Acorn International's (ATV) Management on Q4 2016 Results - Earnings Call Transcript

| About: Acorn International, (ATV)

Acorn International, Inc. (NYSE:ATV)

Q4 2016 Earnings Conference Call

February 24, 2017 8:30 AM ET

Executives

Elaine Ketchmere – Investor Relations

Jacob Fisch – President

Geoffrey Gao – Chief Financial Officer

Analysts

Tony Kamin – Eastwood Partners

Richard Greulich – REG Capital advisors

John Banks – BG Capital

Operator

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

Elaine Ketchmere

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

Before we continue, I would like to remind you that the discussion today will contain certain forward-looking statements. These forward-statements include among other statements regarding the Company’s ability to increase revenue, maintain margins, manage expenses and generate additional cash flow; the Company’s ability to grow sales of its proprietary-branded products, as well as third-party products and brands through e-commerce, its other direct sales platforms, as well as its nationwide distribution network; and the Company’s ability to sell its 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 subject to potential adjustments, that may be identified when audit work has been performed for the Company’s year-end audit, which could result in significant differences from this preliminary unaudited financial information.

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

Jacob Fisch

Great. Thank you, Elaine. Acorn’s financial results for 2016 reflect the continuing business turnaround strategy led by Co-Founder and Executive Chairman, Robert Roche, and the new management team installed in May 2015. Under new leadership, Acorn significantly improved gross margin, made meaningful reductions in operating expenses and completed the sale of non-core assets.

Net income for 2016 was $3.4 million compared to a net loss of $40.2 million in 2015, marking the first year of profitability since 2011. The Company closed the year with a stronger balance sheet, including $25.5 million in cash and equivalents, up from $12.3 million at the end of 2015.

In 2017, Acorn will seek to increase revenue by growing sales of its proprietary-branded products as well as third-party branded products through e-commerce, its other direct sales channels and nationwide distribution network. The Company will continue to support its own brands and build its reputation as a trusted partner for top foreign brands entering China. Management will remain focused on maintaining healthy margins, managing expenses and generating additional cash flow.

The Company anticipates further liquidation of non-core assets, including a potential sale of certain non-core property or potentially another form of transaction involving such non-core property, with a carrying amount of approximately $16.4 million and potential sales of shares of Yimeng Software Technology Company, Limited, a publicly traded company in China, as appropriate.

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

Gross profit in the fourth quarter of 2016 was $3 million, as compared to $4.6 million in the fourth quarter of 2015. Gross margin was 50.3% in the fourth quarter of 2016, unchanged from the fourth quarter of 2015.

Total operating expenses in the fourth quarter of 2016 were $10.5 million, compared to total operating expenses of $11.7 million in the fourth quarter of 2015.

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

Share-based compensation was $247,941 in the fourth quarter of 2016, as compared to nil in the fourth quarter of 2015. Other expense was $0.4 million in the fourth quarter of 2016, as compared to other income of $0.2 million in the fourth quarter of 2015. Net loss was $7.9 million in the fourth quarter of 2016 as compared to a net loss of $7.3 million in the fourth quarter of 2015.

As of December 31, 2016, Acorn’s cash and cash equivalents, with restricted cash, totaled $25.5 million, as compared to $12.3 million as of December 31, 2015. As of December 31, 2016, the Company had repurchased 196,213 ADSs at an average price $7.80 per ADS under its share repurchase program.

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

Total operating expenses in 2016 were $21.7 million, including a $6 million in gain from the sale of non-core real estate, compared to total operating expenses of $53.5 million in 2015.

Loss from operations was $9.3 million in 2016, as compared to a loss from operations of $40.9 million in 2015. Share-based compensation was $736,017 in 2016, as compared to $71,333 in 2015.

Other income was $18.1 million in 2016, primarily attributable to gains from sales of Yimeng shares, as compared to other income of $1 million in 2015. Net income was $3.4 million in 2016 as compared to a net loss of $40.2 million in 2015.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Then we will go first to Tony Kamin with Eastwood Partners. Please go ahead.

Tony Kamin

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

Jacob Fisch

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

Tony Kamin

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

Jacob Fisch

Sure. I would say for this recent phase and the next immediate phase were continuing to look to extend in bulk up, our existing brands I think as we’ve – as you probably know we disclosed previously these brands are China’s best known brands within the categories that they are in. So the opportunity to grow those brands, we think again within the sort of this space with the category allows is there so we are focusing on our pre-existing brands in terms of bringing new brands in, that is something that we are – we think has opportunity.

And we are continuing to develop that piece of the business. Currently, we do have a couple of deals that include, we mentioned on a call or two to go about which is with one of the major movie studios in the U.S. and I guess entertainment more broadly. And we do the merchandising for several of their programs. I would say, at this point, all of that side of the business is still fairly nascent and we do hope to grow it but again just to summarize and answer your question. First step is focusing on our existing brands and growing them further and then looking to expand the side of the business then both bringing brands from overseas.

