United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

For the Quarterly Period Ended September 30, 2020 

OR

For the Transition Period From                      to                     .

Commission file number 1-10593

 

ICONIX BRAND GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(212) 730-0030

(Registrant’s telephone number, including area code)

 

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

 

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

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

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

 

 

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

 

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

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

As of November 7, 2020, 13,174,848 shares of the registrant’s Common Stock, par value $.001 were outstanding.

 

 

 

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Part I. Financial Information

Item 1. Financial Statements

Iconix Brand Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except par value)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except earnings per share data)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit

(in thousands)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Iconix Brand Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

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Supplemental disclosure of cash flow information:

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

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Iconix Brand Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

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

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Iconix Brand Group, Inc. (the “Company,” “we,” “us,” or “our”), all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2020 (“Current Quarter”) and the nine months ended September 30, 2020 (“Current Nine Months”) are not necessarily indicative of the results that may be expected for a full fiscal year.  The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

During first quarter of 2020, the, the Company adopted one new accounting pronouncement.  Refer to Note 20 for further details.

Certain reclassifications, which were immaterial, have been made to conform prior year data to the current presentation. During the year ended December 31, 2019 (“FY 2019”), the Company also made a reclassification between redeemable non-controlling interest and non-controlling interest.    

Liquidity

These condensed consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities, in each case, in the ordinary course of business consistent with the Company’s prior periods.  The Company has experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of $422.3 million as of September 30, 2020. Net losses incurred for the years ended December 31, 2019 and 2018 amounted to approximately $101.9 million and $89.7 million, respectively. While the Company had positive cash flows from operations in recent periods, the potential adverse impact of the COVID-19 pandemic on its operating results, liquidity and financial condition raises substantial doubt the Company can continue as an ongoing business for the next twelve months.

In view of these matters, continuation as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The Company has taken steps to reduce expenses and discretionary cash outlays and is actively pursuing asset sales, in order to satisfy liquidity needs and financial covenants. In July 2020, the Company completed the sale of its equity in Umbro China for approximately $62.5 million (the “Umbro China Sale”), which included the sale of the Umbro sports brand in the People’s Republic of China, Hong Kong, Taiwan and Macau. The Company received approximately $59.8 million in net proceeds from the Umbro China Sale and in August 2020, repaid approximately $44.7 million under its Senior Secured Term Loan (as defined below).

In September 2020, the Company completed the sale of its equity interests of Starter China Limited, a wholly-owned subsidiary of Iconix China (the “Starter China Sale”), for consideration of $16.0 million. The Starter China Sale includes the sale of the Starter brand in the mainland of China, Hong Kong, Taiwan and Macau. The Company received approximately $15.6 million in net proceeds from the Starter China Sale and in October 2020, repaid approximately $11.7 million under its Senior Secured Term Loan.

The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.

For additional information, please refer to Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

COVID-19 Pandemic

The spread of the novel coronavirus or COVID-19 (“COVID-19”) during 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic is an ongoing phenomenon with uncertain scale and has had severe global macroeconomic and financial market impacts. Certain of our licensees have been and may continue to be adversely impacted by the pandemic due to manufacturing facility closures, store closures, impacts to their distribution networks and a general decrease in customer traffic. We

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are, in many cases, suspending or deferring capital expenditures and are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses. We are also taking certain precautions to provide a safe work environment for our employees. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

As the pandemic continues to unfold, the extent of the pandemic’s effect on our operational and financial performance and liquidity will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include changes in the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Notably, certain countries have begun re-enacting lockdowns, which, if re-enacted in the United States, could further negatively impact our business and results of operations. Any prolonged material disruption on discretionary spending and consumer demand could negatively affect our licenses and impact our financial position, results of operations and cash flows. Also, the Company has taken impairment charges during the Current Nine Months as a result of the impact of COVID-19 and may in the future have additional impairment charges. See “Note 3. Goodwill and Trademarks and Other Intangibles, net” below for additional information.

Reverse Stock Split

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

2. Revenue Recognition

Licensing Revenue

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

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

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

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

Within the Company's International segment, the Company purchases licensed products for resale to certain licensees. The Company generally does this as an accommodation to its licensees to consolidate ordering from the manufacturers. The revenue associated with such activity is included in licensing revenue and the associated cost of goods sold is included in selling general and administrative expenses and was approximately equal to revenue.  

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The following table presents our revenues disaggregated by license type:

 

 

The following table represents our revenues disaggregated by geography:

 

Remaining Performance Obligation

We enter into long-term license agreements with our licensees across all operating segments.  Revenues are recognized on a straight-line basis consistent with the nature, timing and extent of our services, which primarily relate to the ongoing brand management and maintenance of the intellectual property.  As of October 1, 2020, the Company and its joint ventures had a contractual right to receive over $380.7 million of aggregate minimum licensing revenue over the balance and the terms of their current licenses, excluding any renewals.

As of September 30, 2020, future minimum license revenue to be recognized under our existing licenses is as follows: $19.3 million, $68.4 million, $66.6 million, $61.0 million, $44.7 million and $120.7 million for the remainder of FY 2020, FY 2021, FY 2022, FY 2023, FY 2024 and thereafter, respectively.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to licensees.  We record a receivable when amounts are contractually due or when revenue is recognized prior to invoicing.  Deferred revenue is recorded when amounts are contractually due prior to satisfying the performance obligations of the contracts.  For multi-year license agreements, as the performance obligation is providing the licensee with the right of access to the Company’s intellectual property for the contractual term, the Company uses a time-lapse measure of progress and straight lines the guaranteed minimum royalties over the contract term.

Contract Asset

We record contract assets when revenue is recognized in advance of cash payment being due from our licensees.  As of September 30, 2020, current and long-term contract assets were $13.7 million and $8.6 million, respectively. Our current and long- term contract assets as of December 31, 2019, were $9.4 million and $11.8 million, respectively.  For the Current Quarter, the Company incurred an impairment loss of its contract assets of $2.0 million as a result of impairments including $1.5 million associated with the Starter China Sale and certain contract modifications as compared to $4.0 million for the three months ended September 30, 2019 (“Prior Year Quarter”). For the Current Nine Months, the Company incurred an impairment loss of $3.2 million as a result of impairments and certain contract modifications as compared to $4.6 million in Nine Months ended September 30, 2019 (“Prior Year Nine Months”).

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Deferred Revenue

We record deferred revenue when cash payment is received or due in advance of our performance, including amounts which are refundable.  Advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s condensed consolidated balance sheet in deferred revenue at the time the payment is received.  The increase in deferred revenues as of September 30, 2020 as compared to December 31, 2019 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $3.8 million of revenues recognized that were included in the deferred revenue balance at the beginning of the period.

3. Goodwill and Trademarks and Other Intangibles, net

 

Goodwill

There were no changes and no impairment of the Company’s goodwill during the Current Nine Months or in the Prior Year Nine Months. The annual evaluation of the Company’s goodwill, by segment, is typically performed as of October 1, the beginning of the Company’s fourth fiscal quarter or as deemed necessary due to the identification of a triggering event.  In accordance with ASC 350, during the First Quarter of 2020, the Company reassessed the fair value of its goodwill considering the impact of the COVID 19 pandemic on current and future cash flows of its International reporting unit.  No triggering event was identified during the Current Quarter that would require a reassessment of the Company’s Goodwill.

Trademarks and Other Intangibles, net

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

 

 

The trademarks of Candie’s, Bongo, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Waverly, Ecko, Zoo York, Ed Hardy, Umbro, Modern Amusement, Buffalo, Lee Cooper, Hydraulic and Pony have been determined to have an indefinite useful life.  Each of these intangible assets are tested for impairment annually and as needed on an individual basis and territorial basis as separate single units of accounting, with any related impairment charge recorded to the income statement at the time of determining such impairment. The annual evaluation of the Company’s indefinite-lived trademarks is typically performed as of October 1, the beginning of the Company’s fourth fiscal quarter, or as deemed necessary due to the identification of a triggering event.

 

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In accordance with ASC 350, the Company reassessed the fair values of its indefinite-lived trademarks considering the impact of the COVID-19 pandemic on current and future cash flows during 2020. The Company recorded impairment charges of $4.8 million for the Pony and Hydraulic brands during the Current Quarter, recorded impairment charges of $5.2 million during the quarter ended June 30, 2020 for the Joe Boxer and Cannon brands which were negatively impacted by Sears store closures and also recorded impairment charges of $13.7 million primarily for the Rampage, Joe Boxer, Waverly, Fieldcrest and Umbro indefinite-lived trademarks during the quarter ended March 31, 2020, resulting in an aggregate charge of $23.7 million for the Current Nine Months. There was no impairment expense on trademarks during the Prior Year Quarter or Prior Year Nine Months.

 

In July 2020, the Company completed its previously announced sale of Umbro China for $62.5 million in gross proceeds. The Umbro China sale included the sale of the Umbro trademark in the People’s Republic of China, Hong Kong, Taiwan and Macau. The Company received approximately $59.6 million in net proceeds from the sale of Umbro China and recorded a $59.6 million gain within operating income. Costs of $2.9 million directly associated with the sale primarily consisted of broker’s commission. The cost basis of Umbro China was immaterial. In September 2020, the Company completed the previously announced sale of Starter China for gross proceeds of $16.0 million. The Starter China sale includes the sale of the Starter trademark in the mainland of China, Hong Kong, Taiwan and Macau. The Company received approximately $15.6 million in net proceeds from the sale of Starter China and recorded a $14.5 gain within operating income. The cost basis of Starter China of $1.1 million consisted of the indefinite lived trademark. The Company separately wrote off a $1.5 million of contract asset associated with Starter China.  

Other amortizable intangibles represent licensing contracts, which are amortized on a straight-line basis over their estimated useful lives of 1 to 9 years. Certain trademarks are amortized using estimated useful lives of 10 to 15 years with no residual values.

Amortization expense for intangible assets for both the Current Quarter and Prior Year Quarter was zero and less than $0.1 million, respectively. Amortization expense for intangible assets for both the Current Nine Months and Prior Year Nine Months was less than $0.1 million.

 

4. Joint Ventures and Investments

Joint Ventures

As of September 30, 2020, the following joint ventures are consolidated with the Company:

 

 

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⁽⁶⁾          In June 2018, the Company entered into an agreement with POS Lee Cooper HK Co. Ltd. (“PLC”) to sell up to no less than a 50% interest and up to a total of 60% interest in its wholly-owned indirect subsidiary, Lee Cooper China Limited, a newly registered Hong Kong subsidiary of Iconix China (“Lee Cooper China”), and which will hold the Lee Cooper trademarks and related assets in respect of the Greater China territory. PLC’s purchase of the initial 50% equity interest in Lee Cooper China is expected to occur annually over a four-year period commencing within 45 days of October 15, 2020, for cash consideration of approximately $8.2 million. The additional 10% equity interest (for a total equity interest of 60% interest) purchase right of PLC is expected to occur over a two-year period commencing January 15, 2024 for cash consideration equal to the greater of $2.5 million or 2.5 times the royalty received under the respective license agreement in the previous twelve months based on other terms and conditions specified in the share purchase agreement.

 

 

Investments

Equity Method Investments

 

 

 

Additionally, through its ownership of Iconix China Holdings Limited, the Company has equity interests in the following private companies, which are accounted for as equity method investments:

 

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Other Equity Investments

 

In July 2013, the Company purchased a minority interest in Marcy Media Holdings, LLC (“Marcy Media”), resulting in the Company’s indirect ownership of a 5% interest in Roc Nation, LLC for $32 million. In the third quarter of 2019, the Company recorded an impairment charge of $17.0 million on its investment in Marcy Media. During the fourth quarter of 2019, the Company sold its interests in Marcy Media for $15.0 million.

5. Gains on Sale of Trademarks, Net

The following table details transactions compromising gains on sale of trademarks, in the condensed consolidated statement of operations:

⁽¹⁾ In July 2020, the Company completed the sale of all of its equity interests of Umbro China, Limited (the “Umbro China Sale”) for gross consideration of $62.5 million. The Umbro China Sale includes the sale of the Umbro sports brand in the People’s Republic of China, Hong Kong, Taiwan and Macau (refer to Note 1 and Note 3).

⁽²⁾ In September 2020, the Company completed the sale of all of its equity interests of Starter China, Limited (the “Starter China Sale”) for gross consideration of $16.0 million. The Starter China Sale includes the sale of the Starter brand in the mainland of China, Hong Kong, Taiwan and Macau (refer to Note 1 and Note 3).

