Business news : Sequential Brands Shows Steep Q1 Loss on Charges

Sequential Brands Group, Inc., the parent of DVS and Heelys, showed a loss of $21.5 million, or $2.96 a share, largely due to charges tied to non-recurring charges related to its acquisitions of Heelys, Ellen Tracy and Caribbean Joe.

Total revenue from continuing operations for the three months ended March 31, 2013 increased 54 percent to approximately $1.6 million, as compared to approximately $1.1 million, in the prior year quarter.

The Company incurred certain costs in the quarter that are either not representative of the Company's ongoing business or are unusual in nature, including: (i) a loss from discontinued operations related to the wind down of the Heelys legacy operating business totaling $3.9 million; (ii) deal related costs incurred in connection with the Heelys, Ellen Tracy and Caribbean Joe acquisitions that closed in the quarter totaling $2.4 million; (iii) non-cash tax expense of $2.3 million; and (iv) non-cash interest expense of $11.6 million related to the conversion of the Tengram Convertible Notes to equity.

Therefore, on an adjusted non-GAAP basis, without giving effect to the unusual loses, taxes, costs and expenses noted above, the company's net loss was approximately $1.4 million, or approximately 20 cents per share, for the three months ended March 31, 2013, as compared to net loss of approximately $0.1 million, or approximately $0.03 per share, in the prior year quarter.

The Company's wind down costs of $3.9 million, which are included in discontinued operations, relate to the Heelys legacy operating business, and were an anticipated cost of acquisition. The cost of the wind down will be offset by the cash the Company is expected to generate from the liquidation of the net assets that were acquired in connection with the acquisition.

The non-cash tax expense of $2.3 million is related to the deferred tax expense created by the amortization of certain trademarks for tax, but not book purposes. Although the Company will continue to recognize deferred tax expense in the normal course of business, it is unusual for a company to have a material non-cash tax expense in a quarter that it is reporting a loss.

The non-cash interest expense of $11.6 million is a result of the amortization of the remaining debt discount of $11.0 million and deferred finance fees of $0.6 million recorded in connection with the Tengram Convertible Notes. The debt discount was a result of the beneficial conversion feature the Company recorded at the inception of the Tengram Convertible Notes, which were not issued at an actual cash discount to the face amount of the notes.

Net loss on a GAAP basis was approximately $21.5 million for the three months ended March 31, 2013, or $2.96 per share, as compared to approximately $0.4 million, or approximately $0.18 per share, in the prior year quarter.

Gary Klein, Sequential's CFO, stated, "Our financial results for the first quarter are not reflective of our business going forward as they do not include any revenue and benefit related to the Ellen Tracy and Caribbean Joe acquisitions, which closed on the last day of the quarter, and include only two months of revenue related the Heelys acquisition, which closed on January 24th of this year. We expect our margins and profitability to improve for the balance of the year as we begin to recognize the revenues associated with these acquisitions. Furthermore, we expect the revenue to be weighted to the fourth quarter as a normal reflection of the timing of our licensees' businesses."

Yehuda Shmidman, Sequential's CEO, commented, "We are very pleased with Sequential's start to 2013. In the first quarter, we strengthened our balance sheet with an equity raise, we doubled our portfolio with the acquisition of three new brands, and we overhauled our internal brand management team. Looking ahead, Sequential's six brands are expected to generate close to $25 million of royalty revenue on a twelve-month forward looking basis from over 50 licensees. With this core brand management platform in place, we are optimistic about our opportunities to grow our portfolio both organically and through new brand acquisitions." Mr. Shmidman added, "Sequential has gone through a complete transformation over this past year, and with that process now fully behind us, we are truly excited about our future ahead as a leading brand management organization."

Sequential Brands' brands include William Rast(R), People's Liberation(R), DVS(R), Heelys(R), Caribbean Joe(R) and Ellen Tracy(R).

Source Sequential Brands group through SportsOneSource

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