Q1 2024 Xcel Brands Inc Earnings Call

Participants

Paul Kuntz; IR; RedChip Companies, Inc.

Robert D'Loren; Chairman of the Board, President, Chief Executive Officer; Xcel Brands Inc

James Haran; Chief Financial Officer; Xcel Brands Inc

Michael Kupinski; Analyst; Noble Capital Markets, Inc.

Anthony Lebiedzinski; Analyst; Sidoti & Company, LLC

Howard Brous; Analyst; Wellington Shields & Co. LLC

Presentation

Operator

Welcome to Xcel Brands; first quarter 2024 earnings conference call advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Xcel Brands. And as a reminder, this conference call is being recorded.
I'd now like to turn the call over to Paul Kuntz from Red Chip.
Paul, you may begin.

Paul Kuntz

Good evening, everyone. And thank you for joining us. Welcome to the Xcel Brands first quarter of 2024 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 quarter ended March 31, 2024, which went out this evening. And in addition, the company has filed with the Securities and Exchange Commission, its quarterly report on Form 10-Q today. The release and the quarterly report will be available on the company's website at www.xcelbrands.com. This call is being webcast, and a replay will be available on the company's Investor Relations website.
Before we begin, please keep in mind 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, 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 EPS 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 these measures adjust for certain costs and other events that management believes are not representative of our core business operating results. Domestic 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 measures of financial performance calculated and presented in accordance with GAAP may refer to the attachment to the company's earnings release or to Part one Item two of the Form 10-Q for reconciliation of non-GAAP measures.
And now I'm pleased to introduce Robert D'Loren Chairman and Chief Executive Officer,
Bob. Please go ahead.

Robert D'Loren

Thank you, Paul. Good evening, everyone, and thank you for joining us today. I'd like to start today's call with a brief update on our performance for the first quarter and then our outlook for the remainder of the year. After that, our CFO, Jim Haran, will discuss our financial results in more detail.
As I have previously mentioned, with the discontinuance of all wholesale operations behind us, we have returned to a working capital light for licensing business. We have made significant headway toward improving our financial performance and operating results. Our total revenues for the first quarter declined year over year.
Given that this was our first quarter in several years with zero product sales from wholesale activities. Our licensing revenues were up across our brands, except for our logo, Lori Goldstein brand, which caused royalties to be flat and our bottom line on non-GAAP, on a non-GAAP basis showed significant improvement.
Our adjusted EBITDA for the quarter improved by almost 50% from the prior-year quarter. As we continue to gain traction and accelerate in future quarters, we expect our licensing revenues to grow and our about bottom line results to continue to improve.
We plan to launch our new brand Tower Hill by Christie Brinkley on HSN later this month. Followed by the launch of additional categories of products outside of HSN starting this fall to date, we have received strong interest from potential licensing partners for the brand across multiple categories, including footwear, handbags, beauty and skin care.
The C. Wonder by Christian, Siriano brand is performing well. We expect to see retail sales volume up to about $20 million to $25 million annually in 2024. That's up 100% from last year's retail sales with a goal of over $50 million in 2025, including HSN and other retailers.
We will launch additional new core categories in footwear and handbags in spring of 2025. We also expect to announce the launch of another celebrity designer brand on HSN. before the end of this year, we are working with JTV to offer greater product assortment, including our Judith Ripka, Couture jewelry products, both on air and on jtv.com.
This has the potential to add over 15 million visitors to the Judith Ripka e-commerce business and allows for email marketing campaigns to an additional 2.1 million customers. We look forward to seeing strong sales momentum carry forward through 2024 and 2025. As previously discussed, G-III is on schedule to launch Holston this fall. We expect them to begin shipping shortly after the second quarter. We expect revenue from this license to begin to pick up later this year and grow strongly in 2025 and beyond.
For me, soft launched its video and social commerce marketplace approximately three weeks ago. The Army team is doing a great job building awareness for the app and onboarding premier brands. They are pleased with the results to date. As I previously mentioned, this is a joint venture with a technology company in which Xcel owns a 30% interest in this video and social commerce marketplace.
We believe this marketplace has the potential to transform the video and social commerce market in the US and its growth potential, potentially is virtually unlimited based on all of the progress with Project fundamentals, our strategic plan to get Xcel back to what made us successful over the years and the organic growth in our brands, we expect to return to profitability in 2024.
I should note that our logo, Lori Goldstein business was softer than expected in Q1 of 2024 caused by continued scheduling conflicts with talent. We continue to work with QVC and our on-air talent to reach a resolution for this. This includes identifying additional on-air guests to support the business or a satisfactory position of the brand. Also, we are working on launching a robust pipeline of new brands on QVC and HSN and other potential business opportunities as we seek to ensure continued growth in our core live stream interactive TV business.
And now I'd like to turn the call over to Jim to discuss our, but otherwise, Jim?

