Xcel Brands, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited, consolidated. Comparisons are with the three months ended March 31, 2015 unless otherwise stated. Xcel develops and licenses consumer brands, including Isaac Mizrahi, Judith Ripka, H Halston, C Wonder and Highline Collective. It also managed and designed Liz Claiborne New York through July 31, 2016; management said its focus going forward would be wholly owned brands.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $8.392 million | $6.591 million; up about 27% |
| Licensing revenue | $8.345 million | $6.524 million; up $1.821 million |
| E-commerce sales | $47,000 | $67,000 |
| Gross profit and gross margin | $8.322 million; about 99.2% | $6.546 million; about 99.3% |
| Operating expenses | $7.983 million | $5.648 million |
| Operating income | $339,000 | $287,000 |
| Interest and finance expense | $435,000 | $511,000 |
| Net loss | $45,000; loss per share reported as $0.00 | $331,000; loss per share $0.02, including $213,000 discontinued-operations loss |
| Non-GAAP net income / diluted EPS | $1.245 million / $0.07 | $1.666 million / $0.11 |
| Adjusted EBITDA | $2.002 million | $2.203 million |
| Cash from continuing operations | $(1.302) million operating cash flow | $(351,000) |
Revenue growth was primarily attributed to the H Halston brands and C Wonder, acquired in late 2014 and July 2015, respectively. QVC contributed $6.79 million, or 81% of revenue, versus $5.15 million, or 78%, a year earlier. QVC receivables were $7.79 million, 85% of total receivables, at quarter-end.
Operating expenses increased about $2.33 million, including higher compensation and stock-based compensation, design and marketing, and other SG&A. The company reported $1.212 million of stock-based compensation, up from $1.013 million. Although GAAP net loss narrowed, non-GAAP net income and Adjusted EBITDA declined year over year; these company-defined non-GAAP measures should be considered alongside GAAP results.
Balance sheet, debt and liquidity
At March 31, 2016, cash and cash equivalents were $12.586 million, down from $16.860 million at December 31, 2015. Current assets were $22.439 million and current liabilities $10.167 million. Total assets were $149.220 million; total liabilities were $48.252 million; stockholders’ equity was $100.968 million.
Reported debt and contingent obligations had a net carrying amount of $38.657 million, compared with $41.028 million at year-end. This included $27.875 million under the new Xcel Term Loan, $4.239 million under the IM Seller Note, and $6.634 million in Ripka and C Wonder contingent obligations. The term loan bears fixed interest of 5.1%, matures January 1, 2021, and is secured by company and guarantor assets. The IM Seller Note’s scheduled $4.377 million payment is due September 30, 2016 and may be settled in stock or cash at the company’s discretion; cash payment requires lender approval.
Cash used in financing activities was $2.726 million, including debt payments and a $250,000 QVC earn-out payment. Cash used in investing activities was $246,000, primarily for office improvements and equipment. 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 following March 31, 2016. The filing reports compliance with applicable loan covenants at quarter-end. Adjusted working capital ratio, as defined by the company and excluding certain obligations, was 3.79 to 1.00, versus 2.80 to 1.00 at year-end.
Changes, outlook and risks
- Operating expenses grew faster than revenue, while Adjusted EBITDA and non-GAAP earnings fell. Management attributed expense increases to staffing and scaling for C Wonder, the quick-time-response “virtual vertical” platform, and brand launches.
- In April 2016, the company launched IMNYC Isaac Mizrahi, H Halston and Highline Collective at Lord & Taylor and Hudson’s Bay; it planned a C Wonder Limited launch later in 2016. These are stated plans, not quantified financial guidance.
- Management described continued efforts to diversify licensed products and distribution channels, expand licensing, and consider additional brand acquisitions. It provided no specific revenue or earnings forecast.
- Key risks include reliance on licensees and QVC, fashion-trend and consumer-preference changes, economic weakness, supply-cost changes, and retail consolidation. The filing says licensee performance is not assured. No off-balance-sheet arrangements with a material expected effect were reported; management viewed pending litigation as unlikely to have a material adverse effect.
- The company issued 2.422 million options during the quarter and reported 5.552 million shares reserved for options, warrants or future plan issuance. Weighted-average basic shares outstanding rose to 18.459 million from 14.069 million.
Important facts for investors to verify
- Whether revenue growth and the April retail launches translate into sustainable royalties, especially given QVC’s 81% share of quarterly revenue.
- Cash conversion and working-capital movements: operating cash use increased to $1.302 million, while cash declined by $4.274 million during the quarter.
- Debt-service capacity, lender covenant headroom, and the planned settlement of the $4.377 million IM Seller Note payment.
- The effect of higher operating costs and substantial equity compensation on future profitability and dilution; reconcile non-GAAP measures with GAAP results.
- Whether the company meets stated loan requirements, including 2016 EBITDA of $9.5 million, capital expenditure limits, liquidity and fixed-charge tests. These are covenant thresholds, not management earnings guidance.