Apex Global Brands Inc
Q3 2019 Earnings Call Transcript

Published: 14 Dec 2018

[Operator:]

Greetings, and welcome to Cherokee Global Brand Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Patricia Nir with Investor Relations. Please go ahead.

[Patricia Nir:]

Thank you, and good afternoon. Speaking today will be the Company's Chief Executive Officer, Henry Stupp and Chief Financial Officer, Steve Brink. 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 expressed in 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 the term is defined in 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 earnings release, which is posted on the Company's Web site at cherokeeglobalbrands.com. And with that, I'll hand the call over to Cherokee's Chief Executive Officer, Henry Stupp.

[Henry Stupp:]

Thank you, Patricia. Good afternoon, everyone. We appreciate your participation today. On today's call, Steve will review our fiscal 2019 third quarter results in detail, as well as update our guidance for the year. I will then review our brand and operational highlights with a focus on how we are once again building momentum and positioning ourselves for future growth and profitability. But, first I want to take a moment and recap some of our year-to-date accomplishments. Through the actions taken over the past several quarters, we are benefiting from our more focused and efficient organizational structure. And we are better positioned to scale our high-growth brands on a global basis. I'm incredibly proud and appreciative of our team, our Board, and our investors whose support are allowing us to realize the full potential of our unique value-added brand management platform. More specifically, we have completed the integration of Hi-Tec operations including the administration and accounting functions, and the transition of the indirect sales structure to a licensing model with IBG. This has allowed us to right size our structure, align our brands and operations, and strengthen our management team. We also completed an important refinancing with Gordon Brothers which increased our financial flexibility with a like-minded, growth oriented strategic lender. These actions mark a significant step towards stabilizing the company, while supporting our global licensing partners and stakeholders. We are now better positioned to realize the full potential of all brands in our portfolio, the strong leadership, and best-in-class licensees and retail partners. At the same time, we are making select and measured investments in our ability to scale and grow our brand on a global basis. Since Mark Conway joined as Chief Brand and Revenue Officer, we've added key talents in our marketing and brand division, and invested in our revenue generation and marketing activities. Mark and our executive team including Howard Siegel, our President and Chief Operating Officer; and Jeremy Coles, our Global Head of Product Design and Development have achieved success in increasing the penetration of our brand in multiple channels and geographies, while driving synergies across our platform and our portfolio. Our marketing investments are focused on driving e-commerce sales, increasing awareness through social media influencers, celebrity seeding, and by partnering with our licensees and retailers on the in-store experience for all of our core brands. As you'll hear in my business update, our team is focused on building traction across our portfolio of brands through new product introductions and additional licensees, expanded marketing activations, and furthering our global retail distribution. And lastly, through the evolution of our platform from a direct-to-retail licensor to a global wholesale and retail licensing platform, we're better positioned to flex both are owned, high-equity brand, as well as create exciting products and expand our brand development capabilities through existing and new retail partners all over the world. This has never been more relevant as retailers seek to balance national brand recognition with our private label aspirations. We're excited about the future of the Cherokee global brand and optimistic that the significant actions that we have taken have set us up for meaningful growth and profitability in the quarters and years ahead. With this as a backdrop, I'll now turn the call over to Steve to review our fiscal Q3 performance and discuss our outlook for 2019. Steve?

[Steve Brink:]

