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EX-31.1 - EX-31.1 - ICONIX BRAND GROUP, INC.icon-ex311_7.htm
EX-32.2 - EX-32.2 - ICONIX BRAND GROUP, INC.icon-ex322_10.htm
EX-10.66 - EX-10.66 - ICONIX BRAND GROUP, INC.icon-ex1066_475.htm
EX-32.1 - EX-32.1 - ICONIX BRAND GROUP, INC.icon-ex321_9.htm
EX-31.2 - EX-31.2 - ICONIX BRAND GROUP, INC.icon-ex312_8.htm

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the Quarterly Period Ended June 30, 2015

OR

o

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 001-10593

 

ICONIX BRAND GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

11-2481903

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1450 Broadway, New York, NY

 

10018

(Address of principal executive offices)

 

(Zip Code)

 

(212) 730-0030

(Registrant’s telephone number, including area code)

 

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  o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

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

 

x

  

Accelerated filer

 

o

 

 

 

 

 

 

 

Non-accelerated filer

 

o  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

o

 

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

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

Common Stock, $.001 Par Value- 48,260,768 shares as of August 3, 2015.

 

 

 


Part I. Financial Information

Item 1. Financial Statements

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except par value)

 

 

 

June 30,

2015

 

 

December 31,

2014

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117,874

 

 

$

128,019

 

Restricted cash

 

 

64,923

 

 

 

59,560

 

Accounts receivable, net

 

 

129,024

 

 

 

118,774

 

Deferred income tax assets

 

 

21,436

 

 

 

10,328

 

Other assets – current

 

 

50,032

 

 

 

68,587

 

Total Current Assets

 

 

383,289

 

 

 

385,268

 

Property and equipment:

 

 

 

 

 

 

 

 

Furniture, fixtures and equipment

 

 

23,435

 

 

 

22,704

 

Less: Accumulated depreciation

 

 

(15,839

)

 

 

(14,946

)

 

 

 

7,596

 

 

 

7,758

 

Other Assets:

 

 

 

 

 

 

 

 

Other assets

 

 

52,516

 

 

 

63,334

 

Trademarks and other intangibles, net

 

 

2,186,263

 

 

 

2,024,541

 

Deferred financing costs, net

 

 

17,383

 

 

 

19,842

 

Investments and joint ventures

 

 

182,760

 

 

 

140,910

 

Goodwill

 

 

238,187

 

 

 

231,738

 

 

 

 

2,677,109

 

 

 

2,480,365

 

Total Assets

 

$

3,067,994

 

 

$

2,873,391

 

Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

46,518

 

 

$

38,286

 

Deferred revenue

 

 

29,439

 

 

 

24,978

 

Current portion of long-term debt

 

 

347,918

 

 

 

61,123

 

Other liabilities – current

 

 

15,447

 

 

 

12,741

 

Total current liabilities

 

 

439,322

 

 

 

137,128

 

Deferred income tax liability

 

 

361,353

 

 

 

322,888

 

Long-term debt, less current maturities

 

 

1,130,667

 

 

 

1,332,954

 

Other liabilities

 

 

10,570

 

 

 

11,660

 

Total Liabilities

 

 

1,941,912

 

 

 

1,804,630

 

Redeemable Non-Controlling Interest

 

 

14,582

 

 

 

14,224

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, $.001 par value shares authorized 150,000; shares issued 80,339 and

   79,263, respectively

 

 

80

 

 

 

79

 

Additional paid-in capital

 

 

970,002

 

 

 

948,714

 

Retained earnings

 

 

887,028

 

 

 

809,420

 

Accumulated other comprehensive loss

 

 

(55,003

)

 

 

(24,186

)

Less: Treasury stock – 31,997 and 31,310 shares at cost, respectively

 

 

(836,256

)

 

 

(812,429

)

Total Iconix Brand Group, Inc. Stockholders’ Equity

 

 

965,851

 

 

 

921,598

 

Non-controlling interest

 

 

145,649

 

 

 

132,939

 

Total Stockholders’ Equity

 

 

1,111,500

 

 

 

1,054,537

 

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

 

$

3,067,994

 

 

$

2,873,391

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

2


Unaudited Condensed Consolidated Income Statements

(in thousands, except earnings per share data)

Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

(in thousands, except earnings per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Licensing revenue

 

$

98,459

 

 

$

97,542

 

 

$

193,846

 

 

$

209,709

 

Other revenue

 

 

 

 

 

21,401

 

 

 

 

 

 

25,372

 

Total Revenue

 

 

98,459

 

 

 

118,943

 

 

 

193,846

 

 

 

235,081

 

Selling, general and administrative expenses

 

 

49,087

 

 

 

44,293

 

 

 

93,242

 

 

 

92,495

 

Operating income

 

 

49,372

 

 

 

74,650

 

 

 

100,604

 

 

 

142,586

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

21,401

 

 

 

21,247

 

 

 

42,697

 

 

 

42,403

 

Interest income

 

 

(1,182

)

 

 

(482

)

 

 

(1,996

)

 

 

(1,083

)

Other income

 

 

(790

)

 

 

 

 

 

(48,155

)

 

 

(37,893

)

Foreign currency translation loss (gain)

 

 

2,006

 

 

 

 

 

 

(8,494

)

 

 

 

Equity earnings on joint ventures

 

 

(3,618

)

 

 

(5,675

)

 

 

(6,820

)

 

 

(8,797

)

Other expenses (income) – net

 

 

17,817

 

 

 

15,090

 

 

 

(22,768

)

 

 

(5,370

)

Income before income taxes

 

 

31,555

 

 

 

59,560

 

 

 

123,372

 

 

 

147,956

 

Provision for income taxes

 

 

12,184

 

 

 

20,778

 

 

 

38,094

 

 

 

46,332

 

Net income

 

$

19,371

 

 

$

38,782

 

 

$

85,278

 

 

$

101,624

 

Less: Net income attributable to non-controlling interest

 

$

4,603

 

 

$

3,463

 

 

$

7,670

 

 

$

6,537

 

Net income attributable to Iconix Brand Group, Inc.

