Michael Porter - VP of Finance Robert Rosenblatt - CEO Tim Peterman - CFO

Tom Forte - Maxim Group Mark Argento - Lake Street Capital Market Eric Wold - B. Riley Alex Fuhrman - Craig-Hallum Capital Group Mark Smith - Feltl & Company

Greetings, and welcome to the EVINE Live Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Michael Porter, Vice President of Finance for EVINE Live. Thank you. You may begin.

Thank you. I am joined today by our CEO, Bob Rosenblatt and our CFO, Tim Peterman. Comments on today's conference call contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may involve risks and uncertainties that could cause actual results to vary materially from those expressed in any such statements. More detailed information about these risks and uncertainties and related cautionary statements are contained in our SEC filings. Comments on today's call will also refer to non-GAAP financial measure such as adjusted EBITDA. For a reconciliation of this measure to our GAAP results and for an explanation on why we use it, please refer to today's news release available on the Investor Relations section of our website. I'd like to remind you that all information in this conference call is as of today and the company undertakes no obligation to update these statements in the future. Now I'd like to introduce Bob Rosenblatt, our CEO. Bob?

Thanks, Michael, good morning everyone and thank you for joining our call today. Despite the third quarters choppy retail environment that was saddled with many consumer distractions, I'm pleased with our team's progress on the following key priorities. First and foremost, our continued improvement this quarter in profitability, gross profit margin rate and balance sheet strength were important successes. Net loss for the quarter was $3.9 million which is a 25% improvement year-over-year with an adjusted EBITDA of a positive $2.5 million also a significant improvement. Gross profit as a percentage of sales increased 210 basis points to 36.6%. We ended the quarter with approximately $40 million in cash and our inventory growth of 9% year-over-year was important as we appropriately stocked this holiday season with proprietary products rather than the lower margin drop ship consumer electronic products we offered last holiday. Second, our discipline product mix this quarter successfully drove 3% growth in our most popular wearable categories of beauty, fashion, jewelry and watches and almost completely absorbed the 66% reduction in our lower margin consumer electronics category. Let me be clear here though. I'm certainly not happy that our total company revenue for the quarter declined 7% year-over-year, however, I am pleased with the progress toward establishing a disciplined merchandising mix this year that sets up a base business model that we can repeat and improve upon going forward. As I stated back in March, this year we are balancing our revenue mix and that is not an easy thing to do. This quarter we purposely reduced the airtime for our consumer electronics category because this lower margin commoditized business was much too big a part of our mix last year. However in hindsight, I see that the airtime reduction causing over rotation of a few of our more popular categories which in turn lowered their productivity. These learnings are part of our development as a team, all good. A significant new priority that we kicked off in the third quarter is our interactive content strategy and I'm happy to report that is ahead of schedule. Our goal is to improve how we tie together EVINE Live on location entertainment with our social, online and mobile and television platforms to produce a more exciting and interactive experience for our customers. We want to create tentpole programming events that our customers can engage with and transact on each week based on whatever platform that they prefer on their PC, mobile or TV, to social or on the phone or any combination that they prefer. Let me give you a few examples of our progress so far this quarter. Vanessa Williams, in October we created a live event at the Mall of America, here in Minnesota will be filmed the live Vanessa Williams hosted fashion show and hosted live auditions, where hundreds of people auditioned in the mall to try to become EVINE host. We streamed it live on Facebook and on our website, as well as nationally broadcast live TV cuttings during the day. Fans and aspiring talent showed up from all over the United States to try to become one of our show host and to see Vanessa's fashion show, a great event for customers, for fans employees and personalities. Paula Deen, last week we premiered the first of its kind weekly television and web series featuring Paula Deen and her family and friends live from her home in Savannah, Georgia. This series will air live every Tuesday on all platforms giving the customer an intimate look at Paul's personal sense of style, southern charm and iconic recipes and allow customers to interact and byproduct from Paula and from EVINE. You can also see Paula on Fox & Friends when she appears as a celebrity chef, as well as on her new syndicated show all of which will allow her to cross promote her products that are only available on EVINE and evine.com. Conversion to high definition TV. Yes, our company has been talking about converting to true HD for the past eight years and we finally pulled the trigger this quarter. In fact, we just completed the first three phases in October which was to purchase a full complement of new