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Edited Transcript of ATV earnings conference call or presentation 7-Mar-18 1:30pm GMT

Q4 2017 Acorn International Inc Earnings Call

Shanghai Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Acorn International Inc earnings conference call or presentation Wednesday, March 7, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey Gao

* Jacob A. Fisch

Acorn International, Inc. - President & CEO

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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 Fourth Quarter 2017 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Elaine Ketchmere. Please go ahead, ma'am.

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Elaine Ketchmere, Compass Investor Relations - Partner [2]

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Thank you, Rochelle. Good morning, everyone, and thank you for joining us today for the discussion of our unaudited financial results for the fourth quarter and full year 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 branded 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 non-core 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 is 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 will 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 2017, Acorn experienced the moderate year-over-year decline in revenues, as we continue to streamline our business operations. In August 2017, we announced the partial divestiture of the HJX electronic learning products business, which reduced revenues but allowed the company to lower operating expenses, increase margins and focus on expanding our already profitable businesses and brands.

Acorn placed a strong emphasis on the e-commerce channel in 2017 with positive results, primarily due to growing momentum in sales of its proprietary Babaka posture correction products throughout the year, despite some choppiness at the end of the year.

This drove an improvement in gross margin to 62.1% as compared to 51.2% in 2016. Total operating expenses decreased 2.9% in 2017 compared to 2016, despite a $6 million gain on the sale of non-core real estate assets in 2016, which offset operating expenses in the year-ago period.

Operating loss improved to $7.3 million compared to an operating loss of $9.3 million in 2016. During 2017, the company received dividends from and recorded gains from the sale of shares of Yimeng Software Technology Company Limited, Yimeng, a publicly traded company in China, and recorded other income of approximately $12.2 million. Acorn recorded a net profit of $4.9 million and closed the year with a cash position of $21.1 million.

We anticipate further liquidation of non-core assets, including a potential sale or other liquidity generating transactions involving non-core real estate -- real property in Shanghai, which has a carrying value of approximately $16.5 million. The company may also sell additional shares of Yimeng from time to time or sell out to -- sell out its position in Yimeng based on market factors and its other investment and capital requirements.

In 2018 and beyond, Acorn will continue to emphasize the e-commerce channel and plans to introduce new products and product line extensions, as well as incubate new businesses within the group. The company continually evaluates new business opportunities and is also exploring several other new areas of potential growth.

Now I'll discuss the preliminary financial results for the fourth quarter of 2017. Total net revenues were $5.6 million in the fourth quarter of 2017, down 8.5% from $6.1 million in the fourth quarter of 2016.

The decrease in sales was primarily due to the partial exit from the HJX electronic learning device business, partially offset by an increase in e-commerce sales of a posture correction and other products.

Gross profit was $3.5 million, up 11.8% from $3.1 million in the fourth quarter of last year, despite the lower net revenues for the period.

Gross margin was 62.5%, up from 51.1% in the year-ago period. The increase in gross margin was due to a larger proportion -- was due to a larger proportion of higher margin e-commerce sales and products in the product mix.

Total operating expenses were $5.4 million, down 49.1% from $10.7 million in the fourth quarter of 2016. The decrease was attributable to lower selling and marketing expenses associated with the exit from the HJX Business as well as a reduction in general and administrative expenses due to lower labor expenses and stock-based compensation. Loss from operations was $2 million as compared to loss from operations of $7.6 million in the same period last year. Other income was $0.1 million as compared to other expenses of $0.4 million in the fourth quarter of 2016.

We recorded an income tax benefit of $1.8 million in the fourth quarter of 2017 as compared to income tax benefit of $0.2 million in the same period last year. Net income was $23,000 as compared to a net loss of -- $23,071 as compared to a net loss of $7.9 million in the fourth quarter of 2016.

Turning to our full year 2017 preliminary financial results. Total net revenues were $22.3 million in 2017, down 9.1% from $24.5 million in 2016. As discussed previously, the decrease in revenues was largely attributable to the partial exit from the HJX electronic learning device business. Gross profit in 2017 was $13.9 million, up 10.3% from $12.6 million in 2016. Gross margin was 62.1% in 2017, up from 51.2% in 2016 due to a larger proportion of higher margin e-commerce sales and products in the product mix.

Total operating expenses in 2017 were $21.2 million down slightly from $21.8 million in 2016. Operating expenses for 2016 were reduced by the impact of a $6 million gain from the sale of non-core real estate assets, which partially offset operating expenses for the period. There was no such gain in 2017.

Loss from operations was $7.3 million in 2017 as compared to a loss from operations of $9.3 million in 2016. The loss from operations for 2016 benefited from a $6 million gain from the sale of real estate assets. Share-based compensation was $25,000 in 2017 as compared to $658,000 in 2016.

Other income was $12.2 million in 2017, primarily due to dividends and gains from the sale of Yimeng shares, this company -- this compares to other income of $18.1 million in 2016, which is also primarily attributable to gains from sales of Yimeng shares. Net income was $4.9 million in 2017 as compared to net income of $3.4 million in 2016. As of December 31, 2017, Acorn's cash and cash equivalents with restricted cash, totaled $21.1 million as compared to $25.6 million as of December 31, 2016. As of December 31, 2017, the company had repurchased 1,162 ADSs at an average price of $16.84 per ADS under our share repurchase program, which was approved by the board on December 8, 2017.

That concludes the prepared remarks section of the call. Now myself and Geoffrey Gao, our CFO, will remain on the line for our Q&A session. Over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question, we'll hear from Rich Greulich with REG Capital Advisors.

