Xcel Brands, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 19, 2020. Xcel is a branded consumer-products and media company, with licensing, wholesale and direct-to-consumer activities across brands including Isaac Mizrahi, Judith Ripka, Halston, C Wonder and Longaberger. Financial amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net revenue | $9.53 million | $10.30 million; down 7.5% |
| Net licensing revenue | $5.64 million | $7.86 million; down $2.22 million |
| Product sales | $3.89 million | $2.44 million; up about 59% |
| Gross profit / margin | $7.13 million / 75% | $8.47 million / 82% |
| Operating income (loss) | $(1.10) million | $0.68 million |
| Net income (loss) attributable to Xcel shareholders | $(0.81) million; $(0.04) per diluted share | $0.13 million; $0.01 per diluted share |
| Adjusted EBITDA (non-GAAP) | $0.60 million | $2.01 million |
| Operating cash flow | $0.31 million | $1.23 million |
| Cash and cash equivalents at quarter-end | $4.25 million | $4.64 million at Dec. 31, 2019 |
| Debt carrying amount | $18.85 million | $18.82 million at Dec. 31, 2019 |
Product-sales gross margin improved to 38% from 25%, while the total margin declined as the business mix shifted from licensing toward wholesale. Operating expenses rose to $8.22 million from $7.79 million, including higher depreciation and amortization, $0.21 million of bad-debt expense and $0.08 million in costs for an uncompleted potential acquisition. Increased product sales and lower licensing revenue were the principal revenue drivers. QVC represented approximately 49% of Q1 revenue, down from 82% a year earlier; QVC receivables were 52% of total receivables at quarter-end.
Liquidity, debt and cash flow
Cash, cash equivalents and restricted cash totaled $5.36 million at March 31, including $1.11 million of restricted cash pledged for a lease-related letter of credit. Working capital, as defined by the company, was $7.8 million, down from $9.5 million at year-end, primarily because more long-term debt was classified as current. Operating cash flow fell year over year; investing outflow was $0.60 million, primarily for capital expenditures including ERP implementation, and financing outflow was $0.10 million. The term loan principal was $19.0 million, with fixed interest rates of 5.1% and 6.25% for its two components and a December 31, 2023 maturity. Xcel reported compliance with applicable loan covenants at March 31.
After quarter-end, an April 13 loan amendment deferred the March 31 installment, reduced remaining 2020 fixed installments and revised or waived financial covenants, without changing principal, interest rates or maturity. Xcel received a $1.8 million PPP loan on April 23, at 1% interest with a two-year term; forgiveness is possible for qualifying uses but is not assured. Management said existing cash and operating cash flows were expected to cover operating needs, debt service and capital expenditures for at least the 12 months after filing, and stated the PPP proceeds would supplement liquidity.
Outlook, risks and unusual items
- Management said COVID-19 was disrupting licensing and wholesale activity, supply chains, manufacturing, distribution and logistics, and causing order cancellations. The company expected its 2020 results to be significantly affected but provided no quantified forecast.
- The filing warns that further pandemic effects could reduce revenue, earnings, liquidity and cash flows; customers or licensees could seek relief, delay or miss payments. Management also noted the possibility that COVID-related results could cause covenant noncompliance and require lender waivers or amendments.
- Effective January 1, 2020, Xcel changed the estimated life of the Judith Ripka trademarks to 15 years, beginning amortization and increasing quarterly amortization expense. The company recorded a $0.55 million income-tax benefit; the CARES Act also enabled potential NOL carrybacks, with an estimated $0.10 million income-statement benefit and $0.20 million tax-refund receivable.
- A contingent earn-out of up to $6.0 million is payable in connection with the Halston Heritage acquisition based on royalties through 2022; $0.9 million was recorded as a long-term liability at March 31.
- Xcel disclosed a Nasdaq minimum-bid-price deficiency, with a December 28, 2020 deadline to regain compliance or pursue available options. The filing states that failure to comply could result in delisting; there is no assurance the company will regain compliance.
- Management reported disclosure controls and procedures were effective and no significant changes to internal control over financial reporting during the quarter. Pending litigation was not expected by management to have a material adverse effect.
Key facts for investors to verify
- Whether COVID-19-related cancellations, supply delays and customer or licensee payment issues materially affected subsequent revenue, cash generation and liquidity.
- Compliance with the amended lender covenants, scheduled debt payments and the availability and terms of any additional lender relief.
- PPP loan forgiveness eligibility, qualifying use of proceeds and any remaining repayment obligation.
- Progress toward Nasdaq minimum-bid-price compliance and any effect on listing status or access to capital.
- The sustainability and concentration of QVC-related revenue and receivables, and the performance of the growing wholesale and e-commerce businesses.
- The assumptions underlying trademark lives and amortization, the tax-refund estimate, and potential Halston earn-out payments.