James Haran

Thanks, Bob, and good evening, everyone. I will now briefly discuss our financial results for the quarter ended March 31, 2024. Total revenue for the first quarter of 2024 was $2.2 million, representing a decrease of approximately $3.9 million from the first quarter of 2023. This decline was almost entirely driven by the decrease in net product sales to zero, resulting from our exit from our wholesale operating businesses.
As part of our Project fundamentals plan, 2023 and 2024 licensing revenue was approximately $2.2 million in both the current quarter and the prior year quarter. Licensing revenue was up across all brands, except for the Lori Goldstein brand, which caused royalties to be flat.
Our direct operating costs and expenses were $4 million for the firm for the current quarter, down by $3 million or 43% from $7 million in the prior year quarter. This decrease was mainly attributable to the discontinuance of our wholesale and e-commerce activities in 2023, which included reductions in staffing levels as well as related reductions in other overhead costs. With the project fundamental initiatives substantially completed last year. Going forward, we expect our average direct operating cost to be less than $4 million per quarter.
Overall, we had a net loss, excluding noncontrolling interest for the current quarter of approximately $6.3 million or minus $0.31 per share compared with a net loss of $5.6 million or minus $0.29 per share in the prior year quarter.
The current quarter's net loss included non-cash operating costs of $2.3 million due to asset impairment charges relating to our successful exit and subleasing of our prior office space as part of Project fundamentals. On a non-GAAP basis, we had net loss for the quarter of $1.8 million or minus $0.09 per share, which ranks which represents a roughly 50% improvement from the non-GAAP net loss of $3.6 million or minus $0.18 per share in the first quarter of 2023.
Now that we have right-sized our cost structure, our non-GAAP net income should continue to improve in future periods as licensing revenues are projected to grow.
Finally, adjusted EBITDA was negative $1.6 million for the current quarter, representing a year over year improvements of $1.6 million or approximately 50% from the negative $3.2 million EBITDA in the prior year quarter. With our new cost structure in place and projected revenue growth, management anticipates achieving positive EBITDA later this year.
Once again, I would like to take this opportunity to remind everyone that 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 and liquidity. As of March 31, 2024, the company had total cash and cash equivalents of approximately $2.3 million, of which $0.7 million was restricted. Our net working capital, excluding the current portion of lease obligations and deferred revenue was approximately $2.1 million, which we believe is adequate and appropriate under our current licensing plus working capital light business model.
Since executing our project fundamentals plan, our cash usage has decreased significantly and is projected to continue to improve with the launch of [Hosston] by G-III this fall the launch of Tower Hill by Christie Brinkley later this month and continued growth in our C. Wonder and juice broker licensing businesses.
In March 2024, we did a small common stock offering for net proceeds of approximately $2 million. This recent capital raise, combined with our current working capital position, lower operating cost and balance sheet borrowing capacity provides us with adequate liquidity to meet our obligations as they become due while growing our business.
And with that, I would like to turn the call back over to Bob.
Bob?

Robert D'Loren

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

Question and Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions)
Michael Kupinski, Noble Capital Market.

Michael Kupinski

Taking my questions and good afternoon, mfirst of all, can you talk a little bit about Lori Goldstein and how does on that brand account for your total licensing revenue maybe in the latest quarter and for the full year 2023? And then finally, can you talk a little bit about what you mean by options for a satisfactory disposition of the brand as a prospect there? What do you mean by that?

Robert D'Loren

Okay.
So on the Lori Goldstein brand, Michael, generate about $5 million in top line royalties and because there's an earn out there with contingent obligation that's booked on the balance sheet of about $5 million. The way the deal works is there is a sweep.
It doesn't contribute a lot of cash flow to us. And we've been concerned about trends in the business and some of the complications of some logistics for Lori herself now having moved to Palm Springs and being able to get to West-Chester Pennsylvania to give us the time that we need to really drive the sales. We've been challenged by that where everyone is working through it.
We are all doing whatever is necessary under the circumstances to keep the flow in the business as good as we can because no one wants and to create any issues for QVC with the business. And part of those negotiations are perhaps, we would sell the brand back to Lori under satisfactory terms and conditions, and we're exploring all of that now and good [Cieffe] on both sides.