 

$

14,768

 

 

$

35,319

 

 

$

77,608

 

 

$

95,087

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

 

$

0.73

 

 

$

1.61

 

 

$

1.94

 

Diluted

 

$

0.30

 

 

$

0.60

 

 

$

1.53

 

 

$

1.63

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

48,243

 

 

 

48,551

 

 

 

48,201

 

 

 

49,034

 

Diluted

 

 

49,595

 

 

 

58,595

 

 

 

50,752

 

 

 

58,237

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

19,371

 

 

$

38,782

 

 

$

85,278

 

 

$

101,624

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

7,123

 

 

 

(2,332

)

 

 

(31,116

)

 

 

(2,620

)

Change in fair value of available for sale securities

 

 

299

 

 

 

 

 

 

299

 

 

 

 

Total other comprehensive income

 

 

7,422

 

 

 

(2,332

)

 

 

(30,817

)

 

 

(2,620

)

Comprehensive income

 

$

26,793

 

 

$

36,450

 

 

$

54,461

 

 

$

99,004

 

Less: comprehensive income attributable to non-controlling

   interest

 

 

4,603

 

 

 

3,463

 

 

 

7,670

 

 

 

6,537

 

Comprehensive income attributable to Iconix Brand Group, Inc.

 

$

22,190

 

 

$

32,987

 

 

$

46,791

 

 

$

92,467

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

Six Months Ended June 30, 2015

(in thousands)

 

 

 

Common Stock

 

 

Additional

 

 

Retained

 

 

Accumulated Other Comprehensive

 

 

Treasury

 

 

Non-Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Paid-In Capital

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Interest

 

 

Total

 

Balance at January 1, 2015

 

 

79,263

 

 

$

79

 

 

$

948,714

 

 

$

809,420

 

 

$

(24,186

)

 

$

(812,429

)

 

$

132,939

 

 

$

1,054,537

 

Issuance of common stock

   related to acquisition of interest

   in joint venture

 

 

465

 

 

 

0

 

 

 

15,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,703

 

Shares issued on vesting of

   restricted stock

 

 

596

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Shares issued on exercise of stock

   options and warrants

 

 

15

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

Tax benefit of stock option

   exercises

 

 

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44

 

Compensation expense in

   connection with restricted

   stock

 

 

 

 

 

 

 

 

5,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,899

 

Shares repurchased on the

   open market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,391

)

 

 

 

 

 

(12,391

)

Cost of shares repurchased on

   vesting of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,436

)

 

 

 

 

 

(11,436

)

Change in redemption value of

   redeemable non-controlling

   interest

 

 

 

 

 

 

 

 

(358

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(358

)

Change in fair value of available

   for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

299

 

 

 

 

 

 

 

 

 

299

 

Net income

 

 

 

 

 

 

 

 

 

 

 

77,608

 

 

 

 

 

 

 

 

 

7,670

 

 

 

85,278

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,116

)

 

 

 

 

 

 

 

 

(31,116

)

Distributions to joint ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,293

)

 

 

(7,293

)

Non-controlling interest of

   acquired companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,333

 

 

 

12,333

 

Balance at June 30, 2015

 

 

80,339

 

 

$

80

 

 

$

970,002

 

 

$

887,028

 

 

$

(55,003

)

 

$

(836,256

)

 

$

145,649

 

 

$

1,111,500

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

5


Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

85,278

 

 

$

101,624

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

809

 

 

 

1,404

 

Amortization of trademarks and other intangibles

 

 

1,724

 

 

 

2,468

 

Amortization of deferred financing costs

 

 

2,459

 

 

 

2,711

 

Amortization of convertible note discount

 

 

15,069

 

 

 

14,428

 

Stock-based compensation expense

 

 

5,899

 

 

 

8,247

 

Non-cash gain on re-measurement of equity investment

 

 

(47,365

)

 

 

(37,893

)

Provision for doubtful accounts

 

 

4,726

 

 

 

1,956

 

Earnings on equity investments in joint ventures

 

 

(6,820

)

 

 

(8,797

)

Distributions from equity investments

 

 

1,333

 

 

 

4,767

 

Gain on sale of fixed assets

 

 

(225

)

 

 

 

Gain on sale of trademarks

 

 

 

 

 

(25,372

)

Deferred income tax provision

 

 

22,398

 

 

 

27,911

 

Gain on foreign currency translation

 

 

(8,494

)

 

 

 

Changes in operating assets and liabilities, net of business acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(15,556

)

 

 

(21,509

)

Other assets – current

 

 

19,793

 

 

 

