Xcel Brands, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Xcel is a branded consumer-products and media company that earns licensing revenue and also generates product sales. Its portfolio includes Lori Goldstein, Halston, Judith Ripka, C Wonder, Longaberger and an equity-method interest in Isaac Mizrahi.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $2.64 million | $4.50 million | $15.47 million | $21.72 million |
| Gross profit | $2.41 million | $3.04 million | $8.75 million | $16.00 million |
| Operating income (loss) | ($5.40 million) | ($5.98 million) | ($15.02 million) | $6.16 million |
| Net income (loss) attributable to Xcel shareholders | ($5.14 million) | ($4.04 million) | ($14.26 million) | $1.96 million |
| Basic and diluted EPS | ($0.26) | ($0.21) | ($0.72) | $0.10 |
| Cash used in operating activities | — | ($2.81 million) | ($11.03 million) |
- Q3 licensing revenue rose to $2.38 million from $2.17 million, while product sales fell to $0.26 million from $2.34 million, largely reflecting Xcel’s exit from wholesale apparel and fine-jewelry operations.
- For the first nine months, licensing revenue declined to $7.03 million from $13.30 million, primarily because Isaac Mizrahi licensing revenue was no longer consolidated following the 2022 sale of a majority interest. Product sales were essentially flat at $8.44 million.
- Product gross margin was approximately 12% in Q3 versus 37% a year earlier, and 20% for the nine months versus 32%. The filing attributes the year-to-date decline to discounted apparel inventory and jewelry sold at agreed prices below historical margins.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $1.41 million in Q3 versus $2.89 million; for the nine months, it was a loss of $4.57 million versus $6.63 million. Nine-month non-GAAP net loss was $8.66 million versus $8.82 million.
Balance sheet and liquidity
- At September 30, 2023, cash was $2.19 million, current assets were $8.38 million, current liabilities were $6.66 million, total assets were $75.75 million, and stockholders’ equity was $55.31 million. The company reported working capital of approximately $2.9 million using its stated adjustment for lease and contingent obligations.
- Xcel had no debt at quarter-end. In October 2023, it entered into a $5 million term loan due October 2028, with quarterly principal installments beginning April 2024 and interest at one-month Term SOFR plus 4.25%. A related swap provides for Xcel to pay 9.46% on the aligned notional amount. The loan is secured by substantially all assets of specified subsidiaries, excluding their trademarks, and by a pledge of membership interests; it includes financial covenants.
- Cash declined by $2.42 million over the first nine months. Investing activities provided $0.36 million, and financing activities provided $0.03 million. Operating cash use was partly offset by a $4.68 million increase in deferred revenue, mainly from the Halston license payment.
Business changes, outlook and risks
- Xcel shifted from a wholesale/licensing hybrid toward a “licensing-plus” model, substantially completing the transition by June 30, 2023. Management cites approximately $13 million of annualized savings versus the previous model, including payroll reductions of about $6 million and operating-expense reductions of about $7 million.
- The Halston master license provides an upfront payment and royalties, including guaranteed minimum royalties, with a 25-year term subject to termination options at five-year intervals. Xcel recorded $4.67 million of deferred revenue related to the agreement, to be recognized over approximately 5.25 years. The licensee has an option to buy the brand for $5 million at the end of the term under specified terms.
- Management said the company’s losses, operating cash use and cash position raised substantial uncertainty about its ability to continue as a going concern. Based on the new licensing model, expected operating cash flows and the subsequent $5 million loan, management concluded that available liquidity should cover operating needs, debt service and capital expenditures for at least 12 months after filing.
- WHP waived the Isaac Mizrahi purchase-price adjustment test after royalties fell below the threshold for the period ending September 30, 2023; the waiver was extended through the measurement period ending March 31, 2024. In exchange, Xcel agreed to reduce future service fees by $0.6 million over 18 months. The maximum potential adjustment was reduced to $6.9 million by WHP cash-flow distributions; no liability was recorded. Weak interactive-TV sales, attributed by management to talent scheduling and QVC’s move to in-studio shows, remain relevant to this exposure.
- In October, Xcel wrote down a $0.76 million Halston-licensee receivable to zero after payment became contingent on the licensee’s future performance. Xcel is also discussing a possible office-lease restructuring that could require a security deposit of up to $0.73 million.
- Qurate represented 61% of Q3 revenue and 32% of nine-month revenue; its receivable was $1.6 million, or approximately 34% of net accounts receivable. The company identifies macroeconomic and consumer-demand weakness, licensee performance and joint-venture risks as concerns. It provided no specific financial guidance.
Important facts for investors to verify
- Whether the licensing transition delivers the expected recurring revenue and approximately $13 million in annualized savings, and whether operating cash flow improves.
- Terms, covenant compliance and liquidity availability under the October $5 million loan and interest-rate swap.
- Developments in IM Topco royalties and the potential purchase-price adjustment after the waiver period, including the $0.6 million service-fee reduction.
- Collections and future performance under the amended Halston licensee arrangement, and the concentration of revenue and receivables with Qurate.
- Any office-lease restructuring, related deposit requirement, and further effects of the wholesale-business exit on margins and cash needs.