Good day, and welcome to the Xcel Brands Fiscal Third Quarter 2017 Investor Conference Call. Please be advised that reproduction of this call, in whole or part, is not permitted without prior written authorization of Xcel Brands. And as a reminder, this conference call is being recorded.

I would now like to turn the call over to Andrew Berger of SM Berger & Company. Thank you. Andrew, you may now begin. .

Thanks, Cynthia. Good evening, everyone, and thank you for joining us tonight. We 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 EVP of Business Development and Treasury, Seth Burroughs.

By now, everyone should have had access to the earnings release for the third quarter ended September 30, 2017, which went out earlier today. And in addition, the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q by early next week.

A release and 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 SEC filings.

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..

Finally, please note that on today's call, management will refer to certain non-GAAP financial measures, such as 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 operation.

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 be considered -- 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 1, Item 2 of the Form 10-Q for a reconciliation of non-GAAP measures..

Now I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead. .

Thank you, Andrew. Good evening, everyone, and thank you for joining us. I'll start this evening with an overview of our 2017 third quarter and then provide some thoughts on the rest of the year. After that, our CFO, Jim Haran, will discuss our financial results in more detail. And then, we will conclude by opening up the call for Q&A..

We are encouraged by the direction of our -- we are encouraged by the direction our business is headed and as we proactively manage expenses and increase profitability while reinvesting our operating cash flow in growth-producing initiatives..

Xcel's strong balance sheet, growth-oriented strategy and flexible operating structure enable us to navigate a retail landscape that is undergoing unprecedented transformation and make strategic investments in initiatives such as our integrated technologies platform, which I will discuss further on our call today, and which we believe will drive further growth in our business across all channels of distribution.

Overall, we believe that Xcel is well-positioned to succeed and now at an inflection point that will demonstrate accelerated momentum in our business and create long-term value for our shareholders..

Looking at our third quarter 2017 financial results, Xcel produced improvements in operating income, primarily due to lower operating costs as certain expenses related to organizing, launching and developing our fast-to-market production platform was eliminated. .

Top line revenues were impacted by the previously reported transition of the C. Wonder brand to our hotel department store platform and the transition of the Judith Ripka hotel business to a new licensee, both of which we expect to generate positive results for the brand in the coming year.

Xcel's department store business and fast-to-market production platform continues to grow as we gain market share, improve performance, increase our door count and expand into more product categories. We expect this will have a favorable impact on revenues over the next year.

From a balance sheet perspective, we ended the quarter with approximately $8.3 million of cash and $21.3 million of senior debt, resulting in a net leverage ratio of approximately 1.6, based on our trailing 12 months adjusted EBITDA..

Our conservative leverage and continued pay down of debt enables us to strategically invest in the platform, processes and technologies that will continue to differentiate Xcel and position us to be on the forefront of the rapidly changing retail environment. .

Before I discuss our specific business segments, I'd like to spend a few minutes on our proprietary integrated technologies platform. We are committed to building the most advanced integrated technology platform, which is designed to completely digitize, accelerate and optimize the design and production process.

This strategy is supported by emerging technologies and new organizational competencies, including trend analytics, consumer insight testing, data science, artificial intelligence, 3D design and digital sampling.

This will improve our ability to identify and execute on emerging design trends, test designs, preproduction through customer insight technologies, optimize inventory opportunities and enhance efficient design resulting in faster and better products that are priced right..

The integrated technology platform will help us enhance the quality and the success of the items we bring to market through our fast-to-market production platform, while further fostering our mission of designing the best responsive products for our followers and partners.

By gauging consumer demand signals and trends from multiple digital sources, our analytics capability, coupled with real-time data science from the retail sales floor, will provide valuable insights for preproduction, preseason and in-season design and merchandising decisions, with the goal of improving sell-through and margin for our retail partners -- for us and our retail partners..

These technologies, including 3D design and artificial intelligence, will drive the digitization of the design and supply chain process. Thus, true to our core value proposition as an industry innovator, we are laying the groundwork for our future image design, and production by our artificial intelligence is a reality.

Our ultimate goal is to create the first intelligent fast-to-market automated production capability. This new production model is directly tied to and predicated upon consumer demand forecasting and the technologies and platform we are adopting and implementing today.

This is a very exciting time at Xcel, and we believe we are at the forefront of creating a disruptive retail solution platform..

Now taking a closer look at our businesses by channel. In our interactive television business, together with QVC, we remain focused on our shared goal to further expand customer count and sales under our brands.

As we grow our audience, we are expanding our apparel collection program into new categories and adjusting our merchandise mix based on customer feedback and expect to be able to impact growth starting in 2018. We also continue to actively look for opportunities to expand sales in this channel.