 

 

6. Fair Value Measurements

ASC 820 “Fair Value Measurements” (“ASC 820”), establishes a framework for measuring fair value and requires expanded disclosures about fair value measurement. While ASC 820 does not require any new fair value measurements in its application to other accounting pronouncements, it does emphasize that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 established the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs

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Level 3: Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities

The valuation techniques that may be used to measure fair value are as follows:

(A) Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

(B) Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

(C) Cost approach - Based on the amount that would currently be required to replace the service capacity of an asset (replacement cost)

To determine the fair value of certain financial instruments, the Company relies on Level 2 inputs generated by market transactions of similar instruments where available, and Level 3 inputs using an income approach when Level 1 and Level 2 inputs are not available. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

Financial Instruments

As of September 30, 2020, and December 31, 2019, the fair values of cash, receivables and accounts payable approximated their carrying values due to the short-term nature of these instruments. The fair value of notes receivable and notes payable from and to our joint venture partners approximate their carrying values. The fair value of certain other equity investments are not carried at fair value is not readily determinable, and it is not practical to obtain the information needed to determine the value. The Company recorded a $17.2 million impairment charge to other equity investments during the Nine Months ended September 30, 2020. The charge primarily relates to a decline in fair value of the Company’s investment in its Ecko/Mark Ecko Joint venture in China and the Company’s interest in its Candies China joint venture (refer to Note 4). For FY 2019, the Company recorded a $9.6 million (inclusive of $2.6 million of advances made to the entity) impairment charge to its equity investment in MG Icon based upon a decline in the fair value of the investment due to poor performance and an impairment of its investment in Marcy Media Holdings, LLC in the amount of $17.0 million based on the estimated value that would be realized on the disposition of our equity interest. The estimated fair values of other financial instruments subject to fair value disclosures, determined based on Level One inputs including broker quotes or quoted market prices or rates for the same or similar instruments and the related carrying amounts are as follows:

 

 

Non-Financial Assets and Liabilities

The Company accounts for non-recurring adjustments to the fair values of its non-financial assets and liabilities under ASC 820 using a market participant approach. The Company uses a discounted cash flow model with Level 3 inputs to measure the fair value of its non-financial assets and liabilities. The Company also adopted the provisions of ASC 820 as it relates to purchase accounting for its acquisitions. The Company has goodwill, which is tested for impairment at least annually, as required by ASC 350- “Intangibles- Goodwill and Other” (“ASC 350”). Further, in accordance with ASC 350, the Company’s indefinite-lived trademarks are tested for impairment at least annually, on an individual basis as separate single units of accounting. Similarly, consistent with ASC 360- “Property, Plant and Equipment” (“ASC 360”), as it relates to accounting for the impairment or disposal of long-lived assets, the Company assesses whether or not there is impairment of the Company’s definite-lived trademarks.  During the Current Nine Months, the Company recorded impairment charges of $23.7 million primarily related to the Rampage, Joe Boxer, Umbro, Pony, Hydraulic, Cannon and Fieldcrest indefinite-lived trademarks. The Company recorded impairment charges primarily on the Joe Boxer, Mudd, OP, Bongo, Rampage, Mossimo, Fieldcrest, Royal Velvet and Umbro indefinite-lived trademarks during FY 2019.

 

 

7. Fair Value Option

The Company accounts for its 5.75% Convertible Notes under the fair value option.  The fair value carrying amount of the 5.75% Convertible Notes as of September 30, 2020 and December 31, 2019 is $49.1 million and $47.3 million, respectively, as compared to the contractual principal outstanding balance which is $94.4 million and $94.4 million as of September 30, 2020 and

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December 31, 2019, respectively. The changes of $(0.3) million and $11.9 million in the fair value of the 5.75% Convertible Notes accounted for under the fair value option are included in the Company’s condensed consolidated statement of operations for the Current Quarter and Prior Year Quarter, respectively, within Other Income. The change of $1.9 million and $(8.4) million in the fair value of the 5.75% Convertible Notes accounted for under the fair value option are included in the Company’s condensed consolidated statement of operations for the Current Nine Months and Prior Year Nine Months, respectively, within Other Income.

The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the 5.75% Convertible Notes (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives.  The 5.75% Convertible Notes contain bifurcatable embedded derivatives and do not require settlement by physical delivery of non-financial assets.  

The significant inputs to the valuation of the 5.75% Convertible Notes at fair value are Level 1 inputs as they are based on the quoted prices of the notes in the active market.

8. Debt Arrangements

The Company’s debt obligations consist of the following:

 

 

Senior Secured Notes and Variable Funding Note

On November 29, 2012, Icon Brand Holdings, Icon DE Intermediate Holdings LLC, Icon DE Holdings LLC and Icon NY Holdings LLC, each a limited-purpose, bankruptcy remote, wholly-owned direct or indirect subsidiary of the Company, (collectively, the “Co-Issuers”) issued $600.0 million aggregate principal amount of Series 2012-1 4.229% Senior Secured Notes, Class A-2 (the “2012 Senior Secured Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”).

Simultaneously with the issuance of the 2012 Senior Secured Notes, the Co-Issuers also entered into a revolving financing facility of Series 2012-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes”), which allowed for the funding of up to $100 million of Variable Funding Notes and certain other credit instruments, including letters of credit. The Variable Funding Notes allow for drawings on a revolving basis. Drawings and certain additional terms related to the Variable Funding Notes are governed by the Class A-1 Note Purchase Agreement dated November 29, 2012 (the “Variable Funding Note Purchase Agreement”), among the Co-Issuers, Iconix, as manager, certain conduit investors, financial institutions and funding agents, and Barclays Bank PLC, as provider of letters of credit, as swingline lender and as administrative agent.  The Variable Funding Notes are governed, in part, by the Variable Funding Note Purchase Agreement and by certain generally applicable terms contained in the Securitization Notes Indenture. Interest on the Variable Funding Notes is payable at per annum rates equal to the CP Rate, Base Rate or Eurodollar Rate, each as defined in the Variable Funding Note Purchase Agreement.  In February 2015, the Company fully drew down the $100.0 million of available funding under the Variable Funding Notes, which remains outstanding as of September 30, 2020.

On June 21, 2013, the Co-Issuers issued $275.0 million aggregate principal amount of Series 2013-1 4.352% Senior Secured Notes, Class A-2 (the “2013 Senior Secured Notes” and, together with the 2012 Senior Secured Notes, the “Senior Secured Notes”) in an offering exempt from registration under the Securities Act.

The Senior Secured Notes and the Variable Funding Notes are referred to collectively as the “Securitization Notes.”

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The Securitization Notes were issued under a base indenture (the “Securitization Notes Base Indenture”) and related supplemental indentures (the “Securitization Notes Supplemental Indentures” and, collectively with the Securitization Notes Base Indenture, the “Securitization Notes Indenture”) among the Co-Issuers and Citibank, N.A., as trustee and securities intermediary. The Securitization Notes Indenture allows the Co-Issuers to issue additional series of notes in the future subject to certain conditions.

On August 18, 2017, the Company entered into an amendment to the Securitization Notes Supplemental Indenture to, among other things, (i) extend the anticipated repayment date for the Variable Funding Notes from January 2018 to January 2020, (the “anticipated repayment date”), (ii) decrease the L/C Commitment and the Swingline Commitment (as such terms are defined in the amendment) available under the Variable Funding Notes to $0 as of the closing date, (iii) replace Barclays Bank PLC with Guggenheim Securities Credit Partners, LLC, as provider of letters of credit, as swingline lender and as administrative agent under the purchase agreement and (iv) provide that, upon the disposition of intellectual property assets by the Co-Issuers as permitted by the Securitization Notes Base Indenture, (x) the holders of the Variable Funding Notes will receive a mandatory prepayment, pro rata based on the amount of Variable Funding Notes held by such holder, and (y) the maximum commitment will be permanently reduced by the amount of the mandatory prepayment.

While the Securitization Notes are outstanding, payments of interest are required to be made on the 2012 Senior Secured Notes and the 2013 Senior Secured Notes, in each case, on a quarterly basis. Initially, principal payments in the amount of $10.5 million and $4.8 million were required to be made on the 2012 Senior Secured Notes and 2013 Senior Secured Notes, respectively, on a quarterly basis.  The amount of quarterly principal payments has since changed in subsequent periods due to the prepayments made under the Securitization Notes Indenture.  See below for further discussion.

The legal final maturity date of the Securitization Notes is in January of 2043. The Company did not repay or refinance the Securitization Notes prior to the anticipated repayment date, and as a result, during the first quarter of 2020, additional interest began accruing on amounts outstanding under the Securitization Notes at a rate equal to (A) in respect of the Variable Funding Notes, 5% per annum, (B) in respect of the 2012 Senior Secured Notes and the 2013 Senior Secured Notes, the greater of (1) 5% per annum and (2) a per annum interest rate equal to the excess, if any, by which the sum of (x) the yield to maturity (adjusted to a quarterly bond-equivalent basis), on the anticipated repayment date of the United States treasury security having a term closest to 10 years plus (y) 5% per annum plus (z) with respect to the 2012 Senior Secured Notes, 3.4% per annum, or with respect to the 2013 Senior Secured Notes, 3.14% per annum, exceeds the original interest rate. Pursuant to the Securitization Notes Indenture, such additional interest is not due to be paid by the Company until January 2043 (the legal maturity date) and does not compound annually.  The Company reflects additional accrued interest as interest expense and Other Liabilities – Long term in its consolidated financial statements. The Securitization Notes rank pari passu with each other.

Pursuant to the Securitization Notes Indenture, the Securitization Notes are the joint and several obligations of the Co-Issuers only. The Securitization Notes are secured under the Securitization Notes Indenture by a security interest in certain of the assets of the Co-Issuers (the “Securitized Assets”), which includes, among other things, (i) intellectual property assets, including the U.S. and Canadian registered and applied for trademarks for the following brands and other related IP assets: Candie’s, Bongo, Joe Boxer (excluding Canadian trademarks, none of which are owned by Iconix), Rampage, Mudd, London Fog (other than the trademark for outerwear products sold in the United States), Mossimo, Ocean Pacific and OP, Danskin and Danskin Now, Rocawear, Starter, Waverly, Fieldcrest, Royal Velvet, Cannon, and Charisma; (ii) the rights (including the rights to receive payments) and obligations under all license agreements for use of those trademarks in such territories; (iii) the following equity interests in the following joint ventures: an 85% interest in Hardy Way LLC which owns the Ed Hardy brand, a 50% interest in MG Icon LLC which owns the Material Girl and Truth or Dare brands, and a 100% interest in ZY Holdings LLC which owns the Zoo York brand; and (iv) certain cash accounts established under the Securitization Notes Indenture.  The Securitized Assets do not include revenue generating assets of (x) the Iconix subsidiaries that own the Ecko Unltd trademarks, the Mark Ecko trademarks, the Artful Dodger trademarks, the Umbro trademarks, and the Lee Cooper trademarks, (y) the Iconix subsidiaries that own Iconix’s other brands outside of the United States and Canada or (z) the joint ventures in which Iconix and certain of its subsidiaries have investments and which own the Modern Amusement trademarks and the Buffalo trademarks, the Pony trademarks, and the Hydraulic trademarks.

If the Company contributes an Additional IP Holder to Icon Brand Holdings LLC or Icon DE Intermediate Holdings LLC, that Additional IP Holder will enter into a guarantee and collateral agreement in a form provided for in the Securitization Notes Indenture pursuant to which such Additional IP Holder will guarantee the obligations of the Co-Issuers in respect of any Securitization Notes issued under the Securitization Notes Indenture and the other related documents and pledge substantially all of its assets to secure those guarantee obligations pursuant to a guarantee and collateral agreement.

Neither the Company nor any subsidiary of the Company, other than the Securitization Entities, will guarantee or in any way be liable for the obligations of the Co-Issuers under the Securitization Notes Indenture or the Securitization Notes.

The Securitization Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Co-Issuers maintain specified reserve accounts to be used to make required payments in respect of the Securitization Notes,

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(ii) provisions relating to optional and mandatory prepayments, including mandatory prepayments in the event of a change of control (as defined in the Securitization Notes Supplemental Indentures) and the related payment of specified amounts, including specified make-whole payments in the case of the Senior Secured Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the transfers of the assets pledged as collateral for the Securitization Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. As of September 30, 2020, the Company is in compliance with all covenants under the Securitization Notes.

The Company’s Securitization Notes include a financial test, known as the debt service coverage ratio (“DSCR”) that measures the amount of principal and interest required to be paid on the Co-Issuers’ debt to the approximate cash flow available to pay such principal and interest.  As a result of a decline in royalty collections during the twelve months ended March 31, 2019, the DSCR fell below 1.10x as of March 31, 2019.  Beginning April 1, 2019, the Senior Secured Notes experienced a Rapid Amortization Event pursuant to the Securitization Notes Indenture.  Upon a Rapid Amortization Event, any residual amounts available will immediately be used to pay down the principal on the Securitization Notes as required by the Securitization Notes Indenture.

The Securitization Notes are subject to customary rapid amortization events provided for in the Securitization Notes Indenture, including events tied to (i) the failure to maintain a stated DSCR, (ii) certain manager termination events, (iii) the occurrence of an event of default and (iv) the failure to repay or refinance the Securitization Notes on the anticipated repayment date. If a rapid amortization event were to occur, including as a result of not paying or redeeming the Securitization Notes in full prior to the anticipated repayment date, the management fee payable to the Company would remain payable pursuant to the priority of payments set forth under the Securitization Indenture, but no residual amounts would be payable to the Company thereafter.  As noted above, a Rapid Amortization Event occurred beginning April 1, 2019.

The legal final maturity date of the Securitization Notes is in January of 2043. As discussed above, the Company did not repay or refinance the Securitization Notes prior to the anticipated repayment date. Beginning January 2020, the Company is no longer required to make previously designated contractual principal payments. Future principal payments will be formulaically based on a percentage of receipts of royalty revenue.

    In July 2017, in connection with the sale of the businesses underlying the Entertainment segment, the Company made a mandatory principal prepayment on its Senior Secured Notes of $152.2 million.

As of September 30, 2020 and December 31, 2019, the total outstanding principal balance of the Securitization Notes was $423.9 million and $438.1 million, respectively, of which $10.9 million and $42.7 million, respectively, is included in the current portion of long-term debt on the consolidated balance sheet. As of September 30, 2020 and December 31, 2019, $11.8 million and $14.9 million, respectively, is included in restricted cash on the consolidated balance sheet and represents short-term restricted cash consisting of collections on behalf of the Securitized Assets, restricted to the payment of principal, interest and other fees on a quarterly basis under the Senior Secured Notes.