HD cameras, as well as changing of our broadcast signal aspect ratio from 4.3 to 16.9. Phase I already improves our customers viewing experience today and we expect to be broadcasting live in full high definition television by the middle of next year. Another sign of gaining traction this quarter is in development of our executive team. Our 2017 revenue growth strategy centers on gathering a world-class team to help us cultivate our products, attract the right new customers by better understanding their digital lifetime value and create a culture that can drive sustainable revenue growth. Our recent hire of Lori Riley, SVP Chief Human Resources Officer is an important part of this progress. Lori comes to us from long tenures at Target and United Health Group. We recently added two new board members Neil Grable and Mark Holdsworth. Neil's legal and finance expertise, as well as his QBC experience and Mark's financial expertise and small to mid cap experience complement our existing board team as we position ourselves for growth. In addition to strengthening of our senior management team and board this quarter we added two fashion and entertainment icons Tommy Hilfiger and Tommy Mottola as advisors to the Company. As previously announced, Morris Goldfarb Chairman and CEO of G3 teamed up with Tommy and Tommy to lead a $10 million investment in EVINE on September 14 of this year. We're excited about the new brands, products and personalities that this investment group can help us bring to EVINE. As you know marketing is important and up to this year we didn't have a marketing strategy or a marketing team to drive our brand strategy. We began to correct this gap by hiring Nicole Ostoya for a newly created Chief Marketing Officer role. We then continue this effort with a significant increase in marketing spend this year as we have worked to engage with our existing customers and potential new customers in ways ranging from search engine marketing, social and traditional advertising, the other small but exciting new brand building activities. For example, EVINE hit the streets of New York and Atlanta this quarter with guerrilla marketing campaigns featuring some of our biggest brands including Todd English, Beekman 1802, Paula Deen, Vanessa Williams, Invicta and Holly Robinson Peete to name a few. Our social teams are also executing a geo-targeted digital campaign to reinforce these regional efforts. Following these tests we will measure the results closely, learn from them and rollout more campaigns like this and others in markets across the United States in 2017. Another example is our EVINE credit card marketing efforts. In September by strategically pairing our new credit card offerings with specific products, we created the largest new credit card acquisition day in EVINE history. This quarter we grew our 12 month wearable categories customer file by a combined 2%. However, we did take a step back on our total company 12 month customer file, it was down 1% which was a direct result of the large decrease in the less productive consumer electronic customers this quarter. I want to emphasize though our strategies to focus on the long-term value of the customer and in our video commerce medium, most consumer electronic customers tend to be doing one and done purchases and therefore they are not as valuable for our future growth. We are confident our new marketing team and investment spending in marketing this year will bear fruit in 2017 as we build our brand and attract new customers across all platforms. Sunil Verma our recent appointed Chief Digital Officer is driving one of our biggest strategic priorities creating a seamless digital experience for our customers to engage with live video commerce on all screens. This means we will provide our customers the search and discovery video content in the forms and at the time s they most prefer. Our customers will interact with us in mobile, event marketing and even strategically located physical retail experiences as we look for the right partners. We believe our live video commerce expertise will help us build a bridge for customers between the traditional physical retail experience and the current one-dimensional e-commerce experience that most pure play still inhabit. This effort will help us attract and retain more customers and provide our internal teams a clear roadmap for how to best build profitable, repeatable revenue programs based on our customer's preferences. In terms of our digital sales this quarter they continue to grow to 49% of total sales which is a 300 basis point increase year-over-year. Mobile sales our biggest priority within digital because of its increasing daily utility in the consumer's hands has increased as a component of digital sales to 46% compared to 42% for the same period last year. Now I'll speak to couple of the merchandising categories. Our jewelry category is our largest and most successful category. We continue to perform well here. We had several well executed jewelry events during this quarter. This included our Brazilian carnival gemstone event which was time to coincide with the Rio Olympics and delivered 60 hours of programming over eight days. It also included our Hong Kong jewelry event and our first girls that rock event which featured our female guest jewelry designers. Each of these events had strong productivity and met or exceeded our financial performance expectations. Our luxury diamond and gold businesses were again strong this quarter both significantly