Xcel(XELB) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Financial Statements The unaudited financial statements reveal a decrease in total assets and a net loss for the nine months ended September 30, 2023, driven by revenue decline and restructuring costs Unaudited Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and stockholders' equity, alongside a slight increase in total liabilities, as of September 30, 2023 Condensed Consolidated Balance Sheet Summary (in thousands) | Account | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2,189 | $4,608 | | Total current assets | $8,382 | $14,020 | | Trademarks and other intangibles, net | $43,055 | $47,665 | | Total Assets | $75,750 | $88,935 | | Liabilities & Equity | | | | Total current liabilities | $6,656 | $6,561 | | Total Liabilities | $20,441 | $18,796 | | Accumulated deficit | ($47,052) | ($32,797) | | Total Stockholders' Equity | $55,309 | $70,139 | Unaudited Condensed Consolidated Statements of Operations The statements of operations indicate a significant decline in net revenue and a shift from net income to a substantial net loss for the nine months ended September 30, 2023 Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | 9 Months 2023 (in thousands) | 9 Months 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $2,637 | $4,501 | $15,468 | $21,715 | | Gross profit | $2,412 | $3,036 | $8,750 | $16,000 | | Operating (loss) income | ($5,403) | ($5,975) | ($15,024) | $6,164 | | Net (loss) income attributable to stockholders | ($5,144) | ($4,042) | ($14,255) | $1,961 | | Diluted net (loss) income per share | ($0.26) | ($0.21) | ($0.72) | $0.10 | - The significant variance in nine-month operating income between 2023 and 2022 is largely due to a $20.6 million gain on the sale of the majority interest in the Isaac Mizrahi brand recorded in 2022, which was absent in 2023[12] Unaudited Condensed Consolidated Statements of Cash Flows Cash flow statements show reduced cash usage in operations but a significant decrease in investing activities compared to the prior year, resulting in an overall cash decrease Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($2,810) | ($11,029) | | Net cash provided by investing activities | $364 | $45,167 | | Net cash provided by (used in) financing activities | $27 | ($30,953) | | Net (decrease) increase in cash | ($2,419) | $3,185 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's business model shift, liquidity improvements, and significant transactions including brand sales and new licensing agreements - The company is shifting from a wholesale/licensing hybrid to a 'licensing-plus' model, entering new licensing and joint venture agreements to reduce costs and operating risks, with this transition substantially completed by the end of Q2 2023[27][28] - Management states that liquidity concerns that raised uncertainties about the company's ability to continue as a going concern have been alleviated due to the business restructuring, cost savings, and a new $5 million term loan obtained in October 2023[26][31][32] - On May 31, 2022, the company sold a 70% interest in the Isaac Mizrahi brand to WHP for $46.2 million in cash, recognizing a pre-tax gain of $20.6 million, with Xcel retaining a 30% interest accounted for using the equity method[35][36] - A new 25-year master license agreement for the Halston Brand was signed in May 2023, which included an upfront cash payment and guaranteed minimum royalties, resulting in the recognition of $4.67 million in deferred revenue[44][45] - Subsequent to the quarter end, in October 2023, a subsidiary of the company entered into a new $5.0 million term loan agreement with Israel Discount Bank of New York, maturing in October 2028[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic shift to a 'licensing-plus' model, detailing revenue declines, net losses, and the impact of cost savings and new financing on liquidity Summary of Operating Results Operating results show a decrease in net revenue for both Q3 and the nine-month period, primarily due to reduced product sales and the Isaac Mizrahi brand sale Q3 2023 vs Q3 2022 Revenue Breakdown (in millions) | Revenue Type | Q3 2023 (in millions) | Q3 2022 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Net licensing revenue | $2.4 | $2.2 | +$0.2 | | Net product sales | $0.3 | $2.3 | -$2.0 | | Total Net Revenue | $2.6 | $4.5 | -$1.9 | 9 Months 2023 vs 9 Months 2022 Revenue Breakdown (in millions) | Revenue Type | 9M 2023 (in millions) | 9M 2022 