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Edited Transcript of ATV earnings conference call or presentation 24-Feb-17 1:30pm GMT

Q4 2016 Acorn International Inc Earnings Call

Shanghai Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Acorn International Inc earnings conference call or presentation Friday, February 24, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elaine Ketchmere

Compass Investor Relations - Partner

* Geoffrey Gao

* Jacob A. Fisch

Acorn International, Inc. - President & CEO

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Conference Call Participants

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* John Banks

* Richard E. Greulich

REG Capital Advisors - President & CEO

* Tony Kamin

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Acorn International fourth quarter earnings conference call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Elaine Ketchmere. Please go ahead, please.

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Elaine Ketchmere, Compass Investor Relations - Partner [2]

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Thank you, operator, and good morning everyone. Thank you for joining us today for the discussion of our unaudited financial results for the fourth quarter and full year 2016. With me today are Mr. Jacob Fisch, our President; and Mr. Geoffrey Gao, our CFO. After our prepared remarks, we will open the line for questions.

Before we continue, I would like to remind you that the discussion today will contain certain forward-looking statements. These forward-statements include, among others, statements regarding the company's ability to increase revenue, maintain margins, manage expenses and generate additional cash flow; the company's ability to grow sales of its proprietary-branded products as well as third-party products and brands through e-commerce, its other direct sales platforms as well as its nationwide distribution network; and the company's ability to sell its noncore assets as planned.

A number of the potential inherent risks and uncertainties that Acorn’s business involves are outlined in the company’s public filings with the U.S. Securities and Exchange Commission. As such, actual results may be materially different from the views expressed or anticipated results described today. Acorn International does not undertake any obligation to update any forward-looking statement, except as required by applicable law.

Furthermore, the unaudited financial information discussed today is preliminary and subject to its potential adjustments that may be identified when audit work has been performed for the company’s year-end audit, which could result in significant differences from this preliminary unaudited financial information.

Now I'll turn the call over to Jacob Fisch, who will discuss our financial results for the fourth quarter and full year.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [3]

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Great. Thank you, Elaine. Acorn's financial results for 2016 reflect the continuing business turnaround strategy led by Co-Founder and Executive Chairman Robert Roche and the new management team installed in May 2015. Under new leadership, Acorn significantly improved gross margin, made meaningful reductions in operating expenses and completed the sale of noncore assets. Net income for 2016 was $3.4 million compared to a loss of $40.2 million in 2015, marking the first year of profitability since 2011. The company closed the year with a stronger balance sheet, including $25.5 million in cash and equivalents, up from $12.3 million at the end of 2015.

In 2017, Acorn will seek to increase revenue by growing sales of its proprietary-branded products as well as third-party branded products through e-commerce, its other direct sales channels and nationwide distribution network. The company will continue to support its own brands and build its reputation as a trusted partner for top foreign brands entering China. Management will remain focused on maintaining healthy margins, managing expenses and generating additional cash flow. The company anticipates further liquidation of noncore assets, including the potential sale of certain noncore property or potentially another form of transaction involving such noncore property, with a carrying amount of approximately $16.4 million and potential sales of shares of Yimeng Software Technology Co., Ltd, a publicly traded company in China as appropriate.

Now I'll discuss the financial results for the fourth quarter of 2016. Total net revenues were $6 million in the fourth quarter of 2016, down from $9.1 million in the fourth quarter of 2015. Cost of sales in the fourth quarter of 2016 was $3 million, down from $4.5 million in the fourth quarter of 2015.

Gross profit in the fourth quarter of 2016 was $3 million as compared to $4.6 million in the fourth quarter of 2015. Gross margin was 50.3% in the fourth quarter of 2016, unchanged from the fourth quarter of 2015. Total operating expenses in the fourth quarter of 2016 were $10.5 million compared to a total operating expense -- compared to total operating expenses of $11.7 million in the fourth quarter of 2015.

Loss from operations was $7.5 million in the fourth quarter of 2016, as compared to a loss from operations of $7.1 million in the fourth quarter of 2015. The operating loss for the fourth quarter of 2016 includes approximately $3.9 million in nonrecurring expenses, including a write-down of obsolete inventory and other accruals. This compares to $5.5 million in nonrecurring expenses in the fourth quarter of 2015.

Share-based compensation was $247,941 in the fourth quarter of 2016, as compared to nil in the fourth quarter of 2015. Other expense was $0.4 million in the fourth quarter of 2016, as compared to other income of $0.2 million in the fourth quarter of 2015.

Net loss was $7.9 million in the fourth quarter of 2016 as compared to a net loss of $7.3 million in the fourth quarter of 2015. As of December 31, 2016, Acorn's cash and cash equivalents with restricted cash totaled $25.5 million as compared to $12.3 million as of December 31, 2015. As of December 31, 2016, the company had repurchased 196,213 ADSs at an average price $7.80 per ADS under its share purchase -- share repurchase program.

