U.S. Markets closed

Edited Transcript of ATV earnings conference call or presentation 8-Jul-16 12:30pm GMT

Q1 2016 Acorn International Inc Earnings Call

Shanghai Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Acorn International Inc earnings conference call or presentation Friday, July 8, 2016 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Elaine Ketchmere

Compass Investor Relations - Partner

* Jacob A. Fisch

Acorn International, Inc. - President & CEO

* Weiji Gao

Acorn International, Inc. - Former CFO & VP

================================================================================

Conference Call Participants

================================================================================

* Peter Lucina

* Tony Kamin

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Acorn International First Quarter Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Elaine Ketchmere. Please go ahead.

--------------------------------------------------------------------------------

Elaine Ketchmere, Compass Investor Relations - Partner [2]

--------------------------------------------------------------------------------

Thank you, Lisa. Good morning, everyone, and thank you for joining us for the discussion of our unaudited financial results for the first quarter of 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-looking statements include, among others, statements regarding the company's ability to stabilize its core business, to reduce expenses and to 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 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.

Now I will turn the call over to Jacob Fisch, who will discuss our financial results for the quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Elaine. Good morning, everyone.

In the first quarter of 2016, Acorn effectively concluded its efforts to reorganize and turn around the business, reducing the cash burn from prior year substantially. Although revenue declined relatively to the year ago period, higher gross margin, across the board reductions in operating expenses and gains from the sale of noncore assets resulted in a net profit of $7.4 million and a corresponding increase in cash and equivalents from the end of 2015.

During the quarter, the company recorded a $6 million pretax gain from the sale of noncore real estate and a $5.6 million pretax gain on the sale of shares of Yimeng Software Technology Co., Ltd. Yimeng, a publicly-traded company in China.

In the remainder of 2015, Acorn will continue its efforts to stabilize its core business, reduce expenses and generate additional cash flow. Management will focus on growing 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. As part of its ongoing policy to liquidate noncore assets, Acorn plans to sell certain real estate assets with a carrying amount of approximately $18.1 million and may sell additional shares of Yimeng as appropriate.

Now turning to the financial results of the first quarter of 2016. Total net revenues were $7.1 million in the first quarter of 2016, down from $16.3 million in the first quarter of 2015. Cost of sales in the first quarter of 2016 was $3.9 million, down from $10.7 million in the first quarter of 2015.

Gross profit in the first quarter of 2016 was $3.1 million as compared to $5.6 million in the first quarter of 2015. Gross margin was 44% in the first quarter of 2016, up from 34% in the first quarter of 2015.

Other operating income net was $6.4 million in the first quarter of 2016, primarily related to gains from the sale of noncore real estate assets. This compares to other operating income net of $0.6 million in the first quarter of 2015. Total operating income in the first quarter of 2016 was $0.3 million compared to total operating expenses of $15.7 million in the first quarter of 2015.

Income from operations was $3.5 million in the first quarter of 2016 as compared to a loss from operations of $10.1 million in the first quarter of 2015.

Share based compensation was nil in the first quarter of 2016 as compared to $71,333 in the first quarter of 2015. Other income was $5.7 million in the first quarter of 2016, primarily attributable to gains from sale of Yimeng shares as compared to other income of $0.3 million in the first quarter of 2015. Net income was $7.4 million in the first quarter of 2016 as compared to a net loss of $9.8 million in the first quarter of 2015.

As of March 31, 2016, Acorn's cash and cash equivalents with restricted cash totaled $19.6 million as compared to $12.3 million as of December 31, 2015.

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. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll go first to Peter Lucina of LaSalle St. Securities.

--------------------------------------------------------------------------------

Peter Lucina, [2]

--------------------------------------------------------------------------------

I have a question on the filing of the stock transfer or sale on June 30 of this year. Could you describe that and what the purpose was for that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stock transfer.

--------------------------------------------------------------------------------

Peter Lucina, [4]

--------------------------------------------------------------------------------

Was there a 13-D filing HattoriRoche?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That may be related to a transfer among one of the co-shareholders. Geoffrey, do you have any insight on that?

--------------------------------------------------------------------------------

Weiji Gao, Acorn International, Inc. - Former CFO & VP [6]

--------------------------------------------------------------------------------

I think that why this should be one of -- or maybe some of the co-shareholders that I -- I think we could check the details.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We can take a look at that, Peter, and let you know, but I'm not sure what your question is exactly.

--------------------------------------------------------------------------------

Peter Lucina, [8]

--------------------------------------------------------------------------------

There was a filing -- yes, I was just wondering how that affects the current shareholders.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, we can take a look. It certainly doesn't affect the company, and we'll take a look and...

--------------------------------------------------------------------------------

Peter Lucina, [10]

--------------------------------------------------------------------------------

What are the -- what is the total amount of shares outstanding right now?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Total amount of shares outstanding is -- I think it's about 74,000, 75,000 shares with -- yes, I think it's approximately that number. Geoffrey, is that the right number?

