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

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

Thanks, Beth. Good evening, everyone, and thank you for joining us today. 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 Executive Vice President of Business Development and Treasury, Seth Burroughs.

By now, everyone should have had access to the earnings release for the fourth quarter and full year ended December 31, 2017, which went out earlier today. And in addition, the company plans to file with the Securities and Exchange Commission its annual report on Form 10-K by the end of the week.

The release and the annual report will be available on the company's website at www.xcelbrands.com. This call is being webcast, and the 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 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 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 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 2, Item 7 of the Form 10-K for a reconciliation of non-GAAP measures..

Now, I'm pleased to introduce Bob 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 tonight with an overview of our recent performance and then provide some thoughts on 2018. After that, our CFO, Jim Haran, will discuss our financial results in more detail. And then we will conclude by opening up for Q&A..

So just moving to my opening remarks. In 2017, we continued our transition from a licensing company to a technology-based operating company that provides a 360-degree solution for our retail customers.

We stayed focused on our goal of becoming the leading solution provider for retailers and made appropriate investments in people, processes and technologies to support this mission.

I believe, we are on the right track to future sustainable long-term growth, the Xcel team performed well in implementing all of the change management required to execute our plan. That said, there is still a lot of work for us to do to fully develop the business..

We managed expenses in 2017, and as a result we were able to achieve our financial goals. I'm optimistic about top line revenue and EBITDA growth for 2018, especially in our interactive television business.

Our department store fast-to-market business is expected to be up in 2018, but it's a business that is evolving on a daily basis, which presents ongoing challenges. That said, the reward that can from perfecting this platform are significant at every level..

By collaborating with our retail, licensing and supply chain partners through our operating model, we are able to minimize working capital requirements associated with inventory, while our conservative leverage enables us to strategically invest in the technology, processes and people that will continue to differentiate Xcel and position us to be on the forefront of a rapidly changing retail environment..

During 2017, we lowered operating cost by streamlining design cost and managing G&A expenses. We were able to lower overall expenses, while at the same time making investments in our integrated technology in fast-to-market production platforms. While top line revenues were impacted by the transition of our C.

Wonder brand from interactive television to bricks-and-mortar distribution and the transition of our Judith Ripka wholesale business to a new licensee, this is not indicative of the underlying growth of our brands in these channels of distribution..

From a balance sheet perspective, we ended the year with a strong cash and low debt position. We expect that all of the work and investments will have a favorable impact on revenues over the next year and beyond..

Now turning to our business units. Taking a closer look at the businesses by distribution channel in our interactive television business, we are working closely with QVC on our shared goal of increasing customer count and sales under our brands.

In 2017, we launched additional categories, including athleisure, denim and home with respect to our Judith Ripka brand on QVC during the year. We were affected by the overall softness in the jewelry sector that also resulted in QVC cutting air-time dedicated to jewelry.

Despite headwinds in the category, several initiatives to improve performance are already underway. This includes introducing new never-before offered gold products, new more casual designs, diamond fashion jewelry and improvements in sourcing..

We continue to grow our interactive television business internationally, predominantly through QVC's European markets and the shopping channel in Canada. We remain focused on actively looking for opportunities to expand sales in the interactive television channel both domestically and internationally..

Overall, we are satisfied with our interactive television business performance, show achievement rates and the productivity of our on-air lifestyle apparel brands increased, thanks to heightened response to consumer engagements with our on-air talent both on TV and in social media.

We expect momentum in this channel will continue to be positive in 2018. Our goal is to ultimately leverage our fast-to-market production and integrated technology platforms in this channel, and we believe there may be additional opportunities in the future with QVC's acquisition of HSN..

And turning to our department store business. During 2017, this business continued to grow. Also, we improved our fast-to-market production platform by adjusting design, planning, merchandising and visual in-store merchandising, which we believe positions us well going forward.

