Apex Global Brands Inc
Q2 2018 Earnings Call Transcript

Published: 8 Sep 2017

[Operator:]

Greetings, ladies and gentlemen, and welcome to the Cherokee Incorporated Second Quarter 2018 Earnings Conference Call. [Operator Instructions] I would now turn the conference over to your host, Ms. Laura Bainbridge with Investor Relations. Please go ahead.

[Laura Bainbridge:]

Thank you. Speaking today will be the company's Chief Executive Officer, Henry Stupp; and Chief Financial Officer, Jason Boling. You can also find accompanying slides for today's call on Cherokee's Investor Relations website. Before I hand the call over to management, please note that on this call certain information presented contains forward-looking statements. Forward-looking statements are neither a prediction nor a guarantee of future events or circumstances, and are based on currently available market, operating, financial, and competitive information and assumptions. Our actual results could differ in a material manner from those expected such forward-looking statements for any reasons including those listed in the company's SEC filings. The company assumes no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Further, this conference call includes a discussion of non-GAAP financial measures as defined by Regulation-G, the most directly comparable GAAP financial measures, and information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on the company’s website at www.cherokeeglobalbrands.com. And with that, I'll hand the call over to Cherokee's Chief Financial Officer, Jason Boling.

[Jason Boling:]

Thank you Laura, and good afternoon everyone. I will start today's call with a detailed review of our second quarter and six-month fiscal 2018 financial results. I will then elaborate on our revised guidance issued today. Henry will then walk you through our brand and partner highlights before we open up the call for your questions. So let me start with a recap of our financial results. Consolidated GAAP revenues for the second quarter were $14 million including the contribution from Hi-Tec. Cherokee Global Brand revenues excluding Hi-Tec revenues were $5.6 million compared to $8.5 million in the prior year period. The year-over-year decrease reflects the expected decrease in North American revenues relating to the Cherokee brand as we transition from Target to our new wholesale licensees. The transition away from Target to our new wholesale licensees has been slower than initially anticipated but we’re beginning to see exciting changes as we expand into more doors and our dotcom presence expands. Henry will discuss in detail later on the call. The results were important to take into consideration that our previous deescalating royalty rate associated with our legacy Target relationship drove lower revenues in the second-half of the year. Moving forward, we expect our financial performance to more closely reflect traditional retail seasonality with higher revenue and profit in the second half of the year. Hi-Tec revenues for the second quarter were $8.3 million and are comprised of two components indirect product sales and royalty revenue. Indirect product sales, which carry a cost of goods sold, were $5.9 million and represent sales to certain distributors and government contracts. Royalty revenue extending from new and existing licensing deals for the Hi-Tec portfolio of brands including Hi-Tec, Magnum, and Interceptor were $2.4 million in the second quarter. As we previously noted, we plan to transition the majority of our distributor agreements to territorial license agreements with the timing to be dictated by the nature of the individual contracts. For the six-month period of fiscal 2018, GAAP consolidated revenues were $25.1 million compared to $19.2 million in the prior year period. Royalty revenues excluding Hi-Tec were $10.8 million compared to $19.2 million in the prior year period. GAAP selling, general, and administrative expenses for the second quarter were $10.1 million compared to $5.9 million in the prior year period. The year-over-year increase was primarily due to the operating expenses relating to the Hi-Tec portfolio of brands and the $1.8 million of integration related expenses that were incurred during the second quarter. Our SG&A expenses have been elevated as a result of our recently acquired portfolio of Hi-Tec brands and we expect elevated integration costs will continue throughout fiscal 2018. For the six-month period, GAAP SG&A totaled $20.3 million compared to $12.3 million in the prior year period. Non-GAAP SG&A, which excludes the aforementioned Hi-Tec integration fees and certain other accounting, legal and professional fees that we believe are unlikely to occur totaled $8.3 million for the second quarter. This compares to $5.3 million in the prior year period. For the six-month period non-GAAP SG&A totaled $16.3 million compared to $11 million in the prior year period. For the second quarter, GAAP operating loss was $1 million compared to operating income of $2.5 million in the prior year period. GAAP operating loss for the six-month periods were $3.1 million compared with operating income of $6.8 million in the prior-year period. Non-GAAP