company concluded that the notes to the financial statements omitted certain required interim disclosures. As a result, the Company has amended the notes to its financial statements to include additional disclosures for intangible assets and fair value of financial instruments. 

 

The cumulative effect of restating the March 31, 2012 balance sheet presented in this Form 10-Q/A was an increase in accounts receivable of approximately $20,000, an increase in other assets of approximately $800,000, a decrease in accounts payable and accrued expenses of approximately $80,000, an increase in deferred license revenue of approximately $338,000, a decrease in senior secured convertible debentures of approximately $10.4 million, an increase in additional paid-in capital of $11.3 million and an increase in the accumulated deficit of approximately $304,000.

 

The cumulative effect of restating the March 31, 2012 statement of cash flows presented in this Form 10-Q/A was an increase in net loss of approximately $304,000, an increase in amortization of valuation discount and deferred financing costs of approximately $65,000, a decrease in cash flows from receivables of $20,000, a decrease in cash flows from accounts payable and accrued expenses of approximately $80,000, and an increase in cash flows from deferred license revenues of approximately $338,000, thereby resulting in no net change of cash used in operating activities.   The restatement has no impact on cash flows from investing or financing activities.

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of the effects of the restatement as of and for the three months ended March 31, 2012 are as follows:

 

Consolidated Balance Sheet		As Previously Reported				Adjustments				As Restated				Notes
Accounts receivable, license agreements		$	-			$	20,000			$	20,000				1
Total current assets			10,325,482				20,000				10,345,482
Other assets			37,339				797,322				834,661				2
Total assets		$	11,676,467			$	817,322			$	12,493,789
Accounts payable and accrued expenses		$	1,037,926			$	(79,505	)		$	958,421				1
Deferred license revenue, current portion			506,368				338,019				844,387				1
Total current liabilities			3,082,898				258,514				3,341,412
Senior secured convertible debentures			13,438,119				(10,413,562	)			3,024,557				2
Total liabilities			16,931,000				(10,155,048	)			6,775,952
Common stock			36,002				(33,602	)			2,400				3
Additional paid-in capital			2,625,090				11,309,913				13,935,003				2,3
Accumulated deficit			(7,915,640	)			(303,941	)			(8,219,581	)			1,2
Total stockholders’ deficiency (equity)			(5,254,533	)			10,972,370				5,717,837
Total liabilities and stockholders’ deficiency (equity)		$	11,676,467			$	817,322			$	12,493,789

 

Consolidated Statement of Operations		As Previously Reported				Adjustments				As Restated				Notes
Net revenue		$	1,372,533				(318,019	)		$	1,054,514				1
Operating expenses			1,038,224				(79,505	)			958,719				1
Income (loss) from operations			334,309				(238,514	)			95,795
Interest expense, net			78,162				65,427				143,589				2
Income (loss) before income taxes			256,147				(303,941	)			(47,794	)
Provision for income taxes			10,000				-				10,000
Income (loss) from continuing operations			246,147				(303,941	)			(57,794	)
Net loss		$	(125,076	)			(303,941	)		$	(429,017	)
Basic and diluted income (loss) per share:
Continuing operations		$	0.10							$	(0.02	)
Discontinued operations		$	(0.15	)						$	(0.15	)
Attributable to common stockholders		$	(0.05	)						$	(0.17	)
Basic and diluted weighted average common shares outstanding			2,400,171								2,400,171				3

 

 

SEQUENTIAL BRANDS GROUP, INC.

FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Consolidated Statement of Cash Flows		As Previously Reported				Adjustments				As Restated				Notes
Cash flows from operating activities:
Net loss		$	(125,076	)		$	(303,941	)		$	(429,017	)			1,2
Amortization of valuation discount and deferred financing costs			62,757				65,427				128,184				2
Receivables			-				(20,000	)			(20,000	)			1
Accounts payable and accrued expenses			(565,013	)			(79,505	)			(644,518	)			1
Deferred license revenue			(1,162,533	)			338,019				(824,514	)			1
Net cash flows used in operating activities			(2,343,958	)			-				(2,343,958	)
Supplemental disclosures of cash flow information:
Fair value of warrants issued in financing transaction		$	285,388			$	3,929,469			$	4,214,857				2
Debt discount – beneficial conversion feature on senior secured convertible debentures		$	-			$	7,346,857			$	7,346,857				2

 

Notes:

1 - Adjustment to recognize license revenue on a straight-line basis over the term of each contract year.

2 - Adjustment to recognize valuation discount, deferred financing costs and related interest expense on Debentures.

