Xcel Brands, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Xcel Brands is a consumer-products and brand-licensing company with apparel, jewelry, accessories, home-goods and direct-to-consumer activities. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $8.77 | $8.43 |
| Net revenue | $8.59 | $8.43 |
| Operating income | $1.21 | $0.44 |
| Income before taxes | $0.93 | $0.06 |
| Income tax provision | $0.43 | $0.46 |
| Net income (loss) | $0.50 | $(0.40) |
| Diluted EPS | $0.03 | $(0.02) |
| Operating cash flow | $1.57 | $(1.01) |
| Cash and cash equivalents at period end | $8.90 | $10.19 at Dec. 31, 2017 |
Operating margin on net revenue was approximately 14.1%, versus 5.2% a year earlier. Operating expenses fell to $7.37 million from $8.00 million, including lower stock-based compensation. Interest and finance expense declined to $0.29 million from $0.38 million. The effective tax rate was approximately 46% in Q1 2018; the prior-year rate was unusually high at approximately 800%.
Adjusted EBITDA, a company-defined non-GAAP measure, was $2.16 million versus $1.94 million. Non-GAAP net income was $1.44 million versus $1.15 million, and non-GAAP diluted EPS was $0.08 versus $0.06. These measures exclude specified expenses and should be considered alongside GAAP results.
At March 31, cash and cash equivalents were $8.90 million and restricted cash was $1.51 million. Working capital was $9.48 million, down from $10.20 million at year-end. Cash, cash equivalents and restricted cash together declined $1.29 million during the quarter to $10.41 million. Investing activities used $1.04 million, primarily for capital expenditures; financing activities used $1.82 million, including debt repayments.
Total debt carrying value was $23.27 million, including $18.50 million under the term loan and $3.05 million of contingent obligations. The term loan bears a stated 5.1% rate, has an effective rate of approximately 6.05%, and matures January 1, 2021. The company reported compliance with applicable loan covenants at March 31, 2018.
Material changes versus Q1 2017
- Total revenue rose approximately $0.34 million. Net licensing revenue increased only $0.05 million; higher department-store and wholesale activity was partly offset by the wind-down of C Wonder’s QVC arrangement. Jewelry wholesale and e-commerce operations were separately reported, with $0.29 million of sales and $0.11 million of net revenue in Q1 2018.
- Operating expenses decreased approximately $0.63 million, mainly due to lower compensation and stock-based compensation, and lower design and marketing costs.
- Net income improved by approximately $0.90 million, from a loss to a profit. Operating cash flow improved by approximately $2.58 million, supported in part by working-capital movements and noncash expenses.
- QVC net revenue was $6.79 million, approximately 79% of net revenue, compared with $7.23 million and 86% a year earlier. QVC represented approximately 74% of receivables at quarter-end.
- The company repaid $1.73 million of long-term debt during the quarter. Capital expenditures were $1.04 million, compared with $0.14 million a year earlier.
Outlook, commentary and risks
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 the filing date. No numerical revenue or earnings guidance was provided. The company plans to diversify licensing products and distribution channels, pursue C Wonder opportunities including a planned Asia launch, expand department-store and other channels, and seek additional licensing arrangements and brand acquisitions.
Management emphasized that results depend substantially on licensees and retailers, with QVC a significant revenue and receivables concentration. Risks include licensee performance and retention, changing consumer preferences, retail-sector consolidation, economic conditions and input-cost changes. C Wonder’s QVC sell-off period ended in January 2018; QVC’s specified interactive-TV exclusivity continued through May 1, 2018. The company stated that it had no off-balance-sheet arrangements expected to have a material effect and that pending litigation was not expected to be materially adverse.
Adoption of the new revenue-recognition standard in 2018 did not materially change reported revenue or results. The company’s accounting for certain Tax Cuts and Jobs Act effects remained incomplete, although provisional estimates had been recorded and were unchanged in Q1. The company was evaluating the impact of the new lease standard, effective for it in 2019.
Important facts for investors to verify
- Whether QVC and other licensees sustain sales, royalty payments and collections, given QVC’s concentration in revenue and receivables.
- Progress in replacing or diversifying C Wonder distribution after the QVC transition, including the stated Asia launch plans.
- Debt repayment capacity and covenant headroom, including the scheduled term-loan payments and minimum liquidity and EBITDA requirements.
- Cash conversion and the level and returns of department-store-related capital expenditures.
- Potential cash or share settlement and assumptions underlying the $2.85 million C Wonder earn-out, as well as the performance-contingent Ripka earn-out.
- Final tax accounting and the balance-sheet impact of adopting lease accounting in 2019.