Xcel Brands, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparison is FY2019. This is an annual filing, not a standalone fourth-quarter report. Filed April 22, 2021.
Business context
Xcel owns and manages consumer lifestyle brands and earns revenue primarily from licensing, with additional wholesale and direct-to-consumer sales. Its portfolio at year-end included Isaac Mizrahi, Judith Ripka, Halston, C Wonder and Longaberger; Longaberger is operated through a 50%-owned joint venture. Qurate Retail Group is a major distribution and licensing partner. Xcel acquired the Lori Goldstein brands in April 2021, after the reporting period.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | $29.4 million | $41.7 million |
| Licensing revenue | $20.3 million | $26.4 million |
| Net product sales | $9.2 million | $15.3 million |
| Gross profit / gross margin | $24.0 million / 81% | $31.5 million / 75% |
| Operating loss | $16.4 million | $2.6 million |
| Net loss attributable to Xcel shareholders | $12.9 million; diluted loss per share $0.68 | $3.4 million; diluted loss per share $0.18 |
| Adjusted EBITDA (non-GAAP) | $4.1 million | $7.1 million |
| Non-GAAP net income / diluted EPS | $1.8 million / $0.10 | $4.8 million / $0.25 |
| Net cash provided by operating activities | $3.2 million | $3.5 million |
Product gross margin improved to 41% from 33%, attributed to greater wholesale operating efficiencies. Total gross margin also benefited from the revenue mix shifting toward licensing, which generally has lower cost of goods sold. Non-GAAP measures exclude specified items and should be considered alongside GAAP results.
At December 31, 2020, cash and cash equivalents were $5.0 million, restricted cash was $1.1 million, working capital was $7.9 million under the company’s stated definition, and accounts receivable were $8.9 million. The company reported $16.75 million of term-loan principal outstanding ($16.64 million net of deferred financing costs), including $2.8 million current. The debt was secured by substantially all company assets. Xcel reported compliance with applicable loan covenants at year-end. Cash from investing activities was negative $0.7 million, including $0.75 million of capital expenditures; financing activities used $2.2 million.
Material changes and unusual items
- Revenue fell $12.3 million (about 29%) year over year. Licensing revenue declined $6.2 million, reflecting COVID-related customer and retail disruption, a $3.0 million reduction in guaranteed minimums on a renewed license, and a $1.7 million reduction associated with a separate move from guaranteed minimums to sales-based royalties. Product sales declined $6.1 million, primarily due to pandemic-related closures and weaker activity.
- Operating costs increased to $40.4 million from $36.9 million. The principal unusual item was a $13.0 million non-cash impairment of Judith Ripka trademarks, compared with $6.2 million in 2019. The impairment followed delays and uncertainty in planned brick-and-mortar expansion, largely related to COVID-19.
- FY2020 operating expenses included $1.8 million of PPP and other government assistance as a reduction to expenses. The company said full forgiveness of the $1.806 million PPP loan was probable, but not assured; the loan bears 1% interest and has a two-year term.
- Bad-debt expense included approximately $1.0 million tied to retail customer bankruptcies. At year-end, receivables from affected bankrupt customers were $1.21 million, against which the company recorded a $0.97 million allowance.
- Qurate accounted for 60% of FY2020 revenue, up from 53% in FY2019, despite Qurate revenue declining to $17.6 million from $22.2 million. Xcel discontinued licensing the H Halston brand to QVC in Q4 and began wholesale supply arrangements with HSN, certain QVC affiliates and other networks.
- Other income was only $0.05 million in 2020, versus a $2.85 million gain in 2019 from release of the C Wonder earn-out liability.
Outlook, risks and subsequent events
The filing provides no quantified 2021 earnings or revenue guidance. Management expected COVID-19 to negatively affect results for at least part of 2021, citing uncertain customer demand, supply-chain and logistics disruption, order cancellations, and further credit losses. Management stated that available cash and anticipated operating cash flows were expected to support operations and debt service for at least 12 months after filing.
Key risks include dependence on Qurate and other concentrated license relationships; reliance on key brand personalities; pandemic-related sales and collection pressures; impairment risk for valuable trademarks; competition and changing consumer preferences; overseas manufacturing and sourcing; and covenant or liquidity pressure. Legal proceedings were described as ordinary-course matters not expected by management to have a material adverse effect.
Subsequent to year-end, on April 14, 2021, Xcel refinanced its debt with a new $25.0 million secured facility, using part of the proceeds to repay the prior $16.75 million balance. The new facility matures April 14, 2025, carries interest at a weighted average rate of LIBOR plus 6.2%, includes a $15.0 million final payment, and permits up to $25 million of additional acquisition financing subject to lender approval. In April 2021, Xcel also acquired the Lori Goldstein brands for $3.6 million upfront plus up to $12.5 million in performance-based earn-outs.
Management concluded that disclosure controls and internal control over financial reporting were not effective at December 31, 2020 because of material weaknesses involving the timing and complexity of reporting, including trademark impairment analysis and significant subsequent events. Management said it hired additional finance personnel. The auditor issued an unmodified opinion on the financial statements and did not audit internal-control effectiveness.
Important facts for investors to verify
- Whether Qurate agreements are renewed or amended, and how the 60% revenue concentration changes; several agreement terms expire in 2021–2022.
- Whether the new $25 million facility’s amortization, final payment, interest expense and covenants remain manageable, and how acquisition financing may affect leverage.
- Whether the PPP loan is forgiven and whether customer bankruptcy receivables produce additional losses.
- Whether the Judith Ripka impairment assumptions and the brand’s retail strategy support the remaining trademark carrying value.
- Whether COVID-related demand, sourcing and logistics pressures ease, and whether the company restores effective reporting controls.
- The cost and performance conditions of the Lori Goldstein acquisition, including potential earn-outs and ongoing employment and consulting costs.