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Edited Transcript of XELB earnings conference call or presentation 9-Aug-18 9:00pm GMT

Q2 2018 Xcel Brands Inc Earnings Call

Parsippany Aug 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Xcel Brands Inc earnings conference call or presentation Thursday, August 9, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew M. Berger

SM Berger & Company, Inc. - MD

* James F. Haran

Xcel Brands, Inc. - CFO & Assistant Secretary

* Robert W. D'Loren

Xcel Brands, Inc. - Chairman, CEO & President

* Seth Burroughs

Xcel Brands, Inc. - Executive VP of Business Development & Treasury and Secretary

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Conference Call Participants

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* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

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Presentation

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Operator [1]

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Welcome to the Xcel Brands Second Quarter 2018 Earnings Conference Call. 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 is being recorded.

I would now like to turn the conference over to Stanley Berger of S.N. Berger & Company. Mr. Berger, you may now begin.

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Andrew M. Berger, SM Berger & Company, Inc. - MD [2]

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Good evening, 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 second quarter ended June 30, 2018, 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 August 14, 2018. 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 risk and uncertainties that could cause actual results to differ materially from certain expectations discussed here today. The 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 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 measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment of the company's earnings or to Part 1, Item 2 of the Form 10-Q for a reconciliation of non-GAAP measures.

Before I turn the call over to Mr. D'Loren, all investors should contact me or Andrew Berger at 216-464-6400, and we will schedule a post-conference call on a one-on-one basis with management to answer your questions. The only questions today the management will answer during this call will be from the analyst that follows Xcel Brands' financial results.

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

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [3]

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Thank you, Stan. Good evening, everyone, and thank you for joining us. 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, then we will conclude by opening the call for Q&A.

First, let me start with a few highlights before I get into the business overview. In the 6 months ended June 30, 2018, we continue to show an improvement in our results from commencement -- from the commencement of the wholesale and e-commerce jewelry business and the continued solid performance of our interactive television business.

Our operating income increased more than 15% and 60% on a quarterly and year-to-date basis, respectively. For the 6 months ended June 30, 2018, our GAAP net income increased more than 900% from the prior year period, and our non-GAAP net income and adjusted EBITDA increased 11% and 4%, respectively, compared with the same period in the previous year. We are continuing our transition from a licensing company to a supply chain 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 capability, provide us with significant competitive advantages compared with more traditional wholesale and licensing companies. We 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 of our 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 we look for opportunities for expansion in this channel. We believe there are significant growth opportunities for us with our brands within the Qurate Retail Group.

Turning to our department store business, in the first 6 months of 2018, this 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 for private label opportunities. We will report on our progress at this opportunity in the quarters ahead. We continue to make good progress with our C. Wonder brand and our license categories, and in China, finally, we continue to explore additional growth and distribution opportunities with our existing retail partners, while remaining focused on selectively leveraging our platform across new brands and retailers, both domestically and internationally.

Now moving to specialty retail, we continue to increase the assortment of products we offer through this channel and to gain momentum in specialty retailers nationwide. Our beauty products with Revlon and our Isaac Mizrahi bedding program are performing well. We remain committed to exploring new specialty retail opportunities, collaborations and partnerships as we seek opportunities with different specialty retail concepts.

Finally, as previously mentioned, in December of 2017 we launched a direct-to-consumer e-commerce platform for our Judith Ripka Fine Jewelry brand, offering items in 18-karat, 14-karat gold and Sterling Silver. In connection with the launch of our e-commerce business in January 2018, we transitioned our jewelry business from a traditional license to a wholesale bricks-and-mortar business. We believe this strategy is the right complement to our e-commerce jewelry business and will contribute to the growth of the Judith Ripka brand as a premier luxury brand across all channels of distribution. We are encouraged by the positive momentum and expect sales to continue to grow with expectations on the majority of 2018 sales to occur in second half of the year. We will continue to report on this business going forward.

In conclusion, through our media and ubiquitous-channel approach, we are positioning ourselves to establish our presence in all tiers of distribution, so that we can reach our customers everywhere they shop. To this extent, the expansion and diversification of our business model beyond the boundaries of a traditional licensing company to a technology-based operating company represents a logical next step in this strategy. And we are enthusiastic by the progress made in early results achieved. We believe our proactive commitment to such innovative solutions is the required cornerstone in our goal of solving today's current retail challenges. 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. Jim?

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James F. Haran, Xcel Brands, Inc. - CFO & Assistant Secretary [4]

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Thanks, Bob and good evening, everybody. I will briefly discuss selected financial results for the quarter ended June 30, 2018. 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 no later than August 14, 2018.

In the second quarter of 2018, total revenue increased by approximately $0.1 million to $8.5 million compared with $8.4 million in the prior year quarter. Sales from our jewelry wholesale e-commerce business contributed approximately $0.35 million to the overall increase in total revenue in the current quarter and $0.12 million to net revenues. Net revenues are equal to total revenues less cost of the goods sold. And additionally, our second quarter net licensing revenue decreased approximately $0.23 million compared to the prior quarter as higher licensing revenue from our ongoing interactive business was primarily offset by lower revenue of $0.38 million associated with the termination and transition of the C. Wonder brand from QVC.

