Equity Method Investment |
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Jul. 29, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Method Investments and Joint Ventures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Method Investment |
The following table is a summary of the Company’s equity method investment with WHP:
The Company accounts for its 40% economic interest in the Joint Venture, through which it exercises significant influence but does not have control over the investee, under the equity method. Under the equity method, the Company records its investment in the investee on the balance sheet initially at cost, and subsequently adjusts the carrying amount based on its share of the investee's net income or loss. Royalty distributions received from the investee are recognized as a reduction of the carrying amount of the investment. The Company's share of equity (income) losses and other adjustments associated with this equity method investment is included in royalty income in the unaudited Consolidated Statements of Income and Comprehensive Income. The carrying value for the Company's equity investment is reported in Equity Method Investment on the unaudited Consolidated Balance Sheets. The Company reports its share of earnings using a one-month lag because results are not available in time for it to record them in the concurrent period. This convention has not historically materially impacted the Company's results. Equity Method Investment with WHP On January 25, 2023, the Company closed the strategic partnership transaction with WHP. In connection with the closing of this transaction, the Company and WHP formed the Joint Venture. The Company contributed certain intellectual property of the Company in exchange for 40% ownership of the Joint Venture and $235.0 million. WHP paid the $235.0 million for a 60% ownership of the Joint Venture, implying a fair value of the Company’s 40% interest in the Joint Venture of approximately $156.7 million. During the fourth quarter of 2022, under the derecognition guidance from Accounting Standards Codification ("ASC") Topic 810, Consolidation, the Company derecognized the intellectual property assets at their carrying amount upon their contribution to the Joint Venture. Because the carrying amount of the contributed intellectual property assets was zero, a $391.7 million gain was recognized at the time of contribution, of which $156.7 million was related to the Company’s 40% interest in the Joint Venture. The gain was recorded in gain on transaction with WHP on the Consolidated Statements of Income and Comprehensive Income. Transaction costs capitalized in the cost of the equity method investment totaled $9.4 million. Separately, on December 8, 2022, the Company and WH Borrower, LLC, an affiliate of WHP ("WH Borrower) entered into an investment agreement (the “Investment Agreement”) pursuant to which the Company issued and sold 5.4 million newly issued shares of Common Stock to WH Borrower in private placement for a purchase price of $4.60 per share, or an aggregate purchase price of approximately $25.0 million, representing an approximate pro forma ownership of 7.4% of the outstanding shares of Common Stock. The difference between the purchase price paid and the trading price of the Common Stock on the day of the completion of the transaction resulted in a gain of $17.8 million and was recorded in gain on transaction with WHP on the Consolidated Statements of Income and Comprehensive Income. In connection with the strategic partnership with WHP, on January 25, 2023, the Company and the Joint Venture entered into an Intellectual Property License Agreement (the “License Agreement”). The License Agreement provides the Company with an exclusive license in the United States to the intellectual property contributed in connection with the membership interest purchase agreement and certain other intellectual property. The initial term of the License Agreement is 10 years, and the License Agreement automatically renews for successive renewal terms of 10 years (unless the Company provides notice of non-renewal at least 24 months prior to the end of the initial or applicable renewal term). Except for the Company’s right not to renew the License Agreement, the License Agreement is not terminable by either party. The Company will pay the Joint Venture a royalty on net sales of certain licensed goods and will commit to an annual guaranteed minimum annual royalty during the term of the License Agreement (i.e., $60.0 million in the first contract year, increasing by $1.0 million per year for the next contract years, and remaining at $65.0 million following the sixth contract year). The Company will pay the Joint Venture royalties at a rate of (i) 3.25% of net sales arising from retail sales of certain licensed goods in the first through fifth contract years (and 3.5% thereafter), and (ii) 8% of net sales arising from wholesale sales of such goods. The Company prepaid the Joint Venture’s first contract year guaranteed minimum royalty of $60.0 million with a portion of the transaction proceeds, which was recorded as a prepaid royalty on the Consolidated Balance Sheets. Pursuant to the agreement governing the operations of the Joint Venture (the “Operating Agreement”), cash earnings of the Joint Venture will be distributed quarterly to the Company and WH Borrower on a pro rata basis based on their respective equity ownership interests. As the Chairman and Chief Executive Officer of WHP was appointed to the Company’s board of directors upon the closing of the Investment Agreement discussed above, the agreements entered into in connection with the WHP strategic partnership transaction, including the Operating Agreement, the Investment Agreement and the License Agreement (including related royalty payments) are considered related party transactions. During the thirteen and twenty-six weeks ended July 29, 2023, the Company recognized $6.2 million and $10.6 million of royalty income, respectively, from the Joint Venture, which is recorded in royalty income in the unaudited Consolidated Statements of Income and Comprehensive Income. Summary Financial Information for Equity Method Investment Summarized financial information related to the Company's equity method investment on a one-month lag is reflected below:
1.Reflects a one-month lag
1.Reflects a one-month lag
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