Xcel Brands, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results; financial amounts below are in millions of dollars unless otherwise indicated.
Business context
Xcel is a brand-management and licensing company whose portfolio included Isaac Mizrahi, Judith Ripka, H Halston, C Wonder and Highline Collective. It earns licensing, design and service revenue through retail and manufacturing partners, including QVC. Management said it intended to focus on its wholly owned brands; its LCNY management and design contract ended in July 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $8.37 | $9.11 | $16.80 | $17.47 |
| Operating income | $1.12 | $0.23 | $1.55 | $0.57 |
| Operating margin | 13.4% | 2.5% | 9.2% | 3.3% |
| Interest and finance expense | $0.35 | $0.53 | $0.73 | $0.97 |
| Net income (loss) | $0.21 | $(0.09) | $(0.19) | $(0.14) |
| Adjusted EBITDA (non-GAAP) | $2.26 | $2.74 | $4.20 | $4.74 |
Q2 basic and diluted EPS were $0.01, versus approximately break-even loss per share in Q2 2016. Six-month basic and diluted loss per share was $(0.01) in both years. Non-GAAP net income was $1.50 million in Q2 and $2.65 million for six months, down from $1.91 million and $3.10 million, respectively. These non-GAAP measures exclude specified items and should be considered alongside GAAP results.
No gross-margin figure is presented in the supplied filing text; Xcel’s reported revenue largely reflects licensing, design and service activities.
Cash, liquidity and debt
- Cash and cash equivalents were $7.62 million at June 30, 2017, down from $14.13 million at year-end 2016. Restricted cash was $1.51 million; total cash, cash equivalents and restricted cash were $9.13 million.
- Working capital was $10.81 million, versus $11.53 million at December 31, 2016.
- Six-month operating cash flow was $0.42 million, compared with $2.33 million a year earlier. Investing used $0.16 million; financing used $6.77 million, mainly for debt repayment and share withholding-tax repurchases. Cash declined by $6.51 million overall.
- Total debt and contingent obligations, net of deferred finance costs, were $26.06 million, compared with $31.92 million at year-end. This included a $20.00 million term loan and $2.85 million C Wonder contingent obligation. Current maturities totaled $4.04 million.
- The term loan bears fixed interest at 5.1% and matures January 1, 2021. Amendments increased near-term principal payments and lowered certain EBITDA covenants. The company reported compliance with all applicable covenants at June 30, 2017.
Material changes and management outlook
- Revenue declined 8% in Q2 and 4% for the first half. Q2 interactive-TV revenue fell about $0.52 million, primarily due to the C Wonder transition; LCNY-related revenue also declined. Growth in wholesale and department-store business partly offset these reductions.
- Operating expenses fell year over year, including lower prior-period facility-exit costs and lower stock-based compensation. Operating income improved, but adjusted EBITDA declined in both comparative periods.
- QVC accounted for 81% of Q2 revenue and 83% of first-half revenue. On April 28, 2017, Xcel and QVC agreed to terminate the C Wonder QVC agreement effective May 1; QVC royalties continue through January 31, 2018, with certain interactive-TV exclusivity through May 1, 2018. Xcel said it was pursuing new C Wonder channels and licensing partners.
- Management expected existing cash and operating cash flows to meet operating, debt-service and capital-expenditure needs for at least 12 months after filing. It gave no specific revenue or earnings guidance. Management also planned to broaden licensed products and distribution, including a Dillard’s H Halston launch and planned IMNYC Isaac products.
- Key risks include dependence on licensees and QVC, the ability to retain partners and build brand awareness, fashion and consumer-demand shifts, retail-sector changes, and execution of new distribution channels. Management said pending litigation was not expected to have a material adverse effect and reported effective disclosure controls.
Items investors should verify
- Progress replacing C Wonder’s QVC sales and royalties after the sell-off and exclusivity periods, and the resulting revenue concentration.
- Cash generation and working-capital trends, particularly receivables: QVC represented approximately 78% of receivables at June 30.
- Debt amortization, covenant headroom and the effect of the accelerated 2017 payments on liquidity.
- Drivers of the high effective tax rate and the effect of stock-award vesting; the six-month tax provision exceeded pretax income.
- Reconciliation and consistency of non-GAAP results with GAAP earnings, especially given declining adjusted EBITDA despite improved operating income.
- Related-party consulting arrangements and share awards, and the valuation and eventual settlement of contingent earn-out obligations.