6,084

 

Other assets

 

 

(1,840

)

 

 

(2,581

)

Deferred revenue

 

 

4,936

 

 

 

433

 

Accounts payable and accrued expenses

 

 

16,033

 

 

 

8,350

 

Net cash provided by operating activities

 

 

100,157

 

 

 

84,231

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(802

)

 

 

(851

)

Acquisition of interest in Iconix China, net of cash acquired

 

 

(20,400

)

 

 

 

Acquisition of interest in Pony

 

 

(37,000

)

 

 

 

Acquisition of interest in Strawberry Shortcake

 

 

(105,000

)

 

 

 

Acquisition of interest in Iconix Latin America

 

 

 

 

 

(42,000

)

Additional investments in joint ventures

 

 

 

 

 

(2,500

)

Proceeds from sale of trademarks and related notes receivable

 

 

13,372

 

 

 

9,168

 

Proceeds from sale of fixed assets

 

 

223

 

 

 

 

Additions to trademarks

 

 

(108

)

 

 

(295

)

Net cash used in investing activities

 

 

(149,715

)

 

 

(36,478

)

Cash flows (used in) provided by financing activities:

 

 

 

 

 

 

 

 

Shares repurchased on the open market

 

 

(12,391

)

 

 

(144,312

)

Proceeds from Variable Funding Notes

 

 

100,000

 

 

 

 

Payment of long-term debt

 

 

(30,562

)

 

 

(30,624

)

Additional payment to Purim

 

 

(2,000

)

 

 

 

Distributions to non-controlling interests

 

 

(7,293

)

 

 

(8,445

)

Excess tax benefit from share-based payment arrangements

 

 

44

 

 

 

1,172

 

Cost of shares repurchased on vesting of restricted stock and exercise of stock

   options

 

 

(3,156

)

 

 

(13,971

)

Proceeds from exercise of stock options and warrants

 

 

 

 

 

3,440

 

Restricted cash

 

 

(5,362

)

 

 

(1,696

)

Net cash provided by (used in) financing activities

 

 

39,280

 

 

 

(194,436

)

Effect of exchange rate changes on cash

 

 

133

 

 

 

(242

)

Net decrease in cash and cash equivalents

 

 

(10,145

)

 

 

(146,925

)

Cash and cash equivalents, beginning of period

 

 

128,019

 

 

 

278,789

 

Cash and cash equivalents, end of period

 

$

117,874

 

 

$

131,864

 

 

6


Supplemental disclosure of cash flow information:

 

 

 

Six Months Ended June 30,

 

(in thousands)

 

2015

 

 

2014

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Income taxes (net of refunds received)

 

$

(12,546

)

 

$

3,508

 

Interest

 

$

23,736

 

 

$

24,448

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Sale of trademarks for note receivable

 

$

 

 

$

22,138

 

Issuance of shares in connection with purchase of Iconix China

 

$

15,703

 

 

$

 

Note receivable in connection with Strawberry Shortcake acquisition

 

$

7,777

 

 

$

 

Shares repurchased on vesting of restricted stock included in accrued expenses

 

$

11,436

 

 

$

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

7


Iconix Brand Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2015

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

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Iconix Brand Group, Inc. (the “Company,” “we,” “us,” or “our”), all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months (“Current Quarter”) and the six months (“Current Six Months”) ended June 30, 2015 are not necessarily indicative of the results that may be expected for a full fiscal year.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“FY 2014”).

 

 

2. Trademarks and Other Intangibles, net

Trademarks and other intangibles, net, consist of the following:

 

 

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

Estimated

Lives in

Years

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

Indefinite-lived trademarks and copyrights

 

Indefinite

 

$

2,174,769

 

 

$

 

 

$

2,012,333

 

 

$

 

Definite-lived trademarks

 

10-15

 

 

19,629

 

 

 

11,537

 

 

 

19,629

 

 

 

10,985

 

Non-compete agreements

 

2-15

 

 

940

 

 

 

568

 

 

 

940

 

 

 

450

 

Licensing contracts

 

1-9

 

 

25,140

 

 

 

22,110

 

 

 

24,323

 

 

 

21,249

 

 

 

 

 

$

2,220,478

 

 

$

34,215

 

 

$

2,057,225

 

 

$

32,684

 

Trademarks and other intangibles, net

 

 

 

 

 

 

 

$

2,186,263

 

 

 

 

 

 

$

2,024,541

 

 

In March 2015, the Company acquired the 50% interest in Iconix China held by its joint venture partner, thereby increasing its ownership interest in Iconix China to 100%. As a result of this transaction, Iconix China is now consolidated with the Company, which increased the Company’s indefinite-lived trademarks by $40.5 million. See Note 3 for further details on this transaction.

In March 2015, the Company acquired the Strawberry Shortcake brand. As a result of this transaction the Company’s indefinite-lived trademarks increased by $94.0 million. See Note 3 for further details on this transaction.

In February 2015, the Company acquired through its wholly-owned subsidiary, US Pony Holdings, LLC, the rights to the Pony brand in respect of the United States, Canada and Mexico. Immediately following such acquisition, a third party contributed specified assets to US Pony Holdings, LLC in exchange for a 25% non-controlling interest in the entity. As a result of these transactions, US Pony Holdings, LLC is consolidated with the Company, which increased the Company’s indefinite-lived trademarks by $48.8 million. See Note 3 for further details on this transaction.