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

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I apologize, I'm having trouble hearing, it maybe my line. So if I'm breaking up when I'm talking to you, let me know, please. During the fourth quarter, what were the sale proceeds, if any, from the sale of Yimeng?

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

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We did not sell any shares in Q4, Geoffrey, that's correct, right?

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Geoffrey Gao, [4]

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We didn't sell any of our shares.

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

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Yes,.

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

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So then the $50 some million available for sale value represents the end of the period market value, is that a mark-to-market value for those shares?

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

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It is a mark-to-market value, that's correct.

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

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And you only purchased 1,000 or so ADSs, what is your strategy there?

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

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There is a plan in place that has -- basically, there is automatic purchases that take place subject to the terms of the buyback and the regulatory requirements associated with the plan. Where we've -- since the close of the year have continued to be repurchasing shares. We've -- the board approved share repurchase up to $2 million, and we've continued to be repurchasing shares when subject to those requirements under the plan.

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Richard E. Greulich, REG Capital Advisors - President & CEO [10]

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Yes, I mean, the stock doesn't trade, so if you're dealing with something along the lines of like 25% of the volume of the day or something like this, it will be pretty hard to buy very many shares. I don't know, I would suggest, I'm not sure what the cost would be, if you do some (inaudible) reserve, but I would suggest you have a partial tender, if you're going to really get serious about it.

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

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Got it. Your line did break up a little bit, but I think, you said look at partial -- look at a partial tender.

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Richard E. Greulich, REG Capital Advisors - President & CEO [12]

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Right. Because the volume is just so low, I mean, you're never going to be able to buy much. The -- this $16 million of real estate assets, you've talked about for some time, is there actually any progress being made at this point or is there a plan there to divest that?

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

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Yes, we continue to work on and look into the market potential sales. We've had, some that have come close and for a variety of reasons haven't finally gotten to the point where we are able to sign a document and proceed. But we're still -- that's still very much on the radar. And we still believe that it's -- there is a market for it.

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

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And then lastly, what if any products, do you think will actually make a big enough difference in terms of e-commerce growth over the next year or so that we might be able to -- you might be -- a year from now you'll be able to talk about, now this is what really caused this growth.

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Geoffrey Gao, [15]

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You say, which products?

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Richard E. Greulich, REG Capital Advisors - President & CEO [16]

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Yes, what products or categories do you expect to grow in this coming year in e-commerce?

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Geoffrey Gao, [17]

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Yes, well, we have our historical proprietary brands such as (inaudible) or Babaka and that continues to be quite strong. And we are engaged in rolling out product extensions under that brand. And we're also diversifying our e-commerce distribution channels away from our concentration on Tmall, which is really the dominant e-commerce player in China. So with that brand as well. So I would say that brand and products under that brand. Our second brand OXY, Youngleda, OXY, that we also are looking to expand through e-commerce. That's a smaller business, but it continues to remain fairly solid. And then, I would say beyond that, opportunistically, some of our other proprietary -- historical proprietary brands, finally, we have some new businesses that we're engaged -- sort of incubating. And I would say, depending on the success of those businesses they could become meaningful, one in particular would be through e-commerce.

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Operator [18]

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(Operator Instructions) And we'll hear from Mike Goodrich with B&G Capital.

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Michael Goodrich, [19]

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So the gentlemen before asked most of the questions. The question that, I guess, I have left is the current tax loss carryforward that you guys have, what's that number?

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

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Group level tax loss carryforwards, Geoffrey, do you have that -- you're asking for the aggregate number, Geoffrey, do you have that aggregate number?

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Geoffrey Gao, [21]

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I don't have that specific number in front of me. But we do have, I think, (inaudible).

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

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Geoffrey, I think, we need you closer to the line, I'm not sure people can hear you.

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Geoffrey Gao, [23]

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Okay, it's better now, hello?

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

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Yes.

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Geoffrey Gao, [25]

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Okay. I said, I don't have a specific number in front of me, but we still have -- had a big loss carryforward, which will be used in the coming year that we can check the statistic number later.

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Michael Goodrich, [26]

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Okay. Maybe can someone can e-mail me, when you get the number.

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

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Yes, I would say, Geoffrey, is it roughly $100 million?

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Geoffrey Gao, [28]

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$100 million, yes.

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

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I think it's probably in that ballpark. But we'll get you a specific number.

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Michael Goodrich, [30]

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It's fairly significant, though, that's good to know. And then can you talk about the new relationship with the Cachet Hotel? Have you made the loan to them? Have you done anything with them yet?

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

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We have, we have, we've loaned probably, roughly, $5 million or so equivalent USD, RMB. We are also working on and it's still probably, in a way, too small to talk about too much, but working on building our sourcing business for the hotel -- for the hotel chain and, yes, both things are happening.

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Michael Goodrich, [32]

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Okay. And how many hotels are in the chain?

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

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I think it's -- I think currently operating, maybe around 7, if I -- let me, so -- I think 4 in China, 1 in Cabo, Mexico, 1 or 2 in the U.S., 1 in New York City, 1 in Thailand. That's roughly, yes, it's roughly 7 or so. And there's more in pipeline as well.

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Operator [34]

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And that will conclude the question-and-answer session. I would like to turn the call back over to Ms. Ketchmere for any additional or closing remarks.

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Elaine Ketchmere, Compass Investor Relations - Partner [35]

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Well, thank you, everyone. With that, I will conclude our call today. For additional questions feel free to contact me at eketchmere@compass/ir.com or at the company directly at ir@chinadrtv.com. Thank you all again, and have a good day. Good bye.

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Operator [36]

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And now we will conclude today's call. We thank you for your participation.