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10-K
ICONIX BRAND GROUP, INC. filed this Form 10-K on 03/28/2019
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1. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and, in accordance with U.S. GAAP and accounting for variable interest entities (where the Company is the primary beneficiary) and majority owned subsidiaries, the Company consolidates fourteen joint ventures (Hardy Way, Icon Modern Amusement, Alberta ULC, Iconix Europe, Hydraulic IP Holdings, US PONY Holdings, Diamond Icon, Iconix Israel, Iconix Middle East, Umbro China, Danskin China, Starter China, Lee Cooper China and Iconix Australia; see Note 5 for explanation). All significant intercompany transactions and balances have been eliminated in consolidation.

In accordance with Accounting Standards Codification (“ASC”) 810—Consolidation (“ASC 810”), the Company evaluates the following criteria to determine the accounting for its joint ventures:  1) consideration of whether the joint venture is a variable interest entity which includes reviewing the corporate structure of the joint venture, the voting rights, and the contributions of the Company and the joint venture partner to the joint venture,  2) if the joint venture is a VIE, whether or not the Company is the primary beneficiary, a determination based upon a variety of factors, including: i) the presence of installment payments which constitutes a de facto agency relationship between the Company and the joint venture partner, and ii) an evaluation of whether the Company or the joint venture partner is more closely associated with the joint venture.  If the Company determines that the entity is a variable interest entity and the Company is the primary beneficiary, then the joint venture is consolidated.  For those entities that are not considered variable interest entities, or are considered variable interest entities but the Company is not the primary beneficiary, the Company uses the equity method as set forth in ASC 323—Investments (“ASC 323”), to account for those investments and joint ventures which are not required to be consolidated under US GAAP.  Refer to Note 5 for further details.    

Liquidity

These consolidated financial statements are prepared on a going concern basis that contemplates the realization of cash flows from assets and discharge of liabilities, in each case, in the ordinary course of business consistent with the Company’s prior periods.  The Company considered, among other things, the Sears Holdings Corporation’s bankruptcy filing on October 15, 2018, and determined that the bankruptcy filing is not expected to have a material adverse impact on its ability to continue as a going concern.  Based on the Company’s financial plans and projections for 2019, which assumes the realization of significant cost savings, among other things, from the successful implementation of the Company’s current strategic initiatives, the Company does not expect the occurrence of any payment defaults on its outstanding debt facilities in the next twelve months, and otherwise expects to generate sufficient cash to meet its operating cash flow needs and maintain compliance with the financial covenants set forth in its various debt  facilities during such period.   In particular, management believes the allocation of residual royalty collections to a restricted reserve account (as is discussed in Note 9) is not expected to have a material adverse impact on the Company’s ability to meet such cash flow needs.  See Liquidity Risk Factor in Item 1A.

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 annual report on Form 10-K have been adjusted to reflect the Reverse Stock Split.  Refer to Note 22 for further details.

Business Combinations, Joint Ventures and Investments

The purchase method of accounting requires that the total purchase price of an acquisition be allocated to the assets acquired and liabilities assumed based on their fair values on the date of the business acquisition. The results of operations from the acquired businesses are included in the accompanying consolidated statements of income from the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

 

Since January 1, 2017, the Company established the following joint ventures to develop and market the Company’s brands in specific markets:

 

 

Date Created

 

Investment /

Joint Venture

 

Iconix’s

Investment

March 2018

 

Starter China

 

100%(1)

June 2018

 

Lee Cooper China

 

100%(2)

 

(1)

In March 2018, the Company formed the Starter China Limited as a wholly-owned subsidiary to hold the Starter trademarks and related assets in respect of the Greater China territory.  The Company entered into an agreement with Photosynthesis Holdings, Co. Ltd. (“PHL”) who will purchase no less than a 50% interest and up to a total of 60% interest in Starter China Limited.  The purchase of the equity interest is expected to occur over a three-year period commencing on January 16, 2022.  Refer to Note 5 for further details.  As of December 31, 2018, the Company’s ownership interest in Starter China Limited was 100%.

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