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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2020

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 twelve joint ventures (Hardy Way, Icon Modern Amusement, Alberta ULC, Iconix Europe, Hydraulic IP Holdings, US PONY Holdings, Diamond Icon, Iconix Israel, Iconix Middle East, Danskin China, Lee Cooper China and Iconix Australia; see Note 4 for explanation). All significant intercompany transactions and balances have been eliminated in consolidation.

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.

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 4 for further details.

Liquidity

These 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 $435.6 million as of December 31, 2020. Net losses incurred for the years ended December 31, 2020 and December 31, 2019 amounted to approximately $(3.0) million and $(99.9) million respectively. The Company has generated positive cash flows from operations in recent periods and has managed its cost structure, its relationships with licensees and sold non-strategic assets to mitigate the adverse impact of the COVID-19 pandemic on its operating results, liquidity and financial condition. 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. Accordingly, the Company believes there is no longer substantial doubt the Company can continue as an ongoing business for the next twelve months.

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.

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 operations from the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. For further information on the Company’s accounting for joint ventures and investments, refer to Note 4.

Use of Estimates

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any adjustments when necessary.

Cash and Cash Equivalents

Cash and cash equivalents consist of actual cash as well as cash equivalents, defined as short-term, highly liquid financial instruments with insignificant interest rate risk that are readily convertible to cash and have maturities of three months or less from the date of purchase. In addition, as of December 31, 2020, approximately $15.0 million, or 25 %, of our total cash (including restricted cash) was held in foreign subsidiaries. The Company has elected to treat its Luxembourg top tier subsidiary (“Luxco”) for US tax purposes. All the foreign operations under Luxco are treated as a branch for US tax purposes and subject to US taxation. As such, the Company will not have any earnings in foreign subsidiaries that are not currently subject to taxation for US purposes.

Restricted Cash

Restricted cash consists of actual cash deposits held in accounts primarily for debt service, as well as cash equivalents, defined as short-term, highly liquid financial instruments with insignificant interest rate risk that are readily convertible to cash and have maturities of three months or less from the date of purchase, the restrictions on all of which lapse every three months or less.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of short-term cash investments and accounts receivable. The Company places its cash in investment-grade, short-term instruments with high quality financial institutions. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collectability of all accounts receivable.

One customer accounted for 10 % of the Company’s total revenue for the year ended December 31, 2020 (“FY 2020”) as compared to two customers accounting for 12% and 11% respectively, of the Company’s total revenue for the year ended December 31, 2019 (“FY 2019).

Accounts Receivable

Accounts receivable are reported at amounts the Company expects to be collected, net of provision for doubtful accounts, based on the Company’s ongoing discussions with its licensees, and its evaluation of each licensee’s payment history and account aging. As of December 31, 2020 and 2019, the Company’s provision for doubtful accounts was $6.5 million and $14.3 million, respectively.

One customer accounted for 10% of the Company’s accounts receivable as of December 31, 2020 as compared with one customer accounting for 16% of the Company’s accounts receivable as of December 31, 2019.

Derivatives

The Company does not use financial instruments for trading or other speculative purposes. From time to time the Company uses derivative financial instruments to hedge the variability of anticipated cash flows of a forecasted transaction (a “cash flow hedge”). The Company had no such derivative instruments in FY 2020 or FY 2019.

Restricted Stock

Compensation cost for restricted stock is measured using the quoted market price of the Company’s common stock at the date the common stock is granted. For restricted stock where restrictions lapse with the passage of time (“time-based restricted stock”), compensation cost is recognized over the period between the issue date and the date that restrictions lapse. Time-based restricted stock is included in total common shares outstanding upon the lapse of any restrictions. Time-based restricted stock is included in total diluted shares outstanding which is calculated utilizing the treasury stock method.

For restricted stock where restrictions are based on performance measures (“performance-based restricted stock”), restrictions lapse when those performance measures have been deemed earned. Performance-based restricted stock is included in total common shares outstanding upon the lapse of any restrictions. Performance-based restricted stock is included in total diluted shares outstanding when the performance measures have been deemed earned but not issued.

