Q3 2023 Xcel Brands Inc Earnings Call
Participants
Robert W. D'Loren; Chairman, President & CEO; Xcel Brands, Inc.
James F. Haran; CFO, Principal Financial & Accounting Officer and Assistant Secretary; Xcel Brands, Inc.
Seth Burroughs; Executive VP of Business Development & Treasury and Secretary; Xcel Brand, Inc.
Andrew M. Berger; MD; SM Berger & Company, Inc.
Anthony Chester Lebiedzinski; Senior Equity Research Analyst; Sidoti & Company, LLC
Pat McCann; Analyst; Noble Capital Markets
Aaron Warwick; Analyst; Breakout Investor
Walter Schenker; Analyst; MAZ Partners
Presentation
Operator
Conference call is being recorded. I would now like to turn the call over to Andrew Berger of SM Berger & Company. Andrew, you may now begin.
Andrew M. Berger
Thank you and good evening, everyone, and thank you for joining us, and welcome to the Xcel Brands Third 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, Jam Haran; and Executive Vice President of Business Development and Treasury, Seth Burroughs.
By now everyone should have access to the earnings release for the third quarter ended September 30, 2023, which went out this evening. And in addition, the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q tomorrow. The release and the quarterly report will be available on the company's website at wwwxcelbrands.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 that this call will contain forward-looking-statements. All forward-looking-statements are subject to risks and uncertainties that could cause actual results to different 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 I've 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 these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and 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 financial performance calculated and presented in accordance with GAAP, you may refer to the attachment on the company's earnings release or to part one Item two of the Form 10-Q for a 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 W. D'Loren
Thank you, Andrew, and good evening, everyone, and thank you for joining us. I would like to start today's call with an update on our strategic transformation efforts and how our business is performing under the new operating model. After that, our CFO, Jim Haran, will discuss our financial results in more detail.
I would be remiss if I did not extend a special thanks, Jim, for powering through a serious bike injury this last weekend to get the 10-Q filed as stated earlier this year, starting in the first quarter of 2023, we began to restructure our business operations shifting from a working capital intensive, wholesale business model to a business model that is working capital light, highly profitable and focused on high-touch licensing, livestream shopping and social commerce growth strategies.
During the third quarter of 2023, we continued to execute on this plan, and I am pleased to report that we have essentially completed this transition of our wholesale and related e-commerce operation and subsequent to the end of the quarter we have outsourced operations through license agreements for our longer burger business.
As a result of all of our restructuring efforts going forward, we expect to now save approximately $14 million in operating expenses on an annualized basis as compared with 2022 expense levels, including approximately $7 million of reduced payroll costs and $7 million in lower operating costs, These cost savings began in the first quarter of 2023 and are expected to be fully realized by the end of 2023.
Based upon some delays in concluding the Longaberger licensing agreements and softness in our QVC business that resulted from scheduling conflicts with our on-air talent. Our current financial forecast indicate that we expect to return to profitability by the first quarter of 2024, driven by these cost savings, combined with revenue from our new licenses and brand launches in 2023.
That will continue to ramp and grow in 2024, to effectuate this transformation, we have engaged with best-in-class business partners and entered into multiple new licensing agreements, some of which I spoke about on last quarter's call and some of which are new this quarter.
We believe that the evolution of our operating model through these new arrangements, coupled with the launch of our livestream and social commerce platform will provide our company with competitive advantage and significant cost savings going forward, while offering our customers exceptional quality at attractive prices.
We also believe our livestream and social commerce platform will enable us to fully engage with and entertain our customers in ways that were not possible in the past. I look forward to sharing more information about this as we get closer to the launch.
In May, we signed the master licensing agreement with G-III apparel group for the Halston Brand. We started to realize revenues from this agreement in the second quarter of 2023, but expect that more meaningful growth will come after G-III launches their first collection in fall 2024, which is a season later than we initially had hoped for our partnership with G-III.
Given their extensive production and distribution capabilities provides us with a tremendous opportunity to grow the brand and take hold them to the next level, for our Judith Ripka Brand. We entered into new licensing agreements in the first and second quarters to move all segments of our Judith Ripka business to jewelry TV.
The brand launched on air October 16. The launch was among the best launches on JTV. and exceeded all business metrics established by the network. In fact, early indications show over 10 million media impressions generated by the marketing efforts for the launch. We expect significant growth with the Judith Ripka Brand in this new and exciting partnership for our C Wonder brand.
We launched on HSN at the end of March with the first show achieving over 200% of planned sales and sales continue to gain strong momentum during Q3. As previously stated, the wholesale production for our HFN. business has been licensed to one jeans wear group. We are working on some exciting license extensions and other categories for the C Wonder brand.