Michael Kupinski

Thank you. And then on terms of the launch of a Houston, obviously a big event for the company and a key factor to your swing toward profitability. You indicated that the shipping of the product will be after the second quarter, was there a little slippage in that timing of that?

Robert D'Loren

I don't think so.
We anticipated. Initially, when we sign the license with G-III that they would be launching in spring, but they pushed it out to fall. Because they simultaneously launching Apparel, Footwear and Handbags and they just couldn't get it all together for the spring launch, they may have already began shipping some goods. we haven't received any shipping reports in them.

Michael Kupinski

Got, gosh, I think I'm can you talk a little bit about Christie Brinkley the brand there in terms of the number of skews that you'll be launching that in initially, that sort of thing.

Robert D'Loren

So the Christie launch is of full apparel collection. And if that launches next week, we have a big press event that will hit simultaneously with the launch of the show. Christy was fantastic in the in the photo shoot for it and it will be tops, bottoms, sweaters full collection in apparel. And we are working now across multiple categories for bags, shoes, accessories, skin care, beauty, and possibly fragrance.

Michael Kupinski

Your final question, I'm sorry for so many. Can you give us an update on the number of vendors for Army at this point? And any particular update on when you might move towards a full-scale launch.

Robert D'Loren

So as far as we know from or me and the pipeline of vendors now is between three to five per week coming on, we just onboarded and clients that will be the first of the WHP brand, and we're working with them to analyze which of their brands really works given their model as a licensing company. They don't operate most of the e-com site. And then we expect other major brands to come on as well over the next 30 days.

Michael Kupinski

Perfect.
And that's all I have for now.
Thank you.

Robert D'Loren

Thank you, Michael.

Operator

Anthony Lebiedzinski with Sidoti.

Anthony Lebiedzinski

Good afternoon, and thank you for taking the questions.
So first, just wanted to follow up on the Lori Goldstein. So Bob, I know you talked about the continued scheduling conflicts. It sounds like it was meaningful for the quarter as the other brands were up So any way you could quantify take a stab at it, China's share, like how much you think this was, how much this impacted your top line?

Robert D'Loren

So we won't know for this year. But until we, until and unless we reach a settlement agreement with Lori and we are close, I think it's in good shape. Everyone's been acting in good faith, obviously, we'll have the first half of the year. Just because of timing to get anything done with Lori and buy. I think based on where we are in the discussions, it will be good for us and the shareholders and good for Lori. That's where we are.

Anthony Lebiedzinski

Okay. All right. So it sounds like from a cash flow perspective, it's not overly meaningful. So it doesn't really take away from your goals.

Robert D'Loren

No it's not. And with all the things that we have coming on now with the business doubling and C. Wonder and Paulson and getting launched. Christy, getting launched other things we have in the pipeline because this wasn't a big cash flow contributor. We're happy with where we are in the negotiations with Lori.

Anthony Lebiedzinski

Okay. And then on terms profitability for this year, I think you said that you expect to be positive EBITDA later this year. So do you mean for one of the quarters later this year, or do you think you'll be positive EBITDA for the full year?
Just wanted to get a little bit more clarification in terms of that.

Robert D'Loren

I see it, it will depend quarter by quarter and quite frankly, how fast, we see the ramp-up in the G-III license and what we expect for the full year will be positive and coming into Q3 and Q4, that's when we're going to see that pickup because that's really when G-III starts to ramp.

Anthony Lebiedzinski

So G-III , will it start already or in July or are we talking about later in the quarter? Like what's the timing?
So we just have a better understanding as to how the business will flow as the quarter as easy as the year progresses?

Robert D'Loren

They should be shipping now. So we're going to wait for them to send to was there shipping report, but to get in propofol shipping is starting now.

Anthony Lebiedzinski

So it sounds like as the year progresses and progresses, each quarter should be better from both a top line and bottom line perspective, is that fair to say?

Robert D'Loren

That's how we say it. There's an adjustment for Lori top line may change, but we believe bottom line and cash flow will be better.

Anthony Lebiedzinski

Okay.
That's very encouraging. And then in terms of or me, you talked about onboarding of three to five per week. Do you think that perhaps could maybe accelerate as the year progresses as well? Or do you think that's a space that you'll be happy with if you could continue without?

Robert D'Loren

No, I think it will accelerate armies and hiring staff is the people, and we're helping them with the bigger brands, making contacts for them, but they're staffing up and beginning to really operate.

Anthony Lebiedzinski

Got you. Okay. I guess my last question here. So you did a small capital raise during the quarter. Do you think given the state of business that you should be all set or do you project any other capital raises?

