Xcel Brands, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed April 14, 2020. This is an annual report, not a standalone fourth-quarter report. Xcel is a branded consumer-products and media company spanning licensing, wholesale, e-commerce and direct-response television, with brands including Isaac Mizrahi, Judith Ripka, Halston, C Wonder and Longaberger.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $41.7 million | $35.5 million |
| Licensing revenue | $26.4 million | $31.2 million |
| Net sales (wholesale and e-commerce) | $15.3 million | $4.3 million |
| Gross profit / gross margin | $31.5 million / 75% | $32.8 million / 92% |
| Operating income (loss) | $(2.6) million | $3.9 million |
| Net income (loss) attributable to Xcel shareholders | $(3.4) million; $(0.18) per diluted share | $1.1 million; $0.06 per diluted share |
| Operating cash flow | $3.5 million | $6.6 million |
| Adjusted EBITDA (non-GAAP) | $7.1 million | $8.4 million |
| Cash and cash equivalents at year-end | $4.6 million | $8.8 million |
| Term debt at year-end | $19.0 million | $15.5 million |
Operating expenses rose to $36.9 million from $28.8 million, including a $6.2 million non-cash impairment of the Ripka trademarks, $3.1 million of trademark amortization, and $1.3 million of costs related to potential acquisitions. Interest and finance expense was $1.5 million, versus $1.0 million. A $2.85 million gain from the expiration of the C Wonder earn-out partly offset expenses. The income tax benefit was $0.6 million, compared with a $1.8 million provision in 2018.
Investing activities used $10.3 million, primarily for the $8.8 million cash portion of the Halston Heritage acquisition and $1.1 million of capital expenditures. Financing activities provided $2.3 million, including $7.5 million of new term-loan proceeds and debt repayments. Working capital was $9.5 million, excluding current lease obligations and contingent liabilities payable in stock; $10.6 million of year-end receivables was substantially collected after year-end. Restricted cash was $1.1 million. Total assets were $143.2 million, including $111.1 million of trademarks and other intangibles; total equity was $98.5 million.
Material changes versus 2018
- Revenue increased $6.2 million as wholesale and e-commerce sales grew $11.0 million, but licensing revenue fell $4.8 million. The filing attributes the licensing decline principally to a change from guaranteed minimums to sales-based royalties in one arrangement and lower department-store design and service fees during the transition to wholesale.
- Gross profit fell $1.3 million and reported gross margin declined from 92% to 75%, reflecting a higher share of lower-margin product sales and lower licensing revenue.
- Net results shifted from $1.1 million of income to a $3.4 million loss. The Ripka impairment and increased amortization were significant contributors; non-GAAP net income was $4.8 million, down from $6.5 million.
- Cash and cash equivalents declined $4.2 million. Debt increased from $15.5 million to $19.0 million following a $7.5 million term-loan draw used in part to finance the Halston Heritage acquisition.
- Xcel acquired the Halston and Halston Heritage trademarks in February 2019 and obtained a 50% interest in Longaberger Licensing in November 2019. Xcel consolidates Longaberger Licensing because it determined it controls the entity.
Outlook, risks and unusual items
- COVID-19: The filing, dated April 2020, says the pandemic had disrupted operations beginning in March, causing supply-chain and logistics delays, order cancellations and lower sales. Management expected 2020 results to be significantly affected and said the impact could threaten compliance with debt covenants. The filing does not provide numerical 2020 guidance.
- Debt and liquidity: The $19.0 million term loan is secured by substantially all company and subsidiary assets. Xcel reported covenant compliance at December 31, 2019. An April 13, 2020 amendment deferred the March 2020 installment, reduced remaining 2020 fixed installments, revised or waived covenants and permitted PPP borrowing; principal balance, interest rate and maturity date were unchanged. Management said available cash and anticipated operating cash flow were expected to cover needs for at least 12 months after filing, but identified COVID-related covenant risk.
- Customer concentration: QVC generated 53% of 2019 revenue, down from 72% in 2018. The company says QVC reduced jewelry programming, and it does not control the time QVC allocates to its brands. The Isaac Mizrahi, Judith Ripka and H by Halston agreements have specified expiry dates and renewal provisions.
- Acquisitions and related parties: The Halston Heritage purchase involved a former director who held an interest in the seller’s parent. The transaction included $8.4 million in cash and 777,778 shares, with potential additional earn-out consideration of up to $6.0 million through 2022; a $0.9 million liability was recorded at year-end. Longaberger was acquired through a 50/50 joint venture.
- Other risks: The filing highlights competition, fashion and consumer-demand shifts, dependence on licensees and key spokespeople, foreign sourcing and manufacturing, brand impairment, and limited cash resources. The company reported $4.6 million of cash and $19.0 million of term debt at year-end.
- Non-GAAP measures: Adjusted EBITDA and non-GAAP net income exclude specified expenses and gains, including impairments, amortization, stock compensation, acquisition costs and the C Wonder earn-out gain. They are supplemental measures, not substitutes for GAAP results.
Important facts for investors to verify
- Whether QVC agreements renew on acceptable terms, and how changes in QVC programming affect revenue and cash receipts.
- Actual 2020 sales, collections, supply-chain performance and covenant compliance following the COVID-19 disruption and April 2020 loan amendment.
- Whether wholesale and direct-to-consumer growth can offset lower licensing revenue while restoring gross margin and cash generation.
- The performance and valuation of the Ripka, Halston Heritage and Longaberger brands, including any further impairment or earn-out payments.
- Potential dilution: 7.8 million options and warrants were outstanding at year-end, in addition to other equity-plan capacity and possible Halston earn-out shares.
The independent auditor gave an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2019; the auditor did not attest to internal-control effectiveness.