For the Current Quarter and Prior Year Quarter, interest expense relating to the Securitization Notes was approximately $4.5 million and $5.2 million, respectively. For the Current Nine Months and the Prior Year Nine Months, interest expense relating to the Securitization Notes was approximately $13.9 million and $16.0 million, respectively. For the Current Quarter and Prior Year Quarter long-term accrued interest expense related to the Securitization Notes was $5.7 million and zero, respectively. For the Current Nine Months and the Prior Year Nine Months, long-term accrued interest expense related to the Securitization Notes was $15.9 million and zero, respectively. For the Current Quarter and Prior Year Quarter, the Company recorded an expense for the amortization of original issue discount and deferred financing costs relating to the Securitization Notes of zero and $1.8 million, respectively. For the Current Nine Months and the Prior Year Nine Months, the Company recorded an expense for the amortization of original issue discount and deferred financing costs relating to the Securitization Notes of $1.1 million and $5.2 million, respectively. The effective interest rate on such notes is 10.9%, as of September 30, 2020.

Senior Secured Term Loan

On August 2, 2017, the Company entered into a credit agreement (as amended or otherwise modified, unless context provides otherwise the “Senior Secured Term Loan”), among IBG Borrower, the Company’s wholly-owned direct subsidiary, as borrower, the Company and certain wholly-owned subsidiaries of IBG Borrower, as guarantors (the “Guarantors”), Cortland Capital Market Services LLC, as administrative agent and collateral agent (“Cortland”) and the lenders party thereto from time to time, including Deutsche Bank AG, New York Branch.  Pursuant to the Senior Secured Term Loan, the lenders provided to IBG Borrower a senior secured term loan (the “Senior Secured Term Loan”), scheduled to mature on August 2, 2022 in an aggregate principal amount of $300 million and bearing interest at LIBOR plus an applicable margin of 7% per annum (the “Interest Rate”).

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On August 2, 2017, the net cash proceeds of the Senior Secured Term Loan were deposited into an escrow account and subject to release to IBG Borrower from time to time, subject to the satisfaction of customary conditions precedent upon each withdrawal, to finance repurchases of, or at the maturity date thereof to repay in full, the 1.50% Convertible Notes (as defined below). Prior to the First Amendment (as discussed below), the Company had the ability to make these repurchases in the open market or privately negotiated transactions, depending on prevailing market conditions and other factors.

Prior to the First Amendment, borrowings under the Senior Secured Term Loan were to amortize quarterly at 0.5% of principal, commencing on September 30, 2017. IBG Borrower was obligated to make mandatory prepayments annually from excess cash flow and periodically from net proceeds of certain asset dispositions and from net proceeds of certain indebtedness, if incurred (in each case, subject to certain exceptions and limitations provided for in the Senior Secured Term Loan).

IBG Borrower’s obligations under the Senior Secured Term Loan are guaranteed jointly and severally by the Company and the other Guarantors pursuant to a separate facility guaranty. IBG Borrower’s and the Guarantors’ obligations under the Senior Secured Term Loan are secured by first priority liens on and security interests in substantially all assets of IBG Borrower, the Company and the other Guarantors and a pledge of substantially all equity interests of the Company’s subsidiaries (subject to certain limits including with respect to foreign subsidiaries) owned by the Company, IBG Borrower or any other Guarantor. However, the security interests will not cover certain intellectual property and licenses owned, directly or indirectly by the Company’s subsidiary Iconix Luxembourg Holdings SÀRL or those subject to the Company’s securitization facility. In addition, the pledges exclude certain equity interests of Marcy Media Holdings, LLC and the subsidiaries of Iconix China Holdings Limited.

In connection with the Senior Secured Term Loan, IBG Borrower, the Company and the other Guarantors made customary representations and warranties and have agreed to adhere to certain customary affirmative covenants. Additionally, the Senior Secured Term Loan mandates that IBG Borrower, the Company and the other Guarantors enter into account control agreements on certain deposit accounts, maintain and allow appraisals of their intellectual property, perform under the terms of certain licenses and other agreements scheduled in the Senior Secured Term Loan and report significant changes to or terminations of licenses generating guaranteed minimum royalties of more than $0.5 million.  Prior to the First Amendment (as discussed below), IBG Borrower was required to satisfy a minimum asset coverage ratio of 1.25:1.00 and maintain a leverage ratio of no greater than 4.50:1.00.

Amendments to Senior Secured Term Loan

First Amendment

On October 27, 2017, the Company entered into the First Amendment to the Senior Secured Term Loan (the “First Amendment”) pursuant to which, among other things, the remaining escrow balance of approximately $231 million (after taking into account approximately $59.2 million that was used to buy back 1.50% Convertible Notes in open market purchases in the third quarter of 2017) was returned to the lenders.

The First Amendment also provided for, among other things, (a) a reduction in the existing $300 million term loan to the then-current term loan balance of approximately $57.8 million, (b) a new senior secured delayed draw term loan facility in the aggregate amount of up to $165.7 million, consisting of (i) a $25 million First Delayed Draw Term Loan (the “First Delayed Draw Term Loan”), and (ii) a $140.7 million Second Delayed Draw Term Loan (the “Second Delayed Draw Term Loan” and, together, with the First Delayed Draw Term Loan, the “Delayed Draw Term Loan Facility”) for the purpose of repaying the 1.50% Convertible Notes; (c) an increase of the Total Leverage Ratio permitted under the Senior Secured Term Loan from 4.50:1.00 to 5.75:1.00; (d) a reduction in the debt service coverage ratio multiplier in the Company’s asset coverage ratio under the Senior Secured Term Loan; (e) an increase in the existing amortization rate from 2 percent per annum to 10 percent per annum commencing July 2019; and (f) amendments to the mandatory prepayment provisions to (i) permit the Company not to prepay borrowings under the Senior Secured Term Loan from the first $100 million of net proceeds resulting from Permitted Capital Raising Transactions (as defined in the Senior Secured Term Loan) effected prior to March 15, 2018, and (ii) eliminate the requirement that the Company pay a Prepayment Premium (as defined in the Senior Secured Term Loan) on any payments or prepayments made prior to December 31, 2018. Indebtedness issued under the Delayed Draw Term Loan Facility was issued with original issue discount.

As a result of the First Amendment, on October 27, 2017, the Company repaid $231.0 million on the Senior Secured Term Loan which represented $240.7 million of outstanding principal balance.  As this transaction was accounted for as a debt modification in accordance with ASC 470-50-40, and based on the Company’s accounting policy for debt modifications, the Company wrote-off a pro-rata portion of the original issue discount and deferred financing costs of $9.3 million and $5.4 million, respectively.  As a result of this transaction, the Company’s outstanding principal balance of the Senior Secured Term Loan was reduced to $57.8 million as of such date.  

On November 2, 2017, the Company drew down the full amount of $25.0 million on the First Delayed Draw Term Loan, of which the Company received $24.0 million in cash, net of the $1.0 million of original issue discount.  

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Second Amendment

Given that the Company was unable to timely file its quarterly financial statements for the quarter ended September 30, 2017 with the SEC by November 14, 2017 and became in default under the terms of the Senior Secured Term Loan, as amended, on November 24, 2017, the Company entered into the Second Amendment to the Senior Secured Term Loan.  Pursuant to the Second Amendment, among other things, the lenders under the Senior Secured Term Loan agreed, subject to the Company’s compliance with the requirements set forth in the Second Amendment, to waive until December 22, 2017, certain potential defaults and events of default arising under the Senior Secured Term Loan.

In connection with the Second Amendment, Deutsche Bank was granted additional pricing flex in the form of price protection upon syndication of the Senior Secured Term Loan (“Flex”) and ticking fees on the unfunded portion of the loan. The Second Amendment allows, among other things, for cash payments on account of the Flex and ticking fees to be paid from the proceeds of the First Delayed Draw Term Loan, which was previously fully funded in accordance with the terms of the Senior Secured Term Loan. After giving effect to the additional Flex provided in the Second Amendment, the Company estimated that it could be responsible for payments on account of Flex in an aggregate total amount of up to $12.0 million.  As of September 30, 2020, the Company has paid a total of approximately $5.0 million in Flex.  The Company has recorded this amount against the outstanding principal balance of Senior Secured Term Loan on the Company’s consolidated balance sheet and is being amortized over the remaining term of Senior Secured Term Loan.

Third Amendment

On February 12, 2018, the Company, through IBG Borrower, entered into the Third Amendment to the Senior Secured Term Loan. The Third Amendment provides for, among other things, amendments to certain restrictive covenants and other terms set forth in the Senior Secured Term Loan, as amended, to permit (i) IBG Borrower to enter into the 5.75% Notes Indenture (as defined below) and a related intercreditor agreement and (ii) the Note Exchange (as defined below). In connection with the Third Amendment, Deutsche Bank was granted additional pricing flex in the form of price protection upon syndication of the loan (“Third Amendment Flex”). After giving effect to the additional Third Amendment Flex, the Company estimates that it could be responsible for payments on account of the Third Amendment Flex in an aggregate total amount of up to $6.1 million.

Fourth Amendment

The Company, through IBG Borrower, entered into the Fourth Amendment to the Senior Secured Term Loan on March 12, 2018. The Fourth Amendment provided, among other things, that the funding date for the Second Delayed Draw Term Loan would be March 14, 2018 instead of March 15, 2018.  The conditions to the availability of the Second Delayed Draw Term Loan were satisfied as of March 14, 2018 due, in part, to the transactions contemplated by the Note Exchange, and the Company was able to draw on the Second Delayed Draw Term Loan. On March 14, 2018, the Company drew down $110 million under the Second Delayed Draw Term Loan and used those proceeds, along with cash on hand, to make a payment to the trustee under the indenture governing the 1.50% Convertible Notes to repay the remaining 1.50% Convertible Notes at maturity on March 15, 2018.

The Senior Secured Term Loan, as amended, contains customary negative covenants and events of default. The Senior Secured Term Loan limits the ability of IBG Borrower, the Company and the other Guarantors, with respect to themselves, their subsidiaries and certain joint ventures, from, among other things, incurring and prepaying certain indebtedness, granting liens on certain assets, consummating certain types of acquisitions, making fundamental changes (including mergers and consolidations), engaging in substantially different lines of business than those in which they are currently engaged, making restricted payments and amending or terminating certain licenses scheduled in the Senior Secured Term Loan. Such restrictions, failure to comply with which may result in an event of default under the terms of the Senior Secured Term Loan, are subject to certain customary and specifically negotiated exceptions, as set forth in the Senior Secured Term Loan.

If an event of default occurs, in addition to the Interest Rate increasing by an additional 3% per annum, Cortland shall, at the request of lenders holding more than 50% of the then-outstanding principal of the Senior Secured Term Loan, declare payable all unpaid principal and accrued interest and take action to enforce payment in favor of the lenders. An event of default includes, among other events: (i) a change of control by which a person or group becomes the beneficial owner of 35% of the voting stock of the Company or IBG Borrower; (ii) the failure to extend of the Series 2012-1 Class A-1 Senior Notes Renewal Date (as defined in the Senior Secured Term Loan); (iii) the failure of any of Icon Brand Holdings LLC, Icon NY Holdings LLC, Icon DE Intermediate Holdings LLC, Icon DE Holdings LLC and their respective subsidiaries (the “Securitization Entities”) to perform certain covenants; and (iv) the entry into amendments to the securitization facility that would be materially adverse to the lenders or Cortland without consent. Subject to the terms of the Senior Secured Term Loan, both voluntary and certain mandatory prepayments will trigger a premium of 5% of the aggregate principal amount during the first year of the loan and a premium of 3% of the aggregate principal amount during the second year of the loan, with no premiums payable in subsequent periods.

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Fifth Amendment

On March 30, 2020, the Company entered into the fifth amendment and waiver to the Senior Secured Term Loan (the “Fifth Amendment”). The Fifth Amendment, among other things, (i) waived an event of default under the Senior Secured Term Loan due to the Company’s receipt of a going concern qualified audit opinion and (ii) modified the asset sale prepayment obligation to obligate the Company to pay 75% of the net proceeds from one or more asset sales in any fiscal year to the extent the aggregate amount of asset sale net proceeds exceed $5.0 million.

As a result of the Umbro China Sale and the Starter China Sale, the Company made principal repayments of $44.7 million and $11.7 million on the Senior Secured Term Loan in the third and fourth quarter of 2020, respectively. As of September 30, 2020 and December 31, 2019, the outstanding principal balance of the Senior Secured Term Loan was $109.7 million (which is net of $6.7 million of original issue discount) and $162.4 million (which is net of $13.2 million of original issue discount), respectively, of which $31.0 million and $19.3 million is recorded in the current portion of long term debt on the Company’s consolidated balance sheet, respectively.

The Company recorded interest expense of approximately $2.6 million relating to the Senior Secured Term Loan in the Current Quarter as compared to $4.6 million in the Prior Year Quarter. Interest expense relating to the Senior Secured Term loan was $10.3 million in the Current Nine Months and $13.7 million in the Prior Year Nine Months.

The Company recorded an expense for the amortization of original issue discount and deferred financing fees of approximately $4.2 million and $1.4 million relating to the Senior Secured Term Loan, included in interest expense on the consolidated statement of operations, during the Current Quarter and the Prior Year Quarter respectively. The Company recorded an expense for the amortization of original issue discount and deferred financing fees of approximately $7.0 million during the Current Nine Months and approximately $4.1 million during the Prior Year Nine Months. The effective interest rate on the Senior Secured Term Loan is 11.6%, as of September 30, 2020.

