Xcel Brands, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results; amounts below are in millions unless stated otherwise.
Business context
Xcel owns, manages, licenses and sells consumer lifestyle brands across apparel, jewelry, home goods and related products. Its portfolio includes Isaac Mizrahi, Halston, Judith Ripka, C Wonder, LOGO by Lori Goldstein and Longaberger. Sales and licensing span television, wholesale, e-commerce, live-streaming and other channels. On April 1, 2021, Xcel acquired specified assets of the LOGO by Lori Goldstein brand.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net revenue | $10.764 | $5.050 | $18.573 | $14.577 |
| Gross profit | $7.701 | $4.797 | $13.675 | $11.924 |
| Operating loss | $(1.717) | $(0.609) | $(4.203) | $(1.705) |
| Net loss attributable to Xcel stockholders | $(1.558) | $(1.300) | $(4.105) | $(2.105) |
| Basic and diluted loss per share | $(0.08) | $(0.07) | $(0.21) | $(0.11) |
| Net cash from (used in) operating activities | Not presented quarterly | $(5.744) | $2.381 |
Gross margin was approximately 71.5% in Q2 2021 versus 95.0% in Q2 2020, and 73.6% in the first half versus 81.8% a year earlier. Management reported first-half product-sales gross margin of 40% in both periods. Adjusted EBITDA, a non-GAAP measure, was $0.851 million in Q2 2021 versus $1.742 million; for the first half it was $(0.013) million versus $2.457 million. First-half non-GAAP net loss was $1.649 million versus non-GAAP net income of $1.365 million.
At June 30, cash and cash equivalents were $4.815 million, restricted cash was $0.739 million, working capital as defined by the company was $8.7 million, and total liabilities were $51.834 million. Net carrying debt was $24.829 million, comprising $24.375 million term-loan principal and $1.5 million revolving borrowings, less unamortized finance costs. The new term loans mature in April 2025 and include a $15 million final payment. Management said available cash and expected operating cash flows should cover operating needs, debt service and capital expenditures for at least 12 months after filing.
Changes, outlook and significant items
- Q2 revenue more than doubled year over year, driven by a $1.7 million increase in licensing revenue and a $4.0 million increase in product sales. First-half revenue rose about 27%; product sales rose $3.6 million and licensing revenue rose $0.4 million.
- Management attributed growth to the Lori Goldstein acquisition, strong Isaac Mizrahi performance, and higher wholesale, jewelry, Longaberger e-commerce and live-streaming sales. Halston licensing declined as the brand transitioned toward a wholesale supply model. Comparisons also reflect COVID-19 disruption to retail sales in the 2020 periods.
- Operating costs rose year over year, reflecting normalized post-COVID salaries, marketing and other costs, higher shipping and warehousing costs, and added amortization. The 2020 comparison benefited from $1.640 million of PPP assistance recognized as an expense reduction.
- Interest and finance expense rose to $1.443 million in Q2 and $1.723 million in the first half. The first half included a $0.821 million loss on extinguishment of prior debt; the refinancing also increased borrowing and interest costs.
- The Lori Goldstein acquisition carried aggregate consideration of $10.3 million, including $1.6 million paid at closing, $2.045 million payable (paid in July), and a $6.639 million recorded earn-out obligation. Additional earn-out payments may total up to $12.5 million, based on royalties over six years. The acquired trademarks are amortized over four years.
- On August 12, 2021, lenders amended the loan agreement: they waived the EBITDA covenant for the quarter ended June 30 and lowered certain financial covenant thresholds for subsequent periods. The revolving facility limit was reduced from $4.0 million to $1.5 million until specified covenant compliance is demonstrated. Xcel reported compliance with applicable covenants at June 30.
- Management gave no specific revenue or earnings forecast and said COVID-19’s effects made 2021 results difficult to forecast, while expecting some portion of 2021 results to be significantly affected. Risks include supply-chain and logistics delays, customer bankruptcies and collection losses, order cancellations, and potential covenant noncompliance. At June 30, approximately $1.5 million was due from affected or bankrupt retailers, against which the allowance was approximately $1.1 million.
- Disclosure controls were deemed ineffective at June 30 due to a previously identified material weakness in internal control over financial reporting. The company cited late filing and complexities involving a trademark impairment analysis, and said it had hired additional finance personnel. Management reported no significant control changes during the quarter.
Key facts investors should verify
- Whether the acquisition contributes royalties and cash flows sufficient to support its purchase price, earn-out, and related employment and consulting costs.
- Whether operating cash flow improves from the first-half cash use and whether receivables, inventory and customer collections perform as expected.
- Compliance with amended lender covenants, the reduced revolving facility availability, and scheduled debt payments, including the substantial 2025 balloon payment.
- Progress in remediating the material weakness and improving financial reporting controls.
- The ongoing impact of COVID-19 on supply, logistics, customer solvency, sales and the collectibility of receivables.