XCEL BRANDS, INC. Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements that are not historical facts contained in this report are
forward-looking statements that involve a number of known and unknown risks,
uncertainties and other factors, all of which are difficult or impossible to
predict and many of which are beyond our control, which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These risks are detailed in the Risk Section of our
Form 10-K for the fiscal year ended
Overview
Our objective is to build a diversified portfolio of lifestyle consumer brands through organic growth and the strategic acquisition of new brands. To grow our brands, we are focused on following primary strategies:
distribution and/or licensing of our brands for sale through interactive
? television (i.e. QVC, The Shopping Channel) whereby we design, manage
production, merchandise the shows, and manage the on-air talent;
licensing our brands to manufacturers and retailers for promotion and
? distribution through e-commerce, social commerce, and traditional
brick-and-mortar retail channels whereby we provide certain design services
and, in certain cases, manage supply and merchandising;
? wholesale distribution of our brands to retailers that sell to the end
consumer;
? distribution of our brands through our e-commerce sites directly to the end
consumer; and
quickly integrate additional consumer brands into our operating platform and
? leverage our design, production, and marketing capabilities, and distribution
relationships.
We believe that Xcel offers a unique value proposition to our retail and direct-to-consumer customers, and our licensees for the following reasons:
? our management team, including our officers' and directors' experience in, and
relationships within the industry;
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our design, production, sales, marketing, and supply chain and integrated
? technology platform that enables us to design and distribute trend-right
product; and
? our significant media and internet presence and distribution.
We believe that our strategy distinguishes us from other brand management companies that rely primarily on their licensees for design, production, and distribution, and enables us to leverage the media reach of our interactive television partners, including through television, digital, and social media, to drive sales of products under our brands across multiple distribution channels. By leveraging digital and social media content across all distribution channels, we seek to drive consumer engagement and generate retail sales across our brands. Our strong relationships with leading retailers and interactive television companies and cable networks enable us to reach consumers in over 380 million homes worldwide and hundreds of millions of social media followers.
We believe our design, production and supply chain platform provides significant competitive advantages compared with traditional wholesale apparel companies that design, manufacture, and distribute products. We focus on our core competencies of design, integrated technologies, design, production and supply chain platform, marketing, and brand development. We believe that we offer a 360-degree solution to our retail partners that addresses many of the challenges facing the retail industry today. We believe our platform is highly scalable. Additionally, we believe we can quickly integrate additional brands into our platform in order to leverage our design, production, and marketing capabilities, and distribution network.
Summary of Operating Results
Three months ended
Revenues
Current quarter net revenue decreased approximately
Net licensing revenue decreased by approximately
Net product sales decreased by approximately
Cost of Goods Sold
Current quarter cost of goods sold was
Total gross profit margin increased from 81% in the prior year quarter to 95% in the current quarter, reflecting the proportional shift of revenue mix towards licensing revenues in the current quarter. Gross profit margin from product sales increased from 24% in the prior year quarter to 54% in the current quarter as a result of achieving greater efficiencies and economies of scale.
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Operating Costs and Expenses
Operating costs and expenses decreased approximately
Other Income
During the prior year quarter, we recognized a
Interest and Finance Expense
Interest and finance expense for the current quarter was
Income Tax (Benefit) Provision
The effective income tax rate for the current quarter and the prior year quarter
was approximately -49% and 37%, respectively, resulting in an income tax
provision of
For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effective rate by approximately 41%. The effective tax rate was also attributable to state taxes and recurring permanent differences, which decreased the effective tax rate by approximately 2% and 27%, respectively. The effective tax rate was also affected by the tax impact of a potential federal net operating loss carryback due to the CARES Act; this item increased the effective rate by approximately 3%.
For the prior year quarter, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 9% and 6%, respectively.
Net (Loss) Income
We had a net loss of
Non-GAAP Net Income, Non-GAAP Diluted EPS, and Adjusted EBITDA
We had non-GAAP net income of approximately
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adjustments to allowances for doubtful accounts, asset impairments, and deferred income taxes. Non-GAAP net income and non-GAAP diluted EPS measures do not include the tax effect of the aforementioned adjusting items, due to the nature of these items and the Company's tax strategy. Prior to 2019, the Company did not adjust non-GAAP net income and non-GAAP EPS for the amortization of trademarks or costs in connection with potential acquisitions.
We had Adjusted EBITDA of
Management uses non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the Company's results of operations. Management believes non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus these non-GAAP measures provide supplemental information to assist investors in evaluating the Company's financial results. The Company has incurred certain costs which it could have eliminated but elected not to do so in light of government assistance received through the Paycheck Protection Program under the CARES Act (the "PPP Benefit"), which represents a cash benefit directly related to the Company's operating expenses incurred. Accordingly, the PPP Benefit is not considered a reconciling item for purposes of the computation of non-GAAP net income and Adjusted EBITDA. Adjusted EBITDA is the measure used to calculate compliance with the EBITDA covenant under the Xcel Term Loan.
