Xcel Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. Xcel develops and licenses consumer brands, generating most revenue from royalties and related services. The company had discontinued its retail stores in December 2014; retail results are presented as discontinued operations.
Financial performance
| Metric | Three months 2015 | Three months 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $6.321 million | $6.072 million | $12.912 million | $9.612 million |
| Gross profit | $6.286 million | $6.068 million | $12.832 million | $9.608 million |
| Net income (loss) | $2.107 million | $0.409 million | $1.776 million | ($0.546 million) |
| Diluted EPS | $0.13 | $0.03 | $0.11 | ($0.05) |
| Adjusted EBITDA (non-GAAP) | $1.897 million | $2.797 million | $4.099 million | $3.537 million |
| Non-GAAP net income | $1.115 million | $1.976 million | $2.781 million | $2.803 million |
- Quarterly revenue rose about 4%; six-month revenue rose about 34%. Growth reflected acquired H Halston and Ripka businesses, continuing Isaac Mizrahi growth, and e-commerce.
- Gross margin was approximately 99% in both 2015 periods, consistent with a predominantly licensing-based model. Operating expenses increased to $5.842 million for the quarter and $11.490 million for six months, largely due to staffing and design and marketing costs for acquired brands and business growth.
- Quarterly Adjusted EBITDA declined about 32% year over year, while six-month Adjusted EBITDA increased about 16%. Management attributed pressure to costs incurred ahead of expected H Halston and C Wonder launches. These are non-GAAP measures and should be considered alongside GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $2.617 million at June 30, down from $8.531 million at December 31, 2014. Restricted cash of $1.109 million was pledged for a lease-related letter of credit.
- Operating cash flow from continuing operations was negative $0.955 million for the six months; total operating cash flow, including discontinued operations, was negative $0.748 million. The company cited a $2.903 million increase in receivables, primarily collection timing at QVC, including $1.0 million earned but unbilled.
- Investing cash outflow was $1.470 million and financing cash outflow was $3.696 million for the six months. Financing outflows included $1.256 million of debt repayments and $2.183 million of Ripka installment payments.
- Reported debt and contingent obligations totaled $43.017 million, including $31.250 million of term loans, seller notes and $6.550 million of contingent obligations. Current debt and contingent obligations were $10.516 million; long-term debt was $32.501 million.
- Adjusted working capital ratio was 1.00 to 1.00 at June 30, versus 1.47 to 1.00 at year-end, using the company’s adjusted definition. Management said cash and operating cash flows should meet operating, debt service and capital expenditure needs for the next 12 months.
Material changes, unusual items and outlook
- GAAP earnings benefited from a $3.0 million gain reducing the Isaac Mizrahi earn-out obligation; this was partly offset by a $0.760 million quarterly loss on extinguishment of Ripka seller notes. For the six months, debt-extinguishment losses were $1.371 million. The earn-out adjustment depended on projected royalties and could be reversed or revised based on results through September 30, 2015.
- The company repaid $5.4 million of Ripka seller-note principal with 600,001 common shares during the six months, reducing the net Ripka seller-note balance to $0.452 million.
- QVC accounted for 78% of revenue in both 2015 comparison periods; QVC represented 83% of receivables at June 30. The company remains dependent on licensee performance and identified diversification of retailers, products and distribution channels as a priority.
- At June 30, the company reported compliance with term-loan covenants. Covenants include minimum consolidated EBITDA targets, a 1.20:1 fixed-charge ratio, minimum net worth of $40 million and minimum liquid assets of $4.5 million after August 31, 2015. Management estimated a $2.0 million 2015 excess-cash-flow principal payment on the IM loan.
- After quarter-end, Xcel completed the C Wonder asset acquisition on July 31 for $2.5 million cash and 500,000 shares, with another $0.5 million and 500,000 shares placed in escrow; future earn-out consideration is also possible. A QVC C Wonder license became effective at closing.
- On August 4, the company completed a public offering of 1.8 million shares at $9.00 per share, receiving approximately $14.9 million net proceeds. An underwriter option covered up to 270,000 additional shares. The company also entered a long-term office sublease commencing January 2016, with fixed rent of $117,032 per month before increases and additional rent.
- No formal revenue or earnings guidance is provided. Management cited fashion and consumer-demand shifts, economic conditions, retailer consolidation, licensee execution and brand awareness as risks. It stated there were no material changes to critical accounting policies, no material off-balance-sheet arrangements, and no legal proceedings reported.
Important facts for investors to verify
- QVC concentration, receivable collection timing and the company’s ability to broaden licensing and distribution sources.
- Whether the post-quarter offering proceeds satisfy liquidity needs and the $4.5 million covenant threshold, and whether the company continues to meet all debt covenants.
- Actual Isaac Mizrahi royalties through September 30 and any resulting change to the earn-out liability or reported gains.
- Performance and launch costs of H Halston and C Wonder, including the C Wonder acquisition’s earn-out terms and share dilution.
- Debt maturities, cash requirements under the new lease, and dilution from stock-based compensation, seller-note settlements and equity offerings. The filing reported 17,997,856 common shares outstanding as of August 12, 2015.