improving productivity with sales increases of 21% and 29% respectively. Driving the strong performance with brands like Effy Jewelry, Beverly Hills Elegance, Diamond Treasures, Gems of Distinction, Stefano Oro, Viale 18K Italian Gold, and Pamela McCoy. We hit an exciting milestone in watches during this quarter as we celebrated our 15th year with Invicta watches which including event programming from locations in Florida and Cabo San Lucas. The event was well received by our customers as over 100,000 watches were sold. Our partnership with Invicta continues to be the standard for our company to strive toward as we work with existing and new brands. A great example of bringing world-class brands together in a unique way to deliver exciting programming to our customers with Invicta Disney partnership that we premiered in August which bodes well when we bring it back this holiday season. This partnership created a new Disney theme to watch collection from Invicta which was a fusion of Disney inspired elements with Invicta's most iconic styles. Each timepiece embodies Disney's classic charm with details such as Mickey Mouse our markers, Mother-of-Pearl Mickey Mouse dials and Disney case backs. In August this line successfully produced a 58% lift over the category average. Another exciting example is just last week when we premiered EVINE Live [Gloria] [ph] live from our studios introducing her new watch collection. A collaboration with TechnoMarine to offer today's modern women with timeless design and classic sophistication. Ahead of the premier Eva appeared on EVINE's Facebook live show dubbed beyond backstage attended unscripted conversation with Eva and will give fans a behind-the-scenes peek, just a great event that we will do more of soon. Beauty continues to be one of our most profitable and growing categories. During the quarter we successfully launched four new brands. This included Sirot in August featuring Alan Sirot one of the top end models in the country. CoverFx in September are prestige line that offers one of the most ethnically diverse shade systems made with good for you ingredients, as well as Jane Iredale and [indiscernible] in October. We also successfully expanded some of our existing brands with new item launches and visits. For instance our Beekman 1802 line grew 160% this quarter year-over-year as we introduced new shampoo, conditioner and lip balm to rave reviews and good initial sales performance. This is a prime example of how we are building connections to our customers whereby they become fans of our brands and purchase new items from us because they trust EVINE and they trust our brands. Our fashion and accessories business continues to perform amid a competitive retail climate. We had great performance in our casual and sportswear lines which grew 46%. This included strong performances from our proprietary and exclusive brands Indigo Thread, OSO Casuals and One World. Our celebrity collections and personality brands continue to perform well growing in high single digits. Like Beekman 1802 and Beauty, our fashion customers are connecting to our celebrity lines which include Paula Deen, Todd English, Vanessa Williams and Holly Robinson Peete. We believe these personalities who already have strong brand recognition and credibility with significant followings on social networks along with our new marketing team and marketing initiatives are critical to our long-term success. In the seasonal apparel business despite a warmer Q3 that affected early sales in fall centric products, the Wear Now accessories offering saw a strong bump in sales with timely layering options. Shifting strategies in season to these lighter cover-ups versus true winter goods allowed on merchant team to offset potential missed sales in the cold-weather categories which should perform well in the fourth quarter. I was particularly pleased with this pivot as it shows our fashion team as both nimble and strategic. While we intentionally pulled back on consumer electronics airtime as part of our focus on improved contribution margin industry softness in key categories like mobile phones and tablets along with the declining ASPs and TVs compounded the sales pressure and decreased productivity. We will continue to look for ways to be opportunistic in these categories and we still believe that CE should be an important part of the balance merchandising mix. The home business is a big growth priority for us because we know how important breath of product is. Our teams have been working hard and we are all beginning to see the progress. Waterford one of our strongest home brands increased sales 20% this quarter compared to prior year as we broaden the assortment into lighting. Kitchen electrics were also strong in the quarter growing 33% over prior year driven by our proprietary brands such as Cook's Companion, as well as Todd English and Paula Deen. In the fourth quarter we are debuting several new and established brands including Tommy Copper, collectible items from the Franklin Mint, [FrenchBall] [ph], Mark Roberts, Gottenger and Bella Xena candles. It's exciting to see all this hardware come together as evidenced by our significant quarterly year-over-year growth in gross profit, adjusted EBITDA and earnings per share. And I feel good that we are well-positioned for a great holiday season. I will now hand the call over to our CFO, Tim Peterman who will walk through our 2016 third-quarter financial, operational and content distribution results in more detail. Tim?

