LXRandCo Reports Financial Results for the First Quarter 2020, and Provides Update on the Impact of Coronavirus on its Operations

MONTREAL, May 13, 2020 /CNW/ - LXRandCo, Inc. ("LXRandCo" or the "Company") (TSX: LXR, LXR.WT), a North American omni-channel retailer of branded vintage luxury handbags and accessories, today reported its financial results for the first quarter ended March 31, 2020, and provided an update on the implications of the outbreak of the coronavirus ("COVID-19") on its operations.

"Despite the very real challenges brought on by the COVID-19 outbreak on the safety and welfare of our employees and customers alike, and on our operations, we were satisfied with our first quarter performance. While net revenue declined by 30% the company excelled in all areas of expense control generating a gross margin exceeding 31%, a gross profit decline of only 12% and a near break-even cash flow from operations. The Company's financial situation subsequent to the quarter end, however, remains severely challenged as all our stores remain closed and most of our employees furloughed. To alleviate the financial pressures brought on by COVID-19, the Company is pursuing all alternative funding avenues available to it." said Cam di Prata, Interim Chief Executive Officer, and member of the Office of the President, LXRandCo.

Set forth below are the financial highlights and a discussion of the Company's financial  results for the three-month period ended March 31, 2020, which are to be read in conjunction with the Company's unaudited interim condensed consolidated financial statements and Management's Discussion and Analysis ("MD&A") for the period, and an update on the implications of the outbreak of the COVID-19 on our business under the section "Going Concern and Update on COVID-19 Situation".

Highlights for the First Quarter Ended March 31, 2020

(All comparable figures are to the first quarter ended March 31, 2019, unless otherwise stated¹)

• The retail network at March 31, 2020 consisted of 71 stores compared to 85 in 2019. This decrease was mainly due to the Company's decision to close eight unprofitable stores with an existing retail partner in early 2020. The Company also terminated an unprofitable retail partnership in 2019, which resulted in the closure of six stores in the U.S.
• Owing largely to the adverse impact of the COVID-19 outbreak, net revenue decreased by 30.4% to $6.1 million from $8.8 million.
• E-Commerce revenue increased to 16.0% of net revenue from 6.9%.
• Gross profit decreased by 12.0% to $1.9 million from $2.2 million.
• Gross profit margin increased to 31.4% compared to 24.9%.
• Selling, general and administrative expenses decreased by 20.7% to $3.9 million from $5.0 million.
• Net loss decreased by 74.8% to $1.0 million from a net loss of $3.9 million.
• Adjusted Net Loss (a non-IFRS measure) decreased by 23.9% to $2.0 million from an Adjusted Net Loss of $2.6 million.
• Adjusted EBITDA Loss (a non-IFRS measure) decreased by 28.6% to $1.6 million versus an Adjusted EBITDA loss of $2.2 million.
• Cash flow used in operations improved by 84.7% to a deficit of $0.2 million from a deficit of $1.0 million.

Discussion of the Three-Month Periods Ended March 31, 2020 and 2019.

Unless otherwise indicated, all amounts are expressed in Canadian dollars. Certain metrics, including those expressed on an adjusted basis, are non-IFRS measures. See "Non-IFRS Measures" further below. For a reconciliation of non-IFRS measures to their most directly comparable measure calculated in accordance with IFRS, see "Select Consolidated Financial Information" further below.

Net Revenue

LXRandCo's retail network consisted of 71 stores as at March 31, 2020, compared to 85 stores as at March 31, 2019. In the three-month period ended March 31, 2020, the Company closed nine stores (versus one closure in the three-month period ended March 31, 2019). These store closures were consistent with the Company's objective of optimizing the performance of its retail network across North America. Specifically, and where possible, the Company actively re-deploys inventory from lower performing stores to higher performing ones which may result in a reduction in store count but not necessarily in a reduction in net revenue. In the three-month period ended March 31, 2020, approximately 87% and 13% of its net revenue was generated in the U.S. and Canada, respectively, as compared to 91% and 9% in the three-month period ended March 31, 2019.