Thank you, Henry. Good afternoon, everyone. Today, I'll discuss our fiscal 2019 third quarter and nine-month financial results, as well as our outlook for the full year. Let's begin with revenues. As noted in today's release, revenues are $5.8 million compared to $7.8 million in Q3 last year. This $2 million decrease is due primarily to the expiration or non-renewal of several licensing agreements including our DTR licenses for Tony Hawk, Cherokee School Uniforms, and Liz Lange. Overall, last year's 2Q revenues from these terminated licensees and the divesture of our Flip Flop shops franchise business in June 2018 were approximately $2.4 million. It's helpful to exclude these revenues to better understand the growth of our ongoing and new licensees. The revenue growth of our current licensees was 8% in the quarter. Royalties from our Hi-Tec portfolio brand were $3.0 million in the quarter, down slightly from $3.1 million in Q3 last year. Revenues from one of our Hi-Tec licensees were weighted heavily to Q3 last year, which was not the case in the current year. This timing difference skewed the comparison. Revenues from our other Hi-Tec licensees were up 13% in the quarter. As I mentioned in our second quarter report, Cherokee brand royalties from Lidl don't repeat every quarter but are based on bulk production of Cherokee products by Lidl which this year occurred in Q2. During the third quarter, we recognized new revenue of approximately $600,000 from a new product development and design agreement in China. Henry will comment further about this new revenue stream. SG&A for the third quarter decreased by $3 million or 48% to $3.2 million compared to $6.2 million in the third quarter of last year. This decrease shows the positive effects of our restructuring efforts, which were implemented earlier this year and at the end of last year. In order to streamline our organization, we eliminated redundant positions, exited unused facilities, and terminated various consulting and other contracts. Q3 interest expense of $1.9 million includes our LIBOR-based interest of $1.5 million plus $400,000 of deferred financing cost amortization. Now at the income tax line. Because of recent pre-tax losses, we are not accounting for any tax benefits for the pre-tax loss expected this year. And for certain foreign subsidiaries, we're continuing to provide deferred tax expense. In Q3 this year, we adjusted our deferred tax liabilities resulting in the credit to income tax expense that partially offset the $300,000 cash component of our income taxes for the quarter. Overall tax expense was $100,000. We reported net income of approximately $100,000 from continuing operations for the quarter. You can find our definition of adjusted EBITDA on our 10-Q, so I won't repeat it now, but for the third quarter, adjusted EBITDA was $2.6 million, an increase of 68% or approximately $1.5 million in Q3 last year. This improvement is driven by the right sizing of SG&A. Now let's look at our results for nine months. Nine-month revenues were $18.3 million compared to $22.5 million in the prior year, a $4.2 million decrease. As with Q3, this decrease resulted from the expiration or non-renewal of several licensing agreements and the divestiture of our Flip Flop shops business. Overall, the nine months revenues from these terminated licensees and franchisees was $8.0 million. Excluding these renewals, these non-renewals I should say, revenues from ongoing and new licensees were up $3.8 million or 26%. This growth came primarily from three areas. Royalties from a Hi-Tec portfolio of brands increased $1.6 million or 22% from the first nine months of the prior year. Secondly, we added our new Cherokee license with Lidl early this year and third, we now have our fully executed product development and design agreement with a retailer in China. On the expense side, SG&A for the nine month period decreased $6.9 million or 37% to $11.6 million compared to $18.5 million in the prior year. We spent less for ongoing payroll, operating costs, professional fees and temporary employees, which reflect the positive impact of our restructuring efforts that I mentioned earlier. Although, we encourage significant restructuring charges and business acquisition and integration costs in the first six months of this year, there were no significant one-time expenses in this year's Q3. For the nine month period, however, these items are affecting our pre-tax loss and as I mentioned earlier, we're not yet recording any tax benefits from these losses. We anticipate tax benefits in the future but those benefits aren't reflected in our current results. Primarily as a result of these one-time items and no current tax benefits, our net loss from continuing operations for the nine months was $11.7 million. Nine month adjusted EBITDA was $6.7 million compared to $4.0 million of a prior year, an increase of $2.7 million or 69%. We entered the third quarter with $2.0 million of cash on hand. Our long-term debt total $50 million net of debt issuance cost which includes $800,000 that is classified as a current obligation. Note that at the end of our last fiscal year, all of our long-term debt was classified as a current obligation. Last quarter, we replaced our former credit facility in its entirety with a new term loan from Gordon Brothers. This term loan contains a covenant that we raised $2 million of junior capital by May 4, 2019. However, this will not be required if we achieve a specified working capital target at the end of the current fiscal year. The term loan also allows us to divest our non primary brand and keep the 2% of the net proceeds which we could use to deleverage going forward, and it provides that we could raise up to $6 million of subordinated debt or equity and keep the cash. We plan to achieve the required working capital threshold at year end by raising additional capital, increasing our working capital through improved operations or through the disposition of non-core assets. Now let's turn to our updated fiscal 2019 guidance. We're increasing the low end of our EBITDA guidance to a range of $9 million to $10 million. SG&A is now expected to approximate $16 million, down from $16.5 million previously. This is based on a narrowed revenue range of $25 million to $26 million; Lastly, I wanted to provide you an update on our continued listing on NASDAQ. We had until December 3, 2018 to regain compliance with the bid price rule which we were not able to achieve. However, our application for an extended 180 day period to regain compliance was approved. You can find more detail in our 10-Q and we are optimistic that we will regain compliance. In summary, we've made significant progress this fiscal year both operationally and financially. Accordingly, our Q3 results are more reflective of our go forward operating model. The consolidation, integration and conversion of Hi-Tec to the licensing model are now firmly behind us and in Q2 we divested Flip Flop shops and refinance our credit facility. Now we're looking forward to benefiting from our improved efficiencies as we grow our revenue base. Now I'll turn the call back to Henry.

