Xcel Brands, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The company owns and licenses consumer lifestyle brands and also operates wholesale and direct-to-consumer businesses.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenue | $6.05 | $8.75 |
| Net licensing revenue | $2.22 | $5.96 |
| Net sales | $3.83 | $2.79 |
| Gross profit | $3.36 | $7.07 |
| Operating costs and expenses | $6.96 | $8.28 |
| Net loss attributable to Xcel stockholders | $(5.64) | $(3.49) |
| Basic and diluted loss per share | $(0.29) | $(0.18) |
| Cash used in operating activities | $(2.92) | $(0.89) |
| Cash and cash equivalents, at quarter-end | $1.61 | $4.61 at Dec. 31, 2022 |
- Revenue fell about 31%; licensing revenue declined about $3.74 million, primarily because Xcel sold a 70% interest in the Isaac Mizrahi business in May 2022 and no longer records that brand’s licensing revenue as its own.
- Net sales rose about $1.04 million, primarily from selling C Wonder apparel inventory to HSN as part of the business restructuring. Gross profit nevertheless declined, largely reflecting lower licensing revenue. Gross profit was about 55.5% of net revenue versus 80.8% a year earlier; management separately reported product-sales gross margin of about 30% versus 40%.
- Operating expenses decreased about $1.32 million, mainly due to the transfer of Isaac Mizrahi employees and staffing reductions. The net loss widened despite lower expenses, as revenue and gross profit fell and the company recorded a $0.52 million equity-method loss on its IM Topco investment. Q1 2022 included $0.71 million of term-loan interest; the loan was repaid in May 2022.
- Adjusted EBITDA, a company-defined non-GAAP measure, was a loss of $3.23 million versus a loss of $0.89 million. Non-GAAP net loss was $3.55 million versus $1.94 million. These measures are supplemental and not substitutes for GAAP results.
Balance sheet, liquidity and cash flow
- At March 31, 2023, total assets were $84.16 million, total liabilities $19.90 million, and stockholders’ equity $64.26 million. Cash had declined $3.00 million from year-end.
- Management reported working capital of $5.1 million under its stated definition, versus $8.8 million at year-end. Operating cash outflow was $2.92 million; investing cash outflow was $0.08 million, mainly software-related capital spending. There was no financing cash flow in the quarter.
- The company reported no debt obligations at quarter-end. Operating lease liabilities totaled $6.93 million, including $1.40 million current. A $6.40 million Lori Goldstein earn-out liability remained long-term.
- The company reported a $38.44 million accumulated deficit. It recorded no income tax benefit, citing a valuation allowance against tax benefits from losses.
Outlook, risks and notable items
- Management identified substantial doubt about the company’s ability to continue as a going concern based on its losses, operating cash outflows and limited cash. It said subsequent business changes and cost actions alleviated that uncertainty and expects adequate cash flows for at least the 12 months after the filing date. This expectation depends on the restructuring and licensing strategy succeeding.
- Xcel is shifting from a wholesale/licensing hybrid toward a “licensing-plus” model, using partners for operations. Management expected the transition to be completed by the end of Q2 2023 and said actions taken by March 31 were expected to reduce payroll costs by $6 million and operating expenses by $7 million over the following 12 months.
- After quarter-end, Xcel signed a 25-year Halston master license providing an upfront payment and royalties, including certain guaranteed minimums and annual minimum sales requirements. The licensee may terminate at specified five-year intervals and has a $5 million purchase option at the end of the term, with certain acceleration conditions. Xcel granted a security interest in the Halston trademarks and issued a 10-year warrant for up to 1 million shares at $1.50, vesting based on royalty targets.
- Qurate accounted for approximately 25% of Q1 2023 revenue, down from 57% in Q1 2022; the prior-year comparison included Isaac Mizrahi revenue. Qurate receivables were approximately 25% of total accounts receivable at quarter-end. This concentration makes results and collections sensitive to a major business partner.
- Other risks include inflation in materials, labor and logistics, potential recession-related softness in consumer demand, reliance on licensees and partners, and the ability to sustain brand appeal. Nasdaq had notified the company of a minimum-bid-price deficiency; the filing described a May 2023 compliance deadline and possible delisting if compliance was not regained.
- Management said ordinary-course litigation was not expected to have a material adverse effect. A separate potential Isaac Mizrahi transaction obligation was unrecorded; management considered payment remote, and the stated maximum potential adjustment had been reduced to $10.11 million by WHP cash-flow distributions.
Important facts for investors to verify
- Whether the licensing transition, including Halston and other partner arrangements, produces the expected cash flows, minimum royalties and cost savings.
- Cash burn, receivables collections and Qurate exposure, given $1.61 million of quarter-end cash and negative operating cash flow.
- Progress in addressing Nasdaq’s minimum-bid-price deficiency and the related delisting risk.
- The terms, contingencies and potential future cash or equity impact of the Lori Goldstein earn-out and Isaac Mizrahi transaction provisions.
- Potential dilution from the Halston warrant and the company’s outstanding options and warrants.