In spring of 2017, our H Halston women's sportswear launched at Dillard's followed with fall 2017 launch of our IMNYC Isaac Mizrahi brand, both in stores and online. We continue to expand into new categories, including denim for IMNYC Isaac Mizrahi and menswear collections for H Halston and Highline. We expect to launch our C.

Wonder brand in better department stores and in China in 2018. We also continue to explore additional growth and distribution opportunities with our existing retail partners and new domestic and international retailers..

We are currently in discussions to arrange distribution in Mexico and are exploring additional distribution opportunities in Asia, South America and the Middle East..

As a reminder, our fast-to-market production platform provides our retail partners with short lead time production capability, helping them to better manage inventory, drive traffic and respond and react quickly to customer demands and trends.

Our fast-to-market production platform reduces supply chain cycle time by leveraging our integrated technology and proprietary planning and merchandising strategies.

The result is an unparalleled ability to assess trend analytics, gain consumer insight through testing digital sample and analyze data, thereby producing more intelligent product that delivers what our customers want, when they want it..

Finally, regarding our wholesale bricks-and-mortar jewelry business. We transitioned the business to a new licensee in 2017. In addition, we are currently working on several strategical initiatives to establish and grow the Judith Ripka brand as a premier luxury brand in department stores.

In this connection, we launched, for holiday 2017, a new casual fine jewelry line featuring 14-karat gold in department stores..

Turning to specialty retail. In this business, we continue to expand our product offering and to gain shelf space in specialty retailers nationwide. In 2017, we launched Isaac Mizrahi bedding and Bed Bath & Beyond and beauty products with Revlon.

We continue to explore new opportunities for collaborations with specialty retailers and expect to announce new programs in 2018..

Also, with regard to direct-to-consumer, in December of 2017, we launched our own direct-to-consumer e-commerce platform for our Judith Ripka jewelry brand. Early results have been very positive, and we will continue to report on this business going forward. .

In conclusion, in 2017, we were recognized for our forward thinking and innovation first as the 2017 top innovative for by Apparel Magazine, and company of the year medium category silver winner by Best in Biz. We are grateful to be recognized by the industry.

Beyond industry accolades, we are encouraged by the progress we made in expanding and diversifying our distribution. We are achieving our goal of being wherever our customers are shopping. Finally, our commitment to continuing innovation and growth is unwavering..

We are confident in the long-term prospects of the company and our ability to create long-term value for our employees and shareholders. Now, I'd like to turn the call over to Jim to review our financial results for the quarter and year-end.

Jim?.

Thanks, Bob, and good evening, everybody. I will briefly discuss selected financial results for the fourth quarter and the year ended December 31, 2017..

Please note that our financial results are described more fully in our annual report on Form 10-K, which will be filed with the Securities and Exchange Commission by April 2, 2018..

In the fourth quarter of 2017, net revenues increased by approximately 2% to $7 million compared with the $6.9 million in the prior year quarter. This was primarily attributable to higher net revenues from our wholesale and department store business and ongoing interactive television business.

These increases were partially offset primarily by lower revenues from the C. Wonder brand that is transitioning away from QVC and lower wholesale royalties from our jewelry business as we transitioned to a new licensee..

On a GAAP basis, our net loss was approximately $10.2 million for the fourth quarter and at December 31, 2017, or $0.55 per basic and diluted share, which includes a onetime noncash charge of $12.4 million related to the company's goodwill and partially offset by a onetime tax benefit of $2.6 million related to the recent federal tax reform legislation..

The underlying cause of the goodwill write-down was a decrease in the company's market capitalization as of December 31, 2017, as compared to the calculated fair value of the company.

This compares to GAAP net income of $2.8 million or approximately $0.14 per diluted share in the prior year quarter, which included a $3.4 million gain on the reduction of a contingent obligation..

Non-GAAP net income for the current quarter was $0.7 million or $0.04 per diluted share based on approximately 18.8 million weighted average shares outstanding compared with non-GAAP net income of $0.5 million or $0.02 per diluted share, based on approximately 19 million weighted average shares outstanding in the prior year quarter..