[Henry Stupp:]

Thank you, Steve. I will now discuss our brand highlights with a focus on how our brands are being positioned to drive growth for the quarters and years ahead. I'll start with a Hi-Tec brand portfolio where revenues grew $1.6 million to $8.6 million for the nine month period or a 22% increase year-over-year. We're pleased that today we can offer the widest and most comprehensive assortment of Hi-Tec branded product including apparel and accessories and footwear in the brand's 40 plus year history. The domestic introduction of men's and women's apparel, accessories and footwear continues to build and retail penetration is tracking ahead of our expectations. Since the initial introduction at the end of our fiscal second quarter, we've meaningfully expanded or retail footprint, working in concert with our best-in-class licensee partners. We've secured placing with top tier retailers including Macy's, Kohl's, Amazon and leading sporting good retailers throughout North America. Importantly, this positive momentum is building with significant, continued expansion planned well into next year in both our retail footprint, as well as the depth of products being offered. Equally is important customer response has been very positive and our licensees are hard at work addressing all aspects of the Hi-Tec brand opportunity. We will continue to expand the breadth and depth of product categories being offered as we seek additional new licenses. Recently, we entered into a new license agreement with All-Star Sports for the introduction of a Hi-Tec branded line of bags and backpacks. Additional category expansion through new licensees and distributors are already underway, and we expect the majority of key categories and key territories to be finalized in the coming months. Performance is equally strong across our European markets. So our pan-European licensee, the Batra Group, we're seeing significant commitments for our spring apparel, footwear and accessory line among the leading European retailers. The expansion of our legacy athletic shoe business through the reintroduction of classic items from the Hi-Tec route continues to perform very well, while it creates brand heat amongst consumers. We've successfully expanded retail placement across several prominent European retailers including Liberty London, Harvey Nichols, Gilbert Street Market, amongst others. And our European partner Batra has recently opened a new showroom in Milan that features the Hi-Tec sport 74 and Hi-Tec heritage sportswear program. Consumer and retail reaction to these new introductions is simply fantastic. Outside of Europe, we recently concluded a significant expansion through IBG and other partners for distribution of Hi-Tec branded footwear into Asia, including a long-term agreement for China. IBG in a very short period of time has delivered above and beyond our expectations, a true testament to Ed Van Wezel's vision and the team he has cultivated. IBG in concert with our apparel and accessory licensees plans to expand the product offering through his territories during fiscal 2020, a big win for our brand, our partners and consumers worldwide. In short, our ever increasing assortment of products are planned to be distributed in over 9,000 doors in over 100 countries in addition to a growing e-commerce business. Turning our attention to the Magnum brand. We continue to expand the product breadth particularly in apparel and accessories which joins an ever-expanding footprint to the legacy boot business. Magnum is the world's fastest growing black boot brand and will be heavily supported with marketing activations and product expansion in the future. I'll now turn to the Cherokee brand where sales of $7.6 million for the nine-month period were down approximately $1 million or 13%, largely due to the non renewal of certain legacy partners. In the United States, we work hard to continue expanding the brand with an eye for supporting the brand's legacy and heritage at retail and through an expanded e-commerce presence. A relationship with Eye apparel for school uniforms and Stargate for boys and girls' apparel and accessories is progressing well. Future order bookings are growing with domestic retailers and the response to the product assortment has allowed our licensees to secure solid retail placement for spring and back-to-school of calendar 2019. As we think about the future of the Cherokee brand in the United States, we will continue to pursue a both a multi category and multi-channel approach. Today, we offer an ever expanding assortment of products across a broad range of channels, retailers and licensees. Partnering with best-in-class licensees will remain a core component of our future growth strategy as we're pursuing direct to retail deals. As a response to inbound retail increase, additional licensee expansion is underway, including a planned reintroduction of a heritage footwear apparel and accessory collection that will be distributed at the uppermost tier of retail. In international markets, we were delighted by the strong performance of Lidl, following the Q3 launch, Cherokee apparel and accessories for men, women and children was made available in over 10,000 Lidl doors in over 25 countries. Sell -through was very strong and we look forward to growing alongside Lidl as they continue their geographic expansion including their growing US footprint. On the heels of our successful launch, we've begun to secure orders for fiscal 2020. And are optimistic about the opportunities to expand our relationship including other brands in our portfolio. More broadly, international sales remain strong and we're especially pleased to make available to our retail licensee partners worldwide the most comprehensive assortment of Cherokee branded product in the brand's history. Turning to Tony Hawk. With regard to our plan to transition our domestic Hawk business, we're seeing solid future progress with our master apparel licensee M Hidary. Heading into the important holiday season, we've secured meaningful placement amongst key retailers. We're also seeing increased placement and account penetration with respect to our spring product 2019 range. Although, this transition is in its early stages, street wear is trending. Retail interest is growing and we believe that the combined strength of our licensees, retailer interest and compelling product will drive the Tony Hawk brand revenue in future periods. In international markets, we're looking forward to the upcoming launch with our pan-European licensee. We're just weeks away from the European launch and the opening of a Tony Hawk signature line showroom in Paris, where we will feature our complete assortment of the Tony Hawk Signature Collection. We've initiated social media campaign including a dedicated Tony Hawk signature line website, and an Instagram handle. Through new brand collaborations, case makers an exceptional forward-thinking trend right product development, we have secured interest with leading retailers throughout Europe. With the review of our branded portfolio complete, I'd like to now elaborate on my earlier commentary regarding our platform, which is driving growth in new and exciting ways. Today, I'm excited to announce that we've recently reached a product development and design agreement with a major global retailer for brands they own, which leverages our capabilities, product development, brand experience and market knowledge that has been cultivated and established through a proprietary 360-degree service platform. The terms of this contract shall remain confidential other than to note that this is a meaningful new multi-year, multi-million revenue streams, the impact of which started in our Q3 fiscal 2019 financials. In summary, we are optimistic about our prospects for the balance of fiscal 2019 and beyond. We continue to expand the global reach of our portfolio through category expansion, new licensees, new retailer partnerships and new market entries. The scalability relevance and vision of our brands and our unique 360-degree platform are leading us to be a more agile, responsive company than ever before. We're confident that this agility will translate and to increase stability in the future. Once again, I'd like to thank our team for their continued hard work and dedication through a very difficult period. And to our shareholders, thank you for your support throughout this process. And we look forward to keeping you updated as we progressed into the future. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Eric Beder with Small Cap Consumer Research. Please proceed with your question.

