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10-K
ICONIX BRAND GROUP, INC. filed this Form 10-K on 03/28/2019
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Discontinued Operations.  In the first quarter of FY 2017, our Board of Directors approved a plan to sell the businesses underlying the Entertainment segment.  As a result, we have classified the results of our Entertainment segment as discontinued operations in our consolidated statement of operations for FY 2017.   We completed the sale of those businesses on June 30, 2017.  See Note 2 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Liquidity

Historically, our principal capital requirements have been to fund acquisitions, working capital needs, share repurchases and, to a lesser extent, capital expenditures. Since FY 2016, our principal capital requirements have been to refinance or extinguish existing indebtedness and working capital needs. We have historically relied on internally generated funds to finance our operations and our primary source of capital needs for acquisition has been the issuance of debt and equity securities. Since FY 2016, we have relied on asset sales and issuance of indebtedness to refinance existing indebtedness. At December 31, 2018 and December 31, 2017, our cash totaled $66.6 million and $65.9 million, respectively, not including short-term restricted cash of $16.0 million and $48.8 million, respectively. Our short term restricted cash primarily consists of collection and investment accounts related to our Securitization Notes (as defined below). In addition, as of December 31, 2018, approximately $12.2 million, or 15%, of our total cash (including restricted cash) was held in foreign subsidiaries. During the second fiscal quarter of 2018, the Company elected to treat its Luxembourg top tier subsidiary (“Luxco”) as a disregarded entity for US tax purposes. All the operations under LuxCo were previously treated as disregarded for US tax purposes. As of the election date, all the foreign operations under LuxCo will be treated as a branch for US tax purposes and subject to US taxation. As such, the Company will no longer have any earnings in foreign subsidiaries that are not currently subject to taxation for US purposes. Before the election, the Company indefinitely reinvested all earnings of its foreign subsidiaries.

 

The Company’s Securitization Notes include a test 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; the test is referred to as the debt service coverage ratio (“DSCR”). As a result in the decline in royalty collections received by the Co-Issuers during the twelve months ended June 30, 2018, the DSCR fell below 1.45x as of June 30, 2018. Beginning July 1, 2018, the Co-Issuers are required to allocate 25% of residual royalty collections (i.e. collections less debt service, management, servicing, administrative and other fees) to a restricted reserve account administered by the securitization program’s trustee, which will result in cash remaining inside the securitization program. The DSCR fell below 1.35x as of September 30, 2018 and as a result, beginning October 1, 2018, the Co-Issuers are required to allocate 50% of residual royalty collections (i.e. collections less debt service, management, servicing, administrative and other fees) to a restricted reserve account administered by the securitization program’s trustee, which will result in cash remaining inside the securitization program and not being distributed to the Company. The cash required to be maintained inside the securitization program may be released to the Company if the DSCR is at least 1.45x for two consecutive quarters.  The DSCR fell below 1.25x as of December 31, 2018 and as a result, beginning January 1, 2019, the Co-Issuers are required to allocate 100% of residual royalty collections (i.e. collections less debt service, management, servicing, administrative and other fees) to a restricted reserve account administered by the securitization program’s trustee, which will result in cash remaining inside the securitization program and not being distributed to the Company.  The cash required to be maintained inside the securitization program may be released to the Company if the DSCR is at least 1.45x for two consecutive quarters.  Management believes the allocation of residual royalty collections to a restricted reserve account will not negatively impact the Company’s ability to meet its cash flow needs.

 

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.

Changes in Working Capital

At December 31, 2018 and December 31, 2017, the working capital ratio (current assets to current liabilities) was 1.34 to 1 and 2.07 to 1, respectively.

Operating Activities

Net cash provided by operating activities increased approximately $54.0 million, from $2.1 million in FY 2017 to $56.1 million in FY 2018 primarily due to a decrease in net loss from continuing operations from $557.5 million in FY 2017 to $89.7 million in FY 2018. The change in the non-cash adjustments is primarily as a result of (i) a decrease in the impairment of trademarks and goodwill, (ii) a change in the gain (loss) on extinguishment of debt from a loss of $20.9 million in FY 2017 to a gain of $4.5 million in FY 2018, (iii) an increase in the mark to market gain on the 5.75% Convertible Notes, (iv) a decrease in our deferred income tax benefit, and (v) a decrease in our stock compensation.  These non-cash adjustments are offset by cash used in working capital items of $29.4 million in FY 2017 as compared to cash provided by working capital items of $26.6 million in FY 2018.

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