--------------------------------------------------------------------------------

Weiji Gao, Acorn International, Inc. - Former CFO & VP [12]

--------------------------------------------------------------------------------

Yes. 75 to 80 (inaudible) along that range.

--------------------------------------------------------------------------------

Peter Lucina, [13]

--------------------------------------------------------------------------------

75,000 shares?

--------------------------------------------------------------------------------

Weiji Gao, Acorn International, Inc. - Former CFO & VP [14]

--------------------------------------------------------------------------------

75 million to 80 million.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Million shares.

--------------------------------------------------------------------------------

Peter Lucina, [16]

--------------------------------------------------------------------------------

Million shares. What is -- And how many -- what does that equate to ADS?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's a 20:1 ratio, yes.

--------------------------------------------------------------------------------

Peter Lucina, [18]

--------------------------------------------------------------------------------

20:1, so there's 40 -- there's only 4 million shares outstanding traded in the U.S. market.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Approximately.

--------------------------------------------------------------------------------

Peter Lucina, [20]

--------------------------------------------------------------------------------

And do you know what -- and out of the 4 million shares, what is publicly traded, a fraction of that or...

--------------------------------------------------------------------------------

Jacob A. Fisch, Acorn International, Inc. - President & CEO [21]

--------------------------------------------------------------------------------

It is -- well, everything is traded through ADS. There is a certain portion that is held by a private equity firm, SAIF. There is a certain portion that is held directly by certain shareholders and the public float is probably beyond sort of affiliated shareholders or -- I believe it's around 20%, 25%. Those numbers, I don't know if you've taken a look at the 20-F that was filed 7 months ago, that will be pretty apparent looking at that.

--------------------------------------------------------------------------------

Peter Lucina, [22]

--------------------------------------------------------------------------------

Yes, I did. So this Yimeng investment, how many -- what is the -- you sold some shares in the first quarter. Is there any subsequent sales scheduled for later this year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nothing -- we don't have a schedule. We've continued to sell some -- Geoffrey, correct me if I'm wrong, subsequent following Q1. We, I believe, did not sell any this month, and they're publicly traded within China, so it's really a day to day analysis.

--------------------------------------------------------------------------------

Peter Lucina, [24]

--------------------------------------------------------------------------------

What is your total stake in that software company or investment company?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think it's valued -- and Geoffrey, correct me if I'm wrong, but price at the end of the year was about USD 90 million. But that, of course, fluctuates depending on the market price of those shares.

--------------------------------------------------------------------------------

Peter Lucina, [26]

--------------------------------------------------------------------------------

And you're still on schedule to sell those noncore assets of real estate assets?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, we are.

--------------------------------------------------------------------------------

Peter Lucina, [28]

--------------------------------------------------------------------------------

And where are you in that process? How many more properties do you have to -- that are currently in -- I guess, what's the status? Yes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sale process. This is really currently the asset that we are liquidating. We do have some other assets but -- such as our office space in Shanghai, but we're actually looking to increase headcount, and that's going to require using really, all of our remaining office space. So we won't...

--------------------------------------------------------------------------------

Peter Lucina, [30]

--------------------------------------------------------------------------------

So you're hiring right now? You're -- I thought you were reducing headcount.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We're restructuring. It's this continued process of restructuring and we have some employees still in our Beijing office. We have a Wuxi call center. We have operations still in Shenzhen. So there's a continued process of restructuring. But the main point is that we are holding on to our office, main office space in Shanghai and we'll be selling that.

--------------------------------------------------------------------------------

Peter Lucina, [32]

--------------------------------------------------------------------------------

That is not going to be sold, that main office in Shanghai. And was that originally part of the discussion in terms of real estate sales?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, it was not.

--------------------------------------------------------------------------------

Peter Lucina, [34]

--------------------------------------------------------------------------------

Okay. So the remaining portion is another USD 10 million pretax?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

You're referring to the real estate that we...

--------------------------------------------------------------------------------

Peter Lucina, [36]

--------------------------------------------------------------------------------

Yes. So the core -- yes, the other real estate that is outstanding that is in the...

--------------------------------------------------------------------------------

Jacob A. Fisch, Acorn International, Inc. - President & CEO [37]

--------------------------------------------------------------------------------

No, the discussion is well north of that and we're still in the process of finalizing that transaction.

--------------------------------------------------------------------------------

Peter Lucina, [38]

--------------------------------------------------------------------------------

And is that going to be scheduled for 2016?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We anticipate that it will be concluded in 2016. There is a possibility that it will carry over, somewhat dependent on approval processes and discussions with government but also with just typical negotiation process with buyers.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

We'll go next to Tony Kamin of Eastwood Partners.