Amortization expense for intangible assets for the Current Quarter and for the three months ended June 30, 2014 (the “Prior Year Quarter”) was $0.8 million and $1.0 million, respectively.  Amortization expense for intangible assets for the Current Six Months and for the six months ended June 30, 2014 (the “Prior Year Six Months”) was $1.7 million and $2.5 million, respectively.

The trademarks of Candie’s, Bongo, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Waverly, Ecko, Zoo York, Peanuts, Ed Hardy, Sharper Image, Umbro, Modern Amusement, Buffalo, Lee Cooper, Hydraulic, Nicholas Graham, Strawberry Shortcake and Pony have been determined to have an indefinite useful life and accordingly no amortization has been recorded in the Company’s unaudited condensed consolidated income statements. Instead, each of these intangible assets are tested for impairment annually and, as needed, on an individual basis as separate single units of accounting, with any related impairment charge recorded to the statement of income at the time of determining such impairment. The annual evaluation of the Company’s indefinite-lived trademarks is performed as of October 1, the beginning of the Company’s fourth fiscal quarter. There was no impairment of the indefinite-lived trademarks during the Current Quarter, Current

8


Six Months, Prior Year Quarter or Prior Year Six Months. Further, as it relates to the Company’s definite-lived trademarks, there was no impairment of the definite-lived trademarks during the Current Quarter, Current Six Months, Prior Year Quarter and Prior Year Six Months.

 

 

3. Acquisitions, Joint Ventures and Investments

 

Consolidated Entities

The following entities and joint ventures are consolidated with the Company:

Iconix China

In September 2008, the Company and Novel Fashions Brands Limited (“Novel”) formed a joint venture (“Iconix China”) to develop and market the Company’s brands in the People’s Republic of China, Hong Kong, Macau and Taiwan (the “China Territory”). Pursuant to the terms of this transaction, the Company contributed to Iconix China substantially all rights to its brands in the China Territory and committed to contribute $5.0 million, and Novel committed to contribute $20 million to Iconix China. Upon closing of the transaction, the Company contributed $2.0 million and Novel contributed $8.0 million. In September 2009, the parties amended the terms of the transaction to eliminate the obligation of the Company to make any additional contributions and to reduce Novel’s remaining contribution commitment to $9.0 million, $4.0 million of which was contributed in July 2010, $3.0 million of which was contributed in May 2011, and $2.0 million of which was contributed in June 2012.

In March 2015, the Company purchased from Novel its 50% interest in Iconix China for $57.4 million, of which $40.4 million was paid in cash, $15.7 million was paid in the Company’s common stock, and $1.3 million was an amount due the Company from Iconix China that was offset against the Company’s accounts receivable (the “2015 Buy-out”), thereby taking 100% of the equity interest in Iconix China. The following is a reconciliation of consideration paid to Novel Fashion Brands Limited:

 

Cash paid to Novel Fashion Brands Limited

 

$

40,400

 

Shares issued to the seller

 

 

15,703

 

Offset of accounts receivable

 

 

1,269

 

Fair value of 50% interest in Iconix China

 

$

57,372

 

 

As a result of the 2015 Buy-out, Iconix China is subject to consolidation and is included in the Company’s unaudited condensed consolidated financial statements as of June 30, 2015.

The estimated fair value of the assets acquired, less liabilities assumed (which is preliminary and subject to change), is allocated as follows:

 

Fair value of 50% interest in Iconix China

 

$

57,372

 

Book value of Company equity investment prior to 2015

   Buy-out

 

 

10,006

 

Gain on re-measurement of initial equity investment

 

 

47,365

 

 

 

$

114,743

 

Trademarks

 

 

40,500

 

Investments in private companies

 

 

42,659

 

Cash

 

 

20,184

 

Other assets

 

 

5,997

 

Accrued expenses

 

 

(447

)

Goodwill

 

 

5,850

 

 

 

$

114,743

 

 

Other assets consist primarily of securities of a company publicly traded on the Hong Kong Stock Exchange.

The Iconix China trademarks have been determined by management to have an indefinite useful life and accordingly no amortization is being recorded in the Company’s unaudited condensed consolidated income statements. The goodwill and trademarks are subject to a test for impairment on an annual basis. The $5.9 million of goodwill resulting from the 2015 Buy-out is deductible for income tax purposes.

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For the Current Quarter and Current Six Months, post-acquisition, the Company’s selling, general and administrative expenses increased by $0.6 million and other income increased by $0.6 million as a result of consolidating Iconix China on the Company’s unaudited condensed consolidated income statement.

As part of this transaction, the Company also acquired, through its ownership of 100% of Iconix China, equity interests in the following private companies with an aggregate fair value of approximately $42.7 million: Candies Shanghai Fashion Co. Ltd. (which can be put by Iconix China to Shanghai La Chappelle Fashion Co., Ltd. for cash based on a pre-determined formula); Mark Ecko China Ltd.; Ningbo Material Girl Fashion Co., Ltd.; Tangli International Holdings Ltd.; Ecko Industry (Shanghai) Co., Ltd; and Joe Boxer China Ltd. See section entitled “Investments in Iconix China” for further detail on such investments.

