Xcel Brands - Q1 2023

Transcript

Operator (participant)

Please be advised that reproduction of this call in whole or in part is not permitted without prior authorization of Xcel Brands. As a reminder, this conference call is being recorded. I would now like to turn the call over to Andrew Berger of SM Berger & Company. Thank you. Andrew, you may now begin.

Andrew Berger (Managing Director)

Good evening, everyone, thank you for joining us. Welcome to the Xcel Brands first quarter 2023 earnings call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D'Loren, Chief Financial Officer, Jim Haran, and Executive Vice President of Business Development and Treasury, Seth Burroughs. By now, everyone should have access to the earnings release for the first quarter ended March 31st, 2023, which went out today. In addition, the company filed with the Securities and Exchange Commission, its quarterly report on Form 10-Q earlier today as well. The release and the quarterly report will be available on the company's website at www.xcelbrands.com. This call is being webcast, a replay will be available on the company's investor relations website.

Before we begin, please keep in mind that this call will contain forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from certain expectations discussed here today. These risk factors are explained in detail in the company's most recent annual report filed with the SEC. Xcel Brands does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The dynamic nature of the current macroeconomic environment means that what is said on this call could change materially at any time. Finally, please note that on today's call, management will refer to certain non-GAAP financial measures, including non-GAAP net income, non-GAAP diluted earnings per share, and adjusted EBITDA.

Our management uses these non-GAAP metrics 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. Our management believes these financial performance measurements are also useful because they measure. These measures adjust for certain costs and other events that management believes are not representative of our core business operating results. Thus, they provide supplemental information to assist investors in evaluating the company's financial results. These non-GAAP measures 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. You may refer to the attachment to the company's earnings release or Part One, Item Two of the Form 10-Q for reconciliation of non-GAAP measures.

I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

Robert D'Loren (Chairman and CEO)

Thank you, Andrew. Good evening, everyone, thank you for joining us. I would like to start today's call with a discussion of our strategic transformation efforts. After that, our CFO, Jim Haran, will discuss our first quarter financial results in more detail. In the first quarter of 2023, we began a restructure of our business operations, shifting from a wholesale licensing hybrid model to a high-touch licensing and live stream DTC business model, with the ultimate goal of transforming our company into a modern asset light and highly profitable live stream media and consumer products company. We expect the transition of our operating businesses to be substantially complete by the end of the second quarter of 2023.

In summary, as a result of all of our restructuring efforts, going forward, we expect to save approximately $13 million in operating expenses on an annualized basis, including approximately $6 million of reduced payroll costs and $7 million in lower operating costs. These cost savings started to be realized in the first quarter of 2023 and are expected to be substantially realized by the end of the second quarter of 2023. Our current financial forecast indicates that we will return to profitability this year. To effectuate this transformation, we have engaged with best-in-class business partners and entered into multiple new licensing agreements for which I will provide more details.

We believe that the evolution of our operating model through these new arrangements, powered by extraordinary live stream and social commerce technology, will provide our company a competitive advantage and with significant cost savings going forward, and allow us to reduce and better manage our exposure to operating risks, while providing our customers with exceptional quality at attractive prices. Also, we believe our live stream technology will enable us to fully engage with and entertain our customers in ways that were not possible in the past. For our Judith Ripka brand, we have entered into a new licensing agreement to move the interactive television operations to JTV. This new arrangement and an agreement with JTV has an initial five-year term with guaranteed minimum royalties.

When the brand launches on JTV in the second quarter of 2023, it will be a brand with significant on-air presence for the network in the first year and beyond. We believe this presents a fantastic and exciting opportunity to grow the brand on TV and online with our new partner going forward. At the same time, we signed an additional license agreement with JTV for them to take over all operations of and product sourcing for the Judith Ripka e-commerce business. This agreement provides for royalties on net retail sales generated through e-commerce in conjunction with executing the JTV licenses in April, we sold JTV all of our jewelry inventory. Moving now to apparel.