operating income excluding the aforementioned cost totaled $800,000 compared to $3.2 million in the prior year period. Non-GAAP operating income for the six-month period totaled $900,000 compared with $8.2 million in the prior year period. GAAP net loss for the quarter was $4.6 million or a loss of $0.36 per share compared to GAAP net income of $1.5 million or $0.17 per share in the prior year. For the six-month period GAAP net loss totaled $7.9 million or $0.61 per diluted share. This compares to GAAP net income of $4.1 million or $0.47 per diluted share in the prior-year period. Excluding the aforementioned integration, account and legal and other professional fees non-GAAP net loss for the quarter totaled $600,000 or $0.05 per diluted share, this compares to non-GAAP net income of $1.9 million or $0.22 per diluted share in the prior-year. For the six-month period non-GAAP net loss totaled $1.5 million or $0.11 per diluted share. This compares to non-GAAP net income of $5 million or $0.56 per diluted share in the prior year period. Adjusted EBITDA for the second quarter of fiscal 2018 was $1.2 million compared to $3.5 million in the prior-year period. For the six-month period adjusted EBITDA totaled $1.9 million compared to $8.9 million in the prior-year period. At July 30, 2017 our cash and cash equivalents were $3.7 million compared to $8.4 million at January 28, 2017. Before I discuss our revised guidance, I’d like to welcome Kimberly Doyle. Kimberly is based in our Amsterdam office and responsible for leading the European based finance team. She brings over 14 years of public accounting experience and her contributions have already help us tighten and refine our financial discipline within our European operations primarily as it relates to the complexities of the integration of Hi-Tec. Our audit committee also hired Deloitte & Touche as our new auditors and we look forward to working with D&T. With our new auditors in place and the investments in our European operations, namely adding additional leadership resources and processes, we feel well positioned to continue to grow and scale our business. Now I’d like to discuss our revised guidance for the fiscal year ending February 3, 2018. Our revised expectations account for our performance to the second quarter of fiscal 2018 and our outlook for the remainder of fiscal 2018. Relative to guidance we provided in December '17, our outlook also reflects updated assumptions around the following areas of the business. Cherokee Global Brands licensing revenue for the U.S. after transition to new wholesale partners while tracking positively is not at level originally forecasted. Tony Hawk licensing revenue in Canada and the bankruptcy of Sears Canada for our Cherokee brand and broader FX headwinds did impact Canadian retail and ultimately our forecast revenue. And finally footwear shops and the transition of the business model is driving slower franchise shop openings, as well as the closing of underperforming franchise locations. With this as a backdrop we are revising our guidance for the full fiscal year of 2018 as follows. The company now expects gross profit to be in the range of $39 million to $41 million which is inclusive of royalty revenues from Hi-Tec brand portfolio of approximately $12 million and gross profit generated from indirect product sales of approximately $7 million. As previously indicated, our guidance implies a more meaningful shift in revenue and profit contribution to the back half of the year to more closely reflect traditional retail seasonality. Adjusted EBITDA for the fiscal year is anticipated to be in the range of $10 million to $12 million. Fiscal 2018 adjusted EBITDA excludes an estimated $7 million of integration and acquisition costs related to Hi-Tec and other professional legal and accounting fees that are unlikely to occur. This guidance is based upon frontlines and expectations and is subject to a number of known and unknown risks and uncertainties including those set forth under the Safe Harbor statement earlier. This forecast is made as of the date of this release and we undertake no obligation or amend this guidance whether as a result of new information in future events or otherwise. Despite some of the integration challenges we face this year, we believe we have now have the proper people, processes and infrastructure in place. Our brand portfolio is strong and we’re operating with increased financial discipline and productivity. Over the next six months we expect operating expenses to normalize and cash flow generation to improve. Lastly as of July 29, 2017 the company was not in compliance with certain financial covenants set forth in the Cerberus credit facility namely the leverage ratio and the fixed charge coverage ratio. We are currently in discussions with Cerberus to obtain a waiver of this financial covenants and have agreed with Cerberus to forbearance through September 15, 2017. This non compliance has required us to classify our debt as current on our balance sheet and has also required some additional language about drawing concern in our 10-Q to be released later today. Thank you for your time. Now Henry will elaborate further on all these fronts.

