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Tick. Tock.

This story first appeared in the January 6, 2016 issue of WWD. Subscribe Today.

The clock is ticking for Iconix Brand Group Inc. and its previous top management, led by former chief executive officer Neil Cole. The company has until June to complete a refinancing of its $300 million debt obligation — and will have to do it with the specter of a formal Securities and Exchange Commission investigation, stock price fall, management turmoil, shareholder lawsuits alleging securities law violations and a string of earnings restatements casting shadows over its operations.

The quintuple whammy has some whispering the dreaded “b” word — bankruptcy — and while that seems a long shot, there is no doubt that Iconix faces some major hurdles. One of the biggest is that the whole business model on which the company was founded by Cole and his former financial adviser, Robert D’Loren, might be extinct.

Another is that Cole has tangled with the SEC once before, settling claims of accounting fraud at his previous firm Candie’s Inc., which became Iconix. And once on the SEC’s radar, it’s hard to get off of it.

To some extent, the group’s troubles can be traced back to July 1, 2005, when Candie’s changed its name to Iconix. That transformed Candie’s from an operating company focused on footwear and apparel manufacturing into a brand management firm that eventually would grow to oversee 35 brands, either through direct ownership of the intellectual property assets or through investment interests. They include Candie’s, Joe Boxer, Badgley Mischka, Rampage, Umbro, Mossimo, Ocean Pacific, Rocawear, Lee Cooper, London Fog, Danskin, Ed Hardy, Strawberry Shortcake and Peanuts.

Cole was chairman and ceo of Candie’s. An attorney, he grew up watching his late father, Charles, and his brother, Kenneth, build the family firm El Greco into a footwear powerhouse, partially on the back of the success of the Candie’s brand. He joined the family business in 1982, eventually acquiring El Greco from Pentland Group in June 1991. Cole took the company public in February 1993 by selling 1.5 million shares at $5 a share. Intense and driven to succeed, Cole connected with D’Loren, who headed up UCC Capital. He helped Cole secure financing for Candie’s in 2003 through a $20 million securitization of the brand’s intellectual property.

D’Loren, who now runs Xcel Brands, is said to have come up with the idea of brand management, transferring the model used in entertainment licensing over to the fashion industry. But if you talk to Cole, the idea for the transformation was all his.

Critics of Cole claim that, aside from ego clashes with D’Loren, he never fully understood the business model. One person familiar with the structure said, “The key for [Cole] has to be really understanding the brand life cycle. If you’re purely a garmento — like he is — he doesn’t.”

The critics emphasized that the model — the one that served as the underlying basis for the formation of Iconix — was set up with the intent that intellectual property assets would be acquired and licensed out for a set period until the brand lived out its usefulness. By then, the brand management firm would be on to the next big thing in fashion IP land. Given that, the model demands that a company make regular acquisitions so newer businesses, with a still robust royalty pipeline, can offset the slowing revenue streams from older assets nearing the end of their shelf lives.

Cole was able to keep the cycle going, buying one IP asset after another, until the mergers and acquisitions well ran dry. The economic crisis that began at the tail end of 2007 didn’t help, which had both sellers waiting for better economic times to get higher valuations on assets and consumers pulling back on their spending.

By the time the M&A drought became evident, Iconix had partially shifted from buying IP to selling stakes in its assets to joint ventures. Then came questions about how it accounted for those sales transactions.

That appears to be where the SEC comes in. Sources told WWD that the current query began in March or April, with Iconix disclosing in August that it was in a “comment letter process” dialogue with the SEC. It’s unclear what actually triggered the SEC’s attention. There are rumblings in the fashion industry that a whistle-blower might have sparked the query. Iconix may have been on the SEC’s radar ever since July 2013 when the commission allowed the company to treat certain financial information as confidential. The SEC in November 2013 said it had questions regarding Iconix’s annual report, or Form 10-K, for 2012. In December 2013, the agency questioned the accounting in the 10-K for 2012, but then said in January 2014 it completed its review.

A December 2014 research report by Off Wall Street took a deep dive into Iconix’s filings, and suggested questionable accounting practices. That report contended there were questionable onetime gains, booking revenue gains on joint venture transactions that flowed directly to pretax income and reclassifying aged account receivables into “other assets,” which in turn allegedly allowed Iconix to reflect higher earnings and avoid having bad-debt expenses. It also highlighted that the company hedged transactions with investment banks on its convertible bonds, suggesting that there was an incentive to keep the stock price down because the company would be hurt if the stock went over $35.56 for the $400 million note due in 2018 and over $40.62 for the $300 million note due June 2016.