In connection with the launch of our C. Wonder brand on HSN, we finalized and signed a license agreement with One Jeanswear Group for them to take over the wholesale production operations related to the C. Wonder brand and other brands in our HSN show pipeline. This license has an initial term of three years with royalty and minimum sales requirements. For the Halston brand, we recently signed a strategic master license agreement with a soon-to-be-announced industry-leading global wholesale apparel and accessories company, under which they will take over and assume all of the existing licensing contracts for the brand, together with apparel wholesale operations and distribution in department stores, e-commerce, and other retailers. This is a 25-year license agreement, which includes a market rate royalty, certain royalty advances, escalating guaranteed minimum sales requirements, and certain guaranteed payments.

We will begin to realize revenues from this agreement in Q2 of this year and expect to realize even greater revenues in 2024 when this license launches new products under the Halston brand in Spring 2024. Our partnership with this licensee, given their extensive production and distribution capabilities, provides us with a tremendous opportunity to grow the brand and take Halston to the next level. With respect to our Longaberger brand, we are in the process of launching our latest version of live stream technology that we believe will revolutionize social commerce. We expect this business to turn the corner to profitability soon. Regarding our interactive television business, the Isaac Mizrahi and LOGO by Lori Goldstein brands are performing well on QVC, with sales in the first quarter of 2023 exceeding sales in the fourth quarter of 2022.

C. Wonder launched on HSN at the end of March. The launch show exceeded plan by 130%. Now, I'd like to turn the call over to Jim to discuss our results and financial highlights for the first quarter.

Jim Haran (CFO)

Thanks, Bob. Good evening, everyone. I will briefly discuss our financial results for the quarter ended March 31st, 2023. Total revenue for the first quarter of 2023 was $6.1 million, representing a decrease of approximately $2.7 million from the prior-year quarter, but an increase of approximately $2 million from the fourth quarter of 2022.

The year-over-year revenue decline from the prior year quarter compared with the current quarter was driven by a $3.7 million decrease in licensing revenue, primarily attributable to the sale of a majority interest in the Isaac Mizrahi brand in May 2022, and was partially offset by an increase of approximately $1 million in net sales, largely due to the sale of our C. Wonder apparel inventory to HSN as part of the restructuring and transformation of our business operating model. On a sequential quarter basis, the increase in revenues from the prior year quarter to the current quarter was mainly driven by the sale of our C. Wonder apparel and along with increased royalties from the Lori Goldstein brand on QVC.

Gross profit margin from product sales decreased from approximately 40% in the first quarter of 2022 to approximately 30% in the current quarter. In conjunction with the exiting the wholesale operation portion of our business and transitioning the production, sourcing, logistics, and inventory management for our brands to best-in-class partners included liquidating inventory, which was primarily attributable to the lower gross margin %. Our operating costs and expenses were $8.8 million for the current quarter, down by $1.3 million from $10.1 million in the prior year quarter. This decrease was primarily attributable to lower salaries and other operating costs related to the Isaac Mizrahi brand and reductions in staffing levels during the current quarter related to the restructuring and transformation of our business operating model.

Operating costs and expenses also declined on a sequential quarter basis from $10.2 million in the fourth quarter of 2022 to $8.8 million in the first quarter of 2023. This decline was primarily related to our restructuring transformation initiatives, including a combination of lower marketing and advertising expenses and administrative costs. We expect that our operating costs and expenses will continue to decrease during the second quarter of 2023, and by the start of the third quarter, reach a run rate of under $4 million per quarter, which is exclusive of depreciation and amortization.

Below operating income, we recognized a $0.5 million equity method loss in the first quarter of 2023, in accordance with the distribution provisions governing the business venture with the Isaac Mizrahi brand, which was exclusively $0.5 million of amortization of intangibles. However, we did not have significant amount of interest in finance expenses in the current quarter, as we fully repaid all of our outstanding debt in the second quarter of 2022. This compares favorably with the first quarter of 2022, in which we did not have any equity method loss but did recognize $0.7 million of interest in finance expense.

