LXRandCo Inc

TSX:LXR

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the LXRandCo's First Quarter 2020 Financial Results Conference Call. This morning, LXRandCo issued a news release reporting its financial results for the first quarter of 2020. That news release, along with the company's MD&A and financial statements, are available on SEDAR and the company's website, www.lxrco.com and can be located in the company's Investor Relations section. Please note that today's call is being broadcast live over the Internet and will be archived for replay, both by telephone and via the Internet beginning approximately 1 hour following completion of the call. Details of how to access the replays are available in our news release. Before we begin, a brief reminder that forward-looking statements may be made today during or after the formal part of this conference call and that any and all material assumptions that have been applied in providing these statements are beyond the company's control and are to be considered as such. These statements, which have been provided as guidance, are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statements. A summary of these underlying assumptions, risks and uncertainties are provided in the company's various securities filings, including LXRandCo's MD&A for the quarter ended March 31, 2020, which are available on SEDAR. These forward-looking statements are made as of today's date and except as required by applicable securities law, the company undertakes no obligation to publicly update or revise any such statements. I would now like to turn the call over to Cam di Prata, LXRandCo's Interim Chief Executive Officer. Mr. di Prata, you may proceed.

[Camillo di Prata, Interim CEO & Executive Director]

Thank you, Casey, and good morning, and thank you to everyone for joining us on today's conference call. Also joining me this morning will be LXRandCo's Chief Financial Officer, Nadine Eap. In terms of the agenda for today's call, I will be providing a high-level financial highlight review of the first quarter ended March 31, 2020, and provide you with an update on the post quarter implications of the COVID-19 outbreak on our operations. Nadine will then review our Q1 financial results in more detail, and then I'll return to open the call for any questions. Before beginning, I wanted to express our gratitude on behalf of our entire Board of Directors, to our dedicated employees across North America and Japan as well as our channel partners and suppliers for their continued ongoing support and to extend our very best wishes to them and their families during these unsettling times. As we now enter our third month of our store-closure program, we know that this has been a taxing time for all concerned. Despite the very real challenges brought on by the COVID-19 outbreak on the safety and welfare of our employees, customers and suppliers and the pressures brought about on our operations, we are nonetheless quite satisfied with the results of our first quarter, which is our traditionally weakest quarter of the year. As we originally communicated to you in the first of several prior press releases, on March 20 of this year, we temporarily closed all of our stores and regrettably furloughed a majority of our employees. The effect of this has had a material financial impact on the revenue for the month of March and on that of the entire first quarter, as Q1 revenue for the quarter declined by 30% versus that of last year.However, while net revenue declined during the quarter, the company continued to excel in all areas of expense control, which resulted in a gross margin that exceeded 31%, a gross profit dollar decline of only 20% when compared to a 30% drop in revenue and a quarter with a near breakeven level of cash flow from operations. We ended the quarter with a retail network of 71 stores across North America, which is a net reduction of 9 stores as compared to the 80 we had at the beginning of the quarter. Approximately 80% of our Q1 net revenue was generated in the U.S., with the balance coming from our Canadian activities, and we ended the quarter with $1.4 million in cash on hand, this after having repaid $2 million in bank debt over the first quarter, all in the normal course of business. Now with this having been said, our financial situation since March 31 has changed quite materially. While some of our partners' retail stores have begun to gradually reopen in select-market locations with reduced operating hours and staffing levels, the early indications are that customer traffic has been slow and developing. And while this is expected to improve with time, overall revenue performance has materially lagged that for similar periods in 2019. Consequently, it is expected that net revenue for LXR for the month of April 2020 will be approximately 90% below that for the comparable month in 2019. While the company has furloughed the majority of its employees at both store and administrative levels and has undertaken other cost-reduction initiatives, these actions, together with ongoing e-commerce activities have not been enough to compensate for the significant decline in revenue from both retail and wholesale activities. Consequently, since the end of the first quarter, the company's financial position has been adversely impacted, and the company's cash position on May 8 had declined to approximately $500,000. The company believes the ongoing effects of COVID-19 on its operations, particularly in a prolonged shutdown scenario where our stores are either unable or it is unfeasible economically to keep them open, we'll continue to have a material negative impact on its financial results and liquidity. To alleviate these financial pressures, the company has applied for the Business Capital Assistance Program, being offered by the Canadian Federal Government, a program which is also referred to as BCAP. And we have been actively working with our banking partners to secure access to this funding in a timely manner. Preliminary discussions are ongoing regarding a possible $15 million financing package that would include the renewal of the company's existing asset-backed lending facility in the amount of $12 million and a BCAP term loan for an amount of $3 million, both of these loans being for 3-year terms. As a condition precedent of the BCAP proposal under discussion, the company's lender has required LXRandCo to undertake an equity private placement of Class B shares in the amount of approximately $500,000. And for it to be subscribed predominantly by insiders. Should this be completed, the securities under the private placement are to be issued at a price of $0.175 per Class B share, such private placement will be subject to the approval of the Toronto Stock Exchange and the satisfaction of certain other customary closing conditions in the normal course. While discussions are presently underway, we would like to underscore that there can be no assurance that the company will succeed in obtaining any BCAP funding, equity financing or other such financings in a timely manner or that they will be available on terms, which are acceptable to the company or its investors. With that, I will now turn the call over to Nadine, who will review the first quarter financial results with you in a little more detail. Thank you, Nadine. Over to you.