For restricted stock, which is measured based on market conditions, the Company values the stock utilizing a Monte Carlo simulation factoring key assumptions such as the stock price at the beginning and end of the period, risk free interest rate, expected dividend yield when simulating total shareholder return, expected dividend yield when simulating the Company’s stock price, stock price volatility and correlation coefficients. Restricted stock based on market conditions is included in total common shares outstanding upon the achievement of the performance metrics. Restricted stock based on market conditions is included in total diluted shares outstanding when the performance metrics have been deemed earned but not issued.

Treasury Stock

Treasury stock is recorded at acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings.

Deferred Financing Costs

The Company incurred costs (primarily professional fees and placement agent fees) in connection with borrowings under senior secured notes, the Senior Secured Term Loan and the 2016 Senior Secured Term Loan. These costs have been deferred and are being amortized using the effective interest method over the life of the related debt.

Property, Equipment, Depreciation and Amortization

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are determined by the straight-line method over the estimated useful lives of the respective assets ranging from three to seven years. Leasehold improvements are amortized by the straight-line method over the initial term of the related lease or estimated useful life, whichever is less.

Operating Leases

We determine if an arrangement contains a lease at inception. An arrangement contains a lease if it implicitly or explicitly identifies an asset to be used and conveys the right to control the use of the identified asset in exchange for consideration. As a lessee, we include operating leases in Right-of-use (“ROU”) -assets within non-current assets, Other liabilities – Current, and Other liabilities in our consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized upon commencement of the lease based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate based on the estimated rate of interest for fully amortizing borrowings over a similar term of the lease payments at commencement date to determine the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Expenses associated with operating leases are included in “Selling, general and administrative” within our Consolidated Statement of operations. Leases with a lease term of 12 months or less are not capitalized.

Long-Lived Assets

If circumstances mandate, the Company evaluates the recoverability of its long-lived assets, other than goodwill and other indefinite life intangibles (discussed below), by comparing estimated future undiscounted cash flows with the assets’ carrying value to determine whether a write-down to market value, based on discounted cash flow, is necessary.

Assumptions used in our fair value estimates are as follow: (i) discount rates; (ii) royalty rates; (iii) projected average revenue growth rates; and (iv) projected long-term growth rates. The testing also factors in economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances. During FY 2020, the Company recorded an impairment charge of $19.6 million 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 was impacted by the effects of COVID-19 in that market. During FY 2019, the Company recorded an impairment charge in the amount of $17.0 million based on the estimated value that was to be realized on the disposition of the Company’s equity interest in Marcy Media Holdings, LLC, and an $9.6 million (inclusive of a $2.6 million of write off of advances made to the entity) impairment to its investment in MG Icon based on the poor performance of MG Icon. Refer to Note 4 for further details.

Goodwill and Trademarks

Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method of accounting. On an annual basis and as needed, the Company tests goodwill and indefinite life trademarks for impairment utilizing discounted cash flow models. Other intangibles with determinable lives, including certain trademarks, license agreements and non-compete agreements, are evaluated for the possibility of impairment when certain indicators are present, and are otherwise amortized on a straight-line basis over the estimated useful lives of the assets (currently ranging from 1 to 15 years). Assumptions used in our fair value estimates are as follow: (i) discount rates; (ii) royalty rates; (iii) projected average revenue growth rates; and (iv) projected long-term growth rates. The testing also factors in economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances. The Company did not record any impairment charges for goodwill for FY 2020 and FY 2019, respectively. In the FY 2020 and FY 2019, the Company recognized non-cash impairment charge for trademarks of $35.1 million and $65.6 million, respectively. Refer to Note 3 for further details.

