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.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2020 2019 2020 2019
Licensing revenue:
Women's $ 5,919 $ 10,317 $ 16,805 $ 26,855
Men's 5,705 7,942 15,419 25,491
Home 3,487 3,430 10,436 11,205
International 9,351 13,782 32,028 42,255
$ 24,462 $ 35,471 $ 74,688 $ 105,806
Operating income (loss):
Women's $ 6,207 $ 9,988 $ 5,750 $ 26,237
Men's (1,249 ) 5,277 4,593 17,775
Home 3,588 2,990 4,512 9,777
International 6,556 6,243 14,569 25,432
Corporate 51,249 (32,613 ) 35,623 (50,364 )
$ 66,351 $ (8,115 ) $ 65,047 $ 28,857
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:
Operating Segment Brand / Trademark Territory Amount
Women's Rampage US $ 4,630
Women's Joe Boxer US 4,605
Men's Pony US 4,244
Home Waverly US 1,783
Home Royal Velvet US 838
Home Cannon US 1,953
International Umbro International 944
Other various various 4,712
Total $ 23,709Investment 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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