5.75% Convertible Notes

On February 22, 2018, the Company consummated an exchange (the “Note Exchange”) of approximately $125 million previously outstanding 1.50% Convertible Senior Subordinated Notes due 2018 (the “1.50% Convertible Notes”), pursuant to which it issued approximately $125 million of new 5.75% Convertible Notes due 2023 (the 5.75% Convertible Notes”).  The 5.75% Convertible Notes were issued pursuant to an indenture, dated February 22, 2018, by and among the Company, each of the guarantors thereto and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (the “Indenture”).

The 5.75% Convertible Notes mature on August 15, 2023.  Interest on the 5.75% Convertible Notes may be paid in cash, shares of the Company’s common stock, or a combination of both, at the Company’s election. If the Company elects to pay all or a portion of an interest payment in shares of common stock, the number of shares of common stock payable will be equal to the applicable interest payment divided by the average of the 10 individual volume-weighted average prices for the 10-trading day period ending on and including the trading day immediately preceding the relevant interest payment date.

The 5.75% Convertible Notes are (i) secured by a second lien on the same assets that secure the obligations of IBG Borrower under the Senior Secured Term Loan and (ii) guaranteed by IBG Borrower and same guarantors as those under the Senior Secured Term Loan, other than the Company.

Subject to certain conditions and limitations, the Company may cause all or part of the 5.75% Convertible Notes to be automatically converted into common stock of the Company.  The 5.75% Convertible Notes are convertible into shares of the Company’s common stock based on a conversion rate of 52.1919 shares of the Company’s common stock, per $1,000 principal amount of the 5.75% Convertible Notes (which is equal to an initial conversion price of approximately $19.16 per share), subject to adjustment from time to time pursuant to the 5.75% Convertible Note Indenture.

Holders converting their 5.75% Convertible Notes (including in connection with a mandatory conversion) shall also be entitled to receive a payment from the Company equal to the Conversion Make-Whole Payment (as defined in the Indenture) if such conversion occurs after a regular record date and on or before the next succeeding interest payment date, through and including the maturity date (determined as if such conversion did not occur).

If the Company elects to pay all or a portion of a Conversion Make-Whole Payment in shares of common stock, the number of shares of common stock payable will be equal to the applicable Conversion Make-Whole Payment divided by the average of the 10 individual volume-weighted average prices for the 10-trading day period immediately preceding the applicable conversion date.

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Subject to certain limitations pursuant to the Senior Secured Term Loan, from and after the February 22, 2019, the Company may redeem for cash all or part of the 5.75% Convertible Notes at 100% of the principal amount of the 5.75% Convertible Notes, plus accrued and unpaid interest, if any, at any time by providing at least 30 days’ prior written notice to holders of the 5.75% Convertible Notes.

If the Company undergoes a fundamental change (which would occur if the Company experiences a change of control or is delisted from NASDAQ) prior to maturity, each holder will have the right, at its option, to require the Company to repurchase for cash all or a portion of such holder’s 5.75% Convertible Notes at a fundamental change purchase price equal to 100% of the principal amount of the 5.75% Convertible Notes to be repurchased, together with interest accrued and unpaid to, but excluding, the fundamental change purchase date.

The Company is subject to certain restrictive covenants pursuant to the 5.75% Convertible Note Indenture, including limitations on (i) liens, (ii) indebtedness, (iii) asset sales, (iv) restricted payments and investments, (v) prepayments of indebtedness and (vi) transactions with affiliates.

During the Current Quarter and Current Nine Months, noteholders have not converted any of the aggregate outstanding principal balance, of their 5.75% Convertible Notes into shares of the Company’s common stock.

The Company has elected to account for the 5.75% Convertible Notes based on the Fair Value Option accounting as outlined in ASC 825.  Refer to Note 7 for further details.  As of September 30, 2020 and December 31, 2019, while the debt balance recorded at fair value on the Company’s consolidated balance sheet is $49.1 million and $47.3 million, respectively, the actual outstanding principal balance of the 5.75% Convertible Notes is $94.4 million and $94.4 million, respectively.

The Company recorded interest expense of approximately $1.4 million relating to the 5.75% Convertible Notes in the Current Quarter as compared to $1.4 million in the Prior Year Quarter. Interest expense related to the 5.75% Convertible Notes was approximately $4.1 million and $4.3 million for the Current Nine Months and Prior Year Nine Months, respectively. During the Current Quarter, the Company issued 1.3 million common shares to noteholders in lieu of $1.4 million of cash interest due on August 15, 2020.

Debt Maturities

As of September 30, 2020, the Company’s debt maturities on a calendar year basis are as follows:

 

 

⁽¹⁾          The legal final maturity of the Securitization Notes is in January of 2043. As the Company did not repay or refinance the Securitization Notes prior to the anticipated repayment date, beginning January 2020, the Company is no longer be required to make previously designated contractual principal payments. Future principal payments will be formulaically based on a percentage of receipts of royalty revenue, and as such are subject market factors outside of the Company’s control. There can be no assurance that all or any future principal payments projected for the Senior Secured Notes will be made in accordance with the projections provided.

 

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9. Stockholders’ Equity

2016 Omnibus Incentive Plan

On November 4, 2016, the Company’s stockholders approved the Company’s 2016 Omnibus Incentive Plan (“2016 Plan”).  The 2016 Plan replaced and superseded the Amended and Restated 2009 Plan.  Under the 2016 Plan, all employees, directors, officers, consultants and advisors of the Company, including those of the Company’s subsidiaries, are eligible to be granted common stock, options or other stock-based awards.  At inception, there were 0.2 million shares of the Company’s common stock available for issuance under the 2016 Plan.  The 2016 Plan was amended at the 2017 Annual Meeting of Stockholders to increase the number of shares available under the plan by 0.19 million shares.  

Shares Reserved for Issuance

As of September 30, 2020, there were less than 0.1 million common shares available for issuance under the 2016 Plan.  

Reverse Stock Split

On March 14, 2019, the Company effected a 1-for-10 reverse stock split (the “Reverse Stock Split”) of its common stock.  No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares of common stock had their holdings rounded up to the next whole share.  Proportional adjustments were made to the Company’s outstanding stock options and other equity securities and to the Company’s incentive plans, and the conversion ratio of the 5.75% Convertible Notes, to reflect the Reverse Stock Split, in each case, in accordance with the terms thereof.  Unless the context otherwise requires, all share and per share amounts in this quarterly report on Form 10-Q have been adjusted to reflect the Reverse Stock Split.

Stock Options

There were no grants of stock options, and no compensation expense related to stock option grants during the Current Nine Months or Prior Year Nine Months as all prior awards have been fully expensed. During FY 2019, the remaining 1,500 stock options outstanding and exercisable at a weighted average exercise price of $171.60 expired.      

Restricted Stock

Compensation cost for restricted stock is measured as the excess, if any, of the quoted market price of the Company’s stock at the date the common stock is issued over the amount the employee must pay to acquire the stock (which is generally zero). Compensation cost is recognized over the period between the issue date and the date any restrictions lapse, with compensation cost recognized on a straight-line basis over the requisite service period. The restrictions do not affect voting and dividend rights.

The following table summarizes information about unvested restricted stock transactions:

 

 

The Company has awarded time-based restricted shares of common stock to certain employees. The awards have restriction periods tied to employment and vest over a maximum period of approximately 3 years. The cost of the time-based restricted stock awards, which is the fair market value on the date of grant net of estimated forfeitures, is expensed ratably over the vesting period.

The Company has awarded performance-based restricted shares of common stock to certain employees.  The awards have restriction periods tied to certain performance measures.  The cost of the performance-based restricted stock awards, which is the fair market value on the date of grant net of estimated forfeitures, is expensed when the likelihood of those shares being earned is deemed probable.

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Compensation expense related to restricted stock grants (inclusive of the restricted stock grants awarded as part of the long-term incentive plans discussed below) for the Current Quarter and Prior Year Quarter was less than $0.1 million and $0.2 million, respectively. Compensation expense related to restricted stock grants (inclusive of the restricted stock grants awarded as part of the long-term incentive plans) for the Current Nine Months and Prior Year Nine Months was $0.2 million and $0.7 million, respectively.

An additional amount of $0.2 million of expense of compensation expense related to restricted stock grants (inclusive of the restricted stock grants awarded as part of the long-term incentive plans discussed below) is expected to be expensed over a period of approximately twelve to eighteen months.  

For the Current Quarter and Prior Year Quarter, the Company repurchased no shares and shares valued at less than $0.1 million, respectively, of its common stock in connection with net share settlement of restricted stock grants. For both the Current Nine Months and Prior Year Nine Months, the Company repurchased shares valued at less than $0.1 million of its common stock in connection with net share settlement of restricted stock grants.

 

Retention Stock

 

On October 15, 2018, the Company hired Robert C. Galvin as its Chief Executive Officer and President and was appointed to the Company’s board of directors.  Mr. Galvin was issued an Employment Inducement Award pursuant to his employment agreement.  The terms of the Employment Inducement Award are similar to the retention stock awards provided to other employees as described above.  The grant date fair value of Mr. Galvin’s award issued on October 15, 2018 was $1.80.

 

Compensation expense related to the retention stock awards was less than $0.1 million for both the Current Quarter and Prior Year Quarter, respectively. Compensation expense related to the retention stock awards was approximately $0.1 million and $0.1 million for the Current Nine Months and Prior Year Nine Months, respectively. An additional amount of $0.1 million of compensation expense related to Mr. Galvin’s retention stock awards is expected to be expensed over a period of approximately fifteen months.

 

Long-Term Incentive Compensation

On March 31, 2016, the Company approved a new grant for long-term incentive compensation (the “2016 LTIP”) for key employees and granted equity awards under the 2016 LTIP in the aggregate amount of approximately 0.1 million shares at a weighted average share price of $73.10 with a then current value of approximately $5.2 million. The awards granted were a combination of restricted stock units (“RSUs”) and target level performance stock units (“PSUs”). Pursuant to the terms of the awards and based upon the Company’s performance over the vesting period, less than 0.1 million were issued upon expiration of the grant on March 31, 2019.

On March 7, 2017, the Company approved a new grant for long-term incentive compensation (the “2017 LTIP”) for certain employees and granted equity awards under the 2017 LTIP in the aggregate amount of approximately 0.1 million shares at a weighted average share price of $75.20 with a then current value of $6.6 million.  The awards granted were a combination of RSUs and target level PSUs.  The material terms of the PSUs and RSUs are substantially similar to those set forth in the 2016 LTIP.  Specifically, the RSUs vest one third annually on each of March 30, 2018, March 30, 2019 and March 30, 2020.  The PSUs vest based on performance metrics approved by the Compensation Committee, which, for the performance period commencing January 1, 2017 and ending on December 31, 2019, are based on the Company’s achievement of an aggregate adjusted operating income performance target as set forth in the applicable award agreements, and continued employment through December 31, 2019.  None of the 2017 LTIP PSUs vested.

On March 15, 2018, the Company approved a new grant for long-term incentive compensation (the “2018 LTIP”) for certain employees, which consisted of (i) PSU equity awards in the aggregate amount of approximately 0.2 million shares at a weighted average share price of $13.80 with a then current value of $3.1 million and (ii) cash awards in the aggregate amount of approximately $3.1 million (the “2018 Cash Grant”).  The Cash Grants comprising the 2018 LTIP vest in 48 equal semi-monthly installments on the 15^th and last days of each month, beginning March 31, 2018 and ending March 15, 2020, subject in each case to continued employment through the applicable vesting date.  Each installment is paid within 15 days of the applicable vesting date.  Upon the end of an employee’s employment with the Company, any remaining unpaid portion of the 2018 Cash Grant is forfeited.  The PSUs vest based on performance metrics approved by the Compensation Committee over three separate performance periods, commencing on January 1 of each of 2018, 2019 and 2020 and ending on December 31 of each of 2018, 2019 and 2020, which, for each such performance period, are based on the Company’s achievement of an aggregated adjusted operating income performance target to be set by the Compensation Committee prior to March 30 of each applicable performance period, and continued employment through the settlement date.  For the Current Nine Months, less than 0.1 million shares were forfeited in respect of the 2018 LTIP.  The weighted average remaining contractual term (in years) of the PSUs is less than one year.

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On March 15, 2019, the Company approved a new grant for long-term incentive compensation (the “2019 LTIP”) for certain employees, which consisted of (i) PSU equity awards in the aggregate amount of approximately 0.4 million shares at a weighted average share price of $2.02 with a then current value of $0.8 million and (ii) cash awards in the aggregate amount of approximately $1.0 million (the “2019 Cash Grant”).  As part of the 2019 LTIP, pursuant to his employment agreement, the Company’s Chief Executive Officer and President was granted 0.3 million shares of the Company’s common stock with an aggregate fair market value of $0.3 million upon final execution of the RSU agreement in April 2019.  The 2019 Cash Grant and the PSUs vest based on performance metrics approved by the Compensation Committee over two separate performance periods, commencing on January 1 of each of 2019 and 2020 and ending on December 31 of each of 2019 and 2020, which, for each such performance period, are based on the Company’s achievement of an aggregated adjusted EBITDA performance target to be set by the Compensation Committee prior to March 30 of each applicable performance period, and continued employment through the settlement date. For the Current Nine Months, less than 0.1 million shares were forfeited in respect of the 2019 LTIP. The weighted average remaining contractual term (in years) of the PSUs is less than one year.

