Xcel Brands, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted. The interim financial statements are unaudited.
Business context
Xcel is a media and brand-management company whose portfolio included Isaac Mizrahi, Judith Ripka, H Halston, C Wonder, and Highline Collective. It earns licensing, design, and service fees and also conducts limited direct-to-consumer activity. Management said it intended to focus on wholly owned brands and diversify licensing and distribution channels. QVC accounted for approximately 87% of revenue in both periods.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $8.43 million | $8.36 million |
| Operating income | $0.44 million | $0.34 million |
| Operating margin | Approximately 5.2% | Approximately 4.1% |
| Interest and finance expense | $0.38 million | $0.44 million |
| Income (loss) before taxes | $0.06 million | $(0.10) million |
| Income tax provision (benefit) | $0.46 million | $(0.05) million |
| Net loss | $(0.40) million | $(0.05) million |
| GAAP loss per share, basic and diluted | $(0.02) | $(0.00) |
| Adjusted EBITDA (non-GAAP) | $1.94 million | $2.00 million |
| Non-GAAP net income | $1.11 million | $1.25 million |
Revenue rose about 0.8% year over year. Operating costs and expenses were essentially flat at $8.00 million. The $0.46 million tax provision, despite only $0.06 million of pretax income, reflected a discrete tax effect from restricted-stock vesting and recurring permanent differences; the company reported an approximately 800% effective tax rate.
Net cash used in operating activities was $1.01 million, versus $1.30 million used a year earlier. Investing activities used $0.15 million and financing activities used $2.76 million. Cash, cash equivalents, and restricted cash declined $3.93 million during the quarter. At March 31, cash and cash equivalents were $10.20 million, restricted cash was $1.51 million, working capital was $10.47 million, and total debt carrying value was $30.01 million. Current liabilities were $9.33 million.
Debt included a $24.00 million term loan, with $6.19 million of total debt classified as current. The term loan bears fixed interest at 5.1% and matures January 1, 2021. Management said the company was in compliance with applicable loan covenants at quarter-end and expected available cash and operating cash flows to cover needs, debt service, and capital expenditures for at least twelve months after filing. That expectation depends in part on licensees performing as projected.
Changes, outlook, and risks
- Interactive-television revenue increased approximately $0.52 million and quick-time-response department-store revenue increased approximately $0.09 million; these gains were largely offset by a $0.53 million decline related to the Liz Claiborne New York management and design contract, which ended in July 2016.
- Interest and finance expense declined approximately $0.06 million, primarily following an amendment that reduced the stated interest rate on the Isaac Mizrahi seller note.
- QVC receivables were $7.25 million, approximately 83% of total receivables. This concentration, alongside QVC’s approximately 87% revenue share, exposes the company to significant counterparty and channel dependence.
- On April 28, 2017, Xcel and QVC agreed to terminate the C Wonder QVC agreement effective May 1, 2017. QVC remains obligated to pay royalties through January 31, 2018, and retains specified interactive-television exclusivity through May 1, 2018. Xcel said it was pursuing other distribution channels and licensing partners; the filing provides no quantified replacement-revenue guidance.
- Management described plans to expand quick-time-response retail distribution, including an H Halston launch at Dillard’s in April 2017, and to pursue licensing opportunities and potential brand acquisitions. No numerical earnings or revenue guidance was provided.
- The loan agreement requires, among other items, minimum net worth and liquidity, fixed-charge coverage, capital-expenditure limits, and $9.0 million of defined EBITDA for each fiscal year beginning in 2017. The company reported covenant compliance at March 31, 2017.
- Other notable items include $1.08 million of stock-based compensation in Q1 2017 and a $0.74 million remaining liability for costs associated with the former office lease. Management said pending legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no significant quarterly change in internal control over financial reporting.
Management identified fashion-trend changes, retail and economic conditions, supply costs, retailer consolidation, and the ability to retain licensees and meet licensee commitments as risks. The company also noted that its results depend substantially on licensees and that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- QVC concentration in revenue and receivables, and the effect of the C Wonder agreement termination and royalty sell-off period.
- Actual cash generation, working-capital movements, and the capacity to meet scheduled debt payments and covenant requirements.
- The assumptions underlying the $0.46 million tax provision and the treatment of stock-based compensation and other exclusions in non-GAAP results.
- Progress in replacing or diversifying revenue through other retailers, licensing partners, and distribution channels.
- Debt carrying value, scheduled maturities, contingent obligations, and the company’s ability to achieve the loan agreement’s defined EBITDA requirement.