Non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA should not be considered in isolation or as alternatives to net income, earnings per share, or any other measure of financial performance calculated and presented in accordance with GAAP. Given that non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are financial measures not deemed to be in accordance with GAAP and are susceptible to varying calculations, our non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in our industry, because other companies may calculate non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA in a different manner than we calculate these measures.
In evaluating non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA, you should be aware that in the future we may or may not incur expenses similar to some of the adjustments in this report. Our presentation of non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results, and not rely on any single financial measure.
The following table is a reconciliation of net (loss) income (our most directly
comparable financial measure presented in accordance with GAAP) to non-GAAP net
income:
Three Months Ended
June 30,
($ in thousands) 2020 2019
Net (loss) income attributable to
1,108 786
Stock-based compensation 488 135
Costs in connection with potential acquisition (101) -
Certain adjustments to allowances for doubtful accounts 472 -
Property and equipment impairment 82 -
Gain on reduction of contingent obligation - (2,850)
Deferred income tax provision 428 1,068
Non-GAAP net income $ 1,177 $ 991
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The following table is a reconciliation of diluted (loss) earnings per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:
Three Months Ended
June 30,
2020 2019
Diluted (loss) earnings per share $ (0.07) $ 0.10
Amortization of trademarks 0.06 0.04
Stock-based compensation 0.03 0.01
Costs in connection with potential acquisition (0.01) -
Certain adjustments to allowances for doubtful accounts 0.02 -
Property and equipment impairment 0.01 -
Gain on reduction of contingent obligation - (0.15)
Deferred income tax provision 0.02 0.05
Non-GAAP diluted EPS $ 0.06 $ 0.05
Non-GAAP weighted average diluted shares 19,192,353 18,977,051
The following table is a reconciliation of net (loss) income (our most directly
comparable financial measure presented in accordance with GAAP) to Adjusted
EBITDA:
Three Months Ended
June 30,
($ in thousands) 2020 2019Net (loss) income attributable to Xcel Brands,
Inc. stockholders$ (1,300) $ 1,852 Depreciation and amortization 1,329 1,000 Interest and finance expense 299 348 Income tax provision 428 1,068 State and local franchise taxes 45 83 Stock-based compensation 488 135 Costs in connection with potential acquisition (101) -
Certain adjustments to allowances for doubtful
accounts 472 - Property and equipment impairment 82 - Gain on reduction of contingent obligation - (2,850) Adjusted EBITDA$ 1,742 $ 1,636
Both non-GAAP net income and Adjusted EBITDA for the current quarter include
certain adjustments to net (loss) income including allowances for doubtful
accounts for account debtors that have filed for bankruptcy protection triggered
by the impact of COVID-19. In addition, net loss for the current quarter
includes
Six months ended
Revenues
Current six months net revenue decreased approximately
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Net licensing revenue decreased by approximately
Net product sales decreased by approximately
Cost of Goods Sold
Current six months cost of goods sold was
Total gross profit margin was 81% in the prior year six months and 82% in the current six months, essentially flat. Gross profit margin from product sales increased from 25% in the prior year six months to 40% in the current six months as a result of achieving greater efficiencies and economies of scale in our wholesale business operations.
Operating Costs and Expenses
Operating costs and expenses decreased approximately
Other Income
During the prior year six months, we recognized a
Interest and Finance Expense
Interest and finance expense for the current six months was
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Income Tax (Benefit) Provision
The effective income tax rate for the current six months and the prior year six
months was approximately 5% and 37%, respectively, resulting in an income tax
(benefit) provision of
For the current six months, the federal statutory rate differed from the effective tax rate primarily due to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effect rate by approximately 16%. The effective rate was also attributable to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 5% and decreased the effective tax rate by approximately 8%, respectively. The effective tax rate was also affected by the tax impact of a potential federal net operating loss carryback due to the CARES Act; this item increased the effective rate by approximately 4%.
For the prior year six months, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 9% and 6%, respectively.