3 - Adjustment to reflect 1-for-15 reverse stock split effective September 11, 2012.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The information contained in this Quarterly Report on Form 10-Q/A (this “Quarterly Report”) is intended to update the information contained in our Annual Report on Form 10-K/A for the year ended December 31, 2011 (our “2011 Annual Report”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in our 2011 Annual Report. The following discussion and analysis also should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Quarterly Report.

 

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of Sequential Brands Group, Inc. for the three months ended March 31, 2012 and the three months ended March 31, 2011. 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 within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. Forward-looking statements involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Forward-looking statements are based on current expectations and assumptions and actual results could differ materially from those projected in the forward-looking statements as a result of, among other things, those factors set forth in “Risk Factors” contained in Item 1A of our 2011 Annual Report and Part II, Item 1A of this Quarterly Report.

 

Restatement of Financial Statements

 

The unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2012 have been restated as a result of adjustments related to the recognition of license revenue and the valuation of our senior secured convertible debentures as further described in Note 15 to our condensed consolidated financial statements. The following information presented below has been revised accordingly to reflect the restatement adjustments.

 

Overview

 

Since our formation in 2005, we have been a designer, marketer and wholesale provider of branded apparel and apparel accessories. Commencing in July 2008, we implemented a retail strategy and opened retail stores to sell our branded products. In the second half of 2011, we decided to change our business model to focus on licensing and brand management. In connection with the change in our business model, we are presently winding down the wholesale distribution of our branded apparel and apparel accessories, liquidating our existing inventory and closing our remaining retail stores. We expect to complete our transition from a wholesale and retail company to a licensing and brand management company during the second or third quarter of 2012. To reflect our business transition, in March 2012, we changed our corporate name from People’s Liberation, Inc. to Sequential Brands Group, Inc. In this report, we refer to our wholesale and retail operations as our Historical Operations.

 

 

Licensing and Brand Management Business

 

As a licensing and brand management company, we plan to promote, market, and license a portfolio of consumer brands. Presently, our brands include William Rast® and People’s Liberation® and we intend to grow our portfolio of brands by acquiring rights to additional brands. We have licensed and intend to license our brands in a variety of categories to retailers, wholesalers and distributors in the United States and in certain international territories. In our licensing arrangements, our licensing partners will be responsible for designing, manufacturing and distributing our licensed products, subject to our continued oversight and marketing support.  Currently, we have one direct-to-retail and three traditional wholesale licenses. In our direct-to-retail license, we granted JC Penney, a national retailer, the exclusive right to distribute William Rast branded apparel in a broad range of product categories through its stores in the United States and through its consumer-direct mail and consumer-direct ecommerce distribution channels which are targeted to consumers in the United States. In our traditional wholesale licenses, we grant rights to a single or small group of related product categories to a wholesale supplier, who is permitted to sell licensed products to multiple stores within an approved channel of distribution. 

 

Historical Operations

 

Wholesale Operations

 

Since our inception in 2005, in the United States, we have distributed our William Rast branded merchandise and, through April 26, 2011, our J. Lindeberg branded merchandise to better specialty stores, boutiques and department stores, such as Nordstrom, Saks Fifth Avenue and Neiman Marcus, as well as online at various websites including williamrast.com, jlindebergusa.com and zappos.com. In 2012, we decided to discontinue its wholesale operations completely. For the remainder of 2012, we will continue to sell William Rast and People’s Liberation branded apparel on a limited basis through our domestic wholesale operations in order to liquidate our existing inventory.

 

As part of our Historical Operations, we also sold our William Rast branded apparel products internationally in select countries directly and through agents and distributors to better department stores and boutiques. Our distributors purchased products at wholesale prices for resale in their respective territories and marketed, sold, warehoused and shipped William Rast branded apparel products at their expense. Our agents were paid a commission on net sales of our William Rast products. In 2012, we expect to have an immaterial amount of sales of our William Rast and People’s Liberation branded apparel from our international wholesale operations.

 

Retail Operations

 

Our Historical Operations also include the sale of William Rast branded apparel and accessories through our William Rast branded retail stores and also through our William Rast branded outlet store. As part of our transition from a wholesale and retail provider of apparel and apparel accessories to a brand management and licensing business, we closed our William Rast retail stores located in Miami and San Jose in November 2011. Our two remaining William Rast retail stores are expected to be closed in 2012. We expect to have limited sales from these locations in 2012.

 

Through April 26, 2011, our J. Lindeberg branded apparel and accessories were sold through our three full-price J. Lindeberg branded retail stores. We sold our interest in our J. Lindeberg business to our joint venture partner in April 2011, including our three retail stores.