Robert D'Loren

I think we're good for now, given where we are and unless there is some kind of transaction that we have need for cash, I don't foresee us doing another equity deal unless there's a there's a need for the capital to effect the transaction.

Anthony Lebiedzinski

Got a very good or I want to thank you gentlemen, though, and best of luck.

Robert D'Loren

Okay. Thank you, Anthony.

Operator

Howard Brous, Wellington Shields.

Howard Brous

So a couple of questions that I have been asked, but not in the depth. I'd like them or me how many companies have you signed up? And can you give us some sense of names that have signed up?

Robert D'Loren

So on our one we don't have daily reports morning. Remember where we are in 30% of that company. We've invested in that armies with private company and they share some information, but not all information with us.
What I can see and coming through as they're adding three to five brands per week now to their pipeline. And of course, as brands come on, then they e-mail those customer databases and recruit users for the app and at some point Army more do its own capital raise and then report accordingly. So that we all have a little more visibility into into the Army business but there are some things that they're just not reporting on.

Howard Brous

You know, how many brands have signed up already?

Robert D'Loren

Nine are on, and there's about another nine in the pipeline and the biggest one that was just put on [event] and Clint.

Howard Brous

So looking at G-III and the minimum base basically guaranteed to you, I'm looking at, if you will, next year's numbers. Is it fair to say that, the EBITDA number certainly engine directional is increasing significantly? And could you comment on what people are looking for in terms of EBITDA for next year.
And the estimate out there is a, call it $11 million.

Robert D'Loren

The catalyst for top line and EBITDA are Paulson, C. Wonder and Christie now going into next year and C. wonder's doing incredibly well to $12.9 million in '23. It's planned at approximately [25] for this year, and we believe it could hit [50] next year based on the trend that it's on and the release now handbags and footwear and some other licensed categories.
And Christy, we really just has tremendous potential. There is another transaction that we will be and executing on with HSN this year, it'll come in in the latter part of Q3, possibly the beginning of Q4 for holiday season.
And those those will be the catalyst for revenue. And of course, Judith Ripka continues to do well with JTV. And they have decided to move all the full price product and two jtv.com, which exposes that product to another 50 million unique visitors per year on JTV and gives us access to millions of customers for the juice or the e-commerce business that they're running.
So we're excited about what JTV is dealing with to three, and those will be the catalyst for growth. We do have other and brands that we anticipate that we will be launching going into next year that could be immediate drivers of revenue, and we look forward to announcing those as we get closer to finalize.

Howard Brous

So is it fair to say the estimate for EBITDA for next year is how concerned?
Let me ask it that way?

Robert D'Loren

Where we're standing behind the estimates that are out there, ours yet based on what we see in the pipeline and the business.

Howard Brous

So effectively, you're selling a 1.5 times EBITDA for next year, a fair comment of that.

Robert D'Loren

It seems reasonable when you when do you think about where that EBITDA can be?

Howard Brous

Yes, that's all I have.
Thank you. Good luck, Bob.

Robert D'Loren

Thank you.

Operator

Michael Kupinski, Nobkle Capital Markets.

Michael Kupinski

So I think some sorry, just one quick follow up, Bob, in terms of the new brand, you hope to launch, you said that I believe it might be featured on HSN. Will this be and have it can you give us any additional color on that, whether or not it's an apparel brand or will it also be streaming on. Could you just kind of give us a little additional color there, Q4 and maybe even some thoughts about how much revenue might generate this year?

Robert D'Loren

So it is an apparel brand and it is with the celebrity designer. We don't think it'll contribute much this year, Michael, just because of when it's launching, but it will be a contributor coming into '25. Just based on timing where we are now, it does look like holiday is one that we'll get out, but we're excited that it's a great opportunity great design and great product, and we're not making that promise. A licensee is doing it. Then our goal is to do more of these at HSN where each of these brands could be 30 million to 50 million in volume on HSN and that's the goal. So.

Michael Kupinski

Perfect. Well, good luck with that. Thank you.
That's all I have.

Robert D'Loren

Thank you.

Operator

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

James Haran

(Multiple Speakers) What I just want to let everyone know that we had some technical difficulties getting our earnings release out. I was just informed that they fixed them and they really should be going out momentarily. We did file our 10-Q earlier this afternoon. So apologies to have an average lease not issued prior to the call. So I do not have Edmundo. We've had technical issues with the fund with the relation additional expect.
So sorry about that.

Robert D'Loren

Okay. So thank you, Jim.
Ladies and gentlemen, thank you for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. As always, state should eat well and be healthy.

Operator

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