Xcel Brands, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context and material change
Xcel is a branded consumer-products and media company with licensing, wholesale, direct-to-consumer, and live-shopping operations. Its portfolio includes LOGO by Lori Goldstein, Halston, Judith Ripka, C Wonder, Longaberger, and Isaac Mizrahi.
On May 31, 2022, Xcel sold 70% of the Isaac Mizrahi brand venture to WHP for $46.2 million in cash, retained a 30% interest accounted for under the equity method, and recognized a $20.6 million pretax gain. Xcel no longer reports the brand’s licensing revenue as its own. It used $30.1 million of sale proceeds to repay its term loan in full.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $4.5 | $11.3 | $21.7 | $29.8 |
| Net licensing revenue | $2.2 | $6.9 | $13.3 | $17.4 |
| Net sales | $2.3 | $4.4 | $8.4 | $12.4 |
| Gross profit | $3.0 | $8.4 | $16.0 | $22.1 |
| Net income (loss) attributable to Xcel shareholders | $(4.0) | $(1.1) | $2.0 | $(5.2) |
| Adjusted EBITDA, non-GAAP | $(2.9) | $1.0 | $(6.6) | $1.0 |
Q3 revenue fell mainly because Isaac Mizrahi licensing revenue moved outside Xcel’s consolidated results; wholesale sales also weakened. Management attributed lower wholesale sales to retailers pausing orders amid excess inventory and to factory closures and delivery delays. Nine-month revenue also declined, partly offset by growth in Lori Goldstein licensing.
Product gross margin was approximately 37% in Q3 versus 35% a year earlier, but 32% for the first nine months versus 38%. Management cited inventory sell-offs and write-downs on cancelled orders for the year-to-date decline. Nine-month GAAP net income included the Isaac Mizrahi sale gain; excluding specified items, non-GAAP net loss was $8.8 million versus $1.6 million a year earlier. These non-GAAP measures are company-defined and are not substitutes for GAAP results.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $8.4 million at September 30, 2022, up from $4.5 million at December 31, 2021. Working capital, as defined by the company, was $13.7 million, compared with $7.9 million.
- Operating cash flow was negative $11.0 million for the first nine months, versus negative $5.5 million a year earlier. Investing activities provided $45.2 million, primarily from the Isaac Mizrahi transaction; financing activities used $31.0 million, primarily for debt repayment and related fees.
- Term-loan debt was zero at quarter-end, down from $28.0 million net carrying value at year-end 2021. Repayment generated a $2.3 million loss on early extinguishment, including a prepayment premium and write-off of deferred financing costs.
- Total liabilities were $20.8 million and total assets were $97.2 million at September 30, 2022. Operating lease liabilities totaled $7.5 million.
Management stated that existing cash and expected operating cash flows should cover operating and capital expenditure needs for at least 12 months after the filing date.
Outlook, risks, and contingencies
- No numerical revenue or earnings guidance was provided. Management intends to pursue brand growth, new launches, licensing, wholesale and e-commerce expansion, and livestreaming initiatives. It noted the Isaac Mizrahi sale is expected to reduce revenue in the short term.
- Risks include ongoing COVID-19 effects, supply-chain and shipping disruption, inflation in materials, labor and logistics costs, potential recession-related consumer weakness, and customer credit exposure. The company reported an allowance for doubtful accounts of approximately $1.3 million.
- WHP may seek up to $16 million from Xcel if specified royalty thresholds for the Isaac Mizrahi venture are missed during the contractual three-year period. No liability was recorded; management considered payment remote. Xcel may also earn a $2.0 million payment if 2023 royalty and EBITDA targets are met.
- Other contingent obligations include a $6.6 million Lori Goldstein earn-out liability, of which $1.6 million was current, and a $0.9 million Halston Heritage earn-out liability. Management said payment under the Halston earn-out was highly unlikely.
- Qurate licensing revenue represented 31% of Q3 revenue and 48% of nine-month revenue, versus 54% and 51% in the comparable periods. Qurate receivables were $1.45 million at quarter-end.
- Management reported disclosure controls were effective as of September 30, 2022, with no material quarterly change in internal control over financial reporting. Pending litigation was not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether the remaining Isaac Mizrahi interest and related distributions, service fees, and royalty arrangements generate the expected ongoing value—and whether the contingent $16 million exposure changes.
- Whether revenue declines and negative adjusted EBITDA persist after the divestiture, and whether management can replace the sold brand’s contribution.
- Whether operating cash use improves and the stated 12-month liquidity expectation remains supportable.
- How retailer inventory, cancelled orders, supply-chain costs, inflation, and customer collections affect margins and cash flow.
- The timing and potential cash impact of the Lori Goldstein and Halston contingent obligations, and the continuing concentration in Qurate-related revenue and receivables.