Xcel Brands, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. Xcel manages and licenses lifestyle brands and sells branded products through licensing, wholesale, e-commerce, and retail channels.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $5.05m | $9.14m | $14.58m | $19.44m |
| Gross profit | $4.80m | $7.37m | $11.92m | $15.84m |
| GAAP net income (loss) attributable to Xcel | ($1.30m) | $1.85m | ($2.11m) | $1.98m |
| GAAP diluted EPS | ($0.07) | $0.10 | ($0.11) | $0.11 |
| Adjusted EBITDA | $1.74m | $1.64m | $2.46m | $3.65m |
- Q2 licensing revenue was $4.50m, down from $6.80m; product sales were $0.55m, down from $2.34m. Six-month licensing revenue was $10.14m versus $14.67m; product sales were $4.44m versus $4.77m.
- Gross margin was 95% in Q2 versus 81% a year earlier, reflecting a greater share of licensing revenue; six-month gross margin was 82% versus 81%. Product-sales gross margin improved to 54% for Q2 and 40% for the first half, from 24% and 25%, respectively.
- Q2 operating costs and expenses were $5.41m, including a $1.64m PPP-related expense reduction. Q2 also included $0.47m bad-debt expense tied to a bankrupt retail customer and an $0.08m property and equipment impairment.
- Cash provided by operations for the first half was $2.38m, compared with $1.98m. Investing used $0.63m, versus $9.39m, mainly reflecting the prior-year Halston acquisition; financing used $0.93m, versus $4.47m provided in the prior year.
Liquidity, debt, and balance sheet
- At June 30, cash and cash equivalents were $5.46m, restricted cash was $1.11m, and working capital under the company’s stated definition was $8.5m, down from $9.5m at year-end 2019. Total assets were $137.50m and total equity was $97.02m.
- Term-loan debt had a net carrying value of $18.13m ($2.90m current and $15.23m long-term), compared with $18.82m at December 31, 2019. The term loan matures December 31, 2023, with fixed interest rates of 5.1% and 6.25% on its two components. The company reported covenant compliance at June 30.
- The company received a $1.806m PPP loan at 1% interest, due over two years. Management considered full forgiveness probable and recognized $1.64m as an expense reduction in Q2, with $0.166m deferred for Q3 recognition; forgiveness was not assured. A separate $10,000 SBA disaster loan was also received.
- Management stated existing cash and operating cash flows were expected to meet operating, debt-service, and capital needs for at least 12 months after filing.
Material changes, outlook, and risks
- Revenue fell 45% in Q2 and 25% for the first half, primarily due to COVID-19-related store closures, weaker economic activity, and order cancellations. Licensing revenue also reflected reduced guaranteed minimums and, for the half-year comparison, a shift in one agreement to sales-based royalties.
- QVC accounted for approximately 81% of Q2 revenue and 60% of first-half revenue, underscoring customer and channel concentration. Receivables from QVC were $3.94m at June 30.
- Lord & Taylor and Le Tote bankruptcy-related receivables totaled $1.172m; the company recorded a $0.586m allowance. Further credit losses could affect results and debt-covenant compliance.
- Management said COVID-19 disrupted manufacturing, sourcing, distribution, and logistics, and expected results in 2020 and potentially 2021 to be significantly affected. The filing provides no numerical revenue or earnings guidance and notes uncertainty about the pandemic’s duration and effects.
- The company received a Nasdaq notice on August 6, 2020 for a bid price below $1.00 for 30 consecutive business days, with until February 2, 2021 to regain compliance, subject to possible extension. Delisting remained a risk.
- Management warned PPP forgiveness was uncertain and the eligibility certification could be reviewed, potentially requiring repayment and creating legal, financial, or reputational consequences.
- After quarter-end, Xcel agreed to be released from its former-office lease for approximately $0.887m consideration, effective August 1. An August 18 lender amendment reduced scheduled 2021 installments and revised covenants without changing principal, interest rate, or maturity.
- Other notable items: the Ripka trademarks became finite-lived assets effective January 1, 2020, increasing amortization; the prior-year comparison included a $2.85m gain from reducing a C Wonder contingent obligation.
Investor verification priorities
- Track post-quarter revenue, licensee sales, QVC dependence, and the recovery of wholesale and direct-to-consumer channels.
- Verify collection outcomes for the $1.172m bankrupt-customer receivables and any subsequent bad-debt provisions.
- Confirm PPP forgiveness, remaining loan accounting, and any regulatory review or repayment requirement.
- Review covenant headroom, scheduled debt payments, future excess-cash-flow repayments, and any further lender waivers or amendments.
- Monitor Nasdaq bid-price compliance and the company’s actions to retain its listing.
- Assess whether the stated 12-month liquidity expectation remains supportable as pandemic impacts and lease-release proceeds develop.