 

Corporate Structure

 

Sequential Brands Group, Inc., formerly People’s Liberation Inc., is the parent holding company of Versatile Entertainment, Inc. (“Versatile”) and Bella Rose, LLC (“Bella Rose”), both of which were consolidated under and became wholly-owned subsidiaries of People’s Liberation on November 22, 2005.

Versatile conducts our People’s Liberation brand business and our William Rast brand business is conducted through Bella Rose, LLC.

 

 

Structure of William Rast Business

 

William Rast Sourcing, LLC and William Rast Licensing, LLC are consolidated under Bella Rose, and through September 30, 2011 were each owned 50% by Bella Rose and 50% by Tennman WR-T, Inc., an entity owned in part by Justin Timberlake.

 

Effective as of October 1, 2011, we recapitalized the ownership of our William Rast branded apparel business. As further described under Note 4 to our consolidated financial statements, the recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as other consideration. Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by TWR, and Bella Rose is entitled to all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing or William Rast Licensing that is not paid to TWR.

 

William Rast Retail, LLC, a California limited liability company, was formed on August 26, 2009 and is a wholly-owned subsidiary of William Rast Sourcing. William Rast Retail was formed to operate our William Rast retail stores. The operations of William Rast Retail are shown as discontinued operations in the accompanying consolidated financial statements.

 

Structure of J. Lindeberg Business

 

Prior to its sale on April 26, 2011, our J. Lindeberg brand business was conducted through Bella Rose. From July 1, 2008 through April 26, 2011, J. Lindeberg USA, LLC was consolidated under Bella Rose and was owned 50% by Bella Rose and 50% by J. Lindeberg USA Corp. an entity owned by J. Lindeberg AB, a Swedish corporation. J. Lindeberg USA Retail, LLC, a California limited liability company, was formed on August 21, 2009 and is a wholly-owned subsidiary of J. Lindeberg USA. J. Lindeberg Retail was formed to operate our J. Lindeberg retail stores. The operations of J. Lindeberg are shown as discontinued operations in the accompanying consolidated financial statements.

 

Cash Received from Securities Purchase Agreement

 

On February 2, 2012, we entered into a Securities Purchase Agreement with TCP WR Acquisition, LLC. Pursuant to the Securities Purchase Agreement, we sold Debentures, Warrants and Series A Preferred Stock to TCP WR Acquisition, LLC, as further described elsewhere in this report. A portion of the proceeds received from this transaction was used to pay amounts due to our factor, Rosenthal & Rosenthal, and terminate our factoring facility, payoff our notes payable to Monto Holdings (pty) Ltd. and Mobility Special Situations I, LLC and pay certain past due payables. Net proceeds from this transaction after the payment of closing, legal and other costs and the repayment of the aforementioned debt amounted to approximately $11.7 million.

 

Critical Accounting Policies, Judgments and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of our allowance for uncollectible accounts receivable and contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions 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. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

 

 

Accounts Receivable. Accounts receivable are evaluated on a continual basis and allowances are provided for potentially uncollectible accounts based on management’s estimate of the collectability of customer accounts. Accounts receivable are also evaluated on a continual basis and allowances are provided for anticipated returns, discounts and chargebacks based on management’s estimate of the collectability of customer accounts and historical return, discount and other chargeback rates. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance may be required. Allowance adjustments are charged to operations in the period in which the facts that give rise to the adjustments become known.

 

Goodwill and Intangible Assets. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment on an annual basis as of December 31, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented. Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented.

 

Revenue Recognition. We have entered into various trade name license agreements that provide revenues based on minimum royalties and additional revenues based on a percentage of defined sales. Minimum royalty revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee's sales. Payments received as consideration of the grant of a license or advanced royalty payments are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheet as deferred license revenue. License revenue is not recognized unless collectability is reasonably assured. Wholesale revenue is recognized when merchandise is shipped to a customer, at which point title transfers to the customer, and when collection is reasonably assured. Customers are not given extended terms or dating or return rights without proper prior authorization. Revenue is recorded net of estimated returns, charge backs and markdowns based upon management’s estimates and historical experience. Website revenue is recognized when merchandise is shipped to a customer and when collection is reasonably assured. Retail revenue is recognized on the date of purchase from our retail stores. Advertising revenue received under sponsorship agreements is recorded in the period in which the event to which the advertising rights were granted occurred. Design revenue received under design and license agreements is recorded in the period in which the design services are provided to the licensee.

 

Deferred Tax Assets and Valuation Allowance. Deferred taxes are recorded for the difference between the financial statement and tax basis of the Company’s assets and liabilities and net operating loss carryforwards. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. U.S. income taxes are not provided on the undistributed earnings of foreign subsidiaries as they are considered to be permanently reinvested.

