Sequential Brands Group, Inc.

About

Sequential Brands Group, Inc. owns a portfolio of consumer brands in the fashion, home, athletic and lifestyle categories. The Company’s portfolio of consumer brands includes Martha Stewart, Emeril Lagasse, Jessica Simpson, Joe’s Jeans, William Rast, Ellen Tracy, Revo, AND1 and Avia. The Company’s brands are licensed for a range of product categories, including apparel, footwear, eyewear, fashion accessories and home goods. The Company licenses brands to both wholesale and direct-to-retail licensees. The Company licenses the Martha Stewart brand to various licensees, including retailers, such as Macy’s, The Home Depot, PetSmart and Staples. The Jessica Simpson Collection is a signature lifestyle concept designed in collaboration with Jessica Simpson, which offers various product categories, including footwear, apparel, fragrance, fashion accessories, maternity apparel, girls clothing and a home line. The Avia brand offers running and activewear products.-10K

4/17/2019: Martha Stewart and Emeril Lagasse brands being sold. See Corporate Highlights.

Corporate Highlights

4/17/2019: Company announces sale of Martha Stewart and Emeril Lagasse brands.

Sequential Brands Group Inc. announced that it has signed a definitive agreement to sell the rights to the Martha Stewart and Emeril Lagasse brands and related intellectual property assets to Marquee Brands LLC for an estimated $175 million with an earn-out opportunity of up to an additional $40 million…The company plans to use a substantial portion of the proceeds from the transaction to pay down debt.

Article: Sequential bought the Martha Stewart and Emeril Lagasse brands four years ago for an estimated $355 million. Lagasse’s brand was acquired by Martha Stewart Living Omnimedia seven years before the Sequential deal.

3/6/2019: Company reports IVQ 2018 and full year results.

“Total revenue for the quarter was $49.9 million, compared to $46.9 million in the prior year’s quarter. Net loss on a GAAP basis for the fourth quarter of 2018 was $1.2 million or $0.02 per diluted share, which includes a $3.2 million expense related to a legacy litigation matter. This compares to a net loss of $162.9 million or $2.58 per diluted share in the fourth quarter of 2017. Non-GAAP net income for the fourth quarter was $9 million or $0.14 per diluted share, compared to $7.8 million or $0.12 per diluted share in the prior year’s quarter…We closed the fourth quarter 2018 with $16.1 million of cash including restricted cash and $618.7 million of debt net of cash. As we mentioned previously, For full year 2019 we expect low-single digit growth for both revenue and adjusted EBITDA.Adjusted EBITDA … for the fourth quarter 2018 was $25.0 million…Adjusted EBITDA for the year ended December 31, 2018 was $91.5 million”.

Note: Total debt outstanding: $610mn.

1/16/2019: From 10-K:.. We received a letter from the Nasdaq notifying us that we were not in compliance with Nasdaq’s requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2), because for a period of 30 consecutive business days the bid price of our common stock had not closed at or above the minimum of $1.00 per share.  On February 14, 2019, we received a letter from Nasdaq indicating that we had regained compliance with the rule because the closing bid price of our common stock was at or above $1.00 per share for a minimum of 10 consecutive business days.  However, we cannot assure you that the trading price of our common stock will exceed Nasdaq’s minimum bid price in the future.  If our stock price again falls below $1.00 for 30 consecutive business days, we will receive a new notice from Nasdaq.  If we fail to meet the minimum bid price and do not or cannot otherwise regain compliance, our common stock may be delisted from Nasdaq.

12/4/2015: According to news reports, Martha Stewart brand acquired by Company.

BDC Credit Reporter View

4/19/2019: There is no immediate threat of default or bankruptcy at publicly traded Sequential Brands, which has been on our Watch List since 2015. Most recently, the Company sold off two of its most famous brands which will generate proceeds that will likely reduce total debt from the $610mn at year end 2018 by more than a quarter. Much of that will reduce BDC debt exposure, which amounted to $285mn. At its peak BDC exposure was close to $400mn, so that’s progress. However, anybody who reviews the latest 10-K – as we have done – or notices that the stock price is so low as to likely result in de-listing from NASDAQ, must worry about the full repayment of the full BDC stakes in first lien, second lien and equity. Before the Martha Stewart sale, debt to EBITDA was already running at over 6.0x. Fixed charges – interest and principal – amounts to $90mn a year, while adjusted EBITDA in 2018 was $92mn. With the parlous state of retail and the higher concentration of brands now two key names have gone, the Company does not have much room for maneuver. The stock price, which used to trade at $17 a share in 2015 – around the time BDC exposure began – now trades under a dollar. Remarkably, the BDCs involved continue to mark their first lien debt outstanding at par or better, including AINV with a $13mn second lien debt. The $10mn invested in equity back in the Good Old Days, though, has no real value, judging by the stock price. We can readily envisage a situation where a default would occur requiring a restructuring or bankruptcy. That would put paid to the equity and the second lien ($23mn of Realized Losses) and even the first lien Term debt – which has to contend with a pari passu or structurally senior Bof A Term Loan and Revolver, may require a haircut. What used to be  a “very comfortable” investment – in the words of a senior portfolio manager at what is now FSK back in 2016 – is now making us very uncomfortable.

Highlights

IVQ 2018: Discount on equity investment (94%). Highest in investment history. Maintain rating of CCR 3.

IIIQ 2018: Both first lien and second lien reduced.  2022 debt refinanced with new 2024 debt, both first and second lien. Total exposure: $297mn.

From Company 2018 10-K: “The Company used a portion of the proceeds of the $335.0 million loans made to theCompany under the New Amended BoA Credit Agreement to prepay loans under the Amended FS/KKR Credit Agreement”.

In CC: “At the beginning of the third quarter, we closed on the refinancing of our debt facilities with Bank of America and KKR. The refinancing extended the maturities under our first and second lien facilities through 2023 and 2024 respectively, lowered our weighted average interest rate and improved our covenant flexibility”.

IIIQ 2016: Debt refinanced with 2022 first lien debt. Equity remains discounted.  AINV adds $17mn second lien loan. Total exposure: $398mn.

From AINV CC 11/08/2016: We invested $17.6 million in the second lien debt of Sequential Brands to support an acquisition.

From Company 10-K: “The Company used a portion of the proceeds of the $287.5 million loans made to the Company under the Amended BoA Credit Agreement and the $415.0 million loans made to the Company under the Amended GSO Credit Agreement [FS Investment ] to fund the payment of the purchase price with respect to the acquisition of the Gaiam Brand Holdco, LLC and costs and expenses incurred in connection with such acquisition and related transactions”.

IVQ 2015: Valuation of equity reduced by 50%. Added to Watch List : CCR 3. Total debt exposure increases to $368mn.

IIIQ 2015: FS Investment lenders add $10mn equity investment, valued at par.

From FSK CC 11/09/2015: “Sequential has made multiple acquisitions, including the Joe’s Jeans Brand and a majority interest in Jessica Simpson Brand which have significantly grown the business, and enhanced our credit. During the fourth quarter, we expect to close on our fourth financing with the company”.

IIQ 2015: BDC exposure increases to $160mn and 2020 debt replaced with 2021 first lien loan.

IIIQ 2014: BDC exposure initiated with $90mn invested by 3 FS Investment funds in 2020 second lien debt.