In the three-month period ended March 31, 2020, net revenue decreased by 30.4% to $6.1 million as compared to $8.8 million in the three-month period ended March 31, 2019, with e-commerce revenue representing 16.0% of total net revenue in 2020 versus 6.9% in 2019. The decrease in revenue for the three-month period ended March 31, 2020 primarily reflects the foregone sales in the month of March resulting from the temporary closure of the Company's retail network and wholesale partner stores in response to the COVID-19 pandemic.

Gross Profit

Despite a 30% reduction in net revenue in the three-month period ended March 31, 2020, gross profit decreased by only 12.0% to $1.9 million as compared to $2.2 million in the three-month period ended March 31, 2019.

In the three-month period ended March 31, 2020, gross profit margin increased to 31.4% compared to 24.9% in the three-month period ended March 31, 2019. The material improvements in gross margin for the three-month period ended March 31, 2020 reflected the Company's objective of optimizing its retail operations and, among other things, include the cumulative effects of reduced licensing fees with two retail partners, the termination of an unprofitable retail partnership, a more efficient and disciplined product sourcing strategy, a decrease in inventory obsolescence, and a significant reduction in inventory shrinkage and freight expense.

SG&A Expenses

In the three-month period ended March 31, 2020, SG&A expenses decreased by 20.7% to $3.9 million, compared to $5.0 million in the three-month period ended March 31, 2019. The improvement in SG&A expenses is attributable primarily to the operation of fewer unprofitable stores throughout the period, which resulted in decreased store and corporate headcount costs, and lower costs related to the storage and transportation of inventory, as well as the absence of one-time expenses and professional fees relating to the financing that occurred in the first quarter 2019.

As of March 31, 2020, and including retail partner employees under the direct supervision of the Company, LXRandCo's total employee headcount decreased to 256 from 278 as at March 31, 2019. The number of employees directly employed by the Company was 152 as of March 31, 2020, as compared to 162 as at March 31, 2019. This decrease in headcount is mainly the result of the streamlined retail network resulting from the store closures discussed above.

Net Loss

In the three-month period ended March 31, 2020, the Company's net loss decreased by 74.8% to $1.0 million from a net loss of $3.9 million in the three-month period ended March 31, 2019.

Adjusted Net Loss

In the three-month period ended March 31, 2020, Adjusted Net Loss decreased by 23.9% to $2.0 million as compared to an Adjusted Net Loss of $2.6 million in the three-month period ended March 31, 2019. The financial table on page 12 sets forth the reconciliation of Net Loss to Adjusted Net Loss.

Adjusted EBITDA

In the three-month period ended March 31, 2020, Adjusted EBITDA loss decreased by 28.6% to $1.6 million as compared to an Adjusted EBITDA loss of $2.2 million in the three-month period ended March 31, 2019. The financial table on page 12 sets forth the reconciliation of Net Loss to Adjusted EBITDA.

Going Concern and Update on COVID-19 Situation

In the preparation of the Company's unaudited interim condensed consolidated financial statements, management is required to identify when events or conditions indicate that significant doubt may exist about the Company's ability to continue as a going concern.

Significant doubt about the Company's ability to continue as a going concern would exist when relevant conditions and events, considered in the aggregate, indicate that there is material uncertainty that the Company will not be able to meet its obligations as they become due for a period of at least, but not limited to 12 months from the statement of financial position date. When the Company identifies conditions or events that raise potential for significant doubt about its ability to continue as a going concern, the Company considers whether its plans that are intended to mitigate those relevant conditions or events will alleviate the potential significant doubt. The mitigating effect of management's plans are considered to the extent that: a) it is probable that the plans will be effectively implemented and, if so, b) it is probable that the plans will mitigate the conditions or events that raise significant doubt about the Company's ability to continue as a going concern.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis which assumes the continued realization of assets and satisfaction of liabilities and commitments in the normal course of business.