[Henry Stupp:]

Thank you, Jason. It’s been a productive few months for Cherokee Global Brands. We continue to grow the relevance and reach of our brands including multi category launch of our namesake, Cherokee brand in U.S. In the final stages of completing our integration of the Hi-Tec acquisition and we’ve been taking meaningful actions towards increasing our financial discipline in our European office. I’ll elaborate further in my remarks which will also include quarterly brand highlights and retail and wholesale partner updates. But first I’ll provide some additional perspective on Cherokee Global Brands, how we’re positioned in the retail landscape and how we’re proactively addressing shifting consumer behavior to accelerate change. Undoubtedly it is the time of transition in retail and our Cherokee Global Brands. While we are making clear progress in our diversification plan, we are only half way through this journey. We are waiting toward the future with Cherokee Global Brands is more diversified than ever before across brands, geographies, categories and channel partners and we built portfolio that supports this vision. Our acquisition of Hi-Tec serves as a prime example of this strategy and one that complements our organic growth initiatives. The affecting change takes time. Integration of Hi-Tec prove more contracts and financial burdens than anticipated. The challenges aside we and our retail partners are very pleased with the performance of the product, the strength of our licensees and most importantly our combined ability to drive category, channel and partner expansion. As Jason touched upon, Hi-Tec net licensing revenue continues to track with our expectations. Adjusted EBITDA contribution will reflect the additional integration complexity that we faced, but with excellent resources in place, we remain confident in our ability to build Hi-Tec into a profitable, multi-category, multi-channel lifestyle portfolio. I’m pleased to report that the multi-category expansion in Cherokee brand in the U.S. is well underway. Although, we anticipated that the replacement of our legacy relationship in the U.S. would be a multiyear initiative and retailers are taking a somewhat cautious stance in general. We’re starting to see positive momentum. Retail response for back-to-school has been positive and based on sell through and reorders we see the sentiments are weighing into the upcoming important fall and holiday seasons. I’ll elaborate more in this in a minute. But suffice to say, we remain excited about the prospects for the Cherokee brand in the United States. The global rollout of Cherokee and Tony Hawk and category and geographic expansion of our Hi-Tec portfolio of brands are also progressing nicely. Retailers are gaining confidence and investing in brands and platforms that are nimble, scalable and diversified. Our senior management team is very focused on maximizing future growth opportunities across our brand portfolio and our robust platform of capabilities. We’re implementing advances across the enterprise that we believe will set us up for double-digit revenue growth in fiscal 2019 and beyond. Like our retail partners and our industry peers, we are investing now to meet the future and the actions we are taking today will enable us to not only participate in change, but to also replicate to our advantage. Diversification has and will continue to drive our direction just as retailers are exploring the numerable consumer touch points and storytelling opportunities. We too are expanding our retail outside the legacy direct to retail approach while we in fact innovative. We’ve never had a better opportunity to get closer to consumers, and expand our reach to a wholesale licensing, franchising, supply chain, and e-commerce diversification. I’ll now share a few brand updates with you focusing my remarks on our primary growth drivers. I’ll start with namesake Cherokee brand. Revenues in the second quarter were $3.2 million, a decrease of 46% from the prior year period. The year-over-year decrease reflects the anticipated wind down of our relationship with Target stores in the U.S., which was partially offset by revenue increases in international markets with my global demand for Cherokee branded products. As I noted previously, we continue to advance a multi-category launch of Cherokee branded product in the U.S. We are pleased to have the largest assortment of apparel and accessories available in over 2,200 retail locations in addition to our fast growing e-commerce business. We are targeting availability of Cherokee products for the full family in over 5,000 stores by fiscal year end. Despite a fairly cautious stance among retailers early in the year, product sell through performance has been strong and is growing and we are seeing the reorder activity among key accounts picking up as we head into the important fall and holiday seasons. We also continue to be pleased with our growing e-commerce presence. We launched with Amazon towards the tail end of the quarter and are working closely with Amazon’s marketing services team to scale revenue growth to a search engine optimization. Through these efforts, we’ve leveraged search engine algorithms to improve the ranking of Cherokee’s school uniforms considerably, resulting in an exponential increase in daily unit sold. We look forward to translating these warnings into additional future opportunities. We are early in our revitalization expansion efforts for the Cherokee brand and our confidence continues to grow as we work closely with our strong growth of licensees. In partnership with women’s apparel and accessory licensees we are securing meaningful orders for ladies that we became shipping later this year. Historically, ladies apparel and accessories have been major categories for us and we couldn’t be more excited to see this full potential of being fully realized in the future. We know that the Cherokee brand has been under represented in the U.S., due to our legacy DTR relationship. Now, we are building awareness for the Cherokee brand through category and distribution expansion and new marketing and philanthropic partnership. We also know that Cherokee customers are looking for opportunities to connect with our brands, while giving back to the communities and organizations that they care about most. We are forced to meeting this desire head on through our partnership which we are announcing today with Save the Children, where percent of every share of Cherokee branded product beginning in calendar 2018 will directly support the families of Save the Children source. Their charitable focus on women’s, families and communities aligns perfectly with Cherokee’s corporate mission, making this an ideal partnership to build even greater royalty and consumer engagement for our Cherokee brand. Outside of the U.S. we remain very pleased with the growing consumer awareness and demand from Cherokee brands across the globe. Our highlight has been Asia, South America and South Africa where licensing revenue will have up to double-digit