Finally, we expect to be announcing before the Christmas holiday, a new brand launched on HSN in March of 2024 with an iconic American supermodel. This continues our push into building a brand portfolio of influencers and creators to drive our TV and live stream and social commerce businesses.
With respect to the longer burger brand, we entered into a new license agreement with an industry leading outsource e-commerce management company to manage and operate the e-commerce business. Also, we have executed a license for made in America US basket and finally, we are in discussions with other potential partners to license additional homes product categories under the brand.
Longaberger is an iconic American brand, and we're excited after reestablishing the brand past few years to now bring in partners who can help grow the brand and business. Finally, regarding our QVC interactive television business, both the logo by Lori Goldstein brand and Isaac Mizrahi brand did not perform as we expected during the third quarter of 2023, primarily due to scheduling conflicts with on-air talent as QVC transitions post-COVID from remote shows to 100% and studio shows in Pennsylvania.
We are exploring ways to increase sales through the use of additional gas and other alternatives to drive the business in 2024, including product refreshments and possible dedicated chose with our backup guests. In summary, we are on track with the execution of our transition plan, and we look forward to growth in 2024.
And now, I would like to turn the call over to Jam to discuss our results and financial highlights. Jam?
James F. Haran
Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter and nine months ended September 30, 2023. Total revenue for the third quarter of 2023 was $2.6 million representing a decrease of approximately $1.9 million from the third quarter 2022. This decline was primarily driven by a $2.1 million decrease in net product sales due to the exit from our wholesale apparel and fine jewelry sale operations currently 2023 as part of the restructuring and transformation of our business operating model.
Partially offsetting the decline in net sales was an increase in net licensing revenue of $0.2 million, primarily driven by the relaunch of our C Wonder brand on HSN. It should be noted that our Judith Ripka brand launched on air and JTV, this past October. Thus, we expect to see a positive impact from the brand beginning with the fourth quarter of this year.
On a year-to-date basis, revenue for the current nine months decreased by approximately $6.2 million from the prior-year nine months to $15.5 million this decline in revenue was driven by a $6.3 million decrease in licensing revenue, primarily attributable to the May 2022 sale of a majority interest in the Isaac Mizrahi brand net product sales were essentially flat year over year as we sold off all of our apparel and jewelry inventory during the first half of 2023, our direct operating costs expenses were $5.6 million for the current quarter, down by $1.3 million or 19% from $6.9 million in the prior year quarter.
It should be noted that the $1.3 million in non-recurring costs associated with restructuring were included in the current quarter's operating expenses and if backed out would represent a $2.6 million reduction from the prior year quarter.
On a year-to-date basis, our operating costs and expenses were $17.8 million in the current year period, down by $7 million or 28% from $24.7 million in the prior nine months. This decrease in operating expenses was primarily attributable to the restructuring and transformations of our business in 2023 that Bob discussed earlier, and in addition, the elimination of costs associated with the Isaac Mizrahi brand ourselves in May 2022.
As Bob mentioned, we recently announced the licensing of our Longaberger operations. Together with the restructuring of apparel and fine jewelry house operations, our operating costs and expenses will continue to decrease, and we expect to reach a run rate of under 4 million per quarter by the first quarter of 2024.
By comparison, the fourth quarter of 2022 had a run rate of approximately $7.5 million in costs. Overall, we had net loss, excluding noncontrolling interests for the current quarter of approximately $5.1 million or minus $0.26 per share compared with a net loss of $4 million or $0.21 per share in the prior year quarter.
On a non-GAAP basis, we had a net loss for the current quarter of $3 million or minus $0.15 per share compared with a net loss of $3.3 million or $0.17 per share in the prior year quarter. This non-GAAP net loss includes the $1.3 million of nonrecurring restructuring charges that I mentioned earlier.
Adjusted EBITDA was negative $1.4 million for the current quarter, an improvement of approximately $1.5 million compared with negative $2.9 million in the prior-year quarter. This level was approximately $400,000 over our forecast as it relates to reduced royalty revenue generated by our QVC businesses.
On a year-to-date basis, our net loss, excluding noncontrolling interest for the current nine months was approximately $14.3 million or $0.72 per share compared with net income of $2 million or $0.1 per share in the prior year comparable period. On a non-GAAP basis, we had a net loss for the current nine months of $8.7 million or minus $0.44 per share.
Compared with a net loss of $8.8 million or minus $0.45 per share in the prior year nine-month period. And finally, adjusted EBITDA was negative $4.6 million for the current nine months, representing a $2 million improvement of negative $6.6 million of EBITDA in the prior nine months.