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Net licensing revenue | $7.0 | $13.3 | -$6.3 | | Net product sales | $8.4 | $8.4 | $0.0 | | Total Net Revenue | $15.5 | $21.7 | -$6.2 | - Direct operating costs decreased by $1.3 million in Q3 2023 and $6.9 million in the first nine months of 2023, primarily due to reduced staffing levels and overhead costs related to the business restructuring[123][145] Non-GAAP Financial Measures Non-GAAP measures, including Adjusted EBITDA, show improved performance in Q3 2023 and the nine-month period compared to the prior year Reconciliation to Adjusted EBITDA (in thousands) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | 9 Months 2023 (in thousands) | 9 Months 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income attributable to stockholders | ($5,144) | ($4,042) | ($14,255) | $1,961 | | Adjustments (Depreciation, Amortization, etc.) | $3,734 | $1,148 | $7,364 | ($8,586) | | Costs associated with restructuring | $1,471 | $0 | $3,319 | $0 | | Adjusted EBITDA | ($1,410) | ($2,894) | ($4,572) | ($6,625) | Liquidity and Capital Resources Liquidity improved due to cost savings and a new $5 million term loan, alleviating prior going concern uncertainties despite reduced cash and working capital - Cash and cash equivalents stood at $2.2 million as of September 30, 2023, down from $4.6 million at December 31, 2022[160] - The company's business restructuring is expected to yield significant cost savings, with payroll costs reduced by approximately $6 million and operating expenses by $7 million on an annualized basis[168] - In October 2023, the company secured a new $5 million term loan, providing additional liquidity to support operations[170] - A contingent obligation exists related to the Isaac Mizrahi brand sale, where Xcel may have to pay up to a remaining $6.9 million if the brand's royalties fall below a certain threshold, though a waiver was received for the period ending September 30, 2023[180][181] Item 3. Quantitative and Qualitative Disclosures About Market Risk This disclosure is not applicable as the company qualifies as a smaller reporting company - Disclosure about market risk is not required for smaller reporting companies[194] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[195] - No material changes to internal control over financial reporting occurred during the fiscal quarter ended September 30, 2023[196] PART II - OTHER INFORMATION This section provides details on legal proceedings, risk factors, equity transactions, and other required disclosures Item 1. Legal Proceedings Management believes ongoing legal proceedings will not materially adversely affect the company's financial position or operations - Management does not expect pending litigation to have a material adverse effect on the company's business, financial position, or results of operations[198] Item 1A. Risk Factors A new material risk factor highlights contingent obligations and potential disagreements within the IM Topco, LLC joint venture, including a maximum $6.9 million purchase price adjustment - A new material risk factor relates to the company's joint venture for the Isaac Mizrahi brand, IM Topco, LLC, where Xcel does not control day-to-day operations[201] - There is a contingent obligation where if IM Topco's aggregate royalties fall below $13.3 million in any four-quarter period before May 31, 2025, WHP is entitled to a purchase price adjustment from Xcel, with the maximum potential adjustment currently $6.9 million[202] - IM Topco's royalties were below the threshold for the period ending September 30, 2023, but WHP provided a waiver in exchange for a $0.6 million reduction in future service fees payable by IM Topco to Xcel[202] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities No unregistered securities were sold, but the company repurchased 12,903 shares of common stock related to cashless stock option exercises - No unregistered securities were sold during the three months ended September 30, 2023[203] - The company repurchased 12,903 shares of common stock at a price of $1.55 per share in connection with a cashless stock option exercise[204] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - None[206] Item 5. Other Information No other information is reported for this item - None[208] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data - The exhibits filed include Rule 13a-14(a)/15d-14(a) and Section 1350 certifications from the CEO and CFO, along with Inline XBRL documents[209]