Xcel Brands, Inc. — Q1 2021 Form 10-Q
Business and period: Xcel is a media and consumer-products company that owns, manages, licenses, designs, and sells branded apparel, jewelry, home goods, and other products through television, wholesale, e-commerce, and other channels. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net revenue | $7.81 million | $9.53 million |
| Gross profit / margin | $5.97 million / 76% | $7.13 million / 75% |
| Operating loss | $(2.49) million | $(1.10) million |
| Net loss attributable to Xcel stockholders | $(2.55) million; $(0.13) per share | $(0.81) million; $(0.04) per share |
| Adjusted EBITDA (non-GAAP) | $(0.86) million | $0.72 million |
| Operating cash flow | $(1.69) million | $0.31 million |
| Capital expenditures | $0.30 million | $0.60 million |
Net licensing revenue was $4.31 million, down from $5.64 million; product sales were $3.50 million, down from $3.89 million. Product gross margin improved to 48% from 38%, while total gross margin rose about one percentage point. The filing also reports non-GAAP net loss of $1.52 million, or $0.08 per diluted share, versus non-GAAP net income of $0.19 million, or $0.01 per share, in Q1 2020. These non-GAAP measures are supplemental and should be considered alongside GAAP results.
Financial position and liquidity
- At March 31, 2021, cash and cash equivalents were $2.97 million, with a further $1.11 million of restricted cash. Cash, cash equivalents, and restricted cash together were $4.08 million, down $1.99 million from year-end.
- Working capital, as defined by the company, was $6.5 million, versus $7.9 million at December 31, 2020. Inventory increased to $2.79 million from $1.22 million.
- Term loan debt had a $16.75 million principal balance ($16.66 million net carrying amount); operating lease liabilities totaled $10.10 million. The company reported total liabilities of $38.02 million and equity of $83.80 million.
- Operating cash use reflected the quarterly loss and a $1.57 million inventory build, partly offset by a $1.82 million increase in accounts payable, accrued expenses, and other current liabilities.
Material changes, outlook, and risks
- Revenue fell about 18% year over year. Management attributed approximately $1.1 million of the licensing decline to discontinuing QVC licensing of the H Halston brand and transitioning it to a wholesale supply model. Other licensing weakness and lower apparel sales were attributed primarily to COVID-19 impacts. Jewelry and Longaberger e-commerce sales grew, partly offsetting product-sales declines.
- Operating expenses increased to $8.46 million from $8.22 million, including higher salaries, benefits, and marketing costs. The larger operating loss and smaller income-tax benefit contributed to the increase in net loss.
- Qurate Retail Group generated approximately 49% of revenue in both quarters. Its receivable was $3.84 million, about 44% of accounts receivable, at March 31, 2021. Management identified concentration and collection exposure.
- COVID-19 continued to affect customer demand, order volumes, collections, manufacturing, and logistics. At quarter-end, about $1.5 million was due from customers affected by bankruptcy or financial distress; the company had an approximately $1.1 million allowance against such customer balances. Further bad-debt expense, supply delays, or added freight and logistics costs could hurt results, liquidity, and covenant compliance.
- Management expected COVID-19 to significantly affect results for some portion of 2021, but gave no specific financial guidance. It stated that cash and expected operating cash flows should cover operating needs, debt service, and capital expenditures for at least 12 months after filing.
- Post-quarter events: On April 1, 2021, Xcel acquired the Lori Goldstein brand for $1.6 million initially, with another $2.0 million due upon the earlier of a first QVC royalty receipt or July 29, 2021, and potential earn-outs of up to $12.5 million. Related employment and consulting agreements provide for substantial annual compensation and incentives. On April 14, Xcel refinanced its existing term debt with a $25 million facility, bearing interest at weighted-average LIBOR plus 6.2%; it provides for quarterly installments and a $15 million final payment at April 2025 maturity. Up to $25 million of additional acquisition financing is available subject to lender approval. The filing states that the refinancing extinguished the prior term loan.
- Disclosure controls and procedures were deemed ineffective at March 31, 2021 because of a material weakness in internal control over financial reporting. The filing cites reporting-process challenges, including the late 2020 impairment analysis and complex subsequent events; the company said it had hired additional finance personnel. Management reported no defaults upon senior securities.
Important facts for investors to verify
- Whether post-quarter borrowing, refinancing costs, scheduled payments, and the $15 million maturity payment remain manageable given operating cash flow and covenant requirements.
- Performance and integration costs of the Lori Goldstein acquisition, including contingent consideration and executive compensation commitments.
- Qurate concentration, receivable collections, customer bankruptcies, and any additional allowance requirements.
- Progress in restoring effective disclosure controls and internal control over financial reporting, and compliance with debt covenants.
- Whether COVID-related demand, supply-chain, and logistics disruption persists, and whether the reported improvement in product gross margin is sustainable.