Our goal is to begin leveraging our fast-to-market production and integrated technology platform in this channel as we move forward with QVC, and believe there may be additional opportunities in the future with QVC's planned acquisition of HSN..

With respect to our Judith Ripka brand on QVC, we are working on several initiatives to build the business despite headwinds in this category, including focusing more on gold products on QVC, which are showing promising results, new more casual designs and diamond fashion jewelry collections.

We are also working on new and exciting innovative marketing programs for jewelry, some in viable new media partners that we hope to announce in the coming quarters that we believe will position us well to connect with new customer base to drive sales on QVC..

Overall, we are pleased with our interactive television business performance as show achievement rates and the productivity as our apparel brands increased, thanks to better product assortments and continued positive consumer engagement with our on-air talent on both TV and the social media.

We expect momentum in this channel will be positive for the remainder of 2017 and continuing to 2018. .

Our department store business is growing as we improve efficiency, increase door counts and expand into more product categories. Our fast-to-market production platform continues to see positive growth, and we have more than doubled door counts since the inception of the program in 2016. .

As a reminder, this innovative fast-to-market platform allows Xcel in partnership with our retail partners to drive towards selling merchandise based upon customer demand. Our goal is to give the customer what they want, when they want it, at a price that they deem fair.

Combining Xcel's fast-to-market production capabilities with our integrated technology platform gives Xcel an unparalleled ability to gain consumer insights, analyze data and design and produce what our customers want, when they want it..

During third quarter, we took further steps to optimize our fast-to-market production platform in the department store channel, particularly with regards to planning and merchandising, and visual in-store merchandising, which we believe will help us to better position our brands in the stores and also allow us to continue to gain market share..

Following the spring 2017 launch of H Halston women's sportswear at Dillard's, we continue to expand the brand into other categories. We launched our own NYC Isaac Mizrahi brands in Dillard's in September, both in stores and online.

Also we recently executed the denim license with an outstanding partner for IMNYC denim, which we believe have strong upside potential and expect to launch next fall. We are also working on expansion opportunities with international retail partners. .

Our increased presence in women's sportswear in the department stores is generating growth in ancillary categories under Xcel's brand, including costume jewelry, legwear, handbags, sleepwear, eyewear well, footwear, watches, storage, home decor, luggage, travel accessories, bath and bath accessories, furniture and children's products.

Our business to date has been primarily focused on women's categories. However, we recently announced a new exclusive licensing agreement with an outstanding licensee to manufacture menswear collections under our brand, and have recruited a highly regarded and experienced menswear veteran to oversee the licensing and development of our collection.

We believe that menswear has a significant potential for us as a company and are excited about the programs that our teams are working on. We expect that the new menswear collections will launch in fall 2018..

Also on the wholesale side of our jewelry business, we were successful in transitioning the business to a new licensee and are working on several strategic initiatives with them to grow the Judith Ripka brand in luxury and department store retailers. One of the first initiative is the launch of a new line later this month at Lord & Taylor.

This marks the beginning of the reestablishing of Judith Ripka as a premium luxury department store brand. .

In our specialty retail business, we are increasing the number of products we are selling through this channel and continue to add shelf space at specialty retailers nationwide. In mid-September, we launched Isaac Mizrahi bedding at Bed Bath & Beyond, both in 850 stores and online, with potential to increase our penetration going into 2018.

A collaboration with Revlon on co-branded beauty products under the Isaac Mizrahi brand also started shipping in September and will launch for holiday 2017..

Finally, we recently launched our Judith Ripka luxury bedding collection at Bed Bath & Beyond. We remain committed to exploring new specialty retail opportunities, collaborations and partnerships with prospects to expand our brands for pet, home, home improvement, children's and other specialty retail concepts. .

Now looking ahead to the rest of the year, as a recognized innovator within the industry, we strongly believe that our forward-thinking approach provides retailers with the right solution to manage the disruptive forces that are impacting our industry.

Through our strong brands, innovative business model and forward-thinking approach, we aim at creating a truly seamless shopping experience based upon the convergence of technology, media and entertainment and retail.

I'm enthusiastic about the success that we have achieved to date in expanding our brands, growing our fast-to-market production platform and attracting new media partners.

Xcel is eagerly and relentlessly engaged in multiple initiatives and programs that while not yet fully reflected in our current financial results, we are confident will ensure significant long-term growth. .