growth. And in Europe, we are in advanced discussions with Pan European licensee for a broad full assortment of men’s, women’s and children’s apparels, footwear and accessories that we fully expect to launch next summer. I’ll now turn to our attention to our Tony Hawk brand. Domestically, demand for the Tony Hawk brand continues to grow as those interest and enthusiasm for skateboarding and skateboarding culture. In coordination with our new licensees, we continue to build traction with new accounts and we are very encouraged with performance of the product at retail. Retailers, new retailers are reporting double-digit weekly sell through from July deliveries and our licensees have began to secure meaningful future orders heading into fall holiday seasons and in fact spring of next year. We expect to add over dozen retail partners over the course of the next several months, which were an estimated 1,000 additional points of retail distribution for the Tony Hawk brand and our strategic e-commerce partnership would further accelerate the scale. As with Cherokee, our newly expanded distribution for Tony Hawk most comprehensive assortment of men’s and boys’ apparels for women accessories evolve in the U.S for many years. And we are rapidly scaling the brand, e-commerce presence through Amazon.com and Wal-Mart.com. We continue to see potential for strong growth in key international markets as well, including Canada which despite a slow start and the South America, where performance among our retail partners including Walmart continues to be very positive. In Europe, we will be launching a C&A with compressive assortment of men’s and boys’ apparel and accessories and with that discussions with partners in both China and Japan and expect to finalize a go-to-market strategy with them, which should be a combination of licensing plus freestanding stores this quarter. Here again, diversification of our business models is allowing us to flex up and meet global opportunities. I’ll now turn my remarks to Flip Flop Shops. We are focused on driving productivity and taking a diversified approach to growth opportunities. We are reviewing our suite of franchise locations in light of the generous progress with mall based retail and how we can drive greater productivity. We have closed several underperforming legacy locations in order to make way for more profitable formats. We’re seeing a strong uplift in same-store sales among franchise locations, which grew 2.5% year-to-date and is growing and we are confident that ongoing finance and format innovation would further accelerate growth. In keeping with the strategy, we are excited to announce the launch of or second floating retail concept in Guwan. The daily performance of which is very encouraging. Our clothing retail store and body approach to scaling Flip Flop Shops. They require little capital, scale quickly and generate attractive economics to our franchise partners. We expect to open an additional 5K clothing retail store in the United States throughout fiscal 2018. Another Flip Flop Shop moves in the U.S. We’re in final contract negotiations with several multi-unit scale operator and we intend to share specific announcements in the near future. On the international front, we are planning to announce master franchise agreement for India. India continues to be an import growth market for us and our established success with Cherokee and Point Cove and future expansion Flip, Flop Shops to further expand this growing market for all of Cherokee global brands. Lastly, when we give you highlights for the Hi-Tec portfolio of brands. Through Hi-Tec we acquired a portfolio of high equity brands that are well positioned to capture growing consumer demand for outdoor across over footwear and apparel and accessories. Particularly as against delay movement begins to wade. We will continue to level our vision [indiscernible] scale, along with the expertise of our high quality licensee partners. To expand Hi-Tec relevance into new categories and diversify Hi-Tec reach to new partners and into new channels of distribution. I am pleased to report that in the second quarter we completed the integration of the sales, marketing and product development functions related to Hi-Tec which is in line with the six month timeframe, we identified at the time of the acquisition. Some of the financial integration challenges have been more time intensive and more costly than we originally anticipated. But we remain very pleased with current performance and future opportunities but we can do better. Most specifically gross profit generated from the sale of Hi-Tec related brand products continues to align with our expectations and reported total $3.5 million. Gross profit consisted of $2.4 million in revenues from our licensees and additional $1.1 million in gross profit from indirect product sales. Partnering with global industry moving forward apparel and accessory specialists ensures that the full potential of the Hi-Tec brand portfolio is realized. We recently launched new collection of apparel and accessories for men and women under the Hi-Tec brand name across several key retail partners in Europe a full quarter ahead of schedule. National and regional department stores, market leading retailers and specialty channel and major e-commerce retailers are participating in this launch. And in North America, we look forward to introducing men’s and women’s apparel and accessories with leading department stores and specialty and outdoor retailers throughout the United States and Canada beginning in calendar 2018. We continue to see strong sales of the interceptor brand for royal Walmart and excited to continue this momentum with them. In summary, we are pleased with the progress we’ve made against our diversification plan in fiscal 2018. We moved pass the bulk of the integration related to the Hi-Tec acquisition. We have improved our financial discipline in Europe and productivity and are squarely focused on our high-growth brand opportunities as we move forward. We have a clear vision for our future while we are taking our brand portfolio and platform and while we are continuously reviewing acquisition opportunities, let me be clear that we are razor focused on organic growth. We look forward to scaling our current portfolio of brands with category and channel diversification. We’re continuing to maintain discipline around operating efficiency and productivity, as well as leveraging our free cash flow to accelerate potentially payment of long-term debt. We are confident that our financial performance will increasingly reflect the benefits of the measures we are taking now and achieve the financial objectives we’ve outlined today. I would like to personally thank our team for whom I am extremely grateful for their dedication and commitment to positioning Cherokee Global Brands for future profitable growth and improved shareholder returns. We will now open up the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Eric Beder with FBR. Please proceed with your question.