Non-controlling Interests / Redeemable Non-controlling Interests

Certain of the Company’s consolidated joint ventures have put options which, if exercised by the Company’s joint venture partner, would require the Company to purchase all or a portion of the joint venture partner’s equity interest in the joint venture. The Company has determined that these put options are not derivatives under the guidelines prescribed in Accounting Standards Codification (“ASC”) 815. As such, and in accordance with ASC 480-10-S99, as the potential exercise of the put options is outside the control of the Company, the Company has recorded the portion of the non-controlling interest’s equity that may be put to the Company in mezzanine equity in the Company’s consolidated balance sheets as “redeemable non-controlling interest”. The initial value of the redeemable non-controlling interest represents the fair value of the put option at inception. This amount recorded at inception is accreted, over a period determined by when the put option becomes exercisable, to what the Company would be obligated to pay to the non-controlling interest holder if the put option was exercised. This accretion is recorded as a credit to redeemable non-controlling interest and a debit to retained earnings resulting in an impact to the consolidated balance sheet only. For each reporting period, the Company revisits the estimates used to determine the redemption value of the put option when it becomes exercisable and may adjust the remaining put option value and associated accretion accordingly through redeemable non-controlling interest and retained earnings, as necessary. The terms of each of the outstanding put options are included in the individual discussions of each joint venture, as applicable. For the Company’s consolidated joint ventures that do not have put options, the non-controlling interest is recorded within equity on the Company’s consolidated balance sheet.

Revenue Recognition

The Company enters into various license agreements that provide revenues based on minimum royalties and advertising/ marketing fees and additional revenues based on a percentage of defined sales. Minimum royalty and advertising/ marketing revenue is recognized on a straight-line basis over the full contract term. Minimum royalties that escalate on an annual basis over the contract term are recognized on a straight-line basis over the full contract term. 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).

Foreign Currency

The Company’s consolidated joint ventures’ functional currency is U.S. dollars. The functional currencies of the Company’s international subsidiaries are the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive income (loss).

Taxes on Income

The Company uses the asset and liability approach of accounting for income taxes and provides deferred income taxes for temporary differences that will result in taxable or deductible amounts in future years based on the reporting of certain costs in different periods for financial statement and income tax purposes. Valuation allowances are recorded when uncertainty regarding their realizability exists.

Earnings (Loss) Per Share

Basic earnings (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, vesting of restricted stock, and potential conversion of our convertible debt. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options, convertible debt and restricted stock outstanding were exercised into common stock.

We may be required to calculate basic earnings (loss) per share using the two-class method as a result of the Company’s redeemable non-controlling interests. To the extent that the redemption value increases and exceeds the then-current fair value of a redeemable non-controlling interest, net (loss) income attributable to Iconix Brand Group, Inc. (used to calculate earnings (loss) per share) could be negatively impacted by that increase, subject to certain limitations. The partial or full recovery of any reductions to net (loss) attributable to Iconix Brand Group, Inc. (used to calculate earnings (loss) per share) is limited to any cumulative prior-period reductions. Refer to Note 10 for further details.

Advertising Campaign Costs

Advertising costs such as print and online media are expensed when the advertisement first occurs. Advertising expenses for FY 2020 and FY 2019 amounted to $5.5 million, and $13.7 million, respectively.

The Company also incurs co-operative advertising costs that represent reimbursements to certain licensees for shared marketing expenses related to the sale of its products. In accordance with ASC 606, these reimbursements are recorded as a reduction to licensing revenue.

Comprehensive Income (Loss)

Comprehensive income (loss) includes certain gains and losses that, under U.S. GAAP, are excluded from net income (loss) as such amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s comprehensive income (loss) is primarily comprised of net income (loss), and foreign currency translation.

New Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13 – Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions and held-to-maturity debt securities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Management is currently evaluating the impact of this ASU on its consolidated financial statements.

In February 2017, the FASB issued ASU No. 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.