[EricBeder:]

Good evening. Congratulations on a solid Q3. Let's talk about some of these brands. So Hi-Tec, the shift into apparel and I guess also the shift into some more rare kind of vintage product, are you attracting-- do you believe new customers to the brand that are attracted by these new categories and how do you leverage that even further?

[HenryStupp:]

Yes, absolutely. We always felt that there was a great history and legacy and consumer affinity for the brand that had been cultivated over the 40 plus years in footwear by putting the best-in-class licensees like Tharanco, Interbrands, and Batra in Europe in place, we were able to expand into the apparel accessory categories, and they've done a stellar job in not only creating great product but also in opening up a lot of new doors for Hi-Tec, which is allowing all licensees to enter into new markets. So, traditionally in the United States, as an example, the Hi-Tec brand is largely focused on ultra-classic footwear and sporting goods channel. And now with the introduction of the apparel, we're starting to see a broadening of the retail distribution into many new accounts. And we've been getting a lot of very positive results from retailers who are entering into the new categories for the first time domestically and internationally. And the opportunities are significant as we move forward, particularly with IBG, who's keen on having the opportunity to distribute these additional categories to their base as well. So we like what we're seeing. The product looks amazing; the consumer reviews have been largely five stars which is an important indicator. And with the marketing activations that are going on like banner ads, we’re driving traffic to retailers and retailers' websites, and we're getting some significant retail sell-through.