[Eric Beder:]

When you look at the opportunities here what do you think in the near-term is the biggest opportunity and what we will see the biggest opportunity in long-term?

[Henry Stupp:]

We’ve taken a broad look at our brand portfolio, we’ve identified several of our brands is being high growth opportunities mainly Cherokee domestically, our licensees are starting to achieve results little later than we had hoped but we are selling more product and more retailers and are achieving positive side. So we remain cautiously optimistic on the domestic growth of the Cherokee brand. This with the expansion of Hi-Tec from our legacy footwear business into a global full timer lifestyle brand is of significant importance to us and our company and we’re pleased with not only the way the licensees are performing but the introduction we’ve had, many retail meetings we’ve had while retailers faced the same views like we had that we are - we have identified a key growth category, key growth areas through them and we have the right brand and the right portfolio through the Hi-Tec acquisition to achieve good long-term results. Lastly we learned a lot over the last few years and we believe that we are able to ramp up and scale the Tony Hawk business particularly the Asia and Latin America and sure at home. So the global view of one brand one partner one country may have lived 20 years ago and Cherokee is on the forefront of initiating that direct to retail concept and in today’s world we have to go where the customers are going and I believe that ubiquity is important for brands. I believe that story telling in a market if there is focus on expanding private label opportunities is also important which is why we also be able to make and draw a direct connecting with consumers by having living, believing sports people like Tony Hawk with the head of the brand by having a new partnership that we announced today we saved the children, which really speaks to the importance and significance of one of America’s favorite brands and how we can directly connect with consumers. It’s the combination of these aspects both short and long-term that I was confident in where we are taking our business.