 

 

The Company’s ability to utilize net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership. In addition, the ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There is no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Accordingly, a valuation allowance has been recorded to offset deferred tax assets. Should we determine that we would be able to realize the deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

 

Reserve for Closed Facilities. We maintain a reserve for future rental obligations, carrying costs, and other closing costs related to closed facilities. In accordance with ASC 420, Exit or Disposal Cost Obligations, we recognize exit costs for any store closures at the time the store is closed. Such costs are recorded within the discontinued operations line item on our condensed consolidated statements of operations.

 

   Stock Based Compensation. Stock-based compensation expense is recognized based on awards ultimately expected to vest on a straight-line prorated basis. 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 our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Stock price volatility was estimated based on a peer group of public companies and the expected term was estimated using the “safe harbor” provisions provided by generally accepted accounting principles.

 

   Noncontrolling Interest. Profit and loss allocations to noncontrolling interest members of our subsidiaries were recorded as increases and decreases in noncontrolling interest in our consolidated financial statements. Cash distributions, if any, made to a noncontrolling interest member of any of our subsidiaries are accounted for as decreases in noncontrolling interest in the consolidated balance sheet of the Company. To the extent the priority distributions are made, it would reduce the income allocable to the controlling interest.

 

   Litigation Contingencies. We are subject to on-going litigation which requires management to make certain assumptions and estimates regarding gain or loss contingencies, if any, related to the outcome of pending litigation. In consultation with legal counsel, we consider the facts and circumstances surrounding the pending litigation and the probability of the outcome of pending litigation, whether favorable or unfavorable, in our estimates of gain or loss contingencies.

 

Results of Operations

 

The following table presents consolidated statement of operations data from continuing operations for each of the periods indicated as a percentage of net revenue.

 

		Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
		(As restated)
Net revenue			100.0	%			-	%
Operating expenses			90.9	%			-	%
Operating income (loss)			9.1	%			-	%

 

 

Comparison of the three months ended March 31, 2012 and the three months ended March 31, 2011 from continuing operations

 

Net Revenue

 

		Three Months Ended  March 31, 2012				Three Months Ended March 31, 2011				Percent Change
		(As restated)
Net Revenue		$	1,054,514			$	-				N/A

 

Net revenue from continuing operations for the three months ended March 31, 2012 consists of license revenue earned under our various license agreements related to our William Rast brand. During the three months ended March 31, 2012, we had one direct-to-retail and three product license agreements. During the three months ended March 31, 2011, we had one product license agreement which did not generate any revenue. In the second half of 2011, we began to transition our business model from a wholesale and retail apparel company to a brand management and licensing business. We expect to derive the majority of our 2012 revenue from our William Rast brand license agreements and anticipate entering into additional license agreements for our brands in the future.

 

Operating Expenses

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Operating  expenses		$	958,719			$	8,202				11588.8	%

 

Operating expenses from continuing operations for the three months ended March 31, 2012 and 2011 primarily related to salaries, royalties, professional fees, facility costs, marketing expenses and depreciation and amortization. The increase in operating expenses from continuing operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was due to our increase in license agreements and related revenue during the three months ended March 31, 2012. We had one direct-to-retail and three traditional wholesale license agreements during the first quarter of 2012, compared to one traditional wholesale license agreement during the first quarter of 2011. Included in operating expenses from continuing operations for the three months ended March 31, 2012 is approximately $226,000 in royalties due to the minority interest member of our William Rast subsidiaries, Tennman WR-T, under the terms of our royalty agreement related to license revenue earned from license agreements of our William Rast brand. Also included in operating expenses from continuing operations for the three months ended March 31, 2012, is approximately $65,000 of nonrecurring expenses and approximately $172,000 of professional fees related to our 2011 year-end audit.

 

 

Interest Expense, net

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Interest Expense, net		$	143,589			$	15,000				857.3	%

 

Interest expense from continuing operations during the three months ended March 31, 2012 resulted primarily from interest due at rates of 7% and 8% on our promissory notes payable in the aggregate principal amount of $1.75 million through the date of their repayment on February 3, 2012, interest at a rate of LIBOR on our $14.5 million Senior Secured Convertible Debentures and interest related to the accretion of the valuation discount and amortization of deferred financing costs associated with our Senior Secured Convertible Debentures amounting to approximately $144,000 during the three months ended March 31, 2012. Interest expense from continuing operations during the three months ended March 31, 2011 resulted primarily from interest due at a rate of 8% on our promissory note payable to related parties amounting to $750,000. The increase in interest expense from the first quarter of 2012 compared to the first quarter of 2011 is due primarily to the accretion of valuation discount, amortization of deferred financing costs and an increase in borrowings during the period.