Net (Loss) Income
We had a net loss of
Non-GAAP Net Income, Non-GAAP Diluted EPS, and Adjusted EBITDA
We had non-GAAP net income of approximately
The following table is a reconciliation of net (loss) income (our most directly
comparable financial measure presented in accordance with GAAP) to non-GAAP net
income:
Six Months Ended
June 30,
($ in thousands) 2020 2019
Net (loss) income attributable to
2,216 1,523
Non-cash interest and finance expense - 16
Stock-based compensation 731 482
Loss on extinguishment of debt - 189
Costs in connection with potential acquisition (21) -
Certain adjustments to allowances for doubtful accounts 586 -
Property and equipment impairment 82 -
Gain on reduction of contingent obligation - (2,850)
Deferred income tax (benefit) provision (124) 1,143
Non-GAAP net income $ 1,365 $ 2,482
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The following table is a reconciliation of diluted (loss) earnings per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:
Six Months Ended
June 30,
2020 2019
Diluted (loss) earnings per share $ (0.11) $ 0.11
Amortization of trademarks 0.11 0.08
Non-cash interest and finance expense - -
Stock-based compensation 0.04 0.02
Loss on extinguishment of debt - 0.01
Costs in connection with potential acquisition - -
Certain adjustments to allowances for doubtful accounts 0.03 -
Property and equipment impairment 0.01 -
Gain on reduction of contingent obligation - (0.15)
Deferred income tax (benefit) provision (0.01) 0.06
Non-GAAP diluted EPS $ 0.07 $ 0.13
Non-GAAP weighted average diluted shares 19,001,842 18,771,053
The following table is a reconciliation of net (loss) income (our most directly
comparable financial measure presented in accordance with GAAP) to Adjusted
EBITDA:
Six Months Ended
June 30,
($ in thousands) 2020 2019
Net (loss) income attributable to Xcel Brands,
Inc. stockholders $ (2,105) $ 1,979
Depreciation and amortization 2,632 1,948
Interest and finance expense 593 827
Income tax (benefit) provision (124) 1,143
State and local franchise taxes 83 121
Stock-based compensation 731 482
Costs in connection with potential acquisition (21) -
Certain adjustments to allowances for doubtful
accounts 586 -
Property and equipment impairment 82 -
Gain on reduction of contingent obligation - (2,850)
Adjusted EBITDA $ 2,457 $ 3,650 Both non-GAAP net income and Adjusted EBITDA for the current six months include
certain adjustment to net (loss) income including allowances for doubtful
accounts for account debtors that have filed for bankruptcy protection triggered
by the impact of COVID-19. In addition, net loss for the current six months
includes
Liquidity and Capital Resources
Liquidity
Our principal capital requirements have been to fund working capital needs,
acquire new brands, and to a lesser extent, capital expenditures. As of
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Restricted cash at
On
We expect that existing cash and operating cash flows will be adequate to meet our operating needs, term debt service obligations, and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q.
Changes in Working Capital
Our working capital (current assets less current liabilities, excluding the
current portion of operating lease obligations and any contingent obligations
payable in common stock) was
Commentary on the components of our cash flows for the current six months as compared with the prior year six months is set forth below.
Operating Activities
Net cash provided by operating activities was approximately
The current six months cash provided by operating activities was primarily
attributable to the combination of the net loss of
The prior year six months cash provided by operating activities was primarily
attributable to the combination of net income of
Investing Activities
Net cash used in investing activities for the current six months was
approximately
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primarily attributable to capital expenditures, a substantial portion of which relates to the implementation of our ERP system, while cash used in investing activities for the prior year six months was primarily related to cash consideration paid to acquire the Halston Heritage Brands.
Financing Activities
Net cash used in financing activities for the current six months was
approximately
Net cash provided by financing activities for the prior year six months was
approximately
Other Factors
We continue to seek to expand and diversify the types of licensed products being produced under our brands. We plan to continue to diversify the distribution channels within which licensed products are sold, in an effort to reduce dependence on any particular retailer, consumer, or market sector within each of our brands. The Mizrahi brand, Halston brand, and C Wonder brand have a core business in fashion apparel and accessories. The Ripka brand is a fine jewelry business, and the Longaberger brand focuses on home good products, which we believe helps diversify our industry focus while at the same time complements our business operations and relationships.
We have transitioned our department store business from a licensing model to a wholesale model, and continue to work towards expanding our Judith Ripka Fine Jewelry wholesale and e-commerce business. Our strategy is to manage our working capital needs by utilizing back-to-back sales and purchase orders and minimizing inventory risk. This change should, on a long-term basis, increase our revenues as compared to the licensing model. We expect to develop a core licensing business for the Longaberger brand, in addition to a direct-to-consumer business.
In addition, we continue to seek new opportunities, including expansion through interactive television, our design, production and supply chain platform, additional domestic and international licensing arrangements, and acquiring additional brands.
However, the impacts of the current COVID-19 pandemic are broad reaching and are
having an impact on our licensing and wholesale businesses. The COVID-19
pandemic is impacting our supply chain as most of our products are manufactured
in
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any effects on our results for the remainder of 2020. However, as of the date of this filing, we expect our results for 2020 and potentially 2021 to be significantly affected.
Effects of Inflation
We do not believe that the relatively moderate rates of inflation experienced
over the past two years in
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, or liquidity.
Critical Accounting Policies
The preparation of our unaudited condensed consolidated financial statements in conformity with GAAP requires management to exercise judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry, and current and expected economic conditions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Because the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
Please refer to our Annual Report on Form 10-K for the year ended
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