Thanks Bob and good morning everyone. Let me start with providing you with some additional financial details. Consolidated net sales for the third quarter were 152 million, it was a 7% decrease year-over-year as Bob mentioned earlier. Our return rate was 20.5% in the third quarter which was an increase of 160 basis points year-over-year. This increase was driven by a shift in our product mix out of consumer electronics and into our wearable categories, beauty, fashion, jewelry and watches. Our gross margin percent improved 210 basis points during the quarter to 36.6%, gross profit dollars decreased slightly by 500,000 to $55.4 million. As we continue to balance our merchandising mix this year, this is the third consecutive quarter of year-over-year gross profit rates improvement and flat to increasing gross profit dollars. We do expect our gross margin improvement in the fourth quarter to be consistent with the year-to-date improvement trend and then stabilize on a year-over-year basis going forward into 2017. Third quarter operating expenses totaled $57.5 million which is a 4% decrease over the prior year. This was attributable primarily to lower content distribution costs and decreased accrued incentive compensation which were partially offset by higher investment spending in marketing and e-commerce, and higher variable expenses from increased credit costs, and increased labor cost in customer solutions and fulfillment center. Our average selling price in the third quarter was $60, an 8% decrease year-over-year. This was primarily attributed to the mixing out of consumer electronics, as well as ASP decline within fashion and beauty categories. As Bob mentioned earlier our digital strategy is designed to create a seamless digital experience for our customers which means our content distribution group is working hard to build additional content distribution, platforms beyond the wide television screen in the online desktop experience. While we work on those initiatives that include improving our interactivity and large social platforms such as Instagram and Facebook and emerging over the top platforms such as Apple TV, Roku and Amazon Fire we continue to pursue our television distribution strategy of more channels in the right homes with the focus particularly on adding new HD channels, and new channels for our second network EVINE 2. For the third quarter our total number of television households is about 87 million which was flat to this time last year and what we expected to see. It is an interesting time right now in the content distribution world as major players reshuffle the landscape, charter combining with Time Warner Cable and Bright House, AT&T $85 billion offer to buy the content home of Time Warner, both are the perfect examples of these. With that being said, we are confident, we have the strong relationships with all of these major players to continue to execute on our plan. I would now like to talk to you about three of our primary operational functions, our fulfillment center, customer solutions group and our credit and payments group. All of which continue to perform well by improving our service levels to our customers and our vendors. In the customer solutions group, one of our central KPI is a live agent contact rate which measures the post sales support calls compared to unit sold. I'm happy to report this quarter it improved 210 basis points. This speaks to the overall operational aspects of our business being better year-over-year, meaning few problems with few reasons for folks to call us. Also on October 27, our CS Group placed second in our category for the Annual Better Business Bureau Torch Award for business ethics. This recognizes that we’ve got a culture here that supports our high level of accountability, transparency and trust. In our fulfillment center we remain focused on the continued design improvements to our new warehouse management system that will maximize our operational cost saving possibilities in Q1 of 2017. This fourth quarter will be the first quarter, the first full quarter we're live with this new designed system in place having tweeted in the prior two quarters and we look forward to talking to you about these results in our Q4 call. In our payments and credit group, we have experienced continued success by increasing our private label credit card penetration by 180 basis points over the same period last year. The utilization of this EVINE card drives customer engagement and reduces our credit interchange and other processing fees. Our average value pay payment has decreased 3% over the prior-year driven by a decline in our ASP of 8%. As a result we have experienced an increase in our total credit interchange and other processing fees to the increased number of credit card swipes, variable cost for the quarter increased by approximately $1.3 million primarily driven by increased credit costs and increased labor costs in customer solutions and fulfillment center. Total variable expense as a percent of sales was approximately 10.6 for the third quarter which was up about 150 basis points from the prior year. This increase in variable rate is due to the reasons I just explained. As for the balance sheet, we ended the quarter with cash and restricted cash of approximately $40 million, which was in line with where we ended the second quarter. Along with our cash of $40 million, the company ended the quarter with about $16 million in additional availability on the PNC credit line, which gave us a total liquidity position of approximately $56 million as of October 29, 2016. Interest expense for the third quarter was $1.6 million and we expect fourth quarter interest expense to be in line with this quarter. Free cash flow in the third quarter of 2016 was negative $8.6 million compared to a negative $12.8 million in the third quarter of 2015. This $4.2 million improvement over the same period last year reflects our improved focus on working capital management and the normalization in capital spending related to the technology and facility upgrade at our fulfillment center. Our inventory for the quarter finished at $81.2 million which is a 9% increase from this time last year. I'm comfortable with this increase in inventory as it has allowed us to appropriately stock up with the right balance of proprietary products this holiday season rather than relying on lower margin drop ship consumer electronic products, we offered last holiday season. In terms of our outlook for Q4, we expect revenue growth in the fourth quarter to be negative by low to mid-single digits on a year-over-year basis. We expect adjusted EBITDA to increase in the fourth quarter on both a sequential and year-over-year basis. And finally a quick update on our Boston Television Station WWDP, which is participating in the FCC auction process. The reverse auction was completed in late spring and the forward auction is still in process. As we have said, we are restricted by the SEC regulations from commenting further on this process. With that, let me turn it over to the operator and Bob and I will be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Tom Forte with Maxim Group. Please proceed with your question.