During the three-month period ended March 31, 2020, the Company incurred a net loss of $1.0 million (three-month period ended March 31, 2019 – net loss of $3.9 million) and had negative operating cash flow of $0.2 million (three-month period ended March 31, 2019 – deficit of $1.0 million). In addition, at March 31, 2020, the Company had a working capital deficit of $0.6 million, which includes its funding obligations under its existing Line of Credit of $6.0 million as it matures in June 2020 (December 31, 2019 – working capital surplus of $1.3 million) and an accumulated deficit of $107.8 million (December 31, 2019 - $106.8 million).

As the Company continues to implement measures to improve profitability by increasing sales and reducing selling, general and administrative expenses (SG&A) and with the World Health Organization's declaration of the COVID-19 as a global pandemic and, after assessing (a) the recent escalation of the spread of the coronavirus in North America, (b) the impact and actions undertaken by our retail partners and the Company in ensuring the well-being and safety of employees and consumers, and (c) the uncertainty as to the duration of the COVID-19's contagion period, management has concluded that there exist material uncertainties related to events or conditions that may cast significant doubt upon the assumptions underpinning the Company's forecasts and plans and accordingly its ability to continue as a going concern. The judgments made by management in reaching this conclusion are based on information available as of the date these unaudited interim condensed consolidated financial statements were authorized for issuance. These unaudited interim condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities other than in the normal course of business. Accordingly, actual results may differ from the Company's forecasts and plans and the variation may be material.

The Company believes the ongoing effects of COVID-19 on its operations, particularly in a prolonged scenario, will have a material negative impact on its financial results and liquidity.  The Company is taking additional actions to improve its liquidity, including accelerating its e-commerce online activities, and initiating capital expenditure and expense reductions.

The Company's activities involve material risk and uncertainty, and the future profitability of the Company is dependent upon a number of factors, including increasing sales, reducing SG&A, the underlying health and viability of its retail partners, general economic conditions and on consumer sentiment in general, and in the near to medium-term, any possible sustained negative effects of the COVID-19 on consumer confidence and buying patterns.  While management has been successful in securing financing through share issuances and a Line of Credit in the past, there can be no assurance it will be able to do so in the future or that these sources of funding or initiatives will be available for the Company or that they will be available on terms which are acceptable to the Company (see "Subsequent Events" Section right below).

Subsequent Events

On March 20, 2020, in response to the COVID-19 outbreak, the Company announced that further to the decisions made by its retail partners in North America, it would temporarily close all its stores until further notice.

While certain of the Company's U.S. retail partners have commenced gradual store re-openings in select market locations (with reduced operating hours and staffing levels), the Company has no stores open at this time, which has and will continue to materially impact its financial results in the second quarter of the year. It is expected that net revenue for the month of April 2020 will be approximately 90% lower than that for the comparable month in 2019. While the Company has furloughed the vast majority of its employees at both the 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 retail and wholesale operations. 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^th, 2020 has declined to $500,000. In addition, the Company's Credit Line matures in June 2020.

The Company believes the ongoing effects of COVID-19 on its operations, particularly in a prolonged scenario, will have a material negative impact on its financial results and liquidity. Where possible, the Company is taking additional actions to improve its liquidity, including accelerating its e-commerce online activities, and initiating capital expenditure and expense reductions and deferrals. The Company's activities involve material risk and uncertainty, and the future profitability of the Company is dependent upon a number of factors, including increasing sales, reducing SG&A, the underlying health and viability of its retail partners, general economic conditions and on consumer sentiment in general, and in the near to medium-term, any possible sustained negative effects of COVID-19 on consumer confidence and buying patterns. 