 

Provision for Income Taxes

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Provision for Income Taxes		$	10,000			$	800				1150.0	%

 

The provision for income taxes from continuing operations for the three months ended March 31, 2012 and 2011 represents the minimum tax payments due for state and local purposes, including gross receipts tax on sales generated by our limited liability companies, and estimated Federal and state taxes due at statutory effected tax rates, if any. As of March 31, 2012, a valuation allowance has been provided for the entire amount of our deferred income tax asset related to net operating loss carryforwards, factored accounts receivable and bad debt reserves and other reserves. At this time, we cannot determine that it is more likely than not that we will realize the future income tax benefits related to our net operating losses. As of December 31, 2011, total net operating losses available to carry forward to future periods amounted to approximately $11.5 million. The increase in the provision for income taxes from continuing operations recorded for the three months ended March 31, 2012, compared to the three months ended March 31, 2011 resulted from an increase in gross receipts tax related to an increase in revenue during the period.

 

Net Income (Loss) from Continuing Operations

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Net loss from continuing operations		$	(57,794	)		$	(24,002	)			140.8	%

 

The increase in net income earned for the three months ended March 31, 2012 compared to the net loss incurred during the three months ended March 31, 2011 is due primarily to increased license revenue during the first quarter of 2012, offset by increased operating and interest expenses during the quarter, as discussed above.

 

 

Noncontrolling Interest from Continuing Operations

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Noncontrolling interest from continuing operations		$	-			$	12,001				(100.0	)%

 

Noncontrolling interest from continuing operations recorded for the three months ended March 31, 2011 represents net loss allocations to Tennman WR-T, Inc., a member of William Rast Sourcing and William Rast Licensing. Beginning January 1, 2009 through September 30, 2011, losses were allocated to the members of William Rast Sourcing and William Rast Licensing based on their respective percentage interests in such entities and profits were allocated to the members based on their percentage interest to the extent that the member was previously allocated losses.

 

Effective as of October 1, 2011, we recapitalized the ownership of our William Rast branded apparel business. As further described under Note 4 to our condensed consolidated financial statements, the recapitalization increased the ownership of Bella Rose in each of William Rast Sourcing and William Rast Licensing in exchange for certain royalties to be paid to Tennman WR-T (“TWR”) as well as other consideration. Both William Rast Sourcing and William Rast Licensing are now owned 82% by Bella Rose and 18% by TWR and Bella Rose is entitled to all of the distributable cash from operations and all of the distributable cash from a sale of William Rast Sourcing or William Rast Licensing that is not paid to TWR.

 

Discontinued Operations of Wholesale Business

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
(Loss) income from discontinued operations		$	(215,958	)		$	955,132				(122.6	)%
Noncontrolling interest in discontinued operations			-				1,264,178				(100.0	)%
		$	(215,958	)		$	2,219,310				(109.7	)%

 

Net (loss) income from discontinued operations of our wholesale business for the three months ended March 31, 2012 and 2011 represents the results of operations of our People’s Liberation and William Rast wholesale business. In November 2011, we began to transition from a wholesale and retail focused business to a brand management and licensing business. As a result, our retail operations included in our William Rast Retail subsidiary were discontinued. In 2012, we also decided to discontinue our wholesale operations completely. For the remainder of 2012, we will continue to sell William Rast and People’s Liberation branded apparel on a limited basis through our domestic wholesale operations in order to liquidate our existing inventory. The decrease in income from discontinued operations of our wholesale business in the first quarter of 2012 from the first quarter of 2011 was due primarily to non-recurring income received in the settlement of our litigation with Charlotte Russe during the first quarter of 2011 and decreased revenue received in the first quarter of 2012, offset by decreased operating expenses during the first quarter of 2012.

 

 

Discontinued Operations of Retail Subsidiary

 

		Three Months Ended  March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Loss from discontinued operations		$	(155,265	)		$	(330,406	)			(53.0	)%
Noncontrolling interest in discontinued operations			-				165,203				(100.0	)%
		$	(155,265	)		$	(165,203	)			(6.0	)%

 

Net loss from discontinued operations of retail subsidiary for the three months ended March 31, 2012 and 2011 represents the results of operations of our William Rast Retail subsidiary. In November 2011, we began to transition from a wholesale and retail focused business to a brand management and licensing business. As a result, our retail operations included in our William Rast Retail subsidiary, which consisted of four retail stores, were discontinued. We closed two of our retail stores in 2011 and the remaining two stores are expected to be closed in the second and third quarters of 2012. The decrease in net loss from discontinued operations of our retail subsidiary during the three months ended March 31, 2012 compared to the three months ended March 31, 2011 is due primarily to decreased operating expenses, offset by decreased net revenue during the three months ended March 31, 2012.