Finally, we remain focused on our commitment to grow Xcel's businesses across all channels of distribution through the development of new brands, actively pursuing new retail and media partners and exploring synergistic acquisition and joint venture opportunities, all while maintaining a prudent and strategic approach in how, where and when we allocate resources for the profitable growth of our business and management of our balance sheet.

We made significant progress during the third quarter and I'm thrilled about the direction we are headed. .

Now I'd like to turn the call over to Jim to review our financial results for the quarter. .

Thanks, Bob, and good evening, everybody. The following discussions relate to our financial results for the 2017 third quarter. In the third quarter, net revenues decreased by approximately 5% to $7.9 million, compared with $8.3 million in the prior year quarter. This is primarily attributable to lower revenue from C.

Wonder brand, the discontinuance of the LCNY brand on QVC and lower wholesale royalties from our jewelry business as we transitioned to our new licensee. These decreases were partially offset by higher revenues from our wholesale department store business..

Our GAAP net income for the quarter was $252,000 or $0.01 per diluted share compared with a GAAP net income of $118,000 or $0.01 per diluted share in the prior year quarter.

The increase in net income compared with the prior year was primarily driven by decreased operating costs and expenses as we eliminated some startup costs associated with launching and developing the fast-to-market production platform..

Net income further benefited from the declining interest in and finance expenses.

Non-GAAP net income for the current quarter was $1.6 million or $0.09 per diluted share, based on approximately 18.9 million of weighted average shares outstanding compared with non-GAAP net income of $1.5 million or $0.08 per diluted share, based on approximately 19.1 million weighted average shares outstanding in the prior year quarter.

Adjusted EBITDA in the current quarter was approximately $2.4 million, comparable to the prior year quarter's adjusted EBITDA of $2.3 million. .

Moving to our 9-month results. Net revenues for the 9 months ended September 30, 2017, decreased by approximately 4% to $24.7 million, compared with $25.8 million in the same period in 2016. The decrease was primarily due to lower revenue associated with the C. Wonder brand and the LCNY brand previously discussed.

This decrease were partially offset by an increase in fast-to-market production platform revenues as it continues to grow and expand..

Nine months 2017 net income were $66,000 or approximately $0.00 per diluted share, compared with net loss of $17,000, or the same, approximately $0.00 per diluted share for the same period in the prior year..

Non-GAAP net income for the 9 months ended September 30 was $4.3 million or non-GAAP diluted EPS of $0.22, based on approximately 18.9 million weighted average shares outstanding, compared with non-GAAP net income of $4.6 million or non-GAAP diluted EPS of $0.24, based on approximately 19.1 million weighted average shares outstanding for the same period in the prior year..

Adjusted EBITDA for the first 9 months was approximately $6.6 million, compared with $7.1 million for the first 9 months of 2016..

On a sequential basis, our operating results in terms of EBITDA and non-GAAP net income continued to show improvements for the third straight quarter. And as a reminder, non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA are non-GAAP unaudited terms.

Our earnings press release as well as our quarterly report on Form 10-Q presents a reconciliation of these items with the most directly comparable GAAP measures..

Turning to our cash position. As of September 30, 2017, the company had total cash and cash equivalents of approximately $8.3 million compared with total cash of approximately $14.1 million at December 31, 2016.

This $5.8 million decrease in cash and cash equivalents was primarily attributable to $7.2 million in principal repayments on our term debts, and $0.8 million for common share repurchases related to vested restricted stock and exchange withholding taxes, which were partially offset by $2.3 million of cash provided by operating activities..

The $2.3 million provided by operating activities was primarily driven by noncash expenses of $5.5 million, partially offset by an increase in accounts receivable of $2.5 million, and a decrease of $0.7 million in accounts payable, accrued expenses and other current liabilities, primarily as a result of overall timing of collections and payments.

We anticipate that cash provided by operations will improve considerably during the fourth quarter as the timing of receivable collections and certain accruals even out..

Looking at our debt. At September 30, 2017, combined debt was approximately $24.9 million. Debt consisted of $19.1 million senior bank term loan, $2.7 million of seller notes and $3.1 million of contingent obligations.

Of these amounts, $2.9 million of contingent obligations and $0.5 million of seller notes are payable in stock or cash at the company's option..

At September 30, 2017, total current liabilities were $7.3 million, inclusive of $4.5 million of the current portion of long-term debt. Our working capital at September was $11.1 million compared with $11.5 million at December 31, 2016..

We did follow-up[indiscernible] our 2017 term debt principal payments were [indiscernible] paid down $6.5 million in the first 9 months of this year, with no scheduled principal payments for the fourth quarter. The company expects to increase its cash position throughout the rest of 2017, as we continue to lower our net debt-to-adjusted EBITDA ratio.