Great, thanks for taking my question. So two, one I want to talk about consumer electronics and how should we think about your strategy for that category on a go forward basis. And then number two, can you talk about shipping and handling revenue both in the quarter and any thoughts on the go forward basis. The notion being that in the quarter when you had lot less consumer electronics sales seems that kind of year-over-year basis your shipping and handling revenue include but electronic and shipping and handling. Thanks.

Hi Tom, it's Bob. Thanks for the questions. Let me start with the - that the first one on the consumer electronics, I’m going to let Tim talk to the shipping and handling question that you had asked. On the consumer electronics area, we made a decision that we were going to go based on looking at our contribution margin reports, we made a decision fairly early on that we didn't want to have products that were easily available everywhere else and we wanted to continue to go with the proprietary and exclusive products that we had. So we're actually - we've did a reduction of about $13.6 million in consumer electronics in revenue and the total revenue reduction for the quarter was actually 10.6. So, as I said my comments earlier, I would have now in retrospect, I probably would not have wanted to shifted that much because what happened was I ended up over rotating a little bit on some of the other categories which is a tactical error it wasn't a strategic error. But the way that we feel about consumer electronics going forward is we're going to be opportunistic when we get a good buy, when we think we can make contribution margin on the item we’re going to drive towards contribution margin and we’re going to drive towards profitability but we’re not going only to sell merchandise just for the sake of getting a revenue that's not going to give us any kind of incremental EBITDA, and I'll let Tim handle the question on shipping and handling.

Hi Tom, to your question on shipping and handling, it was - we don’t obviously go into the detail what shipping and handling revenue was but think of this way, we did not a lot of promotion, we stayed on grid, most of Q3 because we weren't chasing after volume on revenue and we didn’t feel that need from an inventory perspective either, so we stayed back and just executed on the game plan and moving out of the CE, and so the shipping and handling wasn’t something that we used it’s a promotional lever.

Thank you.

Thank you. Our next question comes from the line of Mark Argento with Lake Street Capital Market. Please proceed with your question.

Good morning, gentlemen. Just a couple of questions. First on the kind of new content strategy. Bob, it seems like that's a heightened focus for you here over the last quarter or two, could you talk a little bit more about I know the Paula Deen thing you guys announced in the last week or two, what we should expect to see in terms of additional off-studio or auto-studio opportunities and maybe talk about how you could weave your new hideout strategy into that?

Absolutely, thanks Mark for the question. Yes, there's no question that what we would like to do and Paula Deen is a perfect example I think of being able to set up some fixed programming with somebody that has a lot of followers and has a following and is able to get a lot of attention in the press, and has a lot of merchandize – gross merchandize categories to be able to sell with because she is iconic in her own right. And so what I think, it's going to be one of our big wins going forward is to be able to essentially because the price has gone down so much in terms of being able to do remotes and setting up studios is that we really want to be wherever we think we have the best opportunity to have the people that we want to guess that are going be on. So, because the price is gone down so much, we think if we can continue to set up these [Uber] [ph] host if you will to be able to have a fixed programming on a weekly basis that drives and continues to be able to drive more tune-in and we use proprietary and exclusive brand merchandize and we use the social content to be able to drive people to it that overtime, we feel that this is going to be able to drive even more profitability in that area and as long as we choose the right people and we have the fixed programming, I think you’ll find that we are going to drive this significantly up.

And do you anticipate at any point putting in some fixed facilities on either the Coast or are you just continue to be opportunistic?

Yes, I mean, we are looking on both Coast and we are finding frankly that because the expenses, it’s not so bad to be able to put together a studio and you can do things remotely, fairly inexpensively, that if we find it is a good – if we find a good deal in terms of being able to set up a fixed location in either New York and LA, we certainly are going to be opportunistic to do that. But at this point, we think that the most important thing is to be able to just be able to have a place to be able to cross home if you will in both areas to do so. So at this point we’re reviewing the different options that we have. I very much would like to be able to have us placed in New York and LA, but it's not going to be a big expenses that’s associated with it.