 

Discontinued Operations of J. Lindeberg Subsidiaries

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Net loss from discontinued operations		$	-			$	(262,563	)			100.0	%
Noncontrolling interest in discontinued operations			-				131,281				(100.0	)%
		$	-			$	(131,282	)			100.0	)

 

Net loss from discontinued operations of J. Lindeberg Subsidiaries for the three months ended March 31, 2011 represents the results of operations of our J. Lindeberg subsidiaries during the period. We sold our 50% member interest in J. Lindeberg, USA on April 26, 2011. The gain on the sale of member interest in subsidiary was recorded in the second quarter of 2011 and is further described in Note 10 to the consolidated financial statements included elsewhere in this report.

 

Net (Loss) Income Attributable to Common Stockholders

 

		Three Months Ended March 31, 2012				Three Months Ended  March 31, 2011				Percent Change
		(As restated)
Net (loss) income attributable to common stockholders		$	(429,017	)		$	1,910,824				(122.5	)%

 

 

The net loss attributable to common stockholders for the three months ended March 31, 2012 compared to net income attributable to common stockholders for the three months ended March 31, 2011 is due primarily to income received in the settlement of our litigation with Charlotte Russe and noncontrolling interest recorded during the first quarter of 2011, and a decrease in income from discontinued operations in the first quarter of 2012, offset by an increased in income from continuing operations during the first quarter of 2012, as discussed above.

 

Liquidity and Capital Resources

 

As of March 31, 2012, our continuing operations had cash and cash equivalents of approximately $9.8 million and a working capital balance of approximately $8.0 million. As of March 31, 2011, our continuing operations had cash and cash equivalents of approximately $0.9 million, and a working capital balance of approximately $682,000, and approximately $1.0 million of availability from our factors. As of March 31, 2011, net advances from our factors totaled approximately $1.9 million.

 

Cash Flows from Continuing Operations

 

Cash flows from continuing operations for operating, financing and investing activities for the three months ended March 31, 2012 and 2011 are summarized in the following table:

 

		Three Months Ended March 31,
		2012				2011
		(As restated)
Operating activities		$	(1,354,035	)		$	63,777
Investing activities			(21	)			9,132
Financing activities			11,905,778				-
Net increase in cash		$	10,551,722			$	72,909

 

Operating Activities

 

Net cash used in operating activities from continuing operations was approximately $1.4 million for the three months ended March 31, 2012 and net cash provided by operating activities from continuing operations was approximately $64,000 for the three months ended March 31, 2011. Net cash used in operating activities from continuing operations for the three months ended March 31, 2012 was primarily a result of a decrease in deferred license revenue and decreased accounts payable and accrued expenses. Net cash provided by operating activities from continuing operations for the three months ended March 31, 2011 was primarily a result of net income earned during the period.

 

Investing Activities

 

Net cash used in investing activities from continuing operations was approximately zero for the three months ended March 31, 2012 and net cash provided by investing activities from continuing operations was approximately $9,000 for the three months ended March 31, 2011. Net cash provided by investing activities from continuing operations for the three months ended March 31, 2011 consisted primarily of a decrease in restricted cash, offset by capital expenditures related to property and equipment, and trademarks.

 

 

Financing Activities

 

Net cash provided by financing activities from continuing operations for the three months ended March 31, 2012 amounted to approximately $11.9 million. In February 2012, we received $14,500,000 in gross proceeds from the sale of senior secured convertible debentures. Net proceeds from this transaction after the payment of closing, legal and other costs and the repayment of outstanding obligations related to notes payable and our factoring agreement amounted to approximately $11.7 million. There were no financing activities from continuing operations for the three months ended March 31, 2011.

 

Cash Received from the Sale of Senior Secured Convertible Debentures

 

In February 2012, we raised $14,500,000 in gross proceeds from TCP WR Acquisition, LLC. Net proceeds from this transaction after the payment of closing, legal and other costs and the repayment of outstanding obligations related to notes payable and our factoring agreement amounted to approximately $11.7 million.

 

Cash Received from the Sale of our 50% Membership Interest in J. Lindeberg USA

 

On April 26, 2011, we completed the sale of Bella Rose’s 50% membership interest in J. Lindeberg USA to J. Lindeberg USA Corp. pursuant to the terms of a Unit Purchase Agreement entered into by the parties on April 7, 2011. In consideration for Bella Rose’s 50% member interest in Lindeberg USA, J. Lindeberg USA Corp. agreed to pay us an aggregate of $1,650,000, of which $900,000 was paid upon the closing of the transaction and $750,000 was paid on the six month anniversary of the closing of the transaction.