In the Current Quarter, the Company recognized compensation expense related to the PSUs granted as part of the long-term incentive plans of approximately $0.1 million as compared to a compensation expense of less than $0.1 million in the Prior Year Quarter. In the Current Nine Months, compensation expense related to the PSUs was $0.3 million as compared to a benefit of less than $0.1 million for the Prior Year Nine Months. An additional amount of $0.2 million of compensation expense related to the PSUs granted is expected to be expensed over a period of less than one year.  

 

10. Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects, in periods in which they have a dilutive effect, the effect of restricted stock-based awards, common shares issuable upon exercise of stock options and warrants and shares underlying convertible notes potentially issuable upon conversion. The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options outstanding were exercised, and all convertible notes have been converted into common stock.

For the Current Quarter, of the total potentially dilutive shares related to restricted stock-based awards and stock options, approximately 0.5 million shares were anti-dilutive, as compared to approximately 0.4 million shares that were anti-dilutive for the Prior Year Quarter.  

For the Current Quarter, none of the performance related restricted stock-based awards issued to the Company’s named executive officers were anti-dilutive as compared to 0.4 million of the performance related restricted stock-based awards issued to the Company’s named executive officers that were anti-dilutive in the Prior Year Quarter.  

A reconciliation of weighted average shares used in calculating basic and diluted earnings per share follows:

 

 

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In accordance with ASC 480, the Company considers its redeemable non-controlling interest in its computation of both basic and diluted earnings per share. In addition, in accordance with ASC 260, the Company considers its 5.75% Convertible Notes in its computation of diluted earnings per share.  For the Current Quarter and Prior Year Quarter, adjustments to the Company’s redeemable non-controlling interest and effects of potential conversion on the 5.75% Convertible Notes had impacts on the Company’s earnings per share calculations as follows:

 

 

 

11. Contingencies

 

In May 2016, Supply Company, LLC (“Supply”), a former licensee of the Ed Hardy trademark, commenced an action against the Company and its affiliate, Hardy Way, LLC (“Hardy Way” and together with the Company, the “Iconix Defendants”) seeking damages of $50 million, including punitive damages, attorneys’ fees and costs (the “Supply Litigation”). Supply alleges that Hardy Way breached the parties’ license agreement by failing to reimburse Supply for markdown reimbursement requests that Supply received from a certain retailer. Supply also alleges that the Company is liable for fraud because it made purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark in order to induce Supply to enter into the license agreement and to induce Supply to enter into a separate agreement with a certain retailer. The Iconix Defendants filed a motion to dismiss the Complaint.  In addition, Hardy Way commenced an action against Kevin Yap (“Yap”), the principal of Supply, to enforce the terms of his guarantee of Supply’s obligations under the Supply-Hardy Way license agreement for the Ed Hardy trademark (the “Yap Litigation”).  In response, Yap filed counterclaims against Hardy Way asserting two declaratory judgment claims seeking similar damages as in the Supply Litigation, including the reimbursement of Supply for losses allegedly suffered because of the markdown reimbursement requests, as well as rescission of the Supply-Hardy Way license agreement, other damages and attorneys’ fees and costs.  Hardy Way filed a pre-discovery motion for summary judgment on its affirmative claim and to dismiss Yap’s counterclaims.  

On August 10, 2020, the Court issued a consolidated decision (the “Decision”) resolving the Iconix Defendants’ motion to dismiss the Supply Litigation and Hardy Way’s motion for summary judgment and to dismiss counterclaims in the Yap Litigation.  In

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the Supply Litigation, the Court granted the Iconix Defendants’ motion to dismiss in all respects, except one, and denied Supply’s cross-motion for leave to amend its complaint.  As a result of the Decision, the only claim that remains in the Supply Litigation is Supply’s claim of fraudulent inducement based on the Iconix Defendants’ purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark.  In the Yap Litigation, the Court denied Hardy Way’s motion for pre-discovery summary judgment on its affirmative claim as premature because of Yap’s allegation that he was fraudulently induced into entering into the guarantee by Hardy Way’s purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark.  The Court dismissed Yap’s counterclaims related to the markdown reimbursement request and denied Yap’s cross-motion for leave to amend his answer to assert additional defenses.  As a result of the Decision, the claims that remain in the Yap Litigation are Hardy Way’s affirmative claim against Yap on his guarantee and Yap’s counterclaim for declaratory judgment based on Hardy Way’s purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark.  The Decision is subject to normal appellate rights of all parties.

The Iconix Defendants will continue to vigorously defend the Supply Litigation and the Yap Litigation.  At this time, the Company is unable to estimate the ultimate outcomes of the Supply Litigation or the Yap Litigation.

Two shareholder derivative complaints captioned James v. Cuneo et al, Docket No. 1:16-cv-02212 and Ruthazer v. Cuneo et al, Docket No. 1:16-cv-04208 have been consolidated in the United States District Court for the Southern District of New York, and three shareholder derivative complaints captioned De Filippis v. Cuneo et al. Index No. 650711/2016, Gold v. Cole et al, Index No. 53724/2016 and Rosenfeld v. Cuneo et al., Index No. 510427/2016 have been consolidated in the Supreme Court of the State of New York, New York County.  The complaints name the Company as a nominal defendant and assert claims for breach of fiduciary duty, insider trading and unjust enrichment against certain of the Company's current and former directors and officers arising out of the Company's restatement of financial reports and certain employee departures.  At this time, the Company is unable to estimate the ultimate outcome of these matters.

 

As previously disclosed, the Company received a formal order of investigation from the SEC staff in December 2015 and was contacted by the U.S. Attorney’s office for the Southern District of New York (the “SDNY”) in December 2018 regarding the same matters underlying the SEC’s investigation (together, the SDNY and SEC investigations, the “Government Investigations”). The Company has cooperated fully with the SEC and SDNY regarding this matter. As previously disclosed, on December 5, 2019, the Company reached an agreement with the SEC to resolve the SEC portion of the Investigation. As part of the settlement, which was approved by the U.S. District Court for the Southern District of New York (“SDNY”), the Company agreed to pay a civil penalty of $5.5 million. On the same day, the U.S. Attorney for the SDNY unsealed charges against the Company’s former Chairman and Chief Executive Officer, as well as its former Chief Operating Officer (who subsequently plead guilty).  The criminal trial of the Company’s former Chairman and Chief Executive Officer in respect of this matter was set to begin on May 11, 2020, but has been postponed indefinitely due to the COVID-19 pandemic. The $5.5 million penalty was recorded as an operating expense in 2019 and is being paid in installments. As of September 30, 2020, $0.8 million in future payments are included in Accounts payable and accrued expenses.

 

 

From time to time, the Company is also made a party to litigation incurred in the normal course of business. In addition, in connection with litigation commenced against licensees for non-payment of royalties, certain licensees have asserted unsubstantiated counterclaims against the Company.  While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not, individually or in the aggregate, have a material effect on the Company’s financial position or future liquidity.   

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12. Related Party Transactions

The Company has entered into certain license agreements in which the core licensee is also one of our joint venture partners.  In the case of Sports Direct International plc (“Sports Direct”), the Company maintains license agreements with Sports Direct, but in addition, during FY 2018, the Company entered into a cooperation agreement with Sports Direct that allowed Sports Direct to appoint two members to the Company’s Board of Directors.  The cooperation agreement expired pursuant to its terms during the first quarter of 2019. For the Current Quarter and Prior Year Quarter, and Current Nine Months and Prior Year Nine Months, the Company recognized the following royalty revenue amounts:

 

⁽¹⁾ As detailed in Note 4, as of July 2019, MHMC is no longer a related party.

 

13. Income Taxes

The Company computes its expected annual effective income tax rate in accordance with ASC 740 and makes changes on a quarterly basis, as necessary, based on certain factors such as changes in forecasted annual pre-tax income; changes to actual or forecasted permanent book to tax differences; impacts from tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are unusual and non-recurring in nature and treats these as discrete events. The tax effect of discrete items is recorded in the quarter in which the discrete events occur. Due to the volatility of these factors, the Company's consolidated effective income tax rate can change significantly on a quarterly basis.

With the exception of the Buffalo brand joint venture, Iconix Middle East joint venture, Diamond Icon joint venture and Umbro China joint venture (which was sold during the third quarter of 2020), the Company is not responsible for the income taxes related to the non-controlling interest’s share of the joint venture’s earnings.  Therefore, the tax liability associated with the non-controlling interest share of the joint venture’s earnings is not reported in the Company’s income tax expense, despite the joint venture’s entire income being consolidated in the Company’s reported income before income tax expense.  As such, the joint venture’s earnings have the effect of lowering our effective tax rate.  This effect is more pronounced in periods in which joint venture earnings are higher relative to our other earnings.  Since the Buffalo brand joint venture is a taxable entity in Canada, the Iconix Middle East joint venture and Diamond Icon joint venture are taxable entities in the United Kingdom, the Company is required to report its tax liability, including taxes attributable to the non-controlling interest, in its statement of operations.  All other consolidated joint ventures are partnerships and treated as pass-through entities not subject to taxation in their local tax jurisdiction, and therefore the Company includes only the tax attributable to its proportionate share of income from the joint venture in income tax expense.

The Company files income tax returns in the U.S. federal and various state and local jurisdictions. For federal income tax purposes, during the third quarter of 2020, the Internal Revenue Service initiated an audit of the 2017 and 2018 federal tax returns. The audit is currently ongoing. The Company also files returns in numerous foreign jurisdictions that have varied years remaining open for examination, but generally the statute of limitations is three to four years from when the return is filed.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the recorded deferred tax assets will be realized.  The ultimate realization of deferred tax assets is dependent on the generation of future taxable income in the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.  Based on these items and the consecutive years of pretax losses (resulting from impairment), management determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance for all taxing jurisdictions.  In addition, the Company continues to have deferred tax liabilities related to indefinite lived intangibles on the

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condensed consolidated balance sheet a portion of which cannot be considered to be a source of taxable income to offset deferred tax assets.

As a result of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") signed into law on March 27, 2020, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration ("SBA"). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. In the second quarter of 2020, the Company received a $6.5 million refund resulting from carrying back their 2018 Net Operating Loss to offset 2013 taxable income.

The Company’s consolidated effective tax rate for the Current Quarter was 1.9% which resulted in a $0.9 million income tax expense as compared to the consolidated effective tax rate for the Prior Year Quarter of 1.7% which resulted in a $0.6 million income tax benefit.  The increase in tax expense for the Current Quarter resulted from expenses recorded in the Current Quarter for which no tax benefit was able to be recognized.

The Company’s consolidated effective tax rate for the Current Nine Months was 0.4% which resulted in a less than $0.1 million income tax expense as compared to the consolidated effective tax rate for the Prior Year Nine Months of -15.2% which resulted in a $1.3 million income tax expense.  The decrease in the tax expense is a result of the tax benefit recorded in the Current Nine Months related to the CARES Act.

Management has not recorded a tax provision for years that remain open for tax examinations; however, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.

The Company has net operating loss (“NOL”) carryforwards for federal and state income tax purposes. Use of the NOL carryforwards is limited under Section 382 of the Internal Revenue Code, as we have had a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Internal Revenue Code. These complex changes of ownership rules generally focus on ownership changes involving shareholders owning directly or indirectly 5% or more of our stock, including certain public “groups” of shareholders as set forth under Section 382 of the Internal Revenue Code, including those arising from new stock issuances and other equity transactions.  Some of these NOL carryforwards will expire if they are not used within certain periods. At this time, we consider it more likely than not that we will not have sufficient taxable income in the future that will allow us to realize these NOL carryforwards.

14. Accumulated Other Comprehensive Income

The following table sets forth the activity in accumulated other comprehensive income for the Current Nine Months and Prior Year Nine Months:

 

 

15. Segment and Geographic Data

The Company identifies its operating segments for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer, the Company’s chief operating decision maker, in deciding how to

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allocate resources and in assessing performance.  The Company has disclosed the following operating segments:  men’s, women’s, home, and international.  Since the Company does not track, manage and analyze its assets by segments, no disclosure of segmented assets is reported.  

 

The geographic regions consist of the United States and Other (which principally represent Latin America and Europe). Revenues attributable to each region are based on the location in which licensees are located and where they principally do business.

Reportable data for the Company’s operating segments is as follows:

 

 

16. Other Assets - Current and Long-Term

Other Assets - Current

 

 

 

 

17. Leases

The Company is a lessee in several noncancelable operating leases, primarily for its corporate office, additional office space and certain office equipment.  Beginning January 1, 2019, the Company accounts for leases in accordance with ASC Topic 842, Leases.  

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The Company determines if an arrangement is or contains a lease at contract inception.  The Company recognizes a right of use (ROU) asset and a lease liability at the lease commencement date.  

For operating leases, the ROU asset is initially measured at the initial measurement amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the lease incentive received.  For operating leases, the ROU asset is subsequently measured at cost, less accumulated amortization, less any accumulated impairment losses.  Lease expense is recognized on a straight-line basis over the lease term.  

Variable lease payments associated with the Company’s leases are recognized in the period in which the obligation for those payments is incurred.  Variable lease payments are presented as operating expense in the Company’s condensed consolidated statement of operations in the same line item as expense arising from fixed lease payments.  

Operating lease ROU assets are presented as Right-of-use-assets within Other assets on the consolidated balance sheet.  The current portion of operating lease liabilities is included in other liabilities-current and the long-term portion is included in Other liabilities on the consolidated balance sheet.

The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less.  The Company recognizes the lease payments associated with its short-term leases of office space and office equipment as an expense on a straight-line basis over the lease term.  The Company’s leases may include non-lease components such as common area maintenance.  The Company has elected the practical expedient to account for the lease and non-lease components as a single lease component, therefore, for all of our operating leases, the lease payments used to measure the lease liability include all of the fixed consideration in the contract.  

