Xcel Brands, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results. Xcel designs, licenses, markets and sells consumer brands, including Isaac Mizrahi, Liz Claiborne New York and, from April 3, 2014, Judith Ripka.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.184m | $3.206m | $9.750m | $6.394m |
| Gross profit | $6.105m | $3.193m | $9.638m | $6.381m |
| Reported operating income (loss) | $0.972m | ($1.463m) | ($0.317m) | ($0.924m) |
| Net income (loss) | $0.409m | ($1.196m) | ($0.546m) | ($1.183m) |
| Operating cash flow | Not separately presented for the quarter | $2.068m | $0.583m |
Revenue was predominantly licensing and design fees; Q2 gross margin was approximately 98.7% and six-month gross margin approximately 98.9%. Q2 results include a $0.600m gain from reducing the estimated Isaac Mizrahi contingent earn-out obligation. Adjusted EBITDA, a non-GAAP measure, was $2.466m for Q2 and $3.008m for the six months, versus $1.072m and $1.915m, respectively, in 2013.
Liquidity, debt and capital
- Cash was $5.107m at June 30, down from $7.461m at December 31, 2013. Current assets were $10.836m and current liabilities $7.400m; working capital was $3.436m and the current ratio 1.46, versus 4.79 at year-end.
- Six-month cash flows: $2.068m provided by operations, $12.811m used in investing and $8.389m provided by financing. Investing outflow included $12.363m cash consideration for Ripka.
- Debt and related obligations totaled $40.995m carrying value, including term loans, seller notes and contingent obligations; $1.875m was classified current. The company had $13m outstanding on the Isaac Mizrahi term loan and a new $9m Ripka term loan.
- The loans impose, among other requirements, $3m minimum liquidity, $31m minimum net worth and a $1.3m annual capital-expenditure limit. Management reported compliance with both term-loan covenants as of June 30.
Material changes and business developments
- Revenue increased 93% in Q2 and 52% for the six months year over year, principally from licensing. Management attributed the increase to Ripka-related direct-response television sales beginning in April and continued Isaac Mizrahi growth.
- QVC royalties were $4.316m in Q2 (70% of revenue) and $6.605m for the six months (68% of revenue). QVC accounted for 66% of accounts receivable at quarter-end.
- The Ripka asset acquisition added $24.790m of recorded consideration, including $12m cash at closing, seller notes, 571,429 shares, scheduled installment payments and estimated contingent consideration. Xcel also entered into Ripka licensing arrangements, including with QVC.
- Retail expanded to a second store in Georgia and an e-commerce platform launched in May. Retail sales were $0.120m in Q2 and $0.146m for the six months; the retail segment reported operating losses of $0.605m and $0.922m, respectively.
- Operating expenses rose, reflecting staffing and compensation for growth and Ripka, increased retail costs, and higher six-month stock-based compensation. Stock-based compensation was $3.387m for the six months.
Outlook, risks and unusual items
Management said existing cash and expected operating cash flows should cover operating needs, debt service and capital expenditures for the next 12 months. This is not a guarantee; the company depends on licensees and noted there is no assurance they will perform as projected. No numerical revenue or earnings guidance was provided. Management is evaluating retail opportunities, but reported no commitments to open additional stores; expansion is subject to lender limits.
Key exposures include reliance on QVC and licensees, fashion and consumer-demand changes, retail execution, and contingent-obligation estimates based on projected royalties. The Ripka acquisition includes cash installments of $1.0m due October 2014 and $1.2m due April 2015, plus earn-out obligations. The company reported no legal proceedings and no off-balance-sheet arrangements with a material expected effect. Management concluded disclosure controls were effective at June 30, 2014.
Important facts for investors to verify
- Whether Ripka and Isaac Mizrahi royalty growth is sustained, and how QVC concentration and receivables evolve.
- Cash availability after scheduled acquisition payments, debt service and any cash-settled contingent obligations; confirm covenant compliance and liquidity headroom.
- Actual performance of the retail stores and e-commerce operation relative to continuing operating losses.
- Assumptions and subsequent remeasurement of the Isaac Mizrahi and Ripka earn-outs, including the $0.600m gain recorded this quarter.
- Potential share dilution: 12,025,704 common shares were outstanding August 8, 2014; acquisition shares, restricted stock, options, warrants and earn-outs may affect future share count.