Our operating expenses decreased by $0.28 million compared with the prior year quarter. The net decrease in operating expenses was primarily attributable to a $0.5 million decrease in total compensation, including a decrease in stock-based compensation of approximately $0.26 million. Interest expense decreased by $0.08 million compared with the prior year quarter. The decrease in interest expense is attributable to lowering our term debt balance. On a GAAP basis, we had a net loss of approximately $0.1 million for the current quarter or negative $0.01 per diluted share. This compares to GAAP net income of $0.2 million or approximately $0.01 per diluted share in the prior year quarter. The swing in the GAAP net income was primarily attributable to an increase in the current quarter's cash provision from the prior year quarter, impacted by the 2018 tax reform changes. Our income before income taxes for the current quarter was approximately $1 million compared to approximately $0.8 million in the prior year quarter, and our income tax expense for the current quarter was in excess of $1.1 million compared to approximately $0.6 million in the prior year quarter.

Our income tax expense is entirely represented by deferred tax provisions. Non-GAAP net income for the current quarter and the prior year quarter was $1.5 million or $0.08 per diluted share based on approximately 18.7 million and 18.8 million weighted average shares outstanding, respectively. Adjusted EBITDA in the current quarter was approximately $2.2 million compared to the prior year quarter's adjusted EBITDA of $2.3 million.

Moving to our 6-month results. Total revenues for the 6 months ended June 30, 2018, increased by approximately 2.7% to $17.3 million compared with $16.8 million in the prior year period. Sales from our jewelry wholesale and e-commerce business contributed $0.63 million to the overall increase in total revenue in the current 6 months and $0.22 million to our net revenues. During the current 6 months, net licensing revenue decreased approximately $0.18 million compared to the prior year period, as higher licensing revenue from our ongoing interactive business and wholesale and department store business were offset by lower revenue of $0.68 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 $1 million decrease in total compensation, including a decrease of approximately $0.84 million of stock-based compensation. Interest expense decreased by approximately $0.17 million compared with the prior year period. Again, the decrease in interest expense is attributable to lowering our term debt balance.

On a GAAP basis, our net income was approximately $0.4 million for the 6 months ended June 30, 2018, or $0.02 per diluted share. This compares to GAAP net loss of $0.2 million or approximately negative $0.01 cent per diluted share in the prior year period. Non-GAAP net income for the current 6 month was $2.9 million or $0.15 per diluted share based on approximately 18.7 million weighted average shares outstanding compared with non-GAAP net income of $2.7 million or $0.14 per diluted share based on approximately 18.9 million weighted average shares outstanding in the prior year period, representing an increase of 11% and 8%, respectively. Adjusted EBITDA for the current 6 months was approximately $4.4 million compared to the prior year period's adjusted EBITDA of $4.2 million, an increase of $0.2 million or 4%.

As previously announced, effective January 1, 2018, we adopted the 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. The adoption did not result in material differences for the company's prior revenue recognition policies or revenue recognized in the current quarter and 6-month period. 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.

Now turning to our cash position. As of June 30, 2018, the company had total cash and cash equivalents of approximately $7.6 million compared with total cash of approximately $10.2 million at December 31, 2017. Let it be noted, due to timing of accounts receivable collections and certain payables, we anticipate our cash balance to be at its lowest point at the end of each June quarter. Our cash balance last year at the same time was $7.6 million. This $2.6 million net decrease in cash and cash equivalents was primarily attributable to $2.7 million in principal repayments on our term debts and $1.1 million of capital expenditures for department store business, which were partially offset by $2 million of cash provided by operating activities. The $2 million of cash provided by operating activities was primarily driven by net income of $0.4 million, which includes noncash expenses of approximately $3.5 million, partially offset by an increase in accounts receivable of $1.5 million and an increase in inventory of $0.8 million. The noncash expenses were primarily attributable to deferred income tax provision, stock-based compensation and depreciation and amortization.

Looking at our debt. At June 30, 2018, total liabilities were approximately $36.3 million, which includes $19.3 million term debt, $3 million of contingent obligations and $7.9 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 June 30, 2018, total current liabilities were $9.9 million, inclusive of approximately $6.1 million of the current portion of long-term debt. Our working capital at June 30, 2018, was approximately $10.1 million compared with $10.2 million at December 31, 2017. As of June 30, 2018, our term debt payable in cash was $18.7 million, and with approximately $7.6 million of cash, our net term debt was $11.1 million. Our adjusted EBITDA on a rolling 12-month basis to net-debt ratio was approximately 1.35. As we continue to be positioned with one of the lowest leverage ratios of any of our industry peers.

