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Edited Transcript of ATV earnings conference call or presentation 15-Dec-17 1:30pm GMT

Q3 2017 Acorn International Inc Earnings Call

Shanghai Mar 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Acorn International Inc earnings conference call or presentation Friday, December 15, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jacob A. Fisch

Acorn International, Inc. - President & CEO

* Weiji Gao

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Conference Call Participants

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* Michael Goodrich

* Richard E. Greulich

REG Capital Advisors - President & CEO

* Elaine Ketchmere

Compass Investor Relations - Partner

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Presentation

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Operator [1]

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Good day and welcome to the Acorn International Third Quarter 2017 Earnings Call. Today’s conference is being recorded. And at this time, I’d like to turn the call over to Elaine Ketchmere. Please go ahead.

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Elaine Ketchmere, Compass Investor Relations - Partner [2]

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Good morning, everyone, and thank you for joining us today for the discussion of our unaudited financial results for the third quarter and first nine months of 2017. With me today are Mr. Jacob Fisch, our CEO and 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-looking 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 products as well as third-party products and brands through e-commerce, its other direct sales platforms as well as its 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 statements, except as required by applicable law.

Furthermore, the unaudited financial information discussed today is preliminary and subject to potential adjustments. Adjustments 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 quarter.

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

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Thank you, Elaine. In the third quarter of 2017, Acorn experienced a moderate year-over-year decline in revenues following partial divestiture of the HJX electronic learning products business announced in August 2017. The exit from this business drove increases in gross profit and reductions in operating expenses and more importantly, allowed us to focus on expanding our already profitable businesses and brands.

As a result, we saw a strong growth from the e-commerce channel, primarily from sales of our proprietary Babaka posture correction products, and an increase in gross margin to 69.3% from 54.5% in the year-ago period due to a larger portion of higher margin e-commerce sale in the product mix.

Total operating expenses decreased 11.4% year-over-year and operating loss improved to $0.8 million compared to a loss of $1.5 million.

During the quarter, the company received dividends from Yimeng Software Technology Company Limited or Yimeng, a publicly traded company in China, and recorded other income of approximately $2.7 million. Net profit was $2.3 million and we closed the quarter with a cash position of $25.1 million.

Acorn anticipates further liquidation of noncore assets, including a potential sale or other liquidity generating transaction involving noncore property in Shanghai, which has a carrying value of approximately $13.2 million. We may also sell additional shares in Yimeng from time-to-time based on market factors and other investment and capital requirements.

Looking at the fourth quarter of 2017, we have experienced some pressure on revenue and profits. Our participation in Alibaba's Singles Day event was not as productive as planned and the e-commerce business is facing additional headwinds that are continuing to play out through the month of December.

In 2017 and beyond, we will continue to emphasize the e-commerce channel and plan to introduce new products and product line extensions. We will seek to increase revenues and improve profitability by focusing on our own proprietary brands. Simultaneously, we continually evaluate new business opportunities and are also exploring several other new areas of potential growth.

Now I'll discuss the financial results for the third quarter of 2017.

Total net revenues were $6.1 million, down 19.5% from 17 -- from $7.5 million in the third quarter of 2016. As I mentioned earlier, the decrease was primarily due to the partial exit from the HJX electronic learning device business, which was partially offset by higher e-commerce sales of posture correction and other products.

Cost of sales was $1.9 million, down 45.7% from $3.4 million in the third quarter last year.

Gross profit was $4.2 million, up slightly from $4.1 million in the third quarter of 2016, despite the lower total net revenues for the period. Gross margin was 69.3%, up from 54.5% last year due to a larger proportion of higher margin e-commerce sales in the product mix.

Total operating expenses were $5 million, down 11.4% from $5.6 million in the same period last year. The decrease was attributable to lower selling and marketing expenses associated with the exit from the HJX business as well as lower general and administrative expenses.

Loss from operations was $0.8 million as compared to a loss from operations of $1.5 million in the year-ago period.

Other income was $2.8 million, primarily attributable to dividends from Yimeng shares. This compares to other income of $0.5 million in the third quarter of 2016.

Net income was $2.3 million as compared to a net loss of $1.8 million in the third quarter of 2016. As of September 30, 2017, Acorn's cash and cash equivalents with restricted cash, totaled $25.1 million as compared to $25.6 million as of December 31, 2016.

Turning now to our results for the first 9 months of 2017. Total net revenues were $16.7 million in the first 9 months of 2017, down 9.5% from $18.5 million in the same period of 2016. The decrease was largely attributable to the partial exit from the HJX electronic learning device business announced in the third quarter of 2017.

Cost of sales was $6.4 million, down 29.3% from $9 million in the year-ago period. Gross profit was $10.4 million, up 9.8% from $9.4 million in the same period in 2016.

