Xcel Brands, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial amounts below are in U.S. dollars; balance-sheet and cash-flow amounts are as of September 30 or for the nine-month period, as applicable.
Business context
Xcel is a branded consumer-products and media company with licensing, wholesale, e-commerce, and live-streaming operations. Its portfolio includes Isaac Mizrahi, Halston, Judith Ripka, C Wonder, Longaberger, and LOGO by Lori Goldstein. Xcel acquired the LOGO brand assets on April 1, 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenue | $11.3m | $7.4m | $29.8m | $22.0m |
| Gross profit | $8.4m | $6.1m | $22.1m | $18.0m |
| Operating loss | $1.3m | $0.3m | $5.5m | $2.0m |
| Net loss attributable to Xcel shareholders | $1.1m | $0.4m | $5.2m | $2.5m |
| Basic and diluted loss per share | $0.06 | $0.02 | $0.27 | $0.13 |
| Adjusted EBITDA (non-GAAP) | $1.0m | $1.4m | $1.0m | $3.9m |
Revenue growth reflected the acquired LOGO brand, continued Isaac Mizrahi growth, and higher wholesale and Longaberger e-commerce/social-commerce sales. Halston licensing revenue declined as the brand transitioned toward a wholesale supply model. Overall gross margin was approximately 74.6% in Q3 and 74.0% for nine months, versus approximately 82.8% and 82.1% in the respective 2020 periods. Management reported product-sales margins of 35% in Q3 and 38% for nine months, compared with 41% in both prior-year periods, citing higher freight and supply costs.
Operating expenses rose to $9.7m in Q3 and $27.6m for nine months, reflecting higher payroll, marketing, logistics, and amortization, as well as the absence of prior-year government assistance. Term-loan interest expense increased; nine-month interest and finance expense also included an $0.8m loss on extinguishment of debt. The prior-year period included $1.806m of PPP assistance recognized as an expense reduction; the loan was fully forgiven in September 2021.
Cash, liquidity, and debt
- Cash and cash equivalents were $4.0m, down from $5.0m at December 31, 2020; restricted cash was $0.7m. Current assets were $20.1m and current liabilities $12.4m.
- Operating cash flow was negative $5.5m, versus positive $2.2m in the prior-year nine months. Increased receivables and inventory were significant cash uses. Investing cash outflow was $4.7m, including the LOGO acquisition; financing cash inflow was $8.9m.
- Debt carrying value was $25.2m, comprising $23.75m of term loans and $2.50m drawn on the revolving facility; $5.0m was classified as current. The term loans mature April 2025, with a $15.0m final payment, and bear rates tied to LIBOR plus 4% or 8%, depending on the tranche. The loans are secured by substantially all company and guarantor assets.
- The revolving facility was reduced and amended during 2021. Xcel reported $1.5m availability after November 15, subject to lender discretion and covenant-based conditions. Management said cash and operating cash flows should cover operating needs, debt service, and capital expenditures for at least 12 months after filing.
Changes, outlook, and risks
- The LOGO acquisition had $3.645m of initial cash consideration and a recorded $6.639m contingent earn-out liability; the earn-out may reach $12.5m, based on future royalties. The brand’s trademarks are amortized over four years. The acquisition also brought a 10-year employment agreement and consulting agreement with associated annual fees and incentives.
- April 2021 refinancing increased term debt to $25m. Covenant thresholds and revolving availability were amended in August and September; a November 12 amendment further modified or eliminated certain covenants. The filing states the company was in compliance as of September 30, including the November amendment.
- Management cited continuing COVID-19 effects on demand, customer collections, factories, and logistics. Approximately $1.5m was due from customers affected by bankruptcy or economic distress, against which an approximately $1.1m allowance was recorded. Supply-chain and freight cost pressures were expected to continue through the remainder of 2021 and at least part of 2022. Management said 2021 results were expected to be significantly affected for some portion of the year; no specific revenue or earnings guidance was provided.
- QVC accounted for approximately 54% of Q3 revenue and 51% of nine-month revenue; QVC receivables were 57% of accounts receivable at quarter-end, creating customer concentration exposure.
- Disclosure controls and procedures were deemed ineffective as of September 30 due to a material weakness in internal control over financial reporting. Xcel said it hired additional finance personnel; no significant control changes during the quarter were reported.
- Management said pending legal matters were not expected to have a material adverse effect. The filing reported no defaults on senior securities and no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether operating cash flow, working-capital needs, and cash balances support debt service and the lender’s minimum-liquidity and other covenant requirements.
- Current revolving-credit availability, covenant compliance after the November 2021 amendment, and the implications of the large $15.0m term-loan balloon payment in 2025.
- Whether LOGO acquisition royalties support the recorded earn-out liability and whether acquisition-related fees and compensation affect future profitability.
- Progress in remediating the material weakness and improving timely, reliable financial reporting.
- Whether customer concentration, receivable collectibility, and ongoing supply-chain and freight pressures worsen margins, cash flows, or covenant headroom.
- Performance of non-GAAP measures alongside GAAP results; the company’s adjustments exclude material items and may not be comparable with other companies’ measures.