Robert D’Loren - Chairman, Chief Executive Officer James Haran - Chief Financial Officer Seth Burroughs - Executive Vice President, Business Development and Treasury Andrew Berger - SM Berger & Co..

Michael Kawamoto - DA Davidson Jeffrey Link - Invemed.

Welcome to the Xcel Brands third quarter 2018 earnings conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad.

Should you need assistance during the conference call, you may signal an operator by pressing star and zero. Please be advised that reproduction of this call in whole or in 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 conference over to Andrew Berger of SM Berger and Company. Thank you, Andrew, you may begin..

Good morning everyone and thank you for joining us. 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 access to the earnings release for the third quarter ended September 30, 2018, which went out earlier in this morning, and in addition the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q later today.

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 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 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 related to the company’s results of operations.

Our management believes these financial performance measurements are also useful because these measures adjust for certain cost 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 measures of financial performance calculated and presented in accordance with GAAP.

You may refer to the attachments of the company’s earnings release or Part 1, Item 2 of the Form 10-Q for a reconciliation of non-GAAP measures. Now I am pleased to introduce Robert D’Loren, Chairman and Chief Executive Officer. Bob, please go ahead..

Thank you, Stan. Good morning everyone and thank you for joining us today. I’ll start with an overview of our recent performance 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.

First let me start with a few highlights before I get into the business overview. In the nine months ended September 30, 2018, we continue to show strong results from the launch of our wholesale and ecommerce jewelry business and the continued solid performance of our interactive television business.

Our third quarter total revenue and operating income increased over last year approximately 5% and 11% respectively. Also, our total revenue and operating income for the nine months ended September 30, 2018 increased by approximately 3% and 39% respectively compared with last year.

Our net income for the current quarter and nine months was approximately $1 million and $1.4 million respectively compared with $250,000 and $66,000 in the prior year periods. Our current nine month EBITDA is $6.7 million, up 2% from last year.

We continue to transition from a licensing company to a vertical consumer products media and technology-based operating company that provides a 360 degree solution for our retail customers.

We believe our operating platform, including our fast-to-market production and integrated technologies capabilities provides us with significant competitive advantages as compared to more traditional wholesale and licensing companies.

Our focus remains on expanding distribution of our brands through our media and ubiquitous channel approach, including wholesale and direct-to-consumer sales of our products. We are encouraged by our current growth and continue to make strides in developing this platform, and we believe we are well positioned for sustainable long-term growth.

Now taking a closer look at our business by distribution channel, our interactive television business is performing well as show achievement rates and the productivity from our on-air lifestyle brands continue to be strong.

We continue to work closely with Qurate Retail Group to increase customer counts and productivity for our brands and look for opportunities for expansion in this channel. Last month, we launched Judith Ripka on HSN with excellent results. We are excited to now have Judith Ripka on both QVC and HSN.

We believe there are other significant opportunities for us within the Qurate Retail Group. Now moving to our wholesale bricks and mortar business, in the first nine months of 2018 our wholesale business continued to grow across multiple categories.

We continue to improve our fast-to-market production platform for our branded products, which is providing us with the ability to leverage this platform with private label opportunities.

Beginning October 2018, we transitioned our department store business from a licensing model to a wholesale model, which will result in recording sales, margin, and sourcing fee income in lieu of licensing fees. Our operating model is set up to minimize inventory risk and working capital needs.

Our wholesale business model will include both our branded and private label products. We believe the rationale for this change is to improve efficiencies within our supply chain, gain greater control over our brands, and grow top line and bottom line revenue when compared to just licensing fees.

The transition to a wholesale model does not require significant operating changes and only minimal incremental overhead.

Finally, we continue to explore additional growth and distribution opportunities with our existing and new retail partners while remaining focused on selectively leveraging our platform across new brands and retailers, both domestically and internationally.

Now turning to specialty retail, we continue to increase the assortment of product we offer through this channel and to gain momentum in specialty retailers nationwide. Our beauty products with Revlon and our Isaac Mizrahi bedding programs are performing well.

We remain committed to exploring new specialty retail opportunities, collaborations and partnerships as we seek opportunities with different specialty retail concepts. We expect that we will announce in 2019 some new and exciting programs that are planned to launch in that year. Finally I will discuss our direct-to-consumer business.

As previously mentioned, in December 2017 we launched a direct-to-consumer ecommerce platform for our Judith Ripka fine jewelry brand, offering items in gold and silver. As we have reported previously, we’ve transitioned our jewelry business from a traditional license to a wholesale bricks and mortar and ecommerce business.