Gross margin was 62%, up from 51.2% in the same period of 2016 and was largely attributable to the change in product mix to favorable -- to favor higher margin proprietary products.

Total operating expenses were $15.8 million, an increase of $4.6 million from operating expenses of $11.2 million in the same period in 2016. Operating expenses for the first 9 months of 2016 were reduced by the impact of a $6 million gain from the sale of noncore real estate assets, which partially offset operating expenses for the period. There was no such gain in the first 9 months of 2017.

Loss from operations was $5.4 million as compared to a loss from operations of $1.7 million in the same period in 2016. The loss from operations for the first 9 months of 2016 benefited from the $6 million gain from the sale of the real estate assets.

Share-based compensation was $25,000 in the first 9 months of 2017 as compared to $488,076 in the same period in 2016.

Other income was $12 million, primarily due to dividends and gains from sale of Yimeng shares. This compares to other income of $18.6 million in the same -- in the year-ago period, which was also primarily attributable to gains from sale of Yimeng shares.

Net income was $4.9 million as compared to net income of $11.4 million in the first 9 months of 2016.

Finally, I'd like to comment on our share buyback program. On December 8, our Board of Directors approved a new share buyback plan of the company's ADSs for a period of 1 year, replacing the term -- the terms of the plan approved in February 2017. Under the new buyback plan, Acorn is authorized to repurchase up to $2 million of its ADSs within a 1-year period from December 7, 2017, to December 7, 2018. The proposed repurchases may be made from time-to-time on the open market at prevailing market prices, in privately negotiated transactions and block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations. The timing and extent of any purchases will depend on market conditions, the trading price of its ADSs and other factors and are subject to the restrictions relating to the volume, price and timing under applicable law. The Board of Directors will review the share repurchase program periodically and may authorize adjustment of its terms and size. The company plans to fund any repurchases from its existing cash balance.

That concludes the prepared remarks section of this call. Now myself and Geoffrey Gao, our CFO, will remain on the line for our Q&A session. 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) We will take our first from Richard Greulich, REG Capital Advisors.

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Richard E. Greulich, REG Capital Advisors - President & CEO [2]

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I have just a couple. Could you elaborate on the business opportunities with the Cachet Hotel Group that was announced earlier?

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

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Sure. So the business opportunities -- again, this is the agreement that was announced -- was a strategic cooperation agreement. Under that agreement, the -- there's both the strategic and financial component. The strategic component relates to becoming a preferred supplier for sourcing of basically -- potentially all amenities, FF&E, textiles, et cetera for the hotels. This leverages an existing sourcing operation within Acorn. We're actually building out that operation slightly more to support and grow this area of business, but it's, again, leveraging an expertise that has resided within Acorn throughout.

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Richard E. Greulich, REG Capital Advisors - President & CEO [4]

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Do you anticipate business opportunities to open up with other similar hotels?

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

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We're not pursuing that initially. We've got a captive opportunity and that appears to be a growing opportunity. And so, we don't see the value immediately in trying to become a major supplier to third-party hotels.

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Richard E. Greulich, REG Capital Advisors - President & CEO [6]

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And can you shed some light on potential revenues and timing from something like this?

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

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I can't at this point. This is still nascent. And we are building out -- building out that area, but it's -- we see it as certainly big enough to justify bulking up our internal resources to help grow that area of the business.

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Richard E. Greulich, REG Capital Advisors - President & CEO [8]

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Regarding the Yimeng stock, so I assume that there were no sales of shares during the quarter, is that correct?

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

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I believe that is correct. There were no -- no, I don't think there were any sales. Geoffrey, did we sell any shares in quarter 3?

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Weiji Gao, [10]

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No.

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

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No.

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Weiji Gao, [12]

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No, we didn't.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [13]

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No sales.

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Richard E. Greulich, REG Capital Advisors - President & CEO [14]

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And is the value as of September 30 for available-for-sale securities the Yimeng stock and is that the -- that was the market value at that time?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [15]

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Yes. I think September 30 it was RMB 11.5 per share and as of today we've -- according to the quoted price, CNY 10.9, Geoffrey, is that right?

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Weiji Gao, [16]

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Yes, CNY 10.9 to today.

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Richard E. Greulich, REG Capital Advisors - President & CEO [17]

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And can you refresh my memory, how many shares of the company do -- does Acorn own?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [18]

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Approximately 32 million, I believe, is the number.

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Richard E. Greulich, REG Capital Advisors - President & CEO [19]

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Can you -- I'm not clear. How does Acorn generate U.S. dollars?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [20]

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I'm not sure I understand the question. When you say...

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Richard E. Greulich, REG Capital Advisors - President & CEO [21]

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Well, in order to buy the ADSs, I assume you're going to be paying U.S. dollars to purchase the shares?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [22]

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We have USD in our offshore account. We may be able to allocate RMB for purposes of purchasing ADSs, but in any case, we have the USD in available funds.