The Company’s operating leases expire over the next five years.  The Company’s operating leases may contain renewal options however, because the Company is not reasonably certain to exercise these renewal options, the options are not included in the lease term and associated potential option payments are excluded from lease payments. Payments due under the lease contracts include fixed payments and in certain of the Company’s leases, variable payments.  Variable lease payments consist of the Company’s proportionate share of the building’s property taxes, insurance, electricity and other common area maintenance costs.  

For the Current Quarter, components of lease cost were as follows:

 

As of September 30, 2020, the operating lease ROU assets and operating lease liabilities were $5.1 million and $7.3 million, respectively.

For the Current Quarter and Current Nine Months, cash paid for lease liabilities for operating leases was $0.7 million and $2.0 million, respectively.  There were no ROU assets exchanged and no operating lease obligations assumed during the Current Quarter and Current Nine Months. In the Current Quarter and Current Nine Months, there were no reductions to ROU assets resulting from reductions to lease obligations. The Company recognized $0.1 million in sublease income during the Current Quarter and zero in the Prior Year Quarter. The Company recognized $0.2 million in sublease income during the Current Nine Months and zero in the Prior Year Nine Months. Sublease income is presented in operating expenses.

Because we generally do not have access to the rate implicit in the leases, the Company utilizes our incremental borrowing rate as the discount rate.  As of September 30, 2020, the weighted average remaining operating lease term is 3.55 and the weighted average discount rate for the operating leases is 8.59%.

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Maturities of lease liabilities under non-cancellable leases as of September 30, 2020 are as follows:

 

 

18. Other Liabilities – Current

As of September 30, 2020, other current liabilities of $9.3 million was primarily related to amounts due to certain joint ventures that are not consolidated with the Company as well as the current portion of the lease liabilities (refer to Note 17 for further details) as compared to $13.8 million as of December 31, 2019.  

19. Foreign Currency Translation

The functional currency of Iconix Luxembourg and Red Diamond Holdings, which are wholly owned subsidiaries of the Company located in Luxembourg, is the Euro.  However, the companies have certain dollar denominated assets, in particular cash and notes receivable, that are maintained in U.S. Dollars, which are required to be revalued each quarter. Due to fluctuations in currency in the Current Quarter and the Prior Year Quarter, the Company recorded a $0.5 million currency translation loss and a $0.4 million currency translation loss, respectively, that is included in the condensed consolidated statement of operations.  Due to fluctuations in currency in the Current Nine Months and Prior Year Nine Months, the Company recorded a $0.6 million currency translation loss and a $0.8 million translation loss, respectively, that is included in the condensed consolidated statement of operations.

Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s comprehensive income is primarily comprised of net income and foreign currency translation gain or loss. During the Current Quarter and the Prior Year Quarter, the Company recognized as a component of its comprehensive income, a foreign currency translation gain of $5.7 million and foreign currency translation loss of $4.0 million, respectively, due to changes in foreign exchange rates during the Current Quarter and the Prior Year Quarter, respectively. During the Current Nine Months and Prior Year Nine Months, the Company recognized as a component of its comprehensive income, a foreign currency translation gain of $5.7 million and a loss of $4.6 million, respectively.

20. Accounting Pronouncements

Recent Accounting Pronouncements

In February 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment”, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment.  The ASU is effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  This ASU should be applied prospectively.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company adopted the new standard on January 1, 2020. The new standard did not have a material impact to the Company’s financial statements.

21. Other Matters

 

During the Current Quarter and  Prior Year Quarter, the Company included in its selling, general and administrative expenses approximately $0.5 million and $9.1 million respectively, of charges primarily related and professional fees associated with the continuing correspondence with the Staff of the SEC, the SEC investigation, the class action derivative litigations and the transition of the Company’s management. During the Current Nine Months and Prior Year Nine Months, the Company included in its selling, general and administrative expenses approximately $9.3 million and $15.1 million respectively, of charges primarily related and professional fees associated with the continuing correspondence with the Staff of the SEC, the SEC investigation, the class action derivative litigations and the transition of the Company’s management.

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22. Subsequent Events

 

In September 2020, the Company completed the sale of its equity interests of Starter China Limited, for consideration of $16.0 million. The Company received approximately $15.6 million in net proceeds from the Starter China Sale and in October 2020, repaid approximately $11.7 million under its Senior Secured Term Loan.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary. We are a brand management company and owner of a diversified portfolio of approximately 30 global consumer brands across women’s, men’s, home and international industry segments.  Our business strategy is to maximize the value of our brands primarily through strategic licenses and joint venture partnerships around the world, as well as to grow the portfolio of brands through strategic acquisitions.

As of September 30, 2020, our brand portfolio includes Candie’s ^®, Bongo ^®, Joe Boxer ^®, Rampage ^®, Mudd ^®, London Fog ^®, Mossimo ^®, Ocean Pacific/OP ^®, Danskin /Danskin Now ^®, Rocawear ^®, Artful Dodger ^®, Cannon ^®, Royal Velvet ^®, Fieldcrest ^®, Charisma ^®, Starter ^® , Waverly ^®, Ecko Unltd ^® /Mark Ecko Cut & Sew ^®, Zoo York ^®, Umbro ^® and Lee Cooper ^®; and interests in Material Girl ^®, Ed Hardy ^®, Truth or Dare ^®, Modern Amusement ^®, Buffalo ^®, Hydraulic ^® and Pony ^®.

We principally look to monetize the Intellectual Property (“IP”) related to our brands throughout the world and in all relevant categories by licensing directly with leading retailers (“direct to retail” or “DTR”), through a consortia of wholesale licensees, through joint ventures in specific territories and via other activity such as corporate sponsorships and content as well as the sale of IP for specific categories or territories. Products bearing our brands are sold across a variety of distribution channels. The licensees are generally responsible for designing, manufacturing, and distributing the licensed products. We support our brands with marketing, advertising and promotional campaigns designed to increase brand awareness. Additionally, we provide our licensees with coordinated trend direction to enhance product appeal and help build and maintain brand integrity.  

Globally, we have over 60 DTR licenses and more than 460 total licenses.  Licensees are selected based upon our belief that such licensees will be able to produce and sell quality products in the categories and distribution channels of their specific expertise and that they are capable of exceeding minimum sales targets and royalties that we generally require for each brand. This licensing strategy is designed to permit us to operate our licensing business, leverage our core competencies of marketing and brand management with minimal working capital, and generally without inventory, production or distribution costs or risks, and maintain high margins. The majority of our licensing agreements include minimum guaranteed royalty revenue, which provides us with greater visibility into future cash flows.  As of October 1, 2020, we had a contractual right to receive over $380.7 million of minimum licensing revenue over the balance and the terms of their current licenses, excluding any renewals.  

Our Candie’s and Mudd DTR license agreement at Kohl’s will expire under its terms in January 2021. Our Material Girl license with Macy’s expired on January 31, 2020. Our Royal Velvet license agreement with JC Penney expired in January 2019. We have DTR agreements under various terms with Amazon for Starter and at Costco for the Charisma brands. We are actively seeking to place Candie’s, Bongo, OP, Danskin, Mossimo and Material Girl with new or existing licensees. At this time, we are uncertain how the terms and conditions of any potential replacement licensing arrangements could affect our future revenues and cash flows.

Our goal of maximizing the value of our IP also includes, in certain instances, the sale to third parties of a brand’s trademark in specific territories or categories.  As such, we evaluate potential offers to acquire some or all of a brand’s IP by comparing whether the offer is more valuable than our estimate of the current and potential revenue streams to be earned via our traditional licensing model.  Further, as part of our evaluation process, we also consider whether or not the buyer’s future development of the brand may help to expand the brand’s overall recognition and global revenue potential.

We identify our operating segments according to how business activities are managed and evaluated and, for which separate financial information is available and utilized on a regular basis by the Chief Executive Officer in deciding how to allocate resources and in assessing performance.  

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We have disclosed these reportable segments for the periods shown below.

 

 

COVID-19 Pandemic

The spread of the novel coronavirus or COVID-19 (“COVID-19”) during the first quarter of 2020 and its continued spread throughout the year to date has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic is an ongoing phenomenon with uncertain scale and has had severe global macroeconomic and financial market impacts. Certain of our licensees have been and may continue to be adversely impacted by the pandemic due to manufacturing facility closures, store closures, impacts to their distribution networks and a general decrease in customer traffic. We are, in many cases, suspending or deferring capital expenditures. We are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses. We are also taking certain precautions to provide a safe work environment for our employees. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

As the pandemic continues to unfold, the extent of the pandemic’s effect on our operational and financial performance and liquidity will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include changes in the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Notably, certain countries have begun re-enacting lockdowns, which, if re-enacted in the United States, could further negatively impact our business and results of operations. Any prolonged material disruption on discretionary spending and consumer demand could negatively affect our licenses and impact our financial position, results of operations and cash flows.

 

Results of Operations

Current Quarter compared to Prior Year Quarter

Licensing Revenue. Total revenue for the Current Quarter was approximately $24.5 million, a 31% decrease as compared to $35.5 million for the Prior Year Quarter. Revenue from the women’s segment decreased 43% from $10.3 million in the Prior Year Quarter to $5.9 million in the Current Quarter primarily due to decreases in licensing revenue from our Mudd and Joe Boxer brands. Revenue from the men’s segment decreased 28% from $7.9 million in the Prior Year Quarter to $5.7 million in the Current Quarter mainly due to a decrease in licensing revenue from our Buffalo and Umbro brands. Revenue from the home segment increased 2% from $3.4 million in the Prior Year Quarter to $3.5 million in the Current Quarter mainly due to an increase in licensing revenue from our Charisma brand.  The international segment decreased 32% from $13.8 million in the Prior Year Quarter to $9.4 million in the Current Quarter mainly due to decreases in Latin America and Europe.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses (“SG&A”) were $9.9 million for the Current Quarter as compared to $26.3 million for the Prior Year Quarter, a decrease of $16.4 million or 62%, primarily due to a decrease in professional fees, compensation and advertising costs. SG&A from the women’s segment decreased from $0.8 million in the Prior Year Quarter to income of $0.9 million in the Current Quarter. SG&A from the men’s segment was flat at $2.7 million in the Prior Year Quarter and in the Current Quarter, respectively. SG&A from the home segment decreased from $0.4 million in the Prior

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Year Quarter to income of $0.1 million in the Current Quarter. SG&A from the international segment was $7.2 million in the Prior Year Quarter and $2.7 in the Current Quarter. Corporate SG&A decreased 64% from $15.3 million in the Prior Year Quarter to $5.5 million in the Current Quarter.

Depreciation and Amortization. Depreciation and amortization decreased to $0.3 million for the Current Quarter, compared to $0.4 million in the Prior Year Quarter.

Equity (earnings)loss on joint ventures. Equity earnings on joint ventures was less than $0.1 million for the Current Quarter, compared to income of $0.2 million for the Prior Year Quarter.

Gain on Sale of Trademarks and Investment. Gain on Sale of Trademarks and Investment reflects the $59.6 million gain on the sale of 100% of our equity interest in Umbro China Ltd., and $14.5 million gain on sale of 100% of our equity interest in Starter China Ltd. during the Current Quarter.

Trademarks and Investment Impairment.  Trademark and Investment Impairment loss for the Current Quarter was $22.0 million as compared to $17.0 in the Prior Year Quarter.  The Trademark impairment charge of $4.8 million for the Current Quarter was primarily based on the impact of COVID-19 on current and estimated future cash flows and their impact on the fair values of the Pony and Hydraulic indefinite-lived trademarks, which were written down by $4.2 million and $0.6 million, respectively. Investment impairment of $17.1 million in the Current Year Quarter resulted from a decline in the fair value of our Ecko Mark/Ecko joint venture in China and our equity interest in our Candies joint venture in China which has been impacted by the effects of COVID-19 in that market. Investment impairment in the Prior Year Quarter of $ 17.0 million related to our investment in Marcy Media.

Operating Income. Total operating income for the Current Quarter was $66.4 million, an increase of $74.5 million as compared to a loss of approximately $8.1 million in the Prior Year Quarter primarily resulting from gains from sale of trademarks. Excluding trademark and investment impairment and gain on sale of trademarks, total operating income was $14.2 million for the Current Quarter or 58% of total revenue as compared to total operating income of $8.9 million in the Prior Year Quarter or 25% of total revenue. Operating income from the women’s segment was $6.2 million in the Current Quarter compared to income of $10.0 million in the Prior Year Quarter. Excluding trademark impairment, women’s operating income for the Current Quarter was $6.8 million. Operating income from the men’s operating segment was a loss of $1.2 million in the Current Quarter compared to $5.3 million in the Prior Year Quarter. Excluding trademark impairment, men’s operating income for the Current Quarter was $3.0 million. Operating income from the home segment was $3.6 million in the Current Quarter compared to income of $3.0 million in the Prior Year Quarter. Operating income from the international segment was $6.6 million in the Current Quarter compared to $6.2 million in the Prior Year Quarter. Corporate operating income was $51.2 million in the Current Quarter compared to an operating loss of $32.6 million in the Prior Year Quarter. Excluding gain on sale of trademarks and investment impairment, operating loss from the Corporate segment in the Current Quarter was $5.7 million. Excluding the investment impairment, corporate operating loss was $15.6 million in the Prior Year Quarter.