[EricBeder:]

Great and when you look at Cherokee Lidl, how should we be thinking about that? Obviously, this year your Q2 was significantly positive, Q3 was not really there. Is that how --is it going to be that kind of lumpy low to it? And what are you kind of learning from what they or their customer base wants as opposed to what we used to see on the Cherokee customer base, traditional Cherokee customer base.

[HenryStupp:]

So we knew that they would take a delivery this year. They would then review the results, make sure that they understand the performance, gauge the categories, the pricing, the assortment and that takes them some time to make sure that for the subsequent deliveries that are being planned that they're able to maximize the opportunity. So we knew that there would be a break between our first delivery and our future deliveries. So we did anticipate the lumpiness of the program. Our team is working very closely with them, not only on the Cherokee brand but there are additional future opportunities not only with our portfolio but also other opportunities. And we'll just leave it as the remark where I spoke about brands we own, brands we developed, and for others and brands that we can create. So I think that there's a lot of opportunity for Lidl with our existing portfolio and even brands that they own.

[EricBeder:]

And I know you've talked before about Tony Hawk with the Olympics and other pieces here. So what has been the response? Two things. One is you're going to see the ramp up for that starting next year in terms of your marketing spend. And secondly, how is Tony Hawk doing with Walmart in Canada and South America?

[HenryStupp:]

Very stable in Canada through Q3. We are looking at what's best for the brand long term which is why we are creating this tiered product introduction strategy. This halo program that we will launch in Europe in a few weeks through our partner Batra is really going to speak to the highest tier of retail to position the brand. We believe these halo strategies and collaborations will drive the mid tier and ultimately the mass-market business globally. So we have a good marketing strategy with product strategy in place. Domestically, Hidary has done a very good job seeding product. The results for the most part have been extremely positive in terms of sell-through. There were a couple of soft spots which we've gone back and looked at why a particular item did not perform, but the preponderance of items that were shipped did sell-through quite well, which has led to a lot more seeding and placement as we go into Q4 and Q1. We definitely view next year as being a brighter spot after what can only be determined -- described as a poor performance this year through the transition from our former partner. But the sell-throughs are good; the product is good; the marketing is good. We have the Olympics, street wear in general is trending. So, we think that we're on it and we're letting our licensees perform, and we're certainly hoping for significantly improved results on Hawk for the future quarters and years ahead.

[EricBeder:]

And last question. You've talked a lot about building up the infrastructure of the company and how it lets you leverage in terms of sourcing in terms of marketing. We've seen some of that obviously with some of the pieces here in China. When you look out going forward, how much of that has been the competitive advantage you thought it had and how much of you think is competitive advantage going forward in terms of driving the business? Thank you.

[HenryStupp:]

I think,everyone in our industry has their particular way of doing business. Having, when I look at our management team, we really are at a cross-section of former retailers, brand owners, marketers, and product development people. So, our platform is a value-added platform that allows partners whether they're wholesalers, retailers, to get into our business quicker. There's a difference between doing international business where you acquire a brand with its business, let's say, in Latin America and for every state in Latin America, or our view where we have taken our brands and we've chosen to globalize them. We believe that the brands that we're focused on have tremendous opportunity to scale through the new category introductions, new markets. Our core brands offer a lot of product opportunities and that's where we're focused on. Having the platform allows us to provide more deliverables to our licensees and it enables them to get into the business quicker knowing that we're a fully engaged partner with them that can deliver marketing, product design, consumer insights, retail intelligence and a forward-thinking view to the business. So we've been through a highly disruptive period in retail through calendars 2015, 2016 and 2017. We do believe that the new normal phase of retail started in calendar 2018. So separate to ourselves, we believe that retail is starting to stabilize globally perhaps faster than domestically. But we are seeing some traction out in the US in terms of retail. And we're also of the belief that retailers are still here trying to find the right mix between private label and national brand recognition. And we believe that after a few years of hearing a lot about private label, we believe that the mix and combination of private label and equity brands are really the secret to unlocking profitability for retailers and for ourselves. So hope that answers your question.