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Richard E. Greulich, REG Capital Advisors - President & CEO [23]

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I don't remember the 20-F, if you delineated out what the amount of the cash assets were denominated in RMB versus U.S. dollars?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [24]

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I don't know. I don't recall either. Geoffrey, do we set out? We probably do not. Geoffrey, do we have a currency?

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Weiji Gao, [25]

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We have U.S. dollar currency.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [26]

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I don't recall if it's in the 20-F. If you need some help finding it in the public disclosure, we'll be happy to take a look after the call.

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Richard E. Greulich, REG Capital Advisors - President & CEO [27]

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I didn't recall seeing it, but I would just urge you to actually set that out in the next 20-F, if you haven't already. It would be helpful. And regarding the buyback, do you anticipate most of the shares to be done in private transactions or on the public market?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [28]

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On the public market. Yes.

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Richard E. Greulich, REG Capital Advisors - President & CEO [29]

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Okay. I applaud that action and just would encourage you obviously to buy as low as possible, but at these prices this is pretty attractive for sure.

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Operator [30]

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(Operator Instructions) And we will take the next from Mike Goodrich, B&G Capital.

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Michael Goodrich, [31]

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Congratulations on your new appointment. The question I had is the public float right now in the shares, can you give me approximate number? How many shares trade in the float?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [32]

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I think approximate number is -- the number of shares I don't have but I think it's roughly 20%.

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Michael Goodrich, [33]

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20%, so was that like 600,000, 700,000 shares type of thing, or...

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [34]

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Sorry, when you say -- so...

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Michael Goodrich, [35]

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Like how many shares are in the float right now because you guys have done buybacks already?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [36]

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I see what you mean. So it's about -- it's 2.6 million, ADSs about 53 million shares.

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Michael Goodrich, [37]

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Okay. But, in the U.S., your public float is much less, isn't it? It's like 2.6 million outstanding -- the float, under the...

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [38]

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Yes. ADSs. No, so there are -- I think approximately 53 million shares and they trade as ADSs in the U.S. So there's a 20:1 ratio of ADSs to -- or sorry shares to ADSs. So the 53 million is about 2.6 million ADSs that trade.

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Michael Goodrich, [39]

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Okay. And then the float after that?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [40]

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In the float.

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Michael Goodrich, [41]

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In the float totally, okay. Okay. And this new relationship with the hotel, obviously, there is some ties there with your Chairman. How does that work? How do you guys -- how does the board work making those decisions working with an outside entity like that?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [42]

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Well, it was a pretty rigorous process. We take our corporate governance seriously. The board takes its corporate governance seriously. We've got AEC. This went through a pretty rigorous process with the AEC. A due diligence process was undertaken with Deloitte hired as outside -- as a -- to perform a due diligence. And ultimately, the AEC reviewed the transaction, referred it to the board, the board further reviewed and voted in favor. And so as I said, it's an arm's length process and the conclusion was that it was in the best interest of all the shareholders and all the stakeholders of the company to undertake the transaction.

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Michael Goodrich, [43]

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Okay. And I guess, as an investor, I would assume that if you're going to loan the money that you probably have more money coming in. I guess, that's in the back of my mind as you're going to look to sell that other asset and maybe the real estate in China. Are we thinking among the same type of lines that you're able to do that?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [44]

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We are continuing -- as we reported, we're continuing to look at opportunities to create liquidity at attractive prices. We believe that the cash available -- free cash available to us now is in excess of -- on our books, is in excess of what we need to run the business and this is an opportunity to create an arrangement at market competitive rates in a risk -- in a risk managed way. And so -- but in addition to that, yes, we are looking at further opportunities to create liquidity.

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Operator [45]

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With no further -- I'm sorry. We'll have a follow-up from Richard Greulich, REG Capital Advisors.

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Richard E. Greulich, REG Capital Advisors - President & CEO [46]

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I just wanted to clarify something that the prior questioner had asked. So we've established that there's 2.6 million ADSs, but I guess, the question was how much of that is actually in the public float and not owned by management. And my understanding was Mr. Roche owns about 50% of that.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [47]

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I think between all management and affiliates, it's considerably north of that. I think we're close to 80-plus percent.

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Richard E. Greulich, REG Capital Advisors - President & CEO [48]

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So roughly 500,000, 550,000 shares would be in the public float. And a 2 million authorization, let's say, if you were to buy it at the current price, is about 125,000 shares, I think.

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Operator [49]

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And with no further questions, I would like to turn it back to our speakers for closing remarks.

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Elaine Ketchmere, Compass Investor Relations - Partner [50]

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

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Operator [51]

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We appreciate your participation. You may now disconnect.