Strawberry Shortcake

In March 2015, the Company completed its acquisition from American Greetings Corporation and its wholly-owned subsidiary, Those Characters From Cleveland, Inc. (collectively, “AG” or the “Seller”), of all of AG’s intellectual property rights and licenses and certain other related assets relating to the Strawberry Shortcake brand pursuant to an asset purchase agreement entered into in February 2015.

In accordance with the terms of the asset purchase agreement, the Company paid the Seller $105.0 million in cash at closing.

The cash paid to the Sellers and the estimated fair value of the assets acquired (which is preliminary and subject to change), is allocated as follows:

 

Cash paid to sellers by the Company

 

$

105,000

 

Trademarks

 

$

93,971

 

License agreements

 

 

800

 

Note receivable

 

 

8,654

 

Accounts receivable

 

 

1,075

 

Goodwill

 

 

500

 

 

 

$

105,000

 

 

The note receivable represents amounts due from AG in respect of non-compete payments pursuant to a License Agreement entered into with AG simultaneously with the closing of the transaction. The note is in the principal amount of $10.0 million and is paid in equal quarterly installments over a two year period.

For the Current Quarter and Current Six Months, post-acquisition, the Company recognized approximately $2.0 million and $3.4 million, respectively, in revenue from such assets. The $0.5 million of goodwill resulting from the 2015 acquisition is deductible for income tax purposes.

PONY

In February 2015, the Company, through its newly-formed subsidiary, US Pony Holdings, LLC, (“Pony Holdings”) acquired the North American rights to the PONY brand. These rights include the rights in the US obtained from Pony, Inc. and Pony International, LLC (collectively, “US Pony Seller”), and the rights in Mexico and Canada obtained from Super Jumbo Holdings Limited (“Non-US Pony Seller” and, together with US Pony Seller, the “Pony Sellers”). The purchase price paid by the Company was $37.0 million. Pony Holdings is owned 75% by the Company and 25% by its partner Anthony L&S Athletics, LLC (“ALS”). ALS contributed to Pony Holdings its perpetual license agreement in respect of the U.S. and Canadian territories for a 25% interest in Pony Holdings. Additionally, the Company received an option to purchase, until February 28, 2015, from the Pony Sellers and their affiliates certain intellectual property-related assets and trademarks related to the Pony brand in Europe, the Middle East and Africa and was assigned by ALS the right to purchase from Pony Sellers and their affiliates certain intellectual property-related assets and trademarks related to the Pony brand in Latin America, which expired May 1, 2015. The Company did not exercise either of such rights.

The following table is a reconciliation of cash paid to Pony Sellers and the fair value of ALS’s non-controlling interest (which is preliminary and subject to change):

 

Cash paid to Pony Sellers

 

$

37,000

 

Fair value of 25% non-controlling interest to ALS

 

 

12,333

 

Fair value of PONY

 

$

49,333

 

 

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The estimated fair value of the assets acquired is allocated as follows:

 

Trademarks

 

$

48,750

 

License agreements

 

 

250

 

Goodwill

 

 

333

 

Fair value of PONY

 

$

49,333

 

 

Accounting Standards Codification (“ASC”) 810 - “Consolidations” (“ASC 810”) affirms that consolidation is appropriate when one entity has a controlling financial interest in another entity. The Company owns a 75% membership interest in Pony Holdings compared to the minority owner’s 25% membership interest. Further, the Company believes that the voting and veto rights of the minority shareholder are merely protective in nature and do not provide them with substantive participating rights in Pony Holdings. As such, Pony Holdings is subject to consolidation with the Company, which is reflected in the unaudited condensed consolidated financial statements.

For the Current Quarter and Current Six Months, post-acquisition, the Company recognized approximately $1.2 million and $2.0 million in revenue from Pony Holdings. The $0.3 million of goodwill resulting from the 2015 acquisition is deductible for income tax purposes.

Unaudited Pro Forma Information

Unaudited pro forma information for the transactions completed during the Current Six Months is not presented because the effects of such transactions, individually and in the aggregate, are considered immaterial to the Company.

Iconix Latin America

In December 2008, the Company formed a joint venture, Iconix Latin America, with New Brands, an affiliate of the Falic Group, to develop, exploit, market and license the Latin American territory comprising of Mexico, Central America, South America and the Caribbean. In February 2014, the Company purchased from New Brands its 50% interest in Iconix Latin America for $42.0 million, giving the Company a 100% interest in Iconix Latin America.

Iconix Europe

In December 2009, the Company contributed substantially all rights to its wholly-owned brands in all member states and candidate states of the European Union, and certain other European countries, to Iconix Europe, a then newly formed wholly-owned subsidiary of the Company. Shortly thereafter, an investment group led by Albion Equity Partners LLC, purchased a 50% interest in Iconix Europe for $4 million through Brand Investments Vehicle Group 3 Limited (“BIV”). Also, as part of this transaction, Iconix Europe entered into a multi-year brand management and services agreement with The Licensing Company to assist in developing, exploiting, marketing and licensing the contributed brands in the European territory.

In January 2014, the Company consented to the purchase of BIV’s 50% ownership interest in Iconix Europe by LF Asia Limited (“LF Asia”), an affiliate of Li & Fung Limited, in exchange for $1.5 million from LF Asia. In addition, the Company acquired an additional 1% equity interest in Iconix Europe from LF Asia thereby increasing the Company’s ownership in Iconix Europe to a controlling 51% interest.