[Eric Beder:]

What is the - generate some free cash flows here, so what is the use of free cash flow and with Cerberus how quickly do you expect to be back in compliance?

[Henry Stupp:]

We are working with Cerberus right now on establishing new covenant. We are in a new model this year some prior 20 years. We had not in the past provided quarterly guidance so we are moving to establish a new framework with Cerberus. We have been working closely with them reporting from wholesale licensees as opposed to having one big chunk of licensees that we have in past. I have changed the complexity of our internal reporting we now have switched revenue that was heavy rated in the front half of the year to the back half of the year and that revenue is now coming from almost 70 different licensing partners from where we had one partner represented about 35% of our revenue. So it’s the combination of us getting handles through the new management that we’ve added. We just believe we can demonstrate better financial discipline and we will plan to use excess free cash flow as we have in the past to pay down debt.

[Eric Beder:]

And Hi-Tec, I know that you wanted to transfer some of these gross margin driven accounts to the licensing fees what should we think about going forward as the permanent piece. I know the government piece is really nontransferable what should be kind of the steady state gross margin driven revenue business?

[Henry Stupp:]

We have been approached by several parties that are interested in becoming our licensees throughout the territories that are currently service free distributors and that would in fact to improve the government contracts. We may maintain a specialized sales force to assist under government contracts but we are looking to convert the distribution business into a licensing business which is the business that we are in.

[Eric Beder:]

And last question with Tony Hawk you have moved here from non-exclusive to Kohl how is it still doing in Kohl and where is it now being sold in the U.S.?

[Henry Stupp:]

We are in several specialty chains retailers like Fred Meyer. We’ve also began to secure additional commitments with a lot of the e-commerce retailers. We are not going to advance the other partners who have come on in such point in time with the product hits their stores. We do say that there are about a dozen retailers who will be coming online as we had in secured throughout. We start the results strong as much as 30% a week with several of the new partners that have been put in place. It’s because of the quality of the product that we’re delivering it’s very compelling. We’ve also frankly had a very strong trend. We state the school to social aspect to state building is trending now and we’ve been approached at all levels of distribution now so Tony Hawk from the highest level of specialty chain and department stores looking at a stake opportunity with Hawk all the way through maiden mass market. So we are performing I just wish there was a little bit more product in the market to meet the demand from the consumers.

[Operator:]

Our next question comes from the line of Dave King with ROTH Capital. Please proceed with your question.

[Dave King:]

I guess first off on the guidance and particularly for Hi-Tec. How should we be thinking about the Hi-Tec indirect sales for the 7 million in related gross profit? You know how much should, you know what's the margin on that or how should we think about the overall revenue contribution. And then in terms of the overall Hi-Tec gross profit guidance of $19 million or so, that seemingly still seems about 66% I think back half seasonality. I guess what's the confidence in achieving that and what sort of visibility either anecdotally or you know otherwise. You haven’t getting to that seasonal improvement? Thanks.

[Henry Stupp:]

So, Jason will pick-up on the gross profit and the royalty revenue. I’ll talk a little bit about where the confidence in the back half of the year comes from. We acquired the business December 7, so in order to develop our projection for this year, we have the opportunity to look at total backlogs from our distribution partners and our licensees. We have an opportunity to reflect against what we did in the short period from acquisition day, December 7, through year end, which was last January. So, when we refer back to those numbers realizing of course, we had a stumped quarter. We have great confidence in Q4, achieving numbers that we cancel that internally and there is an opportunity in fact for Q3 on the footwear side to actually outperform Q4. We’re balancing it because we are introducing other categories like apparel and accessories, as we – are in Q3 and Q4, but we have strong confidence in how we waited our numbers in the back half of the year.

