Xcel Brands, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Amounts are USD unless stated otherwise.
Business context
Xcel owns and manages consumer lifestyle brands, including Isaac Mizrahi, Judith Ripka, Halston, C Wonder and, through a 50% interest, Longaberger. Revenue comes from licensing, wholesale and direct-to-consumer sales. QVC represented 64% of Q3 revenue and 61% of nine-month revenue, creating significant customer and channel concentration.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $7.4m | $10.9m | $22.0m | $30.4m |
| Gross profit | $6.1m | $8.0m | $18.0m | $23.8m |
| Total gross margin | 83% | 73% | 82% | 78% |
| Operating income (loss) | $(0.3)m | $0.4m | $(2.0)m | $4.3m |
| Net income (loss) attributable to Xcel | $(0.4)m | $(0.1)m | $(2.5)m | $1.9m |
| GAAP diluted EPS | $(0.02) | $(0.01) | $(0.13) | $0.10 |
| Adjusted EBITDA (non-GAAP) | $1.4m | $1.8m | $3.9m | $5.6m |
Product-sales gross margin improved to 41% in Q3 from 35%, and to 40% year to date from 29%. Management also reported non-GAAP net income of $0.8m for Q3 and $2.1m for the nine months, versus $1.2m and $3.8m, respectively, in 2019. These non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Cash, liquidity and debt
- Nine-month operating cash flow was $2.2m, compared with $3.0m in 2019. Investing cash outflow was $0.7m, versus $9.7m, largely because 2019 included the Halston Heritage acquisition. Financing cash outflow was $1.4m, compared with $3.4m of inflow in 2019.
- At September 30, cash and cash equivalents were $4.8m; restricted cash was $1.1m. Working capital, as defined by the company, was $8.7m, down from $9.5m at year-end 2019.
- Term-loan principal was $17.5m ($17.4m net carrying amount), with $2.85m classified as current debt. The secured loan bears fixed rates of 5.1% and 6.25% and matures December 31, 2023. Scheduled payments were amended and reduced for portions of 2020 and 2021; additional repayments are tied to excess cash flow. The company reported covenant compliance at September 30.
- Operating lease liabilities totaled $11.0m. Management said existing cash and operating cash flows should cover operating needs, debt service and capital expenditures for at least 12 months after filing.
Material changes and management commentary
- Q3 revenue fell about 32% year over year; nine-month revenue fell about 28%. Licensing revenue declined amid weaker licensee sales and lower guaranteed minimums under licensing arrangements. Product sales were affected by canceled or reduced wholesale orders.
- COVID-19-related cost reductions, lower stock compensation and $1.8m of PPP assistance helped reduce nine-month operating expenses. These benefits were partly offset by higher amortization and $1.1m of bad-debt expense.
- Management expects COVID-19 to significantly affect 2020 results and potentially 2021 results, but says the duration and effects are difficult to forecast. No specific revenue or earnings guidance is provided.
- The company received a $1.806m PPP loan and recognized the proceeds as a reduction of operating expenses, based on management’s view that full forgiveness was probable. Forgiveness is not assured. It also received a $10,000 EIDL grant.
Risks, contingencies and unusual items
- COVID-19 disrupted demand, manufacturing and logistics. Several retail customers filed for bankruptcy; receivables from named bankrupt retailers totaled $1.21m, against which the company recorded a $0.97m allowance. Further credit losses could pressure results and covenant compliance.
- Nasdaq notified the company that its share price had fallen below the $1.00 minimum bid requirement. The initial compliance deadline was February 2, 2021; a reverse split was identified as a possible cure if needed. Delisting could impair share liquidity and access to capital.
- The term loan includes financial covenants and secured obligations. Amendments provided waivers and revised requirements; the company warned that pandemic effects could make future compliance difficult.
- The Halston Heritage acquisition carries a contingent earn-out of up to $6.0m through 2022; $0.9m was recorded as a liability at September 30, 2020.
- Q3 included a $0.05m gain on Longaberger asset sales and a $0.19m recovery of costs for a potential acquisition that did not proceed. Nine-month 2019 results included a $2.85m gain from release of a C Wonder contingent obligation.
Key facts for investors to verify
- QVC revenue and receivable concentration, and the financial condition and payment behavior of licensees and retail customers.
- Collections and any further allowance needs on bankrupt-customer receivables, including the $1.21m exposure and $0.97m allowance disclosed.
- PPP loan forgiveness status and any repayment, audit, eligibility or compliance consequences.
- Cash generation, covenant headroom and repayment requirements under the amended secured term loan.
- Progress toward Nasdaq’s minimum-bid-price requirement and any subsequent listing action.