Participants

Seth Burroughs; Executive Vice President - Business Development, Treasurer; Xcel Brands 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

Anthony Lebiedzinski; Analyst; Sidoti & Company, LLC

Howard Borus; Analyst; Wellington Shields & Co

Presentation

Operator

Thank you for standing by. My name is Celine and I will be your conference operator today. At this time. I would like to welcome everyone to the Xcel B's Q3 2024 earnings conference call.
(Operator Instructions)
Thank you. I would now like to turn the call over to bars. Please go ahead.

Seth Burroughs

Good afternoon, everyone and thank you for joining us. Welcome to the Xcel Brands' third 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, and Chief Financial Officer, Jim Haran.
By now, everyone should have had access to the earnings release for the quarter ended September 30, 2024, which went out last Friday. And in addition, the company filed with the Securities and Exchange Commission, its quarterly report on form 10-Q last Friday. 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 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 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 macro economic 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 EBITA. 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 related 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 measure of financial performance calculated and presented in accordance with GAAP.
You may refer to the attachment to 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 D'Loren

Thank you, Seth. Good afternoon, everyone and thank you for joining us today. I would like to start today's call with a brief update on our performance for the third quarter and our outlook for the remainder of the year. After that, our CFO, Jim Haran will discuss our financial results in more detail.
During the third quarter, we made continued progress on executing and concluding our project fundamentals plan to transition fully to a core working capital light licensing business, live streaming over TV and in social media. Although our top line licensing revenues declined as a result of the sale of the Lori Goldstein brand.
At the end of last quarter, we nonetheless improved our bottom line operating results as a result of our strategic cost reduction actions and increased revenues from our brand portfolio. Our non-GAAP earnings for the quarter improved by approximately 56% from last year and our adjusted the EBITDA improved by approximately 26% from the third quarter of 2023. The C. Wonder brand is performing well on HSN remaining on plan and up in retail sales 60% over last year despite September's disruptions caused by two hurricanes.
These hurricanes cause shows to be canceled and fulfillments to be disrupted. Although the impact of them continued into October, we expect to make up lost sales with increased fourth quarter programming. We expect to see retail sales volume continue to grow very strongly into 2025 on HSN and with other retailers. And as previously mentioned, we are on track to launch additional new categories in footwear and handbags in spring of 2025.
TWRHLL by Christie Brinkley successfully launched on HSN during the second quarter. We believe based upon third quarter results, we are on track to exceed the launch plan by 90%. Strong sales growth is expected to continue in 2025 given planned airtime for next year. Separately, the brand sign its first ancillary product license during the third quarter. And we'll introduce additional categories of products on HSN and an additional other retailers. Finally, we have received strong interest for potential licensing partners for the brand across multiple categories including footwear, bags, beauty, skin care, home and garden.
Looking at our due to thrift, the business royalties continue to increase, coming off a 45% 2nd quarter growth rate for the first quarter. The third quarter achieved 98% growth from the second quarter and almost 500% year over year growth. We expect continued quarterly sequential revenue growth with holiday sales to drive fourth quarter royalties. We look forward to seeing continued sales momentum carry forward into 2025 and beyond on JTV.
As previously discussed, G-III launched Halston apparel this quarter. In addition, they expect to begin shipping footwear and handbags during the fourth quarter for spring 2025. As previously discussed, we expect revenues from this license to begin to pick up in 2025 and beyond. As previously mentioned, Orme soft launched its video and social commerce marketplace during the second quarter and began marketing in July.
For Xcel, Orme represents a natural extension of our expertise in video commerce over TV. The Orme team is doing a great job building awareness for the app and onboarding premier brands. They are pleased with results to date. We believe this marketplace will be one of the forces to transform video and social commerce in the US, and it will achieve its goal to democratize the influencer and create our economy. We're very excited about the potential of Orme .
As we wrap up 2024 and enter 2025 with a robust roster of new brand launches and a group of some of the best influencers and celebrity designer spokesperson in our industry, we expect total social media following for our brand portfolio will exceed 50 million followers in 2025. ORME is off to a good start with nearly 30,000 users and 25 aspirational brands. Our business with HSN is growing strongly and our company is focused on what we do best and where things are going in the retail space.
And now I would like to turn the call over to Jim to discuss our financial results.