For the current and prior year quarter, there was a zero tax benefit due to a tax valuation allowance recorded in each period. Overall, we had a net loss excluding non-controlling interest for the first quarter of 2023 of approximately $5.6 million or -$0.29 per share, compared with a net loss of $3.5 million or -$0.18 per share in the prior year quarter. This represents an improvement, however, from the fourth quarter of 2022, net loss of $6 million or -$0.30 per share. On a non-GAAP basis, we had a net loss for the current quarter of $3.6 million or -$0.18 per share, compared with a net loss of $1.9 million or -$0.10 per share in the first quarter of 2022.

Adjusted EBITDA was -$3.2 million for the current quarter, compared with -$0.9 million in the prior year quarter. This represents an improvement, though, from the fourth quarter 2022 adjusted EBITDA of -$5.9 million. For the balance of 2023, we expect our adjusted EBITDA to continue to improve throughout the year. As Bob mentioned earlier, we currently project that as a result of the restructure plan, we will achieve positive EBITDA in the back end of 2023. Again, as a reminder, non-GAAP, net income, non-GAAP diluted EPS and adjusted EBITDA are non-GAAP on audited terms. Our earnings press release in Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures. Turning to our balance sheet.

As of March 31st, 2023, the company had unrestricted cash of approximately $1.6 million and positive net working capital of $5 million, excluding the current portion of our lease obligations. The new strategic master license agreement with our new license for the Halston brand, which was executed in May 2023, included a certain upfront cash payment. Under our current financial projections, we believe this, coupled with our expense cuts and working capital position, provides the company with adequate liquidity going forward. With that, I would like to turn the call back over to Bob. Bob?

Robert D'Loren (Chairman and CEO)

Thank you, Jim. Ladies and gentlemen, this concludes our prepared remarks. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, please press star one on your telephone keypad. If you wish to withdraw your question, simply press star one again. Your first question comes from the line of Howard Brous with Wellington Shields. Please go ahead.

Howard Brous (VP Wealth Advisor)

Thank you. Robert, I first of all want to congratulate you on the significant changes and the vast opportunities that you are presenting to us. I have just a few questions. Clearly the cash payments, advance, will that be disclosed other than in the subsequent 10-Q?

Robert D'Loren (Chairman and CEO)

It will be in a follow-up 8-K, Howard.

Howard Brous (VP Wealth Advisor)

Okay. Using Halston as an example, do you have any other significant opportunities in the works like Halston?

Robert D'Loren (Chairman and CEO)

We have several new brands in our pipeline. We are in the process of launching something with Christie Brinkley on HSN and other similar celebrities on QVC, two on QVC, one more on HSN. Our Christian Siriano launch with our C. Wonder brand on HSN is off to a great start, Howard. We did 130% of better than plan on the first TS launch show. All of Christian shows so far have been quite strong. You know, we look forward to these new businesses with both HSN and QVC. Of course, now with our own live stream platform, we'll be selling product directly live streaming with the celebrities that are working on our brands. Just to add to that, we expect a significant increase in the Halston business under our new license agreement. We expect to announce who we have done this with in early June.

Howard Brous (VP Wealth Advisor)

We're looking at live streaming. Do you have any competition right now in live streaming for these types of brands?

Robert D'Loren (Chairman and CEO)

Well, there's competition that comes from interactive television. There's competition from a lot of retailers that have been trying live streaming. I don't believe that there's any competitor out there that is working with a complete ecosystem from a technology perspective, quite the way it's being done in Asia, and that's the tech that we've built. We are excited to be able to have this now complete and get it launched.

Howard Brous (VP Wealth Advisor)

You talked about positive EBITDA towards the end of the year. You have a research report done by a lovely lady named Debra Fiakas, Crystal Equity Research. In her research model. She talks about, and I'm talking about 2024, and I know you don't give guidance, but are you comfortable, that's the only word I want to use, with her numbers for 2024?

Robert D'Loren (Chairman and CEO)

So-

Howard Brous (VP Wealth Advisor)

She talks about 25 and... Go ahead.

Robert D'Loren (Chairman and CEO)

There are two analysts that cover us, Howard Brous and Debra Fiakas. We're comfortable with the guidance that they've put out there. We expect that the company will return to profitability in Q4 of this year, and then generate significant EBITDA compared to what we will be reporting for the entire year of 2023, going into 2024 and beyond. As you know, we've been able to eliminate $13 million of overhead. Our target was $10 million. We exceeded that by $3 million, and we believe there may be a little more that we can take out without disrupting the business.

