Xcel Brands, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Xcel manages and licenses consumer brands and also sells wholesale and directly to consumers. Its portfolio includes Isaac Mizrahi, Judith Ripka, Halston, C Wonder and Highline Collective. In February 2019, it acquired Halston and Halston Heritage trademarks and related intellectual property.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $10.301 million | $8.766 million |
| Net revenue, after cost of goods sold | $8.469 million | $8.586 million |
| Operating income | $0.681 million | $1.212 million |
| Net income | $0.127 million | $0.500 million |
| Diluted EPS | $0.01 | $0.03 |
| Operating cash flow | $1.232 million | $1.569 million |
| Adjusted EBITDA (non-GAAP) | $2.014 million | $2.163 million |
- Licensing revenue was $7.863 million, down from $8.481 million. Product sales were $2.438 million, versus $0.285 million; higher apparel wholesale and Judith Ripka e-commerce sales drove the increase.
- Cost of goods sold rose to $1.832 million from $0.180 million as wholesale sales expanded. Operating expenses increased to $7.788 million from $7.374 million, primarily due to higher intangible amortization.
- Operating margin on net revenue was approximately 8.0%, versus 14.1% in Q1 2018. Net income fell despite higher total revenue, reflecting lower licensing revenue, increased amortization and higher financing costs.
- Cash and cash equivalents were $6.802 million at quarter-end, down from $8.837 million at year-end 2018; restricted cash was $1.109 million. Current assets were $19.944 million and current liabilities $14.217 million. Reported working capital was $8.6 million, excluding contingent obligations payable in common stock.
- Cash used in investing was $9.112 million, including $8.830 million cash consideration for the Halston Heritage acquisition. Financing provided $5.472 million, including $7.5 million of new borrowing. Cash, cash equivalents and restricted cash declined $2.408 million during the quarter.
- Debt carrying value, including contingent obligations and net of deferred finance costs, was $25.487 million; the amended term loan had $22.0 million principal outstanding. Lease adoption added $8.354 million of right-of-use assets and $10.967 million of lease liabilities at March 31.
Material changes and unusual items
- The February acquisition cost $8.350 million in cash plus 777,778 shares valued at $1.058 million; total purchase consideration, including transaction costs and a $0.900 million contingent obligation, was $10.788 million. The seller was affiliated with a company director, who held a 25% interest in the seller’s parent.
- The acquisition was financed partly by an additional $7.5 million under a refinanced Bank Hapoalim term loan. Term Loan A bears 5.1% interest and Term Loan B 6.25%; both mature December 31, 2023. The agreement includes financial covenants and scheduled principal payments. Xcel reported covenant compliance at quarter-end.
- A $0.189 million loss on extinguishment of debt contributed to higher interest and finance expense, which totaled $0.479 million versus $0.286 million.
- Halston trademarks were classified as finite-lived and are amortized, contributing to increased amortization expense. The company adopted lease accounting on January 1, 2019, materially increasing reported assets and liabilities but not affecting cash flows or the income statement at adoption.
- QVC generated approximately 82% of Q1 net revenue, and represented 69% of receivables at March 31. Management identifies concentration in retail relationships, changing fashion preferences and consumer demand as business risks.
- Potential dilution includes 7.148 million outstanding options at quarter-end; options granted during the quarter included performance-based awards to senior executives tied to stock-price targets.
Outlook, liquidity and risks
Management stated that existing cash and operating cash flows should meet operating, debt-service and capital-expenditure needs for at least the 12 months after filing. No specific revenue or earnings guidance was provided. Management plans to grow and diversify its brands and channels, including wholesale, e-commerce and licensing, while continuing to pursue acquisitions. The filing notes that results remain dependent on brand awareness, key licensees and retail relationships, fashion trends and consumer purchasing patterns. The credit agreement requires at least $5.0 million of liquid assets at all times; cash and cash equivalents were $6.802 million at quarter-end, and the company reported compliance with all applicable covenants.
Most important facts for investors to verify
- Whether QVC concentration and associated receivables exposure remain manageable.
- Debt-service requirements, covenant headroom and the company’s ability to maintain the $5.0 million minimum liquid-assets requirement.
- Halston acquisition performance, earn-out terms and the related-party relationship with the seller.
- Cash-flow capacity after acquisition spending, scheduled debt payments and lease obligations.
- Potential share dilution from outstanding options and acquisition consideration; compare non-GAAP results with GAAP earnings and the company’s stated adjustment definitions.