Other Expenses (income)-Net. Other expenses (income)- net was approximately $18.7 million for the Current Quarter as compared to of $26.7 million for the Prior Year Quarter, a decrease of $8.0 million. The decrease was primarily reflect the change in mark to market accounting for our 5.75 % convertible note partly offset by and an increase of $4.1 million in the Current Year Quarter on interest expense primarily related to the step up in interest rate on the securitization debt.

(Benefit) Provision for Income Taxes. The effective income tax rate for the Current Quarter is approximately 1.9% resulting in a $0.9 million income tax expense, as compared to an effective income tax rate of 1.7% in the Prior Year Quarter which resulted in a $0.6 million income tax benefit.  The increase in the tax expense is a result of expenses recorded in the Current Quarter for which no tax benefit was able to be recognized.

Net Income (loss). Our net income was approximately $46.7 million in the Current Quarter, compared to a loss of approximately $34.2 million in the Prior Year Quarter, resulting from the factors discussed above.

Current Nine Months compared to Prior Year Nine Months

Licensing Revenue. Total revenue for the Current Nine Months was $74.7 million, a 29% decrease as compared to $105.8 million for the Prior Year Nine Months. Revenue from the women’s segment decreased 37% from $26.9 million in the Prior Year Nine Months to $16.8 million in the Current Nine Months primarily due to a decrease in licensing revenue from our Mudd and Candies brands as the brands transition from their historical DTR relationships, as well as a decrease in Rampage revenue. Revenue from the men’s segment decreased 40% from $25.5 million in the Prior Year Nine Months to $15.4 million in the Current Nine Months mainly due to a decrease in licensing revenue from our Buffalo and Umbro brands. Revenue from the home segment decreased 7% from $11.2 million in the Prior Year Nine Months to $10.4 million in the Current Nine Months mainly due to the

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transition of our Royal Velvet brand from a DTR relationship. The international segment decreased 24% from $42.3 million in the Prior Year Nine Months to $32.0 million in the Current Nine Months, mainly due to decreases in Latin America and Europe.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses (“SG&A”) were $42.0 million for the Current Nine Months as compared to $60.8 million for the Prior Year Nine Months, a decrease of $18.8 million or 31% primarily due to decreases in advertising expense, compensation costs and professional fees. SG&A from the women’s segment decreased from $2.1 million in the Prior Year Nine Months to $0.4 million in the Current Nine Months. SG&A from the men’s segment decreased 16% from $7.7 million in the Prior Year Nine Months to $6.5 million in the Current Nine Months primarily due to a decrease in advertising expense. SG&A from the home segment decreased from $1.4 million in the Prior Year Nine Months to $0.8 million in the Current Nine Months. SG&A from the international segment decreased 29% from $17.4 million in the Prior Year Nine Months to $12.3 million in the Current Nine Months. Corporate SG&A decreased 31% from $32.2 million in the Prior Year Nine Months to $22.1 million in the Current Nine Months.

Depreciation and Amortization. Depreciation and amortization was $0.9 million for the Current Nine Months, compared to $1.4 million in the Prior Year Nine Months.

Equity Earnings on Joint Ventures. Equity earnings on joint ventures was a loss of $1.5 million for the Current Nine Months, compared to income of $2.3 million for the Prior Year Nine Months. The Current Nine Months included trademark impairment charges of $1.0 million from our investment in South East Asia.

Gain on Sale of Trademark and Investment. Gain on Sale of Trademarks and Investment reflect the $59.6 million gain on the sale of 100% of equity our interest in Umbro China Ltd., $14.5 million gain on sale of 100% of our equity interest in Starter China Ltd., and the $1.6 million gain on the Sale of a 10% equity interest in Danskin China Ltd. during the Current Nine Months.

Trademark and Investment Impairment.  Trademark and Investment Impairment loss was $41.0 million for the Current Nine Months which represented a trademark loss of $23.7 million and an investment loss of $17.3 million, as compared to $17.0 million in the Prior Year Nine Months.  The charge for the Current Nine Months was primarily based on the impact of COVID-19 pandemic as well as the Sears store closures on current and estimated future cash flows and their impact on the fair values primarily of the Rampage, Joe Boxer, Pony, Waverly. Fieldcrest, Cannon and Umbro indefinite-lived trademarks and investments as follows:

 

Investment impairment was $17.3 million in the Current Nine Months resulted from a decline in the fair value of our Ecko Mark/Ecko joint venture in China and of our equity interest in our Candies joint venture in China which has been impacted by the effects of COVID-19 in that market. Investment impairment in the Prior Nine Months was $17.0 million related to our investment in Marcy Media.

Operating Income(loss). Total operating income for the Current Nine Months was $65.0 million, compared to income of approximately $28.9 million in the Prior Year Nine Months. Excluding trademark and investment impairment, and gain on sale of trademarks and investment, total operating income in the Current Nine Months was $30.3 million or 41% of total revenue. Excluding investment impairment, total operating income in the Prior Year Nine Months was $45.9 million or 43% of total revenue. Operating income from the women’s segment was $5.8 million in the Current Nine Months compared to income of $26.2 million in the Prior Year Nine Months. Excluding trademark impairment, operating income from the women’s segment in the Current Nine Months was $16.4 million. Operating income from the men’s operating segment was $4.6 million in the Current Nine Months compared to $17.8 million in the Prior Year Nine Months. Excluding trademark impairments, operating income from the Men’s segment was $8.9 million. Operating income from the home segment was $4.5 million in the Current Nine Months compared to $9.8 million in the Prior Year Nine Months. Excluding trademark impairment, operating income from the home segment in the Current Nine Months was $9.7 million. Operating income from the international segment was $14.6 million in the Current Nine Months compared to $25.4 million in the Prior Year Nine Months. Excluding trademark impairment, operating income from the international segment in the Current Nine

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Months was $18.1 million. Corporate operating income was $35.6 million in the Current Nine Months compared to operating loss of $50.4 million in the Prior Year Nine Months. Excluding gain on sale of trademarks and investment and investment impairment, operating income from the corporate segment in the Current Nine Months was a loss of $22.8 million. Excluding investment impairment, operating loss from the corporate segment was $33.4 million in the Prior Year Nine Months.

Other Expenses (income)-Net. Other expenses (income)- net was approximately $54.6 million for the Current Nine Months as compared to $37.1 million for the Prior Year Nine Months, an increase of $17.5 million. The change reflects a loss of $1.9 million in the Current Nine Months as compared to a gain of $6.8 million in the Prior Year Nine Months related to the mark-to-market adjustment from our 5.75% Convertible Notes and a $8.8 million increase in interest expense primarily related to the step up in interest rate on the securitization debt in the Current Nine Months.

Provision (benefit) for Income Taxes. The effective income tax rate for the Current Nine Months is approximately 0.4%, which resulted in an income tax expense of less than $0.1 million, as compared to an effective income tax rate of -15.2% in the Prior Year Nine Months, which resulted in a $1.3 million income tax expense.  The decrease in the tax expense is a result of the CARES Act.

Net Income(loss). Our net income was approximately $10.4 million in the Current Nine Months, compared to a loss of approximately $9.5 million in the Prior Year Nine Months, as a result of the factors discussed above.

Liquidity and Capital Resources

Liquidity

Our principal capital requirements are to refinance or extinguish existing indebtedness and to fund working capital needs.  We currently rely primarily on asset sales and the issuance of indebtedness to refinance existing indebtedness.  At September 30, 2020 and December 31, 2019, our cash totaled $70.5 million and $55.5 million, respectively, not including short-term restricted cash of $12.8 million and $15.9 million, respectively. Our short-term restricted cash primarily consists of collection and investment accounts related to our Securitization Notes.  

Our Securitization Notes include a financial test, known as the debt service coverage ratio (“DSCR”) that measures the amount of principal and interest required to be paid on the Co-Issuers’ debt to the approximate cash flow available to pay such principal and interest.  As a result of a decline in royalty collections during the twelve months ended March 31, 2019, the DSCR fell below 1.10x as of March 31, 2019.  Beginning April 1, 2019, the Senior Secured Notes experienced a Rapid Amortization Event pursuant to the Securitization Notes Indenture.  Upon a Rapid Amortization Event, any residual amounts available will immediately be used to pay down the principal.  We will continue to receive our management fee from the Securitization Note and we do not believe the loss of our residual, if any, will have a significant impact on our operations.  The legal final maturity date of the Securitization Notes is in January of 2043. As we did not repay or refinance the Securitization Notes prior to the anticipated repayment date, in January 2020 additional interest will accrue on amounts outstanding under the Securitization Notes. This additional interest is not required to be paid until 2043 and does not compound annually. Beginning January 2020, we are no longer required to make previously designated contractual principal payments. Future principal payments will be formulaically based on a percentage of receipts of royalty revenue. However, we believe recent events, primarily related to the impacts of the COVID-19 pandemic, have created risks related to liquidity and maintaining financial covenants, that raise substantial doubt about our ability to continue as a going concern. We have taken steps to reduce expenses and discretionary cash outlays and have been actively pursuing asset sales in order to satisfy liquidity needs under our financial covenants. In July 2020, we closed the Umbro China Sale and received approximately $59.6 million in net proceeds. In August 2020, we repaid approximately $44.7 million under our Senior Secured Term Loan with proceeds from the Umbro China Sale. In September 2020, we closed the Starter China Sale and received approximately $15.6 million in net proceeds. In October 2020, we repaid approximately $11.7 million under our Senior Secured Term Loan with proceeds from the Starter China Sale.

We may, from time to time, seek to retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity or debt securities, in open market transactions, privately negotiated transactions, or otherwise.  Such repurchase or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved in any such transactions may individually or in the aggregate, be material.

This “Liquidity” section should be read in conjunction with the “COVID-19 Pandemic” section above. See Note 8 of the Notes to unaudited condensed consolidated financial statements for detail on our existing debt arrangements.

Operating Activities

Net cash provided by operating activities increased $3.8 million from net cash provided by operating activities of $15.9 million in the Prior Year Nine Months to net cash provided by operating activities of $19.7 million in the Current Nine Months.  The increase is primarily due to a decrease in Other assets - current, partly offset the decrease in Accounts payable and accrued expenses in the Current Nine Months.  

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Investing Activities

Net cash provided by investing activities increased approximately $80.7 million from net cash used in investing activities of $3.4 million in the Prior Year Nine Months to net cash provided by investing activities of $77.3 million in the Current Nine Months. The difference between both periods is primarily due to the sale of the Umbro China and Starter China trademarks in the Current Year Nine Months.

Financing Activities

Net cash used in financing activities increased approximately $49.2 million from cash used in financing activities of $35.9 million in the Prior Year Nine Months to cash used in financing activities of $85.1 million in the Current Nine Months. The increase between both periods is primarily due to an increase in payments of long-term debt in the Current Nine Months.  

Other Matters

Critical Accounting Policies

The Company’s consolidated financial statements are based on the accounting policies used. Certain accounting polices require that estimates and assumptions be made by management for use in the preparation of the financial statements. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results and that require subjective or complex estimates by management. There have been no material changes with respect to the Company’s critical accounting policies from those disclosed in its 2019 Annual Report on Form 10-K filed with the SEC on March 30, 2020.

Recent Accounting Pronouncements

Refer to Note 20 of the notes to unaudited condensed consolidated financial statements for recent accounting pronouncements.

The statements that are not historical facts contained in this Quarterly Report are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These risks are detailed in our Form 10-K for the fiscal year ended December 31, 2019 and other SEC filings. The words “believe,” “anticipate,” “expect,” “confident,” “project,” “provide,” “guidance” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial and accounting officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, herein referred to as the Exchange Act) as of the end of the period covered by this Quarterly Report. The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial and accounting officer have concluded that the financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.  

The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting, herein referred to as internal control, to determine whether any changes in internal control occurred during the three months ended September 30, 2020, that may have materially affected, or which are reasonably likely to materially affect internal control. Based on that evaluation, there has been no change in the Company’s internal control during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control, except for the matters discussed above.

The foregoing has been approved by our management team, including our Chief Executive Officer and Chief Financial Officer, who have been involved with the reassessment and analysis of our internal control over financial reporting.

The Audit Committee, which consists of independent, non-executive directors, will continue to meet regularly with management, the Director of Internal Audit, and the independent accountants to review accounting, reporting, auditing and internal control matters. The Audit Committee has direct and private access to the Director of Internal Audit and the external auditors, and will meet with each, separately, in executive sessions. The Company reviewed the results of management’s assessment of its internal control over financial reporting with the Audit Committee of the Board of Directors and they agreed with the conclusions.

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PART II. Other Information

Item 1. Legal Proceedings.

In May 2016, Supply Company, LLC (“Supply”), a former licensee of the Ed Hardy trademark, commenced an action against the Company and its affiliate, Hardy Way, LLC (“Hardy Way” and together with the Company, the “Iconix Defendants”) seeking damages of $50 million, including punitive damages, attorneys’ fees and costs (the “Supply Litigation”). Supply alleges that Hardy Way breached the parties’ license agreement by failing to reimburse Supply for markdown reimbursement requests that Supply received from a certain retailer. Supply also alleges that the Company is liable for fraud because it made purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark in order to induce Supply to enter into the license agreement and to induce Supply to enter into a separate agreement with a certain retailer. The Iconix Defendants filed a motion to dismiss the Complaint.  In addition, Hardy Way commenced an action against Kevin Yap (“Yap”), the principal of Supply, to enforce the terms of his guarantee of Supply’s obligations under the Supply-Hardy Way license agreement for the Ed Hardy trademark (the “Yap Litigation”).  In response, Yap filed counterclaims against Hardy Way asserting two declaratory judgment claims seeking similar damages as in the Supply Litigation, including the reimbursement of Supply for losses allegedly suffered because of the markdown reimbursement requests, as well as rescission of the Supply-Hardy Way license agreement, other damages and attorneys’ fees and costs.  Hardy Way filed a pre-discovery motion for summary judgment on its affirmative claim and to dismiss Yap’s counterclaims.  