Once 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 presents a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet and liquidity.
As of September 30, 2023, the company had cash and cash equivalents of approximately $2.2 million and positive net working capital of $2.9 million, excluding the current portion of our lease obligations. Since executing our restructuring and transformation plans early this year, our cash usage has decreased significantly and is projected to continue to improve cash used in operating activities during the current nine months was $2.8 million compared with cash used in operating activities of $11 million in the prior year nine months.
Also in October 2023, we entered into a new five year term loan of $5 billion in which quarterly repayments will commence in April of 2024. We believe that the additional liquidity provided by this new term loan, coupled with our operating expense cuts and working capital position, provides the company with adequate liquidity going forward.
And with that, I would like to turn the call back over to Bob up.
Robert W. D'Loren
Thank you, and it's great to see you recovering so fast from your bike accident. Ladies and gentlemen, this concludes our prepared remarks. Operator.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Anthony Lebiedzinski of Sidoti & Co.
Anthony Chester Lebiedzinski
Yes, good afternoon. It's Anthony Lebiedzinski from Sidoti and thank you for taking the question of black drama, hopefully, we are feeling better and go about our 100% quickly either.
So yes. So first, with just the move, looking at the third quarter, Bob, you mentioned that was came in lower than what you guys expected. Part of that was because of the QVC issue. So Have those issues been resolved with QVC or do you think it will still be a drag on the fourth quarter?
Robert W. D'Loren
So there are two things that were driving the difference between where we thought we would be and where we ended up in the quarter, one about $400,000 in revenue. We were lower and then we expected and that was because of missed shows by by talent. And we had about 200,000 more of expenses with the transition of the longer burger business, we thought we would be able to get everything in place a little sooner than we did. But the good news is that's behind us now.
And we are working on solutions to get talent back on calendar and on schedule so that we don't mess with them it was a fairly sudden change in policy at QVC. And as you can imagine, most of our on-air guests have Bizzy media schedules and we just had complex. We think there will be some continued conflicts in Q4, but we're working on a revised agreements with all of our on-air guests so that we can get back to normal on-air timed heading into January.
Anthony Chester Lebiedzinski
Okay. Yes. Thanks for that, Bob. And in terms of the license deal that you announced last week with Alpha OES for Longaberger. Yes, how should we think about the impact of this deal now going forward? Maybe you can give a sense to us maybe yesterday when you own a portion of longer that you did previously, how much did that contribute? And then kind of going forward, how should we think about this in terms of the financial impact?
Robert W. D'Loren
Okay. I think Seth can talk a little bit about alpha?
Seth Burroughs
Yes. So Anthony, I think the license is structured with the royalty like many traditional licenses. There's also an incentive on the bottom side on the margin generated by the business, if you like, the business. So, we don't report earnings by brand or contribution by brand. That said, longer Burger, we've been investing in the business over the last several years. So, there should be a positive impact. So, it will be a negative impact to revenue since we won't be recognizing the direct-to-consumer revenues from the longer business, but it should be a very positive impact to our EBITDA contribution.
Anthony Chester Lebiedzinski
Okay. That's good to hear. Okay. So going forward, you will sound like you will only be reporting net licensing revenue would be, I guess at the other line item, net sales, I mean, this quarter we only had 236,000 of the sales. There are some I guess going forward, Jam, coming, we have been pretty much zero are now is that correct?
Seth Burroughs
And yes, I believe that's correct.
James F. Haran
There'll be some sales in the fourth quarter as we had transition longer burn during the quarter thereafter, we don't anticipate having sales cost of goods sold.
Got you. Okay. And then last question before I pass on to others. So, in terms of the expense run rate, I know some of the third quarter came in higher because of some nonrecurring items. As far as the fourth quarter. Do you think you can be close to $4 million or above that? like to just roughly speaking, should we expect.
Robert W. D'Loren
Just cleaning up some some some final transition items. So, there'll be a little bit more cost, but this is the end of these transition costs going into the new year. It will be exactly what Bob mentioned, the run rate on the following items.
Anthony Chester Lebiedzinski
All right. Well, that's good to hear. We'll thank you very much and best of luck and Happy Thanksgiving to all.
Robert W. D'Loren
Thank you.
Operator
Pat McCann of Noble Capital Markets.
Pat McCann
This is Pat on for Mike Kupinski. Thanks for taking my questions and congratulations on completing the restructure. So actually of some of my questions have already been answered, but I do have one additional question, which is just broadly, what are you seeing in the marketplace on for your various brands so far our so far in this quarter, just when it comes to as we head into the holiday season, what's what is the demand like from the consumer? What kind of what are you seeing if you have any leading indications of what we should expect on this holiday season given the state of the economy?