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

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Michael Kawamoto of D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [2]

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Just had a few for you here. First just last quarter you talked about the Lord & Taylor and the walmart.com partnership. Can you just give an update there, maybe how orders are trending, and what the initial reception of the product has been on the site?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [3]

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Michael, it's Bob. I think it's a little early to really get a true read there. Lord & Taylor has been working with Walmart to launch this whole program in stages, and it's just a little too early to get a true sense of what performance is going to be like going forward.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [4]

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When do you think you'll have a better picture? Is that more of a back half...

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [5]

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I think as we head into the back end of the year and whatever technical glitches and bugs that they have in the system are resolved, then we'll really get a true sense of how this might really roll out going forward.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [6]

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Got it. That kind of leads to my second question. I think you made a comment that most of your revenue will come in the back half, when I was looking at the last couple of years, it seems like a little bit of change in seasonality, is that just more programs coming on later this year? Or what's driving that back half and gives you confidence?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [7]

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Yes, it's more programs coming on. And specifically, some new licenses that we've signed and some of the private label brands that we're launching.

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Seth Burroughs, Xcel Brands, Inc. - Executive VP of Business Development & Treasury and Secretary [8]

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And also in our jewelry business we expect to have a stronger second half than the first half.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [9]

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Got it. And then on that jewelry business, I think you said you saw some new customers coming on, maybe some younger ones. Is that still the case there? And then can you just dive in a little more on your change in strategy to go through a wholesale model versus the licensing model there?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [10]

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So we made a fundamental decision about 2 years ago, Michael, to transition into more of an operating company as retail became more challenged. As you know, today retailers need more service and more solutions from vendors than perhaps any time before. And we've positioned ourselves to be a solution provider in the market. And that includes now delivering product to our retail partners with a much shorter lead time as well as enabling them to manage inventory better than they can from long lead supply chain. And that's what really drove us to make this transition. And we did something very similar in the jewelry business as well.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [11]

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Got it. That's helpful. And then just on the interactive television business, I'm kind of jumping around here, but can you just highlight maybe which brands or products are really resonating well for you, on QVC?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [12]

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So Isaac is doing extremely well for us. And even though jewelry at QVC is not as strong as it was, Judith Ripka's ahead of plan, which is good for us to see. And Halston is on plan, we just introduced new concepts for next year, and merchants and everyone here at Xcel are excited about where we think we can go with the Halston brand next year.

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Seth Burroughs, Xcel Brands, Inc. - Executive VP of Business Development & Treasury and Secretary [13]

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Michael, as -- across-the-board, I think we're very happy with our businesses, the relationship with QVC. I know Mike George on their conference call talked about apparel being a strong point, and we're just happy to have such a strong relationship, as we mentioned before. We do believe there are some additional opportunities there that hopefully we can address in future.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [14]

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Got it. That's helpful. Just a couple more for me. Just on the C. Wonder, you say you're launching it in China. Can we just get an update there? And then maybe how big of an opportunity do you to think the international businesses is there?

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Seth Burroughs, Xcel Brands, Inc. - Executive VP of Business Development & Treasury and Secretary [15]

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So I can address that, it's Seth, Michael. So in China, we launched on vip.com, it's one of the larger direct-to-consumer e-commerce websites in China. We launched that in partnership with a local Chinese company who is also one of our manufacturing partners there. It just launched within last quarter, the results are extremely promising. The feedback we've gotten, the customers are reacting very strongly to the product which has been adjusted for the Chinese market and so we do believe that, that's a significant opportunity for us and it's actually -- our partner there has planning to expand it to some other direct-to-consumer networks and some of the other major ones there, although we can't yet announce who we're expanding to. And there's also plans to open some -- potentially open some physical locations. So I would say in the Chinese market specifically, the brand is really resonating with customers. We also are working on a few other things, internationally, with the brands. So we're excited about it.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [16]

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Got it. Just last one. I think you targeted $900 million in retail equivalents over the next 3 years or so. Would you say you're still on pace to hit those targets?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [17]

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We think we can hit those targets over time now that platform is in place for the faster market production capability. We see opportunities across multiple tiers of distribution, particularly in Bricks, with specialty retailers and some of the off-price retailers as well as the mass merchants. So when you think of it in terms of door count, it's almost limitless when you have the platform in place that we've built. So we think those numbers will be achievable for us.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [18]

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Yes, how many doors are you in today? Do you have that number?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [19]

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So it's -- what we've been talking about on prior conference calls is how many shop-in-shops we have, so just to be clear, we're in about 350 to 400 doors operating out of 700 shop-in-shops. We expect that number will be about 800 shop-in-shops with our branded product by spring of '19. But we're seeing a lot of new doors opening within our private label program. So it's hard to get a true estimate of what that door count will look like. We've built a very robust sales team and we're penetrating virtually every tier of distribution with these programs. And we expect that, that will be driving the business going forward.

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Operator [20]

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(Operator Instructions) There are no further questions at this time. I'll now turn the call back over to Mr. D'Loren for closing remarks.

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [21]

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Ladies and gentlemen, thank you all for your time tonight. We greatly appreciate your continued interest and support in Xcel Brands. As always, stay fit, eat well and be healthy.

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Operator [22]

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Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.