Hydraulic IP Holdings, LLC

In December 2014, the Company formed a joint venture with Top On International Group Limited (“Top On”). The name of the joint venture is Hydraulic IP Holdings, LLC (“Hydraulic IPH”), a Delaware limited liability company. The Company paid $6.0 million, which was funded entirely from cash on hand, in exchange for a 51% controlling ownership of Hydraulic IPH. Top On owns the remaining 49% interest in Hydraulic IPH. Hydraulic IPH owns the IP rights, licenses and other assets relating principally to the Hydraulic brand. Concurrently, Hydraulic IPH and iBrands International, LLC (“iBrands”) entered into a license agreement pursuant to which Hydraulic IPH licensed the Hydraulic brand to iBrands as licensee in certain categories and geographies. Additionally, the Company and Top On entered into a limited liability company agreement with respect to their ownership of Hydraulic IPH.

NGX, LLC

In October 2014, the Company formed a joint venture with NGO, LLC (“NGO”). The name of the joint venture is NGX, LLC (“NGX”), a Delaware limited liability company. The Company paid $6.0 million, which was funded entirely from cash on hand; in exchange for a 51% controlling ownership of NGX. NGO owns the remaining 49% interest in NGX. NGX owns the IP rights, licenses and other assets relating principally to the Nick Graham brand. Concurrently, NGX and NGL, LLC (“NGL”) entered into a license

11


agreement pursuant to which NGX licensed the Nick Graham brand to NGL as licensee in certain categories and geographies. Additionally, the Company and NGO entered into a limited liability company operating agreement with respect to their ownership of NGX.

Buffalo Brand Joint Venture

In February 2013, Iconix CA Holdings, LLC (“ICA Holdings”), a Delaware limited liability company and a wholly-owned subsidiary of the Company, formed a joint venture with Buffalo International ULC (“BII”). The name of the joint venture is 1724982 Alberta ULC (“Alberta ULC”), an Alberta, Canada unlimited liability company. The Company, through ICA Holdings, paid $76.5 million, which was funded entirely from cash on hand, in exchange for a 51% controlling ownership of Alberta ULC which consists of a combination of equity and a promissory note. BII owns the remaining 49% interest in Alberta ULC. Alberta ULC owns the IP rights, licenses and other assets relating principally to the Buffalo David Bitton brand (the “Buffalo brand”). Concurrently, Alberta ULC and BII entered into a license agreement pursuant to which Alberta ULC licensed the Buffalo brand to BII as licensee in certain categories and geographies. Additionally, ICA Holdings and BII entered into a shareholder agreement with respect to their ownership of Alberta ULC.

Icon Modern Amusement

In December 2012, the Company entered into an interest purchase and management agreement with Dirty Bird Productions, Inc., a California corporation, in which the Company effectively purchased a 51% controlling interest in the Modern Amusement trademarks and related assets for $5.0 million, which was funded entirely from cash on hand. To acquire its 51% controlling interest in the trademark, the Company formed a new joint venture company, Icon Modern Amusement LLC (“Icon MA”), a Delaware limited liability company.

Peanuts Holdings

On June 3, 2010 (the “Peanuts Closing Date”), the Company consummated an interest purchase agreement with United Feature Syndicate, Inc. (“UFS”) and The E.W. Scripps Company (the “Parent”) (Parent and UFS, collectively, the “Sellers”), pursuant to which it purchased all of the issued and outstanding interests (“Interests”) of Peanuts Worldwide, a then newly formed Delaware limited liability company, to which, prior to the closing of this acquisition, copyrights and trademarks associated with the Peanuts characters and certain other assets were contributed by UFS. On the Peanuts Closing Date, the Company assigned its right to buy all of the Interests to Peanuts Holdings, a newly formed Delaware limited liability company and joint venture owned 80% by Icon Entertainment LLC (“IE”), a wholly-owned subsidiary of the Company, and 20% by Beagle Scouts LLC, a Delaware limited liability company (“Beagle”) owned by certain Schulz family trusts.

Further, on the Closing Date, IE and Beagle entered into an operating agreement with respect to Peanuts Holdings (the “Peanuts Operating Agreement”). Pursuant to the Peanuts Operating Agreement, the Company, through IE, and Beagle made capital contributions of $141.0 million and $34.0 million, respectively, in connection with the acquisition of Peanuts Worldwide. The Interests were then purchased for $172.1 million in cash, as adjusted for acquired working capital.

In connection with the Peanuts Operating Agreement, the Company through IE, loaned $17.5 million to Beagle (the “Beagle Note”), the proceeds of which were used to fund Beagle’s capital contribution to Peanuts Holdings in connection with the acquisition of Peanuts Worldwide. The Beagle Note bore interest at 6% per annum, with minimum principal payable in equal annual installments of approximately $2.2 million on each anniversary of June 3, 2010, with any remaining unpaid principal balance and accrued interest to be due on June 3, 2015, the Beagle Note maturity date. Principal was prepayable at any time. The Beagle Note was secured by the membership interest in Peanuts Holdings owned by Beagle. In February 2015, the remaining amount due on the Beagle Note was paid in full.