Adjusted EBITDA in the current and prior year quarters was approximately $1.4 million. .

Turning now to our full year results. For full year 2017, net revenues decreased by approximately 3% to $31.7 million compared with $32.7 million in the prior year..

This decrease was primarily due to lower net revenues associated with the above-mentioned C. Wonder brand transition and from exiting of the LCNY license agreement in 2016, both previously reported..

These decreases were partially offset by higher net revenues from our ongoing interactive television business as well as higher net revenues from our department store business..

On a GAAP basis, our net loss was approximately $10.1 million for the year ended December 31, 2017, or $0.55 per basic and diluted share, which includes a onetime noncash charge of $12.4 million related to the company's goodwill and partially offset by a onetime tax benefit of $2.6 million..

This compares to GAAP net income of $2.7 million or approximately $0.14 per diluted share in the prior year quarter, which includes a $3.4 million gain on a reduction of contingent obligations.

Non-GAAP net income for the current year was $4.9 million or non-GAAP diluted EPS of $0.26, based on approximately 18.9 million weighted average shares outstanding compared with non-GAAP net income of $5.1 million or non-GAAP diluted EPS of $0.27 based on approximately 19 million weighted average shares outstanding for the prior year..

Adjusted EBITDA for the current year was approximately $8 million compared with $8.5 million in the prior year. Overall, these results were impacted primarily by the transition of the C.

Wonder brand to a wholesale department store business, which although resulted in lower revenues than we originally expected in 2017, we believe the decision to reposition C. Wonder will benefit us in 2018 and beyond.

Furthermore, although our revenues were lower than originally -- than our original expectations, we did manage operating expenses, exclusive of the goodwill charge by consolidating design expenses, managing administrative expenses and at the same time investing in our integrated technology platform..

The goodwill write-down we incurred in the fourth quarter was again related to our market capitalization compared with the calculated fair value.

We have continuously monitored the company's stock price and its market capitalization, and expectations were that this sector will eventually improve and our stock price will, again, trade at higher value and be able to support the implied premium, including the fair value obtained through a weighted approach and more representative of the company's expected long-term target stock price..

Our stock trading price gradually improved during the year. However, beginning early November, our stock price begin to trend back down. We believe this to be a temporary trend and that our stock price would soon improve..

Although our stock price did improve toward the end of 2017, the volatility and with the continuing low stock trading price, we decided to proactively and conservatively increase the relative weight of our market approach to determine fair value, which consequently resulted in a goodwill charge..

Before we discuss our cash and balance sheet, a reminder, non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA on non-GAAP unaudited terms, our earnings press release as well as our annual report on Form 10-K presents a reconciliation of these items with the most directly comparable GAAP measures..

Turning now to our cash position. As of December 31, 2017, the company had total cash and cash equivalents of approximately $10.2 million compared with total cash of approximately $14.1 million at December 31, 2016. This $3.9 million net decrease in cash was primarily attributable to $7.2 million in principal repayments on our term debts.

$1.2 million for common share repurchases related to vested restricted stock in exchange for withholding taxes, which were partially offset by $4.7 million of cash provided by operating activities..

The $4.7 million of cash provided by operating activities was primarily driven by a net loss of $10.1 million, which includes noncash expenses of $16.8 million and partially offset by an increase in accounts receivable of $1.6 million and a decrease of $0.5 million in accounts payable, accrued expenses and other current liabilities..

The noncash expenses were primarily attributable to the goodwill write-offs and stock-based compensation. .

Looking now at our debt. At December 31, 2017, total liabilities were approximately $37 million, which includes approximately $24.1 million of debt, $6.4 million of net deferred tax liability. That consist of our $19.1 million senior bank term loan, $2.7 million of seller notes and $3.1 million in 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 December 31, 2017, total current liabilities were $9.1 million, inclusive of approximately $5.6 million of the current portion of long-term debt. Our working capital at December 31, 2017, was $10.2 million compared with $11.5 million at December 31, 2016..