James Haran

Thanks Bob. And good afternoon, everyone. I will now briefly discuss our financial results for the quarter and nine months ended September 30 2024. Total revenue for the current quarter was $1.9 million representing a decrease of approximately $0.7 million from the third quarter. 2023. This decline was primarily driven by $0.9 million decline in net licensing revenues mainly at returnable to the sale of the Lori Goldstein brand in the second quarter of '24 and partly offset by increased licensing revenues generated by our other brands, most notably the C Wonder brand, and the New Tower Hill by Christie Brinkley brand, both on HSN.
Despite the disruptions to our HSN business caused by two hurricanes in the third quarter that impacted their studio location and fulfillment facility. Also during the current quarter, we recognize approximately [$0.4 million] of revenue from the sale of all of our remaining inventory of the longer burger brand to a third party at cost. Following the sale, we no longer have any inventory on our books.
On a year-to-date basis, our total revenue for the current nine months decreased by approximately $8.4 million primarily due to our exit from all wholesale operating businesses as part of our project fundamentals plan that began in '23. The only product sales during the current year were approximately $100,000 related to the final sale of some jewelry inventory, the aforementioned sale of $400,000 of the remaining longer burger brand inventory.
Year-to-date licensing revenue also declined by approximately $0.5 million to $6.5 million for the current year period mainly due to the previously mentioned sale of the Lori Goldstein brand. Our direct operating cost and expenses were $2.8 million for the current quarter down by $2.8 million or 50% from the prior year quarter on a year-to-date basis. The direct operating costs expensive decreased from $17.8 million for the prior year, nine months to $9.9 million for the current period representing a reduction of approximately $7.9 million or 44%.
These decreases in direct operating costs for both the quarterly and year-to-date periods were attributable to the discontinuance of the wholesale business in the prior year which included reductions in staffing levels as well as related reductions and other old costs. With the project fundamentals initiative substantially completed, we have reduced our operating cost to a run rate of approximately $11 million per year with the potential for further reductions.
Looking at our other operating costs and expenses which are predominantly non-cash in nature, depreciation and amortization expense decreased by approximately $0.8 million for the prior year quarter and $1.2 million for the prior year nine months primarily as a result of the sale of the large glossing brand. For both the current quarter and current year-to-date period, we recognize a $6.3 million non cash charge to recognize the estimated value of a contractual contingent obligation to transfer a portion of our equity ownership interest in I Am Taco to WHP after March 2025.
In conjunction with the sale of the Isaac Mizrahi brand in 2022, there was a provision that if revenue targets were not achieved, the company would give back 12.5% of the membership interest to WHP. Also included in the 2024 year-to-date results of various other amounts from the first two quarters of the year, most notably including a $3.8 million gain on the divestiture of the looing brand and a $3.5 million asset impairment charge related to the exit from and sublease of our prior office location.
Overall, we have a net loss for the current quarter of approximately $9.2 million or minus $0.39 per share compared with a net loss of $5.1 million or minus $0.26 per share in the prior year quarter. The net GAAP was included $7.8 million of non cash charges, most notably, the $6.3 million charge related to our investment in on top down. Back in this loss out, we had a $2.2 million improvement compared with last year.
On a non-GAAP basis. We had a net loss for the current quarter of $1.3 million or minus $0.06 per share, which represents a 56% improvement from the non-GAAP net loss of $3 million or minus $0.15 per share in the third quarter of 2023. And finally, our adjusted EBITDA was negative $1 million for the current quarter as compared to EBITDA of negative $1.4 million in the prior year quarter. As previously mentioned, HSN revenues were impacted by two hurricanes where we're expecting to make a portion of that revenues in the fourth quarter.
With our new core structure in place and projected revenue growth, management anticipates improved even in the fourth quarter of 2024 and continued improvement going forward. Now that we have right stars that core structure, our non-GAAP measurements should continue to improve in future periods as licensing revenues are projected to grow. On a year-to-date basis, we have a net loss for the current nine months of approximately $15.3 million or minus $0.68 per share compared with a net loss of $14.3 million or minus $0.72 per share in the prior year nine months.
On a non-GAAP basis, we have a net loss for the current nine months of $3.4 million or minus $0.15 per share, which represents an approximate 60% improvement from the non-GAAP net loss of $8.7 million or minus $0.44 per share in the prior year nine months. Adjusted EBITDA on a year-to-date basis was negative $2.7 million, representing a year over year improvement of approximately 42% from the negative $4.6 million EBITDA in the prior year comparable period.
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 on a the 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 September 30, 2024, the company had total cash and cash equivalents of approximately $1 million, of which $0.7 million was restricted. Our net working capital excluding the current portion of lease obligations and deferred revenue and any others payable shares was a deficit of approximately $0.6 million.
However, last week, we entered into a new $10 million term loan agreement which provides the company with approximately $3.5 million of additional equity after repayment of the previous term loan debt and increased our working capital by approximately $4.5 million subsequent to September 30, 2024. Additionally, quarterly principal repayments of the new term loan will not commence until March 31, 2026.
And with that, I would like to turn the call back over to Bob. Bob.

Robert D'Loren

Thank you, Jim. This concludes our prepared remarks operator.