Hardy Way

In May 2009, the Company acquired a 50% interest in Hardy Way, the owner of the Ed Hardy brands and trademarks, for $17.0 million, comprised of $9.0 million in cash and 588,688 shares of the Company’s common stock valued at $8.0 million as of the closing. In addition, the sellers of the 50% interest received an additional $1.0 million in shares of the Company’s common stock pursuant to an earn-out based on royalties received by Hardy Way for 2009.

12


On April 26, 2011, Hardy Way acquired substantially all of the licensing rights to the Ed Hardy brands and trademarks from its licensee, Nervous Tattoo, Inc. (“NT”) pursuant to an asset purchase agreement by and among Hardy Way, NT and Audigier Brand Management Group, LLC (“ABMG,” and together with NT, the “Sellers”). Immediately prior to the closing of the transactions contemplated by the asset purchase agreement, the Company contributed $62.0 million to Hardy Way, thereby increasing the Company’s ownership interests in Hardy Way from 50% to 85% of the outstanding membership interests.

Scion

Scion is a brand management and licensing company formed by the Company with Shawn “Jay-Z” Carter in March 2007 to buy, create and develop brands across a spectrum of consumer product categories. On November 7, 2007, Scion, through its wholly-owned subsidiary Artful Holdings LLC, purchased Artful Dodger, an urban apparel brand for a purchase price of $15.0 million.

In March 2009, the Company, through its investment in Scion, effectively acquired a 16.6% interest in one of its licensees, Roc Apparel Group LLC (“RAG”), whose principal owner is Shawn “Jay-Z” Carter, for nominal consideration. The Company has determined that this entity is a variable interest entity as defined by ASC 810. However, the Company is not the primary beneficiary of this entity. The investment in this entity is accounted for under the cost method of accounting. Subsequent to March 2009, this investment in RAG was assigned from Scion to the Company. From March 2009 through January 2014, the Company and its partner contributed approximately $11.8 million to Scion, which was deposited as cash collateral under the terms of RAG’s financing agreements. In June 2010, $3.3 million was released from collateral and distributed to the Scion members equally. In July 2014, the lender under such financing arrangement made a cash collateral call, reducing the Company’s restricted cash by $8.5 million. In FY 2014, the Company recorded a $2.7 million charge to reduce this receivable to $5.8 million. RAG caused such amount to be repaid pursuant to a binding term sheet dated April 2015, which resulted in a final agreement on July 6, 2015, between the Company and the managing member of RAG. In addition, on July 6, 2015, in accordance with the terms of such final agreement, the Company sold its 16.6% interest in RAG to an affiliate of Shawn “Jay-Z” Carter for nominal consideration.

In May 2012, Scion, through a newly formed subsidiary, Scion BBC LLC, purchased a 50% interest in BBC Ice Cream LLC, owner of the Billionaire Boys Club and Ice Cream brands for approximately $3.5 million.

Additionally, in April 2015, the Company entered into a binding term sheet, which resulted in a final agreement on July 6, 2015, to purchase the remaining 50% interest in Scion, which the Company has consolidated since inception, from an affiliate of Shawn “Jay-Z” Carter for $6.0 million increasing the Company’s ownership to 100%, also effectively increasing its interest in BBC Ice Cream LLC to 50% and Artful Holdings LLC to 100%.

Joint Ventures/Equity Method Investees

The following joint ventures are recorded using the equity method of accounting:

Iconix Middle East Joint Venture

In December 2014, the Company formed Iconix MENA (“Iconix Middle East”) a wholly owned subsidiary of the Company and contributed substantially all rights to its wholly-owned and controlled brands in the United Arab Emirates, Qatar, Kuwait, Bahrain, Saudi Arabia, Oman, Jordan, Egypt, Pakistan, Uganda, Yemen, Iraq, Azerbaijan, Kyrgyzstan, Uzbekistan, Lebanon, Tunisia, Libya, Algeria, Morocco, Cameroon, Gabon, Mauritania, Ivory Coast, Nigeria and Senegal (the “Middle East Territory”). Shortly thereafter, Global Brands Group Asia Limited (“GBG”), purchased a 50% interest in Iconix Middle East for approximately $18.8 million. GBG paid $6.3 million in cash upon the closing of the transaction and committed to pay an additional $12.5 million over the 24-month period following closing. As a result of this transaction, the Company recorded a gain of $10.3 million in FY 2014 for the difference between the consideration (cash and notes receivable) received by the Company and the book value of the brands contributed to the joint venture. As of June 30, 2015, of the $12.2 million, net of discount for present value, remaining due to the Company from GBG, approximately $6.3 million is included in other assets - current and $5.9 million is included in other assets on the unaudited condensed consolidated balance sheet.

Pursuant to the joint venture agreement entered into in connection with the formation of Iconix Middle East, each of GBG and the Company holds specified put and call rights, respectively, relating to GBG’s ownership interest in the joint venture.

Company Two-Year Call Option: At any time during the six month period commencing December 19, 2016, the Company has the right to call up to 5% of the total equity in Iconix Middle East from GBG for an amount in cash equal to $1.8 million.

13


Five-Year and Eight-Year Put/Call Options: At any time during the six month period commencing December 19, 2019, and again at any time during the six month period commencing December 19, 2022, GBG may deliver a put notice to the Company, and the Company may deliver a call notice to GBG, in each case, for the Company’s purchase of all equity in the joint venture held by GBG. In the event of the exercise of such put or call rights, the purchase price for GBG’s equity in Iconix Middle East is an amount equal to (x) the Agreed Value (in the event of GBG put) or (y) 120% of Agreed Value (in the event of an Iconix call). The purchase price is payable in cash.