[Operator:]

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

[DaveKing:]

Sure, thanks. Good afternoon, guys. I guess first on the on Hi-Tec and the $3 million of revenue there. How much that's footwear versus apparel and accessories? And then on the apparel side to what extent is your US licensee selling replenishment orders at this point versus shipping for initial loaded? Thanks.

[HenryStupp:]

It's still largely footwear, the apparel just started hitting, apparel and accessories are started in late in the quarter and it'll start ramping up Q4, Q1 and moving forward. So it's still heavily footwear based and we think that the split will start to balance a little bit more as we move into next year.

[DaveKing:]

Okay. And then if I'm looking at this correctly was Hawk up year-on-year apart from the Kohl non renewal? And then on the on the $1 million decline for Cherokee is that-- it sounds like some of that was non renewal. Can you remind us again who those were?

[SteveBrink:]

Hi, Dave. On the Hawk business, the wholesale business for Hawk in the US actually was down a little, a small amount around $100,000 in the quarter. So it was flat. We -- as Henry mentioned going into a master license arrangement with M Hidary, which is delayed things a bit, but we still- I think he's got good placement going into next year, but for this particular quarter there was a slight decrease.

[DaveKing:]

Okay, but then on the -- just staying with that then the Walmart Canada piece and those pieces of it. Were those were up then?

[SteveBrink:]

Yes, clicking it altogether, altogether it was down as a brand.

[DaveKing:]

Okay and then on the Cherokee side in terms of the non-renewals there, what were those?

[SteveBrink:]

Yes, Cherokee outside the non-renewals was basically flat with a quarter over last year. So, year-to-date it was up solidly with the new Lidl business.

[DaveKing:]

Okay and then the non-renewal, who were those specifically in terms of that, drove that decline?

[HenryStupp:]

The most significant one was the non-renewal from partner in China. There's also a tail on Cherokee with Target that didn't renew. Those are the two big ones that have impacted in Q3 and as we move into Q4, we are going to stop anniversarying those numbers and start moving forward to through comp.

[DaveKing:]

Okay, perfect. So maybe that leads into my next question then. So in terms of the revenue guidance for Q4, it looks like that assumes an increase which both sequentially and then year-on-year which I think would be encouraging. I guess can you just talk about the puts and take so that it sounds like some of that then is anniversarying some of these non-renewals but anything else to point to. It sounds like maybe apparel accelerating, anything else.

[SteveBrink:]

Yes. I would say the non-renewal impact is smaller in Q5. It's in a $1.5 million range. So that's still lot less than it has been. And outside that we're expecting growth from Hi-Tec as you can expect continued growth there and then the product design development agreements also going to add revenues there. And then the other categories outside the non-renewals whether it's Hi-Tec or I mean Cherokee or Hawk will depend on actual results, but either flat or up from there.

[DaveKing:]

Okay, good to hear and then I guess maybe lastly for-- go ahead Henry.

[HenryStupp:]

Now that our quarter results are out, we'll start issuing updates on quite a few new license fees that have been signed. We wanted to wait until after we post our results to talk about several new deals, but we significantly added license fees to Tony Hawk, Cherokee, and Hi-Tec domestically and internationally. We're expanding our distribution. We just wanted to lead with some numbers and talk about how the business development is going to support the battles of this year and then it'll give some good indications when we issue next year's guidance in a future date.

[DaveKing:]

Okay, good to hear. And then I guess lastly for me on the SG&guidance. So that's great progress there in terms of reducing costs. It looks like you're guiding to some increases in the fourth quarter. Is that just on the higher revenue base? Is that some --are there's some seasonal factors in there? I guess just some color on what might be driving that would be helpful. Thank you.

[SteveBrink:]

Right. So, a lot of our costs are fixed. But on the people side, the trend will continue. There are few more resources being put into product design development which will add costs in the fourth quarter to some degree, and then the rest is a question of the professional fee, things that are discretionary and marketing cost that do fluctuate from quarter-to-quarter.

[HenryStupp:]

There is a little bit variable cost related to commissions and fees that are paid that are tied into revenues. So as revenue goes up and down some of the SG&A is also tied into where the revenue comes in. So that's why there is a degree of variability in our SG&A. End of Q&A

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.