Xcel Brands, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context
Xcel manages consumer lifestyle brands and earns primarily licensing, royalty, design, and service-fee revenue. Its portfolio included Isaac Mizrahi, Judith Ripka, H Halston, C Wonder, and Highline Collective. The company also managed and designed Liz Claiborne New York through July 31, 2016. Retail stores had been discontinued in 2014; management was phasing out e-commerce during 2016.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $9.12 | $6.32 | $17.51 | $12.91 |
| Gross profit | $9.08 | $6.29 | $17.40 | $12.83 |
| Operating expenses | $8.85 | $5.84 | $16.83 | $11.49 |
| Income (loss) before tax | $(0.30) | $2.25 | $(0.39) | $2.03 |
| Net income (loss) | $(0.09) | $2.11 | $(0.14) | $1.78 |
| Adjusted EBITDA (non-GAAP) | $2.74 | $1.90 | $4.74 | $4.10 |
| Operating cash flow | Not provided separately | Not provided separately | $2.33 | $(0.75) |
Gross margin was approximately 99.6% in both quarterly and six-month periods. Revenue growth was driven by licensing; operating expenses rose faster than revenue. GAAP diluted loss per share was approximately $0.00 in Q2 and $0.01 for the six months. Non-GAAP diluted EPS was $0.11 and $0.17, respectively; the company cautions that its non-GAAP measures are not substitutes for GAAP results.
QVC generated $7.83 million, or approximately 86% of Q2 revenue, and $15.14 million, or approximately 87% of six-month revenue. QVC receivables were $7.33 million, about 73% of total receivables, at June 30.
Balance sheet, cash flow, and debt
- Cash and cash equivalents were $13.47 million at June 30, down from $16.86 million at December 31, 2015. Total current assets were $24.12 million and current liabilities $11.92 million; reported adjusted working capital was $16.50 million.
- Total assets were $152.41 million, including $111.76 million of trademarks and other intangibles and $12.37 million of goodwill. Stockholders’ equity was $102.33 million.
- Debt carrying amount, including seller notes and contingent obligations, was $37.90 million, versus $41.03 million at year-end. Cash flow from operations was $2.33 million; investing activities used $2.12 million and financing activities used $3.60 million.
- In February 2016, the company refinanced prior term loans into a $27.88 million term loan, bearing fixed interest of 5.1% and maturing January 2021. June 30 carrying value was $27.00 million. The IM Seller Note had a remaining scheduled payment of $4.38 million due September 30, 2016, payable in stock or cash at the company’s discretion; cash payment requires lender approval.
Changes, outlook, and risks
- Revenue increased 44% in Q2 and 36% for the six months year over year, principally from interactive television sales and new licenses, including brands acquired in 2014–2015. E-commerce and LCNY revenue declined.
- Net results reversed to losses from prior-year income. The prior-year periods included a $3.00 million gain on reducing an Isaac Mizrahi contingent obligation, partly offset by debt-extinguishment losses. Q2 2016 expenses also included about $0.67 million of non-recurring office-exit charges; the company relocated its New York offices.
- Management expected existing cash and operating cash flows to fund operations, debt service, and capital expenditures for at least 12 months after June 30, 2016. No specific revenue or earnings guidance was provided.
- Management’s strategy includes expanding licensing and distribution channels, developing its virtual-vertical platform, launching C Wonder at department stores later in 2016, and pursuing new licenses and brand acquisitions. Results remain dependent on licensee performance, brand awareness, and consumer demand. Fashion changes, economic weakness, retail consolidation, and input-cost changes are cited risks.
- The term loan requires, among other things, minimum net worth of $90 million, minimum liquid assets of $5 million until leverage falls below the specified threshold ($3 million thereafter), a 1.20 minimum fixed-charge ratio, capital expenditure limits, and defined EBITDA of at least $9.5 million for 2016. The company reported compliance at June 30.
- Contingent earn-outs totaled $6.63 million, largely related to the Ripka and C Wonder brands. Management said pending litigation was not expected to have a material adverse effect. Disclosure controls were deemed effective; no significant internal-control changes were reported.
Important facts for investors to verify
- QVC concentration in revenue and receivables, and the performance and renewal terms of major licensing agreements.
- Ability to meet the IM Seller Note maturity and loan covenants, including the 2016 EBITDA and liquidity requirements.
- Cash conversion and working-capital needs as accounts receivable rose by $2.48 million during the six months.
- Whether revenue growth from acquired brands and new retail-channel launches can offset higher staffing and operating costs; assess GAAP results alongside non-GAAP adjustments.
- Potential dilution: 2.77 million options were outstanding at June 30, with additional warrants and plan shares reserved; reported common shares outstanding were approximately 18.67 million.