Howard Brous (VP Wealth Advisor)

Best of luck and congratulations on these significant changes you've just created here. Thank you.

Robert D'Loren (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Anthony Lebiedzinski with Sidoti. Please go ahead.

Anthony Lebiedzinski (Senior Equity Analyst)

Good afternoon, and thank you for taking the questions. Certainly, you know, a lot of changes here ahead. As far as, you know, the first quarter results, revenue did come in better than what we had expected, which was nice to see. Looks like most of the upset came from better than expected wholesale revenue. I know you talked about selling a good chunk of inventory, the C. Wonder to HSN. How much of that $3.8 million in wholesale sales was actually attributable to the C. Wonder sales to HSN?

Jim Haran (CFO)

Hey, Anthony, this is Jim. It was a little bit over half of our sales for the quarter were from C. Wonder to HSN. As we communicated that we're now going to be licensing that component at the end of this year. This was just a transition of the C. Wonder business with HSN to.

Robert D'Loren (Chairman and CEO)

Just as a point of reference, Anthony.

Anthony Lebiedzinski (Senior Equity Analyst)

Mm-hmm.

Robert D'Loren (Chairman and CEO)

C. Wonder launched in late March.

Anthony Lebiedzinski (Senior Equity Analyst)

Mm-hmm

Robert D'Loren (Chairman and CEO)

On HSN. What you're seeing is really just.

Jim Haran (CFO)

Right. There's two pieces there. There's a royalty piece, and then there's wholesales-

Robert D'Loren (Chairman and CEO)

Yeah

Jim Haran (CFO)

That will still continue to have wholesales into the second quarter, and those products then will be sold on HSN will be receiving royalties on the retail sales of that product.

Anthony Lebiedzinski (Senior Equity Analyst)

Got it. Okay. Thanks for that. When I look at the balance sheet for inventory at the end of the first quarter was $3.1 million. It was actually up sequentially from fiscal year-end. I guess, you know, first, just looking at the first quarter ending inventory, what is that left? I mean, obviously, you sold off a good chunk to HSN, but what's left now in the inventory? How do we think about inventories by the end of the second quarter and then by the end of the fiscal year? Will there be much in terms of inventory left?

Robert D'Loren (Chairman and CEO)

No. We sold 100% of our jewelry inventory in the JTV transaction.

Jim Haran (CFO)

Which represented more than half our inventory.

Robert D'Loren (Chairman and CEO)

Which was half the inventory position. That is gone. We expect by the end of June, we won't have any apparel inventory.

Anthony Lebiedzinski (Senior Equity Analyst)

Okay. Gotcha. Okay. All right. Thanks for that. Then, so as far as the annualized cost savings, I know you talked about increasing that from $10 million to $13 million. So have you been able to... I just wanted to get a better understanding, where's the additional $3 million coming from? Sounds like that might be a tad conservative, so just wanted to get a better, you know, explanation for that.

Robert D'Loren (Chairman and CEO)

The cuts came $6 million from salaries and $7 million from operating overhead. Within the salaries, it's primarily people who were involved in the wholesale businesses, and to some extent, some of our e-com businesses, including warehouse people, logistics, sourcing team members, merchants, designers. Then in operating overhead, a lot of warehousing, shipping, marketing. Those expenses will no longer be part of our operating costs, and that's where most of the savings comes from.

Anthony Lebiedzinski (Senior Equity Analyst)

Got it. Okay. Then as far as the Longaberger brand, in one of the prior filings, you guys talked about possibly looking at divesting that. Is that still on the, on the table or, have you reconsidered that?

Robert D'Loren (Chairman and CEO)

We're exploring it. In an ideal world, we'd like Longaberger to be part of our livestream marketplace, and we're exploring either divesting it and bringing it into our marketplace or licensing it out to an operator where they can operate it and be part of our marketplace. The plan for the marketplace is to be focused on fashion, home, and beauty.

