Earnings Call Transcript - XELB Q1 2023

Operator, Operator

Please be advised that reproduction of this call in whole or in part is not permitted without prior authorization of Xcel Brands. And 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.

Robert D'Loren, Chairman and CEO

Thank you, Andrew. Good evening, everyone, and 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 operation 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, 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 5-year term with guaranteed minimum royalties. When the brand launches on JTV in the second quarter of '23, 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 3 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, and 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.

James Haran, CFO

Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter ended March 31, 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, 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 exiting the wholesale operation portion of our business and transitioning to production, sourcing, logistics, and inventory management for our brands to best-in-class partners, we liquidated inventory, which was primarily attributable to lower gross margin percentages. 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 and 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. We did not have significant amounts of interest and 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 and 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 minus $0.29 per share compared with a net loss of $3.5 million or minus $0.18 per share in the prior year quarter. This represents an improvement, however, from the fourth quarter of 2022, which had a net loss of $6 million or minus $0.30 per share. On a non-GAAP basis, we had a net loss for the current quarter of $3.6 million or minus $0.18 per share compared with a net loss of $1.9 million or minus $0.10 per share in the first quarter of 2022. Adjusted EBITDA was negative $3.2 million for the current quarter compared with negative $0.9 million in the prior year quarter. This represents an improvement, though, from the fourth quarter 2022 adjusted EBITDA of negative $5.9 million. For the balance of 2023, we expect our adjusted EBITDA to continue to improve throughout the year, and as Bob mentioned earlier, we currently project that as a result of the restructuring plan, we will achieve positive EBITDA in the back end of 2023. And again, as a reminder, non-GAAP net income, non-GAAP diluted EPS, and adjusted EBITDA are non-GAAP unaudited terms. Our earnings press release and Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet. As of March 31, 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.

Robert D'Loren, Chairman and CEO

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

Howard Brous, Analyst

Thank you. Robert, first of all, I 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, Analyst

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

Robert D'Loren, Chairman and CEO

So 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 planned on the first TS launch show. And all of Christian's shows so far have been quite strong. So we look forward to these new businesses with both HSN and QVC. And of course, now with our own live stream platform, we will be selling products directly, live streaming with the celebrities that are working on our brands. And just to add to that, we expect a significant increase in the Halston business under our new license agreement, and we expect to announce who we have done this with in early June.

Howard Brous, Analyst

So 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, but 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 tack that we've built. So we are excited to be able to have this now complete and get it launched.

Howard Brous, Analyst

You mentioned positive EBITDA towards the end of the year, and there is a research report by Debra Fiakas from Crystal Equity Research. In her model, she discusses 2024, and even though I know you don't provide guidance, are you comfortable with her numbers for 2024? Please go ahead.

Robert D'Loren, Chairman and CEO

There are two analysts that cover us, Howard, Sidoti and Debra. 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 '23 going into '24 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, Analyst

Again, best of luck, and congratulations on the significant changes you just created here. Thank you.

Anthony Lebiedzinski, Analyst

Yes. So certainly a lot of changes here ahead. So as far as the first quarter results, so revenue did come in better than what we had expected which was nice to see. It looks like most of the upside came from better-than-expected wholesale revenue. I know you talked about selling a good chunk of inventory, the C Wonder to HSN. So how much of that $3.8 million in wholesale sales was actually attributable to the C Wonder sales to HSN?

James Haran, CFO

It's Jim. It was a little bit over half of our sales for the quarter were from C Wonder to HSN. And as we communicated, that we're now going to be licensing that component at the end of this year. So 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. C Wonder launched in late March on HSN. So what you're seeing is really just...

James Haran, CFO

Right. So there's two pieces there. There's a royalty piece and then there's wholesale that we'll still continue to have wholesales into the second quarter. And those products then we sold in HSN will be receiving royalties on the retail sales of that product.

Anthony Lebiedzinski, Analyst

When I review the balance sheet for inventory at the end of the first quarter, it shows $3.1 million, which is an increase from the end of the fiscal year. Looking at the first quarter ending inventory, what remains? I know you sold a significant portion to HSN, but what is left now in the inventory? Additionally, how should we view the inventories by the end of the second quarter? By the end of the fiscal year, will there be much inventory remaining?

Robert D'Loren, Chairman and CEO

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

James Haran, CFO

So which represented more than half our inventory.

Robert D'Loren, Chairman and CEO

Which was half the inventory position, so that is gone. And we expect by the end of June, we will have no apparel inventory.

Anthony Lebiedzinski, Analyst

I understand. You mentioned increasing the annualized cost savings from $10 million to $13 million. Can you clarify where the additional $3 million is coming from? It seems like that might be a bit conservative, so I would appreciate more details on this.

Robert D'Loren, Chairman and CEO

So 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-commerce businesses, including warehouse people, logistics, sourcing, team members, merchants, designers. In operating overhead, a lot of warehousing, shipping, inventory, marketing. So those expenses will no longer be part of our operating cost, and that's where most of the savings comes from.

Anthony Lebiedzinski, Analyst

Got it. Okay. And 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 table? Or have you reconsidered that?

Robert D'Loren, Chairman and CEO

We're considering the possibility of including Longaberger in our live stream marketplace. We are looking into either selling it and incorporating it into our marketplace or licensing it to an operator who can manage it within our marketplace. Our marketplace strategy focuses on fashion, home, and jewelry.

Debra Fiakas, Analyst

Thank you for the questions from the previous participants, especially regarding the significant increase in expected savings. I want to clarify that the increase from an estimated $10 million to $13 million is primarily driven by salaries. Could you provide some insight into what your personnel structure will look like by the end of June or by the end of September?

Robert D'Loren, Chairman and CEO

Sure. Pre-transition, we were at about 95 people in our New York office and 6 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. That's where we will be, and 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.

James Haran, CFO

And then a 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're able to take advantage of that in 2023.

Debra Fiakas, Analyst

Okay. Excellent. Well, I understand a little better now. I wanted to discuss your agreement regarding Halston. It seems like 25 years is a long time these days. What is it about this licensee that gives you confidence in their ability to meet their guarantees? They've guaranteed some minimum royalty payments. What factors will allow them to significantly increase your sales volume? Could you share a bit about what you observed 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 multibillion-dollar brands.

Debra Fiakas, Analyst

Okay. So 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, Analyst

Very good. I do have one additional question. That's in regard to just comments that you made related to your own efforts to reach your consumers, reach your customers. You mentioned social commerce technology. And you also mentioned your live stream 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? How does that set you apart from what the next brand owner is doing?

Robert D'Loren, Chairman and CEO

There are two things that are happening in the industry today. One. Short-form video content is winning. 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 products.

Operator, Operator

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, Operator

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