As a result of the above pressures on its liquidity, the Company has applied for the Business Capital Assistance Program ("BCAP") COVID-19 relief program being offered by the Federal Government and has been actively working with its lender partner to secure access to this funding in a timely manner. Preliminary discussions are ongoing regarding a financing package that includes the renewal of the Company's existing asset-backed lending facility for an amount of $12 million for a three-year term and a BCAP term loan for an amount of $3 million for a three-year term. 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 of approximately $500,000 and for it to be subscribed predominantly by insiders. The securities shall 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. There can be no assurance that the Company will succeed in obtaining any BCAP or other such financing in a timely manner or that they will be available on terms which are acceptable to the Company or investors.

 Consolidated Financial Statements and Management's Discussion and Analysis

The Company's unaudited interim condensed consolidated financial statements for the three-month period ended March 31, 2020, and Management's Discussion and Analysis ("MD&A") thereon are available on the Company's web site at http://investors.lxrco.com/financials-reports-information and under the Company's profile on SEDAR at www.sedar.com.

Selected Consolidated Financial Information
The following table summarizes LXRandCo's recent results for the periods indicated:

LXRandCo, Inc.
Consolidated statements of loss and comprehensive loss
(in Canadian dollars, except per share amounts, unaudited)
							For the three-month period ended March 31,
							2020	2019
Net revenue							6,097,604	8,756,063
Cost of sales							4,181,254	6,578,400
Gross profit							1,916,350	2,177,663
Operating expenses
Selling, general and administrative expenses							3,947,192	4,974,901
Amortization and depreciation expenses							220,676	218,444
Impairment of goodwill							—	—
Results from operating activities							(2,251,518)	(3,015,682)
Other income and expenses
Finance costs							167,057	113,341
Debt extinguishment costs							—	—
Foreign exchange loss (gain)							(1,444,429)	690,668
Loss before income taxes							(974,146)	(3,819,691)
Income tax expense (recovery)
Current							—	39,865
Deferred							—	—
							—	39,865
Net loss from continuing
operations							(974,146)	(3,859,556)
Net loss from discontinued
operations							—	(7,621)
Net loss for the period							(974,146)	(3,867,177)
Other comprehensive loss
Cumulative translation adjustment - continued operations							(1,435,524)	450,807
Comprehensive loss for the period							(2,409,670)	(3,416,370)

The following table provides a reconciliation of Net Loss to Adjusted Net Loss and Net Loss to EBITDA and Adjusted EBITDA for the periods indicated:

				For the three-month period ended March 31,
				2020	2019
Reconciliation of Net Loss to Adjusted Net Loss
Net Loss				(974,146)	(3,867,177)
Adjustments to Net Income:
Foreign exchange loss (gain)				(1,444,429)	690,668
Stock-Based Compensation Expense				440,382	79,373
Non-recurring professional fees				—	474,853
Store closing cost				10,485	30,318
Loss from discontinued operations				—	7,621
Adjusted Net Loss				(1,967,708)	(2,584,344)

				For the three-month periods ended March 31,
				2020	2019
Reconciliation of net loss to Adjusted EBITDA
Net Loss				(974,146)	(3,867,177)
Add: Amortization and depreciation expense				220,676	218,444
Add: Finance Costs				167,057	113,341
Add: Income Tax Expense (Recovery)				—	39,865
EBITDA				(586,413)	(3,495,527)
Adjustments to EBITDA:
Foreign exchange loss (gain)				(1,444,429)	690,668
Stock-Based Compensation Expense				440,382	79,373
Professional fees related to strategic review and private placement				—	474,853
Store closing costs				10,485	30,318
Loss from discontinued operations				—	7,621
Adjusted EBITDA				(1,579,975)	(2,212,694)

Conference Call

A conference call to discuss the Company's first quarter 2020 results is scheduled for today, Wednesday, May 13, 2020, at 8:30 a.m. (ET).  Participants can access the conference call by telephone by dialing 647-427-7450 or 1-888-231-8191, or via the Internet at https://produceredition.webcasts.com/starthere.jsp?ei=1313533&tp_key=763b180361. 

