Xcel Brands, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The filing is unaudited. Xcel designs, licenses, markets and sells products under the Isaac Mizrahi and certain Liz Claiborne New York brands. It opened its first retail store in Southampton, New York, in mid-June 2013.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $3.206 million | $2.824 million | $6.394 million | $5.704 million |
| Gross profit | $3.193 million | $2.824 million | $6.381 million | $5.704 million |
| Operating loss | $1.463 million | $0.810 million | $0.924 million | $0.122 million |
| Net loss | $1.196 million | $1.354 million | $1.183 million | $1.192 million |
| Basic and diluted loss per share | $0.13 | $0.19 | $0.14 | $0.19 |
Q2 revenue increased about 14%, principally from licensing revenue; six-month revenue increased about 12%. Licensing revenue was $2.885 million in Q2 and $5.788 million for the six months. Retail contributed $32,000 in sales in both periods, with a disclosed retail gross margin of approximately 59%. Overall gross profit was nearly equal to revenue because the business was predominantly licensing and services.
Operating losses widened as higher stock-based compensation and salaries more than offset revenue growth. Q2 stock-based compensation was $2.292 million versus $1.408 million a year earlier; six-month expense was $2.357 million versus $1.436 million. The smaller Q2 net loss, despite a larger operating loss, reflected a $787,000 income tax benefit versus $1,000 in the prior-year quarter. Six-month tax benefit was $779,000 versus $18,000.
Liquidity, cash flow and debt
At June 30, 2013, cash and cash equivalents were $8.319 million, current assets $12.412 million and current liabilities $3.240 million. Working capital was approximately $9.172 million and the current ratio was 3.83, compared with 2.45 at December 31, 2012. Total assets were $72.270 million and total liabilities were $41.417 million.
For the six months, operating cash flow was $583,000, compared with $1.025 million in 2012; investing cash use was $223,000, compared with $91,000. Financing provided $4.030 million, mainly from a $5.0 million stock-and-warrant offering, partly offset by offering expenses and debt repayments. Cash increased by $4.390 million to $8.319 million. The filing does not provide a separate Q2 cash-flow figure.
Reported debt and related obligations totaled $30.126 million at June 30, including a $12.023 million term loan, $6.595 million seller note and $11.466 million in seller contingent obligations. The company said it was compliant with the existing loan covenants at quarter-end. On August 1, 2013, after the reporting date, it refinanced the existing term loan with a new $13.0 million, five-year secured loan at a fixed 4.44% rate, and paid off the prior loan. The payoff resulted in an approximately $1.046 million loss on debt extinguishment, including a $187,000 prepayment fee; this was a subsequent event, not a Q2 result.
Material changes, outlook and risks
- The first retail store began operating during the quarter. It generated limited initial sales and incurred pre-opening and development costs, resulting in a $93,000 segment operating loss for the quarter and six months.
- QVC generated $1.992 million, or 62% of Q2 revenue, and $3.984 million, or 62% of six-month revenue. QVC receivables were $1.901 million, or 51% of total receivables. Fifth & Pacific-related LCNY revenue was 16% of revenue in each period; its receivable was $1.397 million, or 38% of total receivables.
- Management expected existing cash and operating cash flows to meet operating, debt-service and capital-expenditure needs for the next 12 months. This is management’s expectation, not quantified earnings guidance. The company planned to expand licensing categories and distribution and was evaluating further retail opportunities; it had no commitment to open additional stores.
- Management identified reliance on licensees and the ability to maintain brand awareness and retain key licensees as important risks. Fashion preference changes, economic weakness, supply-cost changes and retail-sector consolidation could impair licensee performance. The new loan also limits annual capital expenditures to $1.0 million, subject to stated conditions, and further retail expansion may require lender consent.
- Contingent payments to the seller depend on future Isaac Mizrahi royalty performance. The filing also says the company considered the QVC earn-out probable. Payment terms may involve cash or stock, which could affect liquidity or shareholder dilution.
Most important facts for investors to verify
- Whether licensing growth and revenue diversification reduce reliance on QVC and other major counterparties.
- The collectability and timing of the sizable QVC and LCNY receivables, including accrued but unbilled revenue.
- Cash generation and operating performance after the new store’s launch, given higher expenses and the six-month decline in operating cash flow.
- The new loan’s payment schedule, cash-flow recapture provisions, covenant requirements and any impact on planned retail expansion.
- Potential seller earn-out payments and dilution from restricted stock, warrants, options and other share-linked obligations.