With approximately $10.2 million of cash and approximately $21.4 million of term debt, our year-end net debt-to-adjusted EBITDA ratio was approximately 1.4, as we continue to be positioned with one of the lowest leverage ratios of any of our industry peers..

And finally, the Tax Cuts and Jobs Act was enacted in December 22, 2017. As a result of the federal tax rate reduction, we recognized a $2.6 million deferred tax benefit and an ensuing reduction of our deferred tax liability.

Although the tax estimate limits certain expenses the company may incur going forward, the reduced tax rate overall should benefit our future tax obligations. And with that, I would like to turn the call back over to Bob for his closing remarks.

Bob?.

Thank you, Jim. I have already given my closing remarks. Therefore, this concludes our prepared remarks. Jim, Seth and I are now available to take your questions.

Operator?.

[Operator Instructions] And we will take our first question from Michael Kawamoto with D.A. Davidson. .

I'm on for Andrew today. First on the QTR platform.

Can we get an update on how the discussions are going around new programs there? And then as we model 2018, how should we think about new programs or can you give us any insight as to the flow of the -- how the year progresses in 2018?.

Sure. Michael, it's Bob. Thanks for joining tonight. The fast-to-market platform is going well for us. And as you know, the industry is very challenging at the moment we are going through an unprecedented cycle of change.

The whole purpose for building this platform was to be a leading solution provider for many of the challenges that our retail partners are facing.

And to more specifically answer your question, what we're seeing is opportunities in both branded products for our brands as well as private label opportunities across the board with department stores and specialty retailers..

The fast-to-market platform is something that many companies have been searching for ways to execute this. It's a lot easier said than done. And I'm happy to report that the last 2 years are behind us, and we actually have this thing operating fairly smoothly at the moment. So we see a lot of opportunity for us, both this year and going forward. .

That's great. And then can you elaborate on the opportunity with the QVC, HSN merger, now that's closed.

Do you see the potential to maybe sell complementary products through HSN?.

So we are working now at least on a preliminary basis with QVC, exploring how we can leverage the fast-to-market platform to help them, both at QVC and at HSN. I would say, QVC is still in the integration process with HSN.

But that said, we do believe that there will be opportunities with HSN for us, and we'll flash those out this year as QVC continues integrating. .

Great.

And then what are you seeing as far as additional opportunities for potential category expansion within your brands? I think you did a H Halston home collection recently?.

We did. I think I'll defer that one to Seth since he's closest to what we are doing on the licensing front. .

'.

Yes. So Michael, as Bob mentioned in 2017, we launched Isaac Mizrahi bedding and Bed Bath & Beyond. We launched a Revlon collection in the fall. Those are the big-ticket items.

But in addition to those, we've been expanding categories and ancillary categories, including footwear, handbags, sleepwear, home categories that you mentioned across all of our brands. So for 2018, we're going to continue to expand on the categories under our brands. We're in discussions on further home categories.

We're in discussions on some accessories, travel accessories categories and number of other new categories. When you look at our brands, there is still a lot of opportunity for sales among other categories. So I would say there's some exciting things we're working on.

I think the most -- the newest category we're really focused on, as far as moving the needle, is denim collection. And so hopefully, we will have some news about that fairly shortly..

But we're always looking at categories that are natural to brands and that fit for the brands. And our team is really focused on driving those across all distribution channels. .

Great. Just a couple more for me. So it looks like the cash from operations was down in 2017 a little bit.

How should we think about that in 2018?.

Yes, this is Jim. In 2017, it was more of a reflection of the timing differences and one of them was our cash receivable, which I think will correct itself in Q1, 2018. So I think we're in line with our non-GAAP reporting in terms of our adjusted EBITDA and our cash from operations when you back out the interest charge.

And the correction that we expect in Q1 with the accounts receivable, I think, it's compelling. .

Got it.