Anthony Lebiedzinski (Senior Equity Analyst)

Got it. Understand. Okay. Well, thank you. Best of luck, and I'll pass it on to the next person.

Operator (participant)

Once again, ladies and gentlemen, if you have a question, it is star 1. Your next question comes from the line of Debra Fiakas with Crystal Equity Research. Please go ahead.

Robert D'Loren (Chairman and CEO)

Hi, Debra.

Debra Fiakas (Managing Director)

Thank you. Good evening. Thank you for taking my questions. I appreciated the questions that were asked by the previous two participants, particularly in regard to the pretty significant increase in the savings that you expect. I just wanna clarify. This jump from an estimated $10 million to $13 million is largely due to salaries. Maybe if you could give us an idea of what your personnel force will look like, say, at the end of June or at the end of October or September, I should say.

Robert D'Loren (Chairman and CEO)

Sure. Pre-transition, we were at about 95 people in our New York office and six outside traveling salespeople. Post-June 30, we will be 40 people in New York. A lot of the savings came from the cuts that we made that were all associated with supporting the wholesale businesses.

Debra Fiakas (Managing Director)

Mm-hmm.

Robert D'Loren (Chairman and CEO)

That's where we will be. We don't see any disruption in the business. All but a few of those people are gone. There will be a few that will leave by the end of June.

Jim Haran (CFO)

Part of the additional cost was the opportunity of the new Halston license. We were able to accelerate some of the costs associated with that business, so we were able to take advantage of that in 2023.

Debra Fiakas (Managing Director)

Okay, excellent. Well, I understand a little better now. I wanted to move on, and you've already mentioned in your opening remarks and a little bit in the Q&A, your agreement regarding Halston. It seems like 25 years is a long time in this day and age. I know we'll all eventually know who this master licensee is, but just for now, could you give us an idea of what it is about this licensee that gives you confidence that one, they're good for their guarantees, they've guaranteed some minimum royalty payments and that they have what is it that's going to allow them to increase your sales volume so dramatically? If you could maybe give us a little bit of a hint as to what you saw in them.

Robert D'Loren (Chairman and CEO)

If history is any indicator of what's likely to happen, they have a track record of building multi-billion dollar brands.

Debra Fiakas (Managing Director)

Okay. We'll see a good track record, and they have a history of making their payments and so forth, so we can trust them with this 25 year term?

Robert D'Loren (Chairman and CEO)

Yes. They are an industry titan.

Debra Fiakas (Managing Director)

Okay. Very good. Thank you. I do have one additional question, and that's in regard to just comments that you made related to your own efforts to reach your consumers, to reach your customers. You mentioned social commerce technology, and you also mentioned your livestream technology that you're going to deploy for Longaberger. I wondered if you could give us a little bit of color on what this technology is and, you know, how does that set you apart from what the next brand owner is doing?

Robert D'Loren (Chairman and CEO)

Well, there's two things that are happening in the industry today. One, short-form video content is winning, and the retail model is shifting from the one-to-many model to the many-to-many model. Amazon announced two weeks ago that they are now shifting to the many-to-many model. By that, what I mean is, the industry going forward will rely on converting everyday customers into paid influencers. It will be a business driven by sales by many people as opposed to one entity that is pushing product via either static images or short-form video content. There aren't a lot of tech platforms that one can provide the everyday shopper or an influencer with the technology that they need.

Think of it as a shoppable version of TikTok, with appropriate reporting, and the ability for brands to do the same thing, in terms of converting, whatever content they have into short-form video content. Clearly, we believe, and it's not just us, it's others that are conducting research in the sector, that the future will be all about short-form video content and harnessing the power of shoppers and influencers, to sell product.

Debra Fiakas (Managing Director)

Okay, thank you. I might come back, but I'll let the next person ask questions.

Operator (participant)

There are no further questions at this time. I will turn the call back to Mr. D'Loren for closing remarks.

Robert D'Loren (Chairman and CEO)

Ladies and gentlemen, thank you for all of your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. As always, stay fit, eat well, and be healthy.

Operator (participant)

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect, and thank you for participating.