Correction of Immaterial Errors

During the fourth quarter of FY 2020, the Company determined certain income tax transactions as well as previously identified expense and equity transactions were incorrectly recorded by the Company in the fourth quarter of FY2019 in the Company’s consolidated financial statements and have been corrected in the consolidated financial statements included in this Form 10-K. Management evaluated the materiality of these errors from a quantitative and qualitative perspective and concluded that the adjustments related to these transactions individually and in aggregate were not material to any of the Company’s previously issued financial statements and disclosures. However, the cumulative impact of these out-of-period adjustments were material to the financial statements for the three and twelve months ended December 31, 2020. Accordingly, no amendments to previously filed reports are deemed necessary. A summary of the effects of these revisions for FY 2019 and 2020 quarterly financial statements are presented below. The information in the tables below represent the statement of operations and balance sheet line items affected by the revisions. There was no impact to net cash provided by operating activities in in any period. The financial information included in the accompanying financial statements and notes thereto reflect the effects of the corrections and other adjustments described in the preceding discussion and following tables.

Revised Consolidated Statement of Operations (in thousands, except earnings per share data)
	For the Twelve Months Ended December 31, 2019
	As Reported			Adjustments			As Revised
Selling, general and administrative expenses	$	83,996		$	752		$	84,748
Operating Income (loss)		(30,780	)		(752	)		(31,532	)
Interest expense		57,264			(343	)		56,921
Loss before income taxes		(93,833	)		(409	)		(94,242	)
Provision for income taxes		8,083			(2,400	)		5,683
Net loss		(101,916	)		1,991			(99,925	)
Net loss per share - basic and diluted	$	(10.56	)	$	0.19		$	(10.37	)

Revised Consolidated Balance Sheets (in thousands)
	December 31, 2019
	As Reported			Adjustments			As Revised
Accounts payable and accrued expenses	$	51,503		$	(1,991	)	$	49,512
Total current liabilities		131,955			(1,991	)		129,964
Redeemable Non-Controlling Interest		34,461			(1,392	)		33,069
Accumulated deficit		(429,117	)		1,991			(427,126	)
Non-Controlling Interest		26,521			1,392			27,913
Total Stockholders' Deficit		(256,359	)		3,383			(252,976	)

Revised Consolidated Statement of Operations (in thousands, except earnings per share data)	For the Three Months Ended March 31, 2020
	As Reported			Adjustments			As Revised
Interest expense	$	16,713		$	343		$	17,056
Net loss		(20,658	)		(343	)		(21,001	)
Net loss per share - basic and diluted	$	(1.86	)	$	(0.03	)	$	(1.89	)

Revised Consolidated Statement of Operations (in thousands, except earnings per share data)	For the Three Months Ended June 30, 2020
	As Reported			Adjustments			As Revised
Selling, general and administrative expenses	$	14,978		$	(216	)	$	14,762
Operating Income (loss)		3,549			216			3,765
Net loss		(15,680	)		216			(15,464	)
Net loss per share - basic and diluted	$	(1.46	)	$	0.02		$	(1.44	)

Revised Consolidated Statement of Operations (in thousands, except earnings per share data)	For the Six Months Ended June 30, 2020
	As Reported			Adjustments			As Revised
Selling, general and administrative expenses	$	32,128		$	(216	)	$	31,912
Operating Income (loss)		(1,303	)		216			(1,087	)
Interest expense		33,760			343			34,103
Net loss		(36,339	)		(127	)		(36,466	)
Net loss per share - basic and diluted	$	(3.32	)	$	(0.01	)	$	(3.33	)

Revised Consolidated Statement of Operations (in thousands, except earnings per share data)	For the Nine Months Ended September 30, 2020
	As Reported			Adjustments			As Revised
Selling, general and administrative expenses	$	42,043		$	(216	)	$	41,827
Operating Income (loss)		65,047			216			65,263
Interest expense		52,249			343			52,592
Net Income (loss)		10,363			(127	)		10,236
Earnings (loss) per share - basic	$	0.55		$	(0.01	)	$	0.54
Earnings (loss) per share - diluted	$	0.37		$	—		$	0.37

Reclassifications

During the current year certain reclassifications, which were immaterial, have been made to conform prior year data to the current presentation. During FY 2019, the Company also made a reclassification between redeemable noncontrolling interest and noncontrolling interest.