 

Cash Received from our Settlement with Charlotte Russe

 

On February 3, 2011 we (along with the other parties to the litigation) settled our litigation with Charlotte Russe Holding, Inc. Pursuant to the settlement, we received $3.5 million, after the distribution of amounts owed under the terms of an asset purchase agreement entered into by us with two related parties pursuant to which we sold 50% of the net proceeds, after contingent legal fees and expenses, that may be received by us as a result of the litigation, and the payment of legal fees and expenses. We also received proceeds of $750,000 in the third quarter of 2010 relating to the litigation in connection with the asset purchase agreement, for total proceeds related to the litigation of $4.3 million. The settlement included the dismissal with prejudice of all claims pending between the parties as well as mutual releases, without any admission of liability or wrongdoing by any of the parties to the actions.

 

Cash Provided from Factoring Agreements

 

On October 7, 2010, William Rast Sourcing entered into a factoring agreement with Rosenthal & Rosenthal, Inc and beginning July 28, 2008 through April 26, 2011, our subsidiary, J. Lindeberg USA, entered into various factoring arrangements with FTC Commercial Corp ("FTC"). As a result of the sale of our 50% member interest in J. Lindeberg USA on April 26, 2011, our interest in the factoring facility with FTC was terminated. In February 2012, we also terminated all of our factoring and related agreements with Rosenthal & Rosenthal and all obligations owed to Rosenthal & Rosenthal were paid in full from proceeds received from our transaction with TWR.

 

While our factoring arrangements were in place, our factors purchased our eligible accounts receivable and assumed the credit risk with respect to those accounts for which the factors had given their prior approval. If the factor did not assume the credit risk for a receivable, the collection risk associated with the receivables remained with us.

 

 

As of March 31, 2011, total factored accounts receivable included in due to factor amounted to approximately $2.3 million. Outstanding advances, net of matured funds, amounted to approximately $1.9 million as of March 31, 2011, and are included in the due from factor balance.

 

Future Capital Requirements

 

We believe the cash received from our senior secured convertible debentures will be sufficient to meet our capital requirements for the next twelve months, as they relate to our current operations and our growth strategies in the near term. 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.

  

Contractual Obligations and Off-Balance Sheet Arrangements

 

The following summarizes our contractual obligations at March 31, 2012 and the effects such obligations are expected to have on liquidity and cash flows in future periods:

 

		Payments Due by Period
						Less than				1-3				4-5				After
Contractual Obligations		Total				1 Year				Years				Years				5 Years
Operating leases		$	5,986,648			$	780,071			$	2,399,566			$	1,479,087			$	1,327,924
Minimum royalties due			2,400,000				400,000				1,200,000				800,000				*
Senior secured convertible debentures			14,500,000				-				14,500,000				-				-
Total		$	22,886,486			$	1,180,071			$	18,099,566			$	2,279,087			$	1,327,924

 

*

Pursuant to the royalty agreement between WRS, WRL and TWR, as discussed in Note 5 to the condensed consolidated financial statements, WRS is obligated to pay TWR a guaranteed minimum royalty of $400,000 per calendar year, with such payments continuing until the earlier of (i) the date that WRL pays a liquidating payment to TWR or (ii) the date that TWR or anyaffiliates no longer owns Class B membership interests in WRL.

 

At March 31, 2012, approximately $35,000 of the Company’s cash is held under lease lines as collateral to secure the Company’s lease agreements.

 

At March 31, 2012 and 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Factored accounts receivable may subject us to off-balance sheet risk. We sold the majority of our trade accounts receivable to our factor and were contingently liable to the factor for merchandise disputes, other customer claims and invoices that were not credit approved by the factors. From time to time, our factor also issued letters of credit and vendor guarantees on our behalf. There were no outstanding letters of credit or vendor guarantees as of March 31, 2012 and December 31, 2011. There was no ledger debt (payables to suppliers that use the same factor as the Company) as of March 31, 2012 and December 31, 2011.