Question and Answer Session

Operator

(Operator Instructions)
Michael Kupinski, Noble Capital Markets.

Michael Kupinski

Good evening, everyone, and thanks for taking my questions. I appreciate it. I was wondering, Rob, if you can give us a little bit more color on how Halston is performing. I know that you're indicating that there's some new product and kind of being shipped and that sort of thing. I was wondering if you can kind of give us some insights on how that's looking as we go into the balance of this year and into the first quarter of next year?

Robert D'Loren

So, hi Michael. We've looked at the product. We think they've done a nice job with this collection. And we don't have sales reports on shoes and bags, so we won't know until 45 days after the quarter. But we hear that it is off to a good start, and they're comfortable with where they are and what their expectations are for next year. And sportswear, outer wear, handbags, and footwear.

Michael Kupinski

Do you seem to be as Sanguine as you were about the prospects of 2025 with Huston at this point? I mean, your opinion hasn't really changed at this point.

Robert D'Loren

No, we expect that they will do what they have said. And we're happy with the product and some of the adjustments that they made particularly in the apparel. And we're comfortable with where they are.

Michael Kupinski

I know that the 10-Q explains the situation with Isaac Mizrahi and I was wondering if maybe you can give us the background story and the structure there, and how you anticipate your interest in Isaac is going to continue going forward.

Robert D'Loren

Yes, we took a conservative approach on the asset value with Isaac, because given where things have been going, Michael, it's not a systemic issue with QVC. Our challenge has been getting Isaac back in person in the studio, and his hours are down significantly. We are introducing someone to pick up a lot of Isaac's air time in studio next year and that will be starting in January. So we're optimistic, but we thought it would be best to stay conservative as the asset value is concerned. Jim can walk you through, the mechanics of that, that adjustment.

James Haran

Is there anything you can specifically answer. I mean, essentially what it is is we're going to, we put a reserve against the value we net it against the asset on the balance sheet and we took a non cash charge for it in the quarter. I mean, it's pretty straightforward. And that will work itself that when the measurement period arrives early next year. And we think that the adjustment that we made now will fulfill, we think that adjustment will be at that time. So that will be very low impact in 2025.

Michael Kupinski

All right. Thanks for the color. And my last question, Jim, you were indicating that Q4 is going to show the improvement. Do you still anticipate the Q4 will show adjusted it's positive in Q4 or where do you think that you might swing towards profits going forward?

James Haran

IiI don't know if it'll return positive. It will certainly be an improvement from the third quarter. There was still some impact in October with our HSN business from the residual of the two hurricanes. And again, without having the benefit of having the reporting and we're just doing the best we can to forecast it. We do know there'll be an improvement. We don't know if it'll be to the extent where it'll turn back to profitability.

Michael Kupinski

Is there any way to monitor or provide some monetary -- whether, you know how much revenues might have been impacted by the hurricanes? Is there any way to quantify that?

Robert D'Loren

Well I can tell you what, what that was Michael. It was about 450,000, 500,00. And we were able to secure more air time. TS or TSV was moved because of the hurricane to last week. And it was a great show, we did 98% realization the show. It was a great TSA for us on HSN. So, we're hopeful that the returns will be normal and we can swing to profitability in the fourth quarter. But we won't know until everything ships and the reporting period ends.

Michael Kupinski

And if I may just squeeze one more in. I know that you were anticipating launching additional brands going into the quarter. And I was just wondering where do you stand on the timeline of additional brands that you kind of indicated in the last quarter?

Robert D'Loren

So we did say that there would be a new brand launch in March of next year. That will be a home category brand. We have several others in the home and kitchen category that we will be launching in next year. Two are under LOI, one, we're wrapping up definitive agreements and working on prototypes for that March launch. We have several other potential new transactions that we're hoping that will launch next year as well in apparel and one in home, part good.

Michael Kupinski

Great. Thank you for the update. Good luck to you guys.

Robert D'Loren

Thank you, Michael.

Operator

Anthony Lebiedzinski, Sidoti.

Anthony Lebiedzinski

Hi, good evening, everyone, and thank you for taking the question. So just to follow up as far as the fourth quarter expectations. I guess, kind of given the timing of today's call, I mean, any sense as to like where you think revenue might come in. It sounds like it should be better than the third quarter, but is there any other additional color that you can provide as far as what you think will happen here?

Robert D'Loren

I think if everything that we did in the last two weeks of December ships this year, it should hold, Anthony. But as I said, we won't know unless the shipments get out by year end.

Anthony Lebiedzinski

I got you. So when you say it should hold it, you mean relative to the third quarter or fourth quarter of last year, just if you could just clarify that.

Robert D'Loren

We've been forecasting for fourth quarter.