And then the last one, with the early success of the Judith Ripka, DTC platform, do you see a similar opportunity emerging for some of your other brands as well?.

We do. And the way we're looking at it now, Michael, is one site for all of our apparel brands. And we needed to get the Judith Ripka site up and running, hire the teams to manage that business, make relationships with 3PLs that can pick, pack and deliver for us. And we now have that behind us.

And we expect that in the latter part of '18, we will introduce a direct-to-consumer platform for the apparel brands as well. .

[Operator Instructions] We will go next to Ross Taylor with ARS Investment Partners. .

Yes.

Robert -- Second, could you give us from your perspective, why you believe the retail industry has been so relatively slow to adopt the fast-to-market approach, which seems on the surface so logical and basically in an industry so challenged, so necessary?.

So Ross, that is a very good question. It is an extremely challenging thing to change an entire value chain to something that is accustomed to working on, say, a 12-month cycle and bring that down to a 6-week or less cycle. And what's really complicated is price points and distribution channels.

So where, let's say, mid-tier retailing Kohl's, JCP, those type retailers where it is really price point driven, it's very difficult to be as fast as we are in that channel. There may not be a need for it in that channel. So when you look at that channel, yes, they can bring supply chain cycle times down from 14 months to 9 months, maybe 7 months.

But when you think about where those goods are being produced, whether it's in Pakistan or parts of the world other than China that it gets complicated in positioning fabric..

So when you really understand how this is all done, the key to this is positioning fabric and we were very good at doing that, which has now enabled us to set up this platform. And it's really designed for the better zone of retailing. So that's the challenge. It's easier said than done is the answer. .

So basically, you see this as a product that fits in the mid-to-high end of the retail chain?.

It's -- yes, mid-to-high end it fits perfectly. If apparel production ever comes back to America through automation, Ross, and we are looking at the possibility of doing this. It's been all over the world, looking at automated equipment. I don't think we're there yet. In terms of the things being fully automated.

But I do believe in the next 3 to 5 years, that the possibility exists, that some production could come back. Then, if we can position fabrics here and get synthetic fabrics into this country duty-free, which I am working on with the AAFA, we might have a shot at doing this at the mid and math level. .

Okay. And also, as you -- if you were able to bring production back in the U.S. will that open up -- excuse me, the background noises, I have a puppy in the house..

The -- will that open up the ability to do the kind of quick to market for QVC and the others where literally you're effectively producing as demand is -- sales go through their process?.

Well, as it relates to QVC, QVC is in the better zones and we could implement this in the near term. This is not something that would be out in the future when we -- when and if U.S. production becomes a reality. I think we're positioned well and QVC is positioned well to benefit from this. It's just the matter of when will we actually begin to do it. .

Okay. And since today's the first day of baseball season.

If you look at the retail industry, the apparel industry and where do you see them? What inning do you see them in that decision process to more widely adopting quick to market?.

I think, the entire industry knows that this is the solution and there isn't a retailer out there that isn't looking at this very carefully and who are trying to implement some version of this. There are very few retailers out there that we are not speaking with about this.

I certainly have been to many industry conferences talking about it and how it's done and what it is that we do here. So I would say, this is not something that the industry does not want to adopt. It's something that the entire industry knows it needs to adopt.

It's now how do they really do it, because it's not just bringing in the goods fast, there is a whole merchandising piece to this. There is also a consumer education piece to this. So it's something that will just happen over time. I don't believe that the industry will be dependent upon long lead supply chains going forward. .

[Operator Instructions] And it appears there are no further questions at this time. I'd like to turn it back to our hosts for any additional or closing remarks. .

Thank you, operator, and thank you, ladies and gentlemen for joining us tonight. We greatly appreciate your continued interest and support in Xcel Brands. I'd like to take this opportunity to wish all of you happy Easter and Passover. And as always, stay fit, eat well and be healthy. .

And this does conclude today's conference call. Thank you for your participation. And you may now disconnect..