In addition, there were the 1 million shares that Cole sold for $40 million on Oct. 31, 2014, three days after the company posted third-quarter earnings that included $179.8 million in free cash flow. Cole’s share sale was completed seven days before Iconix filed its third-quarter report, or Form 10-Q, with the SEC.

The free cash-flow amount came up in the Off Wall Street report, which noted that Iconix’s Sept. 30, 2014 quarterly report included a questionable onetime gain of $62.7 million, as well as a new line item on the company’s cash-flow statement with a negative $44.9 million classified as “gains on sale of trademarks,” although that amount allegedly wasn’t subtracted from the $179 million free cash-flow total.

There have been other reporting instances that bring into question how realistic, and reasonable, some of the company’s estimated projections might be. Take the February 2014 transaction where Iconix paid $42 million to buy back the 50 percent stake in its rights in Latin America for certain brands it sold to Falic Group in 2012 for $10 million. The company posted a $37.9 million noncash gain, instead of a $32 million loss, after revaluing the fair market value of the “new” acquisition. That revaluation boosted the value of the 50 percent interest that Iconix owned before the reacquisition of the stake it sold to Falic.

That’s where calculating fair market value can be an art form that’s truly subjective, according to Ron Friedman, who heads up the national retail and consumer products industry group at national accounting and consulting firm Marcum LLP. “Valuations for goodwill, which can be trademarks, can increase. You have to do an analysis that includes a projection on cash flow based on what [one] thinks the potential revenue will be. It’s an estimate. And one can make an estimate on projected licenses, even if they are not signed yet,” Friedman said.

According to Iconix, the SEC letter process involved the accounting treatment for the formation of the firm’s international joint ventures under generally accepted accounting principles. The company recognized gains surrounding the formation of the ventures ­­— $46.5 million in 2014, $24.6 million in 2013 and $5.6 million in 2012 — and the question is whether they should have been consolidated, which would require the gains to be reversed and treated as non-controlling interests. The firm has joint ventures in Canada, India and Southeast Asia, to name a few.

Apparently trying to get ahead of the matter, Iconix said in November it would restate its results for some of those years and part of 2015. That didn’t seem enough for the SEC, though, which late last month told the company that its probe had been stepped up to the level of a formal investigation. Now the SEC’s staff can utilize its subpoena power to compel individuals — including Cole — to testify as well as produce documents to help it with its fact-finding mission. According to a former federal prosecutor, formal orders that are issued tend to be “broadly written. The SEC staff will want as much flexibility as possible.” Subpoena power is limited to what is authorized in the formal order.

Paul Hessler, a partner in the New York office of the Linklaters law firm, said, “At this stage it is very difficult to tell whether the SEC thinks that something that was done was illegal or not because the investigations are private.” Hessler emphasized that the issuance of an order of investigation should not be read as indicative of a belief by the SEC staff of any wrongdoing.

Hessler said if there’s a preliminary conclusion that further action is warranted, the targets will then be sent a so-called Wells Notice. That letter says the commission plans on bringing a civil enforcement action, and the targets are given an opportunity to detail why the action isn’t necessary. If the SEC staff pushes for a civil action, the matter would go before the full commission for a decision on whether to go ahead with the staff’s recommendation.

A finding that boundaries were pushed beyond what’s allowed under GAAP rules is clearly a negative. But a reliance on the advisement of outside service professionals, such as accountants who said the treatment used is appropriate — and given with impartiality and without any conflict of interest — can be a very good ground of defense, Hessler said, noting that the probe can take a “minimum of several months or even a year or more, since it will involve delving into the minutiae of accounting rules.”

A former federal prosecutor said unless something major happened — “it has to be really egregious….[such as] someone knew the evidence was wrong or there was a cover-up” — the investigation is likely to remain a civil matter. That’s because a recommendation to the Department of Justice that it should consider a criminal probe typically puts the SEC civil matter on hold. Civil settlements, which are before a federal court or an administrative law judge, “very often involve cease and desist orders, sometimes accompanied by a fine. You could also have a particular officer barred permanently or for a period of time,” said the attorney.

Not helping the matter is Cole’s past history with the SEC, observers said.

In April 2003, he settled SEC claims of accounting fraud at Candie’s, without any denial or admission of wrongdoing. Candie’s had been under investigation since July 1999, but the alleged accounting fraud was from August 1997 until the spring of 1999, according to the SEC complaint, which said the company had prematurely recognized revenue as well as artificially inflated revenue in two instances by entering into illusory sales transactions.

“An individual with similar issues in the past, whether proven or not, is a fact relevant in looking at [the new] matter holistically in determining whether or not there might be grounds [to look again]. It doesn’t mean that something similar happened again,” Hessler said.