We believe the wholesale bricks and mortar and ecommerce strategy is the right path forward to growth for our jewelry and apparel businesses. We believe this will contribute to the growth of our brands across all channels of distribution while creating digital relevance with our followers.

I’m encouraged by the positive momentum in our jewelry ecommerce business and expect sales to continue to grow as we expand into new retail accounts and drive increased traffic to our ecommerce site. We expect to launch ecommerce businesses for some of our apparel brands in 2019.

In conclusion, through our ubiquitous channel approach, we are positioning ourselves to establish our presence in all forms of distribution so that we can reach our customers everywhere they shop.

To this extent, the expansion and diversification of our business model as a technology-based operating company which began earlier this year represents a logical next step in this strategy, and we are enthusiastic about the progress made and early results achieved.

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

Jim?.

Thanks Bob, and good morning everybody. I will briefly discuss selected financial results for the quarter ended September 30, 2018, and please note that our financial results are described more fully in our quarterly report on Form 10-Q which will be filed with the SEC later today.

In the third quarter of 2018, total revenue increased by approximately $0.4 million to $8.3 million compared with $7.9 million in the prior year quarter.

Sales from our jewelry wholesale and ecommerce business contributed approximately $0.4 million to the overall increase in total revenue in the current quarter and $0.2 million toward net revenues, which was partially offset by a $0.7 million decrease in net licensing revenue. Net revenues are total revenues less cost of goods sold.

The operating expenses were $6.6 million in both the current and prior year quarters. Although total operating expenses were flat as compared to the prior year quarter, we had a $0.5 million decrease in salaries and stock-based compensation. This was primarily offset by an increase in design and marketing expenses.

Interest expense decreased by $0.05 million compared to the prior year quarter by virtue of reducing our term debt. Our net income for the current quarter was approximately $1 million or $0.05 per diluted share, which compares to net income of $0.3 million or approximately $0.01 per diluted share in the prior year quarter.

Non-GAAP net income for the current quarter and the prior year quarter was $1.6 million or $0.09 per diluted share based on approximately 18.2 million and 18.9 million weighted average shares outstanding respectively.

Adjusted EBITDA in the current quarter was approximately $2.33 million compared to the prior year quarter’s adjusted EBITDA of $2.36 million. Moving now to our nine month results, total revenue for the nine months ended September 30, 2018 increased by approximately 3.4% to $25.5 million compared with $24.7 million in the prior year period.

Sales from our jewelry wholesale ecommerce business contributed $1 million to the overall increase in total revenue in the current nine months and $0.44 million to net revenues.

During the current nine months, net licensing revenue decreased approximately $0.23 million compared to the prior year period as higher licensing revenue from the ongoing interactive business and wholesale department store business were offset by lower revenue of $0.87 million associated with the termination and transition of the C.

Wonder brand from QVC. Our operating expenses decreased by approximately $0.9 million compared with the prior year period. The net decrease in operating expenses was primarily attributable to a $1.5 million decrease in total compensation, including a decrease of approximately $1.1 million of stock-based compensation.

This was partially offset by an increase in design and marketing expenses. Interest expense decreased by approximately $0.2 million compared with the prior year period by virtue of reducing our term debt. Our net income was approximately $1.4 million for the nine months ended September 30, 2018, or $0.07 per diluted share.

This compares to net income of $0.07 million or $0.00 per diluted share in the prior year period.

Non-GAAP net income for the current nine months was approximately $4.5 million or $0.25 per diluted share based on approximately 18.3 million weighted average shares outstanding compared with non-GAAP net income of approximately $4.3 million or $0.22 per diluted share based on approximately 18.9 million weighted average shares outstanding in the prior year period, representing an increase of 6% and 12% respectively.

Adjusted EBITDA for the current nine months was approximately $6.71 million compared to the prior year period’s adjusted EBITDA of $6.56 million, an increase of $0.15 million or 2%.

As previously announced, effective January 1, 2018 we adopted a new FASB revenue guidance accounting standard codification 606 under the modified retrospective adoption method by applying the new guidance to contracts that were not completed as of January 1, 2018, and the adoption did not result in material differences from the company’s prior revenue recognition policies for revenue recognized in the current quarter and the current nine months.

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 present a reconciliation of these items with the most directly comparable GAAP measures.