On August 10, 2020, the Court issued a consolidated decision (the “Decision”) resolving the Iconix Defendants’ motion to dismiss the Supply Litigation and Hardy Way’s motion for summary judgment and to dismiss counterclaims in the Yap Litigation.  In the Supply Litigation, the Court granted the Iconix Defendants’ motion to dismiss in all respects, except one, and denied Supply’s cross-motion for leave to amend its complaint.  As a result of the Decision, the only claim that remains in the Supply Litigation is Supply’s claim of fraudulent inducement based on the Iconix Defendants’ purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark. In the Yap Litigation, the Court denied Hardy Way’s motion for pre-discovery summary judgment on its affirmative claim as premature because of Yap’s allegation that he was fraudulently induced into entering into the guarantee by Hardy Way’s purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark.  The Court dismissed Yap’s counterclaims related to the markdown reimbursement request and denied Yap’s cross-motion for leave to amend his answer to assert additional defenses.  As a result of the Decision, the claims that remain in the Yap Litigation are Hardy Way’s affirmative claim against Yap on his guarantee and Yap’s counterclaim for declaratory judgment based on Hardy Way’s purported misstatements about the Company’s financials and the viability of the Ed Hardy trademark.  The Decision is subject to normal appellate rights of all parties.  

The Iconix Defendants will continue to vigorously defend the Supply Litigation and the Yap Litigation.  At this time, the Company is unable to estimate the ultimate outcomes of the Supply Litigation or the Yap Litigation.

Two shareholder derivative complaints captioned James v. Cuneo et al, Docket No. 1:16-cv-02212 and Ruthazer v. Cuneo et al, Docket No. 1:16-cv-04208 have been consolidated in the United States District Court for the Southern District of New York, and three shareholder derivative complaints captioned De Filippis v. Cuneo et al. Index No. 650711/2016, Gold v. Cole et al, Index No. 53724/2016 and Rosenfeld v. Cuneo et al., Index No. 510427/2016 have been consolidated in the Supreme Court of the State of New York, New York County.  The complaints name the Company as a nominal defendant and assert claims for breach of fiduciary duty, insider trading and unjust enrichment against certain of the Company's current and former directors and officers arising out of the Company's restatement of financial reports and certain employee departures.  At this time, the Company is unable to estimate the ultimate outcome of these matters.

As previously disclosed, the Company received a formal order of investigation from the SEC staff in December 2015 and was contacted by the U.S. Attorney’s office for the Southern District of New York (the “SDNY”) in December 2018 regarding the same matters underlying the SEC’s investigation (together, the SDNY and SEC investigations, the “Government Investigations”). The Company has cooperated fully with the SEC and SDNY regarding this matter. As previously disclosed, on December 5, 2019, the Company reached an agreement with the SEC to resolve the SEC portion of the Investigation. As part of the settlement, which was approved by the U.S. District Court for the Southern District of New York (“SDNY”), the Company agreed to pay a civil penalty of $5.5 million.  On the same day, the U.S. Attorney for the SDNY unsealed charges against the Company’s former Chairman and Chief Executive Officer, as well as its former Chief Operating Officer (who subsequently plead guilty).  The criminal trial of the Company’s former Chairman and Chief Executive Officer in respect of this matter was set to begin on May 11, 2020, but has been postponed indefinitely due to the COVID-19 pandemic. The $5.5 million penalty was recorded as an operating expense in 2019 and is being paid in installments. As of September 30, 2020, $0.8 million in future payments are included in Accounts payable and accrued expenses

As discussed above, the Company has been subject to Government Investigations, as well as the shareholder derivative complaints (the “2015 Matters”).   Pursuant to the terms of its articles and bylaws, the Company is obligated to advance legal and other fees related to the 2015 Matters to certain of its current and former directors, officers and employees.   As previously disclosed

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during the third Quarter of 2019, as a result of the expenses related to the 2015 Matters, the Company’s insurance coverage related to the 2015 Matters has been exhausted.  As such, the Company will not be reimbursed for any further expenses incurred related to the 2015 Matters, including in respect of the criminal trial of its former Chairman and CEO, Neil Cole or by certain of its other former directors, officers and employees.

From time to time, the Company is also made a party to litigation incurred in the normal course of business. In addition, in connection with litigation commenced against licensees for non-payment of royalties, certain licensees have asserted unsubstantiated counterclaims against the Company.  While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not, individually or in the aggregate, have a material effect on the Company’s financial position or future liquidity.  

Item 1A. Risk Factors.

In addition to the risk factors disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, set forth below are certain factors that have affected, and in the future could affect, our operations or financial condition. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could impact our operations. The risks described below and in our Annual Report on Form 10-K for the year ended December 31, 2019, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our financial condition and/or operating results.

The recent coronavirus outbreak could have an adverse effect on our business, financial position and cash flows.

The global outbreak of a novel strain of the novel coronavirus (“COVID-19” or “coronavirus”) originating in Wuhan, China has impacted and may continue to impact our results, liquidity and financial condition. The virus has spread rapidly across the globe, including the U.S. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, our licensees, customer sentiment in general, and temporary closing of stores containing our brands. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine may continue to increase, which has already affected, and may continue to affect, retailers, as well as our licensees who sell to these retailers. We are unable to predict when retailers who have temporarily closed stores will reopen or if additional periods of store closures will be needed or mandated. Continued impacts of the pandemic could materially adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows as our licensees may request temporary relief, delay or not make scheduled payments. COVID-19 is adversely impacting sales in the apparel and accessories industry. Diminished sales of products bearing our brands may have an adverse effect on the estimated fair value of our intangible assets, including our trademarks. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently. The potential impact of COVID-19 intensifies the business and operating risks that we face and should be considered when reading the additional risk factors below.

Our existing and future debt obligations could impair our liquidity and financial condition, and in the event we are unable to meet our debt obligations we could lose title to certain trademarks.

As of September 30, 2020, the Company’s consolidated balance sheet reflects debt of approximately $583.5 million (which is net of $0.5 million of debt issuance costs), including (i) securitization debt of $423.9 million under our Series 2012-1 4.229% Senior Secured Notes, Class A-2, Series 2013-1 4.352% Senior Secured Notes, Class A-2 (collectively, the “Senior Secured Notes”), and the Variable Funding Notes, (ii) senior secured debt of $109.2 million (net of original issue discount and debt issuance costs of $7.2 million) under our Senior Secured Term Loan, and (iii) subordinated secured debt of $94.4 million (which is recorded in our consolidated balance sheet as of September 30, 2020 at a fair value of $49.1 million) under our 5.75% convertible senior subordinated secured second lien notes due 2023 (the “5.75% Convertible Notes”). We may also assume or incur additional debt, including secured debt, in the future in connection with, or to fund, future acquisitions or refinance our existing debt obligations. Our outstanding debt obligations:

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We cannot be certain that our earnings will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. In particular, we do not know at this time what the effects will be of the COVID-19 pandemic on our liquidity and financial conditions, including the effects of our licensees requesting delaying payments or failing to make payments to us. In the event that we fail to make any required payment under any current or future agreements governing our indebtedness or fail to comply with the financial and operating covenants contained in those agreements, we would be in default regarding that indebtedness. A debt default could significantly diminish the market value and marketability of our common stock, result in the acceleration of the payment obligations under all or a portion of our consolidated indebtedness and impact the Company’s ability to continue as a going concern.

A substantial portion of our licensing revenue is concentrated with a limited number of licensees, such that the loss of any of such licensees or their renewal on terms less favorable than today, could slow our growth plans, decrease our revenue and impair our cash flows.

Our licenses with Centric Brands and Kohls represent, each in the aggregate, our largest licensees during the three months ended September 30, 2020, representing approximately 10% and 10%, respectively of our total revenue for such period.

Because we are dependent on a few licensees for a significant portion of our licensing revenue, if any of them were to have financial difficulties affecting their ability to make payments, cease operations, or if any of these licensees decides not to renew or extend any existing agreement with us, or to significantly reduce its sales of licensed products under any of the agreement(s), our revenue and cash flows could be reduced substantially.

As previously disclosed, the Company was notified of the following non-renewals of license agreements: (i) the Candie’s and Mudd license at Kohl’s, (ii) the Danskin Now DTR license agreements with Walmart, (iii) the Royal Velvet license agreement with J.C. Penney’s, (iv) the Mossimo DTR license agreement with Target and (v) the Material Girl DTR license agreement with Macy’s. While the Company is actively working to place these brands with other licensees, the failure to enter into replacement license agreements for these brands on economic terms similar to such DTR arrangements may adversely affect our future revenues and cash flows.

In addition, we may face increasing competition in the future for DTR licenses as other companies owning established brands may decide to enter into licensing arrangements with retailers similar to those we currently have in place. Furthermore, our current or potential DTR licensees may decide to more prominently promote and market competing brands or develop or purchase other brands or establish their own brands, rather than continue their licensing arrangements with us. In addition, increased competition could result in lower sales of products offered by our DTR licensees under our brands. If our competition for retail licenses increases, it may take us longer to procure additional retail licenses.

We have a material amount of goodwill and other intangible assets, including our trademarks, recorded on our balance sheet. As a result of changes in market conditions and declines in the estimated fair value of these assets, we may, in the future, be required to further write down a portion of this goodwill and other intangible assets and such write-down would, as applicable, either decrease our net income or increase our net loss.

As of September 30, 2020, goodwill represented approximately $26.1 million, or approximately 6%, of the Company’s total consolidated assets, and trademarks and other intangible assets represented approximately $253.6 million, or approximately 57% of our total consolidated assets. Under current U.S. GAAP accounting standards, goodwill and indefinite life intangible assets, including most of our trademarks, are no longer amortized, but instead are subject to impairment evaluation based on related estimated fair values, with such testing to be done at least annually.

During the Current Nine Months, the Company recorded $23.7 million of trademark impairment charges.  The charges for the Current Nine Months was based on the impact of COVID-19 pandemic as well as the Sears/Kmart store closures on current and estimated future cash flows and their impact on the fair value of the Rampage, Joe Boxer, Umbro, Pony, Hydraulic, Cannon and Fieldcrest indefinite-lived trademarks. In FY 2019, as a result of a decline in net sales as well as a decline in future guaranteed

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minimum royalties from license agreements for certain brands, the Company recorded non-cash asset impairment charges related to the write-off of certain of our trademarks of $65.6 million.

There can be no assurance that any future downturn in the business of any of the Company’s segments, or a continued decrease in our market capitalization, will not result in a further write-down of goodwill or trademarks, which would either decrease the Company’s net income or increase the Company’s net loss, which may or may not have a material impact to the Company’s consolidated statement of operations.

Our insurance coverage may not be adequate or available for us to avoid or limit our exposure in respect of pending actions or in future claims and adequate insurance coverage may not be available in sufficient amounts or at a reasonable cost in the future. Even in the event the Company is able to resolve all outstanding disputes related to the 2015 Matters as they relate to the Company, the Company retains significant obligations to advance legal fees and costs related to the Government Investigations of certain of its current and former directors, officers and employees as either targets or witnesses for the government, and the amount of such fees and the duration of this liability will be difficult to predict.

In the past, we have been named in and settled securities litigation, which were expensive and diverted our management’s time. Further, the Company received a formal order of investigation into certain accounting and reporting issues occurring during the 2013 fiscal year through the third quarter of 2015 from the SEC staff in December 2015 and was contacted by the U.S. Attorney’s office for the Southern District of New York in December 2018 regarding the same matters underlying the SEC’s investigation (together, the “Government Investigations”).  The Company has cooperated fully with the SEC and SDNY regarding this matter. As previously disclosed, on December 5, 2019, the Company reached an agreement with the SEC to resolve the SEC portion of the Investigation. As part of the settlement, which was approved by the U.S. District Court for the Southern District of New York (the “SDNY”), the Company agreed to pay a civil penalty of $5.5 million.  On the same day, the U.S. Attorney for the SDNY unsealed charges against the Company’s former Chairman and Chief Executive Officer, as well as its former Chief Operating Officer (who subsequently plead guilty).  The criminal trial in this matter was set to begin on May 11, 2020, but has been postponed indefinitely due to the COVID-19 pandemic. Furthermore, pursuant to the terms of its articles and bylaws, the Company is obligated to advance legal and other fees to its current and former directors, officers and employees with respect to the Governmental Investigations, which such amounts to date have been significant.  As of the third quarter of 2019, as a result of the expenses related to such matters, the Company’s insurance coverage related to such matters has been exhausted.  As such, the Company will not be reimbursed for any further expenses incurred related to such matters, including by its former Chairman and CEO or certain of its current and former directors, officers and employees that may be witnesses in the afore-mentioned or any additional enforcement, investigatory or other legal actions taken by the SEC or SDNY in respect of such individuals.

 

The risks described herein and in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company, or that are currently deemed to be immaterial, also may materially adversely affect the Company’s business, financial condition and/or future operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In September, 2020, the Company issued approximately 1.3 million shares of common stock in connection with the semi-annual interest payment on the 5.75% Convertible Notes, for no additional consideration to the Company.

The following table presents information with respect to purchases of common stock made by the Company during the Current Quarter (share count in thousands):

 

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Item 6. Exhibits

 

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

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