Tony Kamin

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

Jacob Fisch

Yes, that’s correct.

Tony Kamin

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

Jacob Fisch

I think there has been some change maybe Geoffrey can speak to – you mean, are you asking if the number reported on the balance sheet is where they are today.

Tony Kamin

Whether those have been much it means roughly…

Jacob Fisch

I think it’s roughly fluctuated between maybe the highs of 14 and maybe it’s been done around 12, so between the 12 and 14 but Geoffrey, did that – is that about right?

Geoffrey Gao

Yes, the price up from last year and it was around – close to 13 and now its about 14 point – 1.2 the highest that approach to a thoughts of 0.8 but now back to 14.10 something like that, so generally the trend is going up for Yimeng its about price.

Tony Kamin

That’s great. And then if they – you’d mentioned that in 20-F – one of your 20-F, they were considering maybe an uplifting, is there any – have they given any other statements on that or?

Jacob Fisch

I’m already seeing – recently I think every once in a while they have mentioned that still the direction that they are trying to go in although, I don’t know if we’ve seen anything recently, Geoffrey, you spoken with them recently, they said anything on that one?

Geoffrey Gao

Yes, this was [indiscernible] and the year beginning but recently they didn’t mention much about this so I think we will report that in – actually with investor closely about those while we get more information.

Tony Kamin

Okay and then a final question in terms of your ADR, I think you added most of it is ADS share count, what’s your current ADS share count for as of year-end?

Jacob Fisch

Geoffrey, do you have that – I don’t have that number in front of me. I mean it is a 20 to one ratio to our shares. Geoff unless you have that in front of you we may have to provide to you separately.

Tony Kamin

That is fine.

Geoffrey Gao

20 to one yes.

Tony Kamin

Great, thank you guys, it’s really nice to see the Company, so much work being done and to see the Company really starting to turn around and so good luck. Thank you.

Jacob Fisch

Appreciate you supporting the questions thank you.

Operator

[Operator Instructions] We will go next to Richard Greulich with REG Capital advisors. Please go ahead.

Richard Greulich

Thank you for taking my question and I appreciate you having these open conference calls. I was just calculating, is my calculation correct that during the fourth quarter the Company repurchased about 35,000 shares at an average cost of 8.60 per ADS.

Jacob Fisch

Geoff do you remember in Q4, that we repurchased.

Geoffrey Gao

I don’t have it – any further update but it sounds to me should be close to 9, 10 yeah.

Richard Greulich

And what is the authorization going forward, left to repurchase.

Jacob Fisch

We’ve just gotten authorization to extend the program, so we have done a – lets see what, the – I just want to be careful about what we’ve disclosed, what will be if this in fact a extension of the program formally we will put through a 6-K on that. Either be on what was previously disclosed, if its not it will just be of course rest than what was disclosed previously, I just not portions of the program are obviously the sort of the lawyers crafts that important in the program number or disclosed in other portions or not and I just want to be careful about that. So that will be in the form of the 6-K.

Richard Greulich

Okay I will stay tuned. The I also applaud the efforts you have been making in terms of improving the cost structure of the Company and looking for revenue growth opportunities. But it strikes me almost equally at this point given where the stock price is, an equal or may be even greater way of adding value upon a per share basis is to step up the pace of this share repurchases. Perhaps doing like Dutch tender or something like that. Because really I will assume you are pretty limited in terms of current volume upon a daily basis of your purchases.

Jacob Fisch

I don’t know, general knowledge of what a tender involves, I think I probably understand what a Dutch tender is, I think broadly speaking my understanding is it tends to be expensive and a little bit involved right now we are trying to take advantage as you said of what we see as an opportunity and repurchase shares while at the same time we also aren’t committed to growing the business and we think there is a long-term future and we are very much focused on the day to day operations of that.

Richard Greulich

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

Jacob Fisch

Sorry the second point was sell what…

Richard Greulich

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

Jacob Fisch

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

Richard Greulich

Will you be offering, a on your website any of the financial information what might be useful for anyone filing as a U.S. citizen that came up with the name of former I think it 8214 for that - for the PFIC designation.

Jacob Fisch

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

Richard Greulich

I thought it had be evolved with one of the PFIC filings, so I am not totally familiar but I will try to do that and may be circle back with you later on.

Jacob Fisch

Terrific.

Richard Greulich

Thank you.

Jacob Fisch

Thank you.

Operator

And next we will go to John Banks with BG Capital. Please go ahead sir.

John Banks

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

Jacob Fisch

That is.

John Banks

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

Jacob Fisch

I don’t know their intentions, we are not actively talking to them.

John Banks

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

Jacob Fisch

Okay.

John Banks

Because once you saw the real estate, unless you are looking to make a bigger acquisition, you’re probably almost close to $100 million in assets and the market cap is $35 million. I’d rather be aggressive now not later well thank you for you time.

Jacob Fisch

Thank you very much.

Operator

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

Elaine Ketchmere

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

Operator

And that will conclude today’s conference you may disconnect at any time.

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