Turning now to our cash position, as of September 30, 2018, the company had total cash and cash equivalents of approximately $8.6 million compared with the total cash of approximately $10.2 million at December 31, 2017.

This $1.5 million net decrease in cash and cash equivalents was primarily attributable to $4.5 million in principal repayments on our term debt, $1.1 million for capital expenditures for our department store business, $0.7 million in shares repurchased for the vesting of restricted stock grants 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 net income of $1.4 million which includes non-cash expenses of approximately $4.6 million, a $0.8 million increase in accounts payable and other liabilities, and partially offset by an increase in accounts receivable of $1.1 million and an increase in inventory of $0.9 million.

The non-cash expenses consist of deferred income tax provision, stock-based compensation, and depreciation and amortization. Looking at our debt, at September 30, 2018 total liabilities were approximately $35.1 million, which includes $17.6 million in term debt, $3 million of contingent obligations, and $8.1 million of net deferred tax liability.

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

At September 30, 2018, total current liabilities were $12.4 million inclusive of approximately $5.3 million of the current portion of long-term debt and $3 million of contingent obligations payable in stock at our option.

Our working capital at September 30, 2018 was approximately $11.2 million exclusive of the contingent obligations payable with stock compared with $10.2 million at December 31, 2017. As of September 30, 2018, our term debt payable in cash was $17 million. With approximately $8.6 million of cash, our net term debt was $8.4 million.

Our adjusted EBITDA on a rolling 12-month basis to net debt ratio was approximately one time as we continue to be positioned with very low and manageable leverage. With that, I would like to turn the call back over to Bob..

Thank you, Jim. Ladies and gentlemen, this concludes our prepared remarks.

Operator?.

[Operator instructions] Our first question is from Michael Kawamoto with DA Davidson. Please go ahead..

Yes, hey guys.

How’s it going?.

Good morning, Michael..

Thanks for taking my questions. Just first off on the fast-to-market department store business, how are those discussions going? I think you said last time you’d have more private label programs launching in the back half, which would make it more of a back half-weighted revenue year.

Are those still on schedule, or do you have any initial feedback from those?.

Yes, they are on schedule and we’ve picked up a few additional programs, so we’re now doing private label for Saks Off Fifth, Lord & Taylor, Hudson’s Bay and Dillard, and working with additional retailers for new programs heading into ’19, so we are on plan and we expect, barring any unforeseen circumstances, a strong Q4..

Got it. Is it fair to characterize it that you’d see a pretty meaningful acceleration in revenue growth in 4Q? I think that’s the way I understood it last time..

Michael, yes. I would expect that, but what I would also say is as we get into these retailers and private label programs, there is a ramp, so you should expect to see further ramp particularly in 2019 as we get into next year..

Okay, that sounds good. Then just on the licensing revenue in the quarter being down a touch, is that just due to the C.

Wonder business at QVC going away, and it’s fair to characterize that the rest of the business there is doing well in the interactive channel?.

Yes..

Okay.

Then in terms of pivoting to the department store--sorry, the wholesale model in the department store business and carrying some inventory, are you seeing the benefits of that when you talk to potential partners, they’re responding favorably to your changes to your operating structure?.

Yes, there is significant--there is a significant need in the industry for fast-to-market capability, and we spent the last two and a half years building this, as you know.

I would say that we expect to continue to see demand there, more companies beginning to embrace this and set up for it, so I would expect to see as an industry supply chain production cycles coming down. .

Got it. You mentioned Judith Ripka on HSN - congrats on that.

Do you plan on putting some of the other brands on HSN as well?.

I think it’s a little early to tell, and of course Qurate will drive that. We don’t have total visibility into that, but certainly I think everyone was happy with the performance of Judith Ripka on HSN and we’ll continue to explore the possibility of putting some of our other brands on both networks. .

Yes Michael, and I think as we look at the HSN and QVC opportunity, a lot of our discussions center around how do we leverage the design platform that we’ve built to develop new brands for HSN, so I think there’s more opportunity for new brands as well. .

Got it. Then just on Judith Ripka, I think the jewelry business was down a little bit the first part of the year.

Has that bounced back for you guys at all, or what are you seeing there?.

Actually, it has. Judith Ripka has performed well on QVC. We are ahead of plan, and I would attribute that to adjustments that we’ve made in design jewelry, like apparel has become much more casual and that was a design shift that we needed to make.