[Jason Boling:]

Dave, when it comes to the $19 million coming in from Hi-Tec, the $12 million of it discussed was relating to the licensing side royalty revenues. And then about $7 million is relating to indirect product sales. In general, you can see that we have about a 20% margin on those. So, I know we haven’t come out and said what the revenue is and what the cost is, and that’s because of the transition that we’ve been talking about moving from these distributors into licensees. Therefore, we didn’t want to give a high level or high end revenue number. So, that’s how we’ve given you the margin and I understand it makes a little bit difficult. But hope you can appreciate that.

[Dave King:]

No, that helps. And then a point of clarification on your comment, Henry. Does the guidance for Hi-Tec assumes any contribution from apparel and accessories?

[Henry Stupp:]

Yes, it does. We’re launching, we have several partners who already started to expand in Central Europe and there will be further expansion from this point to the end of the year and into next year across Europe for apparel and accessories.

[Dave King:]

And then on the EBITDA side, that lower than expected, are we within than I had modeled. And then, it looks like you are guiding to a 28% margin now versus I think 39-ish previously. So, similarly lot of that’s deleveraged. But what sort of ability do you have to kind of drive cost savings to help lift that overall EBITDA margin over time?

[Jason Boling:]

The biggest component of the EBITDA margin right now is due to the change from the Target models to the wholesale model. So, it’s actually less about cost savings and more about revenue growth. And as we've said for the longest time, we can't control our cost. We can softer marketing plans here and do what we needed to do in order to adjust margins if necessary. But obviously a big part of the spend right now is relating to the integration efforts. So, Henry you want to add anything.

[Henry Stupp:]

We focused on the Cherokee inside a run rate is actually slightly below our budget. We've been able to manage that as we obviously incurred higher than anticipated integration and run rate cost in the first two quarters with the European business. We, I think we said throughout our call, we believe that we have the right leadership in place and the right financial discipline is now added in Europe for us to have better control over our run rate. Our focus has always been to low on new partners, grow our business organically and improve our operating margins. I said in my prepared remarks, we are planning double-digit revenue growth next year. We are obviously focused on maintaining a normalizing run-rate exclusive of these one-time costs as we go into next year. We’re starting to see, as well in Q3 a wind down or lowering, a significant lowering of one-time cost and we hope that, the majority of those cost will be done prior to the end of our fiscal '18 so we can enter '19 with a normal well controlled run rate improving operating margin and most importantly improving top line growth.

[Dave King:]

Then maybe along those lines, in terms of the cash balance, any sense or can you give us any color on where that is currently versus the 3.7 million you had at quarter end. And then I guess as we think about those charges, then how do you expect that cash balance to trend as those charges continue, but seemingly subside. And then it looks like, you’re still holding us on receivables I think probably related to Hi-Tec, is there an opportunity to bring those down. I guess what are the puts and takes to driving cash flow and what are your thoughts on the cash balance going forward? Thanks.

[Henry Stupp:]

We're not going to say where cash is now, but I would say subsequent to obviously, July 29, we did that equity raise, so we raised another $4 million. This is the time of the year right now where we started collecting on Q2's revenues. So, we expect to see the cash increases as well from that. And then as far as the receivables, you have to remember, some of those receivables relate to sales of indirect sales. So, there is a much larger amount than you would normally see under a typical license receivable.

[Jason Boling:]

As we push in, as we move through the next quarters should be increasing substantially.

[Dave King:]

And then I guess lastly, forget the ignorance but how does these newer service waivers and forbearance situation, how does that relate or differ from the amendment you already received. I guess what's sort of driving this now versus that. You sort of already alluded to higher thinking about that going forward and in response to Eric's question but I am just trying to get a better understanding of what’s causing this newest piece of it. Is it just based on this quarter's results then?

[Jason Boling:]

I mean that’s definitely a big driver of it. So, when you are negotiating with servers on the covenants, we have not received yet our Q2 results. We did not have royalty reports and we have not completed our processes around the close and so, those items definitely affected it for the quarter.

[Operator:]

Thank you. Ladies and gentlemen, at this time, there are no further questions. I'd like to thank everyone for your participation and you may disconnect your lines at this time.