Got it. And one quick one for Tim, in terms of – looks like returns rates were up a little bit, you talked to that, was that mix of product or what's going on there?

Yes. Hi, Mark. The return rate was up a bit and that is to recall its moving out of CE and going a little bit heavier into the wearable categories, our best performing products and that would be in Jewelry, Watches, Fashion and Beauty, but in particular, the higher price starting from Jewelry, Watches would cross that up.

All right. Thanks, guys.

Thank you. Our next question comes from the line of Eric Wold with B. Riley. Please proceed with your question.

Thank you. Good morning. Couple of questions. One, follow-up on Q3, I know you mentioned you throttle back airtime around consumer electronics and kind of reallocated that. Was there any of the shortfall on the period due to underperformance of the categories were you reallocated the airtime into or merely just the loss of the CE revenue flowing through? And then on the comments around gross margin is looking into next year stabilizing around current levels, is that an indication that this is kind of a gross margin level you feel is optimal to drive your customer engagements and sales or is there still an opportunity to move gross margin higher from these levels overtime?

Thanks, Eric. On the productivity question, which I think is what you are focusing on. Yes, I think that we saw, I don't think I know that, we probably over-rotated a couple of brands in filling up the space that we dropped out of on the consumer electronics. And so, I think we over-rotated some of our major brands, and therefore we saw some productivity drops on that. And I said earlier, the good news is that that is a tactical kind of thing that we will be able to adapt to appropriately and be able to get even more profitable on since we’re going to continue to look at the contribution margin and drive towards the incremental profitability. But I think by doing the drop as quickly as we did, I didn't anticipate as well as I probably should've the fact that we were going to over-rotate some of the other families of business.

Hi Eric. This is Tim. Regarding your gross profit question, as Bob talked about in his prepared remarks, building this base case model this year, which is around balancing the mix as produced a natural lift in the gross profit each of the quarters and so what I was saying in my prepared remarks around its stabilizing. We do think these are sustainable margins where we are today, particularly as we’re going to be growing these revenue programs we have in next year. So we feel good about the growth in Q1, Q2, Q3, and how we’re focusing on Q4. So the answer to your question is yes. We think these are the normalized rates for going forward.

Perfect. Thank you, both.

Thank you. Our next question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.

Great. Thanks for taking my question. You know, just big picture here. I mean, obviously there’s a lot of moving pieces as you grow some of the higher margin categories and pulled back on some business that have perhaps been chased a lower margins in the past. I mean, when do you see the mix really balancing out to a point where there will be more sustainable, normalized growth. I mean, the first quarter obviously this year, revenue was up pretty nicely. Does that mean that potentially the first half of next year we could continue to see revenue be flat to down a little bit as you retool the categories, and then just a quick follow-up on private label credit cards, I was hoping to just get an update on where your penetration is now and where you think that can go, and specifically, where is the benefits from that coming from. Is it typically higher spend for customers once they move on to the private label credit cards or is the bigger benefit from some lower transaction costs that's be curious about that? Thank you.

Hi Alex. This is Tim. Why don’t we start with the last question first which is around the credit card. Certainly, the – we do see more productivity from the customers once they start using their credit cards, they engage more frequently with it and higher basket value. So they are buying – their average are going to be little bit higher. In terms of costs, yes, I mean, obviously we’re saving on the lower transaction fees for not having to pay some of the other card costs associated with swiping, so like it for a multitude of reasons. It brings a loyalty in a sense of community to the customer, say, they have special communications from us around this program and then from a cost perspective it certainly helps us lower our variable rates.

And Alex, its Bob, And just to – what also it's really great about it is now that we actually have the marketing department that’s going to be driving this program here is that we finally have the opportunity to be able to start working on a program to be able to target those customers in special ways and frankly moving into at some point in 2017, a loyalty program which we think will be able to even maximize our customers even more. So the loyalty piece of it is really important, and frankly, we wouldn't have been able to do it until we were able to have the muscle of having a marketing department which was not year or last year. And now your first question?

Yes, I mean, that’s a whole, any sort of Q1 guidance or anything but obviously the back half. But this year looking at decent sized revenue declines and clearly making up for it with the gross margin as you shift the categories. I mean, how should we just be thinking about the first half of next year, I mean, is there more work to be done getting the mix to where you feel it needs to be?