.

And with that, I would like to turn the call back over to Bob for his closing remarks.

Bob?.

Thank you, Jim. During the third quarter, we made considerable progress in gaining market share in new channels of distribution and building long-term sustainable growth for the company. While our revenues were impacted by the transition of our C.

Wonder brand and near-term challenges within the jewelry industry overall that we are addressing, our brands across all channels of distribution are delivering solid performance. The growth and interest in our fast-to-market production platform positively attest to our expectation of continued double-digit growth rate for the foreseeable future.

As we approach the end of the year and head towards 2018, we expect momentum in our business to accelerate because of Xcel's unique and differentiated media design production and technology platform. .

This concludes our prepared remarks. Jim, Seth and I are now available to take questions.

Operator?.

[Operator Instructions] We will take our question from Eric Beder, B. Riley FBR. .

Could you talk a little bit about C. Wonder. I know you've moved it over. What should we be expecting in terms of that brand going forward? When do you think you'll have something to talk about with C.

Wonder? What do you think kind of brand it can be?.

I think you can expect to see similar distribution to what we have today in the department store channel, Eric. And I would say to look for product beginning to hit the stores in late spring of 2018. .

Okay.

And when you look at business model that you've set up, are you seeing the leverage you expected now that you're adding Dillard's to the mix and you've gone through basically a year with a year[indiscernible] plus with Lord & Taylor and Hudson's Bay?.

Yes. One, we were able to eliminate a lot of startup overhead, we really needed to put more people than we needed for the ongoing operations of the business to get it up and started. We had outside advisers helping us to get the process put in place that we're currently utilizing for the business.

So we've been able to reduce operating expenses and now improve the margins on the business as we begin to scale. Dillard's was an important piece of that for us in making it all work. So yes, the answer is we're able to now really begin to scale this. .

And Eric, I would add to that, this is Seth, I would add to that, in terms of what we're focused for the future, and Bob mentioned this in his remarks, we're really -- so we are getting leverage as we grow that business in the department store. We are focused. And because we -- as you know, we have very low leverage ratio.

We can actually allocate some of our free cash flow towards reinvesting in the growth. So as Bob mentioned, as we grow the platform, we are focused on selectively reinvesting and carefully reinvesting in the integrated technologies platform that he mentioned. So that further positions us to continue to take market share. So yes, we're getting leverage.

And as we continue to gain leverage, we're also carefully reinvesting a portion of that leverage that we're obtaining back in the technology and the advanced technology platform that will help us grow. .

Great. In terms of QVC, what are you seeing there in terms of growth? And what are the opportunities at QVC? I know you pulled back on C.

Wonder, but with Isaac and Halston and some of the other ones, what are your opportunities there for growth? What do you think it should be?.

So we had a very good results this year, particularly with Isaac and Halston, quite frankly, in apparel. We see continued improvement with apparel at QVC. We are introducing a denim line for Isaac and for Halston in the spring in '18. So that will be a whole new category for us. Judith Ripka, we are working on changing the product mix.

We're adding more gold. There's been a general shift in the consumers' taste for what I would call more sophisticated form of jewelry. There's definitely a trend toward more casual jewelry and we're making that shift. So expect to see more casual jewelry coming from Judith Ripka into 2018.

And we think adjusting that product mix will really help the business going forward. So we expect that continued growth in our apparel lines with QVC. .

Great. And last question, you guys are -- you have very low debt levels here, you are handling it really well, unlike most of your brethren.

What would -- what kind of acquisition do you want that would want you to decide to level up? And what would be the peak that you think you could see for it?.

So it's -- we are in an interesting moment in time in the industry, Eric. The pendulum has swung a little bit more to private label and proprietary brands with our retail partners.

I think the kinds of things that will come out of this swing in the pendulum are more things like Highline, which has been very successful for us where we created a brand for them and gave them a point of view and are making fast delivery, so that we're kind of right with the product on a monthly basis.

So I think there will be more opportunities like that. We are exploring joint ventures with other media partners to exploit their assets, primarily with cable and network television shows. And I would say, on the acquisition front, these are challenging times. There are a lot of companies that are distressed.

And with the right opportunity, we'd be opportunistic in making an acquisition that fits our core competencies in women's apparel. .

This will conclude our question-and-answer session. I will now turn the call back over to management and Bob D'Loren for closing comments. .

So ladies and gentlemen, thank you for joining us tonight. We greatly appreciate your continued interest and support in Xcel Brands. As always, stay fit, eat well and be healthy. .

This will conclude today's conference call. We thank you for your participation. And you may disconnect at this time..