Xcel Brands, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated financial statements. Xcel operates consumer brands through licensing, wholesale, e-commerce and other retail channels. During 2023 it substantially completed a shift from a wholesale/licensing hybrid model to a “licensing-plus” model, relying more on partners to operate product businesses.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net revenue | $6.8m | $8.5m | $12.8m | $17.2m |
| Net licensing revenue | $2.4m | $5.2m | $4.7m | $11.1m |
| Net sales | $4.4m | $3.3m | $8.2m | $6.1m |
| Gross profit | $3.0m | $5.9m | $6.3m | $13.0m |
| Operating income (loss) | $(3.7)m | $15.2m | $(9.6)m | $12.1m |
| Net income (loss) attributable to Xcel shareholders | $(3.5)m | $9.5m | $(9.1)m | $6.0m |
| Operating cash flow | Not separately presented | Not separately presented | $(1.5)m | $(8.7)m |
| Adjusted EBITDA, non-GAAP | $(0.9)m | $(2.8)m | $(2.9)m | $(3.7)m |
Product gross margin (net sales less cost of goods sold, divided by net sales) was approximately 13% in Q2 and 21% in the first half, versus 22% and 30% in the comparable 2022 periods. The company attributed the decline to discounted apparel and jewelry inventory liquidation. Lower licensing revenue largely reflects the 2022 sale of a majority interest in the Isaac Mizrahi brand. The 2022 comparisons also include a $20.6m gain on that sale and a $2.3m debt-extinguishment loss.
At June 30, cash was $3.5m, down from $4.6m at year-end 2022; working capital, using the company’s stated adjusted definition, was $6.0m versus $8.8m. Total assets were $81.5m and stockholders’ equity was $60.6m. The company reported no debt. Operating lease liabilities totaled $5.9m. Cash decreased $1.1m in the first half; investing activities provided $0.4m and financing activities had no cash flow.
Material changes, outlook and risks
- Restructuring and cost reduction: Management said the operating transition was substantially complete by June 30. It reported annualized payroll reductions of approximately $6m and operating expense reductions of approximately $7m versus the prior-year periods. Q2 direct operating expenses fell to $5.2m from $9.5m.
- Licensing arrangements: New partner arrangements include Ripka licenses with Jewelry Television, C Wonder wholesale licensing with One Jeanswear Group, and a May 2023 Halston master license. The Halston contract includes an upfront payment and guaranteed royalties, has a 25-year term with termination opportunities at five-year intervals, and provides a $5m purchase option at the end of the term. Xcel granted a security interest in Halston trademarks and issued a warrant for up to 1m shares at $1.50, subject to royalty targets. The upfront payment and minimum royalties resulted in $4.89m of deferred revenue at quarter-end, to be recognized over 5.5 years.
- Liquidity and management outlook: The company reported losses, an accumulated deficit of $41.9m and first-half operating cash outflow of $1.5m, which had raised substantial doubt about continued operations. Management said the new business model and cost reductions alleviate the going-concern uncertainty and expects adequate cash flows for operating and capital needs for at least 12 months after the filing date. No numerical revenue or earnings guidance was provided.
- Concentration and market risks: Qurate agreements generated 26% of Q2 and first-half 2023 net revenue; Qurate receivables were 23% of accounts receivable at June 30. Management cited shipping disruptions, elevated input and logistics costs expected to persist through at least most of 2023, potential recession-related demand weakness, and dependence on licensees, retail partners and fashion trends.
- Contingencies and unusual items: The Lori Goldstein earn-out liability was $6.4m at June 30 ($1.4m current and $5.0m long-term). The Isaac Mizrahi transaction includes a potential purchase-price adjustment; no liability was recorded, and management considered payment remote. Q2 also included a $0.44m gain from settling a former store lease, a $0.35m gain on sale of a limited-partner interest, and a $0.52m equity-method loss on the Isaac Mizrahi investment. Management said pending ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the licensing transition delivers recurring cash generation sufficient to offset continuing losses and limited cash reserves.
- Actual performance and collectability under the Halston minimum royalty commitments, alongside the contract’s termination, purchase-option, security-interest and warrant terms.
- Ongoing dependence on Qurate and the impact of further changes in Qurate sales or payments.
- The remaining Lori Goldstein earn-out and any change in the likelihood or amount of the unrecorded Isaac Mizrahi contingent obligation.
- Whether cost savings and inventory liquidation are sustainable without further pressure on product margins or brand demand.