Agreed Value - Five-Year Put/Call: (i) Percentage of Iconix Middle East owned by GBG, multiplied by (ii) 5.5, multiplied by (iii) aggregate royalty generated by Iconix Middle East for the year ending December 31, 2019; provided, however, that such Agreed Value cannot be less than $12,000,000.

Agreed Value - Eight-Year Put/Call: (i) Percentage of Iconix Middle East owned by GBG, multiplied by (b) 5.5, multiplied by (iii) aggregate royalty generated by Iconix Middle East for the year ending December 31, 2022; provided, however, that the Agreed Value cannot be less than $12,000,000.

The Company serves as Iconix Middle East’s administrative manager, responsible for arranging for or providing back-offices services, including legal maintenance of trademarks (e.g. renewal of trademark registrations) for the brands in respect of Iconix Middle East Territory. Further Iconix Middle East has access to general brand marketing materials prepared and owned by the Company to refit for use by the joint venture in marketing brands in the Middle East Territory. GBG serves as Iconix Middle East’s local manager, responsible for providing market experience in respect of the applicable territory, managing the joint venture on a day-to-day basis (other than back-office services), identifying potential licensees and assisting the Company in enforcement of license agreements in respect of the applicable territory. The Company receives a monthly fee in connection with the performance of its services as administrative manager in an amount equal to 5% of Iconix Middle East’s gross revenue collected in the prior month (other than in respect of the Umbro and Lee Cooper brands). GBG receives a monthly fee in connection with the performance of its services as local manager in an amount equal to 15% of Iconix Middle East’s gross revenue collected in the prior month (other than in respect of the Umbro and Lee Cooper brands). In addition, following the closing of GBG’s purchase of 50% of Iconix Middle East, GBG received from the Company $3.1 million for expenses related to its diligence and market analysis in the Iconix Middle East Territory.

At inception, the Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and GBG, that Iconix Middle East is not a variable interest entity and not subject to consolidation. The Company has recorded its investment under the equity method of accounting.

LC Partners U.S.

In March 2014, the Company formed LC Partners US, LLC (“LCP”), a wholly-owned subsidiary of the Company, and contributed substantially all its rights to the Lee Cooper brand in the US through an agreement with LCP. Shortly thereafter, Rise Partners, LLC (“Rise Partners”), purchased a 50% interest in LCP for $4.0 million, of which $0.8 million in cash was received during FY 2014, with the remaining $3.2 million to be paid in four equal annual installments on the first through the fourth anniversaries of the closing date. As of June 30, 2015, of the $2.4 million remaining due to the Company, approximately $0.8 million is included in other assets - current and $1.6 million is included in other assets on the unaudited condensed consolidated balance sheet.

As a result of this transaction, the Company recorded a $4.0 million gain in FY 2014 for the difference between the consideration (cash and notes receivable) received by the Company and the book value of the brands contributed to the joint venture (see Note 4).

Pursuant to the operating agreement entered into in connection with the formation of LCP, Rise Partners holds specified put rights, relating to its ownership interest in the joint venture.

Put Option: For the 30 day period following (x) a change of control of the Company occurring prior to December 31, 2019; and (y) December 31, 2019, if Rise Partners has paid the purchase price for its interest in LCP in full, Rise Partners may deliver a put notice to the Company for the Company’s purchase of all the equity in LCP held by Rise Partners at a purchase price in cash equal to the greater of: (i) $4.0 and (ii) an amount equal to (x) 5, multiplied by (y) the product of (1) 0.10 and (2) the amount of net wholesale sales of applicable Lee Cooper branded product in the US for the annual period ended December 31, 2019.

The Company serves as LCP’s administrative manager, responsible for arranging for or providing back-office services, including legal maintenance of trademarks (e.g. renewal of trademark registrations) in respect of the Lee Cooper brand in the US. Further LCP has access to general brand marketing materials prepared and owned by the Company to refit for use by LCP in marketing the Lee Cooper brand in the US.

At inception, the Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and Rise Partners, that LCP is not a variable interest entity and not subject to consolidation. The Company has recorded its investment under the equity method of accounting.

14


Iconix Southeast Asia Joint Venture

In October 2013, the Company formed Iconix SE Asia Limited (“Iconix SE Asia”), a wholly owned subsidiary of the Company, and contributed substantially all rights to its wholly-owned and controlled brands in Indonesia, Thailand, Malaysia, Philippines, Singapore, Vietnam, Cambodia, Laos, Brunei, Myanmar, and East Timor (the “South East Asia Territory”). Shortly thereafter, GBG (f/k/a Li + Fung Asia Limited) purchased a 50% interest in Iconix SE Asia for approximately $12.0 million. GBG paid $7.5 million in cash upon the closing of the transaction and committed to pay an additional $4.5 million over the 24-month period following closing. As a result of this transaction, the Company recorded a gain of $4.7 million for the year ended December 31, 2013 (“FY 2013”) for the difference between the consideration (cash and notes receivable) received by the Company and the book value of the brands contributed to the joint venture.

In June 2014, the Company contributed substantially all rights to its wholly-owned and controlled brands in the Republic of Korea, and its Ecko, Zoo York, Ed Hardy and Sh