Anthony Lebiedzinski

Okay. Got you. Okay, that's very helpful. Okay. And then, just curious, I mean, what is your sense as far as inventory levels at retailers? Just overall, what are you as far as what you're saying for the Macro perspective? I know Bob you referenced a little bit of that in your press release. But just overall, when you look at the macro picture, look at, inventory levels or retailers, how could any of that impact the competitively your business?

Robert D'Loren

Obviously, if retailers are over inventoried, if sales aren't what they thought, they'll aggressively mark down and push sales. Could that impact our interactive television business? Maybe. Generally, we haven't seen that but there could be some impact. And there could be an impact on Halston, but I don't think G-III has enough inventory out there with Halsten at this time that there would be a material impact there.

Anthony Lebiedzinski

That's very helpful. And then as far as ORME, I know you gave us an update on a number of brands. I mean, how do you think about the trajectory of additional brand launches for next year? What are you expecting? Was just curious in regards to that.

Robert D'Loren

So ORME is being very selective about the kind of brands that they bring on, Anthony. They're looking for luxury aspirational brands that have higher average order values than say what you would typically find on tiktok shops or on flip. Our goal with ORME is to keep the average order value is above $100. And today tech talk shop and, and flip are at around $20 those are the two competing marketplaces. So it's -- and we believe the universe of brands for ORME will be 500 to 600 brands. It will be that better zone marketplace in live streaming. And so with 30 onboarded, now there's no reason that OMRE couldn't add another couple of 100 brands and begin that ramp up.

Anthony Lebiedzinski

That's very helpful. And then as far as your operating costs, certainly you guys have done a nice job of reducing your cost. And it sounds like based on what Jim said, there are some opportunities to perhaps take out additional expenses. Can you provide us with any more color as to what you're looking to do perhaps?

Robert D'Loren

Yes, we've been looking very carefully at overhead. And we think that without disrupting operations, there's another $500,000 to $750,000 in operating expenses that we can cut. And we are going to move to do that going into Q1 of next year.

Anthony Lebiedzinski

Got you. Okay. And then last thing, so you guys have improved your liquidity with the new term loans. Just going forward. I mean, do you guys see perhaps a need for another capital raise, or do you think you will be in good shape or how should we think about that?

Robert D'Loren

I think it depends upon all of the transactions that we have in our pipeline. As I said earlier, some of these are in LOI and converting to definitive agreements, and only one of them would require capital, it would be a purchase of an existing revenue stream and brand. The others are more influencer and personality driven JVS which have some start up costs. So if we -- and they're all accretive to us based on conversations that we've had with retailers, particularly, our interactive TV partners in QBC and HSN. And if we see that we need to do that, we would to conclude all of these transactions.

Anthony Lebiedzinski

Understood. All right. Well, thank you very much and best of luck and happy holidays to all.

Robert D'Loren

Thank you, Anthony. You too.

Operator

(Operator Instructions)
Howard Borus, Wellington Shields.

Howard Borus

Robert, congratulations on the tremendous progress you've been making. When I start looking at some of the numbers out there, say for 2025, how comfortable are you with an EBITDA number of call it $7 million?

Robert D'Loren

So there's a range out there. Howard, and we're comfortable in that range between the call it 44 number and the 86 numbers that are out there. Of course, that will be driven by G-III's performance because it drops a significant amount of EBITDA. And to some extent, some of the new transactions that we're working on, if we can get those signed early and start to generate revenue, it will drive both top and bottom line.

Howard Borus

How significant could that be when you talk about top line, bottom line for say the second part of -- the second half of 2025? So by that time, you'll basically --

Robert D'Loren

We're good where the analysts' numbers are, Howard.

Howard Borus

Taking the mean between the two, you're talking about a company that's selling at 1.1 times EBITDA. Any thoughts about --

Robert D'Loren

It's an attractive multiple as you know, but also, we have significant asset value. We believe that just the Halston contract alone is worth 5x our market cap.

Howard Borus

How did you know that was my next question in terms of balance sheet?

Robert D'Loren

We look at it in the same way you do, Howard. And you know that [EBITDA] and just given the embedded value of our intangibles, it's incredible to see the stock price where it is.

Howard Borus

Best of luck. Merry Christmas and a Happy New Year. Thank you.

Robert D'Loren

Thank you, Howard.

Operator

That concludes our question-and-answer session. I will now turn the call over back to the speakers for any closing remarks.

Robert D'Loren

Thank you, operator. And ladies and gentlemen, thank you all for your time this afternoon. We greatly appreciate your continued interest and support in Xcel brands. I wish all of you the very best in this holiday season and a happy and healthy and prosperous New Year. As always, stay fit, eat well, and be healthy.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You. May now disconnect.