I’ll take that question as well on mix. If you think about it on a quarterly basis, certainly the biggest corrections on the mix are going to be in Q3 and Q4, as those last year were some of the heaviest and some of the lower margin items that we’ve just talked about, particularly around CE. So when you think about Q1 and Q2, there the mix is aren't as big up changes, but there are small tweaks. So I think you're seeing 2016 is certainly the correcting year for establishing that balance and reestablishing the profitability, priority in the organization. And then in 2017, we should be lapping the mix that we put in place this year. So I don’t think you'll see big mix changes taking place in 2017 like you’re seeing this year.

Great, that's helpful. Thanks guys.

[Operator Instructions] Our next question comes from the line of Mark Smith with Feltl & Company. Please proceed with your question.

Good morning, guys. Sorry for asking this, but can you give us the total homes number?

Sure. Mark, this is Tim. We gave that - I gave that in my remarks of $87 million, which is about flat to last year.

$87 million, okay. And then distribution costs per home during the quarter?

We haven't released that number Mark, but it's nothing unusual happened. So if there is a - as you think about what we're doing, there are two things. One, we're building more channels in each of the homes that we feel are productive already and we’re being quite aggressive with our distribution partners today when we had channel placement over a neighborhood that aren’t productive. We're having a serious conversation with them about cost. We’re not afraid to bring that up and having that dialog, because we want to make sure that each one of the homes we’re in are productive and accretive for the Company and that has been - those discussions have been very productive for us.

Is it safe to assume that they were flattish on a sequential basis?

Certainly.

Okay, perfect. And then lastly, just maybe walk us through kind of your balance sheet and cash burn here, you raised $10 million during the quarter, but here at the end of the quarter, we’re sitting at the same cash balance and same debt balance basically of quarter-over-quarter. Walk us through kind of - are you going to use the balance sheet and more leverage as you burn cash here over the next few quarters? Or just walk us through kind of your thought on cash flow?

Sure, Mark. The - let's start at the top. In Q3, obviously we benefited from the $10 million investment from Tommy, Tommy and Morris. So that was a nice investment for us that is - we think that relationship is going to be big value to the Company. But from a balance sheet perspective, the $10 million adds into the $40 million that we ended cash with at the end of the quarter, which was quite a bit more than the $11 million, $12 million that was on the balance sheet, the quarter before. So the balance sheet - the debt has stayed relatively flat were about $88 million in - on the balance sheet for debt. Obviously, you remember the mezzanine debt that we took out at the beginning of the year that was the more expensive debt that has coupled with our line of credit, which is in the 3% to 4% cost. And as we look at how we're managing our balance sheet, we’re really looking for the absolute best return to deploy that capital. So if we think - we had several questions about how we’re going to pay off the mezzanine debt with the new investment that we just received and we’re certainly looking at all the options there and then returns associated with them. One thing to factor in around the thinking of the mezzanine debt is that we took it out in March and the prepayment penalty in year one is obviously more than in year two, and so we’re looking at the best return and ideally when the right time is to payoff that debt. So we feel good from a liquidity perspective sitting again around the [$50] million range in total liquidity of something that we feel is plenty of room for us to be both opportunistic around merchandising and ideas that we talked about just on this call around remote, studio and the interactive content strategy. So we feel good about the balance sheet. We think it’s improving every single quarter.

Okay. And then just looking at inventories up a little bit here, but guidance for sales to be down little bit in Q4, how comfortable are you with your inventory levels today?

We always think about as it relates to what we’re doing with the business. So in Q1 and Q2, and Q3 you saw relatively flat inventory as we moved and balanced the mix and then you saw 9% growth here in Q3 as we prepare for a different kind of Q4. So we had to bring in more inventory as the drop-ship percent in Q4 has come down and the CE has gone down and is planning to go down. So we're bringing in these fresh inventories to make sure that we have the opportunity to maximize our holiday season. So I feel good about where we are today.

Great, thank you.

Thank you. Mr. Rosenblatt, there are no further questions at this time. I’d like to turn the floor back to you for any final remarks.

Thank you so much. Thanks guys for your time and for your attention. It’s going to be an exciting fourth quarter and I think we are on a road to profitability and that is what we're driving towards. So look forward to having these calls in the future and we’ll be speaking with you soon. Thanks again. Bye. Have a happy holiday season.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.