We’re pleased with early results, particularly results that we’ve see over the last three months with some of the new product that we’ve introduced. We are clearly seeing that on our ecommerce platform, where we’ve introduced a line that is cleaner, more casual.

It’s doing very well for us and we’ll begin to lean into that collection, so we’re optimistic. We think we’ve made the right design adjustments to meet customers’ demands..

Good to hear, it’s encouraging. Just a couple more.

Just on the Lord & Taylor and Walmart.com, I know last time you said it was a little early to get any sort of feedback there, but now you’ve been doing it for a little bit, how are orders trending there and what’s initial reception to the product been on the site?.

I think it’s still a little early. Quite frankly, we’re not seeing a big uptick in ecommerce traffic on Lord & Taylor because they’re on Walmart. I think there’s a bit of a discovery phase that both retailers will need to go through with the customer base at Walmart..

Okay, and then just on C. Wonder, I think you talked about it launching in China on the last call. Just looking for an update there, anything you have in addition. .

For the first half of the year, we had strong sales on VIP.com, and we’re looking at now additional channels of distribution perhaps in bricks and mortar in China. We are working on a partnership with one of our production partners for a China-based operation, so we’re optimistic about the potential for C. Wonder and some of our other brands in China.

.

Got it. That’s all the questions I have for today. Thanks for your time, and good luck for the rest of the year..

Thanks Michael..

For any further questions, please press star and one on your telephone. The next question is from Jeffrey Link with Invemed. Please go ahead..

Good morning, gentlemen. .

Good morning, Jeffrey..

First question is for Jim. Since I’m newer to the story, only been in it for about six months now, what was C. Wonder--did you break out C.

Wonder’s revenue so that we knew what it had been and now that it’s not there, what the comparison was for this most recent quarter?.

We broke out for the year where the impact was from the termination of QVC, which I think was roughly $800,000, so that was revenue that we picked up with our other licensing interactive programs. We did not break out revenue that we’ve generated with C. Wonder domestically, which was fairly close to what we lost in the quarter on QVC. .

I see, okay. Bob, maybe you can explain to me what the advantages or disadvantages are of the switch from the licensing to the wholesale model..

The advantage begins with more control over product and more control over the design process. With a licensee, you have--of course, the design direction we’re handing off and then the actual design that’s happening at the licensee.

We’ve not been happy with that and made a decision, like in our jewelry business, we want more control over it, so that is first and foremost because at the end of the day, we all win on product.

I would say that’s the primary benefit that we see, and because we are working back to back on purchase orders, we’re not really taking inventory risk in the sense of buying inventory, holding it in a DC, and distributing it..

Jeff, this is Seth. I would just add that’s the strategic benefit. The financial benefit obviously, as you know, we have significantly more overhead than the old licensing models where you sign a license with a retailer and collect a check.

We have full design teams, sourcing, product development, fabric development, so for us to start selling product in wholesale if we’re not taking significant inventory risk, we can make significantly more margin than we would under a typical license - you know, royalty rates of between 6 and 8% of wholesale.

On a wholesale model, we can make the full wholesale margin, which generally is between 15 and 35 to 40%, so it’s significantly higher for really not taking much risk..

I’d add to that, Jeff, if we were a traditional licensing company that didn’t have a design and sourcing capability, this would be a really difficult transition. But for us, since we have the platform, it’s a fairly easy transition.

And this in on the IMNYC, the Halston, and are there any other brands that the transition is being impacted by?.

All of them. .

So with you now doing the designs in-house when you hadn’t been before, when can we begin to see those new--when is the new inventory going to be able to hit the floor? What’s the lag?.

I would say that you will expect to see it April-May deliveries..

Okay. Just on the HN QVC front, in addition--I’m curious if there are other things that are going on that are potential initiatives that you can do to continue to grow that business. .

We are working with the Qurate team on how can we collectively improve the jewelry business overall, not just our brands.

We collaborate closely with them and we’re looking at ways to improve jewelry, ways to deliver to the customer more casual jewelry that they’re seeking but yet still collectible, and then of course we’re looking at new opportunities of what kinds of brands can we bring to them to help them to bring new customers to Qurate Retail Group, and we are working on programs now that we’re considering..

Okay. All right, thank you..

There are no further questions registered at this time. I would like to turn the conference back over to management for any closing remarks..

Thank you, Operator. Again, ladies and gentlemen, thank you all for your time this morning. We greatly appreciate your continued interest and support in Xcel Brands, and as always stay fit, eat well, and be healthy..

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..