Turning to our results for the full year 2016. Total net revenues were $24.4 million in 2016, down from $47.5 million in 2015. Cost of sales in 2016 was $12 million, down from $34.9 million in 2015. Gross profit in 2016 was $12.5 million as compared to $12.7 million in 2015. Gross margin was 51% in 2016, up from 26.6 million -- 26.6% in 2015.

Total operating expenses in 2016 were $21.7 million, including a $6 million in -- gain from sale of noncore real estate, compared to a total operating expense of $53.5 million in 2015. Loss from operations was $9.3 million in 2016 as compared to a loss from operations of $40.9 million in 2015.

Share-based compensation was $736,017 in 2016 as compared to $71,333 in 2015. Other income was $18.1 million in 2016, primarily attributable to gains from sales of Yimeng shares, as compared to other income of $1 million in 2015. Net income was $3.4 million in 2016 as compared to a net loss of $40.2 million in 2015.

That concludes the prepared remarks section of this call. Now myself and Geoffrey Gao, our CFO, will remain on the line for Q&A. Thanks very much and I'll turn it over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Tony Kamin with Eastwood Partners.

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Tony Kamin, [2]

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Can you tell me in terms of -- as you look forward with the company and continue the turnaround, do you see sort of equal room to continue to lower expense, or are you at the point where this becomes more of just a revenue story?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [3]

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We are continuing to look at opportunities to lower expense. I would say we are equally looking now to growing revenue. Clearly, we've taken the revenue down quite a bit from the past and now it's important that we grow the revenue. I would say that we're not done with the expense side of the equation, but we've really done a lot of work there. And the next step, as you sort of allude to or imply, is that we need to grow -- we need to grow revenue.

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Tony Kamin, [4]

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And on that revenue side, can you talk a little about -- as much as you can about, which product lines are most -- that you're most excited about? And also you've mentioned on the call in terms of representing or assisting foreign brands entering China, maybe a little bit about either what you have now or what you're -- what sort of product lines you might want to bring in that you think would be successful?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [5]

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Sure. I would say for this recent phase and this next immediate phase, we're continuing to look to extend and bulk up our existing brands. I think as we've -- as you probably know this was previously -- these brands are some of China's best-known brands within the categories that they are in. So the opportunity to grow these brands, we think, again, within the sort of the space of the category allows is there. So we are focusing on our pre-existing brands. In terms of bringing new brands in, that is something that we are -- we think has opportunity. And we're continuing to develop that piece of the business. Currently, we do have a couple of deals that include, we mentioned on a call or 2 ago, about which is -- with one of the major movie studios in the U.S. and I guess, entertainment more broadly. And we do the merchandising for several of their programs. I would say at this point, all of that side of the business is still fairly nascent, and we do hope to grow it, but again just to summarize and answer the question, first step is focusing on our existing brands and growing them further and then looking to expand the side of the business that involves bringing brands from overseas.

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Tony Kamin, [6]

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Great. Just turning to the balance sheet a little bit, the -- approximately $16.5 million in land or real estate that you mentioned. That's held on a separate line than the available-for-sale securities. Is that correct, which would be the Yimeng shares, I guess, primarily?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [7]

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Yes, that's correct.

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Tony Kamin, [8]

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Okay. And on Yimeng, have they -- do you know whether the current value since the end of the year is roughly near where the year-end number was?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [9]

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I think there's been some change, maybe Geoffrey can speak to -- oh, you mean -- are you asking if the number recorded on the balance sheet is where they are today?

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Tony Kamin, [10]

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Rough -- whether that there's been much [it means] roughly?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [11]

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I think it's roughly fluctuated between maybe that highs of 14 and maybe it's been down around 12. So between the end of 12 and 14. But Geoffrey does that, is that about right?

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Geoffrey Gao, [12]

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Yes, yes, the price from last year and it was around -- close to 13 and now, it's about 14.1, 14.2, the highest that's like approach to the 14.8, but now back to 14.10, something like that. So generally, the trend is going up for the price.

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Tony Kamin, [13]

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That's great. And then have they -- you'd mentioned in a 20-F -- one of your 20-Fs that they were considering maybe an uplifting. Have they -- is there any -- have they given any other statements on that or...

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [14]

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I'm already seeing -- recently, I think every once a while, they have mentioned that's still the direction that they're trying to go in, although I don't know if we've seen anything recently. Geoffrey, you have spoken with them recently. Have they said anything on those ones?

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Geoffrey Gao, [15]

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Yes, this was communicated year-end and the beginning, but recently they didn't mention much about this. So I think, we will report that and communicate the facts with the investor closely about this when we get more information.

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Tony Kamin, [16]

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Okay. And then a final question. In terms of your ADR, I think you added -- most of it is ADS share count. What's your current ADS share count or as of year-end?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [17]

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Geoffrey, do you have that? We may -- I don't have that number in front of me. I mean, it's a 20:1 ratio to our shares.

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Geoffrey Gao, [18]

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Yes.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [19]

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We may -- Geoffrey unless you have that in front of you, we may just have to provide that to you separately.

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Geoffrey Gao, [20]

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20:1, yes.