--------------------------------------------------------------------------------

Tony Kamin, [41]

--------------------------------------------------------------------------------

When you think about the proprietary product line, can you -- I'd just like to get a better sense of how management sees that proprietary product line developing versus what it's been historically. As you look out a little bit, should we anticipate the company getting into newer areas?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Thank you. Yes. First of all, I'm going to sort of speak in, I suppose, general terms. We're not at this point giving guidance. We're frankly still in the process of finalizing the restructuring and building out our plan as we go forward but -- and I don't want to sort of jump the gun in terms of describing what we plan to do over the 6, 12, 2- to 3-year period. But basically, we have a legacy business that continues to perform, and that is mainly with these proprietary products. The English language learning device, back device, both of those being household brands and products within China continued to perform. Going forward, we are developing new product and brand -- well, product areas that involve new brands. Some of those brands are licensed brands. We just concluded a licensing deal with a major U.S.-based entertainment business movie studio, one of the largest in the world. And that will be a license -- that is a licensing deal that will involve new license, third-party licensed products to be sold. And we're also simultaneously developing out new product areas that will be more appropriate for our shift to e-commerce. Historically, and I'll give you a little bit more color. Historically, we were the largest -- at one point, the largest purchaser of TV advertising time in China, and mainly a TV infomercial-focused business, always omnichannel but the main focus was the TV media. Going forward, I think we've indicated we are shifting to a greater focus on e-commerce. There are -- still remains omnichannel, but because of the regulatory changes in China, we've moved away from the TV. And so the products and brands that we are taking on and developing are, we believe, more appropriate for that e-commerce channel.

--------------------------------------------------------------------------------

Tony Kamin, [43]

--------------------------------------------------------------------------------

Great, that's exciting. Do you have a sense, the earlier caller had asked about the Yimeng carrying value, and I think you gave it as of the 20-F of $90 million. Since it's publicly traded, have the share values of Yimeng fluctuated widely since the end of -- since the 20-F was filed?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Since the 20-F was filed, the price has come down somewhat in terms of when -- Geoffrey, do you know what the range has been?

--------------------------------------------------------------------------------

Weiji Gao, Acorn International, Inc. - Former CFO & VP [45]

--------------------------------------------------------------------------------

Yes. Yes, after 20-F the price that -- the Yimeng price still goes down and this is, I think, mainly because of the China, I mean, economy and the stock market. But China is going down so compared with -- I mean, 20-F maybe with the beginning of the year, the price is down by -- that is down by 20% to 30%. So now, it's about 13-something, but at that time it's about 18% -- 17%, 18%. So basically, that's the trend.

--------------------------------------------------------------------------------

Tony Kamin, [46]

--------------------------------------------------------------------------------

Okay. I mean, the 20-F, I think it referred to them potentially relisting on another exchange. Do you know whether anything in that front has happened?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nothing's happened. It's something that we understood they were looking at doing. I think they came to talk to us about various options, but all of them seem to be potential options and nothing we're aware of is -- involves definite plans.

--------------------------------------------------------------------------------

Tony Kamin, [48]

--------------------------------------------------------------------------------

Okay. The Yimeng investment was a terrific one, obviously, for the company. I'm just curious, are there other -- I'll just characterize on the sort of venture type investments that Acorn made is invested in (inaudible).

--------------------------------------------------------------------------------

Jacob A. Fisch, Acorn International, Inc. - President & CEO [49]

--------------------------------------------------------------------------------

Nonlisted, is that what you're thinking about?

--------------------------------------------------------------------------------

Tony Kamin, [50]

--------------------------------------------------------------------------------

Well, I mean, Yimeng sort of, obviously, it accreted tremendous value to the company and it wasn't -- I mean, I'm just curious whether you've also made other direct investments in other private companies that might also go public and...

--------------------------------------------------------------------------------

Jacob A. Fisch, Acorn International, Inc. - President & CEO [51]

--------------------------------------------------------------------------------

Sure. We do have several small investments in connection with, really, all strategic of -- so that we've got a number of partners we're working with and some of them we've made certain non -- let's call it nonmaterial sized investments. And maybe previously, they may have been more substantial but the answer is yes. From time to time, we do.

--------------------------------------------------------------------------------

Tony Kamin, [52]

--------------------------------------------------------------------------------

Okay. And final question. On the $18 million in carrying value on the land, is there a debt associated with that land? I'm trying to get out whether the $18 million would be a net figure or it's a figure before debt.

--------------------------------------------------------------------------------

Jacob A. Fisch, Acorn International, Inc. - President & CEO [53]

--------------------------------------------------------------------------------

Geoffrey?

--------------------------------------------------------------------------------

Weiji Gao, Acorn International, Inc. - Former CFO & VP [54]

--------------------------------------------------------------------------------

I'm not sure I follow your question. Would you please say it again?

--------------------------------------------------------------------------------

Tony Kamin, [55]

--------------------------------------------------------------------------------

Sure. Is there any mortgage debt or bank debt against the land that you're going to be selling?

--------------------------------------------------------------------------------

Weiji Gao, Acorn International, Inc. - Former CFO & VP [56]

--------------------------------------------------------------------------------

No, no.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

At this time, we have no further questions. I would like to turn the call back over to Elaine Ketchmere for any additional or closing comments.

--------------------------------------------------------------------------------

Elaine Ketchmere, Compass Investor Relations - Partner [58]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

That does conclude our conference for today. We thank you for your participation.