 

Recent Accounting Pronouncements

 

See Note 3 to Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2012, the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures at the time of the Original Filing, our former Chief Executive Officer/Chief Financial Officer previously concluded that our disclosure controls and procedures were effective as of March 31, 2012. In connection with the hiring of our current Chief Executive Officer and Chief Financial Officer, our disclosure controls and procedures were reevaluated. In connection with this evaluation, management identified a material weakness in our internal controls as of March 31, 2012. Specifically, the lack of technical resources to apply accounting requirements as they relate to non-routine and highly complex transactions, resulted in restatements to our financial statements as previously filed on Form 10-Q for the periods ended March 31, June 30 and September 30, 2012. The adjustments in this Form 10-Q/A relate to the recognition of license revenue and the valuation of our senior secured convertible debentures. Based on this material weakness, management has concluded that our disclosure controls and procedures were not effective as of March 31, 2012.

 

Changes in Internal Control Over Financial Reporting

 

There have not been any significant changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The material weakness associated with the financial reporting relating to the recognition of license revenue and the valuation of our senior secured convertible debentures discussed above was subsequently identified and resulted in the initiation of remediation activities subsequent to the original filing of the March 31, 2012 Form 10-Q.

 

Remediation of a Material Weakness in Internal Control Over Financial Reporting

 

We recognize the importance of the control environment as it sets the overall tone for the organization and is the foundation for all other components of internal control. Consequently, we designed and implemented remediation measures to address the material weakness and enhance our internal control over financial reporting. The following actions, which we believe will remediate the material weakness in internal control over financial reporting, were completed as of the date of this filing:

 

·

We retained management and accounting personnel with the appropriate level of knowledge, skills and experience in financial accounting and reporting;

 

·

Our finance team has examined significant accounts and improved related account reconciliations; and

 

 

·

Our finance team changed its monitoring practices concerning the review of significant accounts and transactions and related financial results and reporting.

 

We are committed to a strong internal control environment and will continue to review the effectiveness of our internal controls over financial reporting and other disclosure controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures.

 

PART II
OTHER INFORMATION

 

Item 1

Legal Proceedings

 

We are subject to certain legal proceedings and claims arising in connection with the normal course of our business. In the opinion of management, other than as described in Note 14 of the accompanying condensed consolidated financial statements, which description is incorporated herein by reference, there are currently no claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

Item 1A.

Risk Factors

 

Cautionary Statements and Risk Factors

 

This Quarterly Report on Form 10-Q/A contains forward-looking statements, which are subject to a variety of risks and uncertainties. Our actual results could differ materially from those anticipated in those forward-looking statements as a result of various factors, including those set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2011. There have been no material changes to such risk factors during the three months ended March 31, 2012.

 

 

Item 6.

Exhibits

 

The following exhibits are filed as part of this report:

 

Exhibit Number		Exhibit Title
3.1		Amended and Restated Certificate of Incorporation of Sequential Brands Group, Inc. Incorporated by referenced to Exhibit 3.1 to our Current Report on Form 8-K (dated July 14, 2008), filed on July 18, 2008.
3.2		Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock. Incorporated by referenced to Exhibit 3.1 to our Current Report on Form 8-K (dated February 2, 2012), filed on February 8, 2012.
3.3		Certificate of Ownership and Merger merging Sequential Brands Group, Inc. with and into People’s Liberation, Inc.  Incorporated by referenced to Exhibit 3.3 to our Annual Report on Form 10-K, filed on February 8, 2012.
10.1		Securities Purchase Agreement, dated February 2, 2012, between the Company and each purchaser identified on the signature page thereto. Incorporated by referenced to Exhibit 10.1 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
10.2		Form of Debenture. Incorporated by referenced to Exhibit 10.2 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
10.3		Form of Warrant. Incorporated by referenced to Exhibit 10.3 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
10.4		Stockholders Agreement dated February 22, 2012, by and among the Company, Colin Dyne, TCP WR Acquisition, LLC, and the other stockholders party thereto. Incorporated by referenced to Exhibit 10.4 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
10.5		Security Agreement, dated February 3, 2012, by and among the Company, certain subsidiaries of the Company and the holders of the Company’s Variable Rate Senior Secured Convertible Debentures signatory thereto. Incorporated by referenced to Exhibit 10.5 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
10.6		Subsidiary Guarantee, dated February 3, 2012, by and among certain subsidiaries of the Company in favor of the purchasers signatory to that certain Securities Purchase Agreement, dated February 2, 2012, between the Company and such purchasers. Incorporated by referenced to Exhibit 10.6 to our Current Report on Form 8-K (dated February 22, 2012), filed on February 28, 2012.
31.1*		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.
31.2*		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.

 

 

32.1**		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

 

*Filed herewith.

 

**Furnished herewith.

 

***

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

	SEQUENTIAL BRANDS GROUP, INC.
Date: March 29, 2013	/s/ Gary Klein
	By:	Gary Klein
	Its:	Chief Financial Officer (Principal Financial
	and Accounting Officer)