Robert W. D'Loren
So it's an interesting question on apparel historically as the month of December has not been a big month in interactive TV because networks tend to pivot to electronics food and giftable items. So, and we don't expect them any change in their product mix going into this into December. And and quite frankly, our brands were tracking ahead of QVC overall results in apparel. If we didn't have the scheduling conflicts. I think we would have been very, very pleased with where we were in Q3 and now heading into Q4.
And so that tells us that. And there there remains high demand for our products with the consumer. And of course, we are watching that carefully. People are making a lot of hard decisions about where they should be spending their money but overall, we haven't seen anything quite yet. It's just we need to deliver the talent to West Chester PA, which, as I said, we're working on.
Pat McCann
Great thanks for the call on. That's it for me.
Robert W. D'Loren
Thanks, Pat.
Operator
Aaron Warwick of breakout investors.
Aaron Warwick
Hey, guys. Thanks for taking my call and appreciate all that commentary. Sounds like some good things ahead. One of those I imagine is your social commerce platform. Could you talk a little bit more about what your current thinking on that is in terms of when it's going to launch what we should be looking for and what are what your expectations are, especially as we come up on the holiday shopping season?
Robert W. D'Loren
Yes. So, we have completed everything. We wanted to complete with the attack itself, including a building in for AI engines to recommendation engines, one content filter to have the machines filter out negative content. Our brands participating on the marketplace can set. They're screening filters and a style chat bot. And all of those are done and ready to go.
We expect that we will be conducting an Investor day or perhaps at one of the conferences that we're scheduled to at present that in December, we will we will provide the complete rollout plans and a detailed overview of the technology and it's a revenue model.
Aaron Warwick
Okay. So looking at December timeframe for that, and is that where you have you had mentioned the supermodel before, I think on the last call, and is that for a specific brand or is that as part of the social commerce platform or both.
Robert W. D'Loren
It's both expense and we would expect and all of our brands to be participating on the social commerce platform and then, of course, many third party brands as well.
And we hope to be able to make the announcement before the Christmas holiday was about them through that supermodel is, of course, the planned launch is in March of 24 and HSN doesn't want to get too far out ahead of the launch.
Aaron Warwick
The launch of what is in March 2024.
Robert W. D'Loren
The launch of ours, our supermodel felt low-calorie.
Aaron Warwick
Okay. Yes, and final thing from me, I guess, is you do have that $5 million available now you're talking a lot of good things happening expected to happen. Are you though in the fourth quarter and beyond and even profitability next year. Is there been any thought given especially at the current levels, too, potentially stock buyback or anything like that?
Robert W. D'Loren
But so the answer to that is yes, it is something that we're looking at carefully and on. I think we need to get a read on the launch of the live streaming platform and that will, to some extent will guide us in when the size of some type of stock buyback program. If we decide to do that.
Aaron Warwick
I guess one more that came to mind here, if you don't mind, there was seemed to be quite a bit of heavy selling boot and way beyond what is normal. Is there any any idea what was going on for about a month or so?
Robert W. D'Loren
Yes. We when we acquired Holston from HOCO and their partner, there was an indemnity bucket that was formed the collateral and that indemnity bucket was shares of Xcel and that were held by by HOCO, and they settled their litigation and shares were sold to to realize on the indemnity bucket. And that's what it was. So, there was a lot of pressure on the stock while that selling was happening.
Pat McCann
Okay, that makes it. So, I mean that was price insensitive essentially then and when they don't have to sell, you've got mathematics. That explains a lot. That's good to hear. Okay I appreciate the commentary around that and have a happy Thanksgiving and holiday season and look forward to the future here.
Robert W. D'Loren
Thank you and good things here and there everyone happy holidays.
Operator
(Operator Instructions) Walter Schenker of MAZ partners. Your line is open.
Walter Schenker
Actually, my main question was just asked by Arun, which is given an asset-light model and expectation of profitability on high second, right, that second half would have asked the same question about a buyback. But as a whole there, I think that's a very good use given the discount to asset value. But my question was asked and answered. So, thank you anyway. Happy holidays.
Operator
There are no further questions at this time. I will now turn the call over to Bob D'Loren for some closing remarks.
Robert W. D'Loren
Thank you, operator. Ladies and gentlemen, thank you all for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands, and as always, stay fit eat well be healthy.
Operator
This concludes today's conference call. You may now disconnect.