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Operator [21]

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(Operator Instructions) We'll go next to Richard Greulich with REG Capital Advisors.

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Richard E. Greulich, REG Capital Advisors - President & CEO [22]

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And I appreciate you having these open conference calls. I was just calculating. Is my calculation correct that during the fourth quarter, the company repurchased about 35,000 shares at an average cost of $8.60 per ADS?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [23]

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Geoffrey, do you remember in Q4 what our repurchase...

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Geoffrey Gao, [24]

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I don't have it in front of me, but it sounds to me...

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [25]

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It should be close to, yes, my understanding. Yes.

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Richard E. Greulich, REG Capital Advisors - President & CEO [26]

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Okay. And what is the authorization going forward left to repurchase?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [27]

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We've just gotten authorization to extend the program. So we had a -- let's see what -- I just want to be careful about what we've disclosed. I -- we'll be -- it is, in fact, a extension of the program, formally, we'll put through a 6-K on that beyond what was previously disclosed. If it's not, it will just be, of course, rest on what was disclosed previously. I just know portions of the program are obviously sort of the lawyer's [craft.] It's -- portions of the program are disclosed and other portions are not. And I just want to be careful about that. So that will be in the form of the 6-K.

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Richard E. Greulich, REG Capital Advisors - President & CEO [28]

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Okay. I'll stay tuned. Well, I also applaud the efforts you've been making in terms of improving the cost structure of the company and looking for revenue growth opportunities. But it strikes me that almost equally, at this point, given where the stock price is, an equal or maybe even greater way of adding value on a per share basis is to step up this pace of the share repurchases. And perhaps doing like a Dutch tender or something like that because you're really -- I would assume you're pretty limited in terms of the current volume on a daily basis of your purchases.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [29]

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Well, I don't know. I have general knowledge of what a tender involves, I think I probably understand what a Dutch tender is. I mean, broadly speaking my understanding is tenders tend to be expensive and a little bit involved. Right now we're trying to take advantage as you said of what we see as an opportunity and repurchase shares. However, at the same time, we also are committed to growing the business, and we think there's a long-term future, and we're very much focused on the day-to-day operations of that.

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Richard E. Greulich, REG Capital Advisors - President & CEO [30]

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One negative from a U.S. shareholder standpoint is the PFIC designation. And I would think that you could -- might be able to eliminate that if you were to either spin out the software company's shares or just sell it and then return that in a bulk dividend to their shareholders. Have you considered doing that?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [31]

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Sorry, the second point was sell what?

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Richard E. Greulich, REG Capital Advisors - President & CEO [32]

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Sell the software company shares and perhaps dividend that money back to the shareholders. Create a onetime dividend of that.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [33]

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We'll look at that suggestion in light of PFIC and whether that would be an opportunity.

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Richard E. Greulich, REG Capital Advisors - President & CEO [34]

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Okay. Will you be offering on your website any of the financial information that might be useful for anyone filing as a U.S. citizen, the -- I can't remember the name of the formatting. It's [8214] for the PFIC designation?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [35]

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I think there is some information we offer on the website that is required by regulation. I don't know if that includes what you're asking for. If it is something that we ought to be including or that would be helpful and is not -- that makes sense for us to do so, I mean, we're open to that input. You want to just...

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Richard E. Greulich, REG Capital Advisors - President & CEO [36]

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Okay. I've only been involved with one of the PFIC filings, so I'm not totally familiar, but I will try to do that and maybe circle back with you later on.

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Operator [37]

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Next, we'll go to John Banks with BG Capital.

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John Banks, [38]

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My question on a filing, SAIF Advisors. They filed year-end 1,029,000 shares. Is that the private equity that owns the stake in the company?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [39]

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That is.

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John Banks, [40]

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Okay, do you know their intentions or are you talking to them or...

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [41]

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I don't know their intentions. We're not actively talking to them.

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John Banks, [42]

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Okay. I guess, my question like the other person asked. At this level, with the amount of liquid assets you're going to have probably in 6 months to a year, I'd be looking to buy them out or looking to do a tender offer. Because you don't want to -- you're not going to be buying stock at $20 or $30 a share. So I'd be a little more aggressive on the buyback, and I would do a tender offer $10 to $12 at these levels or try to buy them out.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [43]

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Okay.

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John Banks, [44]

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Yes. So because once you sell the real estate, unless you're looking to make a bigger acquisition, you'd probably [add] almost close to $100 million in assets and market cap is $35 million.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [45]

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Right.

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John Banks, [46]

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So I'd rather be aggressive now not later.

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Operator [47]

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And it appears we have no further questions at this time. I'll turn it back to our presenters for any closing remarks.

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Elaine Ketchmere, Compass Investor Relations - Partner [48]

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Thank you, everyone. And with that, I'll conclude our call today. For any additional questions, please feel free to contact any member of our IR team at ir@chinadrtv.com. Thank you all again and have a good day. Goodbye.

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Operator [49]

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And that will conclude today's conference. You may disconnect at any time.