Xcel Brands, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Xcel owns and manages consumer lifestyle brands and earns licensing revenue, alongside wholesale and direct-to-consumer sales. The portfolio includes Isaac Mizrahi, Lori Goldstein, Halston, Judith Ripka, C Wonder and Longaberger.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net revenue | $8.75 million | $7.81 million |
| Net licensing revenue | $5.96 million | $4.31 million |
| Net sales | $2.79 million | $3.50 million |
| Gross profit | $7.07 million | $5.97 million |
| Operating loss | $(3.03) million | $(2.49) million |
| Net loss attributable to Xcel shareholders | $(3.49) million; $(0.18) per share | $(2.55) million; $(0.13) per share |
| Adjusted EBITDA (non-GAAP) | $(0.89) million | $(0.86) million |
| Net cash used in operating activities | $(0.89) million | $(1.69) million |
- Product gross margin declined to approximately 40% from 48%, which management attributed primarily to selling seasoned apparel inventory. Overall gross profit increased with licensing revenue.
- Cash and cash equivalents were $3.06 million at quarter-end, down from $4.48 million at December 31, 2021; restricted cash was $0.61 million. Working capital, as defined by the company, was $5.2 million, down from $7.9 million.
- Term-loan debt had a $28.38 million principal balance and a $27.50 million net carrying amount at quarter-end. The loan bears interest at LIBOR plus 7.5%; its reported effective rate was approximately 9.8% in Q1, compared with 6.6% a year earlier. The company paid $0.63 million of principal during the quarter.
- Total liabilities were $52.48 million; stockholders’ equity was $71.23 million.
Material changes versus the prior-year quarter
- Revenue rose approximately 12%, primarily from higher licensing revenue, including the Lori Goldstein brand acquired in April 2021. Net sales fell approximately 20%, mainly reflecting lower apparel wholesale revenue associated with a change in C Wonder distribution.
- Operating expenses increased to $10.10 million from $8.46 million. Management cited Lori Goldstein-related costs, including higher salaries and trademark amortization, plus inflation-related vendor, shipping and logistics costs.
- Higher principal debt and borrowing costs under the December 2021 loan contributed to interest and finance expense rising to $0.71 million from $0.28 million.
- The Judith Ripka retail store opened in Q2 2021 and was closed in Q1 2022; Xcel said it was negotiating termination of the related lease.
Outlook, risks and contingencies
- Management said existing cash and expected operating cash flows should cover operating needs, debt service and capital expenditures for at least 12 months after the filing date. No revenue or earnings guidance was provided.
- Xcel reported compliance with applicable loan covenants at March 31, 2022. The agreement includes minimum liquidity, revenue and inventory/accounts requirements, a fixed-charge coverage test beginning in Q3 2022, and an Adjusted EBITDA requirement of at least $2.0 million for the six months ending June 30, 2022.
- Qurate-generated licensing revenue was $5.01 million, approximately 57% of total revenue; Qurate receivables were $5.04 million, approximately 58% of net accounts receivable. This concentration exposes results and collections to a major customer relationship.
- COVID-19, supply-chain disruption, factory and logistics constraints, and elevated freight costs could affect production, sales, collections and liquidity. The company cited approximately $1.4 million due from certain bankrupt retail customers and a related allowance of approximately $1.1 million; further credit losses could increase expenses and pressure covenant compliance.
- Recorded contingent obligations were $7.54 million, including earn-outs tied to the Halston Heritage and Lori Goldstein brands. Management said pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether licensing growth, particularly through Qurate and the Lori Goldstein brand, can offset declining wholesale sales and customer concentration risk.
- Cash generation and covenant headroom, especially against the June 2022 Adjusted EBITDA test and subsequent fixed-charge coverage requirements.
- Collection of the Qurate and other receivables, including balances related to bankrupt retailers, and the adequacy of the doubtful-account allowance.
- The effect of loan interest costs, scheduled principal payments and the large final maturity payment due in April 2025 on future liquidity.
- Whether supply-chain and freight pressures, inventory clearances and the closed-store lease affect margins or create additional costs.