The conference call will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. To access the archived conference call by telephone, dial 1-855-859-2056 or 416-849-0833 and enter the pass code 5591989 followed by the pound key.  The telephone replay will be available until Wednesday, May 27, 2020 at midnight. To access the archived conference call via the Internet, go to http://investors.lxrco.com/events-and-webcasts.

About LXRandCo

LXRandCo is a North American omni-channel retailer of branded vintage luxury handbags and other personal luxury products. LXRandCo sources and authenticates high-quality, pre-owned products from iconic brands such as Hermès, Louis Vuitton, Gucci and Chanel, among others, and sells them at attractive prices through a retail network of stores located primarily in major department stores in the United States and Canada, wholesale operations primarily in the United States, and its own e-commerce website, www.lxrco.com, as well as the e-commerce platforms of its partners.

Non-IFRS Measures

This press release refers to certain non-IFRS measures. These measures are not recognized under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement IFRS measures by providing further understanding of LXRandCo's performance and results of operations from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of LXRandCo's financial information reported under IFRS. Management uses non-IFRS measures including: "EBITDA," "Adjusted EBITDA," and "Adjusted Net Loss". These non-IFRS measures are used to provide investors with supplemental measures of LXRandCo's operating performance and thus highlight trends in LXRandCo's business that may not otherwise be apparent when relying solely on IFRS measures. Management believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of company performance. Management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. For a definition of EBITDA, Adjusted EBITDA, and Adjusted Net Loss, and a reconciliation of these non-IFRS measures to IFRS measures, see the above tables presented.

Caution Regarding Forward-Looking Statements

Certain statements in this press release are prospective in nature and constitute forward-looking information or forward-looking statements within the meaning of applicable securities laws (collectively, "forward-looking statements"). Forward-looking statements generally, but not always, can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "could", "would", "will", "expect", "intend", "estimate", "forecasts", "project", "seek", "anticipate", "believes", "should", "plans" or "continue", or similar expressions suggesting future outcomes or events and the negative of any of these terms. Forward-looking statements in this news release include, but are not limited to, statements concerning future objectives and strategies to achieve those objectives, including, without limitation, store openings and closures, as well as other statements with respect to management's beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, outlook, circumstances, performance or expectations that are not historical facts.  Forward-looking statements reflect management's current beliefs, expectations and assumptions and are based on information currently available to management, which includes assumptions about continued revenues based on historical past performance, management's historical experience, perception of trends and current business conditions, expected future developments, including the Company's capacity to secure additional financing, and other factors which management considers appropriate. With respect to the forward-looking statements included in this press release, management has made certain assumptions with respect to, among other things, the Company's ability to meet its future objectives and strategies, the Company's ability to achieve its future projects and plans and that such projects and plans will proceed as anticipated, the expected growth of the Company's e-commerce revenue, the expected number and timing of store openings, entering into new and/or expanded retail partnerships, the Company's ability to source products, the Company's competitive position in the vintage luxury industry, and beliefs and intentions regarding the ownership of material trademarks and domain names used in connection with the marketing, distribution and sale of the Company's products as well as assumptions concerning general economic and market growth rates, currency exchange and interest rates and competitive intensity, notably in the context of the current COVID-19 outbreak.

Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated or implied by such forward-looking statements will occur or that plans, intentions or expectations upon which the forward-looking statements are based will occur.

All forward-looking statements included in and incorporated into this press release are qualified by these cautionary statements. Unless otherwise indicated, the forward-looking statements contained herein are made as of the date of this press release, and except as required by applicable law, the Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Readers are cautioned that the actual results achieved will vary from the information provided herein and that such variations may be material. Consequently, there are no representations by LXRandCo that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.

SOURCE LXRandCo, Inc.

Nadine Eap, Chief Financial Officer, LXRandCo. Inc., [phone] ext: 037, [email protected]