Xcel Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited. Unless stated otherwise, amounts are in U.S. dollars; financial figures below are in millions.
Business context
Xcel is a media and consumer-products company that licenses and develops apparel, jewelry, and other lifestyle brands, including Isaac Mizrahi, Judith Ripka, H Halston, C Wonder, and Highline Collective. It earns most revenue from licensing and related services. During 2018, it began shifting Judith Ripka jewelry and its department-store Fast-to-Market business from licensing toward wholesale, which adds direct sales and inventory exposure.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $8.27 | $7.89 | $25.52 | $24.69 |
| Net revenue, after cost of goods sold | $8.04 | $7.89 | $24.88 | $24.69 |
| Operating income | $1.40 | $1.26 | $3.90 | $2.81 |
| Net income | $0.98 | $0.25 | $1.37 | $0.07 |
| Diluted EPS | $0.05 | $0.01 | $0.07 | $0.00 |
| Adjusted EBITDA (non-GAAP) | $2.33 | $2.36 | $6.71 | $6.56 |
For the nine months, net cash provided by operating activities was $4.71 million, versus $2.33 million in 2017. Investing activities used $1.10 million, mainly for property and equipment; financing activities used $5.16 million, including debt repayments and share withholding-tax repurchases. Cash and cash equivalents were $8.64 million at September 30, down from $10.19 million at December 31, 2017; restricted cash was an additional $1.51 million.
At September 30, total assets were $135.22 million and total liabilities were $35.10 million. Current assets were $20.71 million and current liabilities $12.43 million. Long-term debt carrying value, including contingent obligations, totaled $20.53 million: $16.50 million for the term loan, seller notes, and $2.95 million of C Wonder contingent consideration. The term loan matures January 1, 2021; its stated interest rate is 5.1% and its current effective rate is approximately 6.05%. Xcel reported compliance with all applicable loan covenants.
Material changes versus comparable periods
- Q3 revenue rose about 4.8%; nine-month revenue rose about 3.4%. Jewelry wholesale and e-commerce contributed $0.44 million in Q3 and $1.08 million year to date, offset in part by lower licensing revenue.
- Net income improved to $0.98 million in Q3 and $1.37 million year to date. Lower compensation and stock-based compensation costs, reduced interest expense, and a substantially lower Q3 tax provision contributed to the comparisons.
- Licensing revenue was slightly lower year over year in Q3 and down $0.24 million for the nine months. The end of the C Wonder QVC sell-off period reduced revenue by about $0.19 million in Q3 and $0.87 million year to date.
- QVC remained a major concentration: approximately 80% of net revenue in Q3 and for the nine months. QVC receivables were $6.45 million, or about 67% of total receivables.
- Debt carrying value fell from $24.95 million at year-end 2017 to $20.53 million. The C Wonder contingent obligation, $2.85 million, was classified as current at September 30, 2018.
Outlook, commentary, and risks
- Management said existing cash and operating cash flows should be adequate for operating needs, debt service, and capital expenditures for at least 12 months after the filing date. No quantified revenue or earnings guidance was provided.
- Management aims to diversify brands and channels, grow licensing and wholesale operations, and pursue domestic and international opportunities. Its wholesale strategy relies on back-to-back orders to limit working-capital needs and inventory risk.
- On October 26, 2018, after quarter-end, Xcel and Halston-related parties terminated the HIP license and sublicense agreements and the at-will license. The filing reports $1.81 million of nine-month revenue from HOC and a $1.3 million HOC receivable at September 30, including $0.69 million past due. The filing does not quantify the termination’s expected financial impact.
- Inventory increased from zero at December 31, 2017 to $0.92 million as the business shifted toward wholesale. Xcel warned that weak sell-through, customer defaults, retail closures, fashion changes, or economic downturns could increase inventory, pressure cash flow, or require write-offs.
- Other risks include dependence on licensees and key retail relationships, fashion and consumer-demand uncertainty, and QVC concentration. Pending litigation was not expected by management to have a material adverse effect. Management stated disclosure controls were effective and there were no significant quarterly changes to internal control over financial reporting.
Important facts for investors to verify
- How the October 26 Halston agreement terminations affect future royalties, design fees, and the HOC receivable, particularly the past-due portion.
- Whether the wholesale transitions can grow net revenue without materially increasing inventory, working-capital needs, or write-offs.
- QVC’s ongoing contribution to revenue and receivables, and the status of efforts to diversify distribution and licensing sources.
- Debt repayment and covenant requirements, including the $2.85 million C Wonder contingent obligation and the seller-note maturities in 2019.
- Drivers of the effective tax rate and the distinction between GAAP net income and non-GAAP measures; Q3 non-GAAP net income was $1.60 million versus $1.64 million in the prior-year quarter despite higher GAAP net income.