[Nadine Eap, Chief Financial Officer]

Thank you, Cam, and good morning, everyone. In the interest of time, I will confine my remarks to the key financial highlights for the first quarter. Our full first quarter financial results are available in our financial statements and MD&A, which are posted on our website and filed with SEDAR. Now on to our results. Owing largely to the adverse impact of the COVID-19 outbreak, mainly the decrease in wholesale's order and temporary closure of LXR retail net -- retail store network. Net revenue for the first quarter was 30% lower at $6.1 million compared to $8.8 million for the same period of 2019. Additionally, in the first quarter, e-commerce revenue accounted for 16% of net revenue compared to 6.9% in Q1 last year. Reported gross profit for the first quarter decreased 12% to $1.9 million or 31.4% of net revenue, from $2.2 million or 24.9% of net revenue for the same period last year. The material improvement in gross margin for the 3-month period ended March 31, 2020, reflect the company's objective of optimizing its retail operations and, among other things, include the cumulative effects of reduced licensing fees with 2 retail partners, the termination of an unprofitable retail partnership and most importantly, a more efficient and disciplined product-sourcing strategy. We also continued to see the benefits of the more focused retail network as well as our ongoing cost-management efforts on selling, general and administrative expenses. In the second half of 2019, we terminated an unprofitable retail partnership, which resulted in the closure of 6 stores, and in the first quarter of 2020, we closed 9 unprofitable stores with 2 existing retail partners. In the 3-month period ended March 31, 2020, SG&A expenses decreased by 21% to $3.9 million or 65% of net revenue compared to $5 million or 57% of net revenue in the 3-month period ended March 2019.The overall improvement in SG&A expenses is primarily due to reduced corporate headcount, the absence of strategic review and financing costs that were incurred in the previous year and an overall improvement in cost management. Despite the decrease in SG&A expenses, SG&A, as a percentage of net revenue increased by 8% from 57% to 65% due to the foregone sales resulting from the COVID-19-related store closures. The significant improvement in gross margin and SG&A reduction translated into significant improvements across our profitability measures. Net loss for the first quarter decreased to $1 million from $3.9 million and an adjusted EBITDA loss, a non-IFRS measure, decreased to $1.6 million from $2.2 million. Turning now to our balance sheet. We ended the first quarter with $1.4 million in cash. During the first quarter, from a cash flow perspective, we saw a $0.8 million improvement with cash flow used in operation improving to $2.2 million from $1 million in the prior period. As of March 31 of this year, we had $6 million drawn on our revolving credit facility, which is down from $8 million at the end of the fourth quarter last year. As Cam mentioned, we are currently working with our lender to renew our existing credit facility, which matures in June 2020. This concludes my review of the quarter. I will now turn the call back to Cam. Cam?

[Camillo di Prata, Interim CEO & Executive Director]

Thanks very much, Nadine, and thanks to everyone this morning for joining us on the call. I'd now like to open the call up to questions. Casey, over to you.

[Operator]

[Operator Instructions] And I'm not showing any questions that are coming into the queue. Cam, I will turn the call back over to you for any closing comments.

[Camillo di Prata, Interim CEO & Executive Director]

Okay. Well, thanks very much, everyone, again for joining us today. We all wish you well during this very difficult time, and we look forward to speaking with you again at the time of our next call at the end of the next quarter. Thank you. Goodbye.

[Operator]

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.