Cole didn’t stick around at Iconix to ride the current SEC investigation out, though — or the board didn’t want him to. In August, he became the third c-level executive to resign from the company, adding further to the turmoil at Iconix. The exits began in March 2014 with the resignation of Jeff Lupinacci, the firm’s chief financial officer. Seth Horowitz, chief operating officer, left a month later. Iconix said the departures of Lupinacci and Horowitz are unrelated.

Cole walked away well compensated, receiving $5 million on his resignation from the company. That was part of the employment agreement he signed in 2011 after a year of negotiation, which made 79 percent of his compensation performance-based pegged to reaching earnings before interest, taxes, depreciation and amortization targets. He received $3 million simply for signing the agreement.

Peter Cuneo, a board member, in August became Iconix’s chairman and interim ceo. Since then, the company has restated its financial statements for fiscal 2013 and the fourth quarter; fiscal 2014 and each quarter in the fiscal year, and the first and second quarters of fiscal 2015. The firm has also twice reset guidance for full-year 2015 since he took over. In November, licensing revenue guidance was pegged at $370 million to $380 million, lower than the $410 million to $425 million projected in August and far lower than the $490 million to $510 million estimated in April when Cole was still in charge.

For now, the immediate pressure remains the $300 million cash payment when its 2016 June convertible note matures. And at this point Iconix doesn’t have the money to pay that obligation.

In a regulatory filing connected with its last annual statement, a Form 10-K, the company cautioned: “We may not be able to pay the cash portion of the conversion price upon any conversion of the principal amounts of our convertible notes, which would constitute an event of default with respect to such notes and could also constitute a default under the terms of our other debt.”

More recently, David K. Jones, the company’s cfo, said during a November conference call to Wall Street analysts that the company ended the third quarter with “$188 million of cash, of which $110 million is in the U.S. and $78 million is international. Of the $110 million in the U.S., $52 million is restricted for the terms of our securitized notes.” He said the convert is the company’s top priority, and between existing cash, free cash-flow generation through June and ability to access the financial markets, the company “will have the ability to satisfy this debt obligation.”

Iconix has hired Guggenheim Securities to help it refinance the notes. A Guggenheim executive declined comment. Board members who were contacted also declined comment.

While bankruptcy seems an extreme solution at this point, the company could lose its institutional support should shares of the stock fall below $5. The largest private-equity shareholders in Iconix all declined comment. The largest, Huber Capital Management, owns 11 percent of the outstanding stock. It added to its position by almost 3.1 million shares per its SEC Form 13F filings in August and November, and now owns 5.5 million shares. The average stock price during that time was $14.50, and the stock now is in the $6.85 trading range, so Huber has potentially lost $23.4 million on the 3.1 million shares it recently acquired.

It was learned after press time for this story that Mike Ashley’s Sports Direct International, a U.K. sports retailer, has acquired an indirect economic interest in 4.3 million Iconix shares, or 9 percent of the company, according to a filing with the SEC on Jan. 5. Ashley, who owns Newcastle United Football Club, has a long-standing interest in Iconix’s Umbro brand.

Even as the pressure mounts on Iconix, there appears to be no panic yet — at least in the bond markets. The June 2016 bonds are trading at 90 cents on the dollar, although the 2018 bonds are another story, trading closer to 54 cents on the dollar. That suggests sentiment calling for higher risk, a belief by some that perhaps the company might not be around in two years to pay off that bond.

Kevin Starke, credit analyst at CRT Capital Group, wrote in a research note, “Given the elevated risks, and credit-market volatility generally, [Iconix] is likely being driven into distressed lender hands.”

Looking ahead, things could get even tougher for the beleaguered firm. While Iconix completed those financial restatements in November, the company also has warned that certain intangible assets related to its men’s fashion brands could be impaired. Cuneo said in November that revenue for the men’s fashion and men’s sports brands were down 17 percent in the quarter. “Our Ecko and Rocawear brands were two of the largest causes of the decline. However, Rocawear, Ecko and Ed Hardy only represent 4 percent of our total licensing revenue so that any further decline should not have a large impact on our overall business,” he said.

Executives on the third-quarter conference call to Wall Street analysts quantified the revenue reduction in the men’s fashion brands at $4 million. David M. Blumberg, executive vice president and head of strategic development, said the business has “become a very small part of our revenue, but hopefully can have good growth opportunities over the next few years.” He added that a new manager was brought in for the men’s fashion division and that Rocawear has a new core licensee.

With the clock clearly ticking away, whether Iconix can turn around its fortunes is being debated. Right now, it probably could use an acquisition that could really move the needle and reassure investors that Cole’s model still works. Instead, the company’s immediate concerns are the bond payment while both it and its former ceo have to worry about what might turn up in the ongoing SEC investigation.

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