Xcel Brands, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial figures below are in millions unless noted. The company operates consumer brands through licensing, wholesale, direct-to-consumer, and other channels.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $8.47 | $10.76 | $17.21 | $18.57 |
| Gross profit | $5.90 | $7.70 | $12.96 | $13.68 |
| Operating costs and expenses | $11.34 | $9.42 | $21.43 | $17.88 |
| Net income (loss) attributable to Xcel shareholders | $9.49 | $(1.56) | $6.00 | $(4.11) |
| Non-GAAP net income (loss) | $(3.61) | $(0.13) | $(5.55) | $(1.65) |
| Adjusted EBITDA | $(2.84) | $0.85 | $(3.73) | $(0.01) |
- Q2 revenue declined about 21% year over year; first-half revenue declined about 7%. Q2 licensing revenue was $5.18 million (down from $6.22 million) and net sales were $3.29 million (down from $4.54 million).
- Product gross margin fell to about 22% in Q2 from 33% a year earlier, and to 30% for the first half from 39%. The company attributed the declines to discounted seasoned apparel inventory and write-downs on inventory associated with canceled orders.
- GAAP net income included a $20.61 million gain on selling a majority interest in the Isaac Mizrahi brand. Excluding specified items, the company reported non-GAAP losses and negative Adjusted EBITDA in both Q2 and the first half.
- First-half cash used in operating activities was $8.72 million, versus $5.74 million in the comparable 2021 period. Investing activities provided $45.32 million, primarily from the Isaac Mizrahi transaction; financing activities used $30.95 million, principally for debt repayment.
- Cash and cash equivalents were $10.87 million at June 30, 2022, versus $4.48 million at year-end 2021. Working capital, as defined by the company, was $16.9 million versus $7.9 million.
- Term-loan debt was zero at June 30, 2022, down from $28.03 million net carrying value at year-end. Xcel used $30.1 million of transaction proceeds to repay $28.4 million of principal, fees, and interest; the repayment generated a $2.32 million extinguishment loss.
Material changes and unusual items
- On May 31, 2022, Xcel sold 70% of the Isaac Mizrahi brand holding company to WHP for $46.2 million in cash and retained a 30% equity-method interest valued at approximately $19.8 million. The transaction produced $45.41 million of net cash proceeds and a $20.61 million pretax gain. Xcel no longer consolidates the brand’s licensing revenue.
- Q2 operating expenses included about $1.0 million of bonuses to senior management related to the sale, as well as higher shipping, logistics, vendor, and service-provider costs.
- Qurate Retail Group represented approximately 48% of Q2 net revenue and 53% of first-half net revenue. Qurate receivables were $4.15 million, or approximately 45% of net accounts receivable, at June 30.
- Recorded contingent obligations included $6.6 million related to the Lori Goldstein acquisition and $0.9 million for the Halston Heritage earn-out. Separately, an unrecorded Isaac Mizrahi transaction provision could require payment to WHP of up to $16 million if specified royalty conditions are not met; management considered payment remote. Xcel may receive a $2.0 million earn-out if stated 2023 royalty and EBITDA targets are achieved.
Outlook, commentary, and risks
- No quantified revenue or earnings guidance was provided. Management expects cash on hand and operating cash flows to cover operating and capital expenditure needs for at least 12 months after filing.
- Management expects the sale of the Isaac Mizrahi majority interest to reduce revenue in the short term and plans to use the proceeds and retained-brand cash flows for brand growth, launches, livestreaming technology, and partnerships.
- The company cited ongoing COVID-19-related supply-chain disruption, factory closures, delayed deliveries and canceled orders, logistics constraints, and higher freight and input costs. It expected inflationary pressures to continue through the remainder of 2022 and potentially into 2023, and said it may not be able to offset or pass on these costs.
- Additional risks include weaker consumer demand or a potential recession, customer payment difficulties and retailer bankruptcies, and reliance on Qurate. The company reported a $1.1 million allowance for doubtful accounts and approximately $1.5 million due from certain bankrupt retailers.
- Management stated that pending legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Separate the one-time Isaac Mizrahi disposal gain from ongoing performance: GAAP profit contrasted with non-GAAP losses and negative Adjusted EBITDA.
- Review post-sale revenue, licensing trends, product margins, and the company’s ability to replace the divested brand’s contribution.
- Track operating cash use, receivable collections, Qurate concentration, and whether management’s 12-month liquidity expectation remains supportable.
- Monitor the WHP royalty-related potential payment, the Lori Goldstein and Halston earn-outs, and the conditions for the possible Isaac Mizrahi earn-out.
- Assess supply-chain and inflation effects, canceled orders, customer credit exposure, and potential dilution from outstanding options, warrants, and equity awards.